Social Security, Pensions and Politics: National Directions Dallas L. Salisbury Employee Benefit Research Institute www.ebri.org
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.
Demographics Drives It All
United States 2000 Male Female 75+ 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 5.0% 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
76 Million Baby Boomers Think They are Poised to Retire 4,500,000 U.S. Births (1910-1998) 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1910 1946 1998 Source: US Census Bureau
United States 2020 Male Female 75+ 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 5.0% 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 ---->
Estimated Life Expectancy at Birth Years 80 75 70 65 60 55 50 45 40 35 30 1900-1997 1997 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 1997 Source: National Center for Health Statistics
The Longer You Live The Longer You Live 50% Chance of living beyond 25% Chance of living beyond Male (age 65) 85 92 50% Chance of living beyond 25% Chance of living beyond Female (age 65) 88 94 At least one person has a: 50% Chance of living beyond 25% Chance of living beyond Couple (both age 65) 92 97 copyright 2002 EBRI - Source: permission 1996 to use US granted 2000 Annuity if not altered. Male & Female Tables
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
The Age Wave Rolls On For All 60 50 40 30 20 2000 2010 2015 2020 10 0 16to24 25to34 35to44 45to54 55to64 65+
Median Workforce Age 41 40 39 38 37 36 35 34 33 32 31 40.6 40.5 40.2 39 39.3 40 39.9 39.7 36.6 34.6 1970 1980 1990 2000 2010 2020 2030 2040 2050 Age
Retirement Age Rise to Match 65 in 1935 76 74 72 70 68 66 64 62 60 58 75.4 74.1 72.8 71.5 69.1 65 1935 1970 1990 2010 2030 2050 Age
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.
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%
Income of the Elderly Today Living the good life requires more income than Social Security
Replacement ratios decline with income Source: SSA Trustees Report
Percentage of total income from SSA is high for many retirees Source: Social Security Administration
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) 50 45 40 35 30 25 20 15 10 5 0 2005-9 2020-4 2035-9 Quartile 1 Quartile 2 Quartile 3 Quartile 4
Social Security: Where it Stands
OASDI Trust Fund Ratios (Assets as a percentage of annual expenditures) Intermediate Scenario 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% 1960 1970 1980 1990 2000 2010 2020 2030 Base
Income From Social Security (OASDI) Taxes Will Exceed Outgo by 2012 800 700 600 500 $ billions 400 300 Income excluding interest Outgo 200 100 0 1998 2000 2005 2010 2015 2020 2025 year Source: Social Security Trustees' Report, 1997 (Intermediate Assumptions).
Comparison of Income and Cost Rates for the OASDI Program Under the Trustees Intermediate Assumptions, 2000-2080 2080 25.0% 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% 2000 2010 2020 2030 2040 2050 2060 2070 2080 Year Source: 2002 Annual Report of the Board of Trustees of the OASDI Trust Funds
Comparison of Income and Cost Rates for the HI Program Under the Trustees Intermediate Assumptions, 2000-2075 2075 12.0% 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% 2000 2010 2020 2030 2040 2050 2060 2070 2075 Year Source: 2002 Annual Report of the Board of Trustees of the HI and SMI Trust Funds
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%
Social Security In-Action Missed window of opportunity in 1998/9. Hard political lines have been redrawn. Market declines add an edge. 2003 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
Selected Revenue Alternatives for the Social Security Program
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
Increase Payroll Taxes Change in actuarial balance Whatever you want
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
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
Increase Payroll Taxes Pro Direct and easily understood approach Maintains purity of financing Con May be needed for Medicare Negative economic affects
Extend OASDI Coverage to all State and Local Government Employees* Change in Actuarial Balance: +0.25 *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
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.
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.
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: +0.40 *SSA Office of the Chief Actuary scoring of The Social Security Solvency Act of 1998 (S. 1792, Moynihan Bill)
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.)
Raise Tax Bases
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.
Increase in Immigration Impact on 75-year Actuarial Balance Net Immigration (millions) 0.90* 1.35 1.80 2.70 3.60 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 2002 2 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 2002. Source: Copeland, Social Security: Unemployment and Immigration, EBRI Notes. April, 2002 copyright using 2002 SSASIM. EBRI - permission to use granted if not altered.
Wait for Entitlement Reform? It Won t Be Enough Alone! Congress extends focus to more saving incentives.
