T-106 to afford critical medical care because they do not have access to their balances prior to disparities likely to occur in a system of individual Social Security accounts through about the future. These assumptions introduce a large element of uncertainty. ForSecurity accounts. A first question for Congress to consider then becomes: are you Employee Benefit Research Institute the Institute. Security Reform Analysis Project. retirement system? A second question: would it be acceptable for some individuals to Statement assessment of individual Social Security accounts, we would like to focus most Security outgoes will exceed income beginning in the year 2018. However, since 1983, increased uncertainty in individual’s benefits due to differences in their investment Before the behavior. Clearly, if a participant’s Social Security benefit is tied to the balance of his or comparison with assumptions used by other government entities and academics, therepolicymakers and the public can subject their own objectives and values. We look Recommendations for Congress to Consider as it Moves Forward House Committee on Ways and Means Security accounts. The EBRI-SSASIM2 policy simulation model will soon present , by other government entities and academics (Chart 2). Security outgoes will exceed income beginning in the year 2018. The Trustees predict fundamental unprecedented capabilities for modeling individual accounts as well as its ability to to nontraditional reform approaches. While the use of individual accounts is not a condition for resolving the program’s projected shortfall, a majority of the Alternate Estimates of US Population Ages 85 and Older in 2050 , fundamental by 1994 - 96 Social Security Advisory Council members agreed that this approach is more Kelly Olsen, M.S.W. Population 85+ 9.6 Employee Benefit Research Institute 11.4 reform debate. Trustees Report (low) ? 11.8 and 14.6 17.8 Trustees’ Report (high) ? Paul J. Yakoboski, Ph.D. 18.2 policymakers and the public can subject their own objectives and values. We look Balances in One Large Employment-Based Retirement Savings Plan, 1994 21.4 • Would individual Social Security account balances be paid out in the form of Employee Benefit Research Institute 31.1 Total Participants (as a Percentage) that only 21 percent of surveyed retirees annuitized their IRA balances, and just 12 Zero <20% 20%- 80%+ 39.0 Washington, DC 80% Manton* 48.7 25.4 7.1 47.8 19.7 trust fund ratio Ages 20-29 19.8 7.4 48.5 24.3 24 June 1997 Ages 30-39 20.0 6.5 51.5 22.0 ? ) Ages 40-49 24.9 7.5 47.5 20.2 • Ages 50-59 31.7 6.7 45.5 16.1 55.2 8.1 31.4 5.2 0 • Would Congress be comfortable with people at the same income level and of the same - retirement system? In addition, would it be acceptable for some individuals to end up benefit ? differently, and are therefore likely to have different individual account balances at 7254368 however, is underscored by the program’s role in the income of the older population. fully reflective of the program’s future experience. In fact, since 1983, the Trustees’ financial hardship? If not, would Congress be comfortable letting people with large The importance of considering any projected Social Security shortfall as serious, Projections under the Trustees’ intermediate assumptions, however, are not necessarily sophisticated employee investment education program. EBRI research shows that similar people invest their Social Security funds would voters demand access to their accounts through lump-sum distributions in times of is not due to a lack of participant education, as this particular employer has a with no individual account balance to supplement a reduced Social Security base Social Security accounts were to become the largest source of assets for most households, Security reform is necessary. Interestingly, the “problem” explaining this plan’s large variance in investment behavior allow access to individual account funds for purposes other than retirement. If individual promised thereafter. However, only time will ultimately tell the degree to which Social organization. demographics receiving different levels of Social Security benefits under a national no equity investments, while almost a quarter were heavily diversified in equities. (Washington, DC: Social Security Administration: 1997). Another issue central to individual Social Security accounts is whether Congress would and FICA income exclusively might be able to cover fewer than 75 percent of benefits takes positions on specific policy proposals. EBRI is a nonprofit, nonpartisan, public policy research Source: 1997Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds 28 held In one large company, we found that almost 20 percent of participants ages 20 earlier date. Likewise, the trust fund could be exhausted several years earlier than 2029, officers, trustees, or sponsors of EBRI, EBRI-ERF, or their staffs. Neither EBRI nor EBRI-ERF lobbies or 2075 2070 2065 2060 2055 2050 2045 2040 2035 2030 2025 2020 2025 2010 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 throughout a person’s retirement years? year that programmatic outgo exceeds income could be pushed ahead from 2018 to an The views expressed in this statement are solely those of the authors and should not be ascribed to the Number 176, August 1996. Issue Brief Source: Employee Benefit Research Institute, negative implications for retirement income security. can we expect individual Social Security accounts to be in providing retirement income Should the Trustees’ mortality assumptions prove optimistic by actual experience, the Ages 60 and Older If Congress allows preretirement access, this decision will surely have retirement? require these balances to be annuitized? If annuitization is not required, how effective Would Congress allow access to individual account funds for purposes other than ability to manage balances from individual Social Security accounts if Congress does not 50 National Institute on Aging. are produced by the EBRI-SSASIM2 model; all others are drawn from information supplied by the individual Social Security accounts: how much confidence should we have in retirees’ asterisk (*) have been supported by the National Institute on Aging. Estimates marked with a diamond ( throughout retirement is unknown. knowledge raises the following questions when considering creating a system of payable after 2029 . 