"A Report on Canadian Pension Law Reform" SIMON B. ARCHER, York University - Osgoode Hall Law School Email: sarcher@osgoode.yorku.ca The focus of this paper is the Canadian occupational plan system. Although others may be relevant, three questions assist in evaluating that system. Do enough people have an occupational pension plan (the "coverage question"), are occupational pension plans affordable and efficient methods for saving for retirement income (the "affordability question") and do occupational pension plans provide sufficient retirement income (the "adequacy question")? "Demographic Risk Indicators in Pay-as-You-Go Pension Funds" ROBERTA MELIS, Università degli Studi di Sassari Email: romelis@uniss.it This paper deals with demographic risk in private pay-as-you-go pension systems. In particular, it analyzes the financial sustainability of the fund in a stochastic framework. We present a model to investigate the dynamics of these types of pension funds which operate according to the pay-as-you-go rule, focusing on the behavior of the demographic variable "new entrants" and on its influence on the future evolution of the fund. The global asset return and the new entrants variation rate are modeled by autoregressive processes. The goal is to propose risk indicators that can be employed to monitor the solvency of the fund. A numerical application is carried out using the data provided by the pension funds of Italian Professional Orders. The analysis highlights how the variable "new entrants" influences the final value of the fund and the application shows that the proposed controlling model appears effective at providing advance warning of the financial insolvency of the fund. "Social Security: The House that Roosevelt Built" PAMELA PERUN, Aspen Institute - Initiative on Financial Security Email: pamela.perun@aspeninstitute.org Critics of the Social Security program are fond of disparaging it as a "Ponzi" scheme or as a redistributive transfer of income from the young to the old. Others go even further, labeling the Social Security trust fund as a fiction or claiming the program is bankrupt. Some also suggest that the government bonds held in the trust fund are mere IOUs. Still others say that the program's legal basis is ephemeral, subject to the whims of Congress. "Internal Governance Mechanisms and Pension Fund Performance" Wharton Financial Institutions Center Working Paper No. 11-46 KRZYSZTOF JACKOWICZ, Kozminski University Email: kjtrist@kozminski.edu.pl This study provides new empirical evidence on the impact of board structure, as an internal governance mechanism, on privately defined contribution pension fund performance. Using a hand-collected dataset, we find evidence that the chairman, as a motivated insider, plays an important role in determining fund performance. The results also suggest, although with weaker evidence, that outsiders may positively impact fund performance. One explanation for this result is the weaker motivation of the outsiders to monitor fund performance. Consequently, the results show that both the composition of the board and the motivation of the board members are important in explaining pension fund performance, while other governance factors have no impact on its performance. The results provide relevant insights into the current regulatory debate on the reforms of the pension fund industry, arguing that modifying the board structure and its members' motivations may improve its governance and, hence, its performance. Consequently, the overall policy conclusion of this study is that more focus should be put on the board structure of pension funds, taking into account the different interests of the beneficiaries and fund shareholders. "An Empirical Analysis of Shanghai Pension System Sustainable Development Methods" Using social security actuarial theory and Shanghai pension data, this paper studies and evaluates quantitatively population importing, postponing retirement age, economic development sustainable development policies from a new prospect. The sensitive analysis results indicate that population importing can improve the problem of aging population and pension deficit. The higher population importing proportion, the earlier pension reaches fiscal balance. Postponing retirement age can reduce the pension deficit, but pension cannot reaches fiscal balance in the long run. During the time window between 2008 and 2018, no matter the average wage grows faster or slower, economic development has negligible impact on pension deficit. It is called pension deficit 'window rigidity'.
Ontario Bar Association 9th Annual Seminar on Pension and Benefits Essential Updates and Key Legal Issues, 2011
Problems and Perspectives in Management, Vol. 8, No. 4, pp 117-126, 2010
ALESSANDRO TRUDDA, Università degli Studi di Sassari Email: atrudda@uniss.it
PATRICIA DILLEY, University of Florida Levin College of Law, National Academy of Social Insurance (NASI) Email: dilley@law.ufl.edu
These assertions are untrue. This brief sets the record straight on Social Security on the following points:
• Social Security is neither a "Ponzi scheme" nor an income transfer program from the young to the old.
