(Archived Content)
JS-2418
Good afternoon. I'm thrilled to be here, to spend some time with all of you. I have an awful lot of respect for your profession, and for your perspective on the fiscal and retirement policies of our great country.
Above all else, you are a fair and ethical profession. Unbiased. Motivated by what is accurate, not by the opinions of the day. That is a difficult standard for mortals to achieve, and you do it as well as any group I've been familiar with.
You may have noticed that I talk a lot about actuaries when I talk about Social Security reform. I point to your work because I know that it stands solid, without the tint or tarnish of politics.
I have been aggravated, as I'm sure you have been, by the partisan politics that have sullied the issue of saving and strengthening Social Security.
The national dialogue that the President has engendered has really been terrific, and we're very proud of the fact that Social Security is being discussed all over the country, from lunch counters to college dining halls, from family dinner tables to the halls of Congress.
The national conversation has definitely changed from should it be fixed? to how can we fix it, and that is great progress.
But not everyone has the President's courage. The political temptation has been to deny the problem or delay the solution, and that's a shame.
Those of you in this room today know better than anyone that to deny that the system is in financial trouble is to deny the facts, period. And delaying action is fiscal foolishness.
So I imagine that we are preoccupied with some common concerns: the long-range fiscal health of the nation's Social Security system, and the implications of both reform and of inaction.
You know the scenario of inaction: A compounding problem, growing worse by $600 to $700 billion each year.
The President doesn't believe in ignoring that reality. He doesn't think it would be wise to turn a blind eye to the reports of your non-partisan colleagues, which tell us that the program, in its current form, is unsustainable.
The President is too honest to ignore the irrefutable facts, the undeniable truth that the Social Security system is on an unsustainable path. As you well know, the demographics, the arithmetic, cannot be denied: Cash flows peak in 2008 and turn negative in 2017, and the trust fund itself will be exhausted in 2041. People are living longer and having fewer children, so there are fewer workers to support retirees. We had 16 workers paying into a system for every one beneficiary in 1950, and today we only have about three workers for every beneficiary. That ratio will drop to two-to-one by the time today's young workers retire.
When those young workers retire, in 2041, the system will be exhausted, bankrupt. Today's 30-year-old can expect a nearly 30 percent benefit cut from the current system when he/she reaches retirement age. Without action, our children and grandchildren will be faced with huge benefit cuts or massive tax increases.
That's the scenario of inaction. And it's one the President won't accept. He understands that the government must plan for the future and deal with looming financial threats when we see them.
We also need to talk about the financial consequences of taking the wrong action. We have to do it right because of the enormous impact Social Security can have on our economy overall. The American economy is the most dynamic and resilient in the world, but we cannot take that for granted.
Your association's website has a clever feature, the Social Security game. I think it's a great way to show what some of the options are that we have to address solvency, and it's a helpful tool that inspires healthy debate.
Now I wish someone would come up with a game that shows the economic consequences of taking the wrong action on Social Security reform.
For example, the deeply negative consequences a tax increase would have on American's take-home income and the ability of businesses to create new jobs.
The Social Security Trustees' report showed that we would have to raise the payroll tax immediately by 3.5 percentage points to make the system whole on a permanent basis. In other words, the payroll tax would have to be increased by nearly 30 percent.
Both workers and employers would bear a significant cost. For very small employers who employ more than half of America's private-sector employees I fear that much of a tax increase would force them to make terrible choices, from lay-offs to health benefit cuts. And it would make hiring new people even more difficultwhich is worrisome since small business creates most of our nation's new jobs.
Increasing payroll taxes hurts the economy and it hurts job creation, period. That's why the President is against it.
Tax increases aren't the answer, so the President has put a number of ideas on the table that might be. He has encouraged the Congress to propose a variety of ideas that might be the answer as well, and we appreciate very much that those ideas are coming forward.
One of the President's core beliefs on this issue is that we ought to move toward a system that is pre-funded, that we should gradually move away from a pay-as-you-go model and give Americans the chance to save their own money. He wants to move away from the filing cabinet of IOUs and toward something that people actually own and that represents real capital.
Voluntary personal accounts are a step toward pre-funding the system, and that's going to put it on a more stable, guaranteed basis down the road.
Additionally, the power of compound interest is a mighty one I don't need to tell you that and including personal retirement accounts in Social Security reform will mean opening a door to that power for people who would not have had the opportunity otherwise. This is an exciting and empowering proposition, and best of all we know that it can be done without disrupting the system of benefits for their parents and other generations of retired beneficiaries.
Former Democratic Congressmen Tim Penny and Charlie Stenholm have said recently that if Social Security were being created from scratch today, Americans would want to include a way to help everyone build up a nest egg.
Now is our chance to make the system work in today's and tomorrow's demographic reality. You are key players in this national dialogue; we seek and welcome your input and ideas, and I suspect Congress does as well.
When talking about retirement, it is of course important to include pension reform, another issue that the President is dedicated to, and the administration is working on.
