Here are our top reasons why we think the transition to DC retirement plans will spread in the public sector:

1. Public sector pay no longer lags the private sector - There was a time when government employees were paid much less than private sector workers of similar status. The pay differential was offset largely by good pensions, benefits and job security that public sector employment offered. But times have changed and there is now mounting evidence that public sector pay and benefits are well in excess of the private sector. An article in USA Today reported that, in 2008, "Overall, total compensation for state and local workers was $39.25 an hour — $11.90 more than in private business. In 2007, the gap in wages and benefits was $11.31...A full-time government worker receives benefits worth an average of $27,830 per year. A private worker's benefits are worth $16,598."

   As the public-private pay gap widens and becomes more publicized, taxpayers will press for reforms to bring pay and benefits in line with private sector compensation.

2. State & local budgets are distressed like never before - A recent article in Bloomberg noted:
   

   "The biggest financial crisis since the Great Depression is squeezing municipalities across the country. Since Vallejo, California, successfully petitioned for bankruptcy protection in May 2008, California’s towns, Detroit’s schools and Pennsylvania’s capital city of Harrisburg have all talked about Chapter 9...(municipalities are) talking about it more than they have since 1994, when Orange County, California, suffered through the country’s biggest municipal bankruptcy. Bondholders have to worry if it’s more than just talk. "

   The facts are:

   • government revenues have fallen precipitously in the recession
   • government costs - especially for pensions and healthcare - are rising at unprecedented rates
   • pension and retiree healthcare funds are not well funded and contribution deferral is no longer an option

   This adds up to mounting fiscal pressures to restructure public pensions.

3. Most taxpayers will never have DB pensions, so why should they have to pay for public workers to have them? - The phrase "public servant" may be out of step with today's reality. As already noted, average pay for public servants surpasses the average wage for their taxpayer-bosses. When it comes to pensions, the differences are even more striking: 90% of public sector employees have defined benefit pensions while only 20% of the private sector workforce get this benefit. Growing awareness of this inequity will pressure sponsoring governments to move towards 401k-type retirement plans.
4. Pension spiking and other abuses are fueling public anger - Defined benefit pensions are formula based and give extra weight to the last few years of a person's employment. In many cases, employees are allowed to boost their income in the last few years by cashing out accrued leave balances or by other means. This results in larger pensions - sometimes 25% larger - payable for life. Pension-spiking practices have been the subject of numerous news accounts in California and have helped fuel citizens' anger over public pensions.
5. The other shoe is dropping: Anyone know what OPEB stands for? - Expensive defined benefit pensions are only part of state and local governments retirement problem. These governments have also promised millions of workers that they will get health care and, sometimes, related benefits like life and dental insurance in retirement. Government financial reports refer to these promises by the acronym OPEB - other post-employment retirement benefits. No one knows how big the nation's total OPEB liability is. A November 2009 GAO survey of the 50 state and 39 large local governments tallied an unfunded liability for these 89 governments alone in excess of $530 billion. Other observers place the total OPEB liability for all state and local governments at $1 trillion or more. Whatever the actual number, there is no disagreement that it is huge and growing. The public is generally unaware of this issue, but they soon will become painfully aware of it as OPEB costs result in higher taxes and reduced public service levels - and more pressure to change the status quo.
6. Assumptions and numbers used by DB pensions are overly optimistic - Assumed annual 8% investment returns, "smoothing" losses over long periods, perpetual 30-year amortization schedules, and on and on. Public pension funding is complex and based on myriad arcane assumptions. These assumptions are sometimes modified - usually with an end goal of keeping employer contributions low and making things look better than they really are. Actuarial valuations for public pensions are not done according to the same standards that private sector valuations are required to follow. Indeed there is ongoing debate in the actuarial profession over whether it is appropriate and realistic to use fixed, non-market based earnings assumptions (typically 8%) for government pensions. According to one public pension actuary, changing standards to be more like the private sector (a distinct possibility) would be the death knell for public DB pensions:
   

   "The use of market-value rates to discount public pension plan liabilities would create greater contribution requirements and spur the replacement of public defined benefit plans with 401(k) plans...State and local (governments) would all have 401(k)s if we had to make contributions like that to provide for market volatility.”

