Fiscal Cliff Might Mean A 64% Decrease In 401k Contributions

Jericho, NY (MMD Newswire) -- The government's possible solution to avoid the fiscal cliff could result in a decrease 401k contributions by as much as 64% for middle class Americans, making it harder to save for retirement.

As Congress tries to come up with a plan to avoid the fiscal cliff, a compromise between the Republicans and Democrats will consider eliminating deductions and imposing tax hikes on families making more than $250,000 per year. At the heart of the compromise is a proposal to reduce 401k contributions by as much as 64%.

"The last time Congress slashed 401k contributions was in 1986. 401k contributions were cut by 70% and many 401ks were terminated," says Brett Goldstein is Director of Retirement Planning at American Investment Planners, LLC based in Jericho, New York. "Congress should be encouraging Americans to save money for retirement not making it more difficult for them."

The reduction in 401k contributions would cause a particularly big reduction in retirement contributions for low-income workers. "Employees earning 30,000 or less rely almost exclusively on company matching and Social Security for their retirement," says Goldstein. "Under the proposal to limit 401k contributions, low-income employees could see a 20% reduction in employer contributions, which would hurt their retirement nest egg."

With the possibility of a 64% decrease in 401k contributions, our firm is advising clients to consider alternatives for retirement income such as IRAs and annuities. "Many annuities today have lifetime income options which can be beneficial," says Goldstein.
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About Brett Goldstein:
Brett Goldstein is Director of Retirement Planning at American Investment Planners, LLC based in Jericho, New York. He is an author, speaker and media personality who specializes in providing businesses and individuals with affordable retirement planning solutions. Goldstein's timely advice and tips have been featured on Fox Business Network, Kiplinger's, Wall Street Journal Radio, MarketWatch.com, New York Daily News, The Chicago Tribune, and many others.

NH House Leadership on Passage of SB 3 (retirement system reform)

CONCORD – The House today voted 238 to 121to pass SB 3, which would make a number of reforms to the current state retirement system. Among them, it would increase the retirement ages of group II members for service retirement, disability retirement, vested deferred retirement, and split benefits. House leaders released the following statements:

 “The need for reform to the retirement system is essential. For years it has been apparent that New Hampshire should address the major problems within our current retirement system including the large and growing unfunded liability of over $3.5 billion. An unfunded retirement system is a ticking time bomb for the taxpayers of the state – that’s an unfair burden on our working families and it just can’t be ignored any longer. This is a responsible step forward to ensure that the retirement system works for retirees, employees, future employees, and the people of New Hampshire,” said House Speaker William O’Brien.

 “This is yet another important step in backing our retirement system away from the current multi-billion dollar unfunded liability. As we progress, we will continue to do so in a careful, open, and respectful manner with regard to our municipal and state employees, retirees, and municipalities. Undoubtedly negotiations will continue in Committee of Conference and we are committed to working with our colleagues in the Senate to address the problems in the system and enact meaningful and lasting reforms,” said House Majority Leader D.J. Bettencourt.

QUESTIONS AND ANSWERS ABOUT RETIREMENT REFORM LEGISLATION SB-3

By Jeb Bradley April 15, 2011

Over the last few weeks, many people, especially public employees, have called, emailed or spoken with me at the State House about the pension reform bill, SB-3, which recently passed the Senate. Many of these people have received misinformation about what the bill actually does and how it affects them. Reforming the pension system to ensure its long term viability has been an emotional discussion for some folks, and that’s why I believe it is so important for everybody to have accurate information on the exact changes that are called for in SB-3. It is my hope that this column will help provide clarification. As always, I remain open and available to discuss concerns or share thoughts on this issue.

