West Virginia Retirees To Rally at Capitol For Tax Exemption, COLA


The Coalition of Retired Public Employees (CORPE), a West Virginia retire advocacy group, is organizing a rally this week at the state’s capitol.

The retirees have gripes with several elements of the state’s retirement policy, and are trying to get the attention of West Virginia lawmakers.

Among the issues retirees are pushing for is a larger (or longer) tax exemption on pension income. From the WV Metro News:

The top item on the retirees’ agenda for 2015 is an increase in the tax exemption on their pension. Presently only $2,000 is exempt from taxes out of the pension and that exemption goes away at age 65. [CORPE President Ernie] Terry said other groups have a full tax exemption or a much higher threshold.

Also on the agenda: a cost-of-living-adjustment.

In West Virginia, COLAs are ad hoc – they are one-time events, and issued by the legislature on a case-by-case, year-by-year basis. Current retirees think another adjustment is in order. From the WV Metro News:

As usual, a cost of living adjustment or any pension increase would be welcomed.

“Several years ago our retirees that were age 70 received a three percent bump in their pension,” [CORPE President Ernie] Terry said. “Those people who have reached that milestone of 70 since then have not gotten anything.”

Terry said they aren’t asking for a retroactive raise, but want everyone in their class to be increased in what is already a meager pension.

The rally will be held at the capitol on Tuesday.

Rally-ers will meet in the capitol cafeteria at 8 a.m.


Photo by  David Wilson via Flickr CC License

Are Pensions More Important To Retirement Security Than Data Shows?

Pink Piggy Bank On Top Of A Pile Of One Dollar Bills

Alan L. Gustman, Thomas L. Steinmeier and Nahid Tabatabai have authored a paper exploring the possibility that the importance of pensions, and the financial support they provide retirees, is understated in retirement income data.

The paper, titled “Mismeasurement of Pensions Before and After Retirement”, was published in the Journal of Pension Economics and Finance.

From the paper:

There are a number of reasons why the value of pensions after retirement may be underestimated, especially if evaluation is based on sources of income realized in retirement. First, not all pensions are in pay status, even after the person leaves the pension job. When a pension is not in pay status, it is commonly ignored in questions related to pension incomes. Even when a pension is in pay status, a survey may not include income from the pension. For example, as pointed out by Anguelov, Iams and Purcell (2012), CPS data on pension incomes in retirement count only annuitized income, but not irregular income from pensions, such as periodic withdrawals from 401k accounts. This is an important problem because funds in DC pension accounts often are not claimed until the covered worker reaches age 70, when withdrawals are mandated. Indeed, a disproportionate amount of benefits may not be withdrawn until even later.

The paper provides further reason that survey data may not accurately portray pension benefits received by retirees:

Another factor is that actual benefit payments may be reduced from the pension called for by the simple benefit formula advertised by the firm when an annuity is chosen that differs from the single life annuity emphasized by plan. For example, the annuitized benefit will be reduced when, as required by law, a spouse or survivor benefit is chosen. The reduction will depend on the ages of each spouse and on whether the survivor benefit is half the main benefit, whether it is two thirds as in Social Security, or whether the annual benefit will remain unchanged upon the death of the covered worker. There may be further reductions if the retiree chooses a guaranteed minimum payout period.

To be sure, these differences in payout due to actuarial adjustments do not create actual differences in the present value of benefits. But one must know the details of the respondent’s choice as to spouse and survivor benefits and other characteristics of the annuity, and adjust using appropriate life tables. That is, a proper analysis would not just consider the annual pension payment, but would also consider the value of payments that will be made in future years to the surviving spouse. Typically these details are not available on a survey and no such adjustment is made.

The paper delves much deeper into this issue – read the full paper here.


Photo by www.SeniorLiving.Org

Principles For Better Pension Design

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A long, insightful discussion and analysis of pension design was published in the Fall issue of the Rotman International Journal of Pension Management. During the course of the paper the three authors, Thomas van Galen, Theo Kocken, and Stefan Lundbergh, propose a set of principles to help navigate the dilemmas and trade-offs posed by both public and private pension systems.

