Wednesday, October 29, 2008

Leading economist says we will have to slash benefits for seniors, especially by "means testing" social security


In a feature called “The Big Idea” in Money Magazine, for November 2008, p. 28, Isabell Sawhill maintains that social security benefits for many Americans should be cut, now. The interview is authored by Goerge Mannes and is called “Why we have to cut benefits for seniors: Economist Isabell Sawhill says America’s elderly are getting too big a slice of taxpayers’ money.” Online, the story appears on CNN’s money site here.

She says, “Right now the benefit formula provides a pretty good retirement income to those who make more than $100000 a year. I don’t think that the working-age population should continue to fund benefits for those who are so well off.” That certainly sounds like a call for "means testing" of social security benefits, or possibly even revising the whole "number holder" concept.

Well, today, most retirees collect social security benefits based on what they contributed. Generally, the more they contributed in FICA taxes (and sometimes, the more their spouses contributed), the more they collect. It’s true that in an sense the income to SSA comes from current taxes. But current retirees have already contributed. The people who started the system in the 1930s as FDR developed it had not contributed, however.

She also refers to “the fact that every individual, every generation, should expect more from their government when they’re young and less when they’re old.”

Does this mean we cap the age at which we offer certain Medicare treatments?

Social conservatives want to see adult children (especially the childless and unmarried) take more generational responsibility for the elderly. As I noted, twenty eight states have filial responsibility laws and are going to come under pressure to try to use them.

Monday, October 27, 2008

ING (US subsidiary of Dutch insurer) offers retirement planning site for public and non-profit employees


ING Life Insurance and Annuity Company (a US subsidiary in Atlanta, of the Dutch insurer and bank ING Groep NV) has made a new service available to employers in deploying their retirement plans, whether contributory and matched or defined benefit (pensions). The service is called “Plan With Ease”, link here. The service is especially target-marketed for certain non-profits, local governments, school districts, colleges and universities, and some other 501C3’s, and emphasizes 403 and 457 plans. The site has both sponsor and participant logins. It also has a number of calculator tools for employees and retirees.

403(b) plans are tax-sheltered annuities operated by public schools and other tax-exempt employers (often for teachers). 457A(b) plans are operated by state and local governments for employees. Generally employees have to buy these plans through employers.

Yahoo! Business has the Press Release here “ING introduces planwithease.com: New Service Helps 403(b) Plan Sponsors Meet IRS Requirements”. The site appears to cover other subjects however. I think it is likely to expand in content scope. The press release will probably appear on the ING US site very soon.

The ING subsidiary ReliaStar used to operate a somewhat similar site called “I Hate Financial Planning”, which aimed at the financial planning needs of the entire general public.

ING fell below 8.00 a share for a while this morning. Like all major financial companies in the US and Europe, its stock has been battered by investor fears in the wake of the credit and financial crisis. It has also accepted a cash infusion by the Netherlands government (infusions from European governments have become common in the past few weeks for banks insurers, in the wake of the American bailout.) My issues blog has a major story about it dated Oct. 19, here.

Sunday, October 26, 2008

Pension Benefit Guaranty Corporation and pension reporting system (and ERISA) need subtantial reform; $100 billion bailout looms


A University of Illinois finance professor, Jeffrey R. Brown, warns that the next big bailout could be of our whole pension system. The Pension Benefit Guaranty Corporation (PBGC) is underfunded. The amount of underfunding was $14 billion a year ago, and is likely much higher now. Brown thinks a taxpayer bailout could amount to $100 billion in a short time.

The article appeared Oct. 15, 2008 in the University of Illinois New Bulletin (from Champaign-Urbana). The link is here.

This blog covered the way PGBC works with a Sept. 16, 2008 blog entry, right after the Lehman Brothers crash. PGBC can force an employer to terminate a plan, but normally it requires employers who want to terminate to set up replacement annuities for pensiorers.

The experience of retirees after PGBC takeovers has been mixed. There are maximums that will be paid, but some retirees have been fortunate enough to continue receiving close to all of what they received before. Common sense says that could go south during the current crisis.

The problem is that pension funds invest in stocks and bonds and various instruments the way other institutions do. Pension fund managers are under pressure at work to show short term returns. That could have encouraged risky investments, just as it did in the securities industry as a whole. The plain truth is that “professional investors” invest other people’s money in a short-term, quota-driven environment and make investments that individuals probably would not make on their own. Would you invest your own money on buying mortgages for unqualified applicants? Probably not. But if you did it for a living (with other people’s money) you might feel pressured to. That’s part of the tremendous crisis in business ethics in our society, that David Callahan wrote about in “The Cheating Culture.”

