Jane the Actuary Retirement

Forbes post, “Does Joe Biden Have Dementia? Does It Matter?” – Update

Should Joe Biden take a dementia screening test?

UPDATE:

Yes, this article was removed by my editor; I have submitted it for publication elsewhere, and will share the link if it’s accepted (so thanks to those who have inquired).  The bottom line of the article was that Republicans are going after Biden for a wide variety of “gaffes” as possibly signaling dementia, but that Biden could remove this as an issue with a simple screening test.  My editor’s rationale for removing it was that this was outside my area of expertise and inappropriately politically-focused, and she has every right, as an editor, to make this call — so there’s no need to feel that I’ve been wronged or that Forbes is inappropriately favoring Biden.

Jane the Actuary Retirement

Forbes post, “Fact Check: Were 401(k)s Really An ‘Accident Of History’?”

Originally published at Forbes.com on March 7, 2020.

 

“401(k)s are an accident of history”: That’s the title of a 2017 article at the Economic Policy Institute, which goes on to say that “401(k)s were never intended to replace pensions.”

In a 2015 CNBC article with the shorthand title (that is, in the URL), “The 401k is a failure,” that news site cited another expert:

“’401(k)s were never designed as the nation’s primary retirement system,’ said Anthony Webb, a research economist at the Center for Retirement Research. ‘They came to be that as a historical accident.’”

And also at CNBC, in 2017, reporter Kathleen Elkins called it an “accidental retirement revolution,” citing a recent Wall Street Journal article interviewing the so-called “father of the 401(k),” Ted Benna. Here are Elkins’ excerpts:

“The original proponents of the 401(k) plan, which has become the dominant source of retirement savings for most Americans, are rueful about the revolution they unintentionally began.

“’[Many early backers of the 401(k)] say it wasn’t designed to be a primary retirement tool and acknowledge they used forecasts that were too optimistic to sell the plan in its early days,’ The Wall Street Journal reports. ‘Others say the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers.’

“Even the ‘father of the 401(k),’ Ted Benna, tells The Journal with some regret that he ‘helped open the door for Wall Street to make even more money than they were already making.’”

Here’s the story of the “invention of the 401(k)” as told by the inventor himself, that is, at the website Benna401k LLC:

“The 401K name comes from a section of the IRS code. This section was added in 1978 but for 2 years no one paid much attention to it. A creative interpretation of that provision by a smart consultant gave birth to first 401k savings plan. The government tried to repeal the 401K provision twice once it realized the enormous tax loss from the 401K provision.

“401K plans as they evolved today are a brainchild of Ted Benna, a retirement benefit consultant working for a Pennsylvania based Johnson Cos. (not Johnson and Johnson as most sites wrongly claim). He devised the plan for a client who declined to use it because of the fear that once the government realized the tax loss potential of the plan the 401k provision would be repealed. After the client rejected it, Ted Benna persuaded his own company to use it.”

But this new conventional wisdom is missing several key points:

First, the implementation of the 401(k) plan was not the “invention” of employer-sponsored retirement accounts; these had existed before. What Benna “invented” (and, let’s face it, someone else would have come up with the concept eventually) was the concept of a matched savings incentive.

Second, the United States is distinctive in offering this matched savings structure, but that’s not what caused traditional defined benefit plans to close, one after the next, in the private sector. Broader forces are responsible here.

And all of this requires a more extensive history lesson.

The early history of retirement accounts

To start with, the impression one gains from the usual reporting is that the 401(k) is the start of retirement savings accounts. That’s not true at all. Here’s an article from the New York Times, February 24, 1952 (no online link; check your local library for newspaper database access), “Profit-Sharing Retirement Plans Advanced As Result of Increased Corporation Taxes”:

“Greater interest in profit-sharing plans as a means to provide retirement benefits for employes is expected this year as a result of the high corporation taxes now prevailing. Such planning showed a marked increase in 1951.

“With the earnings outlook for many companies facing uncertainty, management is finding this method of establishing employe retirement benefits attractive. Companies which have been reluctant to adopt pension plans with fixed charges have found profit-sharing a flexible method of accomplishing retirement purposes.