7. Fixing Medicare and social security are more important than fixing state & local government pensions. - There are about 20 million state and local government workers, the vast majority of whom are covered by defined benefit pensions. Social security and Medicare, of course, are national retirement programs that affect at least ten time as many people and have their own serious funding issues as noted in the most recent annual reports of the two systems:
   

   "The financial condition of the Social Security and Medicare programs remains challenging...The drawdown of Social Security and HI Trust Fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident. For the third consecutive year, a "Medicare funding warning" is being triggered, signaling that non-dedicated sources of revenues—primarily general revenues—will soon account for more than 45 percent of Medicare's outlays. A Presidential proposal will be needed in response to the latest warning. The financial challenges facing Social Security and especially Medicare need to be addressed soon. If action is taken sooner rather than later, more options will be available, with more time to phase in changes and for those affected to plan for changes."

   In coming years, the Social Security & Medicare funding crisis will compete with the state & local retirement funding crisis for taxpayer dollars. Our bet will be that the federal programs affecting nearly all workers will overwhelm concerns about public employee pensions.

8. Strong protections for existing DB benefits allow little flexibility - Reasonable people might suggest one fix for the public pension problem is to scale back benefits some degree for current retirees and/or currently active employees. The problem here is that state constitutions and statutes prohibit this. The Illinois Constitution, as an example, provides an explicit guarantee that makes it nearly impossible to modify benefits levels downward - even in a severe fiscal crisis:
   

   "membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

   Most other states have comparable constitutional, statutory, and/or common law pension guarantees. This makes changing pension benefit structure for new employees the only available avenue for relief.

Combined, these factors are certain to shake up the public sector pension world in the next few years. Formidable legal and political obstacles including will make changes difficult. But maintaining the status quo is simply no longer an option.

Source: National Conference of State Legislatures, September, 2009

A few states have already made the switch to "401k" style defined contribution plans and many more are actively considering the move. The National Conference of State Legislatures published an overview report of state DC retirement plans in September 2009. According to this report, just two states (Alaska and Michigan) and the District of Columbia had defined contribution plans as primary retirement systems for new employees. ¹ Below is a summary of the 401k-type defined contribution plans ² offered by these governments:

State	Year Adopted	Primary or Optional Primary	Details
District of Columbia	1987	Primary for new hires after October 1, 1987	The District government's primary retirement plan for eligible employees first hired on or after October 1, 1987, is a "defined contribution" plan, with benefits based on 100% employer-provided contributions plus earnings over the course of the participant's working years. The District funds this plan; there is no employee contribution. The current employer-paid contribution is 5% of the base salary (5 .5% for Corrections Officers). Employees must have one year of continuous service to participate, and they are fully vested in the Defined Contribution Pension Plan after five years of continuous service.
Michigan	1996	Primary for new state employees hired on or after March 31, 1997.	Mandatory employer contribution of 4 percent of each employee's annual compensation to a personal Defined Contribution Account. Employer match of employee voluntary contributions up to an additional 3 percent of compensation. If an employee contributes 3 percent, the employer will match the 3 percent employee contribution to total 10 percent of employee's compensation. Employees may contribute additional voluntary amounts to their Defined Contribution Account or other tax-sheltered plans to the extent permitted by the Internal Revenue Code with no employer match. Employees will be 100 percent vested in the employer contributions after four years of service.
Alaska	2005	Primary for new hires on or after July 1, 2006	8 percent mandatory member contribution 5 percent employer contribution to the Defined Contribution Retirement (DCR) Plan Member is immediately vested in the balance of the member contributions. Member is not 100 percent vested in the employer contributions until five years of service is accrued.

It is worth noting that the employer contributions for these state plans (4% - 7%) are significantly higher than the norm for private sector 401k's. According to Boston College's Center for Retirement Research, for private sector workers, "the typical employer match consists of a 50 percent match on 6 percent of the employee’s salary...the typical employer match is thus 3 percent of employee earnings. Most employers permit their workers to continue contributing on an unmatched basis past the 6 percent match level."³

Understandably, public employees (and their unions) will not readily give up the lifetime guarantee of a defined benefit retirement for a 401k-style retirement plan - even one that is far richer than than their private sector counterparts enjoy. Instead, this type of change on a nationwide scale will likely come about via a grassroots citizen movement fueled by outrage: outrage over the inequity of public vs private pensions and outrage over the higher taxes needed to fund public defined benefit pensions.

