1. Actuarial Measures of US Household Income and Wealth from Defined Benefit Pension Plans By Marshall Reinsdorf for presentation at the UNECE Group of Experts on National Accounts April 27, 2010 Agenda item 5

2. bea.gov Institutions for Retirement Income in the US  Pension plans are sponsored by and funded by employers (employees may also contribute some of their pay).  In defined contribution (DC) pension plans, benefits depend on the actual account balance, so actuarial estimates are not needed.  In defined benefit (DB) pension plans, benefits depend on a formula that typically involves pay and years of service.  Most private DB benefit entitlements are insured by the PBGC.  Social security is a government social insurance program, not a pension plan (but design of most pension plans takes it into account.)  Individuals’ own tax-advantaged retirement saving plans are also important, especially for proprietors of unincorporated businesses.

3. bea.gov DB pension plans are generally funded  In principle, assets of pension plan’s trust fund should track the participants’ benefit entitlements.  Sources of growth in plan assets include employer and employee contributions, investment income, and holding gains.  In a fully funded plan, a fall in the number of active employees per retiree does not cause a rise in contribution rate required to pay benefits and keep the plan solvent.  Volatility in holding gains can cause volatility in contributions.

4. bea.gov Cash Approach to Measuring Pensions  At present, we measure pensions on a cash basis.  Pension trust fund is included in household sector wealth, and employer contributions are included in household sector income and saving.  Household saving within pension plan = contributions + investment income on plan assets – benefits – plan administrative expenses.

5. bea.gov Shortcomings of the Cash Approach  Cash approach has some advantages:  No need to make debatable assumptions and choices of methods.  Availability of data (though data gaps do exist).  Easy to integrate with rest of the accounts.  But it also has disadvantages:  Timing of contributions can cause distortions and spurious volatility.  Can differ from households’ perceptions of pension wealth and income.  Omits key information; imbalances may be hidden from view.  Article in August 2009 Survey of Current Business reports on research on developing accrual approach estimates based on actuarial calculations.

6. bea.gov Accrual Approach to Measuring DB Pensions  The actuarial value of the benefit entitlements in a DB plan may not equal the value of the plan assets.  Employer responsible to cover shortfalls of plan assets, so unfunded actuarial liability is part of household wealth.  Households’ wealth = the actuarial value of the benefit entitlement under the accrual approach.  Compensation income = benefits accrued through service.  Property income = interest on the actuarial value of the benefit entitlement, not actual investment income earned on plan assets.

7. bea.gov Data Sources for Accrual Estimates  We have different kinds of data for private, state and local government and Federal government plans. Private plans:  PBGC provided data sets of Form 5500, including the actuarial schedule, starting with 2000. Federal government plans:  Actuarial estimates from plan actuaries and GAO reports. State and local government plans:  BEA collected data from a sample of large plans/plan families, but Census Bureau will provide in future.

8. bea.gov Private DB Plans 2000 -7, Cash Accounting ( billions of dollars; from August 2009 SCB, with revisions ) 20002001200220032004200520062007 Opening balance 2011.71918.41755.01657.61944.72105.82249.72474.3 Household Income 96.1106.6148.9149.3148.9149.5152.9143.8 Employer contributions32.848.699.8100.495.192.489.274.8 Investment income from assets63.358.049.148.953.857.163.769.0 Administrative expenses 7.37.26.97.48.38.69.29.9 Benefits, net of employee contributions 117.4123.8133.7134.8141.1138.8151.7160.5 Saving -28.6-24.58.37.1-0.52.2-8.1-26.7 Holding gains/losses on assets -74.1-139.4-130.9277.2167.3126.5252.194.2 Net transfers and other changes in reported assets -0.5-0.8-6.6-2.110.3-7.0-2.0-5.4 Reported end-of-year assets 1908.51753.81625.91939.72121.82227.42491.62536.4 Other Changes in Volume of Assets 9.91.331.75.0-16.0-2.5-17.3NA Change in wealth -93.3-163.4-97.4287.1161.1119.1224.662.1 P Active participants (millions) 22.4 22.221.621.0 20.420.019.4