“The wide fluctuation in earnings of many companies has been one of the causes of strain in the conventional type of pension plan, and it is because of this hazard that many companies are electing to adopt profit-sharing, which is linked more with current operations than the standard pension plan. Advocates of the profit-sharing retirement formula contend their method eliminates the uncertainties in company payments into retirement plans.”

Nine years later, the Times reported, on September 19, 1961 (”Industry Cuts the Pie; An Appraisal of Profit-Sharing Plans And Their Recent Surge in Popularity”), that there were 35,000 profit-sharing plans, covering 2,000,000 workers. While a profit-sharing plan sometimes meant that companies would cut checks at the end of the year based on corporate profits, plans which deferred savings to retirement “still predominate by something like a three-to-one ratio.”

And on the cusp of the 401(k) revolution, in 1979, the Chicago Tribune reported (February 28, 1979) that “More firms eye pension plans.” The article cited Robert Krogman, vice president of Chicago Title and Trust Co., “which administers more than 130 employe benefit plans,” and reports (albeit without statistics) that retirement plans have become increasingly popular, especially among small employers offering profit-sharing plans as well as a form of pension called a “money-purchase pension plan.” This form of pension, which is almost gone from even the experts’ vocabulary, might have indeed been a routine part of retirement benefits: all it means is that the employer commits to making a fixed contribution to retirement plans, year in and year out, rather than based on profits and varying from year to year.

The tax code change

This brings us to 1978 and that tax code change. In 2014, Bloomberg provided a bit of a history lesson.

Despite the earlier numbers I just cited on the success of profit-sharing plans, IRS officials were concerned that their benefits were largely going to top executives. In response:

“They proposed regulations that would have required immediate taxation of money contributed into the plans in some cases, undercutting the whole concept.

“Congress in 1974 then froze the status quo in place for existing plans, effectively promising to set permanent policy and deferring a final decision. This was part of the Employee Retirement Income Security Act, which came to be known as Erisa.

“That created a situation where one set of rules applied to existing plans and there was no clear structure for setting up new plans.”

In the meantime, a larger tax reform was underway which resulted in the Revenue Act of 1978, which had as its primary objectives middle class and capital gains tax cuts, as well as the implementation of inflation-indexing of tax brackets. As a measure to build bipartisan support, it was proposed to add retirement savings incentives.

“Representative Barber Conable, the top Republican on Ways and Means, suggested the add-on related to profit-sharing plans that became section 401(k), [former Oklahoma Democratic Congressman Jim] Jones said. Conable, who died in 2003, had been talking to businesses such as Xerox Corp. and Eastman Kodak Co. that were major presences in his home region in upstate New York.”

Richard Stranger, a staffer and technical expert interviewed for the article, was tasked with drafting the legislative text. Bloomberg reports,

“The provision, changed and expanded in the years since, blessed the idea that employees could direct part of their salary into retirement accounts without paying taxes on it up front and established basic rules to prevent too much of the benefit from going to executives. . . .

“The issue wasn’t the focus of much intense lobbying, at least not as much as the rest of the law.

“That’s in part because people such as Carroll Savage had already done that work for much of the 1970s, helping prevent Congress from killing the plans in Erisa in 1974. They also built support for the idea that employees should be able to choose whether to accept compensation as salary or a deferred payment to be taxed only when they can actually spend it.”

And, as a brief postscript in the article:

“Stanger still shakes his head in amazement that the tax code section itself is so well-known by its number. In 1978, the plans were called cash or deferred arrangements.

“’We thought that the acronym CODA would take off,’ Stanger said. ‘But it didn’t.’”

The aftermath: what really caused the closing of defined benefit plans?

Yes, none of what I’ll say now is new to longtime readers (after all, this was the subject of my first article on this platform).

But let’s review what else happened at roughly the same time as the 401(k) was “invented.”

