Social Security, Pensions and Politics: National Directions

Transcription

1 Social Security, Pensions and Politics: National Directions Dallas L. Salisbury Employee Benefit Research Institute

2 EBRI Mission To contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education.

3 Demographics Drives It All

4 United States 2000 Male Female % 4.0% 3.0% 2.0% 1.0% 0.0% <----- Percent of total population ----> 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% Source: World Bank, 1999

5 76 Million Baby Boomers Think They are Poised to Retire 4,500,000 U.S. Births ( ) 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500, Source: US Census Bureau

6 United States 2020 Male Female % 4.0% 3.0% 2.0% 1.0% 0.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% <----- Percent of total population ---->

7 Estimated Life Expectancy at Birth Years Source: National Center for Health Statistics

8 The Longer You Live The Longer You Live 50% Chance of living beyond 25% Chance of living beyond Male (age 65) % Chance of living beyond 25% Chance of living beyond Female (age 65) At least one person has a: 50% Chance of living beyond 25% Chance of living beyond Couple (both age 65) copyright 2002 EBRI - Source: permission 1996 to use US granted 2000 Annuity if not altered. Male & Female Tables

9 Life Expectancy Increasing With Biogenetics Still Ahead Half of Us Will Outlive It Danger of Relying on Family History Spend Almost as Many Years in Retirement as We Did Working If We Retire at Traditional Ages Many More Will Run Out of Money

10 The Age Wave Rolls On For All to24 25to34 35to44 45to54 55to64 65+

11 Median Workforce Age Age

12 Retirement Age Rise to Match 65 in Age

13 Implications Defined Benefit plans pension and health -will be more expensive than anticipated. Defined Contribution plans will not provide as much as planning tools suggest. Entitlement programs will either have to be dramatically cut or taxes dramatically raised if people don t work longer. Businesses will face both payment and sales challenges.

14 Labor Force Change 1950 to 2000 annual growth of 1.6% From 62 million to 141 million = +79 million 2000 to 2050 annual growth of.6% From 141 million to 192 million = +51 million 55+ workers 13% today; 20% in 2020; 19% in 2050 Ethnicity Non-hispanic whites from 73% to 53%; hispanics from 11% to 24%; blacks from 12% to 14%; asians 5% to 11%

15 Income of the Elderly Today Living the good life requires more income than Social Security

16 Replacement ratios decline with income Source: SSA Trustees Report

17 Percentage of total income from SSA is high for many retirees Source: Social Security Administration

18 Median Replacement Rates from Social Security at Age 65 for Participants Turning 65 in the Year Indicated, by Income Quartile at Age 65 (percent of final 5-year 5 average salary) Quartile 1 Quartile 2 Quartile 3 Quartile 4

19 Social Security: Where it Stands

20 OASDI Trust Fund Ratios (Assets as a percentage of annual expenditures) Intermediate Scenario 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% Base

21 Income From Social Security (OASDI) Taxes Will Exceed Outgo by $ billions Income excluding interest Outgo year Source: Social Security Trustees' Report, 1997 (Intermediate Assumptions).

22 Comparison of Income and Cost Rates for the OASDI Program Under the Trustees Intermediate Assumptions, % Percentage of Taxable Payroll 20.0% 15.0% 10.0% 5.0% 12.7% 10.4% 12.8% 11.0% 14.2% 13.0% 17.2% 13.2% 17.8% 13.3% 17.9% 13.3% 18.6% 13.3% 19.4% 13.4% 20.1% 13.4% Income Rate Cost Rate 0.0% Year Source: 2002 Annual Report of the Board of Trustees of the OASDI Trust Funds

23 Comparison of Income and Cost Rates for the HI Program Under the Trustees Intermediate Assumptions, % 10.6% 10.0% Percentage of Taxable Payroll 8.0% 6.0% 4.0% 2.0% 3.1% 2.6% 3.1% 2.8% 3.6% 3.2% 3.3% 4.9% 6.2% 3.3% 7.2% 3.4% 8.2% 3.4% 9.7% 3.4% 3.4% Income Rate Cost Rate 0.0% Year Source: 2002 Annual Report of the Board of Trustees of the HI and SMI Trust Funds

24 Present Taxes Will Not Support Current SSA and Medicare Benefit Levels 15% in 2000 Low cost of 31.6% in 2040 SSA 17.9% Medicare 13.8% High cost of 47.3% in 2040 SSA 21.9% Medicare 25.4%

25 Social Security In-Action Missed window of opportunity in 1998/9. Hard political lines have been redrawn. Market declines add an edge debate if Senate and House go GOP 2005 debate if one party rules Washington When cash flow crisis hits in divided government then action will come