Background

As of June 30, 2010 the unfunded liability of the New Hampshire Retirement System (NHRS) was $4.7 billion – approximately $3500 per person in NH. On July 1, employers -- meaning taxpayers -- will pay 13.95% of salary for teacher’s retirement, 25.57% for police officers, and 30.9% for firefighters. In two years those rates will escalate to 29.2% for police and 33.9% for firefighters – rates that are unsustainable in my view. Without SB-3, the entire unfunded burden will be borne exclusively by taxpayers. This will price employees out of jobs, drive up property taxes, make growing and attracting businesses to NH more difficult, and may lead to a downgrading of the state’s bond rating.

Impact of SB-3 on retired public employees -- There will be no changes in the pensions of people already retired.

Medical subsidy eligibility -- The medical subsidy is a payment to a retired teacher or municipal employee that allows them to stay on their former employer’s health plan. Legislation several years ago froze the 8% growth rate in the medical subsidy. SB-3 continues that freeze, but if a retired employee is eligible for the subsidy payment he or she will continue to receive it without a growth factor. The medical subsidy is now funded by employers.

Impact of SB-3 on COLA’s – SB-3 does not change COLA status. Legislation several years ago established a 1.5% COLA in 2010 on the first $30,000 of pensions. SB-3 does not alter that but it also does not authorize additional COLAs.

Gainsharing—“gainsharing” is the practice of diverting revenue from the main pension fund into the Special Account to pay for COLAs and the Medical Subsidy. Gainsharing is one of the primary reasons the NHRS has an unfunded liability of $4.7 billion.  Pension systems rely on good earning years to balance poor earnings. Gainsharing diverted $900 million from good earning years leaving the NHRS with no cushion for poor years. No pension system is viable when diversions occur. Legislation enacted several years ago eliminated gainsharing for the foreseeable future and SB-3 ensures gainsharing does not return.  COLAs in the future will have to be funded from a different source.

Impact of SB-3 on employees who have worked for 10 or more years and are vested into the NHRS -- Contribution rates will increase from 5 to 7% for employees and teachers; public safety employees will increase from 9.3% to 11.3%. Overtime, unused sick and vacation time, end of career payments will still count toward retirement calculations, and current multipliers will be used. Special detail pay will still be included in retirement calculations provided it is not higher than the average of the previous 7 years. Also, effective in July of 2016, no one will be able to retire at a level higher than 100% of their base pay.

Impact of SB-3 on employees who have worked less than 10 years and are not vested -- Contribution rates will also increase similarly. Employees will not be able to count unused sick or vacation time or end or career payments toward retirement -- though overtime will count. Retirement will be calculated over 5 rather than 3 years. Public safety employees will have to work somewhat longer depending upon years of service. Currently these employees can retire at age 45 with 20 years of service. Under SB-3 an employee with 8 or 9 years of service can retire at 46 with 21 total years. For someone with 6 or 7 years they will be able to retire at 47 with 22 years.  Someone with 4 or 5 years of service could retire at 48 with 23 years. Someone with 1-3 years could retire at 49 with 24 years. For newly hired public safety employees, they will be able to retire at age 50 with 25 years of service with a pension multiplier designed to achieve 50% of base salary after 25 years.  

For more information about SB-3 and the NHRS – SB-3 can be found at www.nh.gov and the NHRS at www.nhrs.org



Statement By House Majority Leader D.J. Bettencourt with Regard to Retirement Reform Legislation

The following statement was issued today by House Majority Leader D.J. Bettencourt with regard to retirement reform legislation, unveiled today by the NH Senate, of which he is a co-sponsor :

“I am pleased and encouraged that the Senate has joined with the House in making reform of the state retirement system a priority for this legislative session.  I look forward to working together with Sen. Bradley on his reform proposal, as well as others already before the House, to ensure that our retirement system does not slide into insolvency.  As we pointed out when House Republicans presented our agenda at the outset of the session, we must have the courage to confront the estimated $3Billion unfunded liability problem within the system.  I reiterate my pledge that the House will approach pension reform in a careful, open and respectful manner with regard to our state employees, retirees, and municipalities. We will deliberate with an open mind for all concerned.”