PENSIONS AND SOCIAL SECURITY IN AMERICA Past, Present and Future

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1 PENSIONS AND SOCIAL SECURITY IN AMERICA Past, Present and Future CLS Course SS5 Fall 2015 BERNARD HANDEL, JD, CPA, CEBS, DHL

2 BERNARD HANDEL JD, CEBS, DHL Bernard Handel, retired CPA and Attorney, served as President and CEO of the Handel Group, an actuarial and consulting firm, for over 40 years, He served on many professional committees and boards, wrote four published books and hundreds of articles and lectured nationally on employee benefit issues. His government service included the presidency of the Hudson Valley Health Systems Agency, fourteen years tenure on the NY State Hospital Review and Planning Council, and chair of the Dutchess County Empire Zone Human Resources Committee. His community participation includes chair and life trustee of Vassar Brothers Hospital Medical Center, chair of the Dutchess Community College Foundation, past Rotary Club president, a founding director of the World Affairs Council, and service as board member and officer of many nonprofit organizations. With his wife Shirley, he is a trustee and director of the Handel Foundation which has established endowed professor chairs at several colleges and distributed substantial sums annually to charitable organizations. His biography has been included in Who s Who In America for over 40 years.

3 AMERICAN RETIREMENT PLANS Past Workers the Greatest generation - the golden years of retirement -- NOW Present Workers -- Baby Boomers -- hopeful but shaky prospects Younger Workers -- Milleniums and Gen. X -- A dubious retirement future -- Imperiled

4 PENSION PLANS DEFINITION AND DESCRIPTION Nomenclature -- Retirement or Pension Plan, Superannuation Plan in some countries Provide regular fixed sums following retirement from service A contractual irrevocable right Benefits predetermined in accordance with a formula or plan Fiduciary obligation of payers - a trusteed plan

5 TYPES OF RETIREMENT PLANS Government Sponsored and administered -- Social Security Employer sponsored and administered: Defined Benefit Plans Defined Contribution Plans Annuity Plans Multi-Employer and Jointly Managed Plans

6 TYPES OF RETIREMENT PLANS (continued) Individual tax favored plans: Individual Retirement Plans -- IRA Keogh for self-employed Roth plans Simplified employer plans Beneficiaries: Retired workers Dependents and Survivors Disabled Persons

7 HOW DID PENSION PLANS START? A brief overview of history and evolution In the beginning in US and elsewhere Little concern for retirees Rugged Individualism and Self-Reliance Concept Agrarian Major Economy and Family Ownership of Business Short Life Expectancy

8 BEGINNINGS OF RETIREMENT PLANNING Reports of European embryo plans That old culprit -- Otto von Bismarck in Germany 1870 Basic German plan -- NRA the magic age for retirement Life expectancy -- early 40 s in 1870 Mortality data difficult Financed by employee and employer contributions Instituted for government employees and military Some Other European countries started similar small benefit plans Some Government operated, others through insurance companies

9 EARLY PLANS IN THE U.S American Express Co. - first private plan for employees 1875 to some major larger employee companies implemented moderate benefit plans US Revenue Act declared income of profit-sharing or stock bonus trusts to be free of income tax Revenue Act declared all income of Pension Plan trusts to be tax exempt Employer contributions to benefit plans were deductible for income tax purposes, employees taxed on benefits in excess of their contributions 1875 to 1929, 421 plans established, 397 in effect in 1929, including some of largest: Standard Oil of N.J., US Steel, General Electric, AT&T, Goodyear Tire, Bethlehem Steel, American Can, Eastman Kodak

10 A NEW ERA IN RETIREMENT PLAN DEVELOPMENT FDR and New Deal Congressmen advocated a national Social Security Plan Including retirement pensions, unemployment insurance and health care Key role of Frances Perkins, Secretary of Labor Social Security passed but health insurance deferred Coverage excluded agrarian and domestic workers, employees of small companies, municipal and pubic employers allowed to opt out, and other exemptions

11 SOCIAL SECURITY FINANCING The law required equal taxation of wages by employers and employees, up to first $3,000 of wages a year ( equivalent to $ 50,300 in 2015 dollars) The annual wage limit has been raised regularly and is now $ 118,500 A special Trust Fund was established for Social Security taxes collected, to be solely invested in U.S. government obligations, a government office created to administer Social Security receipts were not to be included in general U.S. budget as receipts and pension benefits and expenses were to be paid from trust fund and not treated as budgetary disbursements. (Reversed in receipts and expenditures of Social Security became online items in annual US budgets)

12 Statement of the President upon signing Social Security Bill 8/14/1935

13 Statement of the President upon signing Social Security Bill 8/14/1935

14 Statement of the President upon signing Social Security Bill 8/14/1935

15 SOCIAL SECURITY FINANCING (continued) Social Security Benefits were to be actuarially determined based on net receipts in insurance manner. Original benefits limited to small pensions based on contributions for each employee. Already retired workers in 1937 not included in plan. Benefits commenced at NRA 65. Life Expectancy in 1937: Men 58, Women 62 In 2014, U.S. life expectancy about 80 Subsequently, benefits added for widows, survivors and dependents Disability Pensions added later with separate trust for disabled workers (trust now facing early shortfall).

