Retirement healthcare could bust the budgets of many US cities [Brookings Institution]

While the deficits of public pension plans have been widely discussed, much less attention has been given to the obligations of US local governments to supply healthcare for their retired employees.

The unfunded liabilities for retiree healthcare for the 30 largest US cities exceeds $100bn, according to the Pew Charitable Trusts, a Philadelphia-based non-profit organisation. The unfunded liabilities for the 50 US states exceeds $500bn, according to Standard & Poor’s, the rating agency.

Retiree healthcare plans are uniquely American. They exist because the US has never offered universal healthcare before Medicare, the national social insurance programme, at age 65.

Many employees of cities and states retire between 50 and 55, so local governments usually provide them with highly subsidised healthcare between retirement and Medicare, and sometimes beyond.

Yet retiree healthcare plans of local governments, on average, have less than 10 per cent of the funding they need to meet their future obligations. By contrast, if a public pension plan were less than 60 per cent advance funded, it would be considered to be in dire straits.

Read the rest at brookings.edu…

A Tale of Six Cities: Underfunded Retiree Health Care [Hoover Institution]

The growing costs of health care benefits for retired public employees—known as OPEB (other post-employment benefits)—pose a serious challenge to many city governments. In this paper, we analyze the retiree health care systems of six American cities: Boston, Minneapolis, Pittsburgh, San Francisco, San Antonia, and Tampa, Florida. Without major reforms, most of these cities will have to devote a much larger share of tax revenues to OPEB benefits and consequently less to essential functions like schools and police. We outline a broad variety of reasonable measures that cities could adopt to materially reduce their long-term OPEB liabilities.

Read the rest at hoover.org…

This single act would help many Americans reach retirement savings goals [Market Watch]

It’s true for everyone: despite our best intentions, we often fail to accomplish what we set out to do. When it comes to retirement investing, millions of Americans do not meet their own declared saving goals for retirement.

As a result, almost one-third of the U.S. population has no retirement savings at all, while many others will fall well short of what they will need for their Golden Years.

A solution can be found in the field of behavioral economics, which suggests ways to help Americans start saving. It seems that saving is a lot like dieting — small changes can help you reach your goal.

Read the rest at marketwatch.com…

State Programs to Solve the U.S.’s Retirement Crisis [Real Clear Markets]

The U.S. is facing a retirement crisis. About one third of Americans have no retirement savings, and most don’t have enough savings to retire comfortably. One main cause of this financial shortfall: more than 60 million American workers have no retirement plan offered to them by their employer.

The U.S. Department of Labor (DOL) recently issued a rule proposal intended to encourage more employers to offer a retirement plan to their workers. Specifically, the DOL proposed to exempt from ERISA, the federal pension law, state-sponsored plans for individual retirement accounts (IRAs). These state plans would require employers that do not already offer any retirement program to forward to the plan a state-specified percentage of their workers’ salaries. These monies would be invested as retirement savings, unless workers opted out of this state-sponsored plan.

The DOL proposal is an understandable response to the failure of Congress to pass federal legislation for a similar program called the Automatic IRA — with regular contributions from workers without retirement plans unless they opted out. However, the DOL proposal gives too much leeway to the states in offering their own versions of the Automatic IRA.

Here is the background to the DOL proposal. Most employers without retirement plans run small businesses with fewer than 100 workers. These employers do not want the financial burdens of operating and contributing to a retirement plan.

Read the rest at realclearmarkets.com…

Bob Pozen Knows Retirement [Retirement Income Journal]

Few people in the financial services industry have been more productive and influential than Bob C. Pozen. The 69-year-old Harvard-and-Yale-educated lawyer has served as president of Fidelity Investments, as chairman of MFS Investments, as a presidential adviser and SEC official, as a lecturer at MIT and as a research fellow at the Brookings Institution. He has written books on topics both macro (the mutual fund business, the Global Financial Crisis) and micro (personal time management).

Back in October, Pozen moderated a panel on Innovative Retirement Products at the 2015 Fall Journal of Investment Management conference on retirement at the MIT Sloan School of Management. The panelists included Peggy MacDonald of Prudential Financial’s pension risk transfer business and Tom Reid of Sun Life Financial of Canada.

