Welcome to this week’s edition of This Week in Pensions! This is the news you need to know in the fight for a secure retirement. 

Before you dive into our top stories from this week, check out some stories of public employees helping their communities during the coronavirus pandemic.

Here are the top stories from this week: 

Is America’s Favorite Retirement Plan Broken? By Spencer Jakab. In this article for the Wall Street Journal, Jakab writes about how defined-contribution plans like 401(k)s are failing to deliver a secure retirement for workers as they approach middle age. In 2016, forty years after they were introduced, the median savings of an American family in a 401(k) was a meager $7,800, according to the Economic Policy Institute. This amount is hardly enough to meet one’s financial needs in retirement. Furthermore, Jakab writes that these plans primarily benefit the wealthiest Americans because they offer higher tax breaks to high-income earners for maxing out their accounts. Policymakers must prioritize keeping defined-benefit pensions for public employees, especially in light of how poorly equipped 401(k)s are in offering a secure retirement. 

Connecticut pension fund on sustainable path by Laurie Martin. In this op-ed for the Hartford Courant, Martin rebuts several falsehoods about the state’s public pensions that were featured in an August 22nd op-ed titled “The coronavirus has made Connecticut’s unfunded pension problems even worse.” The piece inaccurately states that the expected investment returns for Connecticut’s plans are higher than other states, as the National Association of State Retirement Administrators (NASRA) states that the average nominal rate of return for all U.S. public pensions is 7.25 percent, while Connecticut’s is 6.9 percent. It also falsely claims that, because of the coronavirus-induced economic crisis, the state government will not be able to meet its annual contributions to the pension plans. In reality, the state government will make its annual contributions and is also expected to allocate an additional $75 million towards paying down the plans’ unfunded liabilities. Finally, the authors of the August 22nd op-ed suggest that taxpayers will be adversely affected by the state’s pension systems during this time. This is incorrect because, shortly after taking office, State Treasurer Shawn Wooden changed the amortization method that is used to calculate the state government’s contributions to the plans. The new method is on a level dollar basis, similar to a mortgage, with a level payment each year. This change will ultimately reduce the state’s annual contributions by $900 million over five years, which will benefit taxpayers and address the current liabilities of the plans so they are not deferred into the future. 

‘It will be drastic and very harmful,’ Governor Kelly warns of possible budget cuts by Korinne Griffith. Kansas, like other states, is currently experiencing the crunch of the current economic crisis on its state revenues. In this article for KSN-TV, Griffith reports on a task force assembled by Governor Laura Kelly to disseminate $290 million in funding from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. However, the CARES Act stipulates that this funding cannot be used to address revenue shortfalls facing state governments. As a result, Gov. Kelly said that the state government could face budget cuts in the fiscal year 2022, including the state’s contributions to its pensions. During times of economic distress, it’s more important than ever for plan sponsors to practice funding discipline and make their annual contributions to pension funds. According to NASRA, investment earnings have provided 63 percent of all pension funding since 1989, but sponsors have to make their annual contributions in order for investments to provide optimal returns over time. 

Retirement ‘a Daunting Challenge,’ Report Says by John Iekel. Last Tuesday, the National Institute on Retirement Security (NIRS) released a new report on the growing challenges Americans face in retirement. Iekel covers some of its major findings in this summary for the American Society of Pension Professionals & Actuaries. For workers with 401(k)s when they approach retirement age, they have to worry about how the market is performing at the time of their retirement, which could impact when they decide to retire and their retirement finances. Additionally, the study highlights that healthcare costs are continuing to increase, as Americans in 2018 have spent twice as much on this necessity compared with Americans in 1984. These additional costs greatly impact the ability of workers to have enough financial resources in retirement. This report is additional evidence that defined-benefit pensions for public employees are critical for them in retirement, as they do not rely on the whims of the market to offer benefits and help retirees meet their needs. 

Be sure to check back in two weeks for the latest news in the fight for a secure retirement!