16 Social Security An Insured Contractual Right" Social Security not intended as a Welfare benefit or Entitlement. No Federal Funds to be expended for payments to beneficiaries. Conceived as "Earned Benefits" financed solely by employee and employer tax payments and contributions. Employee contributions after taxes paid thereon.

17 SOCIAL SECURITY TODAY Over past 75 years, benefits have been increased substantially as the result of Congressional action and institution of COLA annual adjustments. Largest increase occurred during Nixon administration. Withholding Taxes on salaries increased to current level of 7.65%of salary with equivalent amount paid by employers (including Medicare tax of 1.45% on each) up to first $118,500 annually. A part of social security benefits may be taxable to recipients based upon overall income. The maximum monthly benefit in 2015 is $ 2,663.

18 Currently 59 Million Americans Collect Social Security benefits December 2013 summary: Category # People Annual Payments Average Monthly Payment Retired Workers 38 Million $49 Billion $1,294 Dependents 2.9 Million $1.9 Billion Disabled Workers 8.8 Million $10.3 Billion $1,146 Dependents 2 Million $0.69 Billion Survivors 6.2 Million $6.7 Billion $1,244

19 SOCIAL SECURITY TODAY Retired workers and dependents get 74% of total benefits Disabled workers and dependents get 16% Survivors get 10% Half of beneficiaries have total annual incomes under $ 20,000 including SS 25% depend on SS for 90% of their income.

20 FINANCING OF SOCIAL SECURITY 165 Million workers Payroll taxes -- 84% Taxation of benefits -- 3% Interest income on Trust assets -- 13%

21 PROBLEMS FACING LONG-TERM FINANCING OF SOCIAL SECURITY Enhanced life expectancy of retirees - Medicare effect (from 14 years past 65 in in 1940 to 20 years now) Decreasing ratio of workers to retirees to 1 ; to 1 If no additional financing, current retirement age for full benefits would remain same for 19 years; if benefits reduced for future retirees to 77% of present level, 75 years. Disability benefits need increase in funding to continue after a few years from now Possible solutions: Increased payroll taxes on workers and employers Requiring all workers to be under social security - increase ratio Raise, accelerate or eliminate salary limit (will rise annually to $165,000 in 2022) Require employers to provide long-term disability plans

22 Objections to Financing Solutions Workers already paid taxes on wages during working years Workers paid income taxes on wages subject to SS tax (double taxation?) Retired workers face increasing income tax on SS benefits Employers object to increased payroll taxes

23 SOCIAL SECURITY AS INTEGRAL PART OF THREE FOOTED STOOL OF U.S. RETIREMENT 1. Leg - Social Security 2. Leg - Private Employer Pension Plan Benefit 3. Leg - Home ownership, assets and good health (Medicare impact)

24 CHANGES OVER YEARS BY CONGRESSIONAL ACTION AND COURT DECISIONS Pension Trusts made irrevocable Million workers under private pension plans Private plans could integrate benefits with SS Taft-Hartley Law establishes reporting requirements, joint management by labor and employers of multiemployer trusts, basic fiduciary standards NLRB rules that pensions are subjects for collective bargaining and strikes General Motors establishes Pension Plan Million workers covered by PP; 41% of all workers Self Employed and Individual IRA and Keogh plans created

25 CHANGES OVER YEARS BY CONGRESSIONAL ACTION AND COURT DECISIONS The Employee Income Security Act (ERISA) passed by Congress Established strict fiduciary standards and criminal and civil penalties Established Pension Benefit Guaranty Corporation and requires annual premiums to be paid for pension guaranty Established minimum vesting, benefit accrual and survivor rules ERISA to preempt State and Federal laws affecting benefits Multi-employer PP Amendments Act established Withdrawal Liability of withdrawing employers from Trusts, enhanced PBGC premiums and authorities In 1980, 36 Million workers covered by PP, 46%