100 Source: Census Bureau estimates were published in February 1996. Research by sources marked with an percent of promised benefits would be Moreover, the effectiveness of the majority of retirees at managing their savings majority of retirees are at managing their savings throughout retirement. This lack of Without reform, approximately 75 balances are negative. Total Mathew Greenwald & Associates, reveal that most retirees do not purchase annuities. Given that most retirees do not purchase annuities, we do not know how effective the After 2011, annual income Survey, co-organized by EBRI, the American Savings Education Council, and percent annuitized their distributions from other retirement plans such as 401(k) plans. 150 Vaupel* Results from the annual Retirement Confidence annuities or lump-sum distributions? you. Census Bureau (high) American Savings Education Council, and Mathew Greenwald & Associates, we found Equity Investments forward to presenting the Committee and its staff with results from our model. Thank 200 Lee* conducting the annual Retirement Confidence Survey, co-organized by EBRI, the Senior Research Associate Census Bureau (mid) benefits would be paid out in the form of annuities or lump-sum distributions. By Allocation Distributions of Participant Account model is designed to provide a value-neutral scorecard for all types of reforms, to which reform debate ensues. One important issue associated with individual Social Security accounts is whether Table 3 250 debate more complex than its predecessors. The EBRI-SSASIM2 policy simulation The following three issues surrounding individual accounts will prove to be critical as the Trustees’ Report (intermediate) individual Social Security accounts will make this round of the Social Security reform from a range of perspectives. The additional uncertainty surrounding the introduction of equities, while another fraction has invested heavily in equities (Table 3).government currently invests Social Security funds. 300 Olshansky* surrounding individual accounts have found new importance in the Social Security employer’s retirement plan, a sizeable fraction of participants do not invest any funds in provided higher rates of return, on average, than the Treasury bonds in which the Congress is now and will continue to be inundated by multiple reform proposals coming Estimated Trust Fund Ratio Under Intermediate Assumptions, Calendar Years 1997-2075 Census Bureau (low) groups, are receiving a great deal of policy and media attention. As a result, the issues Research Analyst investment preferences among workers. For example, we have found that within one revenue by allowing participants to invest Social Security funds in equities, which have Chart 1 Estimate Source benefits. Individual account reforms, which have been proposed by numerous other Hence, while these data are informative, they do not show much detail on the variation of amounts under an individual Social Security accounts system. nontraditional reform approaches. Using individual accounts could increase program than reforms that would exclusively fix the system by raising taxes and cutting desirable individual investment patterns would affect disparities between individual benefit issue for Congress. Individual, participant-directed Social Security accounts are central toparticipate in the same retirement plan—invest their money in very different ways. presents a more contentious policy desirable reform is (All estimates are expressed in millions of people) Employee Understanding Project will be included in order to show how realistic is projected to equal 2.23 percent of taxable payroll. the degree to which that different people—even people who have similar demographic characteristics and necessary such as different mortality rates. In addition, the information EBRI has obtained from its necessary percent of promised benefits (Chart 1). Over the next 75 years, Social Security’s shortfall and from investment firms. Although the Project is ongoing, preliminary results show While disagreement and uncertainty surrounds the degree to which reform is Chart 2 “The Future of Social Security for this Generation and the Next” database of individual investment data from a number of private pension plan sponsors funds will be exhausted, and FICA income alone will be able to pay approximately 75 account for uncertainty under a range of possible economic and demographic scenarios, issue for Congress. Individual, participant-directed Social Security accounts are central Through EBRI’s Employee Understanding Project, we have gathered the largest known that by 2029, the combined Old Age, Survivors, and Disability Insurance (OASDI) trust income, Social Security is the single most important income source for aged Americans. presents a more contentious policy desirable reform is The Fourth Hearing in the Series on the degree to which quantitative results on this issue. The model will be able to do so because