So pension funds have seen their assets go down, probably more than “Joe the Plumber’s” own 401K. That means that companies have to make up the difference, which, in some cases, could drive them into bankruptcy and either voluntary or forced termination of the plan. That could be another reason why stock market valuations have sunk so much recently.

Pension plans are often set up based on the constituent businesses that larger holding companies (as they are traded on exchanges) have combined. Life insurance holding company stocks may be tanking because of the credit crunch, but individual companies would be all right, except for the fact that individual companies themselves were investors in the market. While there are regulations that provide some safety, it seems as they were not adequate. So one way another, the companies (or their holding companies) will have to buttress their pensions for possibly face terminations. If this happens enough, the PGBC itself will need a bailout.

Brown suggests reforming the system, requiring employers to purchase private insurance for their funds, based on rated risk, rather than flat fees. He believes that reporting to retirees of fund health needs to be much more transparent, and possibly be available online rather than just in once-a-year statements that are usually badly outdated.

Thursday, October 23, 2008

Company offers employers major compliance tool for 401K plans


A somewhat obscure topic is 401K compliance testing. These have to do with government and IRS rules that are supposed to prevent employers from favoring “highly compensated employees” unfairly. In view of the concerns over CEO pay during the financial crisis, it’s possible to debate how effective these are. A typical source on the subject is CPAS, “401K Compliance Testing Rules,” link here.

There are "discrimination tests" called ACP and ADP regarding qualified non-elective contributions (QNEC’s) or qualified matching contributions (QMAC’s), described, for example, at Benefits Link, “Safe Harbor Corrections for ACP and ADP test failures”, link here.

Today I got an email from a company called Peachtree LBP which offers a product LBP 401(k) Plus, which it says eliminates non-discrimination testing issues with methods alternative to safe harbor. The link is here.

There is a Reuters story Oct 23 that GM has suspended 401K contributions, link here.

Friday, October 17, 2008

Social Security retirement benefits to increase 5.8% in 2009


Some good news for many retirees came out today. The Social Security Administration, starting in January 2009, will increase social security retirement benefits by 5.8%, the largest cost of living increase since 1982.

The increase is significant. It will help retirees with living expense and with maintaining principal in their retirement assets (by adding more to it). I believe this occurs with the January 2009 payment, even though in theory that payment represents December’s benefits. It may help retirees living alone on social security qualify for senior apartments in many parts of the country (generally, the south or midwest and regions away from the largest cities have the more affordable apartments).

Retirees with Internet access can check their benefits online after setting up a free SSA account with password. Retirees can order proof-of-income letters from SSA through the Internet. SSA personal information access is often unavailable at night or on many weekends during system maintenance.

The AARP bulletin story is here.

Sunday, October 12, 2008

Northern VA church presents series on eldercare and senior housing; adult child responsibilities discussed


Today I attended a Sunday school presentation on eldercare in northern Virginia.

The presenter reviewed the “Senior Housing Options” from this website. The main opportunities listed were “independent living communities” (country average $1000-$2500 a month, discussed here before; sometimes less in less populated parts of the country, sometimes regulated by HUD or local laws), assisted living (average $1800-$3500 a month), nursing homes ($4000 to $8000 a month), residential care homes ($1500-$3000 a month, like private homes), respite care (to break from a caregiver), $75-$150 a day, and home care with home health aides ($16 to $20 an hour, weekly minimums).

An alternate website is this.

I told the class that filial responsibility laws in 28 states are likely to become controversial as states, pressed by the financial crisis, might be more likely to enforce them soon, although they could meet multiple legal challenges. These laws could hit childless adults very hard, especially in families where there was sibling disagreement resulting in legal mediation. This could provide a future economic shock.

Saturday, October 11, 2008

Is term life the best choice for everyone? Or is this just sales manipulation?


In 2003, while still in Minnesota, I was invited to interview for a role in Citibank’s Primevest. The company, which recruited at job fairs in a down economy then, was seeking to set up an operation to get people to convert their life insurance to term from any other form (whole life, interest-sensitive universal life, or even variable life). During the sales pitch, the presenter said that this is a potential $40 trillion market. That was five years ago.

You often hear financial people say on television today that the only kind of life insurance someone should have is term (with no residual cash value), because it is far cheaper for the same level of protection.

Not all agents agree with the idea that everyone should race for the exits from other products. But if you have substantial dependent responsibility and if their financial well being needs to be insured, then term makes the most sense for a lot of people.

Other forms of life make sense when parents buy them for kids. Over a lifetime, the cash value or investment portion can accumulate a lot of value, which could come in handy should there be some calamity.

