Business and Retirement Income – What Role in the Future?

Anna M. Rappaport
President, Anna Rappaport Consulting

I have been very pleased to spend the last few days in Washington, DC and to participate in several meetings about retirement security. On Wednesday, June 17, I joined a group at the National Academy of Social Insurance at “The Quest for Adequate Retirement Income” a symposium focusing on current issues in the retirement system.

On Thursday [July 18th], I had the opportunity to meet with a number of plan sponsors who were discussing challenges in the retirement income system from their perspective. These large organizations were interested in providing retirement security to their employees, and frustrated at what often seems to be a stream of endless roadblocks.

What I heard from the two sets of people presented a very sharp contrast. At NASI, there were no representatives of the business community and none of the presenters had lived through the challenge of operating pension plans. Further, when asked what business thought about the issues and whether the financial crisis reinforced the importance of DB plans, the response was that business was not interested in offering this type of benefit. I was very frustrated to hear this from a researcher has not been a part of the discussions in the business community. The correct answer should have been to talk to someone in the business community and get their views. While this might seem difficult to an academic or policy person not in touch with benefit managers, there are ways to access this information.

There are groups that represent plan sponsors in Washington and provide business perspective to Congress. They include the ERISA Industry Committee and American Benefits Council. There are also groups that represent public sector plan sponsors. Another way to gain insight on business perspectives is to talk with consultants who work with plan sponsors. One of the great values of NASI is that it brings together people with diverse viewpoints.

Employers have long been an important part of retirement security in America. My view is that many employers have worked for a long time to protect employee security, and that they have endured many roadblocks. The success stories are hidden from view while failures are the focus of the news. How many more roadblocks they are willing to face is not clear, but we reduce the chances if we make it more difficult for them. It is vital for other stakeholders to have a dialogue with the employer community, and not to just make assumptions about it.

Administering Health Insurance Mandates

C. Eugene Steuerle
Vice President, Peter G. Peterson Foundation

Paul N. Van de Water
Senior Fellow, Center on Budget and Policy Priorities

Mandates form an integral part of many proposals to expand health insurance coverage. Often, however, too little attention is paid to how and whether they can be administered. Administering Health Insurance Mandates finds that a mandate will be easier to administer when some or all of the following conditions are met: The mandate emphasizes facilitating compliance rather than penalizing noncompliance; It operates as a simple play-or-pay arrangement; It can accurately take advantage of regular withholding for most workers; It involves penalties that are moderate and collectable; It is coordinated with any subsidies and other public programs, including Medicaid; It is based upon other government payments that can be denied, such as tax benefits; It is applied only to those with more than low incomes, unless the penalty is denial of other benefits; Its size does not vary greatly with fluctuations in income, so any penalty can be collected currently and accurately.

Click here to download the full working paper, commissioned by a joint study panel of the National Academy of Social Insurance and the National Academy of Public Administration on Administrative Solutions in Health Reform. For a list of other papers and study panel members, click here. The project is funded by the Robert Wood Johnson Foundation.

Paying a Fair Share for Health Coverage and Care

Jill Bernstein
Health Policy Consultant

Expanding health coverage will involve changes in the premiums and taxes people pay for health insurance and the amounts they pay out-of-pocket for specific health care services. Payment arrangements must generate sufficient revenue, promote efficiency in health care delivery, assure access to care for people who have low income or are in poor health, and minimize administrative costs and burden. Paying a Fair Share for Health Coverage and Care evaluates alternative approaches—including social insurance programs, means-tested premium assistance, and income-related cost sharing—according to these criteria.

Click here to download the full working paper, commissioned by a joint study panel of the National Academy of Social Insurance and the National Academy of Public Administration on Administrative Solutions in Health Reform. For a list of other papers and study panel members, click here. The project is funded by the Robert Wood Johnson Foundation.