9. bea.gov Private Plans 2000 -7, Accrual Accounting (ABO approach; in billions of dollars ) 20002001200220032004200520062007 Opening ABO, at interest rates assumed by plans 1761.11852.21932.82080.72066.22278.72370.02531.6 Effect of change to 6% interest rate assumption 12.9-7.621.6-9.364.73.3-60.9-59.1 Opening ABO, at 6% rate 1773.91844.61954.42071.32130.92282.02309.12472.4 Household income 172.3180.5192.3199.7198.4211.3215.0227.8 Benefits accrued, net 65.869.875.075.470.574.376.479.4 Employee contributions 0.80.71.10.90.81.0 Interest cost of current liability 106.4110.7117.3124.3127.9136.9138.5148.3 Benefits disbursed, net 117.4123.8133.7134.8141.1138.8151.7160.5 Household saving, at 6% rate 54.856.758.664.957.372.563.367.3 Other changes in vol. of assets 15.853.158.3-4.393.9-45.3100.1NA Change in ABO 70.7109.8116.959.5151.127.1163.3NA Change in ABO, at interest rates assumed by plans 91.280.6147.8-14.5212.691.3161.6NA

10. bea.gov Income, Saving and Change-in-Wealth: Private Plans using Approach of SNA 2008 2000 2006 Household total contributions 180.3225.2 Employers' actual contributions 32.889.2 Employers’ imputed contributions 40.3-3.5 Household actual contributions 0.81.0 Household contribution supplements 106.4138.5 Household actual property income 63.363.7 Imputed interest on unfunded liability 43.174.9 Benefits and admin. expenses 125.5162.0 Pension plan total saving 54.863.3 Pension plan saving—actual -28.6-8.1 Pension plan saving--imputed 83.471.4 Other changes in wealth 15.8100.1 Holding gains, capital transfers, OCVA-actual -64.7232.7 OCVA--imputed 80.5-132.7 Change in pension entitlements70.7163.3 Change in actual plan assets -93.3224.6 Change in unfunded entitlements 164.0-61.3

11. bea.gov Income, Saving and Change-in-Wealth: Private Plans using Approach of SNA 2008 20002001200220032004200520062007 Household total contributions 180.3188.4200.3208.0207.5220.8225.2238.8 Employers' actual contributions 32.852.2100.2100.895.492.789.274.8 Employers’ imputed contributions 40.324.8-18.3-18.0-16.6-9.8-3.514.6 Household actual contributions 0.80.71.10.90.81.0 Hsehold contribution supplements 106.4110.7117.3124.3127.9136.9138.5148.3 Household actual property income 63.35849.148.953.857.163.769.0 Imputed interest on accrued liability 43.152.768.275.474.179.874.979.3 Benefits and admin. expenses 125.5131.7141.7143.1150.2148.4162.0171.5 Pension plan total saving 54.856.758.664.957.372.463.367.3 Pension plan saving—actual -28.6-20.88.77.5-0.22.4-8.1-26.7 Pension plan saving--imputed 83.477.549.957.457.570.071.493.9 Other changes in wealth15.853.158.3-4.393.9-45.3100.1NA Holding gains, capital transfers and OCVA-actual -64.7-142.5-106.1279.6161.3141.5232.7NA OCVA--imputed 80.5195.6164.4-283.9-67.4-186.7-132.7NA Change in pension entitlements70.7109.8116.959.6151.127.1163.3NA Change in actual plan assets -93.3-163.4-97.4287.1161.1143.9224.6NA Change in unfunded entitlements 164.0273.2214.3-227.5-10.0-116.7-61.3NA

12. bea.gov Cash Measures as Percent of Accrual Measures, Private DB Plans 20002001200220032004200520062007 Household income55.861.177.775.075.270.971.163.1 Compensation49.274.0131.7132.1133.8123.1115.192.9 Interest59.552.441.939.342.141.746.046.5 Assets/ABO, at 6% interest rate 113.4104.089.880.091.392.397.4100.1 Assets/ABO, rates used by plans 116.3103.992.881.496.396.496.5104.3

13. bea.gov What’s Different about Government Employee Pension Plans?  In government sector, DB plans continue to predominate.  Employees may not be covered by Social Security.  Inflation protection is common.  Employee contributions are important source of plan funding.  Plan freezes and terminations prohibited by law, which can be viewed as a rationale for measurement by a PBO approach.

