The Retirement Report, Fall 2020
Vol 3 | No. 4
KempThe Social Security Committee released two issue briefs in the past month. Immigration and Social Security looks at the effects of immigration on the finances of the Social Security program. Assumptions Used to Evaluate Social Security’s Financial Condition, which explores making projections for and evaluations of Social Security’s financial condition, notes that since the 1980s, Social Security Trustees Reports have consistently indicated that, in the absence of corrective legislation, assets currently in the Old-Age and Survivors Insurance and Federal Disability Insurance (OASDI) Trust Funds plus future payroll tax income will not be sufficient to finance all scheduled benefits over the 75-year valuation period.
The Retirement Report did a Q&A with incoming Academy Social Security Committee Chairperson Amy Kemp on some of the key issues being addressed by the committee.
Can you summarize what the 2020 Social Security Trustees Report said about what would happen to benefits and/or payroll taxes if no actions were taken before 2035 when the trust fund’s reserves are projected to be depleted? How has COVID-19 changed this projection? (Some of these issues were addressed in the May issue brief, An Actuarial Perspective on the 2020 Social Security Trustees Report.)
Each year, the Office of the Chief Actuary at the Social Security Administration (OCACT) performs a projection of the finances of the Social Security program as overseen by the Social Security Board of Trustees. The report issued is called the Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (Trustees Report). After the Trustees Report is published, the Academy produces an issue brief summarizing highlights of the Trustees Report. [See the link for the 2020 summary, above.]
The 2020 Trustees Report indicates income to the trust funds is projected to fall short of expenses each year beginning in 2021, requiring that the trust funds be drawn down to continue paying scheduled benefits. Without legislative action, the OASDI trust fund reserve was projected to be depleted in 2035. In 2035, income was projected to be sufficient to pay only 79% of scheduled benefits, declining to 73% in 2094 if no changes were made to the program. Note this information is on a total program basis. The Social Security program is made up of two separate funds, the Federal Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. If reviewed separately, the trust fund reserve of the OASI program was projected to be depleted in 2034 and the trust fund reserve of the DI program was projected to be depleted in 2065.
The 2020 Trustees Report did not reflect the potential effects of the COVID-19 pandemic on the Social Security program. On Nov. 24, the OCACT released an informational memorandum, Updated Baseline for Actuarial Status of the OASI and DI Trust Funds, Reflecting Pandemic and Recession Effects. The information contained in that memorandum indicates that the projected year of trust fund reserve depletion is now projected to be 2034, instead of 2035.
There have been various reform proposals introduced in Congress and proposed elsewhere to address the solvency concerns you just described. The Social Security Committee has been developing a new monograph and issue brief that analyzes three of them applying the principles of individual equity and social adequacy. Can you describe what those principles are and why they are important?
The Social Security program provides benefits to retirees based on the taxes collected, but also provides a safety net for individuals who are lower-income workers, for those who are disabled, or for the surviving families of workers who are deceased. “Individual equity” is the focus on a fair benefit in exchange for the taxes collected in the program for a specific worker. “Social adequacy” is the focus on providing the safety net benefits. The current program is based on balancing these two conflicting policy objectives.
The Social Security Committee’s forthcoming issue brief and monograph will focus on the individual equity and social adequacy of Social Security benefits. The analysis compares the current program to three different reform proposals:
- The Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings, October 2016.
- Former Rep. Sam Johnson (then-chair, House Social Security Subcommittee), December 2016.
- Rep. John Larson (current chair, House Social Security Committee), Sen. Richard Blumenthal, and Sen. Chris Van Hollen, January 2019.
These reform proposals were selected as ideologically representative ideas and the analysis of them is offered to assist the reader in assessing the merits of each proposal. Individual equity is reviewed by comparing the value, at various birth years and benefit commencement ages, of a participant’s (discounted) benefits to the accumulated value of their payroll taxes that have been deposited in the Social Security program. It also reviews the adequacy of retirement benefits, at various birth years and benefit commencement ages, compared to three different poverty level benchmarks. The issue brief provides a summary of the monograph’s analysis which provides more detail for the reader who would like to explore the study in more depth.
The committee also just released an issue brief on immigration and Social Security. The number of workers paying into the program per beneficiary collecting benefits has been declining. What is the potential impact of changes in immigration rates on Social Security’s finances?
The new issue brief on immigration is a discussion of the impact of immigration on the finances of the program.
