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Retirement Systems Final Advisory Panel Meeting

Retirement Systems Final Advisory Panel Meeting. Wednesday, April 21, 1999. TIMELINE. 3:00-3:30PM Reception 3:30-4:15PM Presentation 4:15-5:15PM Discussion. WELCOME AND INTRODUCTION. Overview “Three-legged Stool” Breakdown of Social Security Matrix Criteria Explanation Alternatives

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Retirement Systems Final Advisory Panel Meeting

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  1. Retirement Systems Final Advisory Panel Meeting Wednesday, April 21, 1999

  2. TIMELINE • 3:00-3:30PM Reception • 3:30-4:15PM Presentation • 4:15-5:15PM Discussion Timeline

  3. WELCOME AND INTRODUCTION • Overview • “Three-legged Stool” • Breakdown of Social Security • Matrix Criteria Explanation • Alternatives • Description and Matrix Evaluation • Conclusion • Recommendations • Mailing of final report and press release • Friday, May 7, 1999 Welcome and Introduction

  4. “Three-Legged Stool” • Structure • Social Security • Pensions • Private Savings • Direct Effects • Increase Tax Rate (Social Security) • Indirect Effects • Increase Awareness of Pensions and Private Savings Overview

  5. Flowchart of Social Security Overview

  6. Status Quo Actuarial Assumptions Inaccurate Proven Alternative Projection Methods Leave System Alone Better Off Worse Off Accurate Enact Policies Leave System Alone Privatization LFP Earnings Test Raise Age MTL Employer Incentives Overview

  7. Matrix Criteria • Political Feasibility • Current Political Climate • Politicians • Constituents • Administrative Feasibility • Important but Easy Threshold • Robustness/Durability • How long will proposed change sustain system? Overview

  8. Matrix Criteria • Effect on Projected Solvency • According to current Actuarial Assumptions • Effect on long range projections • Social (Behavioral) & Economic Impact • Societal View • Effect on Labor Force Participation (55+) • Does it fit into an overall plan? • Impact on Retirement Incentive • Does it fit into an overall plan Overview

  9. POLICY AREAS • #1 Status Quo • #2 Maximum Taxable Limit • #3 Earnings Test and Labor Force Participation • #4 Company Incentives for Retaining Older Workers Policy Areas

  10. Administrative & Political Feasibility • Maintain current low administrative costs. • System has basically stayed the way it was designed. • Most successful social program. • Politicians and the community have supported the current method of making projections for the last 25 years. #1 - Status Quo

  11. Social and Economic Impacts • 2036 Beneficiaries would only receive 3/4 of their currently expected benefits. • About 50% of the elderly would be living in poverty. Most Americans would not have another source of income for their retirement. • Maintains current built-in retirement incentives • No major effect on labor force participation for workers over age 55. Source: Social Security Solvency: http://www.ssa.gov/press-office/natldisc.html. #1 - Status Quo

  12. Effect on Trust Fund • WAIT and SEE...According to the Social Security administration and its advisors, in: • 2014- First year OASDI outgo exceeds tax income • 2015 - Year HI trust fund assets are exhausted • 2020 - Year DI trust fund assets are exhausted • 2022 - First year OASDI outgo exceeds tax plus interest income • 2034 - Year combined OASDI trust funds’ assets are exhausted • 2036 - Year OASI trust fund assets are exhausted Source: Social Security Solvency: www.ssa.gov/OACT/TRSUM/trsummary.htm #1 - Status Quo

  13. Analysis of Actuarial Projections • Analysis points to understandable inaccuracies • Magnitude • Short v. Long-term • Caution - Major policy changes based on current assumptions are not prudent • Minor errors result in discrepancies of billions of dollars #1 - Status Quo

  14. Alternative Methods of Projections • Transparency • Readily available to interested parties • Accountability - Winners & Losers • Opportunities to repeat the projection process #1 - Status Quo

  15. #2 - 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 increase contributions over $90B yearly. *Source: High Income Tax Returns for 1993, published by the IRS, 1997 #2 - Eliminate the Maximum Taxable Limit

  16. Feasibility and Political Considerations • Politics as usual? The 1993 OBR Act removed the MTL for Medicare. Will it work again? • The OASDI tax rate has been raised six times since 1980. • It may work for individuals, but what about the self-employed? What about corporations? #2 - Eliminate the Maximum Taxable Limit

  17. #3 Eliminate the Earnings Test #3 - Earnings Test and LFP • Our economy is changing from a traditional industrial economy to a service economy. • This transition is creating a labor shortage. • Social Security is threatened by the burden of supporting retired workers #3 - Earnings Test and Labor Force Participation

  18. Relationship of LFP and the Earnings Test • Simulations predict a substantial boost to labor supply from eliminating the earnings test, and at a minimal fiscal cost. • Elderly bunch in substantial numbers at and just below the earnings exempt amount and the bunching responds to changes in the rules. Friedberg, Leora. The Labor Supply Effect of the Social Security Earnings Test. UCSD, 1997 #3 - Earnings Test and Labor Force Participation

  19. Political and Administrative Feasibility • President Clinton has included the removal of the earnings test in his plan for Social Security • In 1996, 75% of Republicans and 45% of Democrats voted to raise the Earnings Test gradually • Administrative costs would be reduced #3 - Earnings Test and Labor Force Participation

  20. Eliminate the Earnings Test • Increasing labor force participation will ease the labor shortage. • Increasing labor force participation will increase income to OASDI, thus improving the balance in the long run. #3 - Earnings Test and Labor Force Participation

  21. #4 - Company and Employee Incentives • Who decides when to retire? • Unemployment ---> labor shortage • How does it work? • Who will support it? • Will the system benefit from incentives? #4 - Company and Employee Incentives

  22. RECOMMENDATIONS • Reevaluate actuarial assumptions • Recommended Policy Changes • Given: Eliminating Earnings Test • Eliminate Maximum Taxable Limit • Offer Company and Employee Incentives Recommendations

  23. Questions and Discussion

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