U.S. Supreme Court Rejects Challenge to the Constitutionality of ACA

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U.S. Supreme Court Rejects Challenge to the Constitutionality of ACA

On June 17, 2021, the U.S. Supreme Court again rejected an Affordable Care Act (ACA) lawsuit filed by a group of Republican State Attorneys General which claimed that a change made by Congress in 2017 had rendered the entire law unconstitutional. However, by a vote of 7-2, the Supreme Court Justices did not reach the merits of the case. Rather, they ruled that the suing states and their two individual plaintiffs from Texas lacked ‘standing’ to bring the case to court.

An excerpt from the syllabus in California v. Texas (No. 19-840) provided by the Supreme Court stated that the two individual plaintiffs “do not have standing to challenge Section 5000A(a)’s minimum essential coverage provision because they have not shown a past or future injury fairly traceable to defendants’ conduct enforcing the specific statutory provision they attack as unconstitutional…. The States, like the individual plaintiffs, have failed to show how that alleged harm is traceable to the Government’s actual or possible action in enforcing Section 5000A(a), so they lack Article III standing as a matter of law. But the States have also not shown that the challenged minimum essential coverage provision, without any prospect of penalty, will injure them by leading more individuals to enroll in these programs.”

The Supreme Court’s syllabus in California v. Texas is available here.

NASRA Updates Issue Brief on COLAs

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NASRA Updates Issue Brief on COLAs

In June 2021, the National Association of State Retirement Administrators (NASRA) released its issue brief, Cost-of-Living Adjustments, which updates an earlier version published in July 2020. The brief discusses: 1) the purpose of cost-of-living adjustments (COLAs); 2) types of COLAs; 3) costs of COLAs; and 4) recent state COLA legislative changes. 

According to the brief, most state and local government pension plans provide some form of COLAs to offset or reduce the effects of inflation on retirement income. In addition, COLAs are important for state and local government employees who do not participate in Social Security in order to supplement their income during disability or normal retirement. Typically, governments prefund the cost of a COLA over an employee’s working career.  

The report also provides a summary of COLA provisions by state-level plans, including any recent legislative changes. According to the report, of the 100 selected state-level plans that provide COLAs, 72 plans provide them on an automatic basis and 28 plans provide them on an ad hoc basis.   

In addition, since 2009, 18 states have changed their COLAs for current retirees, seven states have changed COLAs for current employees’ future benefits, and six have changed COLAs for future employees only. However, in several states, the legality of these changes has been challenged.  In addition, some states are including provisions that would allow COLAs to increase if the plan’s funding status or fiscal conditions improve or if inflation rises.   

The report also includes an appendix with a listing of COLA provisions for many state retirement plans and identifies the applicable changes from 2009-2021.   

The brief is available here.

CRR Finds Public Plan Funding Improves as Workforce Declines

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CRR Finds Public Plan Funding Improves as Workforce Declines

On June 8, 2021, the Center for Retirement Research at Boston College (CRR) released its report, 2021 Update: Public Plan Funding Improves as Workforce Declines. According to the report, at the end of FY 2020, most pension experts tempered their public pension financial projections for the near-term prospects based on the ominous forecasts made by public finance experts early in the pandemic. However, strong investment performance following the low market in March 2020 resulted in pension returns that exceeded expectations.

Regardless of the COVID pandemic, the aggregate funded ratio of public pension plans is estimated to have risen from 72.8% in 2020 to 74.7% in 2021. In addition, state and local employment reductions due to the pandemic have had a slight impact on funded ratios and required contribution amounts, with the average actuarially determined contribution projected to have only increased from 21.3% to 22.0% of payroll.

The report concludes, “the required contribution rate increased more noticeably due to the lower payroll base over which the slightly higher re­quired contributions are now expressed. Interestingly, some plan sponsors have shifted to charging amorti­zation payments as a fixed-dollar amount rather than a percentage of salary. Doing so would remove the potential for unintended underfunding going forward and, if amortization payments are reported as a dollar amount, reduce the appearance of rising contribution rates whenever there is a decline in employment.”

The brief is available here.

NCPERS Updates Report on Top 10 Advantages of Maintaining DB Plans

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NCPERS Updates Report on Top 10 Advantages of Maintaining DB Plans

On June 3, 2021, the National Conference on Public Employee Retirement Systems (NCPERS) published its research series report, The Top 10 Advantages of Maintaining Defined-Benefit Pension Plans: 2021 Update. The report updates the original 2011 NCPERS research series which intends to demonstrate to policy makers that defined benefit (DB) plans are: 1) more efficient; 2) provide greater retirement security than defined contribution (DC) plans; and 3) support state and local economies and revenue.

The report addresses the question, “Should state and local government defined-benefit plans be eliminated and replaced with defined-contribution plans?” It finds that switching from a DB plan to a DC plan would likely result in significant, long-term, detrimental effects on state and local governments, their employees, economies, and ultimately the taxpayers.  After discussing how DB and DC plans work, the report examines the major advantages of DB plans compared with DC plans.  

The report concludes that the real question is, “How can state and local governments efficiently provide secure, sufficient, and sustainable retirement benefits for their employees?”  It indicates that “state and local governments need to stabilize pension liabilities through funding their plans without skipping contributions. They should conduct actuarial valuation annually and stress test every few years. On top of that they should establish stabilization funds to make sure that the ratio between pension liabilities and economic capacity is stable. Above all, state and local governments need to bring their state and local revenue systems in sync with their economies.”

The report is available here.

SOA Examines the Impact of the Low Interest Rate Environment on Retirement Security

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SOA Examines the Impact of the Low Interest Rate Environment on Retirement Security

In May 2021, the Society of Actuaries (SOA) released its report, Understanding the Impact of the Low Interest Rate Environment on Retirement Security in the U.S. The report examines academic and practitioner research related to the impact on retirement security of the low interest rate environment in the U.S.

According to the report, “Persistent low interest rates could affect the retirement security of Americans greatly through direct impacts on investment returns and through impacts on the capacities of governments and the private sector to finance Social Security, pension funds, and other retirement savings mechanisms.” 

Regarding U.S. public defined benefit plans, the report indicates that the direct impact of low interest rates has resulted in plans slightly lowering their discount rates primarily due to their unique regulatory environment. Also, it cautions that low returns may cause challenges in meeting existing pension obligations.

Further, indirect consequences have increased the allocation to equity-like asset classes which may lead to greater investment risk. In addition, higher contributions will be required if lower than expected returns cause underfunding. Also, some plans may choose to cut benefits for new members, share risk with plan members or possibly consider introducing hybrid plans that offer a combination of defined benefit (DB) and defined contribution (DC) plan features.

In the short to medium term, the implications for retirement security are expected to be limited since public DB plans are backed by tax revenue and benefits are typically statutorily protected. While over the long term, the report indicates that pension reforms may generally be less generous for future employees and plan participants may bear more risk.

The report is available here.