As you all know, the single employer defined benefit pension system is in serious financial trouble. Many plans are badly underfunded, jeopardizing the pensions of millions of American workers. The insurance system protecting these workers in the event that their own pension plans fail has a substantial deficit. Such a deficit means that although the PBGC has sufficient cash to make payments in the near-term, without corrective action, ultimately the insurance system will simply not have adequate resources to pay all the benefits that it owes to the one million workers and retirees currently owed benefits who were participants of failed plans and to the beneficiaries of plans that fail in the future.
The Administration believes that current problems in the system are not transitory nor can they be dismissed as simply the result of restructuring in a few industries. The cause of the financial problems is the regulatory structure of the defined benefit system itself. Correcting these problems and securing the retirement benefits of workers and retirees requires that the system be restructured. Minor tinkering with existing rules will not be sufficient. If we want to retain defined benefit plans as a viable option for employers and employees, fundamental changes must be made to the system to make it financially sound.
The President's solution to these issues is to fundamentally reform the rules governing pension plan funding, disclosure and PBGC premiums, based on the following three simple principles:
- Funding rules should ensure pension promises are kept by improving incentives to fund plans adequately.
- Workers, investors and pension regulators should be fully aware of pension plan funding status.
- Premiums should reflect a plan's funding status and the plan sponsor's risk and ensure the pension insurance system's financial solvency.
Such changes will increase the likelihood that workers and retirees actually receive the benefits that they have earned and as a result will moderate future insurance costs that will be borne by sound plan sponsors. Today I am going to discuss how the Administration's initiative improves incentives for adequate plan funding. We have proposed a fundamental reform of the treatment of defined benefit pension plans, one that we believe will change plan sponsor behavior, ultimately result in better funded and better managed defined benefit pension plans, and secure benefits for workers and retirees.
The Administration proposal is designed both to simplify funding rules and to enhance pension plan participants' retirement security. The federal government has an interest in defining and enforcing minimum prudent funding levels, but many other funding, investment, and plan design decisions are best left to plan sponsors. Under this proposal, pension plans would be required to fund towards an economically meaningful funding target a measure of the currently accrued pension obligations. Plans that fall below the minimum funding target would be required to fund-up to the target within a reasonable period of time. Plans that fall significantly below the minimum acceptable funding level would also be subject to benefit restrictions.
Some key features of the proposed funding rules:
- Funding based on meaningful and accurate measures of liabilities and assets. The proposal provides funding targets that are based on meaningful, timely, and accurate (using the yield curve for discounting is a central component of this proposal) measures of liabilities that reflect the financial health of the employer.
- Accrued benefits funded. Sponsors that fall below minimum funding levels will be required to fund up within a reasonable period of time. The proposal requires a 7-year amortization period for annual increases in funding shortfalls. There will be restrictions on the extension of new benefit promises by employers whose plans' funded status falls below acceptable levels. Benefit restrictions will limit liability growth as a plan becomes progressively underfunded relative to its funding target.
- Plan sponsors able to fund plans during good times . Many believe that the inability of plan sponsors to build sufficiently large funding surpluses during good financial times under current rules has contributed to the current underfunding in the pension system. The proposal addresses this problem directly by creating two funding cushions that, when added to the appropriate funding target, would determine the upper funding limit for tax deductible contributions. And every plan will be allowed to fund to a level of funding corresponding to the total cost of closing out the plan.
Under our proposal, allowing plan sponsors the opportunity to prefund and therefore limit contribution volatility is a critical element.
Defined benefit plans are a vital source of retirement income for millions of Americans. The Administration is committed to ensuring that these plans remain a viable retirement option for those firms that wish to offer them to their employees. The long run viability of the system, however, depends on ensuring that it is financially sound. The Administration's proposal is designed to put the system on secure financial footing in order to safeguard the benefits that plan participants have earned and will earn in the future. We are committed to working with Congress to ensure that effective defined benefit pension reforms that protect worker's pensions are enacted into law.
A final issue that I think will be of interest to all of you is the status of the Treasury Department's study on Terrorism Risk Insurance Act.
The terrorism risk insurance program was an important confidence builder as this country recovered from the attacks of September 11 and the recession.
The issue of reauthorization of TRIA is one that will involve a detailed analysis. As you know, the Act required that Treasury study its effectiveness and report to Congress by June 30, 2005 . Through our study, ongoing at this time, we are seeking to answer the questions Congress posed in the Act, such as the financial capacity of the insurance industry, the pricing and take-up of terror risk insurance, whether risk can be priced and managed, the return of re-insurers to the market, and what is the most efficient mechanism to produce insurance for the risk.
We are looking forward to a prompt completion of our study, so that we and Congress can have a full and open discussion about these important questions.
It's an important issue, and Treasury is dedicated to the most thorough study and analysis possible so that Congress may make a fully informed decision about terrorism risk insurance in the future.
Thanks again for having me here today; I look forward to taking your questions.