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Reality hits the New York Times. The economics of business in the real world leading to a pension freeze

26 Apr

The Newspaper Guild of New York reports on current labor negotiations with the New York Times. The Times, in the face of economic reality it is facing in running its business, is proposing a freeze of the defined benefit pension plan for its employees.

While I personally think such steps are reprehensible, they are the reality of this day and age and a step many private employers have taken. They do so because such plans are costly, liabilities are large and subject to fluctuation in interest rates and funding is subject to the whims of the stock market. Promises are easy to make, paying for them is another matter.

But there is some irony in such a proposal from the New York Times. The Times was not sympathetic to actions by various governors trying to address the same issues at the state level and in many cases not nearly as aggressively as the Times has proposed.

NYT blogger Paul Krugman saw the state issue as a scam claiming state workers paid sufficiently toward their pensions because they did so through low wages, ignoring the fact that states still didn’t have the cash to fund generous pension promises.

You can be as liberal and socially conscious as you like. You can sympathize with union workers, you can seek to provide a safety net for every human being on the planet, but sooner or later all those promises and good wishes run smack into reality. Those promises must be affordable now and in the years ahead and they must be paid for by a broad base of participants in society. Anything less simply does not work.

There are many who have learned this truth the hard way. General Motors, Greece, California, New Jersey, Wisconsin … and the New York Times come to mind.

Related articles

How confident are you about your prospects for a secure retirement?

13 Apr

I have been retired (sort of, I still have two very part time jobs) for a little over two years. I am fortunate to have a pension along with Social Security and after working forty-eight years, some savings as well. However, in the first two years of retirement my confidence in a secure retirement has been shaken a few times by high medical bills and unexpected high expenses like $4,000 to have trees cut following a storm.

I obsessed over my retirement planning. I knew my exact income in retirement and had a good estimate of expenses many years before I retired and updated the information frequently. In retirement I watch both expenses and finances carefully (a little too carefully according to my wife).

I am from another generation, a generation whose parents lived through the great depression as young people. Now look at the results of the survey shown below. It’s scary stuff, is it not? Little or no savings, more reliance on Social Security (designed as a safety net, not primary income source), and little planning happening. This does not bode well for the future, especially given the state of Medicare and Social Security.

We can’t blame this all in the economy of the last five years. In fact, saving and long term planning have never been top priorities for most people.

The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings March 2012 EBRI Issue Brief #362 Employee Benefit Research Institute, 2012

Executive Summary :   Americans’ confidence in their ability to retire comfortably is stagnant at historically low levels. Just 14 percent are very confident they will have enough money to live comfortably in retirement (statistically equivalent to the low of 13 percent measured in 2011 and 2009).

Employment insecurity looms large: Forty-two percent identify job uncertainty as the most pressing financial issue facing most Americans today. Worker confidence about having enough money to pay for medical expenses and long-term care expenses in retirement remains well below their confidence levels for paying basic expenses.

Many workers report they have virtually no savings and investments. In total, 60 percent of workers report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000.

Twenty-five percent of workers in the 2012 Retirement Confidence Survey say the age at which they expect to retire has changed in the past year. In 1991, 11 percent of workers said they expected to retire after age 65, and by 2012 that has grown to 37 percent.

Regardless of those retirement age expectations, and consistent with prior RCS findings, half of current retirees surveyed say they left the work force unexpectedly due to health problems, disability, or changes at their employer, such as downsizing or closure.

Those already in retirement tend to express higher levels of confidence than current workers about several key financial aspects of retirement. Retirees report they are significantly more reliant on Social Security as a major source of their retirement income than current workers expect to be.

Although 56 percent of workers expect to receive benefits from a defined benefit plan in retirement, only 33 percent report that they and/or their spouse currently have such a benefit with a current or previous employer.

More than half of workers (56 percent) report they and/or their spouse have not tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement.

Only a minority of workers and retirees feel very comfortable using online technologies to perform various tasks related to financial management. Relatively few use mobile devices such as a smart phone or tablet to manage their finances, and just 10 percent say they are comfortable obtaining advice from financial professionals online.

