Repercussions of the ‘Defined Contribution Plan’

A few days ago, the Senate passed S. B. 15-47 entitled “Defined Contribution Plan Act of 2006.” The bill, as passed, was significantly revised from its original form, but was not re-offered for public comment prior to the vote. It was, apparently, placed on that now familiar “fast-track” and I fear that, if also passed by the House, this Act will need a snowstorm of amendments each year as we encounter the various consequences of what was done.

I am not opposed to reforming the retirement system; in fact, quite the contrary. It must be reformed in order to remain viable and to accomplish its original purpose: to secure a “livable” retirement income for those people who choose to devote their working life to service to the community. But was there really such an urgent need to rush headlong into this bill without an appropriate time to receive, research and consider all the ramifications of such a drastic change? Let us hope the House will take the time to consider some of the Act’s provisions that will have a profound effect on the lives and well-being of generations of government employees to come.

I have received a copy of the Act and read all 31 pages of it. I strongly urge anyone having any desire or anticipation of becoming a CNMI government employee at any time in the future to read this Act. If you are already an employee, you, too, should read it—ALL of it. Then go online to any of several web sites that will lead you through prospective retirement scenarios to see just how the plan offered in S. B. 15-47 MAY affect your future. One of the best, most applicable and easiest to use of these “retirement calculators” can be found at www.tcalc.com/tvwww.dll?save.

In the hope of being helpful, I plan to submit several short letters to the editor, rather than one very long one, expressing my concerns over several provisions of the Act. I hope that anyone else having concerns, after reading the Act, will also express them in any form available to you—but most especially to the House members, who must now consider this bill before sending it to the Governor.

In this first letter, I would like to submit the following “average employee” scenario, then, later, address specific provisions of the bill. The scenario is this: “What will you HAVE to retire on and what will you NEED to retire on in the year 2037 after devoting 30 years to government service under the provisions of this bill?”

Assume you are 25 years old, just graduated from basic college, messed around a couple of years like we all do, then became a CNMI government employee under the “new” retirement system and retire at age 55 with 30 years of service (Hypothetical—it’s still not clear whether you CAN retire at less than age 62 or not). Next, you must determine (guess) how much money you will need to live on each month after you retire (in 2037) and how long you expect to live.

Remember, you will retire at age 55; maybe you expect to make it to age 80? Your starting salary is a modest $30,000 per year and the CNMI is going to take 10 percent of your wages (before taxes) to deposit into your new IRA.

Under Federal law, you are limited to a total IRA contribution of $4,000 per year, so you dutifully allot the maximum—$154 per pay period out of your gross paycheck of $1,154 per bi-weekly pay period. But wait, the CNMI is only going to take $115 per pay period (10 percent) as there is no provision in the bill for a HIGHER amount to be voluntarily allotted up front—at least not yet. BUT, let’s assume you are a good worker, get promotions, move up and are soon able to allot the max—$154 every pay day. It won’t matter how high up you get, $154 will still be your maximum contribution (when spread over 26 pay periods) unless the Federal government increases the ceiling.

What will you need to live on each month—in year 2037 dollars?

This is really just a wild guess AND it becomes more or less meaningless because you will have been able to save only $154 each pay day. So, you put it away, manage your “nest egg” prudently, and obtain a modest (you decide that high risk investments are not your game), but acceptable average 6 percent return on investment for 30 years. Your IRA will then have about $339,000 available in 2037 (use the calculator). Sounds like a lot, so you retire and decide to draw it out monthly for 20 years. That will take you to age 75.

How much will you get? Let’s assume that in the last 20 years you’ve learned a bit about managing your “fund” and by retirement time, obtain a return better than 6 percent—say 12 percent. Use the calculator again and you will see that your IRA will pay you about $3,700 per month for 20 years BEFORE taxes. Yep, you gotta pay the taxes now, so your NET monthly payment will be about $3,000.

The question now becomes, CAN you live on $3,000 per month—IN 2037 and beyond? Thirty years ago (in 1976) a full-size new car cost $6,000, gas was 60 cents a gallon and a haircut cost 50 cents! What is it today? And what will it be in 2037? THEN, what happens in 2057 when you are 75 years old (medical advances will probably extend your life expectancy well beyond this age) and your IRA runs out? Your monthly income will be ZERO; you are still alive…and hungry! You either rely on family, go back to work (at 75?), or rob a bank so you can go to jail and let the state take care of you! Or maybe you just don’t retire until you are 75 when the law REQUIRES you to begin taking withdrawals from your “nest egg”—FIFTY years of work for the same employer; imagine that!

Or, somehow, you manage to have more than ONE retirement “nest egg” in your basket. Planning, my friends—planning. Next time, I’ll address the CNMI’s proposed 4 percent share and why you’ll never see it under this bill as well as some other specifics we all need to look at.

Dr. Thomas D. Arkle Jr.
San Jose, Tinian