ElderWeb

In a new survey of some of the largest U.S. employers - conducted prior to passage of the new Medicare prescription drug legislation - 10% say they eliminated subsidized health benefits for future retirees in the past year, while 20% say they are likely to terminate retiree health coverage for future retirees in the next three years. These changes primarily affect new hires, rather than current retirees. The study also finds that 71% of surveyed firms increased retiree contributions to premiums in the past year, and 86% plan to increase such contributions within the next three years. The survey of large, private-sector employers was conducted and analyzed by the Kaiser Family Foundation and Hewitt Associates.

Employers are an important source of health insurance coverage for workers who retire before they are eligible for Medicare ("pre-65 retirees") and for retirees who have Medicare and rely on retiree coverage to fill in Medicare?s gaps ("age 65+ retirees"). For pre-65 retirees, employer-plans are typically the primary and sole source of health insurance coverage, while for age 65+ retirees, employer plans generally supplement Medicare, helping to pay for benefits, such as prescription drugs, that are not currently covered, and assisting with cost-sharing requirements under Medicare.

Other findings include:

* The total cost for employers of providing retiree health benefits to pre-65 and age 65+ retirees and their dependents increased by an estimated 13.7% from $18.1 billion in 2002 to an estimated $20.6 billion in 2003.

* 46% of surveyed firms have placed "caps" (pre-determined limits) on their future financial retiree health obligations while one-third of all surveyed firms offering health benefits to pre-65 retirees and age 65+ retirees have either hit their cap or expect to hit their cap on retiree health obligations within the next one to three years.

* 71% of large-private sector firms surveyed increased retiree contributions to premiums in 2003. Retiree contributions and premiums increased by 20% for pre-65 retirees and by 18% for age 65+ retirees between 2003 and 2003.

* 86% of surveyed firms say they are likely to increase retiree contributions to premiums and 70% expect to increase contributions for dependent coverage, within the next three years.

The 2003 study, the second survey on retiree health coverage conducted by Kaiser and Hewitt, was conducted between June and September 2003 with 408 large private-sector firms (1,000 or more employees) that offer retiree health benefits, including 45% of all Fortune 100 companies and 30% of all Fortune 500 companies.

Complete survey findings are presented in a new report, "Retiree Health Benefits Now and in the Future."

Many Americans count on employer pension programs to fund their expenses in retirement, but there are changes in the wind that will have a huge impact on how much they can expect to receive. Many, probably most, companies are looking for ways to contain costs and improve income, and the cost of supporting retirees is certainly an area to consider. As the percentage of Americans who are retired increases in proportion to the number who are still working, companies will almost certainly continue to seek ways to reduce their obligation to the burgeoning retiree group.

One way that companies cope with increasing pension costs is to change the type of pension they offer. For instance, many companies that have offered defined benefit plans in the past are trying to switch their plans to cash balance plans. An article in USA Today reports that companies saved $100 million a year by making this switch, but critics, like the AARP, say that this savings is coming out of the pockets of older workers, and that this type of change in pension plans generally hurts older employees with a long tenure at a single company. The movement to cash balance pensions halted temporarily due to a lack of clarity in the application of age discrimination rules to such a change, but the Treasury Department and the IRS issued proposed regulations to address the application of the pension plan age discrimination rules to cash balance plans, paving the way for more changes of this type once the regulations are finalized.

Another type of switch in pension plans is a change from a defined benefit plan to a defined contribution plan, like a 401(k) plan. Statistics in AARP's Beyond 50, A Report to the Nation on Economic Security indicate that the percentage of defined benefit plans has dropped dramatically in the last 10 years, while the number of defined contribution plans has increased. This is a significant change for the covered employees, since in a defined benefit plan the company is responsible for making investments and guaranteeing the amount that will be available in retirement. In a defined contribution plan, the company promises nothing for the future, and the employee can presumably lose everything if his investments fare poorly.

Anyone who hopes to retire some day should probably keep their eyes on these developments.

