MissionSquare Releases Survey Findings of Younger Public Service Workers in 2023

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MissionSquare Releases Survey Findings of Younger Public Service Workers in 2023

Recently, the MissionSquare Research Institute (formerly the Center for State and Local Government Excellence at ICMA-RC or SLGE) published its report, 35 and Under in the Public Sector: Why Younger Workers Enter and Why They Stay (or Don’t). The Research Institute analyzed the views of younger public service employees working for state and local governments.

The report indicated that the majority (64%) of public sector workers age 35 and younger have positive morale related to their employment and are satisfied with their job security, community service and quality of their colleagues. In addition, the report indicated that younger public service workers are facing challenges with their current financial situation and high levels of stress.

Other key findings include:

  • Respondents reported that they were attracted to public service work due to job security (32%), work/life balance (29%), health insurance (28%) and job satisfaction (28%).
  • Workers’ main priorities were to contribute to community improvement (67%), strong team dynamics (65%), intellectual engagement and alignment with personal values (64%).
  • Overall, the respondents reported that their benefits compensation was competitive in the labor market, but only 53% considered their wage compensation to be competitive.
  • About 70% consider their level of debt to be problematic, 22% consider their debt to be a major problem and only 7% are without any debt.
  • Although 77% agree they should be saving more for retirement, they indicated that the primary obstacles were other saving priorities and debt issues.
  • Almost 50% of respondents are very likely to recommend a public service career to others and 46% plan to remain in the public sector until retirement.

The report is based on a national online survey conducted by Greenwald Research in March and April 2023 of over 1,000 state and local government workers that are age 35 and younger.

The report is available here.

NASRA Updates Issue Brief on Employee Contributions to Public Pension Plans

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NASRA Updates Issue Brief on Employee Contributions to Public Pension Plans

On September 26, 2023, the National Association of State Retirement Administrators (NASRA) updated its issue brief, Employee Contributions to Public Pension Plans. The brief analyzes employee contribution plan designs, policies and recent trends.   

According to the brief, almost all state and local government employees are required to contribute to the cost of their retirement benefits. The report also indicates that about 25% to 30% of state and local government employees do not participate in Social Security. In many cases, those who do not participate in Social Security have a higher pension benefit and higher required contributions as compared with those who do participate in Social Security. The median contribution rates have increased to 6.3% of pay for employees who participate in Social Security and 9.0% for those employees who do not participate in Social Security.  

As reported in the brief, since 2009, 40 state governments increased their employee contribution rates. The legality of increasing employee contributions varies by state. In some states, courts have ruled that legislative efforts to increase employee contributions are a violation of the state constitution or contractual rights. However, in other states, higher employee contributions have either withstood or have not been subject to legal challenges. 

The brief also includes an appendix of employee contribution rates for over 100 public pension plans and identifies whether or not plan members have Social Security coverage. 

The brief is available here.

CRS Reports on Proposed Legislation for New Proportional Formula for the Windfall Elimination Provision in Social Security

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CRS Reports on Proposed Legislation for New Proportional Formula for the Windfall Elimination Provision in Social Security

On September 19, 2023, the Congressional Research Service (CRS) published its report, The Windfall Elimination Provision (WEP) in Social Security: Proposals for a New Proportional Formula. The WEP affects Social Security benefits paid to individuals that earn Social Security benefits from Social Security covered employment, but also earn pension benefits from state or local government employment not covered by Social Security. In these cases, Social Security benefits are lowered by the WEP. 

Social Security benefits are designed to replace a larger percent of pre-retirement income for lower-paid workers than for higher-paid workers. This is done by: 1) calculating an employee’s average indexed monthly earnings (AIME) from employment covered by Social Security; and 2) calculating the employee’s primary insurance amount (PIA) using a formula that applies a higher replacement percentage to lower earnings than to higher earnings. 

In 2023, two legislative bills were introduced that would replace the current-law WEP approach with a proportional formula for certain individuals that would become eligible for Social Security benefits in 2025 or later. The bills include: 1) the Public Servants Protection and Fairness Act of 2023 (H.R. 4260); and 2) the Equal Treatment of Public Servants Act of 2023 (H.R. 5342).

