Hatch makes annuity pitch for public pensions
Republican Sen. Orrin Hatch of Utah recently introduced a new type of pension plan for state and local governments that will transfer the risk of lifetime income payments to private life insurance companies using fixed-annuity contracts.
The really catchy title for this yet to be introduced bill is “The Secure Annuities for Employee (SAFE) Retirement Act of 2013.” Nice name, but is this really a good idea? Title One of the SAFE Retirement Act will create a new pension plan called an Annuity Accumulation Retirement Plan, but Hatch refers to the overall thought as the SAFE Retirement Plan.
Currently, no Senate co-sponsors have come forward and no actual bill has been proposed, but I predict insurance carrier/employer heavy states like Iowa, Connecticut, Minnesota will have their representatives fall in line shortly.
With Hatch’s SAFE Retirement Plan, the goal is to take advantage of the lifetime income that fixed annuities can provide and that Hatch says the federal government won’t guarantee. Hatch was adamant that any potential future federal bailout should be avoided at all costs. I’m sure we all can agree on that!
In addition, Hatch would like these plans to be affordable for public employers and structured so that future taxpayers have no liability for past years. The primary purpose would be to provide retirement income security using private insurance carriers. Sounds pretty palatable so far Senator.
According to Sen. Hatch in his speech last week, the gap between the pensions that have been promised to workers by state and local governments and the money that has been set aside is short by as much as $4.4 trillion dollars. To put that into breathtaking perspective, that’s more than the total amount of municipal bond debt nationwide. He points out that with a national savings rate at “only 2.5%” and with people living longer, there is a real issue here that needs to be addressed. No arguments there.
Sen. Hatch is trying to address this well known pension under funding problem which he calls “the pension debt crisis”. If approved, his new bill would drastically change the current retirement plan system in our country. In his words, “a new public pension design is needed.” The goal would be to deliver a lifetime retirement income for employees with both stable and predictable costs for employers and taxpayers. Sounds good on the surface, and below are the key features taken directly from Hatch’s proposal:
· Employees will receive secure monthly income at retirement for life
· Each individual plan will be 100% vested and fully portable from job to job
· Employer pension costs will be stable, predictable and affordable
· Pension plan underfunding isn’t possible
· The life insurance industry invests the assets, pays the lifetime retirement benefits, and bears the risks
· Retirement benefits are protected by a robust (Hatch’s word) State regulatory system and financial backstop
In addition to the public pension reform idea, Hatch also proposes a new retirement vehicle called the Starter 401(k) , which would allow private sector employees to save for retirement (up to $8,000 per year), while placing minimal burdens on employers. Hatch thinks that small companies and startups will benefit most from this new structure, and obviously wants to make sure that the private sector has their pension candy as well.
Predictably, carriers like MetLife and annuity industry lobbying groups are all for this new found “public pension reform” business model, but some union leaders and annuity industry watchers aren’t so sure. One corporate governance analyst, Neil Minow, said in a recent article that the new bill should be entitled “Orrin Hatch’s Proposal Aims to Give Insurance Companies a Record Breaking Windfall at the Expense of Public Employees.” Sounds like Neil isn’t too thrilled.
Hank Kim, the executive director and counsel of the National Conference on Public Employee Retirement Systems, NCPERS, echoed similar negative feelings in a news release response to Hatch’s proposal. He said that “Public pension plans are already in the business of providing their retirees with annuities”, and claims that NCPERS can do it more cost efficiently than private insurers.
Steven Kreisberg of the American Federation of State, County, and Municipal Employees organization with over 1.6 million members said in a recent Bloomberg Businessweek article that “shifting to annuities is just an unnecessarily expensive approach to the issue.” So much for everyone being on board Senator Hatch.
As a warning to MarketWatch readers, this race to pension paradise doesn’t end with Sen. Hatch’s recent proposal. This week, Sen. Tom Harkin (D., Iowa) will hold a hearing entitled “Pooled Retirement Plans: Closing the Retirement Plan Coverage Gap for Small Businesses.” Harkin has been on a retirement income security warpath since he revealed his 2012 study “The Retirement Crisis and a Plan to Solve It,” along with his new goal of introducing a bipartisan “U.S.A. Retirement Funds” bill. Sounds so patriotic. How could anyone be against it?
It will be fun (and disturbing) to see Hatch, Harkin, Republicans, and Democrats fight over the public perception of “who cares more” about your pension. As Bill Clinton would phrase it, “I feel your lifetime-income pain.”
All of this concern for guaranteed lifetime income will undoubtedly be a boon for a number of insurance carriers. Congrats to those select few. However, I have this sneaking suspicion that like all Utopian political dreams, our taxes will probably go up in order to achieve this pension harmony.
All of these ideas sounds good on the surface, and this is going to be a very long haul to get anything of substance accomplished and passed by both parties. The devil is in the details on all of these proposals, so in the interim, my advice is to watch closely, voice your opinion, and hold on to you wallets.
Originally published by MarketWatch.com 7.16.2013 – http://www.marketwatch.com/story/hatch-makes-annuity-pitch-for-public-pensions-2013-07-16