The defined benefit retirement model, which entered decline more than 20 years ago, may benefit from a reincarnation of sorts in the Secure Annuities for Employee Retirement (SAFE) Act of 2013 making the rounds in Congress.
The SAFE Act would offer public employees a new type of defined benefit retirement plan built on fixed annuities. The aim would be to secure millions in guaranteed income for the workers’ lifetimes. Private sector workers would benefit as well because the bill would push the “nudge economics” that is supposed to help prepare workers for retirement.
Backers of the bill, which was sponsored by Sen. Orrin G. Hatch, R-Utah, include insurance underwriters, the fixed annuities industry, financial advisors, the mutual fund industry and a host of powerful business lobbies, including the U.S. Chamber of Commerce and the Small Business Council of America.
“This is using annuities in a very significant way, in the way they were intended to be used,” said Kim O’Brien, president and CEO of the National Association of Fixed Annuities.
SAFE, the acronym, is just what it sounds like, she said. Retirees don’t lose their principal and receive an income on the back end.
But the bill, which has yet to garner the support of any Democrats, is facing resistance from powerful unions including the American Federation of State, County and Municipal Employees and the
National Conference on Public Employee Retirement Systems (NCPERS), which represents 550 public-sector pension funds in the U.S. and Canada.
NCPERS Executive Director and Counsel Hank Kim called the Hatch legislation “ill-conceived and unworkable.” He said it confuses the big deficits in private-sector pensions with the generally healthy state of public-sector pensions.
“Public pension plans, on the other hand, are alive and well,” he said in a statement. Better investment returns since the financial crisis, along with “widespread procedural and operational reforms, have left public pension plans well-funded, financially healthy and sustainable for the long term.”
Lacking any cosponsor, lawmakers, consumed with health care reform, aren’t likely to take up the bill before next year at the earliest. Meanwhile, whether public employee pensions are underfunded and by how much is a matter of real debate.
Public employee unions say that by and large employee pension plans are generally well funded given the rebound of the financial markets.
State and local governments collectively say they are $900 billion short on the funds needed for future promises, but a trio of scholars at the Brookings Institution estimate the unfunded liability at closer to $2.7 trillion.
Funded ratios of state public pensions range from a low of 25 percent in Illinois to a high of 57 percent in Wisconsin, according to the Tax Foundation.
O’Brien also said the bill represents a “new market opportunity” for the fixed annuities industry, which has struggled in recent years with low interest rates.
The public pension changes under the bill would allow state and local employees to receive monthly income for life after they retire, O’Brien said. Not only would pension costs remain stable and predictable, there is no danger of underfunding, and retirement benefits are protected by state life insurance guaranty associations, she said.
Kim of NCPERS, however, said the bill does little more than “hand public pension systems over to life insurance companies.”
“Contracting out a nonprofit enterprise to a for-profit insurance company makes absolutely no sense,” he said. “Public pension plans are already in the business of providing their retirees with annuities. We self-annuitize – at a cost of 50 to 76 basis points, certainly a lower cost than a for-profit insurance company could offer.”
Beyond changes to the public pension system, the SAFE Act’s private pension reform clauses would make it easier to cover employees through simpler, “starter” 401(k) plans and increased auto-escalation plan features. It would also make it easier for employers to move up to Safe Harbor 401(k) plans.
Administrative burdens would also be reduced and hardship distributions simplified, according to the bill. Restrictions surrounding rollovers, forfeitures, minimum participation and 403(b) plan termination would also be lifted.
The bill would also address longevity reforms. These would include expanding the ability of employers to offer annuities in defined contribution plans, updating mortality tables used by the U.S. Treasury for specific distributions, and making certain modifications to the Employee Retirement Income Security Act (ERISA).
There’s still time to voice your opinion before the bill is finalized. Below are the members of the Senate Finance Committee and how to reach them online.
InsuranceNewsNet has put together an online page of resources to help you learn more about the SAFE Act and how to ask your Senator to support the bill. Go to insurancenewsnet.com/SAFE