About Retirement Saving and the Florida Retirement System, Part 2

Continued from Part 1

John Mauldin published an article yesterday in Forbes about the coming public pension crisis. Many states and local governments do not have enough funds to pay future benefits, let alone current benefits, and spending on education and public works is being curtailed due to these shortfalls.

In Florida, the pension crisis is not much of an issue because the Florida Retirement System (FRS) is 84% funded based on actuarial projections ($161 billion of assets) and offers a separate, paltry monthly stipend for medical expenses rather than the generous health benefits offered by many other states. In 2011, the FRS also devalued the program in the following ways:

  • New 3.0% payroll deduction (formerly none)
  • State contributes 3.3% to DC plan (formerly 9.0%)
  • DB vesting period: 5 -> 8 years
  • DB salary lookback period: 5 -> 8 years
  • Full DB benefits 33 years / Age 65 (formerly 30 / 62)
  • DB inflation adjustment removed (formerly 3.0% / year)
  • Deferred Retirement Option Program (DROP) participants earn only 1.3% instead of 6.5% APY on deferred benefits

These 2011 changes continue today despite booming stock market returns. Although they did not affect employees who retired before July 1, 2011, employees who started after this date are fully affected by all of the above, and existing employees are still affected by the inflation adjustment removal for work credits earned after July 1, 2011, as well as having to contribute 3% of salary. There are 643,333 working members in FRS as of June 30, 2018, and 1,210,795 total members including retirees and terminated members who can expect benefits in retirement. These include teachers and other public employees such as police officers, city and county workers, higher education, et cetera, although school districts are the largest component of active membership with 314,001 members (49%). (Source: Comprehensive Annual Financial Reports)

There was a time before the Great Recession where the FRS was more than 100% funded even with the previous, more generous benefits. For it to be 84% funded now is quite good compared with pension systems in other states, but still wanting considering we are potentially at the apex of a 10-year economic expansion. As with most pension plans, the majority of FRS assets (80%) are in high-risk assets such as stocks, real estate, and private equity. Although these risky assets are advisable to invest in as growth will be higher in the long run as compared with safe assets like U.S. Treasury bonds, near-term risks are high. If there is another recession the FRS pension trust fund might go from 84% to 60% funded. The 2011 devaluation was used as an opportunity for the state to contribute less—if they would have kept up their contribution levels the trust fund would be over 100% funded now. For example, the 3% payroll deduction was taken as an opportunity for state and local governments to reduce their contribution rates.

Like life insurance, a pension plan puts a metaphorical bounty on members’ heads. Financially, the best thing that can happen to a life insurance company is for all policyholders to outlive their policies’ end dates; the best thing that can happen to a pension fund is for everyone to die off before receiving benefits. With a defined-contribution retirement account like a 401(k), assets pass to a spouse or children at death, but pension benefits do not generally function like this (although survivor benefits may be offered, they are usually small in comparison). Of course, the state is not going to go on a killing spree to save on pension costs, but conceptually the perverse incentives created by a lifetime payment scheme are entertaining to ponder.

With Social Security benefits, Americans are directly presented with a macabre choice—deciding whether to receive benefits at 62, 67, or 70. Waiting until 67 or 70 results in higher total payouts if one lives to about 83 or older. Of course, someone who is delaying to 70 who ends up dying at 69 would have been better served by starting the payouts at age 62. This is basically the vesting problem in reverse. The FRS, like many pension plans, requires workers to attain eight years of service to get a pension benefit; otherwise, the employee’s contributions (3% of salary) are refunded with no interest and the pension fund retains the employer portion of contributions. However, the FRS is unusual for offering a choice between a 401(k)-like plan and a pension, which must be selected within the first few months of employment. The 401(k)-like plan, called the FRS investment plan, vests the employer’s 3.3% salary contribution after only one year instead of eight. Predicting how long one will work for the State of Florida is not easy, and not fully in the employee’s control—what if they are fired with cause or terminated due to a recession?

