Tag Archives: defined contribution plans

ALEC assault on Nevada PERS: AB 190

AB 190 AB 190 is hitting the light of day [ltn] – and for those advocates of middle class financial security and adequate pensions for former public employees this bill needs to go back down into its pit.  This bill is a bit of ALEC dreamland:

“…relating to public employees’ retirement; providing for the establishment of a hybrid retirement program for certain public employees; requiring the program to include a defined benefit plan and a defined contribution plan; setting forth the required provisions of each plan; requiring certain public employers under certain circumstances to make additional contributions to the Public Employees’ Retirement System to reduce the unfunded liability of the System;…[ NVLeg]

The Hybrid From Hell

This portion of the bill would create a system similar to the one enacted in Utah, and promoted by ALEC in its “State Solutions for Government Pension Reform.” [ALEC pdf] *See Utah Reform, page 18.

There are a couple of crucial point embedded in the ALEC publication.  First is the notion that defined benefit plans are a “problem.”  It doesn’t matter the fiscal state of the pension benefits program – if it isn’t about to send the state into bankruptcy, there are ways to massage the statistics in order to make it appear the state has a monstrous unfunded liability.   Funding from the Koch Brothers partially funds the NPRI’s conclusion that there is a $41 billion current liability.  And, gee whiz – wouldn’t you have guessed it? – they recommend a Utah style hybrid public pension program. *See DB 12/9/14.

Before grabbing the children and heading for the hills in a panic – consider the possibility that we can make the unfunded liability number really big by reducing the advance funding factors.  Translation, if I were to total up the liability for every public employee, working and retired,  and treat it as if it were all going to be paid out tomorrow morning, the number would be really  big – and really misleading and  inaccurate.

What we need to focus on is how well the program deals with liabilities over time.  So, when AonHewitt did an independent review of the NV PERS system what did it find?

“AonHewitt found that NV PERS “funding levels and the discount rates were not uncommon, where NV PERS differs from others is in its Funding Policy and contribution rules which provide much better than average protection, when compared to similar systems. Continued review and comparisons of costs and benefits with other large plans, actuarial audits, and consistent updating of the Funding Policy facilitates NVPERS ability to remain among the best run large public systems.”  [AonHewitt pdf]

Sorry, privatizers and financialists, there really is no reason to adopt any major changes in the current define benefit plan in Nevada because, as the independent comparative review discerned, Nevada doesn’t have the problems associated with other large pension systems in some other states.

There’s Gold In Those Hills (for Someone)

Thus far, ultra-right organizations such as ALEC and associated think tanks like the NPRI have been beating their drums and issuing reports to friendly news outlets about the Problem – which doesn’t exist in Nevada, in the hopes of promoting ALEC’s agenda that brings us to the second major point of the issue:

ALEC, et. al., want to promote defined contribution plans because there’s money to be made.

“On the private side – Continue to tell workers that they’ll be better off with their “economic freedom” (in a defined contribution plan) to finance their own retirement plans with “flexibility,” and they can use their money as they want – just make the management fee structure so complicated it takes a degree in Finance to figure it out, and then operate on the happy assumption that the financial professional’s first duty is to his own firm’s bottom line not with a specific obligation to cover the future retiree’s bottom.   Give us your money, pay us the fees, and just trust us!  Go quietly, and no one will get hurt?” [DB]

AB 190 is a classic assault on a perfectly good public retirement system which is NOT generating an unwieldy unfunded liability.  If the ultimate purpose isn’t to retain the best features of the current system, but to replace it with defined contributions in the future, then the other motive which springs to mind is that the financialists among us have been ogling the coffers of public employee retirement systems and want very much to dip into them up to at least their elbows, if not their shoulders.

What the advocates of AB 190 want to do is fairly easy to see – ultimately hand over wads of money from the public employees retirement funds to wealth management firms who will exact their fees and transactional costs with less public scrutiny than is required in a publicly managed retirement system.  What could possibly go wrong?

Golden Years or Fleeced Sheep?

Not sure this is the case? Then look at the provision in the bill in which individual trust accounts are inserted. [NV Leg pdf Section 4]  Let’s review two problems associated with the individual trust accounts.  First, how many people have the financial training, experience, or acumen to manage their own trust accounts?   The obvious answer is – not many.