Life expectancies of both men and women have increased and are projected to increase further. Since the mid-1970s through 2019, the number of workers paying into the Social Security program per beneficiary collecting benefits has declined and is projected to decrease further. The fertility rate has been below 1.90 births for 2011 through 2019, with the projected ultimate fertility rate in the 2020 Trustees Report of 1.95 births per woman. A fertility rate less than 2.1 births per woman will tend to decrease the size of the U.S. population in the future. Immigration policy is a debated topic, but an increase in immigration would have the effect of stabilizing the size of the country’s working population in an environment where birth rates are declining.
Life expectancy has increased significantly since Social Security first started paying regular benefits in 1940. The age at which beneficiaries can collect unreduced benefits was last changed in 1983. How should increasing this age to reflect increasing life expectancies be evaluated?
The committee is studying this topic now and is drafting an issue brief to discuss the impacts of a potential increase in the Social Security normal retirement age. There is a broad array of reform proposals on this topic.
Under the 1983 law change, a scheduled, gradual increase was put in place for the Social Security normal retirement age to raise it from age 65 to age 67. Life expectancy at age 65 has increased approximately six and a half years during the period 1940 to 2019, while the Social Security normal retirement age has increased by two years. Life expectancy increases are expected to continue into the future; as life expectancies increase, total benefits paid from the Social Security program increase. In considering a possible increase in the Social Security normal retirement age, interrelated topics come to the discussion including expected longevity variations based on income, the earliest age retirement benefits can commence, and potential changes to the disability program.
The Academy has sponsored for many years a web-based “game” format to help educate on the impact of potential changes to Social Security. The Social Security Game allows users to select from a possible changes to the program to form a “solution” to reduce the program shortfall. Options include changes to retirement age. Stay tuned for updates to game in the coming year.
The Pension Practice Council hosted a Dec. 15 webinar, “The Impact of COVID-19 on Retirement Plans” that covered the short- and long-ranging impacts of COVID-19 on pension plans and their sponsors.
A Public Plans Committee issue brief, The Impact of the COVID-19 Pandemic on Public Pension Plans, released in conjunction with the webinar, noted that while long-term impacts are more uncertain, in the near term the most significant impacts to public pension plans are likely to be driven by the economic disruption caused by the pandemic.
It also notes that while the pandemic’s impact on public pension plans is still emerging, it has the potential to affect plan contributions, investment returns, and demographic experience, and that state and local governments are exploring measures to balance their budgets, which may directly or indirectly affect pension contribution levels.
The severity of the impact of the pandemic is likely to vary significantly by plan, depending on the economic disruption in the plan’s geographic region and the exposure of the plan’s members to COVID-19, the issue brief states.
Webinar Covers Key Pandemic-Related Pension Issues
Webinar presenters were Eric Keener, chairperson of the Retirement System Assessment and Policy (RSAP) Committee; Todd Tauzer, chairperson of the Public Plans Committee; and Christian Benjaminson, chairperson of the Multiemployer Plans Committee. Senior Pension Fellow Linda K. Stone moderated.
Stone began by acknowledging the financial hardship and loss of life brought by the pandemic before focusing on its impact on retirement plans. Her overview of current capital market environment, future market expectations, and demographic impacts on all plan types set the stage for the presenters on the specifics of single-employer, multiemployer, and public plans.
Keener remarked on single-employer plan concerns around how the dramatic volatility and asset drops at the end of the first quarter have been countered by a steady movement upward, resulting in a year-to-date increase in aggregate funded status of defined benefit (DB) plans sponsored by firms listed on the S&P 500. Given this year’s unusual circumstances, plan sponsors will need to consider how best to prepare 2020 year-end disclosures and 2021 expenses. Keener also referenced legislative action taken in response to the pandemic and utilization of relevant provisions by single-employer plan sponsors and explored some miscellaneous strategy implications they may be considering moving beyond 2020.
Benjaminson followed with a look at multiemployer plans. “Some of our [multiemployer plans] have seen a spike in retirements,” with increased retirement generally representing a loss, especially if retirees are not replaced by new participants, he said. The pandemic’s impact has also differed by industry, as hours of service and unemployment, employer withdrawals, and bankruptcies can significantly affect plan funding, which could cause some plans to shift Pension Protection Act (PPA) zone funded status and make them subject to further plan certification rules. For multiemployer plans in particularly hard-hit industries, the uncertainty of some employers’ survival through the downturn is daunting, he added.
Tauzer presented on the ramifications of the pandemic for the thousands of public plans across states and localities, noting their extreme variety in financial health, cost, and stability. “Most public plans have a June 30 fiscal-year-end date,” he said, and although return on assets will be lower than expected, factoring in multiyear smoothing will lead to results shown as far from dire in the short term. Longer-term impacts, however, remain to be seen, as risk modeling and scenario testing have received increased interest from plans, according to general observation. Public plan exposure can also be affected by job-related deaths and disabilities of front-line workers. There are extremes in COVID-19-related mortality, “depending on the type of plan and the surrounding circumstances,” including occupation and region.”
