Employee Benefit Plans Joseph Applebaum, FSA October 4, 2002 Views expressed are those of the speaker and do not represent the views of the U.S. General Accounting Office. [email protected] Benefit PlansFertility RatesSlide 4Life Expectancy at BirthLife Expectancy at Age 65Life ExpectancySlide 8Social SecuritySlide 10Social Security Costs and Income RatesSlide 12Slide 13Aged and Total Dependency RatiosSlide 15OASDI Covered Workers and Beneficiaries (in millions)OASDI Covered Workers & Beneficiaries (in millions)OASDI Covered Workers (in millions)OASDI Covered Workers (in millions)OASDI Beneficiaries (in millions)OASDI Beneficiaries (in millions)Worker to OASDI Beneficiary RatioWorker to Beneficiary RatioSlide 24Demographic Impacts on Private PlansPhased RetirementSlide 27Changes in Pension Plan DesignSlide 29Trends in Pension Plan Coverage (millions)Employee Benefit PlansJoseph Applebaum, FSAOctober 4, 2002Views expressed are those of the speaker and do not represent the views of the U.S. General Accounting Office. [email protected] Benefit Plans•What is the Big Picture Issue?•Ageing of the U.S. Population•U.S. is not alone – G-7 countries have similar, if not worse trends.•Key Drivers•Increased Life Expectancy•Decreased FertilityFertility Rates00.511.522.533.541940 1950 1955 1960 1970 1975 1980 1990 2000 2025 2050 2075Fertility Rates1940 1950 1955 1960 1970 19752.23 3.03 3.5 3.61 2.43 1.771980 1990 2000 2025 2050 20751.85 2.07 2.13 1.96 1.95 1.95Life Expectancy at Birth606570758085901940 1950 1955 1960 1970 1975 1980 1990 2000 2025 2050 2075FemalesMalesLife Expectancy at Age 6510121416182022241940 1950 1955 1960 1970 1975 1980 1990 2000 2025 2050 2075FemalesMalesLife ExpectancyYear Males Females Males Female1940 61.4 65.7 11.9 13.41950 65.6 71.1 12.8 15.11955 66.7 72.8 13.1 15.61960 66.7 73.2 12.9 15.91970 67.2 74.9 13.1 17.11975 68.7 76.6 13.7 181980 69.9 77.5 14 18.41990 71.8 78.9 15 192000 73.7 79.4 15.7 192025 76.5 81.5 17.3 20.32050 79 83.5 18.8 21.82075 81.1 85.3 20.2 23.1At BirthAt Age 65Employee Benefit PlansDemographic trends have implications for•Size and composition of work force,•Pension costs, •Healthcare costsStructure of U.S. pension programs •Mixed system – part voluntary, part governmental program•Three ( four ?) legged stool – Social Security, employment based pensions, personal savings ( post-retirement earnings)3Social Security•Financed on a modified pay-as-you-go basis•Combined employer/employee tax rate for 2002 of 12.4% on earnings up to $84,900•Maximum amount subject to tax is updated each year for change in average wage in covered employment•Benefits are paid to retired and disabled workers, their eligible spouses, children, and their survivors (esp. aged widows)Social Security•Big Issue for Social Security is cost rising relative to payroll.•Because current system is pay-as-you-go (more or less) cost of system is related to number of workers supporting each beneficiary. Let’s look at costs over next 75 years or so.•The costs go sharply upward, a few years from now, when Baby Boomers start retiring. •Under current program benefit rules, costs keep growing well after the Boomers retire.•3Principal drivers are demographic – life expectancy, particularly life expectancy at retirement age, and fertility which determines, with a lag, number of workers.3Social Security Costs and Income Rates0%5%10%15%20%25%1990 2000 2010 2020 2030 2040 2050 2060 2070 2080Cost as % of taxable payrollIncome as % of taxable payrollSocial Security Costs and Income RatesYearOASDI Cost as a Percentage of Taxable PayrollOASDI Tax Income as a Percentage of Taxable Payroll1990 10.7% 12.7%2000 10.4% 12.7%2010 11.0% 12.8%2020 14.2% 13.0%2030 17.2% 13.2%2040 17.8% 13.3%2050 17.9% 13.3%2060 18.6% 13.3%2070 19.4% 13.4%2080 20.1% 13.4%Social SecurityTwo sets of measures of demographic trends: dependency ratios – the ratio of those over 65 ( or those under 20 plus those over 65) to those between ages 20 and 64, and; ratio of beneficiaries to workers.Some observations •Around 1950, only a portion of the elderly were eligible for social security benefits•The percentage of workers covered by social security has grown•The labor force participation rates of women have increased•Labor force participation rates of older (greater than 55) men declined.•Disability benefits were introduced in 1950’s, but didn’t expanded rules later.Aged and Total Dependency Ratios10%20%30%40%50%60%70%80%90%100%1950 1960 1970 1975 1980 1990 2000 2025 2050 2075Total DependencyAged DependencyAged and Total Dependency RatiosYear Aged Total 1950 13.8% 71.9%1960 17.3% 90.4%1970 18.2% 94.7%1975 18.5% 89.8%1980 18.9% 74.9%1990 20.9% 70.1%2000 21.1% 69.9%2025 31.9% 77.1%2050 37.1% 81.2%2075 42.3% 85.1%OASDI Covered Workers and Beneficiaries(in millions)02550751001251501752001950 1960 1970 1975 1980 1990 2000 2025 2050 2075Covered WorkersBeneficiariesOASDI Covered Workers & Beneficiaries (in millions)YearCovered WorkersOASDI Beneficiaries1950 48.3 2.91960 72.5 14.31970 93.1 25.21975 100.2 31.11980 113.6 35.11990 133.7 39.52000 153.7 45.22025 175.4 77.42050 187.3 94.12075 200.5 109.9OASDI Covered Workers (in millions)02550751001251501752001950 1960 1970 1975 1980 1990 2000 2025 2050 2075OASDI Covered Workers(in millions)1950 1960 1970 1975 198048.3 72.5 93.1 100.2 113.61990 2000 2025 2050 2075133.7 153.7 175.4 187.3 200.5OASDI Beneficiaries (in millions)01020304050607080901001101950 1960 1970 1975 1980 1990 2000 2025 2050 2075OASDI Beneficiaries(in millions)1950 1960 1970 1975 19802.9 14.3 25.2 31.1 35.11990 2000 2025 2050 207539.5 45.2 77.4 94.1 109.9Worker to OASDI Beneficiary Ratio024681012141618201950 1960 1970 1975 1980 1990 2000 2025 2050 2075Worker to Beneficiary Ratio1950 1960 1970 1975 198016.7 5.1 3.7 3.2 3.21990 2000 2025 2050 20753.4 3.4 2.3 2.0 1.8Social SecurityProblems are well understoodLast major reform culminated in 1983 Amendments•Incremental changes in benefits and taxes•Put program in balance for 75 years – Program is now out of actuarial balance •Valuation period change•Experience & assumption changesWhat are criteria for solution?•Continue to provide layer of protection against insured events•Program should be sustainable•Cost levels should be near current levelsDemographic Impacts on Private PlansDemographic forces also impact private sector employee benefit plans.Phased retirement•Most defined