The proportional formula for the WEP provides workers that have some earnings from noncovered employment the same replacement rate as those workers that worked their entire careers in covered employment, whereas the current-law WEP can only approximately do so.

According to the report, “in 1983, the Social Security Administration (SSA) lacked the data on noncovered earnings needed to make the benefit adjustment under the proportional formula so Congress adopted the current WEP formula instead. As of 2017, SSA has 35 years of data on earnings from both covered and noncovered employment. This data’s availability means that the proportional formula is now an option for Congress to consider.”

The report also compares the current WEP and the proportional formula. In addition, it provides the SSA’s Office of the Chief Actuary (OCACT) cost estimates and funding rules for each of the legislative bills.

The report is available here.

S&P Global Reports on Improved Funded Ratios of U.S. State Pension and OPEB Plans in 2023

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S&P Global Reports on Improved Funded Ratios of U.S. State Pension and OPEB Plans in 2023

On September 7, 2023, S&P Global released its report, U.S. State Pension and OPEBs: Funding Progress is Likely to Pick Up in 2023 After Slipping in 2022. S&P Global reported that the funded ratios of U.S. state pension and other postemployment benefit plans are projected to improve for the fiscal year ended in June 30, 2023. The improvement is expected to be marginal and will likely exceed the potential near-term pressures to states’ debt and liabilities.

According to S&P Global, “absent prudent risk management over time, a confluence of factors, structural demographic shifts including an aging population, and medical cost growth, could add budgetary pressure tied to pension and other postemployment benefit (OPEB) funding longer term.”

Other key highlights include:

  • Unless there are plan modifications, contribution rates could increase to address pension funding shortfalls, which may lead to longer-term budget pressure for some states.
  • The potential for further monetary policy restraints and slower economic growth, or equity market uncertainty could require states to enhance their pension funding discipline to meet their assumed investment return targets.
  • Without substantial plan reforms or increased contributions, retiree medical or OPEB plans remain markedly underfunded and will not likely change.

The report is available here.

NASRA Updates Issue Brief on State Hybrid Retirement Plans

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NASRA Updates Issue Brief on State Hybrid Retirement Plans

On September 5, 2023, the National Association of State Retirement Administrators (NASRA) released its issue brief, State Hybrid Retirement Plans, which updates an earlier version published in July 2022. The brief provides new information on statewide cash balance and combination hybrid plans as well as a map that illustrates the percentage of public employees who participate in mandatory or optional hybrid plans in states that administer such plans for groups of general, public safety or K-12 educational employees.    

While the majority of public employee retirement systems are traditional defined benefit plans, some public-sector plans are considering hybrid plans that contain elements of both defined benefit (DB) and defined contribution (DC) plans. The brief examines two types of hybrid plans: 1) cash balance plans that combine elements of a traditional DB plan and individual accounts into a single plan; and 2) “DB+DC” plans that combine a smaller traditional DB pension plan with separate individual DC retirement savings accounts.     

The brief also provides overviews of cash balance and DB+DC plans that have been established in various states, with some dating back several decades. According to the brief, public-sector hybrid plans have diverse combinations of retirement plan designs to address the cost and risk factors of various state or local governments. However, most continue to include features that meet fundamental retirement plan objectives including: mandatory participation, shared financing, professionally managed pooled investments, benefit adequacy and lifetime benefit payouts. Typically, traditional public-sector DB plans that contain hybrid plan elements include benefits or employee contributions that are linked to the plan’s investment performance or actuarial condition. 

The brief also contains an appendix providing descriptions of various hybrid plan designs and financing arrangements.

The brief is available here. 