The tax relief bill just passed by Congress and awaiting President Bush's signature has some interesting provisions in addition to the income tax and estate tax relief everyone is talking about. One of the most important is that beneficiaries age 50 and older may be allowed to make supplemental "catch-up" IRA contributions of $500 in 2002, gradually increasing to $2,000 in 2011. Supplemental "catch-up" voluntary contributions to some 401(k) and other pension plans are also permitted for beneficiaries age 50 and older, capped at $500-$1,000 in 2002 and increasing to $2,500-$5,000 in 2011, depending on the type of plan.

The bill provides a number of ways to help taxpayers build retirement assets. IRA contribution limits are increased from the current $2,000 a year to $2,500 in 2002 and $5,000 a year by 2011. Vesting schedules are shortened and contribution limits increased for some other employee pension plans, and the bill makes it easier to move funds from one retirement plan to another to make pensions more "portable".

In addition, the bill provides for a tax credit to offset IRA and pension contributions by low-income taxpayers, which reduces the actual out-of-pocket cost of those contributions by up to 50%. These are targeted to married taxpayers with adjusted gross income (AGI) no more than $50,000 ($37,500 for heads of household and $25,000 for singles).

The bill also provides that IRA funds can be contributed to qualified charitable organizations without being taxable to the individual who makes the contribution, which creates a new gifting opportunity for people who have retirement assets they don't need.

Grandparents who want to make gifts to grandchildren may be interested in an expansion of the Education IRA. The annual contribution has been increased from $500 to $2,000, and the definition of "qualified educational expenditures" for which the funds can be used has been expanded to include expenditures for children in grades 1-12, including the cost of computer hardware and Internet access, contributions to Section 529 college tuition programs, payments for private school tuition, and the cost of tutoring, classes, or other special needs. Previously, funds in these IRAs could only be used for college costs.

The Senate Finance Committee is considering the need for tax simplification, including simplification of retirement plan distribution rules and rules related to the taxation of Social Security benefits. For example, the tax Code currently provides that retirement plan benefits must begin by April 1 of the calendar year following that in which the employee turns 70 1/2, and that plan benefits may not be distributed before attainment of age 59 1/2. The half-year age conventions confuse retirees and complicate retirement plan operation because they require employers to track dates other than birth dates.

Richard M. Lipton of the American Bar Association, Pamela J. Pecarich of the American Institute of Certified Public Accountants, and Betty M. Wilson of the Tax Executives Institute, testified before the Senate Finance Committee, and noted that changing the half-year conventions for retirement plan distributions to full-years would greatly simplify matters for both retirees and their employers. They also noted that the rules related to retirement plan distributions are among the most complex in the Code and present numerous traps for the unwary. Since an ever-growing percentage of Americans are now in or approaching their retirement years, millions of retirement accounts will soon become subject to these rules, and simplification is badly needed.

Lindy L. Paull of the Joint Committee on Taxation suggested other changes, including setting a fixed rate for all Social Security benefits to eliminate the need for an 18-line worksheet now needed to calculate taxes. The Joint Committee is also proposing changes that would make distributions from all types of retirement plans more consistent, and hopes to improve the readability of the code related to taxation of annuity income.

Since launching its Pension Search Directory on the Internet in December 1996, the Pension Benefit Guaranty Corporation (PBGC) has located some 6,600 people eligible for $21 million in pension benefits. This includes about 4,800 people owed $10 million who were found in the past year. In that period, 6,800 new names were added to the Directory, for a total of 12,000 missing pension plan participants. Altogether, they have $27 million coming from plans that companies terminated before all beneficiaries could be located.

The Senate Aging Committee held a hearing on the performance of the Pension Benefit Guarantee Corporation (PBGC). The Employee Retirement Income Security Act of 1974 created PBGC as a self-financing, nonprofit, wholly owned government corporation, which protects participants in private pension plans from losing promised benefits due to the termination of underfunded plans. The PBGC collects premiums from sponsors of defined benefit pension plans to insure against default assumes administration of plans that terminate or become insolvent. When plans default, PBGC assumes control of plan assets, calculates benefit amounts, and pays pension plan beneficiaries.