In the private sector, we see the bounty effect result in employer malfeasance in smaller ways. The employer match to a 401(k) plan typically takes a few years to vest; employers are incentivized to terminate employees before reaching this milestone in order to claw back the benefits. Other benefits, such as vacation time and health insurance, are only offered after one year of service at many employers, with employee turnover serving to make these benefits useful to only a small percentage of hires, and rationales for firing employees mysteriously spike as they close in on attaining costly perks. Indeed, the customer-facing space is no exception; consider my continuing crusade against Amazon, a company that encourages customers to pre-pay purchases by attaining a gift card balance, perversely incentivizing the company to ban customers and steal gift card balances to maximize free cash flow. The larger your Amazon account’s gift card balance, the higher the probability of you being banned. This happens with credit card reward programs, frequent flyer miles, hotel points, and in many other areas, both via theft or forfeiture, hoops to jump through to redeem one’s benefits, and by devaluation of existing balances.

Devaluations of benefits occur within the broader context of fiat currencies. The U.S. dollar loses value continuously, with the Federal Reserve aiming for a 2% increase in consumer prices each year. Anyone with substantial debts, particularly if they are locked into a low interest rate such as a fixed-rate mortgage, should cheer inflation as it reduces their debts in real terms. With the 2011 removal of a 3% annual inflation adjustment from FRS benefits, current members must consider the U.S. dollar’s performance if they seek to forecast purchasing power in and during retirement. We could have several decades of 2% inflation per year, or there could be years like 1979–1981 which had more than 10% inflation per year. If high inflation occurs, FRS members’ benefits decline substantially in real terms, although they remain flat in nominal dollars. Even during retirement, this has large costs.

Many people misconceptualize retirement as a singular moment where one cashes in their poker chips and leaves the casino, but in fact it is a long slog with unknowable costs and pitfalls (many of them health related), and a need for risk-taking. Target-date retirement funds don’t go to 0% stock allocation when one retires; they typically stay around 40–50% for continued potential for portfolio growth as retirement could last 30 years or even longer. Another large unknown that may appear unrelated, but in fact is intensely relevant, is climate change. Planet-wide, humans are continuing their suicide mission to boil themselves alive. We have no idea whether risky assets such as corporate stocks and real estate will continue their growth trajectories as the climate crisis worsens, and this will be coupled with personal costs unrelated to one’s retirement portfolio.

This concludes my two-part series on the FRS and retirement saving, but expect more writing from me on similar topics in the months to come.

About Retirement Saving and the Florida Retirement System, Part 1

For my doctoral dissertation at University of Central Florida (UCF), to be completed in Fall 2019 and entitled A Survey of Investing and Retirement Knowledge and Preferences of Florida Preservice Teachers, I will administer a questionnaire to undergraduate students at UCF who are studying to become teachers. The questionnaire (commonly referred to as a “survey”) asks about their financial knowledge and personal preferences related to personal finance, retirement accounts, and the Florida Retirement System (FRS), as well as financial challenges they anticipate in retirement and in funding their retirement.

Although the background information explained in my dissertation’s introduction and literature review chapters is extensive, I am writing here to explain this information along with important but ancillary points regarding teacher retirement preparedness, the FRS, pensions for public workers, and financial literacy.

Pension plans, which pay a monthly benefit in retirement, are uncommon nowadays in the private sector. Since the 1980s, they have been almost completely replaced by 401(k) or similar accounts that employees fund on their own, manage investments, and draw upon. Although employers may add “free” money to an employee’s 401(k) account (e.g., employer matching contribution), employers do not have to worry about paying an employee for the rest of their life in retirement, or other things such as survivor’s benefits for a spouse or children.

However, pension plans remain common in the public sector, and teachers are the most numerous class of public workers. These plans are managed by state governments or school districts, and over the past decade since the Great Recession of 2007–2009, many states have watered down benefits for existing and new employees, with many even replacing pension benefits with 401(k)-like accounts or adding an option for such an account. The FRS added such an option earlier than most, in 2001. Florida offers both a pension plan and a 401(k)-like plan (“investment plan”). Teachers and other public workers get to choose the plan they want when they start working for the State of Florida. Then, in 2011, the Florida legislature watered down benefits for both types of plans, which continues to this day despite a booming economy and stock market.

