ACCI2006 Annual Conference

Baltimore, MarylandMarch 16, 2006

SOCIAL SECURITY:The Way Forward

Background Briefing by

John Rother DirectorPolicy & Strategy

RETIREMENT SECURITY

First . . . let’s putSocial

Securityin context

The Four Pillarsof Retirement Security

Social SecuritySocial SecurityPensions & SavingsPensions & Savings

EarningsEarningsHealth InsuranceHealth Insurance

Now let’s lookat

Social SecuritySocial Security

RETIREMENT SECURITY

2042

2028

2018

2008Repairing and fine-tuning

Who gets benefits?

63%

13.5%

5.5%

18%

Social Security

Disabled Workers

Retired Workers

Spouses

Survivors[widow(er)s, children]& children ofRetired/Disabled Workers-

Sou

rce:

Jan

200

6 M

onth

ly B

enef

its S

tats

SS

A

Looking at:Looking at:

FairnessAdequacy Solvency

• Is Social Security adequate?

• Is Social Security fair?

• Is Social Security solvent?

Adequacy

How much is the average Social Security benefit?

Retired worker $1004

Retired spouse $ 500

Widowed mother/father $ 714

Surviving child $ 658

Widow(er) of retired worker $ 950

Disabled worker $ 938

Sou

rce:

Jan

200

6 M

onth

ly B

enef

its S

tats

SS

A

Social Security: MAIN retirement income for 4/5 of economic brackets

0%

20%

40%

60%

80%

100%

Lowest 1/5 Second 1/5 Middle 1/5 Fourth 1/5 Highest 1/5

Social Security

Pensions/Annuities

Public AssistanceAssets

Misc. Other

Wages

Sour

ce: M

arch

200

4 C

urre

nt P

opul

atio

n su

rvey

Perc

ent o

f ret

irem

ent i

ncom

efro

m a

ll so

urce

s

Key measure of adequacy: “Income Replacement Rate”

Current Social Security benefit formula ensures lower-wage workers receive a higher replacement relative to their earnings

• 57% low-wage workers• 42% average-wage workers• 35% high-wage workers• 24.8% consistent max-taxable wages

Center for Retirement Research, November 2005, Munnell, “Just the Facts on Retirement Issues”

Fairness

African-American and Hispanic Workers

Minorities make up a disproportionate segment of low and moderate wage earners

Social Security benefit formula ensures all lower-wage workers receive a higher replacement relative to their earnings

Women’s Equity Issues

Women more than men concentrated in low-wage workMedian weekly salary = $585 vs $722 for men (81%)Over half of beneficiaries are womenFor 1 in 4 unmarried women, sole source

of income is Social SecurityWomen live longer after age 65: 3 more yearsCOLA crucial to well-being of longest livedWomen (and men) get the higher of:

• Spousal benefit• Or, own work earnings

Source: 2005 Full-time Wage and Salary Workers

0

2000

4000

6000

8000

10000

Male Female Male Female

Single

Divorced

Widowed

Married

Source: Table 51, Statistical Abstract of the United States 2003, U.S. Census Bureau

Age 65-74 Age 75+

Marital StatusBy Age and Sex, United States 2003

Num

ber o

f peo

ple

(thou

sand

s)Most women widowed by 75+

Women compared to Men

*Source: Institute for Women’s Policy Research for 2004

**Source: Center for Retirement Research, Why Are So Many Older Women Poor?, by Alicia H. Munnell, April 2004

***Source: Preliminary figures for 2003 – National Center for Health Statistics - CDC

Men WomenMedian earnings of year-round full-time workers*

$40,798 $31,223

Median years of covr’d emplymt by workers retiring**

44 32

Life expectancy at age 65*** 16.8 19.8

Poor & Near Poor, 2001(within 150% of Poverty)

60-64 15% 20%65-74 17% 24%75+ 20% 33%

% Male % Female

Source: U.S. Census Bureau, Current Population Survey 2004

Poverty Status

Age

Solvency

Social Security: Cash Flow

Estimated OASDI and Cost Rates, 2001-50[as a % of taxable payroll]

8

9

10

11

12

13

14

15

16

17

18

19

2001 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Year

Perc

ent o

f Tax

able

Pay

roll

2018

Social Security: Projected Trust Fund Assets

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2001 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Year