In 1974, the first law dictating funding requirements for American pension plans, ERISA, was passed. Prior to this, employers were at liberty to fund their defined benefit pension plans in any manner they wished, or not at all. Subsequent laws tightened funding requirements even further in 1987, 1994, and the extensive changes of the 2006 Pension Protection Act.

And in 1985, the first set of accounting requirements, FAS 87, was published, requiring employers to account for their full pension liabilities on their financial statements.

Both of these changes caused employers to look far more closely at the costs and the risks associated with their pension plans, and whether they were getting their money’s worth in terms of the appreciation (or indifference) of an increasingly mobile workforce.

Here’s an indicator of how little this has to do with the matched-savings innovation of the 401(k): the trend towards closing defined benefit plans in favor of defined contribution plans occurred just as dramatically in the United Kingdom, for many of the same reasons. Here, too, pension funding and accounting regulations were tightened; in addition, the country began to require that pensions index deferred benefits, that is, increase the benefits of those who left before retirement, to account for inflation up to retirement, as well as adding other costly requirements. And in response, companies closed their traditional plans for new employees, and opened defined contribution plans — not with a matched savings but simply a mandatory employee contribution and an employer contribution.

Similarly, Canadian employers had historically had the same traditional defined benefit plan structure for their employees as the U.S., and, in the same fashion, Canadian employers have been closing their plans, and, again, have been promoting retirement savings accounts to their employees. And in Australia, even though the “Superannuation” retirement plan mandate allowed employers to meet their requirements with defined benefit plans, they have nonetheless closed them.

Why does it matter?

Those who promote the concept that “401(k)s were an accident” are still hanging onto the idea that employers should be guaranteeing their employees’ retirement benefits, and that something went wrong with history that we ended up in a different state of affairs.

In the first place, that’s historically illiterate: even before the decline of defined benefit plans, most employees did not benefit from them, as even the Economy Policy Institute (cited above for their anti-401(k) lament) notes that in the early 1990s, before the decline, only 35% of private-sector workers had a DB pension.

And what’s more, the notion that employers should be expected to continue to offer traditional final-pay defined benefit retirement plans, knowing what we do now about the importance of pre-funding, longevity, risk, and all the rest, is profoundly mistaken.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Beating A Dead Horse, Etc.: Here’s More Research On Public Pensions and the ‘Contracts Clause’”

Originally published at Forbes.com on February 27, 2020.

 

Yes, readers, I have other topics I want to address than Illinois pension reform. But I am also attempting to clear out a dreadfully long list of draft articles and bookmarks, among them an article at MuniNet Guide from last August, by James Spiotto, “What Illinois Can Learn From the Supreme Court of Rhode Island and Even Puerto Rico About Public Pension Reform.”

Readers will recall that I had earlier this month cited some commentary at Wirepoints with respect to the contention made by pension reform opponents that, notwithstanding the clause in the Illinois constitution that protects past and future pension accruals and benefit increases, the Contracts Clause in the U.S. Constitution prevents the state from making any reductions even if an amendement were passed. But what makes Spiotto’s article worth sharing, and summarizing, is that it delves into the issue far more extensively to make the case that this is not so.

Again, reform opponents say that the U.S. Constitution prohibits any sort of reform that affects existing benefits, full stop. Spiotto writes,

“[T]he U.S. Supreme Court and virtually all state courts have recognized that the police powers of a government to impair contractual obligations for a higher public good, the health, safety and welfare of its citizens and its continued financial survival, cannot be waived, divested, surrendered, or bargained away. . . .

“Since 2011, there have been over 25 major state court decisions dealing with pension reforms. Over 80% (21 out of 25) of those decisions affirmed pension reform which provided reductions of benefits, including COLA (“Cost of Living Allowance”), or increases of employee contributions, as necessary, and many times citing the Higher Public Purpose of assuring funds for essential government services and necessary infrastructure improvements. Of the four states that did not permit public pension reform efforts, two states, Oregon and Montana, cited the failure of proponents of reform to prove a balancing of equities in favor of reform for a Higher Public Purpose.”

