How Your Retirement Package Compares to Members of Congress

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 Published: Tuesday, 12 Mar 2013 | 2:21 PM ET

By: Paul O'Donnell

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While extending the payroll tax cut through the end of last year, members of Congress last fall took what many feel was a long overdue whack at the cost of their retirement plan. They bumped up the rate at which federal employees contribute to their pension plan, saving an estimated $15 billion over the next 11 years.

They also made sure that none of the increase applied to themselves. Anyone in service before the law went into effect would pay into the pension plan at the old rate.
For all the talk you hear from Capitol Hill about running government more like a business, Congress has a retirement plan that would make any Fortune 500 executive blush. Members can retire younger, having contributed fewer of their own dollars, than almost any worker in the country — even more than the generous terms other federal workers get.

At a time when traditional pensions are disappearing and many workers are struggling to save for retirement, the Federal Employees' Retirement System (FERS), an old-school defined benefit pension program, pays 215 former congressmen and women an average of $39,576, for an average of 16 years of service, according to a recent Congressional Research Service report.

That's about what the average private-sector worker makes in retirement from all sources after a lifetime of work, according to the Employees Benefits Research Institute. The average income that worker gets from a pension is about $8,800 — if they have one. In 2010, fewer than 15 percent of private sector employees were enrolled in a defined-benefit pension.
"It's not keeping pace with what's happening in the private sector," said Veronique de Rugy, a senior researcher with George Mason University's Mercatus Center. "It's not sustainable."
(Read More: Latest GOP Budget Is Ambitious, Unlikely to Pass)

It's inaccurate, in fact, to refer a single retirement plan, since any senator or representative elected after 1986 has access to three: Social Security, a 401(k) program that matches 5 percent of their contributions up to $17,500, and FERS, which as the name implies covers anyone paid from the federal till.
FERS alone is a plan any U.S. worker would envy. As Jim Kessler, co-founder of the think tank Third Way and a former congressional aide, said, "It's not wrong to have three plans, but the matching is one-to-one for two of them and the other [FERS] is one-to-14."

(Read More: Despite Gains, Many Still Cut Spending)
As a result, all federal employees get a return on their FERS contributions at a rate that's almost double what other workers do. (See chart.) But thanks to a faster accrual rate granted to elected employees—how fast the value of their benefits pile up—members of Congress even get a higher percentage payout on FERS for the same time served than other federal workers do.

According to calculations by Pete Sepp, executive vice president of the National Taxpayers Union, who has been tracking congressional benefits for decades, an executive branch employee with 10 years of service and who is retiring at age 62 this year would begin his pension at roughly $15,600. But a member of Congress of identical age, salary and service would begin at approximately $26,600, reflecting his higher contribution. But for his extra $11,000 in the first year's benefit, the lawmaker will have contributed only $8,350 more to the plan.


Defenders of the system point out that elected politicians have less job security than appointees like our executive branch workers. Sepp doesn't buy it. "Not only do you get a lot more in benefits for the extra you pay," he said, "but how many Cabinet secretaries stay in government for even eight years?"
Some critics say congressional retirement plans are not only too numerous and too generous, but the wrong kind. One of them is Republican Rep. Mike Coffman, who has put forward a bill with a fellow Coloradan, Democrat Jared Polis, that would end FERS.
"It makes no sense for Congress to continue to reward itself using taxpayer dollars, with a defined benefit plan when ... much of the country has moved to a defined contribution plan like a 401K," Coffman said in a statement earlier this year.

But as Washington is consumed with the sequester, the chances that Coffman and Polis' bill, or the $25 million we spend to support our congressional retirees, will get much notice. More pundits have teed off on the fact that our senators and representatives—the very people charged with averting the automatic cuts to the federal budget—are among the few federal employees who won't be touched by them.
Congress didn't enjoy plush pensions until 1946, when it was thought that a gold-plated plan would induce members to cede their seats to young men who had been galvanized by the war. But if the current deal is no longer gold-plated, said Sepp, "it's silver-plated, and it hasn't been attractive enough to get them rotated out of office."

