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Thought Mortality Was Dead?
Source: Cambridge Associates

Considerations for Pensions Given the IRS’s Delay in Implementing RP-2014

Longevity risk, the risk that plan participants live longer than assumed, gained widespread attention in October 2014 when the Society of Actuaries released its draft of updated mortality assumptions (called RP-2014). Because this was the first update to the standard assumptions in over a decade, the change from the previous tables was noticeable: a boost of life expectancy of two to three years, on average. By 2016, accounting auditors largely required defined benefit plan sponsors to use the updated assumptions on their financial statements, resulting in an average drop in reported funded status of 4%–8%.

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Major Savings and Reforms Budget of the U.S. Government Fiscal Year 2018
Source: Office of Management and Budget

This volume describes major savings and reform proposals included in the 2018 President’s Budget. It includes both discretionary and mandatory savings proposals that bring Federal spending under control and return the Federal budget to balance within 10 years. These proposals encompass a common sense approach to redefine the proper role of the Federal Government, and curtail programs that fall short on results or provide little return to the American people.

In total, this volume highlights 2018 savings of $57.3 billion in discretionary programs, including $26.7 billion in program eliminations and $30.6 billion in reductions. The volume also describes the major mandatory proposals summarized in Table S-6 of the Budget volume.

Going forward, the Administration will build on these proposals in order to implement the President’s charge to create a leaner, more accountable, less intrusive, and more effective Government.

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What Are the Costs and Benefits of Social Security Investing in Equities?
Source: Center for Retirement Reasearch

The brief’s key findings are:

  • One option for helping address Social Security’s long-term financial health is to shift a portion of its trust fund reserves into equities.
  • Of course, equities would expose the program to greater financial risk.
  • However, in terms of financial risk, both retrospective and prospective analyses suggest that equities would improve Social Security’s finances.
  • In terms of critics’ concerns:
    • little evidence exists that trust fund equity investing would disrupt the stock market;
    • the experience with the Thrift Savings Plan for federal employees provides a road map for separating the government from investment decisions; and
    • accounting for returns on a risk-adjusted basis would avoid the appearance that substituting stocks for bonds provides magic money.

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Here’s what you probably don’t know about Illinois pensions:
Source: Crain’s Chicago Business

Illinois’ budget mess is the stepchild of Illinois’ pension mess, and for that perhaps nothing incites more steam-coming-out-of-the-ears fury from critics than the volume of six figure annual retirement payouts—topped by one at $581,000—pledged to former public workers.

Yet a BGA analysis of 2017 data from major pension funds for state and municipal employees vividly illustrates the disconnect between high-rolling pensions, legally protected but irksome as they may be, and the deep financial plight experienced by many of those funds.

Simply put, the state’s 17 largest pension funds are slated to pay out more than $17.3 billion in benefits to some 483,000 retirees and survivors this year, totals that underscore the broad reach of pension checks for former public employees. Those payments do not come direct from tax money, though there is indirect correlation that can render the public confused and budgetmakers dyspeptic.

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Actuarial Inputs and the Valuation of Public Pension Liabilities and Contribution Requirements: A Simulation Approach:
Source: Center for Retirement Research

This paper uses a simulated public pension system to examine the sensitivity of actuarial input changes on funding ratios and contribution requirements. We examine instantaneous and lagged effects, marginal and interactive effects, and effects under different funding conditions and demographic profiles. The findings emphasize the difficulty of conducting cross-sectional analyses of public pension systems and point to several important considerations for future research.

The financial condition of public pensions has drawn significant scrutiny in recent years. Much of that attention focuses on the effect of actuarial assumptions and methods on the accuracy of pension liabilities and the adequacy of sponsor funding practices. For example, there is an active debate on whether public pensions should continue to use discount rates that reflect historical investment returns (NASRA 2015) or select actuarial discount rates that reflect the certainty of future benefit payments (Biggs 2012; Novy-Marx and Rauh 2011). In 2013, Moody’s Investor Services adopted its own actuarial procedures to evaluate the financial condition of public sector pension systems, rather than rely on valuations reported under generally accepted accounting principles (Moody’s 2013). And, the Governmental Accounting Standards Board recently revised pension accounting standards (GASB 67 and 68) to significantly change the way actuarial inputs affect financial reporting (GASB 2012).