The idea of a retirement plan is set aside money to avoid poverty in the third phase of life, after one stops working. This phase (“retirement”) is getting longer as lifespans increase; although life expectancy is 79 in the United States now, about half of people will live beyond this, sometimes for a decade or longer, and women also have longer lifespans than men. Teachers and other public workers face a special challenge; about 40% of teachers won’t receive Social Security benefits (unless they worked another job), because 15 states including California do not participate in Social Security. Such teachers are even more dependent on their employer retirement plan. Florida does participate in Social Security, which means 12.4% of employee wages are sent to the Social Security Administration and Florida teachers will receive benefits in retirement, on top of any FRS benefits. Although private employers must participate in Social Security, opting out is a special option given only to public employers.

Retirement plans receive special tax treatment under U.S. law, which is why it is beneficial to put money in a retirement plan rather than receiving pay as normal taxable wages and putting the money in an account that is taxed for interest, dividends, and capital gains. Retirement is something that must occur after a certain age with respect to many plans; there are penalties for drawing on a 401(k) or individual retirement arrangement (IRA) before Age 59 and six months, full retirement age for Social Security is 67, and employees hired on or after July 1, 2011 in the FRS must work 33 years or become Age 65 before receiving their benefits. Retiring before these ages is also ill-advised for many Americans because they wouldn’t be able to afford it and they would lose their employer-sponsored health insurance before Medicare eligibility at Age 65, although the Patient Protection and Affordable Care Act has enabled early retirement for many financially privileged Americans since 2014, thanks to government insurance subsidies provided to Americans which are means-tested based on income, not wealth, which means that even millionaires can be on the dole if they have manipulated their present annual income to be low by ceasing work.

In a similar way, retirement plans allow Americans to manipulate their annual income, by the blessing of Congress as specified in the U.S. tax code, to reduce, defer, or eliminate payment of tax. For states that assess state and/or municipal income taxes, this may also have benefits (to workers) at these levels of government. There are also tax benefits bestowed on employers if providing nonwage benefits and deferred compensation, such as 401(k) plans, health insurance, stock options, et cetera. Data and research shows that workers, not just in the United States but also across the world, tend to spend money as they earn it, not investing for retirement or setting aside money for financial emergencies. Therefore, retirement plans also benefit workers by circumventing such inclinations, although voluntary plans or plans that allow withdrawals without much penalty or effort (such as IRAs) are less effective toward this end.

Putting money in a low-risk investment such as a certificate of deposit (CD) or U.S. government debt (Treasury bonds) is not an effective way to prepare for retirement because the money won’t grow much over time. One would typically talk about “saving” in respect to a savings account, CD, or government debt, so “retirement saving” is a bit of a misnomer. The term “retirement investing” is more appropriate, particularly for young people, who should have a large proportion of funds in the equities markets, as shares of companies’ stock which represents fractional ownership of corporations. Although events such as the Great Depression of the 1930s, the dot-com crash of 2000–2002, and the Great Recession of 2007–2009 decimated such investments, over several decades the probability of such events being counteracted by investment gains approaches 100%. That is to say, investing is the opposite of gambling; as you do it more and longer, your probability of an increase approaches 100%, whereas with gambling it approaches 0%. When it comes to pension plans such as the FRS pension plan, the government assumes investing risk and pays benefits based on a formula calculated from your employee class, salary, and years worked, regardless of how the stock market performs. When it comes to defined-contribution plans such as 401(k) plans and the FRS investment plan, you assume investing risk and may run out of money if you have bad luck or poor planning.