Somebody is in for a bumpy ride in the future, especially given that our current mode of spending and borrowing will come due sometime when these folks are living in retirement.

Don’t mess up your IRA (or 401(k) distribution

10 Apr

Take it out on time

As most people know, distribution from an IRA or 401(k) must begin by age 70-1/2, actually by the April 1 of the year following attainment of age 70-1/2. There are significant penalties if the required minimum distribution is not made on time.

What many people may not know is that if you delay your required minimum distribution until that April 1, and you elect to have a minimum amount distributed each year you must, for subsequent years, receive the RMDs by December 31 of each year. This means you will be required to take a second RMD in the same year as your initial distribution, which counts as the second year for RMDs.

For example, let’s say you will be 70-1/2 in 2013. You must make a distribution for 2013 and the next RMD in 2014. However, by delaying the 2013 distribution until April 2014, you still must make the RMD for 2014 as well.

Taking two RMDs in one year may not be an issue for you.

However, depending on your total income those two distributions may mean you pay more in taxes than you would with only one distribution on a calendar year. Remember, if you do not take that second distribution, you will be subject to penalties.

You might want to consider making your first RMD In the year you attain age 70-1/2 rather than the following year if paying a higher tax rate is in your future.

Bottom line is that if you delayed your required RMD for 2011 until April 1, 2012, your next RMD must be made by December 31, 2012.

Always check with a qualified tax advisor in advance, you are no match for Uncle Sam.

Early Retiree Reinsurance Program (ERRP) money is gone. Five billion dollars from the federal to state governments. What did we get for our money?

12 Dec

The Early Retiree Reinsurance Program was supposed to reimburse employers for some of the health insurance claim costs for retirees through 2013 until the Affordable Care Act exchanges were in place.  CMS has announced that $5 billion allocated for the program has run out and that claims incurred after 2011 will not be accepted. It appears the administrations earlier estimate how long the funds would last was off just about a year.  Here is the CMS release:

The Early Retiree Reinsurance Program (ERRP) was established by section 1102 of the Affordable Care Act enacted on March 23, 2010. Congress appropriated $5 billion for this temporary program and directed the Secretary of Health and Human Services (HHS) to set up the program within 90 days of enactment. By law, the ERRP is scheduled to end when its resources have been used to pay claims. Due to the significant response among the employer community, the Administration’s budget released in February 2011 projected that the funds would last through fiscal year 2012, which started on October 1, 2011. The program ceased accepting applications for participation in the program on May 6, 2011. On November 18, 2011, CMS notified plan sponsors that total payments reached $4.1 billion. On December 9, 2011, CMS notified plan sponsors that $4.5 billion had been paid and issued further guidance informing plan sponsors that claims incurred after December 31, 2011 will not be accepted.

Where did the money go? It went to a wide variety of employers of all sizes, but interestingly, if you scan the list of recipients you will find that most of the money went to state and local governments, including school districts (reflecting their large numbers and generous early retirement programs).  A few very large corporations such a Verizon, Prudential and Johnson & Johnson received sizeable checks as well.

The City of Minot in North Dakota has over 2000 plan participants and has received $112,933 in ERRP reimbursements. As a direct result of these reimbursements the City was able to reduce 2012 premiums by 17 percent.

And what will happen in 2013 when the premium increases will have to cover the shortfall created by artificially reducing premiums in 2012 in addition to the increases being generated over the next year? Wait until these organizations see a compounding of their premium increases in 2013, it will be like the middle class receiving a tax increase because the Social Security payroll tax is reinstated.

In the final analysis, what did the American tax-payer get for his money?  The purpose of the ERRP was to encourage organizations to retain early retiree coverage.  However, state and local government plans and large corporations, especially those heavily unionized, are very unlikely or completely unable to cease providing early retiree health care coverage, certainly not  before 2014.  So what we have is a transfer of federal (borrowed) money to the states, local government and mostly large corporations creating a windfall serving a very questionable purpose.  It is true that some retirees also saw a small benefit in all this, but that too is temporary and any reduction in their cost will quickly disappear.