(Read More: Rarity: House, Senate Work on Budget at Once)

Stars aligned for 'serious' US correction, analyst says

 

  

 

 

Published: Tuesday, 13 Aug 2013 | 1:43 AM ET

 

By: Katie Holliday | Writer for CNBC.com

 

Monday, 12 Aug 2013 | 6:15 PM ET 

 

Jack Bouroudjian, Bull and Bear Partners CEO, says there is no reason for the U.S. Fed to begin tapering now, and explains why he is concerned about the market for the next couple of month.

As U.S. stocks ease back from record highs this week, more and more traders see the S&P 500 as overvalued and are pricing in a "serious correction."

Jack Bouroudjian, CEO of financial services holding company Bull and Bear Partners, told CNBC's Asia Squawk Box on Tuesday he was the most bearish he has ever been on the U.S. stock market.
"The market is overvalued and we've hit an inflection point. Unless we see some real strong growth numbers coming out of the economy, I'm looking at a 10 percent correction between now and October. It's time to be very defensive," he said.
Bouroudjian said the market's notional value has become vastly inflated versus the country's total gross domestic product on a historical basis, which is a red flag and could herald an imminent correction.


"Equities have historically traded at a discount to GDP except for two times in the last 50 years," he said. "In the late 1990's we traded at 148 percent over GDP, and in 2007 we traded at 118 percent over. Unfortunately, both times were followed by a serious correction. We are now at 110 percent."
"The time has come to say that the 'easy' money in equities might be behind us unless we see real growth in the GDP numbers and forecasts increase for top line revenue from corporate America over the next couple years," he added.

Top 4 stocks to weather a pullback

 

Four energy companies are the best way to get through a short-term stock market dip, Don Hodges of Hodges Capital Management says.

Bouroudjian's comments underscore the cautious tone surrounding the U.S. stock market that has emerged recently, as industry watchers start to doubt just how long the good times can last. Wall Street traders have also flagged several occurrences of the 'Hindenburg Omen' in the past few weeks, a technical indicator which predicts the potential of a financial market crash.


The S&P 500 index is up over 18 percent since the start of the year, boosted by more signs of an economic recovery, particularly in the housing market and employment, although it has in the past week eased from record highs seen earlier in the month, due to thin summer trading volumes and continued worries over Fed tapering.

According to Bouroudjian, another trigger point for a market correction could be the appointment of a new Federal Reserve chairman after Ben Bernanke's term expires in January.
"Twice in my investment lifetime, we have changed the Fed chairman. We changed it when (Paul) Volcker changed to (Alan) Greenspan (in 1987) and when Greenspan changed to Bernanke (in 2006). Both times were followed by a serious correction in the market," he said.


"I'm not saying it will happen again for a third time but I am very defensive because of that too," he added.
—By CNBC's Katie Holliday: Follow her on Twitter

@hollidaykatie

Rethinking the 4-percent retirement rule in uncertain market

 

 Published: Tuesday, 6 Aug 2013 | 11:56 AM ET

By: Sharon Epperson | CNBC Senior Commodities Correspondent and Personal Finance Correspondent

Rene Mansi | E+ | Getty Images

 

It may seem like a fairly safe bet. Withdraw no more than 4 percent from your retirement savings each year, and you'll have enough to last the rest of your life.
After all, many people's biggest fear in facing retirement is the possibility of outliving their money. To make sure retirees have enough money, many financial advisors have relied on a rule that a nest egg should hold out as long as they withdraw a maximum of 4 percent annually.
But some certified financial planners now say the so-called 4 percent rule could put your retirement savings at risk.


"I don't think the 4 percent rule is as feasible today as it was in the past, and the reason for that is because the market returns haven't been as consistent as we've seen in the past," said Richard Coppa, managing director of Wealth Health.

The rule, calculated in the 1990s, was based on a model portfolio that contained a certain mix of stocks and bonds: 60 percent large-cap stocks and 40 percent intermediate-term government bonds.
Times have changed, though. And with historically low bond yields and a volatile stock market, the rule may no longer apply.

"In the last decade, we've seen a dot-com bubble, we've seen a real estate bubble, we've seen a financial crisis—and all of that impacts the types of returns we're getting on both stocks and bonds," Coppa said.