In this instance a newly hired heavy equipment operator for NDOT might be given his “freedom” to establish an individual retirement trust account.  This freedom has a price tag.  There will be transactional and management fees associated with this account. There will be transactional decisions made about the portfolio and contents of the account.  If the basis for the transactional decisions is “proprietary” information within the wealth management firm handling the account, then how is the NDOT employee to determine if the transactions were made in his or her best interests?

This brings us to the second problem, not only do many public employees (or other regular folks for that matter) lack the financial expertise to track their own individual retirement trust accounts, but if the system isn’t very carefully structured, and the contracts exceedingly open – the employee may not be able to find out how and why investment decisions were made on his or her behalf.  However, the wealth management firms will be delighted.

Half of the Research is false, ergo Half the Products are false

If these two problems aren’t enough to may a person queasy, there’s one more issue to explore.  Financial firms are happy to inform investors that their investment decisions are based on empirical research.  Sounds nice, doesn’t it?  Wait.  Evaluating trading strategies has proven to be a mare’s nest of research forms, leading the Journal of Portfolio Management to report that,  “Most of the empirical research in finance, whether published in academic journals or put into production as an active trading strategy by an investment manager, is likely false. This implies that half the financial products (promising outperformance) that companies are selling to clients are false.” [Economist]

Do the advocates of AB 190 comprehend what the JPM author’s are saying when they conclude that:

“In summary, the message of our research is simple. Researchers in finance, whether practitioners or academics, need to realize that they will find seemingly successful trading strategies by chance. We can no longer use the traditional tools of statistical analysis that assume that no one has looked at the data before and there is only a single strategy tried. A multiple-testing framework offers help in reducing the number of false strategies adapted by firms. Two sigma is no longer an appropriate benchmark for evaluating trading strategies.” [JPM]

Let’s translate:  If there is a 50-50 chance that the research is wrong, then there’s a 50-50 chance the financial product sold on the basis of that research will be falsely assumed to be a good product to put in a retirement portfolio.   How is our NDOT equipment operator, our public school teacher, our firefighter, our police officer, our assistant county administrator, our receptionist in the Department of Education, supposed to track his or her retirement account IF the research isn’t made available, and if it is, it might very well be inaccurate?

We might revert to the previous advice from the management firm – give us your money, don’t ask too many questions, go quietly, and no one will get hurt – in this firm. You, might be another matter.

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The Great Pension Swipe Coming to a State Near You

Burglar

“Elections have consequences” and this time the results may be a disaster for public employee pensions.  The rationale underpinning this contention is simple.  Wall Street is running out of Big Pots of Money.  They’ve already run through the money which flowed in from the earnings of more women in the work force – the Wall Street Casino used up the proceeds from the increasing number of two income families by 2000, when the number of women in the work force increased from 18,389,000 in 1950 to 65,616,000 in 2000.  To add a bit of context here:  In 1950 there were 43,819,000 men in the work force, and 18,389,000 women.  By 2000 there were 75,247,000 men working and 65,616,000 women. [BLS pdf]   Some families were induced to join in the new Money Market Accounts made possible by the Garn-St. Germain Depository Institutions Act of 1982.  This new form of “savings” account allowed the banks to get and keep the deposits.

“Banks are required to discourage customers from exceeding these limits (on withdrawals), either by imposing high fees on customers who do so, or by closing their accounts. Banks are free to impose additional restrictions (for instance: some banks limit their customers to six total transactions). ATM, teller, and bank-by-mail transactions are not counted towards the total.”  [link]

And so, Wall Street had a big pot of money to play with. But enough is never enough.   Wall Street invented more money pots – using securitized assets. These were non-existent before the 1970s.  For review, a securitized asset is something done to create “debt securities, or bonds, whose payment of principal and interest derive from cash flows generated by separate pools of assets.”  [ HFS pdf 2003]  In plainer English this means that Wall Street can use securitization to immediately (and that’s a key word – immediately) make money on any “cash-producing asset” – like trade receivables, leases, auto loans, credit card lines, and, of course, mortgages.

