Deposits at FDIC-insured institutions are now insured up to at least $250,000 per depositor through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except for IRAs and other certain retirement accounts which will remain at $250,000 per depositor. (This supersedes the October 3, 2008 changes.)

May 20, 2009

WASHINGTON — U.S. lawmakers will scrutinize the Pension Benefit Guaranty Corp.’s ability to continue paying monthly annuities to retirees amid news that the agency’s deficit has tripled to roughly $33.5 billion in the last six months.

The financial update comes at the request of Congress as lawmakers plan to discuss PBGC’s solvency and concern of mismanagement at a Wednesday afternoon hearing held by the Senate Special Committee on Aging.

The $33.5 billion shortfall, up from $11 billion shortfall reported at the close of fiscal year 2008, is a record high for the agency and comes on the backdrop of controversy surrounding former PBGC director Charles Millard, who may have crossed the line with communication he had with potential investment partners.

According to testimony submitted to the committee, PBGC’s Acting Director Vincent Snowbarger attributed the lose to additional pension plans terminations, investment losses, administrative fees and a decrease in the agency’s interest factor — which is a method PBGC uses to value liabilities.

“Economic turmoil poses issues we have never before confronted and that do not lead to easy solutions,” Snowbarger said in written testimony. Snowbarger is expected to reassure committee members that despite the inflating deficit, “PBGC has sufficient funds to meet its benefit obligations for many years’ because the monthly annuity payments are not lump sums.

Still, the agency makes more than $350 million in annuity payments monthly to workers or retirees who are eligible.

The agency receives its funding primarily from insurance premiums that companies pay and from returns on its investment portfolio, which has been scrutinized as well.

The agency’s investment portfolio, as of April 30, had 30% allocation for equities, 68% bonds and less than 2% with alternative investments, such as private equity and real estate. All of PBGC’s alternative investments have been inherited from failed pension plans.

Snowbarger is scheduled to testify alongside PBGC’s inspector general, a representative from the Government Accountability Office, and possibly Millard, the former PBGC head.

The committee hearing will address to some extent Millard’s improper contact with financial firms and the structure of PBGC’s board of directors, which hasn’t met in roughly 15 months, according to written testimony submitted by GAO Associate Director Barbara Bovbjerg.

Apprehension about PBGC’s operational structure and which industries and sectors agency officials believe could pose great fiscal risk are among the other topics expected to be discussed at the hearing.

The agency is closely monitoring financially distressed businesses related to automotive, retail, financial services and health-care industries. Of particular concern is the automotive industry; PBGC estimates that pension underfunding in the entire auto sector is $77 billion, of which $42 billion would be guaranteed.

By Darrell A. Hughes
Of DOW JONES NEWSWIRES

NEW YORK — The option of a lump sum on retirement is likely to disappear for a lot more workers this fall.

Lump sums used to be a fairly common option for workers enrolled in pension plans. It is becoming more rare, however, as dramatic declines in stock values have sent pension assets plunging just as they have to meet more stringent funding requirements. (Pensions themselves, of course, are being offered to fewer workers.)

Some employees may slip through before Oct. 1, the deadline for businesses to update the funding status of their pensions. More companies are expected to be underfunded when the 2009 numbers are run.

The 100 largest pension plans ended 2008 with $217 billion in liabilities, compared to an $86 billion surplus at the end of 2007. The funding status dropped from about 106% at the end of 2007 to less than 80% at the end of 2008.

The Pension Protection Act begins to restrict lump sum payouts when a plan is less than 80% funded, says Judith F. Mazo, senior vice president, director of research at the Segal Co., a consulting firm. At that point, workers can only receive half of the amount in a lump sum and other half as an annuity. Plans that are less than 60% funded are forced to freeze and provide only an annuity.

The limits are designed to prevent participants from draining badly needed cash from the plans. They also give employers an incentive to keep funding at appropriate levels.

But as the markets have plummeted, credit has tightened, making it difficult for companies to add cash to underfunded plans.