IRS Releases Guidance Delaying SECURE 2.0 Roth Catch-Up Contribution Requirement

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IRS Releases Guidance Delaying SECURE 2.0 Roth Catch-Up Contribution Requirement

On August 25, 2023, the Internal Revenue Service (IRS) released guidance under Notice 2023-62 announcing a transition period for the implementation of the new Roth “catch-up” contribution requirement of the SECURE 2.0 Act of 2022 (SECURE 2.0). Specifically, Notice 2023-62 provides relief regarding the SECURE 2.0 requirement that age 50 catch-up contributions for higher income participants in Section 401(k), 403(b), and governmental 457(b) plans be designated as Roth contributions (referred to as the “mandatory Roth catch-up” provision). 

During the past year, public and private sector plan communities, including plan sponsors and retirement plan administrators, have expressed concerns related to the IRS implementing the mandatory Roth catch-up provisions by January 1, 2024, which was the original effective date in the SECURE 2.0 Act. Notice 2023-62 helps to relieve the serious concerns that no catch-up contributions were allowed beginning in 2024 because of a drafting glitch. It also provides some of the requested relief during a two-year “administrative transition period.” Notice 2023-62 extends compliance for the requirement for a two-year transition period until the first taxable year after December 31, 2025 (i.e., January 1, 2026). 

Under Section 603(c) of SECURE 2.0, the provisions of Section 603 apply to taxable years beginning after December 31, 2023. However, the IRS noted, the first two taxable years beginning after December 31, 2023, will be regarded as an administrative transition period. Section 603 of SECURE 2.0 requires that catch-ups from participants in 401(k), 403(b) or governmental 457(b) plans earning $145,000 or more (indexed after 2024) be designated as Roth contributions. 

According to the IRS, “The administrative transition period will help taxpayers transition smoothly to the new Roth catch-up requirement and is designed to facilitate an orderly transition for compliance with that requirement. The notice also clarifies that the SECURE 2.0 Act does not prohibit plans from permitting catch-up contributions, so plan participants who are age 50 and over can still make catch-up contributions after 2023.”

Notice 2023-62 provides relief and guidance to plan sponsors, providers and participants by allowing time to implement the mandatory Roth catch-up provisions without triggering any plan qualification issues. Further, it minimizes the potential disruption for affected participants. The relief will provide critical time needed to implement the requirement and avoid the unintended consequences that could have led to a negative impact on retirement savings.

Under the Notice 2023-62 guidance, catch-up contributions will be treated as satisfying requirements of Section 414(v)(7)(A) through December 31, 2025, even if the contributions are not designated as Roth contributions. In addition, a plan that does not provide a designated Roth contribution will be treated as satisfying the requirements of Section 404(v)(7)(B).  

The IRS indicated that it intends to issue future guidance on the Roth catch-up requirement that will be released to facilitate ongoing implementation efforts. 

Comments to the IRS on Notice 2023-62 are due by October 24, 2023. 

IRS Notice 2023-62 is available here.

International Foundation Releases Health Care Costs 2023 Survey Results

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International Foundation Releases Health Care Costs 2023 Survey Results

On August 15, 2023, the International Foundation of Employee Benefit Plans (IFEBP) released its report, Health Care Costs Pulse Survey: 2024 Cost Trend. The report was based on the 2023 survey of U.S. employers which projects an increase of 7.0% in health care costs for 2024.

According to the survey responses, the primary reasons contributing to an increase in health care costs include:

  • Utilization due to chronic health conditions (22%);
  • Catastrophic claims (19%);
  • Specialty/costly prescription drugs/cell and gene therapy (16%); and
  • Medical provider costs (14%). 

In addition, the respondents indicated that the most effective initiatives to manage costs in 2024 would include: 

  • Utilization control initiatives (e.g., prior authorization, case management, disease management and nurse advice lines) (22%);
  • Cost-sharing initiatives (e.g., deductibles, coinsurance, copays and premium contributions) (16%);
  • Work and wellness programs (13%);
  • Plan design initiatives (e.g., dependent eligibility audits, high-deductible health plans, spousal surcharges/carveouts, formulary changes) (12%); and
  • Purchasing/provider initiatives (e.g., telemedicine, centers of excellence, health care navigators and advocates, coalitions and quality initiatives) (12%).

The report is available here.

