History July 1, 1968 – Establishment of Trust Territory Social Security Administration July 1, 1974 – Establishment of disability program February 8, 1983 – Establishment of FSM Social Security Administration

System Objective Purpose – to effect economy and efficiency in the fields of government and business by providing a means whereby employees may be ensured a measure of security in their old age and given an opportunity for leisure without hardship and complete loss of income, and, further to provide survivors insurance for wage earners and their dependents. Benefits were not meant to replace salaries.

FSMSSA… A Defined Benefit Plan As a defined benefit plan, the FSM Social Security System’s design, as mandated by law, is to have the current working force pay for the current benefits. Controls are put into place by law that determine who is eligible for benefits, how much they are eligible for and conditions and requirements for continued eligibility.

Types of Benefits Retirement Surviving spouse Dependant children Disability Lump sum

Eligibility Definitions Fully insured Retirement & Survivors – 50 quarters of coverage and $2,500 in contributions Disability – 45 quarters of coverage and $1,500 in contributions Currently insured – to have earned at least 20 quarters of coverage within the 25-quarter period immediately preceding death or disability.

Eligibility Criteria Requirements for each benefit type: Retirement Fully insured Reach retirement age Disability Fully insured & currently insured Disabled and has been disabled for 3 full months Disability means the inability to engage in any gainful employment by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last no less than 12 months Surviving spouse Married to an individual who died fully insured Not remarried Not working Surviving children Fully or currently insured Lump sum (regular and optional) When eligibility for regular monthly benefits is not attained

Benefit Formula The Retirement, Survivors and Disability Benefits are being calculated on an annual basis of 16.5% of the first $10,000 of cumulative covered earnings, plus 3% of cumulative covered earnings in excess of $10,000 but not in excess of the next $30,000, plus 2% of cumulative covered earnings in excess of $40,000 but not in excess of the next $262,500, plus 1% of cumulative covered earnings in excess of $302,500: Total Taxable Wages: $360,000.00 10,000.00 X 16.5% 1,650.00 30,000.00 3% 900.00 262,500.00 2% 5,250.00 57,500.00 1% 575.00 8,375.00 divided by 12 = $697.92

Miscellaneous Statistics Wage Earner Counts (CY 2015) Employers 796 Employees 17,103 FSM Total Population – 102,843

Miscellaneous Statistics Total Number of Beneficiaries - 6,402

Financial Statements Unaudited Audited 2015 2014 2013 Revenue   Unaudited Audited 2015 2014 2013 Revenue 17,632,365 17,714,633 17,321,187 Appropriation from FSMNG 2,000,000 1,000,000 Total Revenue 19,632,365 18,714,633 18,321,187 Benefits 19,240,092 18,985,730 18,431,757 Administrative Expenses 1,202,751 1,121,569 1,153,150

Valuation Results 2009 2011 2014 Actuarial Accrued Liability (AAL) Active Workers $130,729,000 $138,786,00 $128,270,000 Deferred Vested 32,542,000 38,601,000 50,135,000 In Pay Status 105,920,000 110,384,000 129,208,000 Total Accrued Liability $269,191,000 $287,771,000 307,613,000 Assets (36,717,000) (42,361,000) (49,134,000) Unfunded AAL (UAAL) $232,474,000 $245,410,000 $258,479,000 Funded Percent 14% 15% 16%

Total Deficiency 2009 2011 2014 Total Accrued Liability $269,191,000 $287,771,000 $307,613,000 Market Value of Assets (36,717,000) (42,361,000) (49,134,000) Current Value of Excess Employee Contributions from Active Workers (63,250,000) (58,083,000) (68,422,000) Total Deficiency* $169,224,000 $187,327,000 $190,057,000 *The current value of excess employees contributions from active workers includes an allowance for future system expenses.

Projected Funded Status

Projected Funded Status

Investments 8% targeted annual returns Asset Type Allocation Large Value Equity 12.5% Large Core Equity 5% Large Growth Equity SMID Core Equity 10% Non-US Equity 15% Core Fixed Income 20% Intermediate Fixed Income Master Limited Partnerships U.S. REIT 8% targeted annual returns

Making Changes, 2000 to Now 2000 Increased tax rate to 6% 2003 Introduced retroactive limits to benefits, 12 months for retirement and survivors and 24 months for disability 2005 Increased taxable wage base from $3,000 to $5,000 2006 Paid foreigners lump sum benefits equal to contributions Created voluntary contributions program (local and abroad) 2007 Introduced minimum contribution requirements ($2,500 for retirement and survivors and $1,500 for disability) Introduced fourth tier to benefit formula to counteract increasing benefits 2008 Increased quarterly taxable wage base from $5,000 to $6,000

Making Changes, 2000 to Now 2009 Modify language in the law to give FSMSSA more options and authority in collecting delinquent taxes Change investment law to allow Triple B bonds Allow international investments through ADRs 2010 Increased quarter requirement for retirement and survivors to 50 Increased quarter requirements for disability to 45 Reinstated currently insured status as a requirement for disability Increased tax rate to 7% 2011 50% to retirees from age 60 to 64 2013 Tax rate increased to 7.5% Quarterly tax rate increased to $7,000

Proposed Amendments Elimination of taxable wage base – Net impact on the System would be net increase of $1.63 million Inclusion of new benefit tier at 1% - Decrease unfunded liability by approximately $22 million Inclusion of new rule that requires all fishing vessels registered in FSM and under FSM Flag to pay SS tax – Increase annual collections by $1.755 million Requirement that all FSM residents to pay SS tax into FSMSS system regardless of participation in another SS system Allow retirees at age 65 to receive 70% of the calculated benefit while being able to work with no earnings test except this reduction is permanent – Unfunded liability would decrease by approximately $14 million and the annual benefits, in the short term, would increase by approximately $300,000 Inclusion of a maximum benefit – if $1,000 benefit cap is put in place, the unfunded liability would decrease by approximately $7.3 million The use of revenue interest from a $10 million loan from the National Government Trust Fund – At 7.5% annual return, this would yield an additional $750,000 return per annum

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