While the majority of workers typically choose a lump sum rather than an annuity if the plan offers a choice, Rebecca Davis, staff attorney at the Pension Rights Center, says people need to carefully consider their choice. No one should make any decision before finding out exactly how much the lump sum would be, the center says.

Some people think they can manage the money better on their own, but as last year’s market losses illustrate, there’s no guarantee. A lump sum may be a lot of money, but a big advantage of an annuity is that it’s guaranteed for life, she says.

One disadvantage to an annuity is that many are not adjusted to reflect increases in the cost of living.

It also might be worth taking the lump sum if the Pension Benefit Guaranty Corp. (PBGC) has to take over the plan. About 84% of participants get their full benefits even if the PBGC steps in, but the limit is currently $54,000 a year.

By Jilian Mincer
A DOW JONES NEWSWIRES COLUMN

NEW YORK — Spooked by shrunken savings, even some wealthy retirees are going back to work. One way to boost income further over the long term: Reset the clock on Social Security benefits.

Retirees who collect Social Security can start over — provided they pay back all benefits received so far. Individuals can start collecting Social Security at age 62, but they earn an extra 7% to 8% for each year they defer until age 70.

“By pushing back the start date, retirees can collect a higher benefit for the remainder of their lives,” says Chuck Roberson, a certified financial planner at Modera Wealth Management in Old Tappan, N.J.

The oldest of the baby boomers turned 62 last year, and many began claiming Social Security — believing that government benefits, 401(k)s and other money invested in the market would allow them to retire in comfort.

But the market meltdown changed all that. Now some retirees are returning to work not out of financial necessity, but to more quickly recoup investment losses.

“They’re looking to create a bigger financial cushion,” says Brett Horowitz, a wealth manager at Evensky & Katz LLC, in Miami. He is flagging resetting Social Security benefits as an option to clients.

Retirees who begin collecting Social Security benefits at 62 typically receive benefits that are about 25% lower than if they had waited until full retirement age. (The age of eligibility to receive full Social Security benefits is 65 for those born in 1937 or earlier. The eligibility age increases for retirees born in 1938 or later; full retirement age is 67 for those born in 1960 or later.)

The monthly payment is even higher for those who wait a few years beyond the eligibility age for full benefits to start collecting, “If you can wait from 62 to 70, you can almost double the initial benefit,” says Christine Fahlund, senior financial planner at T. Rowe Price in Baltimore.

The maximum pretax benefits at 62 are $21,228, compared with $26,064 at 65 and $36,648 at 70, when maximum benefits are available (in current dollar values). Payments are adjusted for each year for the cost of living.

For retirees to reset their Social Security payment schedule, all benefits received must be repaid, using a form SSA-521. (For more information, visit

www.socialsecurity.gov/retire2/withdrawal.htm
 

Individuals in poor health should take the retirement benefit as soon as they can to maximize how much they’ll receive over the rest of their lives. Waiting longer, and then getting bigger monthly payments, is beneficial for those who live to a ripe age.

If he or she lives to 85, someone who waited until 70 to get Social Security would have received $76,896 more in current pretax dollars than the person who took the benefit at 62. If he or she lives to 95, the advantage would be $231,096, according to research from T. Rowe Price.

Because a claimant is required to return only the nominal amount of collected benefits in a reset, he or she could in theory use it as a no-interest loan, investing the money and keeping the interest.

“In essence, the claimant is a ‘borrower” who is required to pay back only the ‘principal” on a loan,” says Alex Golub-Sass, a research associate at the Center for Retirement Research at Boston College, who co-authored a recent paper on this topic.

Commenting on this strategy, Cynthia Edwards, a spokeswoman for the Social Security Administration, says: “This is legal to do under current law, but our Commissioner has some concerns. It’s an issue we intend to raise with the Office of Management and Budget.”

Before doing a reset, investors should talk to their tax adviser.

Married couples in particular need to think carefully about the mortality risk. If the higher earner in the couple takes Social Security at age 62, for example, and dies before doing a reset, the survivor benefits could be reduced.

By Victoria E. Knight
A DOW JONES NEWSWIRES COLUMN

WASHINGTON — Social Security and Medicare trust funds are expected to run out of money sooner than expected, a report released Tuesday shows.

