The Executive Officer of the Retirement System traveled to Washington D.C. in mid-May to testify before the House Ways and Means Subcommittee on Social Security on proposals to mandate all newly hired public employees into the Social Security System. The opportunity was provided to us by Congressman John Ensign, who was able to arrange it through the chairman of the subcommittee. Congressman Ensign is opposed to mandatory coverage, as we believe all our Congressional representatives to be. There are approximately 8 states and many local governments that do not participate in Social Security. When PERS of Nevada was created in 1947, public employees were prohibited from participating in Social Security. Then Congress allowed local governments (including states) to participate on a voluntary basis. In 1983, all local governments that elected to participate in the System were thereafter prohibited from opting back out of Social Security.
Several commissions have been studying proposals to "fix" Social Security's economic woes. Virtually everyone of these commissions include mandatory coverage for all newly hired public employees as one revenue source to help cure funding issues for Social Security. A General Accounting Office (GAO) study projected that mandatory coverage would reduce the long term funding shortfall of Social Security by 10. This long term projection does not take into account the additional liabilities Social Security would assume when these employees become eligible for benefits. The GAO acknowledges that mandatory coverage will resolve only a small part of Social Security's problems and many legal and administrative issues need to be resolved before mandatory coverage could be imposed.
The Public Employees' Retirement System of Nevada remains firmly opposed to mandatory coverage. In fact the Board adopted a resolution reaffirming the System's opposition and is requesting that the Legislature adopt a similar resolution during the next legislative session to send to Congress. The impact to our state should we be forced to overlay Social Security on our benefit structure is estimated to be $27 million dollars in the first year, rising to $157 million after just 5 years. Such a cost is clearly an unfunded mandate which could cause serious disruption to our well founded retirement program.
In part of the Executive Officer's testimony, he took exception to the Social Security Advisory Council's suggestion that Social Security is superior to state and local pension plans. "Nevada provides a comprehensive benefit program to its members and beneficiaries, which includes service retirement, disability, and pre-retirement survivor benefits. In a state whose population is 1.8 million, we estimate the system has some financial impact on 1 out of every 5 Nevadans and infuses over $300 million annually into the Nevada economy."
In addition to Nevada's testimony representatives of Colorado PERA, Ohio PERS, the National Fraternal Order of Police and Massachusetts STRS testified in opposition to mandatory coverage. On the issue of imposing mandatory coverage because of fairness (meaning every American should participate and help fund Social Security) each of the panelists questioned the fairness of Congress imposing such taxes on states, cities and towns whose local services would be reduced and whose public employees would incur benefit cuts.
Congress continues to hold hearings on Social Security and may create legislation late this year or early next year. We will continue to voice our opposition.
Few of us at the beginning of our careers think definitively about the end of our careers. Why should we? We have pressing things at hand, such as buying a house, paying off student loans, starting a family and other matters specific to each of us. We tend to put off the idea of retirement because it is just too far out in the future. The problem with this reasoning is that retirement arrives only too soon and in today's era of extended lifespans and an increasingly more active senior population, many of us will need savings to remain financially secure in our retirement years.
Financial planners will tell you that you need somewhere between 75% and 80% of your active salary to have the same lifestyle in retirement. But this rule must be taken in the context of a couple of things:
If you haven't started saving already, now is the time. Pay yourself first----putting away a small portion of disposable income will greatly benefit you in the long run! Take advantage of any tax deferred saving program offered by your employer (401k, 457 or 403b plan), or start an individual retirement account (IRAs).
Start saving as early in your career as possible. Even if you haven't started yet and you are in the middle or later years of your career, every penny counts. So start now!
Hedge against inflation
Putting a portion of your income into an investment plan will help guard against the erosion of purchasing power caused by inflation. But how much of a hedge will it be? That depends largely on how you invest your money. Using a standard passbook savings account will probably not provide enough money for you to retire comfortably. Since 1926 the annual inflation rate has averaged 3.1%. Inflation will probably offset any interest earnings you've accumulated in a passbook savings account.
While there is no way to avoid inflation totally, planning your investments carefully will help grow your nest egg above the inflation rate. How much above that rate depends on your individual tolerance for investment risk. The following example will help illustrate the point.
Two individuals invest $10,000. The first uses a passbook savings account which earns 4% interest per year. The other invests the money in the stock market averaging annually a 10% return. In the passbook savings example the money will grow to $26,658 over a 25 year period. The stock market investment will generate $108,349 in that same period of time.
As demonstrated by the example, the potential return on the stock market is far greater than the savings account but does carry with it additional risk. It is up to you to decide how much risk to take by measuring your own risk tolerance. A key method for controlling risk is through diversification. Everyone has heard the expression "don't put all your eggs in one basket." In the investment world such a concept would be foolhardy. Diversification is the practice of spreading out investments across different asset classes. By using more than one type of asset class in your investment plan reduces the risk that one market downturn could wipe out your investment. Even within an asset class it is a good idea to diversify. For information on how PERS manages investment risk, review the article entitled Investments in this same newsletter.