That $5 billion could have been spent in more productive ways.

Your pension may be at risk. You CAN lose all or a portion of your pension…even if you are already retired

5 Dec

ERISA, the Employee Retirement Income Security Act, had its genesis in the failure of the Studebaker car manufacturer when the pensions of its workers we’re wiped away with the passing of the company.  ERISA included the establishment of the Pension Benefit Guarantee Corporation (PBGC) a government agency funded by premiums paid by pension plan sponsors, well partially funded, the PBGC is not in great shape itself in terms of assets versus liabilities. 

If you would like to see the issues facing the PBGC and what Congress is considering doing take a look at this:  Congress and the PBGC 

While ERISA imposed new minimum funding standards on pension plans, employers don’t or can’t always comply. The result is that if a pension plan is terminated with insufficient assets to cover liabilities or an employer goes bankrupt, the PBGC steps in to make up the difference for retirees … up to a point that is. 

For example, a 65-year-old retiree is guaranteed up to $4,653.41 in monthly payments from the PBGC in 2012 should the agency take over his or her plan. On the other hand, a 55-year-old retiree is guaranteed just $2,094.03 (both based on the age at which a person retired).  Any amount above those limits is lost, you had it and now you don’t. Participants who have earned a benefit but are not yet eligible to retire have even more to lose. 

The situation is worse for anyone who earned above the amount permitted under federal law for pension purposes. In 2011 the annual compensation limit is $245,000 (it’s adjusted periodically, for example: 1990=$209,200, 1995=$150,000, 2000=$170,000 and 2005=$210,000). That means any earnings above the annual compensation limit cannot be used to calculate a pension in a qualified plan, the benefit cannot be funded in a pension trust and is not guaranteed. 

So, if you happen to be in the same pension plan as employees earning $100,000 and you are fortunate to earn $300,000 you better hope your employer stays in good financial shape because the pension you earned is at risk if the employer goes bust.  Unlike a qualified pension trust, money put aside to pay pensions earned on income above IRS annual compensation limits is not protected from creditors. Remember, these are not extra pensions; they are based on the same formula used for all plan participants. It’s just that you earned too much and I guess you need to take your “fair share” of risk. 

Here is the bottom line, regardless of your income; at least a portion of your pension could be at risk if your employer or union is not adequately funding your pension. This is something you want to pay close attention to. What percentage of the promised benefits is funded in the pension trust?  Is the employer making required funding contributions today?  This information must be made available to participants once each year through the Annual Plan Funding Notice.  

The lack of adequate funding is going to wipe out a significant portion of the pensions earned by American Airlines (AMR) employees just as it did for United Airlines several years ago.

Here are the results of one study. 

The funded ratio of the Milliman 100 pension plans increased slightly during 2010, reaching 83.9%. The aggregate pension deficit of $231.6 billion had decreased by $12.4 billion during the 2010 fiscal years, partially reducing an aggregate deficit of $244.1 billion at the end of 2009. 

Many employer plans are far less funded as a result of employer actions and the decline in stock values. States are among the poorest funded plans, but then a state doesn’t go out of business. 

Read this from The Atlantic: 

The Incredible Shrinking Public Pension Funds

By Megan McArdle

Apr 9 2009, 4:38 PM ET 36

America’s public sector pensions have been a scandal for years.  It wasn’t that long ago that they finally got around to doing their accounting the way that normal pensions do:  by showing how likely their assets were to generate enough revenue to pay for future benefits.  When they did, we found out what critics had long been claiming:  many pension funds for state and local governments were disastrously underfunded.  Politicians had gotten into the habit of promising generous pensions as a “cheap” giveaway to powerful unions…

This is not, it should be emphasized, exclusively a problem of public sector pensions; private firms are also underfunded.   But the scale is vastly different.  According to the Pension Benefit Guaranty Corporation, which regulates and insures pensions, the total deficit in private plans covering about 34 million workers was a little over 10 billion as of September 2008.  That’s almost certainly multiplied quite a bit since then.  But the current underfunding in public plans, which cover about 22 million workers, seems to be something north of a trillion dollars.  And they’re not insured.