The report, from the programs’ trustees, shows that expenses will exceed tax revenues for Medicare’s hospital insurance fund in 2017, two years earlier than was estimated in a similar report in 2008.

Social Security’s trust fund is expected to be exhausted in 2037, four years earlier than last year’s estimate.

The report “once again reminds us that the longer we wait to address the long-term solvency of Medicare and Social Security the sooner those challenges will be upon us and the harder the options will be,” U.S. Treasury Secretary Timothy Geithner said in response to the data.

The data shows Medicare’s financial problems are larger and more imminent than Social Security’s. Medicare has been hit hard as demand for public health programs increases alongside rising health-care costs.

President Barack Obama has in recent days been lobbying the health-care industry to find ways to cut costs, measures that could make funds held in trust for Medicare go further.

Social Security’s challenges have been exacerbated by the ongoing recession. Still, the fund is expected to continue paying full benefits for almost 30 years while funding about 75% of benefits thereafter.

Last year, the trustees projected Social Security’s trust fund would run dry by 2041, Medicare’s by 2019.

By Meena Thiruvengadam
Of DOW JONES NEWSWIRES

Americans say that despite daunting circumstances, they have developed a more practical attitude toward money and retirement since last year, according to a study by San Francisco-based Age Wave. And that’s good news for financial planners, says Ken Dychtwald, CEO of Age Wave, because Americans know they need planners’ help.

In a new study, Age Wave, a research firm, found that only 4% of respondents strongly agree that Americans behave in a financially responsible manner. An overwhelming 95% of respondents said financial management should be a standard part of high school curricula. Eighty-one percent said that to live within ones means was the most important financial advice that parents could pass on to their children. That figure jumped from 69% a year ago, when the survey was last conducted.

All of these responses underscore the need for guidance and education among financial services clients, and financial planners are positioned to provide those services, said industry professionals. “There has not been a moment in history when more people need to be coached, guided and educated about how to create a long-term plan,” Dychtwald said. “What you’ve got is a population of people who have been spooked. They don’t know who to trust, who’s lying, or what people’s intentions are.”

The study, called “Retirement at the Tipping Point: The Year that Changed Everything,” gathered opinions from more than 2,000 Americans from four generations. The study was conducted with Harris Interactive.

Nearly 60% of Americans lost money in mutual funds, 401(k) plans or the stock market. Respondents believe that it will take about seven years, on average, to recover losses. Among respondents 55 and older, 46% say that medical expenses not covered by insurance is a top financial worry for their retirement phase. Four out of ten respondents said they believe they will have to help support their parents, in-laws or siblings eventually. In light of their financial situations, respondents believe, they might need to postpone retirement by 4.2 years, on average.

Clients might find that they have other reasons for optimism, especially when it comes to the timeline for earning back financial losses. Financial markets typically recover very quickly from recessions, so the U.S. would have to be in a prolonged recession for recovery to take as long as seven years, said Russell Diachok, president and chief executive officer of Centennial, Colo.–based Geneos Wealth Management, Inc., an independent broker dealer. 

“Personally, I think it would be a shorter recovery time, more like three to five years,” Diachok said. Of course, he acknowledged, “that is a significant amount of time if you were planning to retire in two years.”

In the survey, some Americans did express optimistic attitudes about retirement, and even saw working during their retirement years in a positive way. Sixty percent of Americans say that they view retirement as “a new, exciting chapter in life.” That is an increase from the 52% who felt that last year, according to the study. Seventy percent say that working in retirement is a way to remain stimulated and pay bills.    

By Donna Mitchell

WASHINGTON — The U.S. recession appears to be losing steam, with growth likely to resume later this year on the back of firmer household spending, a bottoming housing market and an end to inventory liquidation, U.S. Federal Reserve Chairman Ben Bernanke said Tuesday.

But Bernanke said that the recovery will probably be slower than usual, and warned that the unemployment rate may stay high “for a time” as businesses remain cautious about new hiring.