Now the Money Mad Denizens of Wall Street have run through the addition of women’s earnings, the accumulation of funds in money market accounts created thereby, and they mis-managed their money in securitized assets such that the Housing Bubble of the early 2000’s burst and splattered all over their operations.  But enough is never enough.  One former Wall Street trader described the Wealth Addiction rampant in the firms:

“But in the end, it was actually my absurdly wealthy bosses who helped me see the limitations of unlimited wealth. I was in a meeting with one of them, and a few other traders, and they were talking about the new hedge-fund regulations. Most everyone on Wall Street thought they were a bad idea. “But isn’t it better for the system as a whole?” I asked. The room went quiet, and my boss shot me a withering look. I remember his saying, “I don’t have the brain capacity to think about the system as a whole. All I’m concerned with is how this affects our company.” […]

“From that moment on, I started to see Wall Street with new eyes. I noticed the vitriol that traders directed at the government for limiting bonuses after the crash. I heard the fury in their voices at the mention of higher taxes. These traders despised anything or anyone that threatened their bonuses.” [NYT]

What might threaten those bonuses? Not having Big Pots of Money to play with.   There are some money pots out there – and more and more of them are being “touched” by the Wall Street bankers who see them as ways to enhance those precious bonuses.  Pension funds.

How to unlock that next Big Money Pot for the Wealth Addicts of Wall Street?  The strategy has been alarmingly simple.

First, bash public employee unions – the organizations which negotiated defined benefit plans for retiring public employees.  Union bashing has been a staple of Republican politics since time out of mind, so it makes perfect sense to incorporate it into the strategy for raiding public pension funds. Public employees are no longer to be seen as the helpful librarian, or the firefighter who saves the kittens, or the police officer who donates time to direct traffic at the high school football game.  He or she is no longer the person willing to work in frigid temperatures clearing snow from highways at 3:00 A.M. Nor is the public employee to be thought of as the bookkeeper who diligently keeps track of taxes paid, fees assessed, or paper-work properly filled out to prevent fraud.  No! These people are to be seen as “greedy teachers” who think only of job security, “lazy” bureaucrats who create paperwork, and “leagues of over-paid shovel leaners” who don’t care about the snow on the roads…. The cynicism of this is excruciating.  The result is little else than a contemptuous, divisive, misanthropic perspective which divides private sector employees earning $45,000 per year from public sector employees earning $45,000 per year.

Secondly, once the bashing begins the misanthropes add in a measure of jealousy.   Publish the retirement incomes of Everyone, because surely someone is making more money in retirement income than the targeted population of disaffected voters.  Cover this in the banner of Right to Know. “You,” meaning the disenchanted audience, have a “right” to know what “each and every public employee is making” because, “you know” they have been “feeding at the public trough.”  The argument is predicated on the jealousy factor – who else would care what a firefighter, police officer, highway department employee, teacher, librarian, public health nurse, etc. would receive in a year?

That the release of this information would allow personal identity thieves to thrive is of little consequence to the advocates of total transparency – so much transparency that the former public employees have no right to any financial privacy whatsoever.

Third, flat out lie about the sustainability of defined benefits pension plans.  There are three major advantages of a defined benefit plan.  It provides security.  The person who has paid into the plan knows exactly want the financial benefits will be and can do some financial planning accordingly. The person also know exactly how long he or she has to work to be eligible for the benefits.  And, finally, the person knows that the pension is covered by the Pension Benefit Guaranty Corporation.

We know that some public employee pension plans are better administered than others, but the opponents of defined benefit plans are eager, enthusiastic even, about publicizing the problems of some as the characteristics of all.  This is evident in the ALEC assault on public pension funds, all 45 pages of it which blatantly calls for defined benefit plans to be morphed  into “properly defined alternatives, such as defined contribution, cash balance, and hybrid plans.”  Read: The Next Big Money Pot for Wall Street.

Creeping Financialism

The ALEC advocates and associates are only too pleased to discuss the delights of the defined contribution plans.  Most often they are couched in friendly wording such as “you can manage your own plan,” which sounds like “freedom.”  It also sounds like a 401(k).   What they aren’t anxious to publicize is that 401(k) plans have been a bust.

“The 401(k) plan was never meant to be a mainstream pension plan and is a poor substitute for one. It’s a voluntary program that was intended to supplement retirement savings –  one of those quirky little options in the byzantine tax code that employers seized upon as a way to save money while pretending that they were doing the right thing by their employees.” [Forbes]

That’s putting it about as bluntly as possible.  Oops! The 401(k) was never intended to be the main source of retirement funds, and it’s a poor substitute for a defined benefit plan.