Stone also cited the Social Security Administration’s recent update since the 2020 Trustees Report with its projected date for trust fund depletion moved up one year to 2034 and changes to other key assumptions, before opening the floor to Q&A, in which proactive changes being considered by plan sponsors across the three sectors were further discussed, including in the context of low-interest-rate environment.
Archived slides and audio are available free to logged-in Academy members.
The Pension Committee published an issue brief considering the near-term and long-term effects of COVID-19 on pension plans, including mortality and other assumptions.
Key points include:
- There is much uncertainty about the impacts of COVID-19 on both near-term and assumed long-term future mortality;
- The effects of the pandemic on the economy, on workforce patterns, and on plan sponsors’ budgets are likely to be far more financially significant to most pension plans, at least in the near term, than the effect on mortality. There is expected to be wide variance among the plans themselves, regardless of whether they are private sector, multiemployer, or public plans; and
- As plan experience and medical research unfold, actuaries will be able to incorporate this information as they consider both short- and long-term effects on actual plan experience and future economic and demographic assumptions.
Pension sessions at the Academy’s Annual Meeting and Public Policy Forum—held in November in a virtual format—covered an array of timely topics.
PBGC—A Tale of Two Funds
The PBGC multiemployer and single-employer funds came into 2020 in vastly different positions, and the short- and longer-term economic effects of the coronavirus pandemic have created uncertainties for the future of both funds. This session gave an update on the forecasted solvency of both funds, the potential participant impact of the funds’ circumstances, and potential legislative efforts that could affect the PBGC.
Presenters were Ted Goldman, the PBGC’s director, policy research and analysis; and Andy Banducci, the PBGC’s chief policy officer. Jason Russell, vice chairperson of the Academy Pension Practice Council, moderated.
Goldman provided highlights and projections of single and multiemployer plans from the 2019 PBGC Projections Report. He reported three main takeaways—that the expected year of insolvency year of the multiemployer program is 2026; that multiemployer plans are projected to decline in value over the next 10 years; and that single-employer plans are projected to increase in value over the next 10 years.
Banducci discussed the outlook on Capitol Hill for legislation to address the PBGC. He said that this year, the PBGC used the disaster relief authority in the CARES (Coronavirus Aid, Relief, and Economic Security Act) to allow plan sponsors “breathing room” in regard to filing requirements.
Goldman shared the breakdowns and trends available in the annual Pension Insurance Data Book; the details on single-employer risk transfer activity in the Partial Pension Risk Transfer Report; and the detailed breakdowns in the Multiemployer Pension Plan Benefit Provisions Report that illustrate variations across industries.
Social Security—Reinforcing the Foundation of U.S. Retirement in a Time of Uncertainty
Clockwise from top left: Gebhardtsbauer, Glenn, Klouda, and Shuart at the Social Security breakout session
This session looked at proposed changes to Social Security and discussed projections of the program’s solvency, the impact that select proposals could have on solvency, and other potential paths forward.
Presenters were Amy Shuart, Republican staff director, U.S. House Committee on Ways & Means’ Subcommittee on Social Security; Tom Klouda, senior domestic policy advisor, U.S. Senate Finance Committee; and Karen Glenn, deputy chief actuary, Social Security Administration. Ron Gebhardtsbauer, chairperson, Academy Social Security Committee, moderated.
Glenn gave an overview on the outlook for Social Security including its solvency. She stated that conclusions in the 2020 Trustees Report showed that the disability insurance reserves are expected to be depleted by 2065, the Old-Age & Survivors Insurance Trust Fund reserves are expected to be depleted by 2034, and the combined OASDI Trust Fund reserves are expected to be depleted by 2035. She provided a disclaimer that these projections do not take into account the changes in the workforce caused by the COVID-19 pandemic.
Klouda and Shuart talked about congressional legislation that has been proposed to address insolvency and other issues. Gebhardtsbauer addressed the issue of immigration and Social Security. Higher levels of immigration would mean more workers paying into the system, with immigrants tending to have higher fertility rates. He cited data to show that an immigration rate four times higher than it is currently would decrease the projected payroll deficit.
Retirement in the 21st Century—Individual Responsibility in the Age of the 401(k)
This session looked at the how the U.S. retirement landscape has changed dramatically over the past three decades.
