DC Retirement Board

The District of Columbia DC Retirement Board is seeking to amend the DC Retirement Reform Act with an alternative benefits rule. The amendment would allow the Board to establish an enhanced retirement benefit for its staff. The Retirement Board approved the proposed rule on November 19.

Secret Service Retirement

Sen. Joe Lieberman, ID-Connecticut, has introduced the United States Secret Service Retirement Act of 2009, legislation that would "provide that certain Secret Service employees may elect to transition to coverage under the District of Columbia Police and Fire Fighter Retirement and Disability System."

IRS Phone Forum

Recently, the Internal Revenue Service (IRS) hosted a phone forum, the "IRS Phone Forum," during which IRS representatives discussed certain of the guidance issued this fall that relate to retirement plan distributions, specifically:

• Notice 2009-82 – Required Minimum Distribution Rules
• Revenue Ruling 2009-31 – Annual Paid Time Off Contributions
• Revenue Ruling 2009-32 – Paid Time Off Contributions at Termination of Employment
• Notice 2009-68 – Safe Harbor Explanation – Eligible Rollover Distributions
• Notice 2009-75 – Roth IRAs – Rollovers From Employer Plans

Target Date Funds

The Senate Special Committee on Aging recently held a hearing on the topic: "Default Nation: Are Target Date Funds Missing the Mark?" It also released the Aging Committee Majority Staff Information paper entitled, "Target Date Retirement Funds: Lack of Clarity Among Structures and Fees Raise Concerns."

The Committee's report recognized that target date funds "offer investors certain advantages generally not offered by other types of investment vehicles" and that "well-constructed target date funds have great potential for improving retirement income security." However, the Committee also has identified concerns regarding design, transparency, and fees of target date funds.

The Committee's concerns regarding target date design derive from the significant differences in asset allocation and investment performance among the various providers of 2010 target date funds, as well as the sizeable losses experienced by many 2010 funds in 2008.

Target date funds were developed to offer a simple, straightforward investment solution for participants that lacked the time, knowledge, or inclination to make asset allocation and investment decisions. Experts feel that most target date funds have been successful in providing investors with better results than they would have earned on their own, even during the worst investment environment in history of 401(k) plans.

Railroad Retirement Annuities

The following questions and answers describe how railroad retirement annuities are affected when retired rail employees are also entitled to pensions from employers not covered by railroad retirement or social security.

1. When and how did the noncovered service pension reduction in employee annuities come about?

The noncovered service pension reduction in railroad retirement benefits was introduced by 1983 social security legislation which also applied to the tier I benefits of railroad retirement employee annuities.

Social security and railroad retirement tier I benefits replace a percentage of a worker's pre-retirement earnings. The formula used to compute benefits includes factors that ensure lower-paid workers get a higher return than highly-paid workers. For example, lower-paid workers could get a social security or tier I benefit that equals about 55 percent of their pre-retirement earnings. The average replacement rate for highly-paid workers is about 25 percent. Before 1983, such benefits for people who worked in jobs not covered by railroad retirement or social security were computed as if they were long-term, low-wage workers. They received the advantage of the higher percentage benefits in addition to their other pension. The modified formula eliminated this advantage.

2. In general terms, which employees are affected by this reduction and what types of benefits would cause a reduction?

For employees first eligible for a railroad retirement annuity and a Federal, State or local government pension after 1985, there may be a reduction in their tier I benefits for receipt of a public pension based, in part or in whole, on employment not covered by social security or railroad retirement after 1956.

This may also apply to certain other payments not covered by railroad retirement or social security, such as from a non-profit organization or from a foreign government or a foreign employer. It includes both periodic payments, as well as lump-sum payments made in lieu of periodic payments. It does not include military service pensions, payments by the Department of Veterans Affairs, or certain benefits payable by a foreign government as a result of a totalization agreement between that government and the United States.

3. If a noncovered service pension reduction is required in a railroad retirement employee annuity, how would it be applied?

Unlike the dual benefit offset for social security entitlement applied by deducting the amount of the social security benefit from the annuitant's tier I railroad retirement benefit, an alternate factor is used in the tier I benefit computation of annuitants with noncovered service pensions.

A tier I benefit is calculated in the same way as a social security benefit. In computing a tier I benefit, an employee's creditable earnings are adjusted to take into account the changes in wage levels over a worker's lifetime. This procedure, called indexing, increases creditable earnings from past years to reflect average national wage levels at the time of the employee's retirement. The adjusted earnings are used to calculate the employee's "average indexed monthly earnings" and a formula is applied to determine the gross tier I amount.