During the panel discussion, Pozen spoke favorably about the usefulness of annuities in mitigating longevity risk. In a recent phone conversation with RIJ, he expanded on some of his views regarding retirement.

Read the rest at retirementincomejournal.com…

Retiree health care a budget buster [Boston Herald]

Like most American cities, Boston has promised to pay most of the health care premiums for its employees after they retire — which can be as early as age 45 or 50. Boston also subsidizes the Medicare premiums of its retired employees after age 65.

As a result, Boston reported an unfunded liability for retiree health care in 2013 of over $2 billion (that is a B!). This equated to a liability of over $3,000 per city resident — the fifth highest per capita of large American cities. And these figures did NOT include Boston’s share of another almost $2 billion in unfunded health care liabilities
for retired employees from the MBTA.

The good news. In fiscal 2014, Boston contributed $154 million toward retiree health care — more than 10 percent of its total payroll (including schools) for that year. This sum covered its current benefit premiums plus $40 million to help pre-fund its future liabilities for retiree health care. Moreover, Boston committed to keep contributing current benefit premiums plus $40 million to pre-fund such future liabilities.

The bad news. Boston is using two overly optimistic assumptions in estimating what it would take to address its future costs for retiree health care.

Boston is assuming that it can meet its commitment by making large payments out of each year’s budget despite more retirees and rising premiums. This works out to be an average increase of 4.5 percent per year according to Stanford professor Josh Rauh. Can Boston really devote $400 million out of its 2035 budget to retiree health care given competing priorities like police and schools?

Read the rest at bostonherald.com…

States Are the Laboratories For Retirement Ideas [Real Clear Markets]

When policy makers and commentators express concerns about how little most American workers have saved for retirement, they should focus on three related facts:

1. Roughly half of all American workers are employed by a firm that does NOT offer them any retirement plan.
2. Only 14% of small firms — with fewer than 100 employees — offer them any type of retirement plan.
3. 42 million workers –approximately one third of full-time workers in the private sector — work for small firms.

Of course, these employees of small firms have the right to go to a financial institution, file an application for an Individual Retirement Account ( IRA ), and enjoy federal tax deductions for their IRA contributions. Yet relatively few overcome the forces of inertia and take the time to open an IRA on their own. Only about 5% of employees without a retirement plan at work contribute to an IRA on a regular basis, according to best estimates.

In response to these problems, Mark Iwry and David John (both from Washington think tanks at the time) developed federal legislation that would create the Automatic IRA. This legislation would require all employers without a retirement plan, and with over a specified number of employees, to connect their payrolls to a retirement plan at a qualified financial institution. Then, approximately 3% of the salary of these employees would be contributed each month to this retirement plan, unless they decided to opt out.

Such opt-out plans have been very successful in raising the participation rate of employees in retirement plans, especially low-income and minority employees. In addition, the Automatic IRA does NOT require any contribution by the employer to the retirement plan of its employees. And the proposed legislation has garnered considerable support from both Democrats and Republicans. Nevertheless, Congress has not come close to passing the Automatic IRA.

Read the rest at realclearmarkets.com…

Self-Funding of Health-Care Plans by Small Firms: Risks and Reforms [Risk Management and Insurance Review]

Small employers that offer health insurance have usually offered fully insured products through traditional health plans. Recently, the Patient Protection and Affordable Care Act (ACA) has created new requirements for fully insured products that will entice more small firms to fund their own health-care benefits. However, self-funding poses significant risks to these small firms, their employees, and state exchanges. To mitigate some of these risks within current political realities, we recommend advance disclosures—to small firms of material changes in their stop-loss policies, and to their employees that premium subsidies are available only on ACA exchanges. We also suggest strengthening Small Business Health Options Program exchanges by broadening the availability of subsidies and building partnerships with brokers. Finally, we recommend an expanded role for brokers and third-party administrators in helping small firms improve their choice of health-care insurance.

Read the rest in the Risk Management and Insurance Review