US Retirement Systems Project 21 October 1998 Ben Fischer, Faculty Advisor

US Retirement Systems Project

21 October 1998

Ben Fischer, Faculty Advisor

Introduction

• 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– Carnegie Mellon University,

Biology– Group Project Manager

• Rebecca Bosch– University of Michigan,

Psychology

• Glenn Dubin– University of Miami,

Broadcasting/ Political Science

• Yuan Gao– Shanghai University, Accounting

• Melissa Gongaware– Carnegie Mellon University,

Psychology

• Serge King – Howard University, Political

Science

• Zhenqqing Li– Nankai University, Business

Administration/Economics

• Matthew Maletestinic– Carnegie Mellon University,

Industrial Management

• María De León– University of Wisconsin-

Madison, Literature

Panel Members

• Please introduce your:

Name and Organization

• U.S. Retirement System• Data Gathering• Actuarial Reports

– Assumptions

• Pensions• Policy Proposals

Project Description

Economic Assumptions of the OASDI

• 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

1985 Predictions & Actual

6.6

9.8

6

9.910.8 10.8 10.8

0

2

4

6

8

10

12

1979* 1982 1983* 1984* 1985* 1986* 1987*

Report Year

Interest R

ate


6.66.0

5.66.1

7.56.8

7.2

9.0 8.6

0

1

23

4

5

6

78

9

10

1979* 1982 1983* 1984* 1985* 1986* 1987* 1989* 1992*

Report Year

Interest R

ate


6.65.6 5.6 5.6 5.5 5.6 5.5 5.8 6.3 5.9

7.76.9

0

2

4

6

8

10

Report Year

Interest R

ate

1985Mean 9.0Sample Variance 4.5Confidence Level(95.0%) 2.2

1990

Mean 6.9Sample Variance 1.2Confidence Level(95.0%) 0.9

1995Mean 6.0Sample Variance 0.5Confidence Level(95.0%) 0.5

Interest Rate Assumptions


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


GDP Assumption

Projected & Actual 1995 GDP

2.92.52.62.62.7

3.23.13.3

3

2.4

2.9

2

0

0.5

1

1.5

2

2.5

3

3.5

1979 1980 1982 1983 1984 1985 1986 1987 1989 1992 1993 1995

Report Year

Rea

l G

DP


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


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


Average Annual Unemployment Rate

• Unemployment rate

• Unemployed Persons

• Retired Employees

• The unemployment rate represents the proportion of the civilian labor force that is unemployed.

• 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

• At work part time for non-economic reasons due to retirement or Social Security limits on earnings


Actual vs. Predicted Unemployment Rates for 1997

5.0 5.0 5.0 5.0 5.0

5.5 5.5 5.5 5.55.2

6.25.9

4.9

4.0

4.5

5.0

5.5

6.0

6.5

7.0

1978

1979

1980

*

1982

*

1983

*

1984

*

1985

*

1986

*

1987

*

1989

*

1992

*

1993

1998

Year

Perc

ent

Average Annual Unemployment Rate


The percentage of people working is rising slightly higher in 1998 than in 1992 or 1993

0.9

1.7

1.0

00.2

0.40.60.8

11.21.4

1.61.8

1992* 1993 1998

Year

Perc

enta

ge

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

Average Annual Percentage Increase in

LFP


45.1

43.6

42.5

43

43.5

44

44.5

45

45.5

Actual Projected

Perc

enta

ge

In 1993, the Labor Force Participation Rate was off by 1.5% (ages 60-64)


45.1

7

43.6

7

0

10

20

30

40

50

60-64 70+

Age Groups

Perc

enta

ge

Projected

Actual

In 1985, Labor Force Participation was off

by 1.5% (ages 60-64)


0500

10001500200025003000350040004500

60-64 65-69 70+

Age Group

Thousa

nds

ActualProjected

In 1995, the actual labor force participation

was much higher than anticipated.


Pensions: Private and Public

• 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)• ERISA governs the creation and maintenance of employer-provided pensions

• A qualified ERISA plan is entitled to preferential tax treatment

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.

• Shortcomings- Not available to everyone- Many Americans overestimate how much their pension plans will provide

• 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

Public Pension Funds

• Federal Regulations

• State Regulations

Source: Paisley, Kathleen. “PUBLIC PENSION FUNDS”, 4 Yale Law & Policy Review 188.

• Conflicts of interest arise in:- 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

• Public pension fund trustees must:- Act with strict fiduciary loyalty to participants and beneficiaries- Administer the funds prudently

- Tax sanctions are not an effective means of regulation- Federal tax regulations harm the plan participant rather than the sponsor

•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.

Private v. Public Pensions

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

• 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?

Documents

US Retirement Systems Project 21 October 1998 Ben Fischer, Faculty Advisor