Puerto Rico Twist

The 401(k) plan was invented in 1979 by Ted Benna by accident not anticipating how popular it would become (primarily as a tool to cut overall pension benefits in the private sector). Puerto Rico may have just stumbled upon something similar for public plans.

According to an AP story:

Puerto Rico’s governor on Wednesday signed a law that establishes a pay-as-you-go pension plan and sets aside $2 billion this year for tens of thousands of retirees who depend on a public pension system that’s expected to run out of money next month.

Gov. Ricardo Rossello said the government’s general fund will now be responsible for ensuring retirees get a monthly check, and that the new defined-contribution plan will operate similar to a 401K retirement savings program. The current system faces nearly $50 billion in liabilities.

“If we had left things as they are, our retirees starting as early as September would not have received pension payments that they worked decades for in public service,” he said.

The announcement comes just weeks after a federal control board overseeing Puerto Rico’s finances said the pension system will face a 10 percent cut given the island’s deep economic crisis. Government officials rejected that measure and said they would create their own law to protect retirees.

Board members did not immediately respond to a request for comment. The board also has said that all newly hired employees in Puerto Rico will be enrolled in Social Security. Currently, local teachers and police officers do not receive Social Security and depend solely on the public pension system.

Those representing retired Puerto Rico union workers lamented the new law was approved without any public hearings or input from retirees.

According to its June 30, 2015 actuarial report the Puerto Rico Government Employees Retirement System was already issuing debt to pay retirees but that avenue is apparently shut. Now it looks like Puerto Rico will be putting 126,742 former employees back on the books which brings up some interesting questions (and a possibility):

  1. Will these payments be considered earned income for which the recipients would get a W-2 or 1099-R?
  2. If so, can they make 401(k) deferrals out of these former pension payments?
  3. Will the payments be subject to FICA taxes?

If the answers to the above questions are all ‘no’ then here is the twist.

Why can’t some forward thinking government entity reclassify all (or some like the oldest and highest paid) of their employees as retirees defining their pension benefit as what was formerly their salary? All the tax advantages that pensioners get (reduced income tax in some states and no payroll taxes) would accrue to these ‘new’ retirees which may allow the government entities to pay them less overall.

17 responses to this post.

  1. Posted by Anonymous on August 24, 2017 at 1:37 pm

    • Posted by Tough Love on August 24, 2017 at 2:43 pm

      If Public Sector Union-loving Phil Murphy becomes our next Governor, NJ’s Taxpayers will be burdened with the level of unjustifiable tax increase that occurred in the years prior to implementation of the 2% salary cap.

      ANY (yes ANY) unbiased review of Police compensation would show that they are now way over paid in wages alone*. And on top of that, they get pensions whose “value upon retirement” (taking into account not only the ludicrously rich pension “formula”, but also the fact that they can start collecting that pension in the early-mid 50s WITHOUT any early retirement adjustment), is ROUTINELY 4+ times greater than the pension granted comparable Private Sector workers who retire at the SAME age, with the SAME wages, and the SAME years of service. And, they get free or very heavily subsidized retiree healthcare benefits (that very few Private Sector taxpayers get any longer) with a cost to taxpayers in excess of $250,000.

      The outrage is palpable.
      * After just 5 years, many Patrolman (the lowest rank) now have BASE PAY in the $130K to $140K range. This is patently absurd. Who in the Private Sector in a job with comparable risks and comparable education, experience, skills, and knowledge makes such wages after only 5 years?


    • Posted by Anonymous on August 24, 2017 at 8:41 pm

      Seems to me it is all the same story….way too much promised with no sustainable way to pay for it

      Then of course if taxpayers don’t pay up they threaten to cut schools and police……..yawn


  2. Posted by Anonymous on August 24, 2017 at 6:03 pm

    PR’s crisis has its beneficiaries; just google their tax reforms to lure big money away from the US via a Fed tax abatement in lieu of a 4-5% PR tax.


  3. Posted by George on August 27, 2017 at 9:30 am

    I don’t like 401ks in general . The same could be accomplished cheaper just by giving people a lifetime deduction of say $1000000 a year or some other amount on interest and cap gains. The current scheme is very bureaucratic and benefits mostly fund companies and the extremely rich.

    The scheme in Puerto Rico will eventually lead to PR becoming a US state. I personally think the US should give PR a partial bailout and set them free as a country. Alternatively, add PR to Florida or some other state.


    • Posted by Anonymous on August 27, 2017 at 9:58 am

      PR already is getting a bailout of sorts. The US (IRS) allows for zero Fed taxation, conditions apply, in lieu of a 4-5 % tax paid directly to PR?


    • Posted by Tough Love on August 27, 2017 at 12:25 pm

      Personally I don’t care what tax-preferenced mechanisms are made available to assist in saving for retirement, as long as taxpayers don’t contribute more towards Public Sector workers’ pensions (AND benefits) than what they typically get from their employers.

      It’s also fine if “wages” must be raised or lowered to achieve “Total Compensation” (pay + pensions + benefits) equivalence in the Public/Private Sectors.

      This structure FORCES our Elected Official to live withing their means (i.e., available revenue) and not promise more than is affordable by deferring those costs (e.g., excessive pensions & benefits) into the future for future taxpayers and another administration to deal with.


    • Posted by Tough Love on August 28, 2017 at 12:32 pm

      Unless one assumes NJ will repeat the very favorable investment return realized in the last fiscal year, I don’t understand HOW the funding ratios won’t continue to decrease when the State is contributing about HALF of the ARC (even when calculating the liability and funding requirements using the State’s “official” extremely optimistic investment return rates).


      How is that possible ?


      • Posted by Anonymous on August 28, 2017 at 12:38 pm

        The numbers are the numbers but who’s numbers are they – Murphy’s & the Unions? NJ’s on the road to recovery!


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