Wednesday, February 10, 1999
WELCOME AND INTRODUCTION
• What we’ve done so far
– Summaries, analyses, research
• Where we’re going next
– Report, more analysis, and presentation
• Final Advisory Panel Meeting
Wednesday 21 April 1999
3:30-5:00PM Hamburg Hall 1003
Presented to entire Heinz community
Welcome and Introduction 2
TIMELINE
• 3:50-4:20PM Presentation
• 4:20-4:50PM Discussion
• 4:50-5:15PM Individual Discussion
Timeline 3
POLICY AREAS
• #1-Projections and the Status Quo
• #2-Earnings Test and Labor Force
Participation
• #3-The Maximum Taxable Limit
• #4-Raising the Retirement Age
• #5-Private Investment
• #6-Pensions and Savings Accounts
Policy Areas 4
#1- Projections and
the Status Quo
• 30 Years Until Benefits will be Reduced
– Time for more detailed look at projection method
• Crisis & Overhaul v. Improvement & Tweaking
– Privatization v. Retirement Savings Education
• Dynamic Microsimulation v. Static Cell-Based
Modeling
– Our Evaluation of the Actuarial Assumptions
– Procedural review of alternative methods of actuarial
projections?
#1 - Projections 5
#2 - Earnings Test and LFP
What We’ve Found:
•The population over 65 years of age has continued to increase
throughout the last 57 years.
•The labor force participation rate for people 65yrs+ has continued to
drop throughout the last 57 years.
•The Earnings Test has a negative influence on labor force
participation.
• Social Security trustee fund is strongly correlated with the labor
force participation of aged people rather than 65+ years old
population
• Earning test has impact on LFP of elderly people
• Education has positive impact to keep older workers in labor force
• Redefining the retirement age will significantly change LFP of the
elderly in the future
#2- Earnings Test and Labor 6
Force Participation
Labor Force Participation
• An increase in labor force participation (LFP) of the 65+ population
would have a significant positive impact on the income of the Social
Security trust fund.
• Currently, 75% of Social Security beneficiaries are 65+ years of
age; therefore, an increase in LFP of among this age group would
result in a substantial decrease in the amount of benefits being paid
out by the system.
How to Increase LFP in Americans 65yrs+
•Increase amount of Earnings Test or eliminate it entirely
•Offer employers tax credit for hiring older workers
•Educational programs for older workers
•Increase retirement age
Earnings Test and Labor Force 7
Participation
Labor Force Participation
The population of workers over 65 years of age has been rising steadily since 1960.
Earnings Test and Labor Force 8
Participation
#3-Eliminate the Maximum
Taxable Limit
• The 1999 Maximum Taxable Limit (MTL) for Social
Security is $72,600; it is indexed to the average real
wage
• Any income over that $72,600 is “tax-free” from
Social Security, but not Medicare
• *In 1993, there were 1,043,213 tax returns showing
income over $200,000. The number is growing at
5.4% annually
• Eliminating the MTL for Social Security will add over
25% yearly to the trust fund surplus.
*Source: High Income Tax Returns for 1993, published by the IRS, 1997
#3 - Eliminating the Maximum 9
Taxable Limit
Growth of the Trust Fund
The Trust Fund will increase 20% annually if the MTL is repealed.
#3 - Eliminating the Maximum 10
Taxable Limit
#4-Raise the Retirement Age
• The current retirement age is set for 65, with reduced benefits
at 62 and unrestricted benefits at 70
• Benefits
– 1999: 5/9 of 1% for each month prior to age 65. The
maximum reduction is 20%.
– 2022: 5/9 of 1% for each month prior to age 67 (up to 36
months prior). Then, 5% for each of the previous 2 years.
• This is the only “acceptable” way to reduce benefits--public will
not support a reduction of monthly benefit sums
#4 - Raise the Retirement Age 11
Raising the Retirement Age
The monthly benefits paid with a higher retirement age decrease over time.
Source: Social Security Administration. CPI (1997)= 2.1%
Raise the Retirement Age 12
Raising the Retirement Age
• Will raising the retirement age affect who retires
early?
• Is raising the retirement age going to increase LFP?
Is it an incentive to work?
• How will the shorter time frame to collect benefits
affect when people retire?
• What will the effect be on the Social Security Trust
Fund?
Raise the Retirement Age 13
# 5 - Investing the Trust Fund
in the Market
• Concerns
– Administrative Costs
– Effect on the Economy
– Government “Control” of private sector through
Market Investment
– Risk
#5 - Invest in the Market 14
Administrative Costs
• Pro
– Financial institutions stand to profit through the use of large
investments . Some have promised to charge as low as 1
and even zero basis points. 1
• Con
– Private sector insurance companies and pension investment
firms have administrative overhead averaging 40%, while
SSA’s overhead costs are just under 1% of benefits. 2
1. Source: David E. Sanger, “Big Eye on the Markets”, New York Times, January 7, 1997.
2. Source: The White House Conference on Social Security- Statements from Participants. American
Federation of Government Employees, AFL-CIO (AFGE). December 8-9, 1998.