Don't Worry, Be Happy: Characterization of Social Security Trust Funds

A. Haeworth Robertson
Former Chief Actuary, Social Security Administration, 1975-78

The nature and significance of Social Security trust funds is sometimes misrepresented to the public. This appears to be the case in Social Security Brief #30 issued on May 12, 2009 by the National Academy of Social Insurance. The section of this brief entitled “Where does the Social Security surplus go?” states essentially the following:

“Some people worry when they hear that Social Security annual cash surpluses are loaned to the U.S. Treasury and the government spends the cash on other activities.” Don’t worry, be happy, because when a Social Security surplus is loaned to the government it reduces the debt owed to the public by the amount of the surplus and thereby makes it “easier to afford Social Security and other activities of the government in the future.” (Emphasis added)

I believe that this conclusion is incorrect and that it is an inappropriate way to characterize the nature and value of the trust funds.

Those who believe the brief’s conclusion is correct appear to rely on the assumption that “intragovernmental debt” is different from “public debt.” Perhaps it is, but no matter how the debt is labeled:

• the U.S. government’s responsibility to pay interest and eventually repay the loans is no different.
• the amount of future taxes required to pay interest and eventually repay the loans is no different.

Collecting surplus Social Security taxes and loaning the funds to the government and calling it “intragovernmental debt” does not “make it easier to afford Social Security and other activities of the government in the future” than if the government borrowed that same amount from someone else and called it “public debt.”

There are, however, other consequences to collecting surplus Social Security taxes and loaning them to the government:

• The government uses Social Security taxpayer money to finance other government programs during the years that surplus Social Security taxes are added to the “trust fund,” and thereafter uses general revenue to finance Social Security benefits. This results in a subtle cost-shifting between one generation of the Social Security taxpaying population and a later generation of the general taxpaying population.
• By the time the trust fund is nearly exhausted, say in 2037, Social Security benefits and administrative expenses will be financed 76% by payroll taxes and 24% by general revenue (to redeem Treasury securities). Therefore, this financing procedure is, in effect, an ingenious method of gradual transition from payroll tax financing to significant general revenue financing.
• After 2037 when the trust fund has no more Treasury securities to be redeemed, the government could--with a change in the law--finance the deficit between payroll taxes and benefits by simply continuing to use general revenue or by borrowing, just as it will have been doing since 2016 to pay interest on or redeem Treasury securities. The result would be a seamless shift to still more general revenue financing after 2037.
• Labeling some of the government’s debt as intragovernmental debt (the part borrowed from the trust funds), and thus reducing the acknowledged public debt, may lead some people to believe the government’s fiscal condition is stronger than it really is. Accordingly, the government may be able to offer lower interest rates than otherwise required to induce the general public to buy Treasury securities. However, this will work only so long as the voluntary purchasers of Treasury securities fail to recognize the true government debt. (It may be relevant to note that at the beginning of 2009, 24 percent of the total national debt was owed to the Social Security trust funds; and another 19 percent was owed to other federal trust funds or accounts.)
• By requiring Social Security taxpayers to pay excess taxes that are then used to buy Treasury securities (using the ruse of building up a “trust fund” to finance Social Security benefits), the government may be able to pay a lower interest rate on such securities than if it had to sell them on the open market. (An effective subsidization of government operations—and general taxpayers-- by Social Security taxpayers?)
• By requiring Social Security taxpayers to pay excess taxes that are then used to buy Treasury securities, the government takes funds from the hands of such taxpayers that are thus not available for alternative uses. Such taxpayers might well have made more productive use of these funds if they’d had a choice.
• For the unsophisticated, all the rhetoric frequently used to describe the “trust funds” tends to bestow on the trust funds an undeserved significance; to obscure the fact that funds purportedly collected to pay Social Security benefits are diverted to other government programs; and to suggest that Social Security is more financially viable, during the period the “trust funds” exist, than it really is.

Acknowledgment of the true nature and significance of the Social Security trust funds will be important as the nation considers alternative ways to make the program viable. It will be of particular significance when considering proposals to increase payroll taxes at a time they are not needed to pay current benefits. Such tax increases might put the system’s income and outgo into “arithmetic balance,” but they would result in a trust fund buildup of questionable value.