This benefit formula has up to three levels. Each level of earnings is multiplied by a specified percentage. The first level of earnings is multiplied by 90 percent, the second by 32 percent, and the final level by 15 percent. The results are added to obtain the basic benefit rate. For those first eligible in 2009, the gross tier I benefit is equal to: 90 percent of the first $744 of average indexed monthly earnings, plus 32 percent of the amount of those earnings over $744 up to $4,483, plus 15 percent of those earnings in excess of $4,483.

Beginning with 1986, a reduction in the 90 percent factor was phased in until, for employees subject to the noncovered service pension reduction who became eligible in 1990 or later, the 90 percent factor is reduced to as low as 40 percent. For example, an employee born in 1947 is eligible for a noncovered service pension and has 20 years of railroad service. Her railroad retirement annuity begins with the first full month she is age 62 and her average indexed monthly earnings are $2,000. She would receive, after the reductions for the noncovered service pension and early retirement, a tier I benefit of $527.16, rather than the $807.72 otherwise payable.

However, for employees with relatively low noncovered service pensions, there is a guarantee that the amount of the reduction in tier I cannot be more than 50 percent of the pension.

4. Are there any provisions exempting retired railroad employees who also receive noncovered service pensions from this reduction?

Railroad retirement employee annuitants also receiving a noncovered service pension who attained age 62 before 1986, or who became entitled to a railroad retirement disability annuity before 1986 and remained entitled to it in any of the 12 months before attaining age 62 (even if the employee attained age 62 after 1985) are not affected by the noncovered service pension reduction.

Railroad retirement employee annuitants who received, or were eligible to receive, their noncovered service pensions before 1986 would not be affected. They are considered eligible if they met the requirements of the pension plan before January 1986, even if they continued to work.

The reduction also does not apply to:

• Federal workers hired after December 31, 1983;
• Persons employed on December 31, 1983, by a nonprofit organization that was exempt from social security and became mandatorily covered under social security on that date;
• Railroad employees whose pensions are based entirely on noncovered employment before 1957; and
• Railroad employees eligible for a noncovered service pension who have 30 or more years of "substantial railroad retirement and/or social security earnings." They are generally exempt from the reduction. Also, employees with 21 to 29 years of substantial earnings may be subject to a lesser reduction. In such cases, the 90 percent factor is reduced in increments of 5 percent, providing factors ranging from 85 percent for employees with 29 years of substantial earnings to 45 percent for those with 21 years.

5. What is considered a year of "substantial earnings" for purposes of exempting a person from the reduction for a noncovered service pension?

A year of "substantial earnings" is not the same as a year of service. For 1951-78, the amount of earnings needed for a year of coverage is 25 percent of the annual social security maximum creditable earnings bases in effect for those years. For years after 1978, the amounts are 25 percent of what the maximum earnings bases would have been if the 1977 social security amendments had not been enacted. For example, in 1979, earnings of $4,725 would be considered a year of substantial earnings; in 1989, earnings of $8,925 would be needed; in 1999, earnings of $13,425; and in 2009, earnings of $19,800.

6. Are any reductions made in railroad retirement spouse or widow(er)s' benefits if a public service pension is also payable?

Yes. The tier I portion of a spouse or widow(er) annuity may also be reduced for receipt of any Federal, State or local pension separately payable to the spouse or widow(er) based on her or his own earnings. The reduction generally does not apply if the employment on which the public pension is based was covered under the Social Security Act throughout the last 60 months of public employment. Most military service pensions and payments from the Department of Veterans Affairs will not cause a reduction. For spouses and widow(er)s subject to the public pension reduction, the tier I reduction is equal to 2/3 of the amount of the public pension.

7. Where can more specific information be obtained on how noncovered pensions affect railroad retirement benefits?

Longevity of Recipients of Railroad Retirement Annuities

Every three years, the Railroad Retirement Board's Chief Actuary conducts a study of the longevity of its annuitants, as part of a valuation of future revenues and benefit payments.

The following questions and answers summarize the results of the most recent longevity study.

