FY13 Pay Raise for State Employees?

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Are state employees getting a raise soon? I have heard that we are, but I have heard that before and it never happened?
The General Assembly passed a two percent pay raise for qualified employees making less than $70,000 beginning July 1, 2012.  This item is part of the appropriations bills that are pending the Governor’s review and signature.  Please consult with your Human Resource Office for additional implementation information. 
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Pension Transition Cost Myths

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In a recent posting titled “Public-Sector Pensions: The Transition Costs Myth,” Andrew Biggs noted that public pension administrators and other subject matter experts have “an obligation to provide the public with solid facts.” I could not agree more.

The main point of his posting, as well as the paper on which it is based, is that governments need not immediately pay for the added costs associated with closing an underfunded pension plan and establishing a new 401(k)-style plan. So, the so-called “myth” is not whether transition costs exist, but how governments must mortgage them. I agree that governments can mortgage added costs in any number of ways. What seems to be completely lost is the fact that closing a defined benefit pension plan and setting up a 401(k)-style plan doesn’t change the unfunded liability, and often increases other costs.

Andrew Biggs seems to understand this fact as it relates to other retirement programs. In an August 30, 2010, National Review Online article titled “Personal Accounts Are No Cure-All,” he posits that if Social Security were to migrate from a DB approach to an individual account DC approach, there would be transition costs for which it would be necessary “to generate new revenues for the program, either by raising taxes, cutting other programs, or borrowing.”

In this new posting he also claims that 401(k)-style plans “can’t generate unfunded liabilities” and that once the contribution is made, “the employer’s obligation is fulfilled.” It is well documented that participants in such plans have nowhere near the amount that will be needed to provide anything close to a subsistence level of retirement income. The difference between what participants accumulate and what they need to survive is an unfunded liability that is going to fall on someone. Assuming the employers he mentioned have not determined a method for completely avoiding taxation, they will ultimately be on the hook for the financing of entitlement programs needed to fill the gap. By any reasonable assessment, that is an unfunded liability.

Yes, I am a public employee and the administrator of a public employee DB plan. Interestingly enough, I’m also the administrator of a supplemental DC plan for public employees. I get paid the same regardless of the type of plan I administer. I agree that I have a duty to provide policymakers and the public with all the facts related to pension reforms, including the whole truth about transition cost myths which includes pointing out the flaws in the claims of scholars.

To read the continued exchange between Mr. Findlay and Mr. Biggs, visit the post on the PensionDialog blog.

Gary Findlay is the Executive Director of MOSERS Print Friendly and PDF

Was the Annually Required Contribution Rate Funded Throught the Legislative Process in 2012?

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Back in September, you issued a press release which said, "On September 15, 2011 the MOSERS board of trustees voted to certify the contribution rate for the fiscal year beginning July 1, 2012 at 14.45% of payroll." You noted that "[t]he state of Missouri has consistently funded 100% of MOSERS’ annually required contribution (ARC), as determined by the actuary." Did this require legislative budgetary action? If so, was it funded at the certified level?
That is a very good question. The answer is yes, the annually required contribution (ARC) that was certified by the MOSERS Board back in September was fully funded for the upcoming FY13 budget year. 
Once the board certifies the required rate that is necessary to fund the System for the upcoming fiscal year, the Commissioner of Administration, who is a member of the board, requests the funding in the Office of Administration’s budget. The appropriations bills made their way through the legislative chambers and were agreed upon on May 11, 2012. The amount necessary to fund MOSERS, as certified by the Board, is in the final appropriations bill, which is now awaiting the Governor’s signature. 
It is worth repeating that the State of Missouri has always fully funded the annually required contribution as determined by the Board of Trustees and certified by the Commissioner of Administration, and this year is no exception. MOSERS remains well-funded and promised benefits remain secure.
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Is There Insurance Covering MOSERS' Retiree Benefits?

