Benefits May 5, 2005

EBRI Study Finds Wide Variety of SS Accounts Effects

May 5, 2005 (PLANSPONSOR.com) - Even though low-income workers could expect higher annual Social Security benefits under a system of individual accounts, individual account benefit levels would vary widely even among people of the same age, according to a new study.
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According to the the Employee Benefit Research Institute (EBR)I announcement, study conclusions included that individuals in their 20s and younger (born in and after 1985) would benefit the most from action to correct Social Security’s solvency problem now, as opposed to waiting until the Trust Fund is exhausted.

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EBRI focused on four policy options to study the effects of individual accounts as proposed in the Bush Administration’s Social Security reform plan. The full report, Comparing Social Security Reform Options, is published in the May 2005 EBRI Issue Brief and is available online .

According to an EBRI news release , the options researchers studied included:

  • creating voluntary individual accounts as part of Social Security
  • maintaining benefits at the level provided in current law
  • maintaining current benefits until the Social Security Trust Fund is exhausted and then cutting benefits sharply to restore the federal retirement program to balance (The study used the Social Security Trustees’ 2004 assumptions, which placed this date at 2042).
  • gradually reducing current-law benefits to account over time for the program’s funding deficit

The EBRI study includes a chart showing 42 examples of possible Social Security benefit levels for the four policy options. The study uses “Model 2” of the 2001 President’s Commission to Strengthen Social Security as the basis for comparing the impact of individual accounts with the other three options. Even though Bush has not spelled out the details of his individual account proposal, Model 2 embraces the basic principles the administration favors and is closest to what Bush has proposed, EBRI said.

“This study shows there is no simple answer to the question of whether individual accounts or any other policy option would be best for all Social Security recipients,” said Dallas Salisbury, EBRI president. “Social Security is the largest entitlement program in the nation and affects the lives of millions of Americans. As this study demonstrates, any changes to the program-whatever they are-will affect different people in different ways, based on age, income, and other factors.”

Effects on a 30-Something

One of the examples in the study shows that an individual who is 30 years old today and is earning $16,000 a year could expect these differing levels of Social Security benefits starting at age 65:

  • $11,200 a year for the option of maintaining benefits provided under current law by removing the current $90,000 annual wage cap on Social Security taxes.
  • $11,200 a year for the option of maintaining benefits provided under current law until the Trust Fund is exhausted and then cutting benefits to the level that money being paid into the system would support (because a 30-year-old today will begin drawing benefits before the sharp benefit cut is imposed)
  • $9,600 a year if benefits were cut gradually over time to account for the shortfall in the Trust Fund.
  • $12,500 a year under the Model 2 individual account plan, assuming historic investment returns for a mix of stock and bonds. However, if an individual decided to invest only in Treasury bonds to avoid stock market risk, the amount would be $10,400 a year.

The study also provides results detailing the percentage of a worker’s pre-retirement income that Social Security would replace under the different policy options. In addition, the study contains information about the probability that the benefit levels from Model 2 individual accounts would be higher than the other three policy options.

Compliance May 4, 2005

DoL: Keep Plan Assets out of SS Policy Debate

May 4, 2005 (PLANSPONSOR.com) - A US Department of Labor (DoL) official has issued a stern warning against plan sponsors using plan assets to lobby for or against Social Security reform or to get similarly involved in other public policy issues.
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The warning came  in a letter from Alan Lebowitz, deputy assistant secretary for program operations in the Employee Benefits Security Administration to Jonathan Hiatt, general counsel of the AFL-CIO in Washington.

Using plan assets to influence public debate or making plan administration decisions based on a particular provider’s public policy stance would violate the Employee Retirement Income Security Act (ERISA), Lebowitz contended.

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“The Department reiterates its view that plan fiduciaries may not increase expenses, sacrifice investment returns, or reduce the security of plan benefits in order promote collateral goals,” Lebowitz wrote to Hiatt. “A fiduciary’s reconsideration of its current service providers based solely upon the service provider’s view on Social Security would raise grave concerns about the prudence and loyalty of the fiduciary’s actions. Similarly, a fiduciary could not, consistent with the duties of prudence and loyalty, simply exclude qualified service providers from consideration in hiring based solely upon their views on Social Security policy.”   

The Lebowitz letter was prompted by complaints from two prominent US House Republicans that the union was improperly lobbying against the Bush Social Security reforms. House Education & the Workforce Committee Chairman Representative John Boehner (R-Ohio) and Employer-Employee Relations Subcommittee Chairman Representative Sam Johnson (R-Texas) asserted that such the department should look into whether federal labor and pension laws were violated by what the lawmakers said were union efforts to pressure financial firms and brokerage houses to oppose Bush’s plan (See  Two Lawmakers Call for DoL Probe of Union SS Reform Lobbying).

 

Boehner and Johnson complained about public protest and picketing of the target financial services firms, as well as tacit and/or explicit notice to these firms that if they support the President’s proposal, the union will withdraw its assets and invest through brokerages they find more politically palatable.

“Plans are important participants in the national economy and are generally affected by legislation, regulations, actions and events which affect the economy as a whole such as Social Security policy,” Lebowitz wrote. “This simple fact does not convert every legislative or regulatory proposal concerning the economy into a rationale for spending plan assets on the policy debate. If a fiduciary could characterize an “educational” expense as “plan administration” merely by positing some connection between the particularly policy at issue and the broad economic interests of ERISA-covered plans, there would be virtually no limit to the range of such expenses that would be permissible.…The Department rejects a construction of ERISA which would render the Act’s tight limits on the use of plan assets illusory, and which would permit plan fiduciaries to tap into ERISA trusts to promote myriad public policy preferences rather than to pay benefits and engage in plan administration with undivided loyalty.”

In a statement Wednesday, Boehner applauded the Lebowitz letter. “The Department has made clear that union leaders violate federal law if they threaten to withdraw pension assets from a financial firm simply because it has a differing view on the importance of reforming Social Security,” said Boehner.  “We should have an open and honest discussion over how to save Social Security for future generations, but no special interest should be breaking federal law in its quest to influence the debate.”

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