1. Several other states - including Colorado, Florida, Montana, North Dakota, Ohio, and South Carolina - offered DC plans as "optional primary plans" meaning "new employees may elect to be members of a defined benefit plan or a defined contribution plan, but must be a member of one or the other. Under current law in these states, both kinds of plan remain open to new members, and limited transfer between them is available."
2. IRS rules prohibited establishment of new governmental 401k plans effective May 6, 1986. Some governments - including Michigan - had 401k plans in existence on that date and were grandfathered in. Thus, Michigan's DC offering is, in fact, a 401k plan.
3. Why Did Some Employers Suspend Their 401(k) Match?, p. 2.

Source: Center for Retirement Research at Boston College

The budget pressures are immense; while the recession has created vast needs for more spending on public safety and social programs, these programs are instead being cut because money is drained away to pay for rich public employee pensions.

Many experts say that the future of defined benefit (DB) pensions in the public sector is seriously threatened. Until now, government has been largely shielded from the massive shift from DB pensions to defined contribution (DC) retirement systems that took place in the private sector over the last 25 years. ¹ About 80% of public sector employees are covered by a DB plan that provides a guaranteed retirement benefit for life; in the private sector, only 10% have this benefit.

Ron Seeling, chief actuary of CALPERS² shook things up with comments made at an August 2009 seminar in Sacramento California:

“I don’t want to sugarcoat anything,” Seeling said as he neared the end of his comments. “We are facing decades without significant turnarounds in assets, decades of — what I, my personal words, nobody else’s — unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters) … unsustainable pension costs. We’ve got to find some other solutions.”

While Seeling did not specifically call for replacement of government defined benefit pensions with a new defined contribution model, Raymond Scheppach, executive director of the National Governors Association, does not mince words. From a February 1, 2010 Neal Pierce article appearing in Nation's Cities Weekly:

So what about the hundreds of billions of dollars that the state governments owe in unfunded pension obligations and retiree health care? Scheppach has one answer: the so-called "defined benefits" system, with its lifetime guarantees, "just has to go." State workers - at least new ones - would have to manage their own 401k or comparable plans.

So too are citizen-taxpayers starting to realize that a big share of their taxes goes to pay for public pension benefits - benefits far beyond those they will ever enjoy in retirement. Many public pension funds are in poor financial shape. This means that the tax dollars funneled into them goes not just to pay for today's vital public services but also to pay down employee benefit debts incurred years - even decades - ago.

In our view, the 401k³ tidal wave that swept over the private sector will soon hit the public sector. However, there will be some big hurdles standing in the way:

1. First, unions are far more prevalent and powerful in the public sector than in the private sector. Just recently, the Bureau of Labor Statistics reported that in 2009 for the first time the number of unionized workers who work for the government surpassed those in the private economy. Unionized government workers present a potent political force that will not easily succumb to the need for major pension reforms.
2. Second, retirement benefits for current public workers in many cases are protected by state constitution bans on "diminishing" benefits. The practical effect of this is that a government 401k system can only be mandated for new workers. Pension benefits, once earned, are strongly protected. ⁴ Existing workers covered by defined benefit plans can be given an option to voluntarily switch to a 401k style retirement, but few would have sound reason to do so.
3. Finally, the collapse of the financial markets in 2009 underscored weaknesses in the 401k retirement model. Workers saw their retirement account balances plummet and millions nearing retirement had to abruptly change retirement plans. Many experts seriously doubt that 401k's, even in conjunction with a stable social security system, can provide adequate resources for workers to retire on.

But regardless of the hurdles, the overriding economic fact is that governments and their taxpayers simply will not be able afford to provide guaranteed lifetime benefits to public employees. The b-word (bankruptcy) is uttered more frequently in government finance circles these days. Vallejo, California (pop. 117,000) is now going through a bankruptcy brought on primarily by out-of-control DB pensions. Much larger governments including the State of Illinois and San Diego are the subject of bankruptcy discussions as well - again, with DB pension costs as the main cause. We suspect that once a major government bankruptcy occurs, it will be the logjam break that results in a major shift away from public defined benefit plans.

GAO map showing type of pension for new state hires.

Presently, among the 50 states, only Michigan and Alaska require new employees to go into defined contribution retirement plans. But serious discussion and proposed legislation shifting public sector retirement systems is underway in may other states including Pennsylvania, Utah and others. Additionally, numerous counties and municipalities have moved to DC. We believe this is certain to grow and come to dominate the public sector as it has in the private sector. It's a topic we will closely monitor in the coming months.

