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8 Jan 2018

Senator Deal proposes to offer a choice to future retirees: if you retire before age 70, the benefits are calculated on the last 35 years of income; if you retire at age 73, however, you receive benefits calculated on only the last 15 years of income. Which option are high-income workers likely to choose? Low-income workers? Why?

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Question: do you agree or disagree with my answer for question(Estimates vary widely as to when the trust fund for SS retirement benefits will be depleted. However, there is wide agreement that the program as currently structured is not sustainable in the long run. Increasing revenue and/or decreasing benefits will be necessary. What changes would you make to keep the program viable?)?Please be very specific.

In order to make the Social Security program viable in the future, the following steps need to be implemented:1-Remove the payroll tax cap so that all payroll wages above $113K are taxed; however, the tax increase should be implemented on a tiered approach for each $50K over the current earned income cap. For example, wages between $113K and $163K would be taxed at 2% for social security, $163.1K to $213K at 1.5%, and the rate would be reduced as each income block increases. This would increase cash flows to the program and reduce the programs deficeit. It is critical to remember that if taxes are increased on social security, other taxes must be decreased in order to keep the overall tax rate for individuals and corporations constant. If taxes increase, corporations have the tendency to reduce their work force, and not hire additional employees. Increases in unemployment could adversely impact the overall solvency of the Social Security program.

2-Giving the citizens the option of managing a portion, but not all, of the Social Security account. The government manages the SS fund at a more effective administrative costs than the private sector; however, they are not able to generate the returns that a private investment firm can because they are forced to invest in Treasury Bonds for the growth of the trust fund. With that in mind, high risk and high rewards comes into play. If an individuals entire account was managed by a private investment firm, the risk of financial loss increases in the event of market recession or stock market crash. Therefore, it is imperative that a portion of the account be managed by the government to hedge that risk. This strategy would reduce the administrative costs of the government.

3-Increase the retirement age to 70, as overall health care is leading people to live longer lives, and therefore have the ability to work longer as well. As "60 is the new 40" philosophy is becoming prevalent in America, it is plausible to expect employees to work longer. Additionally, if the employee wants to take the SS benefit before age 70, the reductions in benefits should be increased to 35 to 40% until the age of 70.

3-Eliminate the cost of living adjustment (COLA) and structure the SS benefit payouts like an annuity, where the recipient would receive a set monthly amount for life. This would enable the administration to budget and project the cash flows of the program with more accuracy, and reduce expenses that are currently hindering the vitality of the programs finances.

4-Educate the American population on the overall purpose and structure of the program, so that they understand what is paid in is to help all of us replace income due to retirement or disability, and educate the country on what is actually paid by an Employee, Employer, and then what is eventually paid out in benefits

1. Which of the following statements about defined contribution plans is incorrect?


a. In general, employees can choose the investment vehicle under a defined contribution plan. Thus, highly risk-averse employees can choose low-risk investments, while more risk-tolerant employees can choose high-risk investments.


b. In a defined contribution plan, the employer must make larger-than-average contributions to the pension plan when investment returns have been below expectations.


c. Defined benefit plans are used more often by large corporations than by small companies.


d. The PBGC insures a portion of pension benefits.


e. A defined contribution plan places the risk of poor pension portfolio performance on the employee.



2. Which of the following statements about pension plan portfolio performance is incorrect?


a. Alpha analysis, which relies on the Capital Asset Pricing Model, considers the risk of the portfolio when measuring performance.


b. Peer comparison examines the relative performance of portfolio managers with similar investment objectives.


c. A portfolio annual return of 12 percent from one investment advisor is not necessarily better than a return of 10 percent from another advisor.


d. In managing the retiree portfolio, fund managers often use immunization techniques such as alpha analysis to eliminate, or at least significantly reduce, the risk associated with changing interest rates.


e. Pension fund sponsors must evaluate the performance of their portfolio managers periodically as a basis for future asset allocations.



3. Ms. Lloyd, who is 25 and expects to retire at age 60, has just been hired by the Chambers Corporation. Ms. Lloyd's current salary is $30,000 per year, but her wages are expected to increase by 5 percent annually over the next 35 years. Chambers has a defined benefit pension plan in which workers receive 2 percent of their final year's wages for each year of employment. Assume a world of certainty. Further, assume that all payments occur at year-end. What is Ms. Lloyd's expected annual retirement benefit, rounded to the nearest thousands of dollars?


a. $35,000


b. $57,000


c. $89,000


d. $116,000


e. $132,000

You are a small employer who has believed in providing top-notch benefits to your 250 employees for many years. For the last several years you have provided a wide choice of health benefits through a cafeteria plan and made very generous contributions to their cost. Employees could choose between a comprehensive major medical plan and two different PPOs and were required to pay for only 10% of the cost. Everyone received vision coverage at no cost. All employees had their choice between two different dental plans with the employer paying 75% of the premium. Employees could elect to receive long-term care insurance for themselves and their parents and pay for it through a salary reduction plan with pre-tax dollars. As a result of these wonderful benefits, you don’t experience much turnover amongst your employees. However, your costs have been increasing lately at an alarming rate. You realize you must change the way you provide benefits. You are considering either a core-plus plan or a modular plan. The core-plus plan would provide everyone with health insurance through a point of service plan (POS) at no cost to the employee. Additionally, employees would be given a certain number of benefit credits to apply toward the purchase of vision, dental and/or long-term care insurance that would fund approximately 20% of the costs of the optional benefits. They could contribute toward the remaining cost on a pre-tax basis. The modular plan would offer employees a choice between three plans: Plan L would completely cover the cost for employees to enroll in an HMO for both expenses and dental insurance. Plan M would provide coverage in a POS plan for medical and a modest dental insurance policy, requiring employees to cover 20% of the cost. Plan H would give employees health, dental and vision insurance through a PPO with employees paying 40% of the cost. Again, any costs borne by employees would be set up on a pre-tax basis. Discuss the following:

a.How will the new plans allow you to control your benefit costs compared with the current arrangement? Be specific.

b.How do you think your employees will react to switching away from their previous cafeteria plan? Explain.

c. Do you think the core-plus plan or modular plan will be better? Justify your selection with specific reasons.

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