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Is there any insurance covering retirees' benefits should MOSERS or the state be unable to pay our monthly retiree benefits. If so, what are the annual limits or caps a retiree can count on receiving? Please advise as to where one can look for more information on such insurance. I realize this is unlikely given MOSERS current status, but I think most of us would like to know what we count on should this occur.
There is no “insurance,” per se, covering MOSERS. You might be thinking about the private sector and the fact that private sector pensions are partially covered by the Pension Benefit Guaranty Corporation (PBGC). There is nothing comparable for public sector plans such as MOSERS. What protects plans like MOSERS is the full faith and credit of the state.
Participation in MOSERS is, by law, considered to be part of your “contract of employment” with the state and the law further stipulates that no alteration, amendment, or repeal of the MOSERS law shall affect the then-existing rights of members and beneficiaries. The State of Missouri, as the employer, is obligated by law to make the contributions to MOSERS that are necessary to fund the promised retirement benefits. Regardless of the MOSERS investment returns, your retirement benefits are secured by law.

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Did HB 1139 - the retirement incentive - pass?

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What is happening with the bill regarding retirement incentives [HB1139] for Missouri state workers? Did it pass and will be effective this year?
The 2012 Missouri Legislative session ended Friday, May 18. HB1139 did not pass.
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Social Security 2012 (Unvarnished)

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Over the years, the Social Security program has received a great deal of media attention but it seems to be increasing of late. For reasons that are unclear to me, that attention seems more directed at perpetuating myths than at informing the public. The following is offered to bring some unvarnished truth to a number of issues.

For starters, people who are covered by Social Security do not pay into the system. “Paying in” implies that participants are establishing accounts that will eventually be used to pay their benefits – that is not now, nor has it ever been, a design feature of the program.

Even though it was established by the “Federal Insurance Contributions Act (FICA)”, the “insurance” properties are questionable and the amounts withheld from your pay and the amount paid by the employer are not “contributions.”  In the simplest terms, Social Security is an income redistribution program supported by a payroll tax.  (Here, “payroll tax” is distinguished from “income tax” in that it is a tax on gross pay with no deductions or exemptions.)  It is generally a program for collecting tax on the payroll of people who are working and distributing it to people who have reached a certain age or who are unable to work because of disability.

For Old Age Survivors and Disability Insurance (OASDI), employers and employees are each taxed 6.2% of pay up to a certain pay level, which is indexed for inflation over time.  The maximum pay subject to the OASDI tax in 2012 is $110,100.  The total tax (employer and employee combined) for individuals earning that much or more in 2012 would be $13,652.40.[1]  There is an additional payroll tax of 1.45% for employees and employers for Medicare.  Unlike Social Security, there is no cap on the income subject to the Medicare tax.  (For high income earners, the amount paid in tax for Medicare can exceed the tax paid for OASDI.)

Social Security tax revenue that is collected currently is used to pay Social Security benefits to current recipients.  If the tax revenue collected exceeds the amount needed to pay benefits, the balance collected is spent currently on other federal government programs.  Any surplus collected is accounted for by the issuance of non-marketable US government securities to what is called the Social Security Trust Fund.  In other words, the Social Security Administration receives IOUs from the federal government for the portion of social security payroll taxes spent currently on other government programs. As it stands now, the taxes collected are not sufficient to meet the benefit payment payroll. This means that the Social Security Administration has to go to the Treasury Department and collect on some of the IOUs they have been holding in order to make up the difference.  If you cut to the bottom line, this means that the federal government is presently paying for a portion of Social Security benefits by either the use of other tax revenue or by borrowing.

The financing approach used by Social Security is commonly called “pay-as-you-go” as significantly distinguished from the “actuarial funding” approach required by state law for MOSERS.  Under pay-as-you-go financing, if things are perfectly in balance, the amount collected in taxes will equal the amount required to pay benefits.  This is why issues concerning demographics and our aging population are so important in discussions regarding the financing of Social Security. As we move toward having fewer workers per retiree, the options are somewhat limited but generally consist of one or more of the following:

1)  More can be collected on the wages of those who are working;

2)  Less can be paid on behalf of those who are retired;

3)  General revenue can be tapped to make up any shortfall (meaning higher
general taxes or less available for other government programs);

4)  Additional debt can be issued by the federal government (another form of
general revenue financing); or

5)  Immigration policies can be changed to increase the active employee workforce
(assuming jobs are available).