“We continue to expect economic activity to bottom out, then to turn up later this year,” Bernanke said in prepared testimony to the Congressional Joint Economic Committee.

The “key elements” to that forecast, he explained, “are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters.”

Fiscal and monetary stimulus should support demand, he said.

Last week, in a cautiously upbeat statement accompanying their decision to hold the target federal funds rate for interbank lending near zero, Fed officials said that the economic outlook has “improved modestly” but activity “is likely to remain weak for a time.”

U.S. gross domestic product has contracted in excess of 6%, at an annual rate, in each of the last two quarters, the worst six-month performance in a half century. But Wall Street economists generally expect stabilization around the middle of the year with a gradual recovery thereafter.

That scenario has found support from recent consumer- and business-sentiment surveys as well as housing and construction figures that have helped push equity markets up sharply. However, grim automobile sales for April suggest consumers remain cautious amid rising unemployment.

Still, Bernanke said there are “tentative signs” that household demand is stabilizing, citing a rise in consumer spending during the first quarter.

“The housing market, which has been in decline for three years, has also shown some signs of bottoming,” he added, citing “fairly stable” existing home sales, firmer sales of new homes and a reduced backlog of unsold new homes. Still, sales levels remain “depressed,” he said.

Meanwhile, “some progress” has been made on inventory adjustment, Bernanke said, and as inventories move into better balance with sales, “a reduction in the pace of inventory liquidation should provide some support to production later this year.”

Even foreign economies appear to be stabilizing, he added, and their financial markets appear to have improved somewhat as well.

Still, Bernanke warned that even when the U.S. recovers, growth is likely to remain below its long-run potential for a while. Many economists assume the economy’s noninflationary potential to be between 2.5% and 3%.

“We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly,” Bernanke said. With firms still cautious, the unemployment rate “could remain high for a time, even after economic growth resumes,” Bernanke said, adding that expects “sizable” job losses “in coming months.”

The unemployment rate is currently at a 25-year high of 8.5%. Wall Street economists expect the April jobless rate, due for release Friday, to hit 8.9%.

There are other headwinds, too, Bernanke warned.

“In contrast to the somewhat better news in the household sector, the available indicators of business investment remain extremely weak,” he said, while conditions in commercial real estate “are poor.”

And while financial conditions appear to have improved, markets and institutions “remain under considerable stress,” he said.

“A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” Bernanke said.

With a good deal of slack still in the economy, inflation should remain low and come in below its 2008 pace this year, Bernanke said.

“However, inflation expectations, as measured by various household and business surveys, appear to have remained relatively stable, which should limit further declines in inflation,” he said.

Bernanke told lawmakers that the Fed will soon provide additional information on its lending programs, including breakouts of the types of collateral the Fed is accepting.

Fed Vice Chairman Donald Kohn has been leading a review of the Fed’s disclosure policies.

By Brian Blackstone
Of DOW JONES NEWSWIRES

WASHINGTON — The U.S. recession appears to be losing steam, with growth likely to resume later this year on the back of firmer household spending, a bottoming housing market and an end to inventory liquidation, U.S. Federal Reserve Chairman Ben Bernanke said Tuesday.

But Bernanke said that the recovery will probably be slower than usual, and warned that the unemployment rate may stay high “for a time” as businesses remain cautious about new hiring.

“We continue to expect economic activity to bottom out, then to turn up later this year,” Bernanke said in prepared testimony to the Congressional Joint Economic Committee.

The “key elements” to that forecast, he explained, “are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters.”

Fiscal and monetary stimulus should support demand, he said.

Last week, in a cautiously upbeat statement accompanying their decision to hold the target federal funds rate for interbank lending near zero, Fed officials said that the economic outlook has “improved modestly” but activity “is likely to remain weak for a time.”

U.S. gross domestic product has contracted in excess of 6%, at an annual rate, in each of the last two quarters, the worst six-month performance in a half century. But Wall Street economists generally expect stabilization around the middle of the year with a gradual recovery thereafter.