14. bea.gov Federal DB Pensions, 2008 PBO for civilians assumes interest rate of 6.25%, inflation of 3.5%, and salary growth of 4.25%.

15. bea.gov Income, Saving and Change-in-Wealth of Federal Government Plans using Approach of SNA 2008 20012007 Household total contributions 149.7180.5 Employers' actual contributions 68.698.0 Employers’ imputed contributions -35.5-57.0 Household actual contributions 4.74.2 Household contribution supplements 116.7139.6 Household actual property income 49.250.0 Imputed interest on unfunded liability 67.589.6 Benefits and admin. expenses 83.7108.4 Pension plan total saving 66.172.1 Pension plan saving—actual 34.139.7 Pension plan saving--imputed 32.032.6 Other changes in wealth -7.226.9 Capital transfers/timing adjustments-actual 3.8-17.6 OCVA—imputed -11.044.5 Change in pension entitlements 58.999.0 Change in actual plan assets 37.922.0 Change in unfunded pension entitlements 21.077.0

16. bea.gov Income, Saving and Change-in-Wealth of Federal Government Plans using Approach of SNA 2008 2001200220032004200520062007 Household total contributions 149.7154.0148.7152.1164.0171.0180.5 Employers' actual contributions 68.672.270.481.385.191.298.0 Employers’ imputed contributions -35.5-35.0-36.4-47.5-47.1-53.1-57.0 Household actual contributions 4.74.6 4.54.44.2 Household contribution supplements 116.7116.9114.8118.4126.9133.0139.6 Household actual property income 49.249.148.247.049.647.950.0 Imputed interest on accrued liability 67.567.866.671.477.385.189.6 Benefits and admin. expenses 83.786.087.991.996.9102.8108.4 Pension plan total saving 66.168.060.860.267.168.272.1 Pension plan saving—actual 34.135.330.736.437.836.339.7 Pension plan saving--imputed 32.032.830.223.930.232.032.6 Other changes in wealth -7.2-29.48.878.334.278.726.9 Capital transfers/timing adjustments-actual 3.84.03.8-0.21.74.2-17.6 OCVA—imputed -11.0-33.45.078.532.574.544.5 Change in pension entitlements 58.938.669.6138.5101.3146.999.0 Change in actual plan assets 37.939.334.536.239.540.522.0 Change in unfunded pension entitlements 21.0-0.735.1102.361.8106.477.0

17. bea.gov State & Local Government Plans, SNA 2008 Approach 20012006 Household total contributions 244.3337.8 Employers' actual contributions 39.168.0 Employers’ imputed contributions 42.142.3 Household actual contributions 26.633.9 Household contribution supplements 136.5193.6 Household actual property income 71.094.3 Imputed interest on unfunded liability 65.599.3 Benefits and admin. expenses 118.7177.2 Pension plan total saving 125.6160.6 Pension plan saving—actual 18.119.0 Pension plan saving—imputed 107.5141.6 Other changes in wealth 49.352.9 Holding gains, cap transfers and OCVA-actual -24.7340.7 OCVA—imputed 74.0-287.8 Change in pension entitlements 174.9213.5 Change in actual plan assets -60.1371.1 Change in unfunded pension entitlements 235.0-157.6

18. bea.gov State & Local Government Plans, SNA 2008 Approach 2001200220032004200520062007 Household total contributions244.3261.4275.8294.2311.4337.8369.7 Employers' actual contributions39.142.353.460.261.168.077.2 Employers’ imputed contributions42.143.735.433.437.242.348.8 Household actual contributions26.627.829.330.732.333.936.1 Household contribution supplements136.5147.6157.7169.9180.8193.6207.6 Household actual property income71.068.97681.887.894.393.1 Imputed interest on accrued liability65.578.781.788.193.099.3114.5 Benefits and admin. expenses118.7130.3141.7152.8162.8177.2190.7 Pension plan total saving125.6131.1134.1141.4148.6160.6179.0 Pension plan saving—actual18.18.917.019.818.419.015.8 Pension plan saving—imputed107.5122.2117.1121.6130.2141.6163.2 Other changes in wealth49.353.834.761.334.352.9 Holding gains, cap transfers and OCVA-actual-24.7-22.6139.4232.9170.9340.7136.7 OCVA—imputed74.076.4 -104.7-171.6-136.6-287.8 -83.8 Change in pension entitlements174.9184.9168.8202.7182.9213.5231.9 Change in actual plan assets-60.117.5176.7252.4193.1371.181.0 Change in unfunded pension entitlements235.0167.4-7.9-49.7-10.2 -157.6 150.9