In 1983, the law was changed to push out, in a phased manner, the eligibility age for normal Social Security retirement eligibility from 65 to 67.  (Even though it became law in 1983, it first impacted people who tuned age 62 in the year 2000 by raising their eligibility age from 65 to 65 and 2 months.  It is scheduled to be fully implemented for people reaching age 62 in the year 2022 or later whose normal retirement age will be 67.) This is a version of collecting more on the wages of workers and paying less on behalf of retirees. (In big picture terms, it extends the time people will work which automatically reduces the period for them to receive benefits.)

Questions & Answers

Q:  Will a Social Security program be present in some variety for the long-term? 

A:  I firmly believe that we will indefinitely have an income redistribution program in place to assist older and disabled citizens with their financial needs.

Q:  Will the Social Security program as we know it today be continued for the long-term future? 

A:  My guess is that it will be changed at some point to address financing issues. 

Q:  Will any future changes to the Social Security program be applied to people who are retired when the changes are made or who will retire in the not too distant future after the changes are made? 

A:  With only history as a guide, my guess is that future changes will be applied only to active employees who retire at some point after the effective date of the changes.

Q:  Are the demographic dynamics in play within Social Security going to have an equal impact on MOSERS? 

A:  Whether or not there will be future changes to the benefit provisions applicable to MOSERS’ participants will be dependent on future policy decisions made by the legislature and the administration. However, the funding dynamics are completely different in an actuarially funded program like MOSERS compared to a pay-as-you-go program like Social Security – accordingly, demographic shifts are not expected to be a driving force behind any future changes that may be made to MOSERS’ benefit provisions.

Why is the Program Important?

Thus far my focus has been on what the program is not. Now let’s examine what it is. For decades we talked about retirement income security being a three-legged stool consisting of an employer sponsored traditional defined benefit pension plan, Social Security and personal savings. The percent of the total workforce covered by traditional pension plans has declined dramatically over the past 20 years. (The reasons for this are beyond the scope of this analysis but they are recognized and well understood in the employee benefit community.)  Many private sector employees have no employer sponsored retirement program at all and many of those that do have a program only provide for individual accounts in defined contribution type plans where participants have relatively small balances. Having personal individual savings set aside for retirement sounds like the responsible thing to do but the fact is that many employees simply do not have the resources needed to meet current expenditures, much less save for retirement. In combination, what this means in the private sector is that the three-legged stool is evolving toward a pogo stick consisting only of future Social Security benefits. The reality is that for an increasingly large segment of our aging private sector population, Social Security may be the only thing standing between them and abject poverty.

In the public sector about 80% of the workforce is covered by Social Security.  In the vast majority of the cases where the employees are also covered by traditional employer sponsored plans, the benefits were designed taking potential Social Security benefits into account.

With this for context, is it conceivable that we, as a nation, will allow Social Security to simply disappear?


On April 23, 2012, the trustees of the Social Security system announced that the fund that helps sustain retiree and survivors’ benefits will become exhausted in 2033, three years sooner than they projected last year. Their projections suggest that at that time, payroll taxes and taxation of Social Security benefits will provide only enough revenue to pay about ¾ of the benefits promised to retirees and beneficiaries under federal law.

In considering what will happen then, think about what is happening now.  Presently, the payroll taxes collected plus the tax on Social Security benefits is not adequate to pay the promised benefits.  To make up the difference, the Social Security administration cashes in some of the IOUs in the trust fund.  So, how does the federal government make good on those IOUs?  They do it by diverting other tax revenue to the program or by issuing additional debt. Remember, those IOUs only exist because the federal government already spent the surplus Social Security payroll tax when it produced more than was needed to pay promised benefits.  In other words, presently the benefit payments are being made using the taxes collected for Social Security plus federal government payments to cover the tax shortfall.

Next consider how the current situation differs from what the situation is projected to be in 2033. Actually, there is no practical difference unless you expect the federal government to default on the payment of benefits that have been promised. The tax revenue is projected to cover 75% of the amount needed and the rest will have to come from diverting other tax revenue or issuing more debt. My guess is that the likelihood of default in 2033 is no greater than the likelihood of default currently.