To make sure clients don't outlive their savings, Coppa advises them to get a handle on their cash flow. Managing income and expenses in retirement is more important than relying on any rule, he said. Bottom line, knowing what you'll spend is the best way to determine what you'll be able to withdraw.

But Doug Lockwood, a certified financial planner with Harbor Lights Financial, said it is possible for retirees to withdraw 4 percent a year from savings and have the money last—as long as the mix of assets is well-diversified. A model portfolio of 60 percent stocks and 40 percent bonds could work, depending on the type of equities.

"You have to look at not only interest rates and bond rates that you can draw upon, but where am I getting my income from my equities," Lockwood said. "At that point, you have to look at dividend-paying stocks to grab that equity yield, which is quite frankly a better bet these days ([han bond yields]."

Depending on age and risk tolerance, Lockwood said, a 4 percent withdrawal rate is a good guideline for gauging whether you'll have enough money in retirement. But also consider what effect taxes and inflation have on your investments.

"With inflation and taxes, that investor ... has to be able to make at least a 7 percent return on average to be able to get that 4 percent in their pocket. That can be challenging at times," Lockwood said. "A lot of folks are just not invested appropriately to be able to address that type of need."
But Lockwood and Coppa agree that the most important factor in not outliving your nest egg is to save more. Even increasing your retirement contributions to reach the maximum annual limit for 401(k)s and IRAs may not be enough, so consider adding more money to taxable accounts earmarked for retirement.
In the end, how much money you put in will ultimately determine how much you'll have to take out.
—By CNBC's Sharon Epperson. Follow her on Twitter

@sharon_epperson

Pandemic of pension woes is plaguing the nation

 Published: Monday, 5 Aug 2013 | 6:00 AM ET

 

By: John W. Schoen | Economics Reporter

Bill Pugliano | Getty Images

 

Detroit firefighters protest the city's bankruptcy hearing in July.

Detroit, you're not alone.


Across the nation, cities and states are watching Detroit's largest-ever municipal bankruptcy filing with great trepidation. Years of underfunded retirement promises to public sector workers, which helped lay Detroit low, could plunge them into a similar and terrifying financial hole.

A CNBC.com analysis of more than 120 of the nation's largest state and local pension plans finds they face a wide range of burdens as their aging workforces near retirement.
Thanks to a patchwork of accounting practices and rosy investment assumptions, it's not even clear just how big a financial hole many states and cities have dug for themselves. That may soon change, thanks to a new set of government accounting standards that could serve as a nasty wake-up call to states and cities relying on rosy scenarios and head-in-the-sand accounting.

Public pensions too generous, Romney adviser says

 

Glenn Hubbard, campaign adviser to Mitt Romney's 2012 presidential campaign, told CNBC's "Squawk Box" Monday that state and local governments, like Detroit, have over-promised and need to re-calibrate expectations.

 

"Sadly, [Detroit] is not the only municipality in trouble," Glenn Hubbard, economist, Columbia University Graduate School of Business dean and Mitt Romney campaign adviser, told CNBC's "Squawk Box" on Monday. "A lot of state and local governments have too much debt, too generous public pensions. We need a national conversation on how to fix this."

One of the thorniest questions that conversation will need to address: who will pay to clean up these financial messes? Will it be the millions of retirees owed trillions of dollars in benefits, the bondholders who lent states and cities trillions more, or local taxpayers who may have to pay more to cover the shortfalls or see deeper cuts in public services?

Regardless, the painful process will likely play out for years.
"Moving pension plans is like steering a blimp: You turn the wheel and you go 6 miles before it starts to turn," said John Tuohy, Arlington County, Va., deputy treasurer, who chairs the pension committee of the Government Finance Officers Association. "In the political process, that kind of patience is very difficult."


Many state and local governments have set aside enough money to comfortably make good on promised retirement benefits. Seventeen states have funded more than 80 percent of their projected pension liability, a level that's generally seen as financially sound. Most of the rest have been scrambling to make up investment losses inflicted by the 2008 market collapse and the shortfalls in sales, property and incomes taxes produced by the Great Recession.
But even as the economy and housing markets have recovered, most states are still falling behind in closing their pension funding gaps. In the last year, 34 states have seen their pension funds stretched further as they've failed to make the full contributions needed to meet the projected cost of retirement promises.