“Authors like Helaine Olen have been right on the mark in saying that the financial services industry and employers are all too eager to tell us how little we’re saving, yet don’t serve as honest brokers in maximizing our retirement savings. That would require cutting fees, eliminating middlemen, increasing employer contributions and getting rid of the fee structure that is based on assets under management. And above all, the most dangerous part of this equation: Educating employees on how to invest cost- and risk effectively.”  [Forbes]

And for all this – while the fund administrators collect the fees, hire middlemen, and thrive under the fee structure – the public employee is asked to give up any and all financial privacy, learn to be a financial manager, and forget about the security a defined benefits plan offers. All this so that Wall Street will secure the next Big Money Pot.  And it’s already started.

Creepy Financialists

The unease felt by public employees about their future financial security isn’t merely the result of escalating fiscal paranoia; it’s very real. The Rhode Island Case describes what happens when crony capitalism merges with Wall Street wealth addiction when state treasurer Gina Raimondo issued forth :

“Nor did anyone know that part of Raimondo’s strategy for saving money involved handing more than $1 billion – 14 percent of the state fund – to hedge funds, including a trio of well-known New York-based funds: Dan Loeb’s Third Point Capital was given $66 million, Ken Garschina’s Mason Capital got $64 million and $70 million went to Paul Singer’s Elliott Management. The funds now stood collectively to be paid tens of millions in fees every single year by the already overburdened taxpayers of her ostensibly flat-broke state. Felicitously, Loeb, Garschina and Singer serve on the board of the Manhattan Institute, a prominent conservative think tank with a history of supporting benefit-slashing reforms. The institute named Raimondo its 2011 “Urban Innovator” of the year.

The state’s workers, in other words, were being forced to subsidize their own political disenfranchisement, coughing up at least $200 million to members of a group that had supported anti-labor laws.” [Rolling Stone]

Worse still, the states that were supposed to be making defined contributions didn’t seem to be taking the process very seriously.

Chris Tobe, a former trustee of the Kentucky Retirement Systems who blew the whistle to the SEC on public-fund improprieties in his state and wrote a book called Kentucky Fried Pensions, did a careful study of states and their ARCs. While some states pay 100 percent (or even more) of their required bills, Tobe concluded that in just the past decade, at least 14 states have regularly failed to make their Annual Required Contributions. In 2011, an industry website called 24/7 Wall St. compiled a list of the 10 brokest, most busted public pensions in America. “Eight of those 10 were on my list,” says Tobe.

Among the worst of these offenders are Massachusetts (made just 27 percent of its payments), New Jersey (33 percent, with the teachers’ pension getting just 10 percent of required payments) and Illinois (68 percent). In Kentucky, the state pension fund, the Kentucky Employee Retirement System (KERS), has paid less than 50 percent of its ARCs over the past 10 years, and is now basically butt-broke – the fund is 27 percent funded, which makes bankrupt Detroit, whose city pension is 77 percent full, look like the sultanate of Brunei by comparison.” [Rolling Stone]

However, nothing stops the administrators of the Annual Required Contribution plans from drawing their salaries. Nothing stops the hedge fund managers and wealth managers from earning their money, and nothing stops the hedge funds, wealth funds, and bankers from getting nice bonuses from playing with these new Big Money Pots.

2013 also brought the disclosure of other pension swindles.  A report on North Carolina’s pension plan yielded the most opaque atmosphere surrounding a supposedly transparent pension system, with the Wall Street characters benefiting from the opacity:

“Today, TSERS assets are directly invested in approximately 300 funds and indirectly in hundreds more underlying funds, the names, investment practices, portfolio holdings, investment performances, fees, expenses, regulation, trading and custodian banking arrangements of which are largely unknown to stakeholders, the State Auditor and, indeed, to even the (State) Treasurer and her staff,” he reports. “As a result of the lack of transparency and accountability at TSERS, it is virtually impossible for stakeholders to know the answers to questions as fundamental as who is managing the money, what is it invested in and where is it?” [Salon]

How are the investors in the system (the state, the locality, the employees) supposed to act as “free” administrators of their own pension plans when they can’t discover who is managing the money, what investments have been made, and where the money is?  Much less ask what fees are being paid to the money managers of the new Big Pot?  In the initial example above, Rhode Island, state treasurer Raimondo couldn’t answer the question about the amount paid in fees.