All this provides a good lesson. Too much of a good thing may end up being nothing. When an employer finds itself in decline, it behooves unions and management to deal with the problems before the PBGC starts writing partial pension checks that make retirement a struggle for many workers…or states start diverting money from other programs or raise taxes.

Why your retirement budget should include ongoing savings

25 Nov
ceramic piggy bank
Feed me, feed me

If you listen to the experts they will tell you that because expenses are lower and you no longer need to save, you can live on less in retirement.

About that saving thing … sure you are no longer saving for retirement, but that does not mean you no longer need an emergency fund with the ability to replenish it as needed. In other words, save again.

Here is my true story. Earlier this year my wife’s medical problems resulted in $1,000 in out-of-pocket costs. A few months ago I backed into a mailbox ripping the mirror off my car. That clearly was not planned, nor was my stupidity but it cost me $700 (yup, for the motor in a side mirror). My wife’s car needed new brakes, $430 and yes, that can be expected, unwelcome but routine. Here is the kicker and one I can legitimately claim as unanticipated. The famous October snow storm in the northeast devastated trees in my yard to the tune of $4,000 to get them trimmed and broken branches removed.

 
Let’s see, that is $6,130 in unanticipated, not budgeted expenses in the first ten months of my second year of retirement.  What to do, what to do?

Well, I’m lucky I do have savings to pay for this and when planning for retirement I budgeted ongoing savings for just such situations. I didn’t listen to the experts on this one. I am also lucky because I have a pension and do not rely on the accumulation of assets such as with a 401(k) plan. That is not typical.

What if I was relying on my 401(k) plan withdrawing at a certain rate for living expenses, but now I suddenly had to use an additional $6,000 in my second year of retirement. That snowstorm and my bad driving just put my future income stream at risk because depletion of my pool of money is accelerated. I may run out of money before I run out.

Assume you were earning $70,000 a year while working and you diligently figured that to cover all your expenses in retirement you need $65,000 (ignore taxes for this illustration).   An unexpected large expense throws your plans in a tizzy.   Let’s say you do have a pension, but no savings.  An unexpected expense probably means you whip out the credit card or otherwise take a loan. Either way your expenses have gone up and your living standard on your fixed income has gone down.

I hope there is a lesson here. Your retirement budget must include some ongoing savings. If you don’t need them,  great.  After a few years you’ll have extra money for a nice vacation. If you do have an emergency, it won’t impact your living standard.

The disappearing pension plan, you are on your own these days

11 Nov
Laborer in bib overalls Digging the fire pit.

Would you believe I am 87?

Most Americans outside of  government never did have a pension to rely on in retirement. Today the situation is dismal.

Since 1998, there has been a steady — yet dramatic — overall shift in retirement offerings to newly hired employees. At the end of 1998, 90 of the Fortune 100 companies offered some sort of defined benefit pension, either a traditional or account-based, (usually cash balance) plan.  Today, only 30 companies offer these pension plans to their new hires.

Offering defined contribution plans (think 401(k) as the sole retirement plan became increasingly common over this period, jumping from only 10 Fortune 100 companies at year-end 1998 to 70 companies in this year’s Fortune 100.

Once upon a time employers valued a long-term, experienced employee and rewarded him with a lifetime pension at the end of a career.  Those days are gone for good. The philosophy today among employers and workers is get what you can for a few years and move on.  Loyalty and long-term reward is a thing of the past for both parties. You can argue whether that is good or bad, but you can’t argue with the fact that the decline and fall of the pension has changed forever the concept of retirement, perhaps eliminating it for many.  Employers used the excuse that workers did not appreciate a pension with an unknown benefit many years in the future and besides starting in the late twentieth century who was going to work for a company for 30 years? The grass is always greener someplace else.  I can tell you as one of those dinosaurs who worked for a company for forty-eight years and who has a good pension, it’s easier to sleep at night than it would be wondering what my 401(k) will look like tomorrow or how much I can withdraw next year without running out of money.