Commonwealth Fund Analyzes Affordability of Health Care for Older Americans with Employer Coverage

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Commonwealth Fund Analyzes Affordability of Health Care for Older Americans with Employer Coverage

On August 10, 2023, the Commonwealth Fund released its issue brief, Can Older Adults with Employer Coverage Afford Their Health Care?  The Commonwealth Fund examined whether employer health coverage is providing adequate protection for health care costs for older adults ages 50 to 64. Overall, this age group is considered to be at a higher risk of health care expenditures. The brief is based on findings from the Commonwealth Fund Biennial Health Insurance Survey, 2022. 

The brief used data from the survey to analyze whether older adults ages 50 to 64 with employer health care coverage find their health plans and their health care to be affordable. In particular, the study focused primarily on the experience of older adults with low and moderate income.

Low income is defined as less than 200% of the federal poverty level (or $27,180 for an individual and $55,500 for a family of four in 2022). Moderate income is defined as 200% of slightly under 400% of the federal poverty level (or $54,360 for an individual or $111,000 for a family of four in 2022).

The key findings include:

  • About 50% of low-income older adults and more than 33% of those with moderate income indicated that it was very or somewhat financially challenging to afford their premiums;
  • 54% of low-income adults and about 33% of moderate-income adults were underinsured and facing high out-of-pocket costs and/or deductibles compared to their income;
  • About 50% of low-income adults reported delaying or eliminating needed health care due to cost;
  • Of the older adults that had difficulties paying medical bills and paying off medical debt, about 44% were low-income adults and 40% were those with moderate income; and
  • About 63% of those older adults that are facing medical bills and debt were not confident that they had sufficient assets to retire.

The brief indicated that, “One of the most important functions of health insurance is to protect people against catastrophic health care costs. Older adults also depend on good health insurance to enable access to care without the fear of incurring medical debt. The survey data in this brief indicate employer health insurance is failing many older adults especially those with low and moderate incomes.”

The brief is available here. 

 

CRR Issues Brief on Late Boomers’ Retirement Wealth

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CRR Issues Brief on Late Boomers’ Retirement Wealth

On August 1, 2023, the Center for Retirement Research at Boston College (CRR) released its issue brief, What Happened to Late Boomers’ Retirement Wealth? The brief indicates that Late Boomers have less retirement wealth than previous cohorts, including lower than expected 401(k) balances. CRR analyzed the changing demographics and labor market experience to examine the decline in retirement wealth.

The analysis suggested that there were two primary factors that impacted the retirement wealth of Late Boomers including:

  • The changing composition of households towards lower-wealth with part of the decline due to a decrease in the share of the cohort that are White, married and have college degrees; and
  • A weakening connection between work and wealth accumulation for the Late Boomers who were in their 40s during the Great Recession and were unable to recover financially.

The brief concludes, “The Great Recession story is a bit of good news for younger cohorts, as some of the downward pressure on their wealth holdings should abate.”

The brief is based on data using the Health and Retirement Study (HRS) to examine actual patterns of wealth accumulation by cohort and the Survey of Consumer Finances (SCF) to get information on the experience of Late Boomers over their work life.

The brief is available here.

S&P Global Provides U.S. Public Pension Fiscal 2023 Update

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S&P Global Provides U.S. Public Pension Fiscal 2023 Update

Recently, S&P Global released its report, U.S. Public Pension Fiscal 2023 Update: Funded Ratios Stable, Inflation Retreats, and POB Issuance Stops. S&P Global reported that U.S. public pension funded ratios are projected to remain stable or slightly improve due to the expected improvements in asset performance for fiscal year ended June 30, 2023.

​According to S&P Global, “After a slow start to the fiscal year, we estimate that a typical public pension plan will have experienced a return of around 9% for fiscal 2023…, which equates to a 2% gain for the year above the 7% return assumption.” 

Other key highlights include:

  • Although high inflation continues to move toward previous lows, volatility may affect pension funding if public pension plan sponsors experience budgetary stress; and
  • Pension obligation bond (POB) issuances have completely ceased this year due to the expectation that volatile interest rates may decline in the near future.

The report is available here.