• Social Security is a pension plan in the form of a defined benefit plan.
• Like most other defined benefit plans, contributors earn a right to a benefit paid at retirement based on their earnings.
• The Social Security trust is a valid trust, and the trust fund is invested as required by law.
• By law, contributions are held in a trust.
• Trust assets not needed to pay current benefits and costs are invested to increase revenues to pay for future benefits.
• Federal law requires trust assets to be invested in the safest possible investment: special government bonds backed by the full faith and credit of the United States government.
• The bonds held by the Social Security trust are entitled to the same legal status and repayment rights as other full
faith and credit obligations of the United States.
• Social Security's financial status is strong, and the program is not a major contributor to the long-term federal deficit.
• Social Security's trust holds $2.4 trillion in assets for retirement benefits alone.
• The program is projected to be able to pay 100% of scheduled benefits for the next 25 years. After 2036, non-interest income is sufficient to pay approximately 77% of scheduled benefits for decades, and 74% of scheduled benefits in 2085.
OSKAR KOWALEWSKI, Warsaw School of Economics (SGH) - World Economy Research Institute Email: okowale@sgh.waw.pl
YUXI WANG, Shanghai University of Engineering Science
Email: wyxixl@163.com
Monday, August 22, 2011
New papers from the Social Science Research Network
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8 comments:
• Social Security is neither a "Ponzi scheme" nor an income transfer program from the young to the old.
When social security started in 1937, the payroll tax was 2% on about 120% of the average US wage. It covered about 50% of the work force. It did not cover low wage earners with unsteady work because it would be a drain on the program nor did it include high wage earners such as doctors and lawers in order to prevent it as being welfare from rich to poor. It did not cover military, farmers, lawyers, doctors, hotel staff, waitresses, etc. However, in 1950 this changed. SS began was projected to go broke. SS began to enroll previously non covered workers, increasing the tax and base. Between 1955 and 1965 SS-OASI ran negative cash flows. Between 1970 and 1983, SS-OASI again ran negative cash flows. In 1983 the SS-OASI trust fund was exhausted.
A Ponzi scheme works by having a steady stream of new suckers in order to pay the previous suckered people what they were promised. When there are no more suckers the Ponzi scheme collapses. In the case of SS-OASI, all workers are covered including politicians (1983). Changes to retirement age, benefits, COLA, Taxes and more are being analyzed in order to pay promised benefits. The only reason this Ponzi scheme has lasted so long is that politicians have legislated changes. In fact the program can be repealed at any time with no liability incurred.
What would you call this type of scam?
• Social Security is a pension plan in the form of a defined benefit plan.
Social Security changed the SS-OASI benefit formula in 1977 and now uses a defined formula to determine the initial benefit. http://www.socialsecurity.gov/pubs/10070.html#estimate
However, there is no connection between taxes paid and benefits paid. This is the reason why SS-OASI a present value unfunded liability of over $23 Trillion.
• Like most other defined benefit plans, contributors earn a right to a benefit paid at retirement based on their earnings.
“There has been a temptation throughout the program's history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled "RESERVATION OF POWER," specifically said: "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress." Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor.” http://www.ssa.gov/history/nestor.html
“Workers and beneficiaries have no legal ownership over their Social Security benefits. Instead, what they have is a political promise that can be changed at any time, by any amount, for any reason. In any retirement system a lack of legal ownership is a source of insecurity. In one that is under-financed in the long run by 25 percent, it is a serious problem.” President’s Commission to Strengthen Social Security, Interim Report August, 2001, Page 3, http://www.csss.gov/reports/Report-Interim.pdf
• The Social Security trust is a valid trust, and the trust fund is invested as required by law.
TRUE
• By law, contributions are held in a trust.
TRUE
• Trust assets not needed to pay current benefits and costs are invested to increase revenues to pay for future benefits.
TRUE
• Federal law requires trust assets to be invested in the safest possible investment: special government bonds backed by the full faith and credit of the United States government.
TRUE
• The bonds held by the Social Security trust are entitled to the same legal status and repayment rights as other full faith and credit obligations of the United States.