Of the two remaining failed reforms, one of these was, yes, Illinois. (I wrote at length about the Illinois Supreme Court’s decision in January.) The other was Arizona, which, like Illinois, had an explicit pension protection in its constitution. Unlike Illinois, however, all parties — state workers, legislators, and local governments — came together to pass an amendment enabling reform.

Spiotto also explains that the Illinois Supreme Court interpreted the constitutional protection of pensions as so strong as to mean that, unlike the acknowledged ability of the state to modify other contracts in the interest of a Higher Public Purpose, pension promises were unique in being fixed and permanent regardless of any such needs. But, Spiotto writes,

Virtually every other analysis has recognized that governments, state and local, could not surrender or bargain away an essential attribute of their sovereignty, namely, the police power of a government to be able to impair contractual obligations for a Higher Public Purpose for the preservation of government and the health, safety and welfare of its citizens. The U.S. Supreme Court for over two centuries has so held that the police power to impair contracts for a Higher Public Purpose cannot be divested, surrendered or bargained away as the cases of Stone v. Mississippi, 101 U.S. 814, 817 (1880), U.S. Trust Company of N.Y. v. New Jersey, 431 U.S. 1, 23 (1977) and their progeny have so eloquently ruled. Likewise, numerous state courts consistently have so held, most recently in the State of Rhode Island’s Supreme Court decision of Cranston Police Retirees Action Committee v. The City of Cranston, et al., Rhode Island Supreme Court, 208 A.3d 557 (June 3, 2019).”

The Cranston, Rhode Island, case deserves special mention; its pension plan was less than 60% funded, and the city responded by suspending the COLA adjustment for 10 years for police and fire retirees. Retirees filed suit and the courts, including the Rhode Island Supreme Court, decided in favor of the city, that is,

“The Rhode Island courts found that there was a contractual relationship that was substantially impaired by the 2013 Ordinance, but that the impairment was permitted as reasonable and necessary to fulfill an important public purpose. The court recognized the precarious financial condition of the city compounded by a reduction in state aid rendering a budgetary shortfall that resulted in reduction in salaries, public employees and services.”

In fact, subsequent to this article’s publication, in December, the United States Supreme Court weighted in, by declining to hear the case.

What’s more, Spiotto suggests that, in the case of Illinois, the court had come to its decision because the state had not increased taxes to solve the problem, so that “public pension unfunded liabilities were perceived by the Supreme Court of Illinois to be a self-inflicted crisis not borne out of the notion of poverty or inability to pay.” However, since that time, the state of Illinois has indeed raised taxes considerably and intends to raise them further with a graduated income tax. Therefore, “Any reluctance to permit reasonable and needed modifications of pension benefits due to the failure to increase taxes or the mistaken belief the unfunded liabilities are affordable should, for all practical purposes, be overcome and resolved by recent action at the state and various local levels demonstrating the limits of taxation and the unaffordable nature of certain pension benefits.”

And I’ll end this brief summary with a sentence with which Spiotto begins his argument:

“One of the hallmarks of a mature and successful society is the continued capacity for growth and change.”

Casting public pensions as immutable, even with respect to potential changes which minimize harm to their participants, regardless of the degree to which they stand in the way of the well-being of residents of the state or locality, is, to the contrary, a hallmark of a society on the decline.

Update: as it happens, James Spiotto passed away the very same day as I published this article. For the interested reader, here’s more about the man the Bond Buyer called “a legendary voice in the municipal industry for his bankruptcy and restructuring expertise that influenced governments, investors and federal lawmakers.”

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “It’s Time To End Social Security Opt-Outs For Everyone”

Originally published at Forbes.com on February 26, 2020.

 

Earlier this month, I wrote about the Windfall Elimination Provision and the Government Pension Offset, two provisions in Social Security which are designed to prevent double-dipping by workers who participated in both Social Security (directly or as a spouse) as well as another retirement system which opted out of Social Security.

Who are these workers?

Federal government workers who were hired before 1984 and who in 1984 declined to make a switch when offered the option, are covered by the Civil Service Retirement System, and

Public employees in 15 states, including California, Texas, and Illinois. (In Illinois, most direct state employees are covered by Social Security, depending on classification; employees at schools and universities as well as municipal workers are not.)