1. What were the study's finding on the life expectancy of retired male railroaders?

The most recent data reflected a continued improvement in longevity. Using data through 2006, the study indicated that, on the average, a male railroader retiring at age 60 can be expected to live another 21.3 years, or approximately 256 months. Studies done three, six and nine years ago indicated life expectancies of 20.7, 20.1, and 19.8 years, respectively, for this category of beneficiary. The study also indicated that a male railroader retiring at age 62 can be expected to live another 19.6 years (235 months), while the previous three studies indicated life expectancies of 19, 18.5, and 18.2 years, respectively. A male railroader retiring at age 65 can be expected to live another 17.1 years (approximately 205 months). The previous studies indicated life expectancies of 16.6, 16.1, and 15.8 years, respectively, for this category of beneficiary.

2. How did these life expectancy figures compare to those of disabled annuitants?

As would be expected, disabled annuitants have a shorter average life expectancy, but the difference decreases with age. At age 60, a disabled railroader has an average life expectancy of 16.4 years, or 4.9 years less than a nondisabled male annuitant of the same age; at age 65, a disabled annuitant has an average life expectancy of 3.6 years less than a nondisabled 65-year-old annuitant; and at age 70 the difference is only 2.6 years.

3. Are women still living longer than men?

In general, women still live longer than men. This is shown both in the Railroad Retirement Board's life expectancy studies of male and female annuitants and by other studies of the general United States population.

For example, at age 60 a retired female railroader is expected on the average to live 24.5 years, 3.2 years longer than a retired male railroader of the same age; and at age 65, a retired female railroader is expected on the average to live 20 years, 2.9 years longer than her male counterpart. Spouses and widows age 65 have average life expectancies of 20.5 years and 18.3 years, respectively.

4. Can individuals use life expectancy figures to predict how long they will live?

Life expectancy figures are averages for large groups of people. Any particular individual's lifetime may be much longer or shorter than the life expectancy of his or her age and group.

According to the study, from a group of 1,000 retired male employees at age 65, 920 will live at least 5 years, 791 at least 10 years, 607 at least 15 years, and 385 at least 20 years. Of female age annuitants at age 65, 532 will be alive 20 years later.

5. How do the life expectancies of railroad retirement annuitants compare with those of the general population?

While exact data were not available for direct comparison, data available to the Railroad Retirement Board did not indicate significant differences. The entire longevity study is available on the agency's Web site at www.rrb.gov.

Private-Sector Savings Emphasis

The Canadian Bankers Association has concluded that Canada's retirement savings system is not broken and rushing into a ``one-size-fits-all'' fix would be a mistake, says in a new report. The association is calling on governments to steer clear of creating a new public pension plan and to concentrate instead on increasing the attractiveness of private-sector savings options.

Canadians Shift Priorities toward Home Ownership

The Royal Bank of Canada poll also uncovered a shifting priority in Canada toward home ownership. For those ages 55 and older, 44 per cent said their top financial goal was home ownership, up from just 20 per cent in the 2008 poll.

What We Do, Not What We Say

Whether Canadians say their goals are saving for retirement or dreaming of buying a home, less than half actually set aside money for these goals, according to an annual survey by the Royal Bank of Canada.

The poll found that nearly half of those who listed home ownership as a priority don't put money toward it. Similarly, 4-in-10 of those with retirement savings as a priority don't put money toward it. Canadians do better with debt reduction. Eight-in-10 are putting extra money away to reduce debt.

Reinvention, Not Retirement

We cannot undo the impacts of the recent economic crisis, but we can change the way we think about retirement and the last third of our lives. In light of new financial realities, the old rules no longer apply. It's no longer about retirement; it's about reinventing yourself and remaining productive and engaged for your entire life.

Eleanor Blayney, Consumer Advocate for the Certified Financial Planner Board of Standards, offers these suggestion:

• Don't think retirement: think reinvention.  Make your senior years a  time when you will work by choice, rather than work by necessity.  Consider putting the skills and interests you have developed to productive use in new part-time or full-time endeavors.
• Health care inflation is one of the biggest threats to the financial     security of retirees, do what you can to keep your costs in check.  We all know what that means:  healthy eating, exercise, and regular, preventative care. Staying productive has also been show to improve both the mental and physical health of senior citizens.
• Reexamine your priorities and be creative with trade-offs. Less housecould mean more travel or medical coverage. 
• Get involved with your community.  Learn about the resources and     activities for seniors offered where you live.  Better still, help to     create and build these resources.
• Think of retirement as a new beginning rather than the end of your working life. It is never too early, nor too late, to plan for the most important decades of our lives.
• Managing your spending is as important as managing your income.  Every dollar you don't spend is worth as much as $1.40 in pretax income.