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Attorney Aaron Maduff on the Constitutionality of the Legislature’s New Effort to Control Pension Costs
Source: Illinois Channel

Attorney Aaron Maduff on the Constitutionality of the Legislature’s New Effort to Control Pension Costs.

From Springfield:  We talk with attorney Aaron Maduff, one of the lawyers who argued before the Illinois Supreme Court, when the Court ruled the legislature’s effort to diminish pensions was unconstitutional.

Now as the Illinois legislature attempts a new approach to control pension costs, we hear Mr Maduff’s views of whether this effort is constitutional, and if not… what if anything can be done to control the state’s rising pension obligations.

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Retiree Health Care Benefits for State Employees in Fiscal Year 2015
Source: NASRA

Other Postemployment Benefits (OPEB) is an umbrella term that characterizes retirement benefits, other than pensions, that are offered to employees of state agencies and participating political subdivisions who meet designated age and/or service related eligibility criteria. The most significant costs associated with OPEB benefits are for employer-subsidized health care for retired employees.

Nearly every state and most local governments provide access to health benefits to retired employees, and, in most cases, this coverage includes spouses and dependents. This employer-subsidized coverage typically serves as the primary health coverage until the retiree reaches age 65, when it becomes secondary to Medicare. The level of benefits, and their associated costs, depends on an assortment of factors including eligibility requirements, benefit type, and the plan’s actuarial assumptions and methods.

In 2015, approximately 80 percent of state government units offered health insurance to retirees under age 65 and approximately 70 percent offered the benefit to those over age 65. These percentages are essentially the same for large local governments (over 10,000 employees), with smaller local governments less likely to offer insurance for either

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Make the call to stop pension cuts
Source: We Are One-Illinois

Call your state representative TODAY to urge a NO vote on SB 16, HB 4027, HB 4045 or any other bill that cuts the pensions of public employees. Dial 888-412-6570 or Click to Call.

In recent years, the Illinois Supreme Court has twice found legislation reducing the pension benefits of active and retired public employees to be unconstitutional. So why does Governor Rauner keep pushing to cut public employee pensions—and why are some legislators going along with him?

It’s important to note that no legislation before the General Assembly would cut the pension benefits of current retirees. There is widespread acceptance that the court has flatly rejected any reductions in the pensions of those who have already retired. And it’s important to remember that, despite strong opposition from the unions of We Are One Illinois, the General Assembly acted in 2010 to significantly reduce the pension benefits of all those hired after January 1, 2011 (Tier 2 pension participants). The courts have consistently ruled that only the benefits of current employees and retirees are constitutionally protected. Benefit reductions—or even elimination—are legal for any employee not yet hired at the time changes to the pension code are made.

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Why Employers Should Care About the Cost of Delayed Retirements
Source: Prudential Financial, Inc.

Having employees able to retire “on time” is a win/win scenario for both employees and employers. In a perfect world, all employees would be able to begin enjoying their retirement years when they wish, and employers would, therefore, be better able to manage workforce resources and costs. However, in today’s society, many employees are expected to delay their retirements beyond their desired retirement ages due to financial concerns, such as having inadequate savings to sustain them throughout their retirement. To quantify the impact of delayed retirements on employers’ costs, Prudential conducted research1 using workforce composition and cost assumptions based on national averages for private sector workers. The research indicates that a one-year increase in average retirement age results in:

  1. An incremental cost of over $50,000 for an individual whose retirement is delayed.2 This represents the cost differential between the retiring employee and a newly hired employee.
  2. Incremental annual workforce costs of about 1.0%–1.5% for an entire workforce.3 For an employer with 3,000 employees and workforce costs of $200 million, a one-year delay in retirement age may cost about $2-3 million.

To put this in perspective, we compared the cost of delayed retirement to other types of workforce costs,4 and found that, on an aggregate national basis, a delay in retirement may

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“How Will More Retirees Affect Investment Returns?”
Source: Center for Retirement Research

The brief’s key findings are:

  • Economic theory suggests that retirees draw down the assets they accumulated in their work lives, so a higher retiree-worker ratio reduces the supply of saving, thereby increasing investment returns.
  • However, research generally shows that retirees draw down their wealth much more slowly than expected, particularly the wealthy who hold most of the assets.
  • Therefore, as retirees retain much of their wealth, a higher retiree-worker ratio leads to a greater supply of savings and a decrease in investment returns.
  • To the extent that investment returns decrease, workers will need to save more to maintain their standard of living in retirement.

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