Much like a family that fails to save regularly to build a retirement nest egg, shortchanging those contributions increases the risk that the fund eventually will go broke.


Nine states—Hawaii, Alaska, Kansas, Rhode Island, New Hampshire, Louisiana, Connecticut, Kentucky and Illinois—have now set aside less than 60 percent of what they need. Illinois has saved just 43 cents to cover every dollar of what it needs to pay 350,000 retirees and 500,000 current plan participants who are counting on a pension check.

In Detroit, city officials argue that pension payments to retirees simply have to be cut because the money just isn't there to pay them. But union officials there and in other cash-strapped cities say that's the city's problem.

"Our members were promised certain things," said Tom Ryan, president of the firefighters' union in Chicago, where years of underfunding have prompted proposals to cut workers' retirement benefits. "They enter dangerous situations every day, and the only thing they want to look forward to when they can no longer perform their duties is to be able to retire with some sort of security. People expect us to be there, and we are always there. We expect that the city holds up their end of the bargain when we signed on to be firefighters and paramedics for the city of Chicago."

Without a pension check, public sector workers face a bleak retirement. Many are ineligible for Social Security.
"If we were talking about doing this to people with Social Security there would be rioting in the street," said Ryan. "But because it's public servants on pensions it seems to be OK to do this."
Most cities and states with funding gaps still have time to fix the problem. Of the roughly 20,000 municipalities in the country, only a handful have completely run out of cash and been forced to seek shelter in bankruptcy court.



What's less clear is whether those states and cities have the political will to make the necessary, unpopular decisions, according to Jean-Pierre Aubry, assistant director of state and local research at the Center for Retirement Research at Boston College.

"Even the ones that are really up against it have somewhere around 10 to 15 years of a window to turn things around," he said. "That's not a whole lot of time. And it's not clear if these governments that couldn't make contributions when times were good and the economy was better will be able to make them now or going forward."

That political challenge is playing out in Illinois, where a $95 billion pension fund gap has deadlocked the state legislature over reform proposals for two years. In March, the nation's fifth most populous state settled with the Securities and Exchange Commission after the agency charged Illinois with fraud for misleading bond investors about its pension funding problems between 2005 and 2009.

After lawmakers adjourned in May without fixing the problem, the state's credit rating was slashed, raising future borrowing costs. Earlier this summer, Gov. Pat Quinn used a budget line-item veto to freeze lawmakers' salaries effective August. Last week, the Illinois House speaker and Senate president hauled Quinn into court to get their pay restored.
Such gridlock only increases the cost of fixing the problem. As pension payments consume a greater share of tax dollar—for example, Illinois' badly underfunded pensions now consume a fifth of the state's revenues—other services are starved of funds.
"This is happening in too many cities and towns across America, where social services, because they can be cut, are cut, financial analyst Meredith Whitney, CEO and founder of Meredith Whitney Advisory Group, told CNBC: "(But) because pensions and bonds constitutionally cannot be cut, they're the protected class. I think you're going to see a real issue of neighbor against neighbor on these very issues."

But as Detroit has demonstrated, budget-balancing service cuts only lower the quality of life in a community, chasing residents away and further eroding the tax base. Raising taxes, on the other hand discourages new business expansion, further reducing revenues. For cities and states that have failed to fund their pension promises, it's a vicious cycle.
To be sure, many jurisdictions have avoided falling into that the trap by keeping up with their pension promises.

Even after sustaining heavy losses in the 2008 stock market crash, seven states—Wisconsin, South Dakota, North Carolina, Washington, New York, Tennessee and Delaware—have set aside more than 90 percent of their estimated future pension payments.
"There are great stories about the cities and towns that are doing well that are investing in key things and being mindful of their fiscal discipline," said Whitney.

Fuzzy math 

Assessing the financial health of a jurisdiction is compounded by the fuzzy math used to calculate just how much a state or city needs to set aside to meet its pension promises.
Even in the best of times, pension accounting is fertile ground for voodoo economics and political expediency because those projections are based on a series of all but unknowable assumptions. It's hard to predict with precision, for example, just how many years of service a current employee will accumulate or how many checks they'll collect in their lifetime.

