Actuarial study: benefits to exceed contributions each year through 2015 & possibly beyond
posted 01/10/06

Based on current benefit provisions and tax rates, it appears that the total amount of benefits paid will exceed total employer and employee contributions collected each fiscal year though fiscal year 2015 and possibly beyond.

This gloomy scenario was the highlight of the most recent study conducted by MISSA’s actuary, Pacific Actuarial Services, LLC.

This situation will make it extremely difficult for the Administration to gain any ground in its goal to reduce its unfunded Actuarial Accrued Liability (AAL)of $164.2 million or (80% of total AAL) as of October 2003 and increase the funded status of the system. In fact, if the dollar amount of earnings on trust assets is not sufficient to make up the difference between the benefit payments and collected contributions, the Administration may eventually be forced to liquidate trust investments to raise funds needed to meet benefit payment obligations.

To illustrate such gloomy situation: if there are no changes in the current benefit provisions, MISSA would need to increase in FY 2006 the employee/employer rate of contributions from the current 7% to 7.4% and at the same time withdraw $0.5 million from its Trust Fund, in order to pay off the estimated $11.1 million benefits for the current fiscal year.

This can develop into a very dangerous situation because as the amount of invested trust assets decreases, the associated earnings on these assets will also decrease, which will require that even more of the trust assets be sold in order to pay benefits.

Continued depletion of trust assets in order to pay benefits could eventually result in depletion of the trust fund and the result would be that without additional funds, MISSA could find itself in a position where it can no longer pay any benefits.

Until contributions are at least sufficient to cover benefit payment, the benefit structure should not be changed to allow for any increase in current or future benefits.

For the last couple of years, there is constant pressure to increase the level of benefits. To cite one particular example, a bill has been proposed to abolish the “Earnings Test” and is now being heard by the Nitijela. This proposed legislation has been adamantly opposed by MISSA and its Actuary, as it will aggravate the present unfunded AAL (see related story on p.6).

At this point, it is most important that the Administration remains viable, and viable means that the Administration is able to meet its benefit obligations on a regular basis well into the future. Accordingly, any benefit increases should be matched with a means to pay for these increases. Should the Nitijela approve the abolition of the earnings test, this would amount to an unfunded mandate forcing the Administration to pay additional benefits without any additional source of funds to cover the increase.

The study also explored a proposal to allow the spouse of a deceased beneficiary who is currently collecting a benefit to continue to receive the benefit that was paid to the deceased beneficiary and also to allow the payment of retirement benefits as a single lump-sum payment. Both these proposals will most likely increase overall benefit payments.

Another assumption that was considered was the effect of a cap to the growth of benefit payments, if a maximum amount is established. This study ultimately explored the effect of the unfunded AAL, future benefit payments, and the associated required employer and employee tax rate such that contributions collected each year are not less than benefit payments, if there are no changes to the benefit structure and if the basic benefit were capped at $850.00 per month for future beneficiaries (benefits to those currently in pay status would be unchanged.) It is anticipated that current adjustments for early and late retirement that apply to the basic benefit would also apply to this cap. The study also explored the implications of immediately increasing benefits to all current beneficiaries by 4% and also if this 4% increase were only applied to current retirees both of which will add to the unfunded AAL and total benefit payments.