"The solution to the funding crises in state pension plans will require fundamental reform. Everything should be on the table, including changes in benefits and increased employee contribution rates, as well as employer contribution rates. These plans should consider replacing their defined benefit plans with defined-contribution plans for new employees." (emphasis added)

- State Pension Funds Fall Off a Cliff, American Legislative Exchange Council

1. Pension plans can generally be characterized as either defined benefit or defined contribution plans. In a defined benefit plan, the amount of the benefit payment is determined by a formula typically based on the retiree’s years of service and final average salary, and is most often provided as a lifetime annuity. In a defined contribution plan, the key determinants of the benefit amount are the employee’s and employer’s contribution rates, and the rate of return achieved on the amounts contributed to an individual’s account over time. The employee assumes the investment risk; the account balance at the time of retirement is the total amount of funds available.
2. California Public Employees Retirement System - the country's largest defined benefit program.
3. Under current IRS rules, 401k's are not available for government workers. However, DC retirement plans very similar to the 401k can be structured under IRS section 401a.
4. According to GAO, the majority of states have some form of constitutional protection for their pensions. In 2000, 31 states had a total of 93 constitutional provisions explicitly protecting pensions. The other 19 states all have pension protections in their statutes or recognize legal protections under common law.

Click image to view full study

A new study from the Center for Retirement Research at Boston College delves into the determinants of why companies suspend matches. Their main findings are not particularly surprising: Companies most likely to have suspended 401k matches in 2009 tended to be:

1. Larger Companies
2. In the manufacturing sector
3. Exhibiting liquidity constraints

Somewhat surprisingly, neither a company's profitability nor the presence of a defined benefit pension program were significant factors in explaining match suspensions.

The study concludes:

The recent financial crisis and ensuing recession has once again sorely strained 401(k) participants. As in 2000, employees have been reminded that they are on the hook for financial risk. At the same time, it is once again clear that the employer match, a valued component of 401(k) plans, is neither mandatory nor permanent. About 5 percent of active participants in 401(k) plans have seen their employer’s match suspended. The key cause of this phenomenon is likely a lack of liquidity on the part of employers, which renders them unable to continue their previous contributions. As the crisis abates, companies appear to be restoring the match. If this trend continues, the suspensions may have done little harm and may have been better than the alternative of cutting payroll or laying off workers.

The CRR study was done at a macro-level by a correlating of company data submitted on federal form 5500 filings with financial data fro Standard & Poors. The study did not delve into the actual decision-making that leads firms to determine that they will suspend their match. For example, it would be interesting to examine whether cutting the 401k match is a first resort or a last resort in the menu of cash preservation techniques that liquidity constrained firms choose from.

Our fear is that 401k matches are becoming the cash preservation tool of choice because they can be implemented relatively easily, swiftly and have a big and immediate impact (2% - 4% of payroll). If this is the case, it does not bode well for workers who can expect to weather 3-5 recessionary period over a 40 year working career.

But rumors of the 401k's demise are premature. Despite many shortcomings, 401k's will almost certainly remain the primary retirement program for US workers for decades to come. Cost-conscious companies are not about to get back into the defined benefit pension business. The federal government is in no position to take on retirement funding responsibilities beyond social security and medicare. And state and local governments, buckling under the weight of their own overly-rich DB pensions, may be the next big growth area for 401k-type retirement programs.

So if 401k's aren't going away, it makes sense to see what the next generation of 401k's might look like. Here's a brief look at some new 401k features to watch out for:

1. Auto-401k - Continued emphasis on automatically enrolling employees in company 401k's and automatically defaulting employees into pre-selected investment funds. This movement is well underway and is strongly endorsed in federal legislation and supported by powerful interests like AARP. More focus will be placed on auto-enrolling all employees, not just new hires.
2. Auto-Contribution Escalation - More 401k programs will automatically step-up employee 401k contribution rates (e.g. 1% per year) until maximum threshold (e.g. 10% of pay) is reached. As with auto-enrollment, increases would occur by default and need to be specifically overridden by the employee.
3. Investment Options - Look for: 1) movement away from actively managed funds to lower-cost index funds, 2) greater use of "managed accounts" where an investment adviser places participants into a pre-mixed portfolio of funds based on factors like age, expected date of retirement, and risk tolerance, 3) more focus on maintaining low investment management and transaction fees and, 4) automatic re-balancing of investment portfolios.
4. Personalized Financial Advice - Online tools as well as face-to-face financial advice will cover broader spectrum of personal finance issues not limited to 401k investments.
5. Reporting & Disclosure - Pending legislation would require plan sponsors to provide clear and understandable fee disclosures on 401k investment options. Another recent piece of legislation would require sponsors to inform participating workers of the projected monthly income they could expect at retirement based on their current 401k account balance. The buzzword these days is transparency and 401k's will include more reporting and disclosure to try and ensure that participants are fully informed about their retirement program.
6. More and Better Annuities - Unlike traditional pensions that pay a monthly benefit for life, 401k's benefits last only until the account balance is depleted. Indeed, one of the shortcomings of 401k's is that far too many participants take money out in a lump sum instead of planning for a steady benefit distribution. Look for a variety of annuity-based 401k withdrawal options in the future.
7. Retention of Participants Post-Retirement - Upon reaching retirement age, the norm has been for participants to take a lump-sum withdrawal from their 401k and roll it over to an IRA. Plan sponsors are realizing that this detracts from the plans asset base, increasing fees and lowering buying power. Participants are realizing IRA investments have higher fees and lack the fiduciary oversight and advice tools available in an employer's 401k. Look for greater emphasis on retaining 401k participants into retirement.

1. Procrastination and Inertia - It is human nature to put off doing things we don't like, things we don't feel comfortable doing or things we don't fully understand. But in the world of 401k's time really is money and procrastinating on actions like enrolling in your 401k, bumping up contributions, or reviewing and adjusting your investment mix can be costly indeed. Remedy: Just Do It! The cost of inaction is too severe as the following example shows:

	Mike	Bob
Starting Age	27	30
Annual Amount	$2,000	$2,000
Annual Return	8%	8%
Retirement Nestegg @65	$477,882	$374,204

.

Mike and Bob following the same retirement investment program with the only difference being that Mike got a 3-year head start. End result: The additional $6,000 dollars that Mike saved in the first three years becomes a $103,678 retirement savings advantage at age 65.

2. Information Overload - A big reason people procrastinate is that they feel overwhelmed with too much data and too many choices. This is especially true in the realm of investing. Some 401k plans offer participants dozens of investment funds to choose from. Result? Studies show that the more investment options offered, the more likely participants are 1) not to participate in the 401k and, 2) opt for "safe" bond or money-market funds if they do participate. Remedy: Keep things simple and stick with low-cost index mutual funds that mimic overall market performance. Research consistently shows indexing to be the best long-term 401k investment portfolio strategy.
3. Too Much Focus on the Short-Term - Too often 401k participants "buy high" and "sell low". When markets tumble and things are at their gloomiest, individuals have had enough and opt to get out. Conversely, they often jump in when markets are riding high and news is favorable. (One study by Hewitt Associates showed that, in 2008, 9 of the 10 most active trading days for 401k participants occurred the day after a large market downturn.) Remedy: Again, keep things simple and understand that attempts to time the market almost always fail. Stick with a consistent "dollar-cost averaging" approach. This allows more shares to be purchased when prices are low and fewer shares to be purchased when prices are high. The overall result is a lower average cost per share.
4. Too Much Focus on Lump Sums - The single greatest risk that people face in retirement is longevity risk - i.e. outliving one's assets. A study by McKinsey & Company projects that 1 in 5 retirees will live at least until 90, but run out of money at age 85. Yet the overwhelming majority of 401k participants opt to withdraw assets on their own schedule (often in a single lump sum), and only rarely convert them to a guaranteed lifetime annuity. One study found 3 out of 5 people were willing to exchange part of the guaranteed Social Security annuity for an immediate lump-sum of approximately equal actuarial value. Remedy: Do not let the general preference for lump sums over annuitized distributions drive your decisions. Take time to study the annuity option. Securing a guaranteed income stream for life may be you best defense against longevity risk.

The Senators' Lifetime Income Disclosure Act (S. 2832) would require 401(k) plan sponsors to inform participating workers of the projected monthly income they could expect at retirement based on their current account balance. The measure is patterned on the Social Security Administration's annual statements, which are mailed annually to working Americans to inform them of estimated monthly benefits based on their current earnings. Congress mandated annual Social Security statements in 1989, and they have proven to be very useful to workers in preparing for retirement.

