Social Security Benefit Increase in 2009

Social Security recipients are scheduled for a 5.8% cost-of-living increase in 2009. The increase will raise the average monthly Social Security retirement benefit to about $1,153.

Obama and Retirement

On the retirement side of policy, President-Elect Barack Obama has issued a number of key proposals. One would require many employers for the first time ever to offer their workers a retirement plan.

It would require all employers who have been in business for two years, have at least eleven employees, and do not already offer a work-sponsored plan to provide an automatic individual retirement account program to their employees. Employees could opt out of the program. But for employees who opt in, the employer would have to automatically deduct IRA contributions from the employees' paychecks.

Proponents argue that the automatic IRA program would dramatically increase the number of workers covered by retirement plans, because more than half of the estimated 78 million workers currently without work-based retirement plans would be eligible for the new IRAs.

Americans Lack Basic Social Security Knowledge

A recent online survey commissioned by Fidelity Investments shows many Americans lack the basic knowledge of the Social Security system and its benefits. For example:

• Eighty-five percent of sixty-one-year-olds did identify age sixty-two as the earliest they can start collecting reduced benefits. But 56% did not know when they would receive unreduced benefits if they waited to collect.
• Almost a third believed incorrectly that Social Security benefits are never taxed
• Nearly three-quarters didn't know that a nonworking or lesser- earning spouse could be eligible for benefits based on the work record of the higher-earning spouse.
• More than half didn't know that a surviving spouse could be eligible to receive the Social Security benefit of the deceased spouse if it was larger than the survivor's own benefit.
• 45 percent of the sixty-one-year-olds say they plan to start taking benefits as soon as they are eligible at age sixty-two. Among those planning to collect as soon as possible, 73% did not have a retirement income plan. So perhaps there are other ways to bridge the income gap until full retirement age that they did not consider.
• Only 22% said they knew exactly how much their benefits would be while 26% had no idea even though Social Security has been mailing Americans an annual benefits estimate since 1997.

Retirement Fairness and Emergency Relief Act

Rep. C.A. Dutch Ruppersberger, D-Maryland, has introduced the Retirement Fairness and Emergency Relief Act of 2008 (H.R. 7278). This legislation would suspend the beginning date for required distributions from defined contribution plans based on attainment of age 70 ½. It would also waive the 10% penalty on withdrawals from qualified retirement plans during 2008 and 2009 for financial hardship.

The bill was introduced on November 19 and was subsequently referred to the House Ways and Means Committee.

401(k) Balances Falling

The average balance in 401(k) plans has fallen14% in 2008, according to Hewitt Associates. In 2007, average balance was $79,000. It fell to $68,000 in 2007. In the past two months alone, employees on average have lost nearly 18% of their 401(k) plan savings.

A Shift, Not a Drop, in Savings

A recent survey from human researches firm Hewitt Associates shows that savings rates in America have barely dropped. In 2007, the savings rate was 8%. It dipped to 7.8% in 2007. So far, according to Hewitt, only 4% of employees terminated their 401(k) plan contributions altogether in 2008. 

What has changed is a shift of investment assets from equities to other investments. In fact, the amount of 401(k) assets held in equities has reached an all-time low: only 53.8% of assets on average, compared to 68.1% a year ago, and down from its high of 74.2% in 2000.

Action Steps for Employers in Light of Market Turbulence

A new guide from the Principal Financial Group(®) can help employers make this critical review of their retirement programs. “Navigating Your Way through Market Turbulence” takes an in-depth look at how the market volatility may be affecting four common retirement plan types: defined benefit, defined contribution, Employee Stock Ownership Plan, and nonqualified deferred compensation. The guide offers action steps to consider for each plan type.

The guide is the latest in a series of educational resources from The Principal for financial professionals and employers about weathering the financial storm. It is available in the retirement section of the Principal Research Center at www.principal.com/research.

Canadians Rethinking Retirement

 Approximately 42% of Canadians over age forty are thinking about deferring their retirement by an average of 5.9 years according to an annual survey on Rethinking Retirement carried out by Desjardins Group. The reason is the current financial climate, which is pushing Canadians to adopt a cautious approach to retirement planning.

401(k)s: An Unpredictable Trend

In 1978, Congress established defined contribution retirement plans, such as the 401(k) to supplement Social Security and traditional employer pensions. Since then,  many companies have shifted from their traditional pension, in which the company assumed the investment risk, to 401(k) plans in which the burden of risk falls on the employee.

By 2005, 62% of all private-sector retirement plans were of the defined-contribution variety with only 10% the traditional type. The difficulty is that what has emerged as the dominant retirement plan in America, the defined-contribution, 401(k)-type is inherently unpredictable.

Automatic Pension Increases Continue in Georgia

A Georgia state board has voted unanimously to keep a forty-year-old policy that guarantees cost-of-living increases to pension payments for retired Georgia teachers. In so doing, the Board of the Teachers Retirement System of Georgia rejected a proposed removal of that guarantee by Georgia Governor Sonny Perdue.

The policy guarantees retirees 1.5% cost-of-living increases twice a year. The Governor’s proposed change would have let the board vote each year on how much retired teachers get in cost-of-living adjustments, which would have opened up the possibility that retirees get no increase in some years.

 The Board's vote came on the heels of a letter from the Georgia Attorney General saying the state could be held in breach of contract if the Governor’s proposal were approved.