In addition, clergy and religious workers who complete Form 4361 and declare that they conscientiously/religiously opposed to social insurance, are exempt from FICA taxes for their ministerial income, and forego not just Social Security but also Medicare, which personal finance expert Dave Ramsey says he would do “in a nanosecond” but the site The Pastor’s Wallet issues strong cautions. For most of us, however, this is merely a bit of trivia.

To be sure, when Social Security was first enacted, far more workers were excluded: self-employed workers, government, farm, domestic, and non-profit workers were all added later. 1950 amendments added farm workers, domestic workers, and the self-employed; in each case with subsequent adjustments loosening the eligibility requirements. Also in the 1950 amendments, non-profit employers were included if two-thirds of their employees elected to be covered; in 1984, coverage was extended to all non-profit employees, except that religious groups who, as an organization, object to Social Security, are permitted to opt out as an entity; however, their workers must still pay in as if self-employed, except for those exempt as objecting clergy.

(And here’s an incidental piece of information on the question of coverage: it has long been claimed that the exclusion of farm and domestic workers was due to the demands of racist Congressmen from the South, because they wanted to keep black workers bound to low-paying jobs in their fields and kitchens; however, the record shows that their actual objection was to the social assistance provisions of Social Security rather than the social insurance elements earned by work history.)

All of which is context for an article from late January profiling the situation for teachers in Alaska, “No Social Security? For Alaska teachers, that’s just the way it is.” (The article is bylined as “Presented by NEA-Alaska” rather than being the product of a reporter at the Anchorage Daily News, where it’s published.) I’ve written before about the Illinois Tier 2 pensions, in which newly-hired teachers may accrue pension benefits lower than they would have under Social Security, and school districts may find themselves failing the “adequacy test” for public systems that don’t participate in Social Security. In Alaska, the legislature created a different sort of retirement system reform for teachers hired after 2006, a defined contribution system in which the employer contributes 7% of pay into workers’ accounts. That’s not in addition to Social Security benefits — that’s instead of Social Security.

At the same time, teachers and other public employees aren’t permanently excluded from Social Security. As the article explains:

“’Any single district can allow a vote to opt back into Social Security,’ [NEA Alaska President Tim] Parker said. “That option is right there in front of us.” From there, teachers in the district would decide the matter, either a straight up-or-down vote or an opt-in vote that would allow in those who wished to join, while other positions would be phased into Social Security as employees left and were replaced.

But, he added, a school district that wanted to opt in to Social Security would have to be prepared to pay for it.

“‘They’re on the hook for 6.2 percent for every one of their employees, every year,’ Parker said. ‘The employee is also on the hook for 6.2 percent. These things all happen in addition to the numbers that are going in on the defined contribution side.’

“At a time when state funding is tight, he acknowledged that might be a tough sale.

“’Where do you find an extra 6.2 percent?’ Parker asked. ‘It’s not an easy thing. Our budgets are very tight.’

“Still, Parker said he wouldn’t be surprised to see some of the state’s smaller districts, where teacher turnover is especially high, opt in to Social Security as a way to attract candidates.”

And that’s the key:

In the same way as federal employees were moved to the Social Security system in 1984, so, too, for state and local public employees to be moved into Social Security should not be a choice left to be made by school districts or teachers focused on the short-term expense of an additional a 6.2% of pay each.

After all, to revisit the nonprofit workers: in 1951, they were provided a mechanism to opt into Social Security. In 1981, over 20% of those workers were still not a part of the system, necessitating the 1984 legislation mandating their inclusion.

And I’ll point out that my longstanding proposal to move Social Security to a flat benefit system would solve the issue nicely. But that’s hardly the only way to get from here to there: although the system initially excluded all state and local workers due to federalism concerns (that it, it was seen as inappropriate for the federal government to tax state or local governments), and only in the 1950s permitted states to elect participation, the federal government’s power relative to state governments has expanded to such a degree (whether directly or in the guise of withholding grant money to states) that it’s hard to find this rationale credible any longer.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.