By providing similar information for 401(k) plans, the Lifetime Income Disclosure Act would give American workers a more complete snapshot of their projected income in retirement.

Specifically, under the Act, defined contribution plans subject to ERISA – including 401(k) plans – would be required annually to inform participants of how the account balance would translate into guaranteed monthly payments – a "retirement paycheck for life" – based on age at retirement and other factors.

To ensure there is no material burden or potential liability on employers who voluntarily sponsor 401 (k) plans, the legislation directs the Department of Labor issue tables that employers may use in calculating an annuity equivalent, as well as a model disclosure. Employers and service providers using the model disclosure and following the prescribed assumptions and DOL rules would be insulated from liability.

As far as Congressional bills go, the Lifetime Income Disclosure Act is relatively simple and straightforward - only six wide-margin, double-spaced pages in length. The heart of the bill is comprised of three sections setting forth the type of lifetime income disclosures to be made:

1. DISCLOSURE — A lifetime income disclosure shall set forth the annuity equivalent of the total benefits accrued with respect to the participant or beneficiary.



2. ANNUITY EQUIVALENT OF THE TOTAL BENEFITS ACCRUED — For purposes of this subparagraph, the ‘annuity equivalent of the total benefits accrued’ means the amount of monthly payments the participant or beneficiary would receive at the plan’s normal retirement age if the total accrued benefits of such participant or beneficiary were used on the date of the lifetime income disclosure to purchase the life annuities described in subclause (III), with payments under such annuities commencing at the plan’s normal retirement age.
3. LIFE ANNUITIES.—The life annuities described in this subclause are a qualified joint and survivor annuity (as defined in section 205(d)), based on assumptions specified in rules prescribed by the Secretary, including the assumption that the participant or beneficiary has a spouse of equal age, and a single life annuity. Such annuities may have a term certain or other features to the extent permitted under rules prescribed by the Secretary.

Details concerning the assumptions to be used and implementation rules are left for the Labor Department to determine.

With the transition from defined benefit pensions to 401k's, Americans have been forced to assume greater responsibility for their own retirement funding. Too many are ill-prepared for the task. If the defined contribution retirement model is to succeed, it is critical that workers be better educated on retirement issues and provided good information on which they can base their savings decisions. Senate Bill 2832 appears to provide a low-cost, common-sense way to greatly improve 401k planning.

401k plans have grown astonishingly fast: in less than thirty years, 401k's have become the primary retirement program for American workers. The time-line below documents the rapid growth and development of the 401k. Click on an event link in the time-line for more detailed information.

A new study by a couple of high-powered finance professors comes down squarely on the side of low-cost index funds as the best 401k investment portfolio strategy. Running thousands of simulations using actual returns (1984-2006) on more than 3,000 actively-managed mutual funds, the authors find that active "fund managers do not have enough skill to produce risk-adjusted expected returns that cover their costs."

In other words, choose to pay high fees to get professional active investment management services and you are almost certain to end up worse off than if you had invested in passively-managed low-cost index funds. ¹

High investment management fees are one of the more insidious threats that 401k investors face. The following graph shows how a 1% higher fee can erode the value of a 401k account:

Avoid the high fees associated with active investment management. Research shows you'll almost certainly do better with low-cost index mutual funds.

Unfortunately, tons of money are thrown into marketing actively-managed funds to 401k investors. In many cases, 401k participants are not sophisticated investors and follow the marketer's pitch. It is incumbent upon 401k account holders to ask questions about fees and performance. For most 401k investors, the guiding principle should be "you don't always get what you pay for - stick with low cost index funds."

1. An index fund is constructed to match the components of a market index like the S&P 500 or Wilshire 5000. Because index funds do not rely on professional managers to "pick" investments, fund expenses are kept low.

Under 1983 legislation, Full Retirement Age increases were enacted, beginning with those born in 1938 (turning 62 in 2000) and are fully phased in for those born in 1960 (turning 62 in 2022). The increase in the FRA is a form of benefit cut – either individuals wait longer to claim their full benefit and receive it for fewer years or they claim before age 67 and receive a reduced benefit.

The following chart shows the official Social Security Full Retirement Age (FRA) by year of birth. (Note: If a birthday is on January 1st, Social Security figures the benefit as if the birthday was in the previous year.)

Full Retirement Age (FRA) By Year Of Birth

A description of the benefit impacts of the FRA changes is found at Social Security Online.