#5 - Invest in the Market 15
Effect on the Economy
• Pro
– New Source of Investment.1
• Con
– The expected return on investments will go down.2
1. Source: Tim Smart, Washington Post, January 20, 1999, page A10. Market Experts Mostly Bullish on Proposal’s Impact on
Stock.
2. Source: Daniel J. Mitchell, “Why government should not Invest Americans Social Security Money. Backgrounder No.240
December 23, 1998. Heritage Foundation.
Invest in the Market 16
Govt. “Control” of Private Sector
through Market Investment
• Pro
– Index funds will help assure a broad based investment strategy.1
• Con
– The process could easily be politicized. 2, 3
– The government might start interfering in corporate policies.3
– The government would immediately become the largest single
investor. 4
1. Source: Peter Diamond, Institute Professor. The White House Conference on Social Security- Statements from Participants.
MIT. December 8-9, 1998.
2. Source: David E. Sanger “Big Eye on the Markets”, New York Times, January 7, 1997.
3. Source: Deroy Murdock (CATO Institute) “ And Should the Feds Invest? Washington Times, August 11, 1998.
4. Source: Merrill Matthews ( National Center for Policy Analysis) Government Investment is fraught with Peril, Investor’s
Business Daily, January 11, 1999.
Invest in the Market 17
Risk
• Pro
– If the stock market returns continue to match past performance it
could leave the system healthier.
• Con
– Americans should expect lower returns if the market investments
are administered by a (conservative) federal control board, as
compared to returns from individual investing.1
– The investment will only work if the returns are 10.7% annually
and it is impossible to predict that kind of consistent return.2
1. Source: Richard C. Leone. The White House Conference on Social Security- Statements from Participants. The Twentieth
Century Foundation.
MIT. December 8-9, 1998.
2. Source: David C. John, “CRS Report Says Government Investment Won’t Save Social Security, Executive Memorandum
No. 565, December 21, 1998, Heritage Foundation.
Invest in the Market 18
#6- Pensions and Individual
Savings Accounts
• Choice of investing in one or more of five to ten
plans
– some of which would be indexed equity funds,
– some all-bond or all-government-securities funds,
– and some with mixed portfolios, with the government
• Funds for IA would either come from additional
tax revenue or deducted from part of the
current employer contribution
Sources: Ball, Robert M., “Partial Privatization of Social Security”, Straight Talk about Social Security,
The Century Foundation, Washington, DC 1998.
#6 - Pensions and Individual 19
Savings Accounts
Individual Accounts- Pros
• Allow people to invest their Social Security taxes in financial assets such as stocks
and bonds
• Creating opportunities to accumulate significant retirement assets and income,
using very conservative assumptions
• The investor in the private accounts owns the corpus of the money paid in, which
is not the case with Social Security
• Studies have shown support for Individual Accounts among younger Americans
- In 1996, Bill McInturff of Public Opinion Strategies found the public favoring the
idea by 68 percent to 11 percent.
• Many Americans overestimate how much their pension plans will provide
Source: Ferrara, Peter. Destiny of Freedom for Social Security? The Cato Institute July 11, 1997.
Pensions and Individual Savings 20
Accounts
Individual Accounts - Cons
• Public support for Social Security might be undermined
• The plan would reduce the living standard of low wage earners
• The plan puts workers at increased risk
– Assumption that wage-earners setting aside funds for retirement would prefer
to bear part of the risk individually rather than share risk in a system for which
all of the participants are collectively responsible.
• The plan promises more than it can deliver
– The IA plan would reduce Social Security's defined benefit in the long run,
replacing the diminished benefit with the hope that the average return on
savings in individual accounts would make up for the loss
Sources: Ball, Robert M., “Partial Privatization of Social Security”, Straight Talk about Social Security,
The Century Foundation, Washington, DC 1998.
Pensions and Individual Savings 21
Accounts
Individual Accounts and
Defined Contributions
• Cost of managing these accounts
• Growing need for investment education
• Risk is present in either situation, but in Social Security the risk is broadly shared,
while in individual accounts the risk is borne by the individual
• Philosophy between defined benefits and defined contributions
• Partial privatization would shift Social Security toward becoming a defined-
contribution plan, in which benefits are dependent upon how contributions are
invested.
– Private pension plans are increasingly of the defined-contribution type, such as
401(k) plans.
Source: David C. John and Gareth G. Davis, "The Cost of Managing Individual Social Security
Accounts," Heritage Foundation Backgrounder No. 1238, December 3, 1998.
Pensions and Individual Savings 22
Accounts
23