The paper begins:

Designing a pension system is a complex business in which difficult tradeoffs must be made. On the one hand, we may want everyone to receive a retirement income that is linked to their own contribution; on the other, we want to protect people from poverty. How do we weight these two goals? The choice will depend on societal preferences and cultural values. We must also ask for whom we should design the pension system: what is ideal for a self-employed high-income earner may be far from adequate for someone living on a minimum wage, paying rent, and raising a family of five.

Addressing these dilemmas is a daunting task, especially with the recognition that pension systems all have their own historical background, and that each has evolved in its own particular context.

The authors propose a set of pension design principles, organized into three groups: behavioral principles, stability principles and risk-sharing principles.

The behavioral principles:

1. Keep it simple. Don’t make the pension solution any more complex than necessary. Complexity and lack of transparency make decision making more difficult, increasing the risk that people will make decision they will later regret. Simplicity, by contrast, helps manage people’s expectations and increases their trust, both vital qualities for a successful pension system.

2. Provide sensible choices. Employees should be given a standard package, on top of which a limited set of well- considered alternatives are offered, to protect them from making mistakes while allowing them individual freedom (Boon and Nijboer 2012). Creating a set of choices for a pension system is like drawing up a good restaurant menu: it offers people tools (the menu) for tailoring the solution (the meal) to their needs, but without expecting them to be financial experts (the chef) (Thaler and Benartzi 2004).

3. Under-promise, over-deliver. Research has shown that people experience twice as much pain from a loss as pleasure from a gain of equal size. Therefore, it is wise to avoid delivering outcomes below people’s expectations, which implies that a pension system should offer people a minimum level of pension income that, in practice, will likely be exceeded (Tversky and Kahneman 1992). Research shows that people value some kind of certainty very highly and are willing to pay substantial sums of money for it (Van Els et al. 2004), but too much certainty will make the pension design unaffordable.

The stability principles:

1. Ensure adaptability. Constantly changing external conditions require an adaptable pension system. Explicit individual ownership rights ensure flexibility, so that the system can adjust itself over time, and also make pensions more mobile to move to other systems.

2. Keep it objective. The health of a pension system should be measured based on objective market valuations. An objective diagnosis ensures that beneficiaries feel comfortable with how the pension fund deals with their property rights. If the valuations are calculated differently from market practice, participants may feel they are better off outside the system.

3. Prepare for extreme weather. The world is uncertain and unpredictable things happen; a pension system should be robust under extreme circumstances, built not on predictions but on consequences of possible outcomes. To assess the system’s robustness, draw up a set of “extreme weather” scenarios for risks outside and inside the pension system. The design of the pension system should target the ability to endure these extreme scenarios.

And the risk-sharing principles:

1. Avoid winner/loser outcomes. To avoid losing support, pension system design should prevent any one group of participants benefitting at the cost of another group. For example, if internal pricing in DB plans deviates from market pricing, it is likely to create winner/loser outcomes, eventually leading to pension system distrust.

2. Only diversifiable risks should be shared. A system founded on solidarity in bearing diversifiable risk creates value for all by reducing individual risk. For example, we have no idea how long we will live after we retire, but we can estimate the current average life expectancy of a homogenous group reasonably well, so it makes sense for individuals to pool their individual longevity risk with a large group.

3. Individuals must bear some risks. Risks that cannot be diversified or hedged in the market should be borne by the individual. Pooling non-diversifiable risks leads inevitably to transfers between groups in the collective pool and will eventually erode trust in the system. In reaching for higher long-term returns, younger people can absorb more market risk than older people; this calls not for risk sharing but for age differentiation in exposure to financial markets.

The authors go on to provide examples of these principles in action, using pension systems from the UK, Sweden and the Netherlands. The full seven page paper can be read here.