26 CHANGES OVER YEARS BY CONGRESSIONAL ACTION AND COURT DECISIONS Congress expanded types of plans, provided simplified plans Congress expanded rules on discrimination in PP s, improved minimum vesting rules Million covered, 43% Multi-Employer Plan Act allowed PBGC to reduce benefits of Multi-Employer plans in trouble as well as those taken over by PBGC 20!5 - PBGC premiums on DB plans set as: $57 per employee plus 2.4% of unfunded liability for private plans $26 per employee for multi-employer plans

27 STATE, GOVERNMENT, MUNICIPAL, SCHOOL DISTRICTS AND PUBLIC AUTHORITIES Most operate own Pension Plans Tendency for large benefits Many do not offer SS benefits Some Plans Integrated with SS Many Plans under-funded, reluctance to raise taxes to meet actuarial needs, a real crisis in many states and cities Some units go bankrupt, seek remedies in Bankruptcy Court or by bargaining Some cities suing advisors and consultants for ignoring shortfalls Suits against investment consultants Claims that actuaries use incorrect assumptions as to increases in payroll, turnover, mortality, investment result projections, interest factor, life expectancy after retirement

28 STATE, GOVERNMENT, MUNICIPAL, SCHOOL DISTRICTS AND PUBLIC AUTHORITIES Many plans did not finance 13th check in good years, loss in assets due to transfer of contributions to fund higher cost health plan, fallacy in borrowing from PP to meet current contributions Public Employee PP tend to be underfunded. Many are in default. Bankrupt and broke cities attempt reduction in vested benefits - Stockton, CA, Detroit, Chicago Some States guarantee vested pension benefits in Constitutions or by court decision: Arizona, California, New York, Oregon Some states - no guarantee - Colorado, Minnesota, New Mexico, So. Dakota, Illinois

29 U.S. PRESIDENT, MEMBERS OF CONGRESS AND FEDERAL EMPLOYEES President has special pension - salary $400,000, pension $ 191,000 Congressmen are under FERS (Federal Employees Retirement System) and/or CRS (Retired Benefit For Members of Congress) - possible dual eligibility Federal employees are all under FERS - generous benefits

30 MILITARY PENSIONS Very generous benefits Officer benefits based on grade Can start immediately after as low as 20 years of service Increase as pay for active officers increase

31 TRENDS IN PRIVATE EMPLOYER PLANS Change in Corporate Culture - Management and Ownership changes High turnover - outsourcing, loss of jobs, subcontracting Employees no longer foresee lifetime employment with one company Employers less paternalistic Decline in manufacturing jobs with large employers More part time workers not eligible for benefits

32 TRENDS IN PRIVATE EMPLOYER PLANS Employers opt to substitute defined contribution plans and variations in lieu of DB for financial reasons: Fixed determined cost, eliminate unfunded liabilities Under DC plans, Employee can choose investment form Companies can outsource all administrative operations with fixed costs Eliminate PBGC premiums Employees do not stay with company - DC plan facilitates portability Under DC plans, employees can choose among possible investment choices and improve their individual plans Employers no longer have to be concerned with investment results and other factors affecting their costs

33 TRENDS IN PRIVATE EMPLOYER PLANS Multi-employer Funds Union membership down Many employers bankrupt or leaving union affiliation Economic decline in many trades, inability to finance excessive benefits, withdrawal liability leads to employer bankruptcy or court settlement TOTAL U.S. WORKERS 123 MILLION FULL TIME, 27 MILLION PART TIME About 650,000 Private Employer Pension Plans, only about 40,000 DB Plans, Total decreased sharply in recent years

34 TRENDS IN PRIVATE EMPLOYER PLANS The three stool foundation of American retirement planning is in difficulty for present and future workers. They cannot rely on social security or an employer plan. They may not accumulate the personal assets and home ownership of their parents in many instances. In next seven weeks, outstanding speakers will discuss these problems and possible solutions.

35 # Pension Plans by Type Year Total # DB Plans Total Plans Single Employer Plans Multi-Employer Plans # DC Plans Total # DB Plans # DC Plans Total # DB Plans , , , , , ,437 2,443 2, , , , , , ,378 2,759 2, , , , , , ,158 3,066 2, , , , , , ,153 2,904 1,812 1, ,404 69, , ,265 67, ,584 3,139 1,810 1, ,651 48, , , ,639 2,997 1,758 1, ,095 47, , ,181 46, ,061 2,945 1,524 1, ,012 46, , ,188 45, ,114 2,826 1,471 1, ,622 43, , ,883 42, ,701 2,738 1,419 1,319 # DC Plans

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37 Thank you Questions?