Future pension cost estimates have been made more problematic by a common practice known as "spiking"—in which retirement-ready workers rack up hours of overtime and apply unused vacation to swell their last paychecks to lock in a higher monthly pension payment.


Managers of many underfunded plans have come up with a neat trick to make the problem seem to disappear. By simply assuming a higher investment return in the future, they can lowball the reported amount needed to meet future payments.
Even as low interest rates have badly depressed investment performance, many fund managers continue to project returns of 8 percent or higher.

In 2011, the latest data available, the 100 largest public pension funds projected an average return of 7.84 percent. But their actual return over the prior 10 years was just 5.6 percent a year, according to a survey by Pensions and Investments, a trade publication.
Eventually, those assumptions come home to roost, according to Rhode Island state Treasurer Gina Raimondo, who helped shepherd an overhaul of the state's ailing pension system in 2011.
"Real people get hurt when politicians aren't honest and realistic about the magnitude of these issues," she said. "If you use a set of assumptions that makes the problem look smaller on paper today, that's irrelevant 10 years from now when the cash runs out and someone needs a pension check."

Many fund managers also use a technique called "smoothing"—which allows them to book investment gains and losses slowly for as long as five years. In good times, the scheme lets state and city officials ride a bull market years after it's over, underfunding pensions to pay other government expenses, cut taxes or increase pension benefits without paying for the added longer-term cost.
"The boom of the '90s was probably the worst thing that happened because (states and cities) ended up with a number of overfunded plans," said Arlington County's Tuohy. "And promises were made based on those overfunded plans."

But smoothing also prolongs the pain of a severe market downturn, including heavy losses like those sustained in the 2008 market collapse. Thanks to smoothing, the burden of those investment losses continues to weigh on pension funds even as the stock market has recovered in the past year.
That's one reason the Government Accounting Standards Board, which sets the bookkeeping rules for pension plan managers, has banned smoothing and requires underfunded plans to put away their rose-colored glasses when estimating future investment returns.
When implemented next year, the new rules will paint a bleaker funding picture, cutting the average funding ratio of assets to liability, which stood at 75 percent in 2011, to 57 percent, according to a study by the Center for Retirement Research.

Bond rating agency Moody's recently issued its own state-by-state reality check, based on its estimates of "adjusted" pension fund shortfalls that better reflect the new accounting realities.

 

 

Pensions: The next investing challenge

 

Verne Sedlacek, Commonfund president & CEO, discusses the problem of underfunded pensions, and why it will continue to be an issue for the next decade.

Moody's figures that 15 states are in better shape than the current reporting rules would indicate. The rest have bigger liabilities (some much bigger) than found in their current financial statements. Based on the adjusted funding gaps, nine states—Massachusetts, Pennsylvania, Colorado, Louisiana, Hawaii, New Jersey, Kentucky and Connecticut—would see their funding liabilities exceed an entire year's worth of state revenues. In Illinois, the adjusted funding gap amounts to 241 percent of state revenues.

Since the Great Recession officially lifted in 2009, all 50 states have undertaken ever-more intense reforms as the pension funding problem deepened. This year alone, more than 1,200 bills have been introduced covering a range of fixes.
The list includes suspending cost of living increases for retirees and shifting some of the investment risk on future retirees with the addition of a defined contribution plan similar to a 401(k). Some states have gone further by raising employee contributions or shifting the entire burden onto new workers with defined contribution plans.

"That deals with the next generation," said Verne Sedlacek, president of Commonfund. "But we've got this whole group of people who worked for city and state governments for decades who had an expectation of payment. And they can't be paid."

The most drastic reforms also leave jurisdictions at a marked disadvantage when they go to recruit the next generation of police, firefighters and teachers. Because cuts to public pension plans haven't been offset with wage increases, they leave public workers making about 20 percent less than their counterparts in the private sector, according to a Center for Retirement Research study.
"So you now have two people with the same human capital—and the one in the private sector makes 20 percent more than the one in the public sector," said Boston College's Aubry. "The question is how are you going to attract and retain quality public sector employees with that disparity?"
—By CNBC's John W. Schoen. Follow him on Twitter

@johnwschoen

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