In 1985, 89 Fortune 100 companies offered a traditional DB plan to their newly hired workers, while 11 offered only an account-based plan. Over the past 25 years, the pattern has flipped almost completely. Today, 87 of today’s Fortune 100 companies offer only account-based retirement plans to newly hired workers, while 13 offer traditional DB plans.

Data Source: Towers Watson.

There are many reasons for the demise of the pension plan including; a changing more mobile workforce, government regulation and related costs, volatility and the cost of funding such plans, long-term liabilities, high and growing premiums to the Pension Benefit Guarantee Corporation and because everyone else is no longer doing it, providing a pension is not necessary to attract workers to an employer.

When it comes to retirement income these days, you are pretty much on your own.

IRS announces 2012 limits for 401(k), IRA contributions and more

20 Oct

The IRS has announced qualified retirement plan limits for 2012. I have taken excerpts from the press release for simplicity.

IR-2011-103, Oct. 20, 2011

WASHINGTON — The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment.

However, other limitations will remain unchanged.  Highlights include:

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.

The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. 

For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011.  For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000.  For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

Medicare premiums, a Part B surcharge, Medicare cuts and our favorite; fraud and waste

30 Sep

No doubt the President’s proposals for deficit reduction will start rumors about Medicare cuts, but keep in mind that so far what he is talking about is for future beneficiaries starting six years from now – long enough for Congress to mess things up again. Less than two years ago Congress expanded Medicare in several ways while claiming to reduce costs, now we are talking about cuts in Medicare to reduce the deficit. During the health care debate cutting fraud and waste was going to save Medicare, now cutting fraud and waste again is going to save the country.

Exactly how much fraud and waste is there? And by the way, who designed this massive bureaucracy that apparently is unable to manage fraud and waste in the course of doing its business? Politicians are proposing new laws to accomplish what we have been paying people to do since 1965. If this was the real world people would be fired rather than making political hay out of this great fraud revelation.

The truth is Medicare needs to operate more like insurance companies rather than forcing insurers to act more like a government bureaucracy.

To add more logic to the mix, the President will not consider any cuts affecting the middle class unless the wealthy pay their fair share. How does having a billionaire paying more in taxes thereby allowing cuts for the middle class help the middle class? Politicians surely have their own logic and language.

What we are seeing is more of the same piecemeal approach to taxation and budgets rather than stepping back and doing a complete tax overhaul that does assure fairness. In fact, what has been proposed will make the entire system more complex and costly to administer. Take this idea for example.

“A surcharge on Medicare Part B premiums equivalent to about 15 percent of the average Medigap premium for new beneficiaries that purchase Medigap policies with particularly low cost-sharing requirements, starting in 2017. This proposal will save approximately $2.5 billion over 10 years.”

Although the savings are speculative, this simply means that if you buy supplemental coverage for Medicare that insulates you from most cost sharing (deductibles and coinsurance) thereby eliminating your incentive to care about costs and driving up your demand for services, you pay more. Okay, Medicare beneficiaries should not lower their out-of-pocket costs just because they turn 65. I’ve written about that concept before. If you had a deductible and coinsurance before being enrolled in Medicare, why not after becoming a Medicare beneficiary? Actually, taking all things into consideration, such coverage is probably not in most seniors best interest anyway.

However, the point is rather than a complex surcharge system why not simply prescribe the type of Medigap that can be sold and thereby address the problem. This is only the start of the debate of course, but simple, logical solutions are in short supply.

The President’s proposal also seeks to freeze the income thresholds where higher Part B premiums begin. The freeze would be extended until 25 percent of beneficiaries pay higher premiums based on higher gross income. Remember the good old Alternative Minimum Tax that was implement because 200 people escaped paying income tax? Now because of no inflation adjustments the ATM affects millions of middle class Americans, here we go again. Twenty-five percent of Americans who are on Medicare is a lot of people, probably including you.

Nobody is going to escape the pain of all this, but it would be nice to hear the truth. It would also be nice to see a broad strategy addressing the fundamental problems rather than piecemeal changes designed more for November 2012 maneuvering than problem solving and true fairness.