19. bea.gov All DB Pensions (percents of disposable personal income) 20012004 2007 Household total contributions 7.67.47.6 Employers' actual contributions 2.12.72.4 Employers’ imputed contributions 0.4-0.30.1 Household actual contributions 0.4 Household contribution supplements 4.84.74.8 Household actual property income 2.32.12.0 Imputed interest on accrued liability 2.42.62.7 Benefits and admin. expenses 4.4 4.5 Pension plan total saving 3.22.93.1 Pension plan saving—actual 0.40.60.3 Pension plan saving—imputed 2.82.32.8 Other changes in wealth 1.22.60.8 Holding gains+cap transfers+OCVA--actual -2.14.41.1 OCVA—imputed 3.4-1.8-0.4 Change in pension entitlements 4.55.53.2 Change in actual plan assets -2.45.11.0 Change in unfunded pension entitlements 6.9 0.52.2

20. bea.gov All DB Pensions (percents of disposable personal income) 2001200220032004200520062007 Household total contributions 7.67.77.57.47.57.47.6 Employers' actual contributions 2.12.7 2.62.52.4 Employers’ imputed contributions 0.4-0.1-0.2-0.3-0.2-0.10.1 Household actual contributions 0.4 Household contribution supplements 4.8 4.7 4.84.74.8 Household actual property income 2.32.1 2.0 Imputed interest on accrued liability 2.42.7 2.62.72.62.7 Benefits and admin. expenses 4.44.54.4 4.5 Pension plan total saving 3.2 3.12.93.12.93.1 Pension plan saving—actual 0.40.7 0.6 0.50.3 Pension plan saving—imputed 2.82.62.42.32.5 2.8 Other changes in wealth 1.21.00.52.60.32.30.8 Holding gains+cap transfers,+OCVA--actual -2.1-1.65.04.43.45.81.1 OCVA—imputed 3.42.6-4.6-1.8-3.1-3.5-0.4 Change in pension entitlements 4.54.23.65.53.45.33.2 Change in actual plan assets -2.4-0.55.95.14.16.41.0 Change in unfunded pension entitlements 6.94.8-2.40.5-0.7-1.12.2

21. bea.gov What’s Different about the Accrual Estimates?  Less volatile.  Compensation income is slightly lower than in the cash estimates.  Imputed interest is higher than investment income on assets.  Assets < actuarial liabilities.  Investment income on assets excludes capital gains, but interest rates in actuarial calculations reflect expected total returns on assets.  Total household income is higher by enough to add more than 2 percentage points to the personal saving rate.  Accrual estimates are sensitive to assumptions/methods.

22. bea.gov Government Social Insurance Programs  Pension Benefit Guarantee Corp. (PBGC) is a public financial corporation that pays benefits to retired participants in DB plans whose sponsor has declared bankruptcy.  Railroad Retirement Board is a public financial corporation that provides pension benefits to retirees from the railroad industry.  My Survey of Current Business article has actuarial estimates for pensions from the PBGC and Railroad Retirement Tier II.  Actuarial information on Social Security and Railroad Retirement Tier I will take different approach from the information provided for defined benefit pensions because they are government social insurance schemes.

23. bea.gov Social Security  Social security actuaries calculate “open group unfunded obligation”, “closed group liability” and “maximum transition liability”.  Maximum transition liability resembles the ABO of a pension plan.  Yet it is not so useful for analytical purposes—it is very large because benefit entitlement grows rapidly in the early part of career. But participation in the remainder of the career can’t be avoided.  Closed group liability is useful for inter-generational accounting.  Open group unfunded obligation is useful as a measure of solvency. Open group future benefits less taxes for next 75 years, as of 01-2009 Open group obligation Trust Fund Assets Unfunded Open Group Obligation $7.7 trillion (2.71% of covered payroll) $2.4 trillion (0.86% of covered payroll) $5.3 trillion (1.86% of covered payroll)