TRUE
• Social Security's financial status is strong, and the program is not a major contributor to the long-term federal deficit.
Social Security by law cannot borrow money. It has statutory authority to spend only those funds received from the dedicated social security tax on wages, tax on benefits and funds in the trust fund. Federal Law prohibits transferring general revenues to any trust fund. United States Code Title 42, Chapter7, Subchapter VII, Sec. 911 (a)
By law the trust fund cannot be drawn down to zero. The trustees must submit a report promptly to congress detailing benefit cuts or tax increases when in any given year the trust fund is projected to fall below 20% of that given years expenses. Social Security's ability to pay future promised benefits is dependent solely on the ability to raise social security taxes. United States Code Title 42, Chapter7, Subchapter VII, Sec. 910 (a)
• Social Security's trust holds $2.4 trillion in assets for retirement benefits alone.
Actually the SS-OASI trust fund holds $2.608 Trillion as of the end of 2010
• The program is projected to be able to pay 100% of scheduled benefits for the next 25 years. After 2036, non-interest income is sufficient to pay approximately 77% of scheduled benefits for decades, and 74% of scheduled benefits in 2085.
“...the 75-year time horizon is arbitrary since it ignores what happens to system finances in years outside the valuation period. For example, we could eliminate the actuarial deficit by immediately raising the payroll tax by 1.86 percent of payroll. However, as we move one year into the future, the valuation window is shifted by one year, and we will find ourselves in an actuarial deficit once more. This deficit would continue to worsen as we put our near term surplus years behind us and add large deficit years into the valuation window. This is sometimes called the "cliff effect" because the measure can hide the fact that in year 76, system finances immediately "fall off the cliff" into large and ongoing deficits."
In addition the evaluation uses the taxes paid by all workers, even those who will not turn age 67 (Full retirement age) before2085. In essence they take young people money (those born after 2018 and consume all of their contributions without setting aside one penny for their future. The fact is if you did not include the taxes paid by who would not retire prior to 2036 (currently all those under age 42), SS-OASI would go belly up much sooner, around 2024. But if 2024 is the date it goes belly up by not including those under age 42, then you should not include those under age 54. But if you did not include the taxes paid, but not the benefits promised to those under 54, then you would have to exclude all those under age 67 today. In this case SS-OASI would pay full benefits for less than four years and then ZERO THERE AFTER!
However, under current law “United States Code Title 42, Chapter7, Subchapter VII, Sec. 911 (a) “ and . United States Code Title 42, Chapter7, Subchapter VII, Sec. 910 (a) requires across the board cuts when the trust fund is projected to fall below 20% of any given years expenses. The first to go is COLA. Teh equivalent up front cut no COLA would have is 25%. The 77% payable under current law is without COLA. So we are looking at 57% to 60% of those benefits paid today. If you think this is fair, then why don’t you propose to group of cohorts to cut SS-OASI benefits to 77% and eliminate COLA. This is what this fantastic program you support has in store for future generations.
"According to the SEC, a Ponzi Scheme is “an investment fraud that involves the payment of
purported returns to existing investors from funds contributed by new investors."
You can argue about whether SS is entirely insurance, but it is certainly not an investment (regardless of terminology its proponents sometimes use). Further the SS Administration provides annual reports which clearly delineate what is required to keep the program solvent, so it is certainly not fraudulent. Of course, it does pay beneficiaries from current payments (legally by way of the TF), so William is not entirely wrong, but Pay-As-You-GO is a feature of many insurance systems. When people say that SS is a Ponzi scheme, they are just attaching negative connotations to the fact that SS is paygo.
To see what the author has to say about Fleming v Nestor, you need to actually find the paper.
link
"if you did not include the taxes paid by who would not retire prior to 2036"
you would have a very silly analysis.
SS is paygo, so that is the way to analyze it. By analog, if you want to know about fluid flows in a cystern, you must include all flows in and out or you siumply get the wrong answer.
"United States Code ... requires across the board cuts"
This is just wrong. Look it up. There is no such requirement.
"So we are looking at 57% to 60% of those benefits paid today."