Social Security unmasked; Roosevelt was a crafty politician indeed

19 Sep

I don’t know if Franklin Roosevelt was a smart man, but he certainly was a smart politician. If you think about Social Security, one of the most massive entitlements ever conceived, Roosevelt crafted it so that it would be virtually impossible to repeal or significantly modify, except to improve it as Congress has done over the last seventy-five years. Not only has Congress improved it, it has set improvements on automatic via the COLA.

Whenever I write about modifying Social Security to make it sustainable I get comments like “I earned those benefits.” “I paid in my whole life, that’s my money you’re talking about.” Seniors tend to forget that their employer paid as much as they did in taxes. Therein lies the genius of Roosevelt. By including what started as a very modest payroll tax he provided Americans with a sense of paying for their own entitlement and if that is the case, how can any current politician take away what was earned? No matter that the tax payments one makes are recouped in only a few years after starting benefits.

If Social Security were not a welfare program (or more accurately a Ponzi arrangement) disguised as a participant paid insurance plan then it would be perfectly feasible for each of us to save 6.2% of our earnings and live off the accumulated assets starting at age 66. Of course that is a myth, as is the notion that we paid for our own Social Security.

If we are paying for our own benefit, how can the already insufficient tax rate be trimmed under the guise of job creation? If we are concerned about the stability of our self funded entitlement how can we so quickly put it in greater jeopardy for a possible short-term gain? Why isn’t the AARP protesting the reduction in Social Security funding as loudly as it does when someone talks about adjusting the COLA formula?

Given we are already at the point where incoming payroll taxes from working Americans are insufficient to pay current beneficiaries, it will become increasingly apparent that general tax revenue is providing this entitlement.

But wait, even as we argue that all Americans earned at least some benefit from their contributions, there are calls for means testing. The great recession has unmasked this charade so some openly see a new solution, take from the well off who have contributed during their entire working lives and give to the less well off who have also contributed relative to their income. However, let us not forget as we mangle this monster that some people pay income tax on up to 85% of their Social Security benefit and others on much less of the benefit.

It will be the extraordinary political leader who can overcome the genius of Roosevelt. But I suspect even Roosevelt would be appalled at what has happened to his grand safety net Hey, we’re all entitled are we not?

CPI-W for August indicates Social Security increase for 2012

17 Sep

The August 2011 CPI-W is reported at 223.326, higher than July at 222.686. These numbers continue to indicate a COLA for Social Security recipients of about 3.5% for 2012. The CPI-W for September is the final number needed to determine the three-month average for July, August and September 2011. That average will be compared with the same three months in 2008. The percent change between the two periods will determine the Social Security COLA for 2012.

Social Security Disability running out of money … is there any wonder?

2 Sep

What's left?

It is all over the news, the Social Security Disability Trust Fund is going broke.  Here are the numbers:

At the end of 2009 the Disability Insurance (DI) fund had $203.5 billion in assets.  It received $104 billion in income (taxes, interest) in 2010 and paid out $127.7 billion in benefits.  Which means that at the end of 2010 the fund assets had decreased by $23.6 billion for a total of $179.9 billion.  In other words, this fund is bleeding cash and unlike the Old Age Survivor Income portion of the Social Security Trust (OASI) its payments exceed both the payroll taxes and interest paid on the Trust’s bonds issued by the Treasury Department.  In fact, according to the most recent Trustees report, the DI trust fund will be entirely exhausted on 2018.

Social Security disability has a rather strict definition for eligibility but that does not stop people from applying for benefits and it does not stop a cadre of lawyers from helping people get those benefits.  There are almost as many of these ads on television as those trying to get you to sue drug companies.

Disability claims tend to rise during poor economic times, not because more people are truly disabled but because they are laid off from their jobs and see Social Security disability as a ready source of income.  If you are able to work today, you are not eligible for disability benefits.  If you are laid off from your job tomorrow, it is hard to see how you suddenly become disabled especially when that disability is supposed to last at least one year or to result in death. 

Nevertheless, human nature being what it is that pot of government goal is a tempting target.  In addition, the system provides additional incentives to game the system.  If you are laid off and near retirement age you cannot receive you full Social Security until age 66 or later.  However, if you receive disability benefits there is no age restriction on full benefits. Why wouldn’t people take a shot at receiving disability benefits especially when they are frequently encouraged to do so?

