‘Selected’ problems, events impacting NMI retirees

[B]Conclusion[/B]

If you are a CNMI retiree or a government employee expecting to retire in the coming years you would do well to get up to speed in understanding a little about your future financial security and the forces working against you.

In this regard, I shall address two different NMI retirement plans. One is the plan of which the majority of NMI members have remained and that’s the Fund’s defined benefit plan, DBP.

The other is the plan that a group of 470 former members who voluntarily opted out of the benefit plan when solicited to do so by the central government to join the defined contribution plan, DCP. To this group there are 686 new hires who did not have the option of choice between the two plans and who could only participate in the new defined contribution plan after the government froze any additional new membership participation in the benefit plan after April 2007. Confused? Don’t be. Hopefully, the following will assist in understanding the difference between the two.

Think of the defined contribution plan as consisting of your assuming the responsibility for your own future retirement based largely upon your ability to invest your money wisely in any number of investment possibilities in any amount one chooses. A few might be the stock market, real estate, U.S. Treasury notes, your local bank’s passbook savings account or an IRA or 401(k) account, or whatever. If you invest in, for example, a 401(k) account the NMI government will contribute 4 cents for every dollar you invest. You also accept the risk associated with all your investment decisions. Therefore, you should become well aware of such risks and possess a measure of investment knowledge.

Economist Ben Stien, a former member of President Nixon’s staff, had an interesting televised discussion recently on the condition of retirement plans in the United States and in particular the defined contribution plans. Stein pointed out that in planning for retirement, a 30-year-old individual hoping to retire at age 65 with the same relative standard of living enjoyed at age 30 must start now to save somewhere between 30 to 35 percent (if not more) of his or her income in a contribution plan hopefully structured to achieve the living standard maintained prior to the “savings set-aside.” By the way, a 30-year-old male in 2009 under normal circumstances could expect to live another 46.2 years or until the year 2055.

In other words, the individual must lower their present disposable income expenditures (their consumption) through the process of saving, of which the net result for many will require lowering their present standard of living to accommodate the lower disposal income available for their discretionary purchases.

Many 401(k) investors aren’t aware of the fees and costs charged by the managers of 401(k) plans (usually mutual fund firms). These fees and costs compound over time and eat up a huge chunk of the employee’s investment returns. John C. Bogle, founder of the Vanguard mutual fund firm, says that “over several decades, this adds up to 80 percent of returns going to the system’s managers, only 20 percent to the investor.” Think about that!

Some studies have suggested that half the people with 401(k)s cash them out when they change jobs, despite the tax penalties for doing so.

Under the Federal Employee Retirement Income Security Act of 1974 (ERISA), the federal government does not insure defined contribution plans such as 401(k)s.

Those interested in the above can read more on the subject at http://finance.yahoo.com/columnist/archives/headlines/yourlife/2006/1 or visit the Saipan Tribune archives for Dec. 14 and 15, 2006, for an article titled, “Planning for Retirement” and also the article which appeared in the May 12, 2008, issue of the Tribune (see archives) titled: “W.Va. Teachers Hope to Return to Defined Benefit Retirement Plan.”

This piece concerned a group of West Virginia teachers who had once participated in that State’s defined benefit plan and who were convinced by the State to convert to a defined contribution plan. After doing so they became dissatisfied with the contribution plan—and petitioned the W.Va. Legislature to return to the benefit plan and were eventually permitted to so.

I couldn’t help but wonder if this might be a harbinger for the NMI government’s defined contribution retirement plan sometime in the future. Many of the West Virginia teachers apparently felt that the required monitoring of their own retirement investment in a contribution plan was more difficult and involved than previously thought. They recognized the need for rather sophisticated (and timely) knowledge of the stock market, their 401(k)’s, IRA’s and other investments. For more information Google “stock market risks and rewards.”

As the chief investment economist for J.& W. Seligman, Douglas Peta observed, “We know there is a lot of paper out there that we can’t trust. We don’t know exactly who owns it and how much. And we don’t know how they are valuing it.” A sobering statement. It comes down to a simple truth of not knowing who or what investment opportunities to believe.

Apparently, West Virginia lawmakers provided for the voluntary “switch back over” (return back to the benefit plan) after fielding complaints that Time Certificates of Deposits weren’t yielding enough returns for retirement” (from contribution plans). Blame ranged from negligent oversight by individual enrollees (in the defined contribution plan) and shoddy advice from W.Va. state-hired consultants, to the inherent risks of playing the stock market.

A brief examination of the NMI’s defined benefit plan reveals there were 7,266 remaining members as of October 2007. Under this plan the participant contributes a portion of his or her salary to the Fund’s defined benefit plan and the central government by law is required to make an employer’s contribution to the employee member’s account. The Fund then assumes the fiduciary responsibility of investing and managing the employee’s money and upon becoming eligible to retire, the member receives a pension for the rest of his or her life presumably guaranteed by the government.

Of course, both plans are more complicated than I have summarized but the above should give the interested reader an idea of the differences between the two different plans.

Some retirees who contact me about the dire circumstances and the government’s neglect remind me of what my dear sweet granny once said, “They’re as nervous as a long tailed cat on a porch full of rocking chairs.”

At a time of grave economic uncertainty witnessed by declining values, reduced employment opportunities and loss of confidence in many of our institutions—all the while prices continue to rise. It has been insinuated by some who are more acquainted with the condition of the Fund than I that if some relief isn’t forthcoming from the central government the Fund may run out of money to pay pensions in 3-5 years. A very sobering projection.

If so, it may soon be time to start thinking about reducing individual pensions in order to “stretch out” payments—even in reduced amounts over a longer period than the projected 3 to 5 year span. It boils down to “better something than nothing.” Should it ever come to that unpleasant action all that would remain would be the question by what percentage should be applied to the across-the-board reduction? Please note that the scenario is mine alone and in no way reflects the current thinking of the Fund’s board of trustees.

As shocking as the possibility of pension reductions may be, the question must be posed: How far must the Fund’s investment base be depleted as a result of the central government’s nonpayment of its obligations, which has had the disastrous effect of requiring the Fund to “cash-in” investments to pay pensions? Something that should never have been necessary.

Meanwhile, as I mentioned previously, the government’s failure to pay its debt of $165 million, which continues to increase as time goes by month after month, has resulted in the Fund filing a lawsuit against the central government. The status hearing for this action is scheduled for Feb. 13 in the Superior Court.

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[I]Editor’s Note: For other essays by the author concerning the Retirement Fund from the point of view of an economist visit the Saipan Tribune’s archives.
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[I]William H. Stewart is an economist, historian and military cartographer.[/I]