Transcript Social Security Retirement and Pensions

US Retirement
Systems Project
21 October 1998
Ben Fischer, Faculty Advisor
Introduction
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Welcome
Group Member Introduction
Panel Member Introduction
Project Description
Discussion of Actuarial Assumptions
Discussion of Pensions
Where Do We Go From Here?
Group Members
• Jim Archbold
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–
Carnegie Mellon University, Biology
Group Project Manager
• Rebecca Bosch
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University of Miami, Broadcasting/
Political Science
• Yuan Gao
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Shanghai University, Accounting
• Melissa Gongaware
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Carnegie Mellon University,
Psychology
Howard University, Political Science
• Zhenqqing Li
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University of Michigan, Psychology
• Glenn Dubin
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• Serge King
Nankai University, Business
Administration/Economics
• Matthew Maletestinic
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Carnegie Mellon University,
Industrial Management
• María De León
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University of Wisconsin-Madison,
Literature
Panel Members
• Please introduce your:
Name and Organization
Project Description
• U.S. Retirement System
• Data Gathering
• Actuarial Reports
– Assumptions
• Pensions
• Policy Proposals
Economic Assumptions
of the OASDI
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•
•
•
•
•
•
Annual Interest Rate
Gross Domestic Product (GDP)
Consumer Price Index (CPI)
Average Wage
Real Wage Differential
Level of Unemployment
Labor Force Participation
Interest Rate
• Average Annual Interest Rate
• Each Annual Report Makes Projections 75 years into the
future
• There is variation between the predicted rate and the
actual rate.
• Should Americans panic and make “rash” policy changes
based on these predictions.
Economic Assumptions
Interest Rate Assumptions
1985 Predictions & Actual
12
Interest Rate
8
10.8
9.9
9.8
10
6.6
10.8
10.8
1985
6
6
4
2
0
1979*
1982
1983*
1984*
1985*
1986*
1987*
Report Year
Mean
Sample Variance
Confidence Level(95.0%)
9.0
4.5
2.2
Interest Rate
1990 Predictions & Actual
10
9
8
7
6
5
4
3
2
1
0
9.0
7.5
6.6
6.0
7.2
6.8
6.1
5.6
8.6
1990
Mean
1979*
1982
1983*
1984*
1985*
1986*
1987*
1989*
1992*
Report Year
Sample Variance
Confidence Level(95.0%)
6.9
1.2
0.9
1995 Predictions & Actual
Interest Rate
10
8
6.6
6
7.7
5.6
5.6
5.6
5.5
5.6
5.5
5.8
6.3
5.9
6.9
1995
4
2
Report Year
Economic Assumptions
19
96
*
19
95
*
19
93
*
19
92
*
19
89
*
19
87
*
19
86
*
19
85
*
19
84
*
19
83
*
19
82
19
79
*
0
Mean
Sample Variance
Confidence Level(95.0%)
6.0
0.5
0.5
Gross Domestic Product
• The GDP is the sum of all goods and services
produced in the United States, by both foreign and
domestic organizations
• The GDP is a tremendous measure of economic
strength
Economic Assumptions
GDP Assumption
3.5
3
Real
GDP
2.5
2.9
2.4
Projected & Actual 1995 GDP
3.3
3.2
3.1
3
2.7 2.6
2.6
2.5
2.9
2
2
1.5
1
0.5
0
1979 1980 1982 1983 1984 1985 1986 1987 1989 1992 1993 1995
Report Year
Economic Assumptions
CPI and Real Wage
Differential
• The CPI is the “bundle” of goods that has come to be
used as an indicator of inflation
• The average real wage is the average wage of all
earnings taxable for social security purposes for all
covered workers indexed for inflation
• Real Wage - CPI = Real Wage Differential
• The Real Wage Differential is indicative of the
standard of living
Economic Assumptions
CPI and Real Wage
Differential
• The CPI is important as an index of inflation and
represents the cost of living
• As the CPI (and inflation) rises, the real wage
differential is negative. As the CPI is steady or
decreases, the real wage differential is positive
• When the real wages are higher than the CPI, net
income to the trust fund increases
Economic Assumptions
Average Annual
Unemployment Rate
•
Unemployment rate
•
The unemployment rate represents
the proportion of the civilian labor
force that is unemployed.