Bill

ions

of D

olla

rs

Assets at end of year,including interest

2042

2028

We are here

in current dollars

CBO/SSA Projections of Trust Fund Assets Compared

0

1

2

3

4

5

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2015

2020

2025

2030

2035

2040

2041

2042

2045

2046

2047

2048

2049

2050

2051

2052

2053

2054

2055

2042 2052

Trus

t Fun

d R

atio Congressional

Budget OfficeSocial Security

Trustees

Numbers as a ratio of balance to outlays

Implications of CBO Projections

• Long-term problem looks only half as big• Short-term cash flow the same• More modest changes would be sufficient

Options to StrengthenSocial Security

POLICY OPTIONS %(Shown on the next two slides)

Percent by which option would reduce

the 75-year actuarial deficit

Raise payroll tax ½ percentage point 24%Include newly-hired State/Local workers 9%Raise max. wages subject to Soc Sec tax 43%Gradually raise age of full benefit to 70 38%Increase calculation period to 38 years 16%

. . . continued on next slide

Options to StrengthenSocial Security

More Options to Strengthen Social Security

Index benefits for “average longevity” 25%Reduce benefits for new retirees (5%) 26%Diversify 15% of Trust Fund investments 15%Slightly lower the COLA calculation 14%Raise the earliest eligibility age from 62 10%

Private Accounts

opposed by AARP

Private Accounts

Shift risk to the individual

Require deep cuts in future benefits

Necessitate added government borrowing for transition; interest obligations increased for taxpayers

Expensive to administer, fees would reduce earnings

The Other Pillarsof Retirement Security

Pensions & SavingsPensions & SavingsEarningsEarnings

Health InsuranceHealth Insurance

Retirement Securityincreasingly requires

Financial Management Skills

Source: Surveys of Consumers; analysis by AARP Public Policy Institute 2004.

Scor

e

6757

6277

63

8174

52

70

46

5955

0

25

50

75

100

OverallScore

Other Credit Savings Investment Mortgage

All AgesAge 65+

Consumers Age 65+ score even Lower than General Population onFinancial Knowledge Tests

Source: Surveys of Consumers- uses Federal Reserve Board types of money managers; analyses by AARP Public Policy Institute, 2004.

Types of Money Managers

HIGH financial product ownershipHIGH in prudent financial behaviorVery Good

LOW financial product ownershipHIGH in prudent financial behavior

LOW financial product ownershipLOW in prudent financial behavior

HIGH financial product ownershipLOW in prudent financial behavior

Good

Bad

“Lost”

Source: Surveys of Consumers; analysis by AARP Public Policy Institute 2004.

13%

19%23%

30%18%

48%38%

11%

0%

25%

50%

75%

100%

All Ages Age 65+

Very Good

Good

Bad

Lost

Consumers Age 65+:

More Likely to be “Lost” Money Managers

Factors that Increase Difficulty of Information Gathering and Financial Management for ALL Today’s Consumers

Time pressures

Working more

Increased individual responsibility

More decisions/choices

Complexity of products and services

Pricing not clear

Difficult to comparison shop

Low levels of financial literacy

Financial Disclosures

Fail to provide complete information on costs

Do not make consumer aware of seller compensation arrangements

Not provided in a timely fashion

SimplicityPlain English, no legalese,lay termsClarification of financial terms, definitionsPreferably 1 pageLarger font size, more white space (esp. around fees)Glossary800 # for assistanceColor coding who gets $Standardization for comparison shopping

What Consumers Want

Clarity in FeesTotal feesDifferentiate between mutual fund fees, broker fees, others Charts, tablesExamples, numericAnnual costsHow much money brokers may receive as incentiveInformation on difference between back-end & upfront charges

Source: A Public Assessment of the Proposed Mutual Fund Disclosure forms. AARP 2004.

Changes in PensionsShifting risks to individuals

Defined-Benefit PensionsDisappearing

0%

10%

20%

30%

40%

50%

60%

70%

1981 1991 2001

Defined Benefit Only

Defined Contribution Only

Source: Alicia H. Munnell, Kevin E. Cahill, and Natalia A. Jivan, An Issue In Brief, Number 13, Center for Retirement Research at Boston College, September 2003.

% of Wage & Salary Workers Covered by Plan Type, 1981-2001

United Airlines (parent UAL Corp.)International Business Machines Corp (IBM) Verizon Communications Inc.Hewlett-Packard Co.Sprint Nextel Corp.Tribune Co.Lexmark International Inc.Alcoa Inc.Russell Corp.

All have terminated or frozen traditional pensionsor announced plans to do so.