Continued in Part 2

Digitally-Mediated Team Learning Workshop Photos (Blog Post)

Digitally-Mediated Team Learning workshop at the University of Central Florida
Sponsored by the National Science Foundation
March 31 – April 2, 2019

Click below for photos of the conference by Richard Thripp (Twitter announcement):

Day 1: Sunday, March 31, 2019: 158 Photos and 1 Video (00:01:00)
Day 1 Photos on Google Drive
Day 1 Photos on Facebook

Day 2: Monday, April 1, 2019: 589 Photos and 5 Videos (Total: 00:13:25)
Day 2 Photos on Google Drive
Day 2 Photos on Facebook

Day 3: Monday, April 2, 2019: 160 Photos and 2 Videos (Total: 00:04:50)
Day 3 Photos on Google Drive
Day 3 Photos on Facebook

Deletion requests can be emailed to thripp@ucf.edu. Please include filename(s).

Response to commentator on Amazon’s theft of $2,200 gift card balance purchased with cash at Walgreens

I received the following comment on my website from a commentator who purportedly suffered a theft by Amazon of their $2,200 gift card balance purchased with cash at Walgreens:

omg please tell me you can help me. here is quick version of what happened

I buy $2,200 in gift cards with cash at Wal greens to make a purchase on amazon with. I load the giftcardds to my amazon account and then I have AMAZON ask me to verify my account, I verify it then AMAZON asks for the bank to fax them proof of my name address and account. My bank is a prepaid Green Dot card and there terms are not to fax my info to anyone, even amazon.

6 weeks later of me faxing the info to amazon and them playing games saying they need the bank to do it. I call amazon up and tell them the bank doesn’t send out my personal info. and we do this whole circle for 8 weeks or so.

Amazon closes my account now for no reason and stole the gift card balance in my account.
I have receipt where I bought all the giftcards with CASH. and they still tell me I wont get it back

I responded as follows:

Amazon has been unprofitable for many years and only recently has become profitable, so they steal gift card balances as a way of improving profitability. It’s illegal, but no government officials care or do anything about it and even the general public assumes people deserved to have their gift card balance stolen.

With Green Dot as your bank, they probably provide you with statements online or by mail, so I would have faxed them a statement myself (although they asked for the fax to come from the bank rather than you, they might not have noticed the difference). I see that you did this and they claimed they needed it direct from the bank… but the low-level Amazon employees that handle this probably don’t know Green Dot’s fax number.

I have had a couple times where a corporation asked me to have a bank fax them a personalized letter indicating some information about me which banks will usually not do… I used to use NetSpend savings accounts to earn 5% interest and they ended up (after several years) freezing my accounts and demanding a fax from Chase Bank attesting to my legitimacy, which a veteran employee at Chase said they could not provide and she had never heard of a bank asking for this. I ended up getting my money back after explaining to the NetSpend corporate employee that this was ridiculous and I would file complaints and sue in small claims court if necessary, and that I had fought Amazon before and won.

Keep your Walgreens receipt and scan + photocopy it just to be safe. File complaints against Amazon with your state attorney general, the Washington state attorney general, and even the Internet Crime Complaint Center. Of course, if you try to go to a consumer advocate like Elliott.org they are going to say something like “he’s obviously a drug dealer—why would anyone buy $2,200 of Amazon gift cards with cash.” Caveat emptor.

A Ratio for the Relative Climate Change Impact of an Economic Activity

I wrote a three-page paper and submitted it to the Social Science Research Network (SSRN) on a ratio for climate change impact using gasoline as as an example.

A Ratio for the Relative Climate Change Impact of an Economic Activity
Richard Thripp
University of Central Florida

I propose a ratio for assessing the climate change impact of an economic activity as a function of global greenhouse gas emissions and annual gross world product. To construct a simple example, I consider only CO2 emissions and use the purchase and combustion of gasoline. I show that it has a ratio of 8.82:1 in the United States as of March 6, 2019 at a national average price of $2.44 per gallon. This means that in consideration of the direct impacts of gasoline’s combustion alone, gasoline would have to cost $21.50 per gallon in order to achieve a 1:1 ratio. Other applications of the ratio and its impact are discussed.

Keywords: climate change, co2, greenhouse gas emissions, economics, fossil fuels, relative harm, carbon taxes

You can download the paper on SSRN (free account required) or by clicking here.

Writing on finance, education, et cetera