Presenters were Kara Getz, chief counsel, U.S. House Ways & Means Committee; Chantel Sheaks, executive director, retirement policy, U.S. Chamber of Commerce; Michael Sinacore, economic policy advisor for Sen. Rob Portman; and Richard Jones, an Academy member and senior partner, national retirement practices, Aon. Academy Pension Vice President Tim Geddes moderated.
Presenters looked at the SECURE (Setting Every Community Up for Retirement Enhancement) Act and follow-up legislation and the regulatory process that aims to improve the retirement system for both industry and beneficiaries.
Jones gave background on the SECURE Act provisions he is most focused on—the pooling of 401(k) plans, or pooled employer plans (PEPs). PEPs remove two historical issues with retirement plans, the common nexus requirement and the “one bad apple” rule. He said he looks forward to the passage of the SECURE Act 2.0 as it contains a provision allowing 403(b) plans to be pooled into PEPs as well.
Sheaks agreed that both the Act and the 2.0 bill from her perspective are steps in the right direction but said that much of her time and attention has been focused on the SECURE Act as its provisions have begun to move through the regulatory process. She said that while the Internal Revenue Service (IRS) did provide some guidance on the SECURE Act, more is needed, including the need to identify the administrative duties and other actions required by a pooled plan provider, and to identify what happens when an employer doesn’t take actions to meet the new qualification requirements.
The Lifetime Income Risk Joint Committee submitted comments to the U.S. Department of Labor (DOL) on an interim final regulation with request for comments regarding pension benefit statements and lifetime income illustrations.
The letter to DOL’s Employee Benefits Security Administration (EBSA) addressed consideration of growth in account balance, retirement age, annuity conversion rates, inflation adjustment, spouse age, updating the EBSA lifetime income calculator, and additional disclosure information.
The Pension Committee released for comment an exposure draft of a practice note, Modeling—for Pension Actuaries, that provides background and ideas about how pension actuaries may be approaching ASOP No. 56, Modeling. ASOP No. 56 was adopted by the Actuarial Standards Board in December 2019 and is effective for work performed on or after Oct. 1, 2020.
The exposure draft provides perspectives on responsibilities of pension actuaries as they relate to this general standard when performing actuarial services with respect to designing, developing, selecting, modifying, using, reviewing, or evaluating models. Comments should be sent to firstname.lastname@example.org by Jan. 31, 2021.
Webinar Covers New Exposure Draft
The Pension Committee hosted a Nov. 17 webinar, “Practice Note on ASOP No. 56, Modeling: A Discussion of the Exposure Draft,” which offered an overview of the recently released exposure draft.
The presenters—Pension Committee members Margaret Berger and Grace Lattyak, with Chairperson Bruce Cadenhead moderating—discussed their views of the implications for pension actuaries, outlined by the draft practice note, of the new cross-practice ASOP.
A robust discussion of the exposure draft’s case study section featuring all three presenters capped off the session, and they invited questions, which presenters said would help inform the committee as it works toward publishing a final practice note. Slides and audio are available free to logged-in Academy members.
A Dec. 10 pension webinar, “Setting Investment Return Expectations in an Evolving Capital Market Environment,” offered a variety of viewpoints from presenters who discussed methodologies for developing and assessing investment return expectations. Academy volunteer Evan Inglis moderated, and presented the first segment on asset pricing and the impact of pricing on returns and return forecasting.
Investment professionals Shaum Shrinivas and Phil Kivarkis built on that foundation, walking through processes for developing capital market assumptions. Academy volunteer Jerry Mingione summarized a composite of forecasts from a variety of models. The Q&A that followed included discussions about the effects of Federal Reserve policies and rapid technological advancement. Archived slides and audio are available free to Academy members.
The Pension Committee published an issue brief, PBGC Single-Employer Premiums and Their Impact on Plan Sponsorship, detailing PBGC single-employer premiums and considering their impact on pension plan sponsorship.
Key points include:
- One of the PBGC’s missions is to encourage the continuation and maintenance of voluntary private-sector pension plans for the benefit of their participants.
- PBGC premiums have increased substantially over the past decade, especially for those plans subject to variable premiums, causing some employers to fully or partially exit the system by terminating their plan, purchasing annuities for some of their participants, or offering lump sum programs.
- Consideration should be given to changes to both the PBGC single-employer premium structure and to how PBGC premiums are set.
The Retirement System Assessment and Policy Committee released a new assessment as part of the “Retirement for the AGES” initiative. The Australian Superannuation Guarantee Program received an overall grade of B. The initiative is intended to focus attention on retirement-income systems, which needs to be strengthened to improve financial security.