Investments
Often when evaluating investment performance, attention is focused solely on return, ignoring risk. The PERS investment program is structured with significant emphasis on risk control.
There are two types of risk, statistical and "emotional". Statistical risk in the securities markets is often referred to as standard deviation or the volatility of returns. It is relatively easy to measure. The calculation addresses how much (and how far) the price has gone up and down. The chart below details the historical volatility of stocks and bonds. A higher standard deviation equals higher statistical risk. As you would expect, stocks have been riskier than bonds.
Emotional risk is much more difficult to define. It is dependent on each investor's risk tolerance. One person may only be comfortable holding U.S. Government bonds, while another might think nothing of more speculative investments. Another way to think of emotional risk is terms of losing money or the risk of not meeting objectives. It is important to note that investor expectations are not always reasonable. Recent stock market performance has led some people to expect unnecessarily high returns from stocks. If an individual expects a 30% annual return from stocks, and the markets generate an 11% return (approximate long term average), objectives will have not been met.
Statistical and emotional risk have been low recently. Exhibited in the chart below, the volatility of stocks has been low in relation to historical experience. Only recently has volatility begun to creep back into the stock market. Further, the investment markets have generally exceeded expectations. Long term return goals have been relatively "easy" to meet over this short term time frame.
The most important tool utilized in the PERS portfolio to minimize risk is asset allocation. Studies show over 90% of risk and return is explained by asset allocation. In actual practice, the amount of money allocated to the stock market has an important impact on the risk of the overall fund. Forty percent of the PERS fund is invested in domestic and foreign stocks. This is conservative compared to the average public pension fund average of 55 - 60%. As a result, we expect the PERS fund to outperform our peers during disappointing market environments and underperform other public funds in "hot" stock markets. Importantly, this mix reflects a portfolio having a reasonable opportunity to meet our long term actuarial goals. Essentially, the Retirement Board seeks to "smooth out the bumps" and reduce investment volatility by maintaining a conservative, well diversified portfolio.
The PERS fund is designed to generate investment returns which will fund benefit payments and meet long term funding goals while minimizing risk. By maintaining their disciplined, conservative investment approach, the Retirement Board is focused on continuing to meet these goals in the future.
Benefits Available for PERS Members and Their Families
You probably already know that a regular employee of PERS establishes eligibility for service retirement with five years of service at age 65; with 10 years of service at age 60; and with 30 years of service at any age. A policeman or fireman establishes eligibility with five years of service at age 65; with 10 years of police/fire service at age 55; and with 20 years of police/fire service at age 50. But, do you know that PERS also provides benefits for disability and survivor benefits?
Disability Retirement
If you have five or more years of service credit and you are unable to perform your present or a comparable job because of permanent injury, physical or mental illness, you may apply for disability retirement. As with service retirement, your disability benefit is based on your years of service credit in PERS and your average compensation during the 36 consecutive months of highest compensation as reported by your employer. While the same formula is used to calculate a disability benefit, there is no reduction for retiring at an early age. For instance, if you are 49 years old, have 20 years of service credit, and average compensation of $2,000 per month, your benefit will be $1,000 per month (50% of average compensation). It is important to remember, in order for a disability application to be processed by PERS, it must be on file in the PERS office before you terminate from your public employment.
Survivor Benefits
Survivor benefits are payable when an active member (not a retired employee) who has met the eligibility criteria dies. Benefits are paid to a spouse, minor children, and unmarried children between the ages of 18 and 23 who are full-time students.
Generally, survivor benefits are earned by a member who has at least two years of service in the two and one-half years immediately preceding his (or her) death. Benefits are available, however, to a spouse and surviving children if the death of the member is job-related. The benefits available to eligible survivors are:
If member has less than 10 years of service credit:
The benefit is $400 per month and is payable for lifetime of the surviving spouse or until remarriage.
If member has at least 10 but less than 20 years of service credit:
The benefit is equivalent to Service Retirement Option 3 (beneficiary amount) and is payable for the lifetime of the surviving spouse.
If member has 20 or more years or was fully eligible to retire:
The benefit is equivalent to Service Retirement Option 2 (beneficiary amount) and is payable for the lifetime of the surviving spouse.
In addition, each minor child, or unmarried child between the ages of 18 and 23 who is a full-time student will receive a benefit of $350. To be eligible for benefits, a child must be your biological offspring or must be legally adopted by you.
What is a QDRO?
This is a legal document (Qualified Domestic Relations Order) which splits retirement benefits between two parties, for example, a member and the member's ex-spouse as a condition of their divorce. For divorces that occurred after October 1, 1993, PERS requires a QDRO to authorize payments to anyone other than the retired employee.
A QDRO must be signed by a judge in the State of Nevada or must be filed with one of the District Courts in Nevada through the Foreign Judgments Act. A QDRO must provide specific information regarding the parties and must clearly establish the benefit (or the method to arrive at the benefit) which is to be paid to the ex-spouse. Benefits will not be paid by PERS until the member requests a refund or retires.
If you are contemplating a divorce, you should contact us for a sample QDRO form and other information to ensure that your QDRO complies with Chapter 286 of the Nevada Revised Statutes.