of its 60 percent of the elderly depend on Social Security benefits for at least one-half of their necessary The 1997 Social Security Trustees report that, under intermediate assumptions, Social While disagreement and uncertainty surround the degree to which reform is Security Trustees appear rather optimistic in comparison with mortality assumptions used age cohort invests in exactly the same manner in terms of asset allocation. underscored by the program’s role in the income of the older population. Because over different people will receive vastly different benefits under a system of individual Social placed on Social Security finances. The mortality assumptions used by the 1997 Social outcomes under a system of individual Social Security accounts have assumed that each The importance of considering any projected Social Security shortfall as serious is Subcommittee on Social Security For some of you, the answer to these questions hinges on ascertaining the likelihood that been unavailable. As a result, all researchers who have studied Social Security reform different mortality values. Clearly, the longer people live, the more pressure will be To What Degree Is Social Security Reform Necessary? Proposals to make investment decisions. It is unfortunate that to date, realistic investment data have An Assessment of the Advisory Council’s Recommendations and Other Reform Security’s long-range financial status. In addition, projections are quite sensitive to forward to presenting the Committee and its staff with results from our model. may be reason to believe that Social Security outgo will exceed income before 2018. Consistent with our mission, we do not lobby or advocate specific policy solutions. Mortality rates are one of the most controversial assumptions used in projecting Social her individual Social Security account, it is important to ascertain how persons are likely policymakers, the media, and the public with value-neutral analysis of reform options. model is designed to provide a value-neutral scorecard for all types of reforms, to which assumptions currently used by the 1997 Social Security Trustees are optimistic in we have been conducting a Social Security Reform Analysis Project to provide differences in value can translate into vastly different policy projections. debate more complex than its predecessors. The EBRI-SSASIM2 policy simulation total income over $22,254 in 1995. the Trustees’ projections as a whole have tended to be optimistic. Given that the mortality individual Social Security accounts will make this round of the Social Security reform outcomes are quite sensitive to the value chosen for some assumptions in that small uppermost income quintile. In fact, just 20 percent of the elderly population received a formulation of effective and responsible health and retirement policies. For the past year, intensively today on one largely unexplored aspect of individual account reforms: the benefit? end up with no individual account balance to supplement a reduced Social Security base significantly supplement the Social Security benefit of primarily those among the economic assumptions. Several of these assumptions are controversial. In addition, of economic security issues. Through our research, we strive to contribute to the from a range of perspectives. The additional uncertainty surrounding the introduction of The 1997 Social Security Trustees report that, under intermediate assumptions, Social Since its founding in 1978, EBRI has been committed to the accurate statistical analysis Congress is now and will continue to be inundated by multiple reform proposals coming While lump-sum distribution and preretirement access issues are critical to the supposed to supplement Social Security benefits for all retirees, these sources each of which is based on what many experts believe to be reasonable actuarial and Summary anywhere from a 0.2 percent surplus to a 5.54 percent shortfall under three scenarios, characteristics receiving different levels of Social Security benefits under a national income from personal savings, employment-based pensions, and possibly earnings are beneficiary is maintained at just above the poverty level by Social Security. Although comfortable with people at the same income level and of the same demographic example, the 1997 Social Security Trustees project the trust funds will experience would surely have negative implications for retirement income security. the EBRI-SSASIM2 policy simulation model, the cornerstone of EBRI’s Social retirement? On the other hand, if Congress allows preretirement access, this decision Institute (EBRI) and seated beside me is Paul Yakoboski, a senior research associate with aged Americans. With the average annual benefit in 1997 at $8,940, the average Statement of Kelly Olsen and Paul J. Yakoboski actual experiences has occurred in part because projections depend on many assumptions reform. I am Kelly Olsen, a research analyst with the Employee Benefit Research socioeconomic group—are going to receive different returns on their individual Social one-half of their income, Social Security is the single most important income source for retirement. Using the data behind this conclusion, EBRI will explore the actual From this example, we can logically conclude that different people—often of the same individual Social Security account balances to be evicted from their homes or be unable Because over 60 percent of the elderly depend on Social Security benefits for at least projections as a whole have tended to be optimistic. Variation between projections and We are pleased to appear before you this morning to discuss issues of Social Security