1. Wednesday, February 10, 1999

2. Welcome and Introduction2 What we’ve done so far –Summaries, analyses, research Where we’re going next –Report, more analysis, and presentation Final Advisory Panel Meeting Wednesday 21 April 1999 3:30-5:00PM Hamburg Hall 1003 Presented to entire Heinz community WELCOME AND INTRODUCTION

3. Timeline3 TIMELINE 3:50-4:20PM Presentation 4:20-4:50PMDiscussion 4:50-5:15PMIndividual Discussion

4. Policy Areas4 #1-Projections and the Status Quo #2-Earnings Test and Labor Force Participation #3-The Maximum Taxable Limit #4-Raising the Retirement Age #5-Private Investment #6-Pensions and Savings Accounts POLICY AREAS

5. #1 - Projections5 #1- Projections and the Status Quo 30 Years Until Benefits will be Reduced –Time for more detailed look at projection method Crisis & Overhaul v. Improvement & Tweaking –Privatization v. Retirement Savings Education Dynamic Microsimulation v. Static Cell-Based Modeling –Our Evaluation of the Actuarial Assumptions –Procedural review of alternative methods of actuarial projections?

6. #2- Earnings Test and Labor Force Participation 6 #2 - Earnings Test and LFP What We’ve Found: The population over 65 years of age has continued to increase throughout the last 57 years. The labor force participation rate for people 65yrs+ has continued to drop throughout the last 57 years. The Earnings Test has a negative influence on labor force participation. Social Security trustee fund is strongly correlated with the labor force participation of aged people rather than 65+ years old population Earning test has impact on LFP of elderly people Education has positive impact to keep older workers in labor force Redefining the retirement age will significantly change LFP of the elderly in the future

7. Earnings Test and Labor Force Participation 7 An increase in labor force participation (LFP) of the 65+ population would have a significant positive impact on the income of the Social Security trust fund. Currently, 75% of Social Security beneficiaries are 65+ years of age; therefore, an increase in LFP of among this age group would result in a substantial decrease in the amount of benefits being paid out by the system. How to Increase LFP in Americans 65yrs+ Increase amount of Earnings Test or eliminate it entirely Offer employers tax credit for hiring older workers Educational programs for older workers Increase retirement age Labor Force Participation

8. Earnings Test and Labor Force Participation 8 Labor Force Participation The population of workers over 65 years of age has been rising steadily since 1960.

9. #3 - Eliminating the Maximum Taxable Limit 9 #3-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 add over 25% yearly to the trust fund surplus. *Source: High Income Tax Returns for 1993, published by the IRS, 1997

10. #3 - Eliminating the Maximum Taxable Limit 10 Growth of the Trust Fund The Trust Fund will increase 20% annually if the MTL is repealed.

11. #4 - Raise the Retirement Age11 #4-Raise the Retirement Age The current retirement age is set for 65, with reduced benefits at 62 and unrestricted benefits at 70 Benefits –1999: 5/9 of 1% for each month prior to age 65. The maximum reduction is 20%. –2022: 5/9 of 1% for each month prior to age 67 (up to 36 months prior). Then, 5% for each of the previous 2 years. This is the only “acceptable” way to reduce benefits--public will not support a reduction of monthly benefit sums

12. Raise the Retirement Age12 Raising the Retirement Age Source: Social Security Administration. CPI (1997)= 2.1% The monthly benefits paid with a higher retirement age decrease over time.

13. Raise the Retirement Age13 Raising the Retirement Age Will raising the retirement age affect who retires early? Is raising the retirement age going to increase LFP? Is it an incentive to work? How will the shorter time frame to collect benefits affect when people retire? What will the effect be on the Social Security Trust Fund?

14. #5 - Invest in the Market14 # 5 - Investing the Trust Fund in the Market Concerns –Administrative Costs –Effect on the Economy –Government “Control” of private sector through Market Investment –Risk

15. #5 - Invest in the Market15 Administrative Costs Pro –Financial institutions stand to profit through the use of large investments. Some have promised to charge as low as 1 and even zero basis points. 1 Con –Private sector insurance companies and pension investment firms have administrative overhead averaging 40%, while SSA’s overhead costs are just under 1% of benefits. 2 1. Source: David E. Sanger, “Big Eye on the Markets”, New York Times, January 7, 1997. 2. Source: The White House Conference on Social Security- Statements from Participants. American Federation of Government Employees, AFL-CIO (AFGE). December 8-9, 1998.