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
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
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
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
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
Most US Families Do Not Save Which Has Long Term Implications 60 50 40 30 20 10 0 27 42 51 Below 35 34-44 45-54 55-64 65-74 75, greater 39 24 17 Percent Source: Federal Reserve 2000
Median Net Worth Is Low Relative to Needs Thousands of constant 1998 dollars 160 140 120 100 80 60 40 71.8 63.4 125.7 105.5 124.6 127.5 146.5 97.1 125.6 92.2 1989 1998 20 0 9.9 9 Under 35 35-44 45-54 55-64 65-74 75+
Homeownership Could Help With a Willingness to Sell But Few Want To Sell Their Home And the Young Have Debt 90 80 70 60 50 40 30 20 10 0 70.7 67.2 75.9 78 80.1 69.8 51.4 45.9 23.4 19.9 Under 25 25-34 35-44 45-64 65+ 1973 1999
Provision of Retiree Health Benefits Is On the Decline for Current and All Future Retirees, Employers with 500+ Employees, 1993-2001, 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% 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: William M. Mercer, 2001.
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
A Changing Workforce?? Full Time Part Time Voluntary Involuntary 90 80 70 60 50 40 30 20 10 0 1969 1979 1983 1990 1993 2001 Source: U.S. Bureau of Labor Statistics
Prime Age Male Tenure Trends, by Worker Age, 1951-2002 High Turnover and Relatively Short Median Tenures Median Years 18 16 14 12 10 8 6 4 2 0 1951 1963 Source: U.S. Bureau of Labor Statistics 1966 1973 1978 1983 1987 1991 1996 2000 2002 Age 25 34 Age 35 44 Age 45 54 Age 55 64
Prime Age Female Tenure Trends, by Worker Age, 1951-2002 Lengthening Tenures, but still short 12 10 Median Years 8 6 4 2 0 1951 1963 Source: U.S. Bureau of Labor Statistics 1966 1973 1978 1983 1987 1991 1996 2000 2002 Age 25 34 Age 35 44 Age 45 54 Age 55 64
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+ (1983--2002) 35 Percentage 30 25 20 15 32.8 31.4 19.8 29.3 26.6 27.3 25.5 25.5 23.4 17.0 16.8 17.2 27.6 26.9 16.2 23.5 24.6 20.2 21.2 14.8 14.9 Ages 45 to 54 Ages 55 to 59 Ages 60 to 64 10 5 0 1983 1987 1991 1996 1998 2000 2002 Source: EBRI tabulations of data from the Bureau of Labor Statistics
Retirees Are Entering a Period With an Unprecedented Reliance on Self-Insurance
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
The Average Result What You Can Spend Each Year 4.08% with 90% Likelihood
The Key Learning Transfer Risk Self-Insure Autonomy Matters
What Is The Right Balance? $5,850 $4,080 Self-Insure Transfer Risk
Inflation Is Frequently Ignored 1970 $3,700 2000 $21,000 $26,600 $187,000 $.36 $1.65 Source: Bureau of Labor Statistics
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
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.
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
Medicare - On Average Pays for ½ of Retiree Health Costs
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. 1980 s with retiree medical 39% of non-medicare by retiree; 2001 reached 68%; projected to 2031 to reach 92%.
Saving for/paying for Retiree Medical Post 65 Age of Last Life 80 85 90 100 7% Health Inflation $94,000 $126,000 $160,000 $226,000 14% Health Inflation $160,000 $261,000 $408,000 $852,000
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?
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
The Future Is In Our Hands
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
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
Median Replacement Rates for Participants Turning 65 Between 2035 5 and 2039, by Income Quartile at Age 65 (percent of final 5-year 5 average salary) 120 100 80 60 40 20 Quartile 1 Quartile 2 Quartile 3 Quartile 4 0 social security 401(k) accumulation both
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) 0-5 -10-15 -20 bear, start bear, middle bear, end -25-30 Quartile 1 Quartile 2 Quartile 3 Quartile 4
What Is The Right Balance? $5,850 $4,080 Self-Insure Transfer Risk
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
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?
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
Annually Equity Returns 45% 30% 15% 0% -15% -30% -45% Annual performance of the S&P 500 Stock Index 1926-2001. Source: Ibbotson Associates. Past performance is no indication of future results.
20-Year Smoothed Funding 45% 30% 15% 0% -15% -30% -45% 20-year rolling performance of the S&P 500 Stock Index 1926-2001. Source: Ibbotson Associates. Past performance is no indication of future results.
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
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.
The 2002 Election
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
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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