Will there be future changes to the Social Security program that will increase taxes collected and/or reduce the benefits payable?  Probably!  Will a federally administered income redistribution program be an ongoing feature of our society?  The notion that there may not be seems completely ludicrous to me.

A number of younger people today hold the view that it is more likely that they will meet an extraterrestrial than ever receive Social Security benefits. My suggestion to them is that they should brush up on their Klingon.

P.S.   The changes between the current situation and what would be required to put Social Security into a long-term positive cash flow position are relatively modest.  The point here is that the "sky is falling" diatribe regarding Social Security is more histrionics than truth. Note that I did not address Medicare other than for the contribution rate. Medicare is the real elephant in the living room.

Gary Findlay is the Executive Director of MOSERS

[1] The employee OASDI rate for 2012 is 4.2% rather than 6.2% meaning that the maximum payroll tax for an employee is $4,624.20 rather than $6,826.20. That reduction is scheduled to expire at the end of 2012.  The employer OASDI rate for 2012 remained at 6.2%. Accordingly, the combined maximum for 2012 is $11,450.40 rather than $13,652.40.

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Annual Leave payment and Deferred Compensation

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I am an OA employee and would like to have my unused annual leave split into a partial payment and partial rollover to my Deferred Comp 401a. Is that possible?
Yes, you can split your unused leave check into a partial payment and a partial deferral to your deferred compensation account. Using the Accrued Vacation and Other Leave Deferral Change Form you can establish the partial payment amount you would like to contribute to your deferred compensation account. That money will be contributed to your 457 plan, not the 401(a). It’s important that this form be signed and submitted to your payroll department prior to the 1st of the month in which you are terminating service. You will receive the remaining portion of your unused leave (the amount you didn’t defer to the deferred compensation plan) as a check.
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Pensionomics 2012: A new research report from the National Institute onRetirement Security (NIRS)

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Public pensions are a “$1 Trillion Economic Engine,” according to a new report from our friends at NIRS. We’re very pleased to see this new data, measuring the economic impact of defined benefit (DB) pension expenditures.

This new economic analysis study finds that pension benefit expenditures provide critical economic stimulus to the Missouri economy, including $4.9 billion in total economic output, and pension spending supports 38,518 jobs. Retiree spending stimulates and stabilizes the Missouri economy.

Pensionomics 2012: Measuring the Economic Impact of Defined Benefit Pension Expenditures, reports the national economic impacts of public and private pension plans, as well as the impact of state and local plans on a state – by – state basis.

The study calculates that pension expenditures supported some 38,518 jobs in Missouri that paid $1.6 billion in income. Pension benefits accounted for some $4.9 billion in total economic output and $2.8 billion in value added in Missouri. These expenditures also supported some $640.1 million in tax revenue at the local, state, and federal levels.

In 2009, Missouri’s unemployment rate was 9.3%. The study finds that the number of jobs (38,518) supported by pension expenditures is significant, as it represents 1.3 percentage points in the state labor force in that year.

“Missouri retirees don’t put their pension checks in a drawer and forget about them,” said Ilana Boivie, report author and NIRS economist. “They use it for daily living expenses, and to pay taxes. The money goes right back into the economy, which means financial stability for the retiree and economic growth for Missouri.”

“Understanding the economic impact of pension spending is critical  as our economy struggles to recover and create jobs,” said Diane Oakley, NIRS executive director. “The secure monthly income provided by pensions can act as an ‘automatic stabilizer.’ Missouri retirees with a reliable pension check can continue spending on food, housing, and medicine even during tough economic times.”

Oakley continued, “That isn’t necessarily the case for retirees relying on 401(k)-­‐type plans, who in 2009 experience big losses to their nest egg. These Americans are often forced to retreat from spending just when the economy needs stimulus.”

The study also finds that expenditures made from public pension benefits in 2009:

• Paid $3.3 billion in pension benefits to 149,001 retirees and beneficiaries in Missouri.

• Had large multiplier effects. Each taxpayer dollar invested in Missouri’s public pensions supported $5.43 in total economic activity, while each dollar paid out in benefits supported $1.49 in economic activity.

• Impacted every industry in Missouri.

Read the full fact sheet on the report’s key findings in Missouri. Print Friendly and PDF