In 1975 the PBGC administered three pension plans with a total of 400 participants. By 1999 the PBGC had assumed responsibility for more than 2,700 pension plans with a total of more than 500,000 participants. Beginning in the mid-1980s, several large unexpected bankruptcies greatly increased the number of plans and participants under PBGC control, including those of LTV Steel, Wheeling Pittsburgh Steel, Eastern Airlines, and Pan American Airlines.

The PBGC issues beneficiaries an Initial Determination Letter (IDL) which states the amount of his or her benefit at "Normal Retirement Age." If the Participant is already receiving a pension, an IDL confirms or refutes the amount that is being paid. An IDL is the most important document that the participant will receive from the PBGC, since it officially establishes the amount of pension which is due.

Until the IDL is issued, beneficiaries receive a monthly check for an estimated benefit amount. Once the correct amount is determine, the participant will either be paid the additional amount due them, or will receive a notice that they must refund the overpayment back to the PBGC. The longer it takes for an IDL to be issued, the larger that potential refund may be. In the meantime, the beneficiary has no idea what amount they are really due, or what their potential liability could be.

In response to a government request, the PBGC Inspector General reviewed the timeliness of the PBGC benefit determination process, and found that they have taken an average of 5.7 years to give participants their final benefit determinations, with half having to wait over seven years, but some determinations take from 15 to 20 years.

There were other issues raised, too. The PBGC relies heavily on the services of contractors whose employees account for almost half of its workforce and about $100 million of its $160 million budget, but the General Accounting Office is investigating allegations of improprieties in the way that contracts have been awarded and the level of oversight over contractors.

A report by the Inspector General found that the PBGC could not attest that IDLs have been issued to all participants, could not accurately account for the number of IDLs yet to be issued, did not have a timeliness performance measure for IDL processing. They found that the number of IDLs that PBGC reported as actually issued did not match the number of IDLs recorded in their computer database, and the number of IDLs that PBGC reported as issued was not the number it used to compute the average length of time to issue IDLs.

David Strauss, PBGC Executive Director, pointed out that some improvements have been made. The PBGC is off the GAO and OMB High Risk Lists, a $3 billion deficit has become a $7 billion surplus.

Federal employees can use a new online tool to estimate their CSRS, CSRS Offset and FERS retirement benefits -- normal, early or disability -- as well as an estimate of their future TSP savings and Social Security benefits. This model is designed for all federal employees, including those in special occupations such as law enforcement, firefighters, air traffic controllers, and those under the Congressional retirement rules. The tool is posted on the Access America for Seniors official federal government senior site. They state that this model gives a very accurate estimate of benefits.

HR1102 has passed out of the Senate Finance Committee and now goes to the Senate floor for a vote. Among other things, this legislation would raise the contribution limits for Individual Retirement Accounts (IRAs). The limit for IRA contributions is currently $2,000 a year, which would be increased to $5,000 a year by the year 2003. In addition, people who are age 50 or older will be allowed to contribute $5,000 in 2001. The IRA contribution limits will also be increased for inflation in the future. The legislation also increases the taxable income levels at which contributions can no longer be made, and sets a provision that IRA funds which are donated to charity will not be included in the taxable income of the donar. Contributions to 401(k) plans, currently limited to $10,000 a year, would be gradually increased to $15,000 by 2005, then indexed for inflation. Employees age 50 and over would be allowed to contribute an additional $5,000 a year to a 401(k) plan.

The bill was passed in the House with broad bi-partisan support. 182 Democratics, 218 Republicans, and 1 Independent voted for it. Only 25 congressmen voted against it, 23 of them Democratic, and 9 members did not vote.

The House passed HR 1102, The Comprehensive Retirement Security and Pension Reform Act of 2000, and it has passed to the Senate. This bill would gradually increase to $15,000 from the current $10,500 limit the maximum annual salary deferral an employee could make to a 401(k) plan. Other provisions would allow employees age 50 and older to make an additional $5,000 in annual "catch-up" contributions to their 401(k) plans and allow employees moving back and forth between the for-profit and non-profit sectors to transfer funds from 401(k) to 403(b) plans and vice versa. In addition, the measure would shorten, to three years from five years, the maximum amount of time in which employers' matching contributions to savings plans must be vested.