President George W. Bush famously tread on the third rail of American politics, privatizing Social Security in 2005, and just as famously backed away from the precipice.  It seems that Americans have not forgotten what is supposed to be a “mainstream pension plan.”   If continued symbolic acts continue to be promoted by the Cato Institute and if there continue to be the likes of Iowa senator-elect Ernst who call for a hybrid plan in which younger workers are allowed to put a portion of their Social Security into a Retirement Savings Account (read: Wall Street Money Pot) we can’t declare the nation free of schemes to privatize Social Security.  If a state treasurer in Rhode Island who promoted the defined contribution plan in her jurisdiction can’t find out how much is being raked in by money managers, then how do we expect our average “younger worker” to effectively track his or her retirement account.

Thus we can look forward to more proposals for Hybrid Plans – which augment the Big Money Pot, and Defined Contribution Plans – which can’t be tracked and make a mockery of the entire concept of transparency, and more assaults on public employees who might be victims of the latest Great Burglary of their pension systems.  Elections do have consequences, and the last mid term election put more than $100 billion in public pension funds in the hands of financialists turned politicians.

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Filed under Economy, financial regulation, Politics, public employees, Republicans

Senator Heller’s Happy Land: Retirement Income?

hellerSenator Dean Heller (R-NV) had this to say during the Senate Banking Committee’s hearing on retirement security:

“A growing number today’s workers are preparing for retirement through defined contribution plans, like 401(k)s, and Individual Retirement Accounts (IRAs), that allow families to accumulate financial assets from investments in stocks, bonds and mutual funds.  These retirement accounts, along with the development of rules allowing for increased after-tax contribution allowances in Roth plans, are further expanding individuals abilities to contribute earnings to their retirement plan.  Although these are positive developments, many Americans are still struggling to save for retirement.  Senator Dean Heller (R-NV) March 13, 2014”

True… sort of.  Did we notice the part about “workers are preparing for retirement through defined contribution plans?”   Senator Heller makes this sound like a ‘happy thing.’  In fact, there are some serious disadvantages to those defined contribution plans.

In a defined contribution retirement plan (1) the worker/investor takes all the risk; (2) unless the worker annualizes their account balance they can outlive their benefits; (3) benefits may not bear any relation to the working pay; (4) is more expensive to administer than a defined benefits plan; (5) outside service is not easily translated into a larger retirement account balance; (6) employees are not necessarily rewarded for continuing to work if the account balance is deemed sufficient or they want to transfer to a new employer’s program; (7) there is no post retirement benefit increase; (8) it is difficult to transfer a lump sum account into a steady monthly or annual income stream. [IllinoisMRF pdf]

In other words, for an employee to derive the full benefit from a defined contribution retirement plan that individual has to be a pretty savvy investor, and  has to think of him or herself as a ‘non-career’ employee.  There is also a bit of a calendar game going on.  Imagine the difference between a person’s retirement investment portfolio if the person were to retire in the wake of the Mortgage Meltdown of 2008 when the market closed at a low of 6,594.44 on March 5, 2009, [USecon] and the individual who retired as of 3:00 pm yesterday afternoon when the DJIA was 16,075. [Money]

There’s nothing which seems particularly ‘positive’ about putting family retirement plans into the hand of the Wall Street Casino and hoping they accumulate — and peak at just the right time — unless some ickiness happens like fund managers investing in Enron, or Lehman Brothers, or… whatever.

Timing is crucial. If we look at the real world, and the reality of savings in America then the Work Until You Drop Rule could easily come into play:

“The reality is that many DC plan participants are unable to retire or must find a way to generate additional income because their investments failed to meet their needs. A recent study by Fidelity Investments revealed that workers 55 and older had an average 401(k) plan balance of $233,800 in 2011. If those investors retired and put all of their money into high-risk investments (the only way to generate decent returns), they might be able to generate 6% per year. That’s about $14,000 in income.” [Smith InVest]

To put this in perspective, 2014 federal poverty level guidelines put a two person family at 100% of the poverty level based on an income of $15,730, and that would be if they placed their money in high yield high risk investments.

