Recent Developments in U.S. Financial Accounts Susan Hume McIntosh Senior Economist and Special Project Coordinator Flow of Funds Section Board of Governors of the Federal Reserve System Meeting on Financial Information Needs for Statistics, Macroprudential Regulation and Supervision in Central Banks of Latin America and the Caribbean Mexico City, Mexico May 15, 2014
Household Net Worth Americans' wealth hit the highest level ever last year, according to data released Thursday, reflecting a surge in the value of stocks and homes that has boosted the most affluent U.S. households. The net worth of U.S. households and nonprofit organizations rose 14% last year, or almost $10 trillion, to $80.7 trillion, the highest on record, according to a Federal Reserve report released Thursday. The Fed report shows Americans have made considerable progress repairing the damage inflicted by the housing crash and recession, which ran from December 2007 through June 2009 and decimated the wealth of a wide swath of the nation. But the rebound, while powerful, has been tilted in a way that limits the upside for the broader U.S. economy and is increasingly leaving behind many middle- and lower-income Americans. Wall Street Journal March 6, 2014 May 15, 2014 Mexico City meeting 2
Outline of Presentation Growing importance of Financial Accounts Converging to 2008 SNA; some differences Recent changes to structure, software, instrument detail, sector definitions, supplementary sector tables, Defined benefit pension entitlements Upcoming changes Enhanced Financial Accounts May 15, 2014 Mexico City meeting 3
Importance of Financial Accounts Financial Accounts have become more important since the financial crisis More emphasis on financial sectors Global world - international comparisons Moving toward 2008 SNA international standards May 15, 2014 Mexico City meeting 4
Differences from SNA Purchases of consumer durables treated as investment rather than consumption Nonfinancial noncorporate business shown as separate sector rather than included in household sector Most debt securities recorded at book value rather than market May 15, 2014 Mexico City meeting 5
Financial Accounts Renamed from Flow of Funds Accounts Added Integrated Macroeconomic Accounts Release Highlights emphasized Interactive online Guide (SNA identifiers) International submissions (OECD matrices) May 15, 2014 Mexico City meeting 6
Splitting Flows Rewrote software to include all components Flows = transactions + revaluations + other changes in volume 1. Transactions: purchases/borrowing - repayments 2. Revaluations: holding gains and losses on equities, mutual fund shares, real estate, etc. 3. Other changes in volume: uninsured disaster losses, sector definition changes, data source changes, charge-offs, etc. May 15, 2014 Mexico City meeting 7
Instrument Detail Treasury securities split into bills (short-term) and bonds (long-term) Corporate bonds split into structured and other Showing repurchase agreements on a gross basis for all sectors Types of consumer loans (credit cards, auto, student loans) May 15, 2014 Mexico City meeting 8
Sector Definitions International Banking Facilities treated as domestic rather than foreign (in line with BOP manual and 2008 SNA) Holding Companies part of financial corporations sector Only holding cos. that file regulatory reports Not include nonfinancial holding cos. Structure in place for expansion May 15, 2014 Mexico City meeting 9
Supplementary Sector Tables Life Insurance: 1. General accounts 2. Separate accounts REITS: 1. Equity Reits 2. Mortgage Private Pensions: 1. Defined benefit 2. Defined contribution 3. IRAs May 15, 2014 Mexico City meeting 10
Measuring DB Pensions Plan Old: pension reserves represented funded assets Current: pension entitlements represent expected benefit (funded and unfunded) BEA s accrued liabilities series for private, state and local government, and federal government DB pension plans New items: 1. New instrument: claims of pension fund on sponsor 2. Funded status of defined benefit plans shown 3. Household retirement assets shown May 15, 2014 Mexico City meeting 11
DB Pension Liabilities Private: ABO approach using tax returns filed with PBGC; AAA corporate bond yield (5.5% recently) used for interest rate assumption State and local: ABO approach using sample of actuarial valuation reports covering 90% of assets back to 2000; Census Bureau will be collecting data going forward; AAA corporate bond yield used for discount rate Federal: PBO approach based on actuarial reports for civilian (1979 forward) and military plans (1985 forward) adjusted for plan changes. May 15, 2014 Mexico City meeting 12
International Standards (2008 SNA) Pension entitlements 11.107 Pension entitlements show the extent of financial claims both existing and future pensioners hold against either their employer or a fund designated by the employer to pay pensions earned as part of a compensation agreement between the employer and employee. Social security 17.191 In recognition of the fact that social security is normally financed on a pay-as-you basis, entitlements accruing under social security (both pensions and other social benefits) are not normally shown in the SNA. May 15, 2014 Mexico City meeting 13
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Shift from Defined Benefit Plans to Life Insurance Annuities May 15, 2014 Mexico City meeting 19
General Motors and Prudential Insurance On June 1, 2013 GM offered 42,000 salaried retirees who retired after Oct. 1, 1997 and before Dec. 1, 2011 lump sum payments; roughly 30% accepted Purchased group annuity from Prudential Insurance for 76,000 salaried retirees who turned down lump sum or retired before Oct. 1, 1997; retirees get same payout Shifted $26 billion of pension obligations; Only $9.2 billion in pension obligations with $6.1 billion in assets left in U.S. salaried pension plan. Prudential getting 10% premium on transaction; expected to ultimately make $91 million of total profits on the deal Cost to employer is 110% to 115% of current liabilities No longer offers DB pensions to newly hired salaried workers. May 15, 2014 Mexico City meeting 20
Verizon Communications and Prudential Insurance Oct. 2013 Verizon transferred $7.5 billion 25% of total pension obligations -- to Prudential Insurance Covered 41,000 salaried employees who began receiving pensions before Jan. 1, 2010; retirees formerly represented by unions not included in buyout Verizon contributed $2.5 billion to its pension plan to raise funding to 80% of obligations and paid insurer premium of $1 billion (15% of 2011 cash flow from operations) DB plan closed to new hires, now placed exclusively in the 401(k) plan May 15, 2014 Mexico City meeting 21
Decoupling DB Pension Plan from Employer Objective is to de-risk the pension plan (interest rate and longevity) while improving longer-term financial profile Employers no longer exposed to fluctuating interest rates and investment results which can affect contributions Investments shift from equities to mostly high-quality corporate bonds. PBGC will no longer insure benefits Neither GM nor Prudential will pay PBGC premiums (flat or variable based on underfunding) for annuitized obligations State guaranty associations provide partial coverage for Prudential annuities Prudential and MetLife two largest players in the buyout market May 15, 2014 Mexico City meeting 22
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Upcoming Changes Short-term projects: Major revision to Balance of Payment and International Investment Position data to be consistent with BPM6 and SNA2008 Long-term projects: 1. Hedge funds 2. Derivatives 3. Nonprofits 4. Financial subsectors in IMAs May 15, 2014 Mexico City meeting 25
Enhanced Financial Accounts Maintain basic framework Ambitious program Need more detailed information 1. Whom-to-whom 2. Higher frequencies 3. More disaggregated data 4. Risk exposure (derivatives) Joint work with other organizations May 15, 2014 Mexico City meeting 26