26 Selected Revenue Alternatives for the Social Security Program

27 Appropriate General Revenue As Needed Pro Larger base than the payroll tax More progressive tax than FICA Con Benefits are progressive and a dedicated tax supports this Could increase pressure for future benefit cuts

28 Increase Payroll Taxes Change in actuarial balance Whatever you want

29 Necessary Increase in OASDI Payroll Tax Rate to Achieve a Zero Actuarial A Balance in the OASDI Program, by Assumption Alternatives Percentage Points of Taxable Payro 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1.87% 5.00% -1.0% -0.44% Low Cost Intermediate High Cost Assumption Alternative Source: 2002 Annual Report of the Board of Trustees of the OASDI Trust Funds

30 Necessary Increase in HI Payroll Tax Rate to Achieve a Zero Actuarial Balance in the HI Program, by Assumption Alternatives Percentage Points of Taxable Payro 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% 6.47% 2.02% -0.20% Low Cost Intermediate High Cost Assumption Alternative Source: 2002 Annual Report of the Board of Trustees of the HI and SMI Trust Funds

31 Increase Payroll Taxes Pro Direct and easily understood approach Maintains purity of financing Con May be needed for Medicare Negative economic affects

32 Extend OASDI Coverage to all State and Local Government Employees* Change in Actuarial Balance: *SSA Office of the Chief Actuary scoring of ISA Plan for NCPR and The Social Security Solvency Act of 1998 (S. 1792, Moynihan Bill) B

33 Extend Coverage (cont.) Pros: It would make the system universal so that all workers are covered by the system. It potentially eliminates some individuals from qualifying for benefits as a spouse, even though they work but do not pay OASDI taxes removing the windfall controversy. Some state employees would have better disability and survivor benefits as well increased protection from inflation. Cons: It would likely increase exempted states costs of providing retirement benefits as their employees average earnings are higher than the economy wide earnings. It is likely to be administratively burdensome to integrate the state plan with Social Security. It could exacerbate the unfunded liabilities of a state plan or move workers from a funded plan to one with unfunded liabilities.

34 Extend Coverage (cont.) General systems that do not participate: Alaska, Colorado, Louisiana, Maine, Massachusetts, Nevada, and Ohio. All or certain teacher plans that do not participate: Connecticut, Kentucky, Illinois, Missouri, Texas, California, Rhode Island, Georgia, Oklahoma, and Minnesota The Bush Commission did not speak to the issue.

35 Tax All OASDI Benefits Tax OASDI Benefits like Benefits from Private and Government Employee Defined Pension Plans (Eliminating current threshold levels for taxing OASDI benefits)* Change in Actuarial Balance: *SSA Office of the Chief Actuary scoring of The Social Security Solvency Act of 1998 (S. 1792, Moynihan Bill)

36 Tax All OASDI Benefits (cont.) Pros: The portion of payroll taxes paid by employers is untaxed compensation to employees. Consequently, it should be taxed at withdrawal just as with pensions, providing consistency in tax rules. Cons: This would hurt the middle income beneficiaries as Social Security tends to be one of their largest sources of income, where many of them would have their lifestyle affected. (Lower income workers would likely not be affected because of current tax rules on deductions and exemptions.)

37 Raise Tax Bases

38 Raise Tax Bases (cont.) Pros: It only raises taxes on wealthy workers, who could presumably afford to pay more. The payroll tax for Medicare is already unlimited. Cons: It is a tax increase that has been previously not desired by many want-to to-be reformers of Social Security. The Medicare tax rate is significantly smaller. As shown in the previous slide, the revenue may not be as great as projected if the economy grows faster than expected. Thus, an increase could be argued for again. The return on such a tax would be very small because the additional income for calculation would be at the 15 percent bend point. Consequently, the program would be criticized for becoming similar to a welfare program.

39 Increase in Immigration Impact on 75-year Actuarial Balance Net Immigration (millions) 0.90* Actuarial Balance (% of taxable payroll) -1.86% -1.60% -1.36% -0.96% -0.61% *2001 OASDI Intermediate Assumption from the Trustees Report and d approximately equal to the estimated value of net immigration in 2000 and 2001 from the Trustees Report. The 2002 Trustees Report increased the estimate of the impact of immigration from a 0.05 improvement in actuarial balance for each additional 100,000 net immigrants above 9000,000 in 2001 to 0.07 in Source: Copeland, Social Security: Unemployment and Immigration, EBRI Notes. April, 2002 copyright using 2002 SSASIM. EBRI - permission to use granted if not altered.