16. Invest in the Market16 Effect on the Economy Pro –New Source of Investment.1 Con –The expected return on investments will go down.2 1. Source: Tim Smart, Washington Post, January 20, 1999, page A10. Market Experts Mostly Bullish on Proposal’s Impact on Stock. 2. Source: Daniel J. Mitchell, “Why government should not Invest Americans Social Security Money. Backgrounder No.240 December 23, 1998. Heritage Foundation.

17. Invest in the Market17 Govt. “Control” of Private Sector through Market Investment Pro –Index funds will help assure a broad based investment strategy.1 Con –The process could easily be politicized. 2, 3 –The government might start interfering in corporate policies.3 –The government would immediately become the largest single investor. 4 1. Source: Peter Diamond, Institute Professor. The White House Conference on Social Security- Statements from Participants. MIT. December 8-9, 1998. 2. Source: David E. Sanger “Big Eye on the Markets”, New York Times, January 7, 1997. 3. Source: Deroy Murdock (CATO Institute) “ And Should the Feds Invest? Washington Times, August 11, 1998. 4. Source: Merrill Matthews ( National Center for Policy Analysis) Government Investment is fraught with Peril, Investor’s Business Daily, January 11, 1999.

18. Invest in the Market18 Risk Pro –If the stock market returns continue to match past performance it could leave the system healthier. Con –Americans should expect lower returns if the market investments are administered by a (conservative) federal control board, as compared to returns from individual investing.1 –The investment will only work if the returns are 10.7% annually and it is impossible to predict that kind of consistent return.2 1. Source: Richard C. Leone. The White House Conference on Social Security- Statements from Participants. The Twentieth Century Foundation. MIT. December 8-9, 1998. 2. Source: David C. John, “CRS Report Says Government Investment Won’t Save Social Security, Executive Memorandum No. 565, December 21, 1998, Heritage Foundation.

19. #6 - Pensions and Individual Savings Accounts 19 #6- Pensions and Individual Savings Accounts Choice of investing in one or more of five to ten plans –some of which would be indexed equity funds, –some all-bond or all-government-securities funds, –and some with mixed portfolios, with the government Funds for IA would either come from additional tax revenue or deducted from part of the current employer contribution Sources: Ball, Robert M., “Partial Privatization of Social Security”, Straight Talk about Social Security, The Century Foundation, Washington, DC 1998.

20. Pensions and Individual Savings Accounts 20 Individual Accounts- Pros Allow people to invest their Social Security taxes in financial assets such as stocks and bonds Creating opportunities to accumulate significant retirement assets and income, using very conservative assumptions The investor in the private accounts owns the corpus of the money paid in, which is not the case with Social Security Source: Ferrara, Peter. Destiny of Freedom for Social Security? The Cato Institute July 11, 1997. Studies have shown support for Individual Accounts among younger Americans - In 1996, Bill McInturff of Public Opinion Strategies found the public favoring the idea by 68 percent to 11 percent. Many Americans overestimate how much their pension plans will provide

21. Pensions and Individual Savings Accounts 21 Individual Accounts - Cons Public support for Social Security might be undermined The plan would reduce the living standard of low wage earners The plan puts workers at increased risk –Assumption that wage-earners setting aside funds for retirement would prefer to bear part of the risk individually rather than share risk in a system for which all of the participants are collectively responsible. The plan promises more than it can deliver –The IA plan would reduce Social Security's defined benefit in the long run, replacing the diminished benefit with the hope that the average return on savings in individual accounts would make up for the loss Sources: Ball, Robert M., “Partial Privatization of Social Security”, Straight Talk about Social Security, The Century Foundation, Washington, DC 1998.

22. Pensions and Individual Savings Accounts 22 Source: David C. John and Gareth G. Davis, "The Cost of Managing Individual Social Security Accounts," Heritage Foundation Backgrounder No. 1238, December 3, 1998. Individual Accounts and Defined Contributions Cost of managing these accounts Growing need for investment education Risk is present in either situation, but in Social Security the risk is broadly shared, while in individual accounts the risk is borne by the individual Philosophy between defined benefits and defined contributions Partial privatization would shift Social Security toward becoming a defined- contribution plan, in which benefits are dependent upon how contributions are invested. –Private pension plans are increasingly of the defined-contribution type, such as 401(k) plans.

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