As of September, 2005, 627 of Fortune 1000 companies sponsored traditional pensions, and of those, 115 have been terminated, frozen or closed to new workers.

Source: Benefits consulting firm Watson Wyatt Worldwide Inc.,

What do these companieshave in common?

Half of workers have no access to pension plans, defined benefit or defined contribution

Even for those who do have 401(k)-type plans, balances are low, and withdrawals before retirement are common

How widespread are pensions?

Continued Earningsan increasing trend

Labor Force participationcontinues to rise for older workers

43.0%

30.2% 29.8% 29.5% 30.1% 30.0% 30.3% 30.9% 31.3% 31.8% 32.3% 33.1% 34.5% 35.7% 36.2%

29.70%

0%

10%

20%

30%

40%

50%

1950 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: U.S. Bureau of Labor Statistics, Handbook of Labor Statistics, 1985; Employment and Earnings, January issues, 1986-2005

Labor Force Participation Rates, Age 55+ 1950 and 1990-2004

26.7%

11.9% 11.6% 11.3% 12.4% 12.1% 12.1% 12.2% 11.9% 12.3% 12.8% 13.1% 13.3% 14.0% 14.4%11.6%

0%

10%

20%

30%

40%

50%

1950 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: U.S. Bureau of Labor Statistics, Handbook of Labor Statistics, 1985; Employment and Earnings, January issues, 1986-2005

Labor Force Participation Rates, Age 65+ 1950 and 1990-2004

Labor Force participationup for 65+ also

What do older workers want?

Flexible job optionsPhased retirementRecognition of the worth of older workersHealth care benefits

Rising Consumer Debtan increasing concern

Most Boomers’ Net Worth Low

Med

ian

Net

Wor

th

Income Quartile

$2,504

$42,866

$229,560

$0

$50,000

$100,000

$150,000

$200,000

$250,000

Low 25% Mid 50% Top 25%

Sou

rce:

Fed

eral

Res

erve

Boa

rd,

Sur

vey

of C

onsu

mer

Fin

ance

s 19

98

Minus home equity Age 50-61

30%

12%

38%

56%

0%

20%

40%

60%

Prime SubprimeType of Loan

45+ more likely to have subprime loans

Source: AARP Mortgage Borrower Survey, 2001.

18-34 18-3445+ 45+

Source: Dēmos’s calculations from Federal Reserve Board Survey of Consumer Finances, 1992 and 2001

$2,608

$4,088

$1,626

$4,041

$ 0

$ 1,000

$ 2,000

$ 3,000

$ 4,000

$ 5,000

1992 2001

Families 55–64

Families 65+

Average Credit Card Debt of Older American Families 1992- 2001

65+credit card debt tripled in a decade

1992 2001

Spiraling Health Costsbecoming a major financial threat

Average Medicare Out-of-Pockettakes 22% of Income

30%24%

33%

22%

29%

0% 10% 20% 30% 40%Percent of Income

Figures are for non-institutionalized Medicare beneficiaries only. “Out-of-Pocket” includes payments for Medicare cost-sharing, Part B & Private insurance premiums, physician balance billing, and goods & services not covered by Medicare. It excludes the cost of home care and long-term nursing home care.

Sourc

e: A

ARP P

ublic

Polic

y In

stitute

pro

ject

ions

usi

ng M

edic

are

Ben

efits

Model

, v5

.306.

Under 135% Poverty

People in “Fair” or “Poor” health

Women

85+ only

ALL 65+

Average Out-of-Pocket Health Care Spending 2003

What needs to be done to help consumers?

Four priorities:

Strengthen and protect Social Security

Give all workers a means to save through payroll deduction

Reform health care to keep affordable

Give consumers better decision tools

Empower consumers with new tools & technology

Focus on outcomes that lead to improved money management

Increase financial literacy

Consumer Public Policy Recommendations

Make. . .Product informationLabelingDisclosures

. . .easier to understand& more accurate

(Continued)

Consumer Public Policy Recommendations

Improve information quality

Increase quality & integrity of advice to consumers

Increase consumer product & services evaluation sources

Improve information quality

Consumer Public Policy Recommendations

Strengthen Community Reinvestment Act

Encourage increased basic banking and credit services

Consumer Public Policy Recommendations

Increase options for underservedpopulations and communities

(Continued)

Eliminate predatory financial practices

Increase options for underservedpopulations and communities

Consumer Public Policy Recommendations

SOCIAL SECURITY:Part of The Way Forward