March 26, 2010
First-time in history… Social Security Will Payout More than it
Receives in 2010!
While states like
Florida,
Texas
and
California
are contemplating changing their Teacher Retirement System benefits to remain
solvent, other states also are debating what to do about their budget
shortfalls.Those states that offer
their employees both Social Security benefits and retirement programs are carefully looking at the government’s
recent report on Social Security.
The Social Security Administration just released a report that the system this year will pay out more in benefits than it
receives in payroll taxes, an important threshold it was not
expected to cross until at least 2016, according to the Congressional
Budget Office.
Stephen C. Goss, chief actuary of the Social
Security Administration, said retirees
would keep receiving their checks as usual. The problem is that payments have risen more than expected during the downturn,
because jobs disappeared and people applied for benefits sooner than they had
planned. At the same time, the program’s revenue has fallen sharply,
because there are fewer paychecks to tax.
Is this the Tipping Point
That Results in Benefit Cuts?
Analysts have long tried to predict the year when Social
Security would pay out more than it took in because they view it as a tipping
point — the first step of a long, slow march to insolvency, unless Congress strengthens
the program’s finances.
“When
the level of the trust fund gets to zero, you have to cut benefits,” Alan Greenspan, former
chairman of the Federal Reserve Board.
Social Security’s annual report last year projected revenue would more than cover payouts until at least 2016
because economists expected a quicker, stronger
recovery from the crisis. Officials foresaw an average unemployment rate of
8.2 percent in 2009 and 8.8 percent this year, though unemployment is
hovering at nearly 10 percent.
Although Social Security is often said to have a “trust
fund,” the term really serves as an accounting device, to track the
pay-as-you-go program’s revenue and outlays over time. Its so-called
balance is, in fact, a history of its vast cash flows: the sum of all of its
revenue in the past, minus all of its outlays. The balance is currently about
$2.5 trillion because after the early 1980s the program had surplus revenue,
year after year.
Now that accumulated revenue will slowly start to shrink, as
outlays start to exceed revenue. By law, Social Security cannot pay out more
than its balance in any given year.
A $29 Billion
Shortfall This Year
Mr. Goss, the actuary, emphasized that even the $29 billion
shortfall projected for this year was small, relative to the roughly $700
billion that would flow in and out of the system. The system, he added, has a
balance of about $2.5 trillion that will take decades to deplete. Mr. Goss
said that large cushion could start to grow again if the economy recovers
briskly.
Indeed, the Congressional Budget Office’s projection shows
the ravages of the recession easing in the next few years, with small
surpluses reappearing briefly in 2014 and 2015.
After that, demographic forces are expected to overtake the
fund, as more and more baby boomers leave the work force, stop paying into
the program and start collecting their benefits. At that point, outlays will exceed revenue
every year, no matter how well the economy performs.
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Florida
House Bill
1319 Will Dramatically Change
Florida
Retirement System If Passed!
There is a bill moving through committees in
Florida'
s State House that will significantly
change the Florida Retirement System if passed.
According to
Florida
House of
Representative’s summary on myfloridahouse.gov, here are several highlights
of HB 1319/SB 1902:
Retirement compensation will
be computed based on the average
salary over ALL years of service. The average of the
“highest five years” rule will be repealed.
There is no grandfather
clause for existing employees who continue to work after July 1.
All new hires as of July 1,
2011, and all with DROP participation dates beginning on or after July 1,
2011, would pay a 1% contribution of gross income into the FRS system.
Reduction in annual multiplier from 1.6% to 1.44% for regular class; reduced from 2% to 1.8% for senior
management class; and reduced from 3% to 2.7% for special risk class (cops,
firefighters, etc).
Normal retirement service years and DROP
ages increased to 33 years/age 65 (currently: 30 years/age 62), and by +3
years for all special risk categories.
This would not impact those
who enter DROP before the July 1, 2010, effective date.
Average full compensation
would no longer include accumulated annual leave paid out of the end.
Accumulated sick leave paid out at the end will also not be counted towards
calculating FRS compensation benefits.
Maximum benefit reduced to
80% of average final compensation. Existing 90% cap would remain for FRS
participating employees who vested (at least 6 years of qualified FRS
service) before July 1, 2010.
If passed, these bills will have a dramatic impact on
Florida's
Retirement System. It is important to note that other states
also will be making changes to their TRS plans. The results may place a greater
importance on saving in a 403(b) or 457.
For more information, please contact LSW’s 403(b) Team at 877-449-5791.
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