Thursday, June 16, 2016

Commission Proposes Comprehensive Changes to Strengthen U.S. Retirement System

This month, the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings issued a report entitled, “Securing Our Financial Future:  Report of the Commission on Retirement Security and Personal Savings.”  This report includes many policy recommendations designed to strengthen the retirement system in the U.S., and with one exception that I will discuss below, I believe the recommendations are very well thought-out.  If you are interested in possible changes in Social Security and retirement related law in the U.S., I encourage you to read this report.  The report’s recommendations are organized into six major areas:

I. Improve Access to Workplace Retirement Savings Plans
II. Promote Personal Savings for Short-Term Needs and Preserve Retirement Savings for Older Age
III. Facilitate Lifetime-Income Options to Reduce the Risk of Outliving Savings
IV. Facilitate the Use of Home Equity for Retirement Consumption
V. Improve Financial Capability Among All Americans
VI. Strengthen Social Security’s Finances and Modernize the Program

By far the most controversial recommendations to strengthen our retirement system are the ones regarding Social Security.  According to the report, long-term solvency is achieved under their proposal by increasing system revenues by about 53% and by decreasing scheduled net benefits (there are some proposed increases) by 47%.   The Commission notes that their proposed package of changes would not only solve the 75-year actuarial deficit, but it would also result in “sustainable solvency” as that term is defined by the Social Security actuary. 

The only real bone I have to pick with the Commission’s conclusions with respect to Social Security’s long-term solvency is that these conclusions are valid only if the 2015 Trustees assumptions are exactly realized (or are more favorable) and not changed over the next 75 years.  For example, the Commission proudly announces that, “the commission’s package of recommendations would extend Social Security’s ability to pay benefits without abrupt reductions through the end of the 75-year projection period” and “if adopted, the commission’s recommendations would secure the program’s trust funds for 75 years and beyond…”  The commission neglects to point out that these statements are conditioned on the accuracy of the assumptions made for the 75-year period.  And since very few people can accurately predict the future (not even actuaries), it would seem imprudent to assume that assumptions made in 2015 will be accurate for 75 years or longer.  After all, even though the assumptions made in 1983 weren’t horribly inaccurate, they were still wrong to some degree, and we now find ourselves facing the very significant changes recommended by the Commission earlier than predicted in 1983.  No sound “actuarial” process involves making assumptions for 75 years without anticipating making periodic adjustments in future years.  The current approach just isn’t sustainable. 

As I said in my post of May 17, 2016, “There exists no process in current law to automatically adjust the System’s tax rates to maintain a balance between system assets and system liabilities.  Imbalances (in the form of deficits in the annually calculated 75-year actuarial balance) may occur as a result of the previously unrecognized deficits…, or because of changes in assumptions, experience losses or gains, or from other sources.  Unfortunately, the Commission does not address this problem in their recommendations, so instead of achieving their goal of providing predictable Social Security benefits that workers can plan on, workers relying on Social Security could once again in the near future find themselves in a position similar to Charlie Brown trying to kick a football being held by Lucy van Pelt.

As I have said in previous posts on Social Security financing, we just need to look at what Canada did with their Canada Pension Plan for an example of how to use sound actuarial principles to provide “Self-Sustaining Sustainable Solvency.”