•
Unemployed Persons
•
All persons who had no employment
during the reference week, were
available for work, except for
temporary illness, and had made
specific efforts to find employment
sometime during the 4-week period
ending with the reference week
•
Retired Employees
•
At work part time for non-economic
reasons due to retirement or Social
Security limits on earnings
Economic Assumptions
Average Annual
Unemployment Rate
Actual vs. Predicted Unemployment Rates
for 1997
7.0
6.2
6.0
5.0
5.0
5.0
5.0
1980*
1982*
1983*
5.0
4.5
5.0
1979
5.5
5.5
1978
Percent
6.5
5.5
5.5
5.5
5.9
5.2
4.9
Year
Economic Assumptions
1998
1993
1992*
1989*
1987*
1986*
1985*
1984*
4.0
Average Annual Percentage
Increase in LFP
Percentage
The percentage of people working is rising slightly higher in
1998 than in 1992 or 1993
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1.7
0.9
1992*
1.0
1993
1998
Year
Note: Labor force is the total for the United States (including military personnel)
and reflects the average of the monthly numbers of persons in the labor force each year
Economic Assumptions
In 1993, the Labor Force Participation Rate
was off by 1.5% (ages 60-64)
45.5
45.1
Percentage
45
44.5
44
43.6
43.5
43
42.5
Actual
Economic Assumptions
Projected
In 1985, Labor Force Participation was off
by 1.5% (ages 60-64)
Percentage
50
45.1 43.6
40
30
Projected
20
Actual
7
10
7
0
60-64
Age Groups
Economic Assumptions
70+
Thousands
In 1995, the actual labor force participation
was much higher than anticipated.
4500
4000
3500
3000
2500
2000
1500
1000
500
0
Actual
Projected
60-64
65-69
Age Group
Economic Assumptions
70+
Pensions:
Private and Public
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ERISA
Defined Benefit v. Defined Contribution
Level of Savings-Private
Level of Savings-Public
Private Pension Plans
•
Private pensions currently cover less than half of the American
workforce
•
Contributions to private plans have been declining for a number of
years
– In 1989, plan terminations increased 37% and new plan creations
decreased 67%
– In 1994, there was a decrease in private pension plan contributions of
approximately $2 million from 1993
•
The main reason for this trend is the complexity of pension regulations
– Tax Reform Act of 1986
– Pension qualification rules enacted in 1989
Sources: Kelley, Christopher T., UNCERTAINTY IN THE GOLDEN YEARS: THE GROWING DEMANDS
UPON THE AMERICAN RETIREMENT SECURITY SYSTEM, 2 Elder L.J. 225; Private Pension Plan
Bulletin, Abstract of 1994 Form 5500 Annual Reports, U.S. Dept. of Labor.
Employment Retirement
Income Security Act (ERISA)
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ERISA governs the creation and maintenance of employer-provided pensions
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A qualified ERISA plan is entitled to preferential tax treatment
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Benefits
- Employees are allowed to defer taxation of a portion of their income
- Interest accrued on the funds is tax-deferred until withdrawal or retirement
- The employer avoids payroll taxes on the amounts contributed
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Shortcomings
- Not available to everyone
- Many Americans overestimate how much their pension plans will provide
Sources: 29 U.S.C. §§ 1001-1461 (1988) and 26 U.S.C. § 401(a) (1988). “Merrill Lynch Survey
Finds Baby Boomers Not Saving for Retirement”, BNA PENSIONS & BENEFITS DAILY, July 11, 1991.
Public Pension Funds
• Federal Regulations
- Tax sanctions are not an effective means of regulation
- Federal tax regulations harm the plan participant rather than the sponsor
• State Regulations
•
Public pension fund trustees must:
•
Conflicts of interest arise in:
- Act with strict fiduciary loyalty to participants and beneficiaries
- Administer the funds prudently
- Personal interest in a transaction involving fund assets
- Divergent interests of the various beneficiaries
- Duty of the Trustee to the beneficiaries and to other interests
Source: Paisley, Kathleen. “PUBLIC PENSION FUNDS”, 4 Yale Law & Policy Review 188.
Private v. Public Pensions
•Public Sector employees are more likely to receive defined benefit
pension plans than are their private sector counterparts.
•Private Sector employees are more likely to receive Social Security.
•Defined contribution plans are becoming increasingly prevalent among
private sector employees.
•Beyond coverage, defined benefit pension plan provisions differ widely
between public and private sector employees, making comparisons
difficult.
Source: Wiatrowski, William J. “On the Disparity Between Private and Public Pensions.” Monthly
Labor Review. April, 1994. P8.
Summary
• Is Social Security broken?
• Are the assumptions reliable enough to base major
policy changes upon them?
• Improving upon the US Retirement System (ie. Social
Security, Pensions, Medicare, Private Savings) can be
done “rationally”, without the panic that current
projections create.
Sampling of Policy Alternatives
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Raise earnings cap for Social Security recipients
Raise the level of taxable earnings
Raise the age limit for people to receive Social Security benefits
Invest trust fund surplus in stocks/bonds/funds
Create private investment accounts for Social Security
recipients
• Give incentives to employers to keep older workers employed
• Eliminate benefits for those with more than a certain amount of
income regardless of age
• Bolster private and public pension funds with trust fund surplus
or with entire trust fund
Questions and Answers
• Our three identified areas of future analysis:
– Labor Force Participation
– Private & Public Pensions
– Policy Alternatives
• Where does your expertise fit into our areas of future
analysis?