40 Wait for Entitlement Reform? It Won t Be Enough Alone! Congress extends focus to more saving incentives.

41 Annuity or self-managed withdrawals? Defined benefit / defined contribution is more and more about funding and accrual as opposed to payout the result plan type no longer determines how to get to retirement income security Annuity options are available from all plan types the question can one educate individuals as to why part of their assets being turned into an annuity stream provides protection against unanticipated events like down markets and extended life An annuity only defined benefit plan is the cleanest most cost effective way to get to an income target for long service workers if the design is maintained

42 Public plans are becoming hybrid Washington State Oregon Florida Colorado Ohio And the list goes on of governments moving away from pure / traditional annuity only DB plans

43 The ultimate education challenge Defined benefit plan accrual, with asset management and allocation by third parties Paying a lump sum distribution Without having trained the retiree to manage assets, allocation, or distributions Could lead to greater shortfalls than a defined contribution plan that required a career of financial learning The key issue is stream of income or capital accumulation, not simply DB / DC

44 Added design issues follow Portability Wage indexation of left behind accruals Post retirement indexation Availability of annuity and stream of payment options Availability of investment education

45 New Millennium Needs More Employer and Institutional Sponsorship of Pension and Savings Programs, including ones with Payroll Deduction More Financial Education As Early As Possible More Transparent Investment Advice Saving For Health Expenses as Part of Retirement Assessment of The Prospects Of Living A Long Time Teaching and Planning on the Distribution Phase and More Education on Annuities Planning Retirement Ages Accordingly - Higher

46 Most US Families Do Not Save Which Has Long Term Implications Below , greater Percent Source: Federal Reserve 2000

47 Median Net Worth Is Low Relative to Needs Thousands of constant 1998 dollars Under

48 Homeownership Could Help With a Willingness to Sell But Few Want To Sell Their Home And the Young Have Debt Under

49 Provision of Retiree Health Benefits Is On the Decline for Current and All Future Retirees, Employers with 500+ Employees, , and Worse for Smaller Employers Public and Private For-Profit and Not-For Profit 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 46% 43% 41% 40% 38% 36% 35% 40% 40% Early Retirees 35% 33% Medicare-Eligible Retirees 31% 30% 28% 31% 24% 29% 23% Source: William M. Mercer, 2001.

50 The Labor Force Has Not Changed Much It has always been highly mobile. Few have ever worked one place long enough to get the gold watch

51 A Changing Workforce?? Full Time Part Time Voluntary Involuntary Source: U.S. Bureau of Labor Statistics

52 Prime Age Male Tenure Trends, by Worker Age, High Turnover and Relatively Short Median Tenures Median Years Source: U.S. Bureau of Labor Statistics Age Age Age Age 55 64

53 Prime Age Female Tenure Trends, by Worker Age, Lengthening Tenures, but still short Median Years Source: U.S. Bureau of Labor Statistics Age Age Age Age 55 64

54 Percentage of Older Long Tenure Workers Was Never Above 1/3 and is now less than 1/4 Percentage of Male Wage & Salary Workers with 25+ Years of Tenure, by Cohort Ages 45+ ( ) 35 Percentage Ages 45 to 54 Ages 55 to 59 Ages 60 to Source: EBRI tabulations of data from the Bureau of Labor Statistics

55 Retirees Are Entering a Period With an Unprecedented Reliance on Self-Insurance

56 People don t know what their DC account is really worth $100,000 Account Balance = Less than $450 Monthly Lifetime Income * $40,000 Annual Income Requires Almost $1 Million Dollar Account Balance *Based on average annuity rates for a 65 year-old male

57 The Average Result What You Can Spend Each Year 4.08% with 90% Likelihood

58 The Key Learning Transfer Risk Self-Insure Autonomy Matters

59 What Is The Right Balance? $5,850 $4,080 Self-Insure Transfer Risk

60 Inflation Is Frequently Ignored 1970 $3, $21,000 $26,600 $187,000 $.36 $1.65 Source: Bureau of Labor Statistics

61 Income Required to Keep Pace with Inflation Based on 3.5% Rate $3,000 $2,500 $2,000 $1,675 $1,990 $2,363 $2,807 $1,500 $1,000 $1,000 $1,188$1,411 $500 $0 Today 5Years 10Years 15Years 20 Years 25Years 30Years

62 Trends Recap Defined Benefit with lump sums will expand more in the private sector but some public sector as well Defined Contribution will expand in all sectors for the mobile workforce= more lump sum distributions that must be rolled over to achieve security Dominance of Rollover IRA s and Self Management Retiree Medical benefits vaporizing and ultimate medicare value decline job attractor for public sector Individual mis-estimation of longevity, savings need, future investment returns and sustainable spending rates.