When I was 35 and had just moved to Dallas from New York, I got a call from somebody from AAA about a whole life policy. Yes, he came to my apartment and I let him manipulate me into buying a whole life policy from Standard Life of Indiana (back in 1979). I eventually surrendered it and got some money back out. I wouldn’t let anyone do that today.

It seems that so much of our workforce is committed to manipulating people into buying things that ought to be more transparent to start with. If term is right for you, it should be simple and there's no reason that you need to pay an agent commission, it would seem. No wonder we are living beyond our means.

Friday, October 10, 2008

McCain proposes allowing seniors to delay withdrawals of deflated IRA assets


John McCain has suggested that, if he were elected, he would urge repeal of tax rules that require mandatory distribution from IRA’s (or 401K's) on a schedule starting at age 70-1/2. Or it might be delayed at least one year. The point is to protect the retiree from having to sell deflated assets until they have time to recover their value, as well as to avoid burdening the retiree with income taxes on the distribution.

SmartMoney has a page “Understanding the IRA Withdrawal Rules” here.

The “First Read” column on MSNBC quotes him directly:

My friends, we have to protect investors, especially those relying on their investments for retirement," McCain said five minutes into his remarks. "Current rules mandate that investors must beginning to sell off their IRAs and 401ks when they reach age 70 and a half. To spare investors from being forced to sell their stocks at just the time when the market is hurting the most, those rules should be suspended”

And columnist Adam Aigner-Treworgy notes that McCain gave no other explanation.

Since Obama says that seniors making less than $50000 a year would pay no taxes at all, Obama may be making a similar "promise." It was Gerald Ford in the 1970s who warned about Jimmy Carter's "promises."

Thursday, October 09, 2008

Retirees feel pressure to dump stocks immediately, given fiscal crisis


One of the most disturbing aspects of the financial crisis is indeed that senior citizens, as a class of people, may feel pressured to pull all of their money out of stocks into cash-like, insured instruments. If all seniors did this at once, the pressure on the equity markets would be enormous, perhaps pressing it down another 15%, the Dow to below 8000.

Young and middle aged people, everyone says, have the luxury of dollar-cost averaging. They can simply buy more shares while equity markets are down and take advantage of the rebound in some number of years. The one hooker is that unemployed people (or those on low-wage jobs, the “Nickel and Dimed” class that Barbara Ehrenreich talks about) can’t very easily, and young adults with huge college loan debts also feel similar pressure.

There is, in the way equity markets behave, an unavoidable aspect of financial Darwinism. That is to say, people go through life cycles, just like in biology class. When people reach a certain age, they no longer have the same opportunities, just because of mathematical demographics. The opportunities reside in younger generations. It’s supposed to be their turn. But this essentially mathematical fact can put even more pressure on the markets.

And then, if you will, think about the demographics of longer life span. We are creating a new class of dependents, the long-lived elderly, who in many cases may no longer have the capability of returning to work and expanding their own time horizons for investment strategy. At the same time, their adult children, some of whom are childless, are finding that they will have dependents in circumstances that go beyond the scope of their own “choices.” States with filial responsibility laws could (ironically and unintentionally) suddenly exacerbate the fiscal crisis if they start enforcing them at once! A critical economic issue is keeping seniors able to work, and keeping employers interested in employing them longer. That doesn’t sound easy given the distractions of the current crisis.

Wednesday, October 08, 2008

Retirement accounts have lost $2 trillion during fiscal crisis


The Washington Post is reporting (on Oct. 8 2008) that Individual Retirement Accounts (IRA’s) have lost $2 trillion during this current fiscal crisis (actually, during the past fifteen months). The story is by Julie Hirschfeld Davis of the Associated Press, reprinted today in The Washington Post on the front page of today’s print version (Wednesday, Oct. 8), link here or here on the AP site.

By way of comparison, I recall being told in 2003 in a sales pitch (for a job) by Citigroup PrimeVest that the potential market of converting ordinary life insurance to term life was $40 trillion. That comparison sticks in my mind.

The Bailout will cost $1 trillion (some of which could be recouped), and the stock market loss on Sept 29 when the first Bailout failed as about $1 trillion.

Our national debt is about $10 trillion, or about $33000 per person. Imagine if that could be confiscated (accounting for minors, those with less than that amount, the poor, etc).

Generally, many people approaching retirement seemed to have had 401K’s with some portion of financial stocks often connected to the faulty mortgage market.

The loss of wealth by retirees could present issues for their adult children, as noted earlier on this page (as with Monday’s posting). Families, not always by willing choice, are returning to live under the same house again.

This morning (Oct. 8), on ABC "Good Morning America", Sherry Parrish offered advice on how adult children could help parents exposed to financial losses.

Monday, October 06, 2008

Filial Responsibility: do we need a new concept of "household head" in the law?