Since initial benefits are indexed to AWI, not CPI, we are looking at benefits that that are 108% of those being paid today (as measured in CPI adjusted dollars) (and for a "medium earner") See my blog.
I don't think the sudden drop in 2036 is fair, but a small increase in the payroll tax will allow all future beneficiaries to participate in a safety net that keeps strengthening at the same rate that the economy is growing. The increase pays for the fact that future beneficiaries can expect to have this safety net longer because they can expect to live longer.
The following sentence in the Perun article caught my eye, and my curiosity:
“First, under Section 401(d) of the Social Security statutes, they are entitled to a special rate of interest.”
That “special rate” suggested to me that the Trust Fund should be getting a “preferred” rate of interest. Is that so? Here’s what 42 USC 401(d) actually says:
“Such obligations issued for purchase by the Trust Funds shall have maturities fixed with due regard for the needs of the Trust Funds and shall bear interest at a rate equal to the average market yield (computed by the Managing Trustee on the basis of market quotations as of the end of the calendar month next preceding the date of such issue) on all marketable interest-bearing obligations of the United States then forming a part of the public debt which are not due or callable until after the expiration of four years from the end of such calendar month; except that where such average market yield is not a multiple of one-eighth of 1 per centum, the rate of interest of such obligations shall be the multiple of one-eighth of 1 per centum nearest such market yield.”
The authors make a big deal about the Trust Fund being a separate entity from the general government, so one would expect arm’s length dealing. But, who’s getting a “special rate” here---the Trust Fund or the Treasury? One would expect that the Trust Fund’s needs would primarily be long-term, not short-term. So, one would expect they might invest in longer-term instruments. If that assumption is correct, for example, it would strike me that if the Trust Fund went for a 30 year instrument, it would almost always get a lower rate than the outstanding 30 year Treasury bonds. This is because the formula requires that the instrument issued by Treasury to the Trust Fund (in the case of a 30 year instrument) equal the average market yield of outstanding Treasury obligations from 4 years to 30 years (I assume that this is not weighted for the percentage of issues outstanding in each category). Add to this the fact that those instruments issued to the Trust Fund cannot be traded, and it looks like the Trust Fund, on average, is getting a bad deal. This is particularly true in the current environment with the Federal Reserve pushing down interest rates particularly in the short-term range. That means, I think, that the Trust Fund is getting the shaft under this formula when they “buy” longer-term instruments, particularly in the current “special” environment. Per the SSA website, the average monthly rate under this formula in 2010 was only 2.760 percent!
http://www.ssa.gov/oact/progdata/fundFAQ.html
Is anyone aware of research done on this issue to compare the “performance” of the Trust Fund compared with, say, what an average return would be for a pension fund manager?
It strikes me that a possible needed reform would allow the trust fund to go out in invest in other types of investments, such as AAA securities of other governments, just like other “sovereign wealth funds” are allowed to do. This might also have a salutary effect on the federal government borrowing from the trust fund to finance other “projects”.
I haven't looked closely into the TF interest rate issue, but there's another related aspect of things that moves in the other direction: as I understand it, the TF can redeem bonds as needed regardless of their maturities, without any penalty. Let's say the TF held 30-year bonds but needed to redeem some today; ordinarily it would need to sell some bonds, which if interest rates had risen it might do at a loss. But the TF can redeem the bonds to the Treasury regardless, which is an advantage. I don't know for sure how the maturity/interest rate issue nets out, though when I get some time I'll check it out.
My guess is that the TF could select which "bonds" to redeem; however, the need to redeem bonds has, until now, been next to nil. Even now, the amount of funds invested is very, very much greater than that need to be redeemed over at least the medium term.
The fact that they can "redeem bonds as needed" is not nearly as advantagous as being able to "redeem and re-invest when prudent". This, of course, assumes that the TF managers are, well, good managers.
One of my points is that the current policy of the Federal Reserve to push down short-term rates (they may want to push down long-term rates, too, but they are much more effective at pushing down ST rates) means that the TF is at a serious disadvantage under this formula. They would be much better off being able to invest in marketable securities, Treasuries, or not. Perhaps the TF management is managing this buy only investing in ST "bonds". Who knows? None of this is very transparent.
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