That scenario has found support from recent consumer- and business-sentiment surveys as well as housing and construction figures that have helped push equity markets up sharply. However, grim automobile sales for April suggest consumers remain cautious amid rising unemployment.

Still, Bernanke said there are “tentative signs” that household demand is stabilizing, citing a rise in consumer spending during the first quarter.

“The housing market, which has been in decline for three years, has also shown some signs of bottoming,” he added, citing “fairly stable” existing home sales, firmer sales of new homes and a reduced backlog of unsold new homes. Still, sales levels remain “depressed,” he said.

Meanwhile, “some progress” has been made on inventory adjustment, Bernanke said, and as inventories move into better balance with sales, “a reduction in the pace of inventory liquidation should provide some support to production later this year.”

Even foreign economies appear to be stabilizing, he added, and their financial markets appear to have improved somewhat as well.

Still, Bernanke warned that even when the U.S. recovers, growth is likely to remain below its long-run potential for a while. Many economists assume the economy’s noninflationary potential to be between 2.5% and 3%.

“We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly,” Bernanke said. With firms still cautious, the unemployment rate “could remain high for a time, even after economic growth resumes,” Bernanke said, adding that expects “sizable” job losses “in coming months.”

The unemployment rate is currently at a 25-year high of 8.5%. Wall Street economists expect the April jobless rate, due for release Friday, to hit 8.9%.

There are other headwinds, too, Bernanke warned.

“In contrast to the somewhat better news in the household sector, the available indicators of business investment remain extremely weak,” he said, while conditions in commercial real estate “are poor.”

And while financial conditions appear to have improved, markets and institutions “remain under considerable stress,” he said.

“A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” Bernanke said.

With a good deal of slack still in the economy, inflation should remain low and come in below its 2008 pace this year, Bernanke said.

“However, inflation expectations, as measured by various household and business surveys, appear to have remained relatively stable, which should limit further declines in inflation,” he said.

Bernanke told lawmakers that the Fed will soon provide additional information on its lending programs, including breakouts of the types of collateral the Fed is accepting.

Fed Vice Chairman Donald Kohn has been leading a review of the Fed’s disclosure policies.

By Brian Blackstone
Of DOW JONES NEWSWIRES

After suffering deep losses in their retirement savings accounts, most Americans appear to be in a state of shock, unsure where to move next.

“People are shell-shocked, paralyzed and afraid to do anything,” said Christopher “Kip” Condron, chairman and CEO of AXA Equitable at a “thought leadership program” last week here. “Their retirement accounts have taken a terrible beating. There’s no question that virtually everyone is being affected in one way or another by one of the most severe recessions in generations.”

Mutual fund companies, insurance providers and banking advocates all want to help and are naturally pushing their own products, but battered and weary investors aren’t sure whom to trust.

About the only thing everyone can agree on is that Americans haven’t been saving enough.

“People start saving too late,” said Pamela Perun, policy director for the Initiative on Financial Security for the Aspen Institute. “We’ve been waiting until midlife to save. We need a saving system that covers people from birth to death.”

Employer-sponsored 401(k)s play a valuable role in getting people to put a little extra aside every month, she said, but the tax-deferred incentive is not enough to convince people to change from being spenders to being savers.

“It’s not just how much we save, but how and where we save,” Perun said. “The problem is bigger than just retirement. Saving needs to mean more than just saving on taxes.” Perun noted that 20% of Americans are not in the banking system at all, and the bottom 40% to 60% of Americans may or may not save, but they certainly do not invest.

For decades, there have been major imbalances between big savers and big spenders, particularly among nations, said Eric Chaney, chief economist at the AXA Group. The savings rate in the U.S. dropped from around 8%, where it hovered for decades, to practically zero in recent years as equities continually pumped up stock portfolios.

The extended bull market created the illusion that equity and real estate growth could take the place of saving for retirement, he said. With equities down 50% and the average defined contribution account balance down 27% in 2008, everyone has been reminded of the bitter truth: markets are volatile, and stocks don’t always go up. Financial advisers may be preaching that everything is on sale and now is a great time to load up on bargains-but most investors just aren’t buying it.