63 The Nation Needs To Take Action Education and Financial Literacy Targeted More than 90% of those who could have an IRA don t Nearly 25 % of those who could contribute to a 401(k) plan don t Most who get a small lump sum distribution when they change jobs spend it immediately

64 Medicare - On Average Pays for ½ of Retiree Health Costs

65 Employers Are Providing Less RM A new study from ARHQ finds that only 12% of employers now offer RM pre-65 and 10.7% post 65. A drop from over 20% only a decade ago. FAS 106 caps in a time of high health inflation - may cause the decline to accelerate (median $4,450 retiree and $3,900 for future retirees. And will cause retiree cost shares to climb s with retiree medical 39% of non-medicare by retiree; 2001 reached 68%; projected to 2031 to reach 92%.

66 Saving for/paying for Retiree Medical Post 65 Age of Last Life % Health Inflation $94,000 $126,000 $160,000 $226,000 14% Health Inflation $160,000 $261,000 $408,000 $852,000

67 Bottom Line Society Challenge Will retirees have enough income as their numbers swell to keep our consumption driven economy going and to pay taxes? What will the future demands be on Medicaid and what impact on state budgets and expenditures? Will there be enough tax revenue to finance our schools? Should many workers defer retirement? If they do will we have enough jobs?

68 It Is Time To Think Long Term Those In The Asset Business Like Pension Plans - Should Take The Lead Along With Employers, Unions, Foundations, Universities, etc. The Nation s Future Depends Upon the Outcome

69 The Future Is In Our Hands

70 DC Asset Allocation by Age Relative to all DB and DC Assets 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 20's 30's 40's 50's 60's DB K GICs balanced money co stk bond equity

71 Supplementing SSA and Medicare Is Essential For Most Millions Will Be Forced To Leave Work Early Due To Poor Health Or Disability There Is No Substitute For Saving Early Retiree Medical Alone Would Require an age 65 Lump Sum of Over $160,000 optimistically - To Pay What Medicare Does Not Pay for A Couple

72 Median Replacement Rates for Participants Turning 65 Between and 2039, by Income Quartile at Age 65 (percent of final 5-year 5 average salary) Quartile 1 Quartile 2 Quartile 3 Quartile 4 0 social security 401(k) accumulation both

73 Equity Market Investment Returns Effect on 401(k) Accumulations at Age 65 Among Participants Reaching Age 65 Between 2030 and 2039, by Income Quartile at Age 65 (percent change) bear, start bear, middle bear, end Quartile 1 Quartile 2 Quartile 3 Quartile 4

74 What Is The Right Balance? $5,850 $4,080 Self-Insure Transfer Risk

75 A Need To Take Action More than 90% of those who could have an IRA don t Nearly 25 % of those who could contribute to a 401(k) plan don t Most who get a small lump sum distribution when they change jobs spend it immediately

76 Bottom Line Society Challenge Will retirees have enough income as their numbers swell to keep our consumption driven economy going? Should many workers defer retirement, will we have enough jobs?

77 Defined Benefit Challenges Accounting Debates Could Lead to Annual Mark to Market Leading to Wide Swings Low Interest Rates Drive Up Liabilities Low Market Returns Drive Down Assets Absence of Ability to Smooth IS and BS? Absence of Employee Appreciation New Designs No Longer Provide Life Benefit Security in Response to Employee Demands

78 Annually Equity Returns 45% 30% 15% 0% -15% -30% -45% Annual performance of the S&P 500 Stock Index Source: Ibbotson Associates. Past performance is no indication of future results.

79 20-Year Smoothed Funding 45% 30% 15% 0% -15% -30% -45% 20-year rolling performance of the S&P 500 Stock Index Source: Ibbotson Associates. Past performance is no indication of future results.

80 Trends Recap Defined Benefit With Lump Sum (cash-balance) Defined Contribution for New Economy and Small Mobile Workforce= More Lump Sum Distributions That Must Be Rolled Over To Achieve Security Dominance of Rollover IRA s and Self Management Retiree Medical Benefits Vaporizing and Ultimate Medicare Value Decline Individual Mis-Estimation of Longevity, Savings Need, Future Investment Returns and Sustainable Spending Rates Consumer Driven Health Care Creates New Educational Challenges

81 Business Case Bottom Line The future economic success of employers rests far more heavily on the effective design of employee benefit programs than most CEO s and CFO s realize not just today s worker satisfaction and today s costs but tomorrow s market for the firms products.

82 The 2002 Election

83 A Toss-Up Year 435 House Seats Up Safe 202 GOP 192 DEM Almost Safe 17 GOP 12 DEM Toss Ups 11 Six Is Magic Number 34 Senate Seats Up Safe 12 GOP 6 DEM Almost Safe 4 GOP 4 DEM Toss Ups 8 One Is Magic Number

84 Which Outcome? GOP House DEM Senate GOP Senate DEM House GOP House GOP Senate DEM Senate DEM House The President Cares More Than Anyone!

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