However, Senator Heller is correct, there has been a shift into the defined contribution plans, as noted in EPI testimony to the panel:

“In the private sector, defined-benefit pensions were largely replaced by defined-contribution plans, shifting costs and risks from employers to individual workers. In 1989, 62 percent of full-time private-sector workers had retirement benefits and these were divided roughly equally between those with defined-benefit pensions and those with defined-contribution plans, including roughly 20 percent of full-time private-sector workers who had both. By 2010, 50 percent of these workers had a defined-contribution plan and 22 percent had a defined-benefit plan, including roughly 13 percent who had both (Wiatrowski 2011).” [EPI]

And here’s the part wherein the rubber of Republican theoretical and ideological rhetoric meets the road of reality:

“In theory, the shift from defined-benefit pensions to defined-contribution plans could have broadened access by making it easier for employers to offer retirement benefits. However, participation in employer-based plans, which peaked at just over half (52 percent) of prime-age wage and salary workers in 2000, fell to 44 percent in 2012. This occurred even though the baby boomers were entering their 50s and early 60s, when participation rates tend to be high (Copeland 2013; Morrissey and Sabadish 2013).” [EPI]

What is the result of this shift?  Can we use the Inequality and Uncertainty tags?

“As 401(k)s replaced traditional pensions and the population aged, assets in individual and pooled retirement funds grew faster than income. By 2010, average savings in retirement accounts had surpassed the value of annual household income. However, retirement insecurity worsened as retirement wealth became more unequal and outcomes more uncertain (Morrissey and Sabadish 2013).”  [EPI] (emphasis added)

Here’s what that looks like with real numbers:

Mean household savings in retirement accounts increased from around $24,000 in 1989 to around $86,000 in 2010. However, the growth was driven by a small number of households with large balances. Median savings—the savings of the typical household with a positive balance—peaked at around $47,000 in 2007 before declining to $44,000 in 2010 in the wake of the Great Recession, even as the baby boomers were entering their peak saving years (Morrissey and Sabadish 2013).  [EPI] (emphasis added)

And about those ‘tax incentives’ to which Senator Heller refers as ‘positive developments’ — what of those?

“Retirement account savings are very unevenly distributed. In 2010, a household in the 90th percentile of the retirement savings distribution had nearly 100 times more retirement savings than the median (50th percentile) household, which had a negligible amount. The top 1 percent of households had over $1.3 million in retirement account savings. All told, households in the top fifth of the income distribution accounted for 72 percent of total savings in retirement accounts (Morrissey and Sabadish 2013). Assuming upper-income households receive tax subsidies at least proportional to their share of savings, this suggests that the lion’s share of tax subsidies for retirement savings go to high-income households.” [EPI] (emphasis added)

And so, in Heller’s Happy Land, the rich get richer and the “lion’s share of tax subsidies for retirement savings go to high income households.”   There seems to be something of a theme going on here — Lion’s Shares and Subsidies for the Top 1% — the Republican Concern Core.

Meanwhile, the Wall Street sector enjoys a cut of the savings at every jog and turn.  No wonder Senator Dean “Banker’s Boy” Heller is pleased with the trends?

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Miles to Go, Promises to Keep: The Economics of Military Pensions

Pensions matter. The type of pension determines personal financial planning, and personal finances drive our American consumer economy.  Payments from a defined benefit program are predictable, last throughout a person’s retirement, and make household budgeting easier people  — including retirees from our Armed Forces.

So, members of our military at Nellis AFB or the Fallon Naval Air Station are expecting to retire with defined benefits, our promise to members of the U.S. military and to their families.  At this point it’s advisable to step back and look at what the major political parties are offering in terms of Defense spending and how this might impact members of our Armed Forces and future retirees.

On the Republican Side

The Republican Platform is long on rhetoric, and very short on specifics.  We do know that the GOP is calling for military spending equal to 4% of our Gross Domestic Product. [CPI]  The Bureau of Economic Analysis reports  the GDP is now $15,075.7  (add three sets of zeros and we get  $15.075 trillion.) The platform specifically calls for an increase in the nation’s nuclear weapons arsenal, and there are suggestions that spending be increased for a form of nuclear defense shield, although one such program was cancelled for inefficiency.