A recent survey by Hewitt and Associations showed that 68% of employees who change jobs take their 401(k) benefits in cash, rather than reinvesting them in an IRA or other retirement program. Not only are they failing to accumulate those investments for future retirement needs, but these employees, many of whom are under age 59 1/2, are also paying significant penalities and taxes on the early withdrawal of their funds. Although younger workers were the most likely to take cash rather than to roll over their balances, even older workers cashed out at discouragingly high rates (60% for those ages 50-59).

In combination with the reduction in the number of people covered by traditional defined benefit, or annuity, pension plans, the survey illustrates a disturbing trend in the lack of preparation of employees for future retirement needs.

The surveyors recommended that employers, accountants, and financial planners step up their efforts to educate workers about their retirement options, both encouraging new workers to roll retirement balances from previous employers into plans at their new employers, and enlightening departing workers about the tax implications of cashing their accounts out.

The Senate Special Committee on Aging heard testimony about cash balance pension plans. Some large companies are switching from traditional defined benefits pension plans to this new form of pension. The concern many older people have expressed is that traditional plans tend to benefit older workers, with a large part of the benefits earned in the final years before retirement. In cash balance plans, however, benefits are more evenly distributed over the lifetimes of the workers. Companies which are making these changes are doing so in order to create a benefit which will be more attractive to a younger workforce which makes frequent job changes, as opposed to the worker of the past who stayed in one job for most or all of their career. One of the problems which is arising as companies make these changes, is that older workers who are nearing retirement are finding that their benefits under the new plans are significantly lower than they would have been under the old plans. Since they are so near to retirement, they will have little opportunity to make up the difference before they retire.

The committee chairman, Senator Chuck Grassley, urged that the Senate proceed cautiously in legislating any changes in this area because of the complexity of pension law.

A United Nations International Labor Organization issued a report warning that about 90% of the world's working-age population is at risk of retiring into poverty because of inadequate pension benefits. The report noted that many developing countries are unable to collect the money owed them and pay benefits, and many wealthy countries are being forced to reduce retirement benefits either by raising the entitlement age or reducing cost-of-living increases.

Member countries of the Organization for Economic Cooperation and Development, which includes developed nations in North America and Europe and also Japan, already are spending 10% of their gross domestic products on retirement benefits, more than they are spending on health care. Spending on retirement benefits continues to rise as populations age.

The International Labor Organization said that "there is almost no country throughout the world where the reform, development, adjustment, improvement or modification of pension schemes does not appear on the political agenda. Within the next few years, the international landscape of income protection in old age may have changed beyond recognition."

At the same time, countries which didn't have pension programs in the past are beginning to implement them. Many Asian countries don't have mandatory pension schemes, but Hong Kong is instituting one, China is planning to overhaul its pension programs, and other Asian countries are adding or expanding their pension programs.

The International Labor Organization suggested that countries increase benefit entitlement ages and increase the number of working women to expand the number of workers paying into the system. They also advised against what they call "one of the most fashionable panaceas" for relieving the financial burden on pension systems ?- investing pension funds in the stock market. They caution that "people may save up to 30% more than they need ?- which would reduce their spending during their working life, or they may save 30% too little ?- which would severely cut their spending in retirement. Which way round cannot be foreseen at the beginning of a working life."

National Underwriter interviewed Harris Chorney of KMPG Consulting LLC about a recent KMPG study of how "Baby Boomers" plan to manage their retirement funds. They interviewed Boomers between the ages of 37 and 55 with incomes in excess of $75,000 a year, and found that many respondents were likely to need help in understanding how to manage their funds after retirement. For example, many were unclear about the tax consequences of withdrawing money from their retirement funds, and a number were unsure of their ability to manage large 401(k) or pension portfolios on their own. They also generally didn't know how to prioritize withdrawals of funds from savings accounts, annuities, investments, and IRAs. Many of them recognized the value of getting professional assistance, and expected to seek such help.