This is the fundamental problem with entitlement programs, we think we are entitled to these programs “paid for by the government,” but of course they are paid for by American tax payers.  Every time a new program is created some segment of society will see that as their gift from government and will seek their share of the pie in any way possible thereby making it that much more difficult to provide assistance to the truly needy and deserving.  It is not hard to see how this mentality can develop under a constant barrage of political rhetoric designed to make the electorate beholding to their elected officials.. These are not benefits earned, you pay taxes as you would pay insurance premiums to protect you in the event of an unforeseen catastrophe recognizing that the great majority of people will not see any benefit from their premiums and hopefully would rather not.  In short, many people are committing fraud in their quest for an “entitlement.”

In the 1970s Congress tightened up on the criteria for disability benefits making it tougher to qualify.  However, in typical political fashion it subsequently loosened the criteria, and the rolls began growing again. 

You would think that it is totally inconsistent to think you can collect unemployment benefits while receiving disability benefits or even while your claim is pending; that’s not entirely true.  There is no direct link between unemployment and Social Security although your claim could be in question if you say you can both work and not work at the same time. However, that does not keep many people from trying and if they don’t get caught, hey it’s more free money.  In fact, some lawyers will advise their clients to state that the onset of the supposed disability is just after unemployment benefits expire.  Here is a website that talks about the issue.

Here is what the Social Security website says about qualifying for disability benefits:

(more…)

The greatest problem you face after you retire

29 Aug

I have been retired for just over three years now.  I have collected my pension since July 2008 and Social Security since November 2009.  Each month my pension pay stub is available to me electronically so I go online and download it into a file where I save such information.  The left side of the stub shows  my income and tax payments and the right side my deductions which include an amount for life insurance, health and dental insurance, long-term care insurance and my property and casualty insurance (the latter two voluntary employee pay all benefits).

In the three years since I retired, one thing has become perfectly clear to me.  The left side of the stub never changes, but the right side increases each year.  Then there is the right side of things that don’t appear on ones paystub, like the price of food, gasoline, health care and all the other stuff we buy.

It’s not hard to do the math and figure out that sooner or later the left side of my pay stub will be insufficient to cover the right side and still maintain my lifestyle, something will have to give.  I could go out to dinner less often, I could give up or greatly reduce traveling which I enjoy immensely, or perhaps give up the occasional golf game, but regardless of what I decide to do nothing is that appealing.

I am lucky that I do have a pension, for millions of Americans the left side is IRAs or a 401(k) or perhaps there is no left side (except Social Security).  In many cases not having a steady stream of income means that the left side may not stay the same, but may go down as well, the last two years present a good example; it’s a scary thought.

So what does this all mean for people not yet retired?  It means longevity is your biggest concern in retirement.  Simply put, you could outlive your assets or live to the point where you cannot keep up with inflation and maintain the lifestyle you desire.  That lifestyle will change over the years to be sure, but regardless, it is all about the quality of life and the ability to be self-sufficient.

What does one do about this issue?  There are several strategies that are very basic and apply to most people.

  1. Forget the idea that you are going to retire at 55, 60 or even 65 for most people that is a pipe dream that will come back to bite them when they are 70.
  2. If you do not have a defined benefit pension plan that provides a lifetime annuity, get one.  That means take at least a portion of your 401(k) or IRA or even other savings and purchase an annuity that provides a lifetime stream of income.  You can also buy annuities that include COLAs.
  3. Delay receiving your Social Security until at least your full retirement age, longer if possible to increase the benefit.  Remember, unless you are receiving a pension from a government plan, Social Security is likely the only portion of your income with a cost of living adjustment possible.  You will need a higher Social Security benefit in your older years plus if you must take Social Security at 62 to meet expenses, you probably should not be retired.
  4. Make sure that you have some savings/investment outside your retirement funds that you can use to help offset the effects of inflation on your basic retirement income.  In other words, just because you are retired does not mean you don’t need an emergency fund.
  5. Don’t forget your survivors who may be counting on you for their income.  Unless you take a survivor annuity either from your pension or an annuity you purchase, these benefits will stop upon your death…then what?  If you take a survivor option with your annuity it will reduce your benefit or cost you more to purchase the annuity and then there is the possibility that the beneficiary will predecease you.  The alternative is to have a large stash of cash somewhere or adequate life insurance to allow your dependent survivor to maintain his or her lifestyle. 