This column has discussed the topic of filial responsibility laws (particularly in July 2007), on the books in 28 states in the U.S.m and more recently the notion of Confucian “filial piety” accepted to as an inherent part of culture in much of China.

I’ve noted that states rarely so far have enforced them outside of giveback situations, but that might change quickly with the fiscal crisis. It’s been suggested (here on July 24, 2008) that their constitutionality could be challenged, particularly on "takings clause" and due process grounds.

One other aspect of the problem strikes me. A parent is responsible for his or her minor children, but he or she (or the couple) has the right to control the behavior of the minor children. In contrast, an adult child is potentially responsible for an indigent parent, in at least 28 states, but he or she does not have legal control over the behavior of the parent that could lead to the indigence. This could well affect an adult child who did not have the experience of having or raising his or her own children, or never made the behavioral “choices” that lead to that responsibility.

As a societal matter, such an observation seems to comport with the calls from social conservatives and religious groups for more emotional “solidarity” within. Nevertheless, the legal system would have to deal with this observation. In 2005, Pennsylvania, with some measure of stealth, moved filial responsibility from the welfare code to the family code. The intention could have been to convey the idea that every extended family, when it has impoverished or disabled adult members, should have a “head” who takes responsibility for them but who has some authority that goes with the responsibility. If so, that would be a novel concept in the law, but it is worthy of exploration. The "power of attorney" concept(s) only partially addresses the problem. Such a responsibility (to "play family") can fall on the shoulders who never became a household head by marrying and/or having children. There would occur other questions about how such a concept works in many areas (obviously tax policy and maybe social security policy, as Nancy Polikoff’s book “Beyond (Straight and Gay) Marriage: Valuing all Families under the Law” (reviewed on my Books blog Sept. 21), as well as how the household head is expected to behave, socially and with public expression. Again, that’s why writers like Jennifer Roback Morse (reviewed on the same blog Sept 25) argue that there is too much “laissez-faire” in American families and that more solidarity should be expected among relatives, apparently even among those without children. In past generations, it had been the childless who were expected to stay home with the elderly parents.

Sunday, October 05, 2008

Fiscal Crisis: Assessment for Retirees: Go back to work?


So, what does all of this fiscal crisis mean for retirees? Oh, please—we’ve heard about dwindling IRA’s and 401K’s for the past two weeks. I dread the opening tomorrow, because underneath the emergency credit flow rescue, the fundamentals are bad. We don’t have an anchor on how to maintain our standard of living in a sustainable manner. Yes, we need a Pickens Plan and a number of them. Yet, that, to many seniors, seems like the next generation’s problem. But those are “our” kids and grandkids. I do recall, as I write this, the best students when I substitute taught. They’re going to have to solve this problem. They’re going to remember calculus test problems when they have to solve real ones.

And there is another reason to worry. The banking system is in disarray because the whole system that tells banks how much they can safely lend has broken down. That system resides in artificial financial instruments that no one understood. What happens is that the real economy comes back to real value in the products and work of real people.

So, some seniors are faced with going back to work. Maybe I am. There is a perception that employers won’t want us, because we will “cost” too much. I can imagine a future of night shifts at 7/11’s, “paying my dues” again, bringing back the mood of the military draft.

The best chance for employment is some scenario that takes advantage of a particular “wisdom” that a senior has accumulated. One looks for opportunities where intellectual or job disciplines need to be combined in unusual ways, analytical jobs involving “connecting the dots” that sometimes only older people will have enough life experiences to be able to see.

One observation is that a lot of senior employment opportunities have involved selling things. Thankfully, perhaps, the pressure to go to work selling cheesy financial products or lifestyle amenities might go away as the economic crisis exposes the folly of the “always be closing” sales mentality. On the other hand, employment in areas requiring “intimate” contact with others – something many people find unwelcome in our individualistic world – is likely to increase because of eldercare demographics.

It's important to remember that the almost exponential increase in the demand for end-of-life care could become a major component of the next major economic shock and public policy challenge.

The worst thing that could happen for the economy Monday morning (tomorrow!) might be if every retiree sold all of his or her stocks out of fear. You could have a run on equities just like a run on the banks or money market funds. Then the market would tailspin into an immediate depression dwarfing the size of the federal bailout on Friday.

The Metro section of the Sunday Washington Post has a story by Pamela Constable, “Struggling Seniors: A Fiscal Lesson for the Ages: For Some, the Economic Turmoil Is a Grim Reminder of Past Crises. For Others, It Marks a New Fear. Across the Region and Across the Spectrum, Residents Are Adjusting to Changes in Their Fortunes, link here.

Ther AARP links for job-finding for retirees are here and especially ("2008 Best Employers For Workers Over 50") this.