The Medium Extended Air Defense System (MEADS) is under scrutiny for its current shortcomings:

The Pentagon decided to keep paying until the program attained a “proof of concept,” a status that falls well short of production and deployment but would in theory allow the U.S. or its foreign partners to restart the project later if they chose. DoD requested a total of $804 million over 2012 and 2013. But Congress disagreed, and agreed to fund only the first year. [CPI, May 2012]

So, while the GOP Platform is long on “strong America” talk the lack of specificity and the paucity of comments on veterans leads to the conclusion that the military spending envisioned by the Republicans is mainly for nuclear missile systems and missile defense systems.   Page 43 of the Republican Platform for 2012 (pdf) addresses veterans’ issues, and touches upon retirement:

“…we believe compensation and conditions for our Armed Forces in place at the time military service is initiated should be sufficient to attract and retain quality men and women as we honor our promises and commitments to veterans, retirees, and their families. These shall continue and not be reduced or otherwise diminished while in service, or upon separation, or retirement.”

Readers should assume that “these” refers back to the “promises and commitments” to members of military families.

On the Democratic Side

The Democratic Platform is different in focus and emphasis in terms of military spending and priorities.  The document refers to actions taken by the Obama Administration in terms of national defense and foreign policy and continues:

“These actions have enabled a broader strategic rebalancing of American foreign policy. After more than a decade at war, we can focus on nation-building here at home and concentrate our resources and attention abroad on the areas that are the greatest priority moving forward. This means directing more energy toward crucial problems, including longstanding threats like nuclear proliferation and emerging dangers such as cyber attacks, biological weapons, climate change, and transnational crime. And it means a long-overdue focus on the world’s most dynamic regions and rising centers of influence.”

The section on members of the armed forces is as follows:

“President Obama and the Democratic Party are committed to keeping the sacred trust we have with our troops, military families, and veterans. These brave men and women and their families have borne the burden of war and have always made our military the best in the world. We will not only continue to support them in the field, but we will also continue to prioritize support for wounded warriors, mental health, and the well-being of our military families and veterans. We will keep working to give our veterans the health care, benefits, education, and job opportunities that they have earned. That’s why the President and the Democratic Party supported the Post-9/11 G.I. Bill to provide opportunities for military personnel, veterans, and their families to get a better education.”

Both sides seem in general agreement that benefits and services to veterans, including retirement should not be reduced.  What is troubling is the lack of specificity from either camp on the “shape” of the benefits for retired members of the Armed Forces, the current defined benefit program or a new 401(k) type program?  The lack of specific support for the defined benefit program opens the door for consideration of defined contribution plans which have problems of their own.  Both platforms state promises should be kept, thus the question becomes — What Promises?

The 401(k) Epidemic

As institutions as varied as the National Football League (in the dispute with its officials)  and the Department of Defense look at ways to reduce costs, pension plans nearly always come into play.  The current military pension plan calls for defined benefits — a 2011 proposal by the Defense Business Board is suggesting a 401(k) style defined contribution plan for members of the military.

“The proposal comes from an influential panel of military advisors called the Defense Business Board. Their plan, laid out in a 24-page presentation “Modernizing the Military Retirement System,” would eliminate the familiar system under which anyone who serves 20 years is eligible for retirement at half their salary. Instead, they’d get a 401k-style plan with government contributions.”  [CBS]

The presentation (pdf) begins with rationales for changing to a defined contribution system, including:

“…in light of the budget challenges facing the Department of Defense, the military retirement system appears increasingly unaffordable. In FY11, the retirement plan will accrue 33 cents for each dollar of current pay, for a total of $24 billion.

According to the OSD Office of the Actuary, annual military retirement payments are forecasted to increase from $52.2 billion in 2011 to $116.9 billion in 2035. As of today, the total life cycle program costs will grow from $1.3 trillion, of which only $385 billion is presently funded, to $2.8 trillion by FY34 (see Appendix D of the final presentation). Increases in inflation and life expectancy will further increase military retirement benefit costs. Moreover, as presently structured, any increase to base pay has an automatic and dramatic impact on future retirement liabilities.”

Other voices agreed, including Douglas Holtz-Eakin, recently the chief economic policy adviser to 2008 presidential candidate Senator John McCain:

“Douglas Holtz-Eakin, former director of the Congressional Budget Office says it’s very important that the military attack its retirement issues. “We’re talking about an underfunding that starts to look like hundreds of billions of dollars in the next 20 years. And if you want to maintain the core mission which is to defend the nation and have the strategic capabilities we need, we can’t have all their money tied up in retirement programs.” [CBS]

There are some positive arguments to be made concerning adjustments in the military retirement program — such as how to compensate service which does not extend to 20 years.  The question now becomes: Where DO we want money “tied up?”  Another question might be: Is the 401(k) format the only option, or the best option, by which to address the need to keep our promises to members of the military concerning their retirement income?