There it is in a nutshell, longevity is your biggest concern in retirement, ironic isn’t it?  The one thing we all wish for in retirement…a long one…is the one thing that is most difficult to deal with financially.

To see the possible annuity your assets may purchase you might want to check out the calculator at ImmediateAnnuities.com  

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How much money do I need to live on in retirement?

25 Aug

This is an easy answer?

I thought about this question a lot in the years just before I retired, I think about it more now that I have been fully retired for a year and a half. Given that I managed pension and 401(k) plans and conducted retirement planning programs, you would think the answer would come easy to me; you know what, it does.

Conventional wisdom says you need less income than before retirement because once you are retired you have no need to save and you don’t have the expenses associated with work. Unless you are planning to give up lunch for the rest of your life and plan to draw large lump sums from your retirement nest egg to deal with those emergencies that will inevitably come your way, don’t believe any of that nonsense.

One thing you can be sure of is that if some expenses go down when you retire others will go up and up and up.

There are numerous calculators and planners out there for you to take a look at and use for free, they will ask you to put in all kinds of nifty numbers and assumptions and voila’, they will tell you what percentage of your pre-retirement income you need in retirement. Go ahead, give them a try, it’s worth the experience and the resulting depression.

Unless you plan to live in a cave and admire the prehistoric drawings on the walls all day, you are going to need money and each year that goes by you are going to need more money. Consider this, let’s say you were a good saver and at retirement you accumulated $1,000,000 in assets (probably pre-tax so you really don’t have $1 million in the bank to use). In today’s market that will buy you an annuity paying about $6,345 per month for life or $76,140 a year before taxes. Not bad huh? Of course, there are two things to consider; first that amount never increases and second, upon your death the payments stop, over, done, kaput…now call in your spouse and let her (or him) read this.

Just because you are retired doesn’t mean you don’t need an emergency fund. Even if you have a steady guaranteed income, you still need cash if a financial emergency strikes, where are you going to get it if you don’t put money away periodically (otherwise known as saving)? Let’s say you don’t have a steady guaranteed income from a pension or annuity, but rather you are managing your own investments and withdrawals from your 401(k) or IRA, where are you going to get the ten grand for a new roof, take it from your 401(k)? Go ahead and see where that extra unplanned withdrawal gets you in a few years. Even if you borrow the money, you now have a new loan payment.

Here is the plan, use all the calculators you can get your hands on, listen to all the advice out there, look closely at all your expenses and the things you want to do in retirement and then . . . give my opinion at least a passing consideration.

Your goals for retirement should be (1) start with 100% replacement of pre-retirement income, (2) have a plan to have that amount increase with inflation and (3) figure out what additional income be it life insurance, a big pile of cash or a joint and survivor annuity you need so that any dependent survivors will have the income they need for the rest of their lives (an alternative plan here is to marry a much older women).

By the way, when I say you need 100% income replacement, it means 100% from all sources including Social Security and any investment income you may generate on a regular basis such as dividends.

See I told you the answer was easy to come by.

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Social Security COLA still on track for nearly 3.5% increase in 2012

19 Aug

Good news for a change?

 The Bureau of Labor Statistics released the CPI-W figure for July, 2011, the first month of the three-month average (July, August, and September) that will determine the COLA applied to Social Security benefits at the end of 2011.

The CPI-W was 222.686 and when compared to the average for 2008 (the last year in which there was a COLA calculated) that number would call for a nearly 3.5% increase in Social Security benefits.  Of course an average of about 222.6 for the rest of the quarter will be required for the 3.5% COLA.  August and September CPI-W numbers will determine the actual COLA which will be known in October sometime.

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