A February survey conducted by AXA Equitable found that 65% of Americans were worried about meeting everyday expenses should they lose their job, up from 54% in a similar study last year.

“Our research showed that paying bills was a middle-of-the-pack concern last April,” Condron said. “The fact that it is now a top priority underscores how the year-long market volatility has shaken Americans’ sense of security about their immediate financial future, most notably as a result of job instability.”

Securing guaranteed income for life remains the top priority for 69% of Americans, particularly among women, who tend to live longer. Approximately 75% of women surveyed said getting guaranteed income payments for life was a top priority, compared to 58% of men.

Annuities can provide that guaranteed income stream later in life, but many cash-strapped investors are hesitant to lock up money they need right now for an uncertain future.

AXA found that 61% of men said they planned to shift the asset mixture of their investments to react to the changing markets, whereas women were less likely to act, with only 51% saying they would make changes. Half the survey respondents said they had taken no action to change their financial situation.

“Women continue to show more concern than men as the period of economic instability lingers on,” said Barbara Goodstein, executive vice president and chief innovation officer at AXA Equitable. “What is troubling is that it appears that their sense of caution has morphed into an inability to take the prudent steps necessary to navigate through this crisis.”

“The fact that people are still concerned about the health of their retirement during the market volatility we are experiencing makes it clear that they still understand the importance of preparing for their financial future,” Condron said. “What is alarming, however, is that so many are still not taking the steps needed to achieve these goals.”

Beyond working longer and spending less, most Americans don’t seem to know how to recover their losses. The fastest way to recover their losses might be to take another risky gamble on equities, but most investors can’t afford to lose any more of the money they have left.

Approximately 40% of men and women within 10 years of retiring said they planned to delay retirement. Among the men surveyed, 40% said they would work an extra three years to retire at 64, while 39% of women said they would work an extra four years, retiring at 66.

Contrary to many reports, Social Security is not doomed, and experts say the program should have no trouble providing retirement benefits to future generations of Americans for the foreseeable future. It might not be much, but Social Security should provide most elderly Americans with enough money to survive. For those who can save a little more, it will provide a steady and reliable income supplement.

Unlike a personal retirement account that has a set period of wealth accumulation followed by an open-ended period of decumulation, the nation’s Social Security program is structured so that the income for the monthly payments to retirees are generated by current members of the workforce. Payments can keep up with inflation because the average income keeps rising.

Since the program began, there have always been more workers than retirees, providing the system with a net surplus, said Peter Brady, a senior economist at the Investment Company Institute. When the Baby Boomer generation begins retiring en masse, this situation will temporarily reverse, causing a deficit, he said.

“The demographic shock of Baby Boomers is a one-time event,” Brady said, but it won’t break Social Security because the income payments from active workers will keep coming in. The Congressional Budget Office estimates payroll taxes will cover at least 80% of benefits.

When the income/payment deficit happens, the government will have to either reduce payments or increase taxes. Others have suggested raising the minimum withdrawal age, but because of its inherently political nature, most experts don’t think older voters would approve of such hardships on themselves.

By John Morgan

Commenting on the House Savings Recovery Act introduced this week, Rep. Ed Royce (R-Calif.) said, “Along with our struggling economy, over the past 16 months, millions of Americans have seen their personal savings and retirement accounts hit hard. Americans should be given every opportunity to help rebuild their savings. “

Royce continued: “If our economy is going to experience long-term sustainable growth going forward, we have to encourage savings and investment. This is a step toward getting capital back into the financial system and putting our country on the path back to recovery.”

Among other things, the Savings Recovery Act would increase contribution and catch-up limits. It would also extend the tax credits that families get for contributing to a 529 plan.

The act would also double the Social Security earnings limit from $14,161 to $28,320, thereby allowing more Americans to increase their income without being hit by the Social Security earnings penalty.

Further, it would suspend the capital gains tax on newly acquired assets for the next two years, in order to provide tax relief to investors and seniors. It would suspend dividend income through 2011 and raise the amount of capital losses allowed against ordinary income to $10,000.

By Money Management Executive
April 24, 2009