The first thing almost any competent investment adviser will say to a client considering a 401(k) plan is that it is market driven.

“Your money, when placed into a 401k, does not have the benefit of being insured. In fact, depending on the investments that you’ve chosen, you could actually lose money while it is tied up in a 401k. If you see that you’re starting to lose money on a particular investment, you might want to consider changing it.”  [InvestHub]   — or to put it less optimistically:

“Hopefully your money is safe in a 401k plan, although you don’t have the luxury of having your investment protected by the Pension Benefit Guaranty Corporation (PBGC) which safeguards the assets of most pension plans. And ultimately your money is only as safe as the investments and funds that you invest it in – any investment plan carries some degree of risk and uncertainty.”  [Essortment]

Any financial adviser who doesn’t almost immediately mention the market based foundation of 401(k) accounts should be avoided in the interest of financial health and safety.  There’s one other point to consider, besides the intrinsic financial market related issues, there are management fees which also impinge on 401(k) account performance.

Here again we meet our old friend — market volatility — a benign face to the Wall Street trading desks, but a real question mark for retirement planning.  Consider the performance of 401(k) plans in the private sector in 2011, as Bette Davis once advised — Buckle Up:

“The average 401(k) balance tracked the year’s bumpy market returns. At midyear, it reached $72,700, the highest since Fidelity began tracking balances in 1998. The average dropped 12 percent over the next three months, amid growing worries about the global economy and the European debt crisis. Those fears eased late in the year, sparking stocks to climb and boost the average account 8 percent in the fourth quarter.

Typically, about two-thirds of annual increases in 401(k) account balances are the result of workers’ added contributions and company matches. It’s only the final third that’s the result of investment returns, said Beth McHugh, vice president of market insights at Boston-based Fidelity.”  [CSM]

Less elegantly phrased, Manic Mr.  Market, buffeted by the rumors and realities of the financial sector in 2010 and 2011, didn’t add very much to 401(k) investors’ accounts.   If the proposed military retirement 401(k) accounts aren’t augmented by much more than more enrollments or company (Defense Dept.) matching contributions, then members of the Armed Forces would do almost as well simply putting their money in a good old fashioned savings account at the local bank.   This statement might even be more unfortunately accurate if Manic Mr. Market behaves badly at just the moment the service member retires.

Yes, the Pentagon could save some $250 billion over the next 20 years, BUT what might have happened to a soldier’s 401(k) account if that individual’s retirement date was — say, March 9, 2009 when the DJIA bottomed at a measly 6507.04?    If there is inequity in the current system, how much more inequity might there be between the unfortunate soul who retired on March 9, 2009 and the person who retires today when the DJIA is at 13,266.99 and the Nasdaq is at 3130.94?

The backgrounds and affiliations of several members of the Defense Business Board make it clear that most are well aware of Manic Mr. Market’s behavior.  There are representatives of Accenture, Veritas Capital, Citigroup, Renaissance Strategy Advisers, Lovell Group Venture Capital, Fall Creek Management, the Regency Group, and Providence Equity Capital.   There’s even an “Outsourcing Superstar” from NEOGROUP.  [DBB]  What can we infer from their presentation about the efficacy of their proposal?

There’s always one clue to how enthusiastic so-called reformers are about the plans they are hawking — do they recommend immediate implementation?  If something is the End and Be All of Hot New Ideas, then why not put it into effect with alacrity?  If something may not be so good, or faces some stiff opposition, then the “phase in” language appears.  However, if some proposal has some really large question marks attached to it — then we get phrasing like this from the Defense Business Board:

This plan would apply to Reserve and Active Duty personnel. Retired and disabled personnel would be unaffected.”

If we all think we’ve heard this somewhere before — it’s because we have.  The Republican proposals for turning Medicare into a voucher/coupon program are all couched in “this doesn’t apply to current enrollees” verbiage.

If we expect a veteran’s retirement planning to be predictable, and his or her household and other expenses based on a “floor” of defined benefit payments after retirement, then we could do much better than to agree to a plan to make those retirement benefits driven by Manic Mr. Market and his contemporary penchant for volatility.  This election season would be as good a time as any to ask candidates what they think of a plan to privatize military retirement plans?  Plans that could be miles from the promises we should be keeping.

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Filed under Politics, privatization, Veterans