Actuary: retirement fund will run out of money by 2022
posted October 12, 2009
With the release of the most recent actuarial report from Joseph Nichols of Pacific Actuarial Services, MISSA’s actuary, the pressure to initiate drastic changes in the social security laws and regulations has now come to utmost urgency for MISSA’s top management and Board of Directors. At stake for the people of the Marshall Islands is the future welfare of both their current and future generation of retirees and their immediate families.
The report said that as of October 1, 2008, the total accrued actuarial liability (AAL) of MISSA stood at $225.8 million while the market value of Trust Assets was $63.2 million. This results to an unfunded AAL of $162.6 million or 72%. Therefore, the funded AAL is only 28%. This simply means that if the social security program in RMI is stopped on that date, MISSA can only pay for 28% of all benefits due on that date. Although this is an improvement in funded status to past years, there are warning signs showing future stresses to the System. Due to market decreases in 2008, the funded status of the System has hit a critical mark. Adding to the stress on the System is the fact that the number of workers and taxable earnings continue to decrease.
MISSA’s funded AAL was 15% in 1999. In 2001, it slightly improved to 16% and then jumped to 20% in 2003. It further soared to 29% in 2006 due to MISSA’s exceptional investment gains.
AAL represents the current value of benefits already earned and which are in pay status as well as benefits earned as of the valuation date by those who are still working and are expected to earn future benefits. One can think of this as the amount needed today to pay for all benefits earned as of today that are either already being paid or may be paid in the future.
This determination of the AAL does not include former workers who are no longer making contributions, are not fully-insured, and therefore are not entitled to a future benefit. Should these workers re-enter the workforce in the future, their benefits will then be included in the category of workers currently earning benefits.
The funded ratio is an indication of how well-funded the Administration is at any point in time with respect to benefits already earned. A funded ratio of 100% would indicate that the Administration’s liability for benefits earned was fully funded by current Trust assets. A funded ratio of 25% would indicate that current Trust assets were only great enough to cover 25% of the benefits already earned. The greater the funded status, the better funded the Administration is with respect to benefits already earned.
The deficiency is calculated as the accrued liability less the market value of Trust assets and further reduced by the estimated value of future employee contributions in excess of that needed to fund future benefits and System expenses.
The unfunded AAL is greatly affected by the level of Trust assets which, in return, is affected by the investment performance of the Trust. After experiencing positive investment returns for fiscal years 2002 through 2007, the Trust has realized a negative return in 2008 with the Trust losing $8.5 million or 8.33%
ACTUARY’S COMMENTS AND SUGGESTIONS TO MANAGE THE UNFUNDED AAL
Benefit payments and administrative expenses exceeded the amount of contributions collected during each fiscal year from 2006 to 2008, and will continue to do so for fiscal year 2009. Since a larger portion of the contributions are for past due collections, the difference between the current year collections and disbursements are even greater. The trend of deficits shows no end. This puts the Administration in the position of having to dip into the Trust in order to meet its financial commitments. As the amount of benefit payments grows in the future, without further changes, it is certain that the Trust will run out of money. In fact, based on current provisions and worker demographics, the Trust will be diminished by 2022. This projection is based on no growth in the active workforce. The deficit will come even sooner should the workforce continue to decrease.
Increasing revenue
The most immediate source of additional revenue could come through an increase in the tax rate levied on workers, self-employed workers and employers. Contributions can increase two ways: first by increasing the percentage, then by increasing the maximum taxable wage base. Increasing the percentage only increases contributions, not liabilities. If the maximum taxable wage base is increased, the benefit earned on the additional amount should be lower than the current 2%. In fact, one option is to eliminate the taxable wage base maximum for contributions, but keep the gradual increase in place for benefits. This would increase current annual revenues by approximately $1.3 million. This change would be very difficult, but at least it provides a starting point to make decisions. Since most of the liability is based on benefits in pay status, continually increasing current worker and employer contributions will not fully fix the impending deficit.
Another source of additional funding is to look directly to the Marshall Islands Government for additional funds. Keeping in mind that the more money there is in the Trust fund, the larger the potential dollar amount of investment return. The RMI Government could make investments in Social Security by allocating $5 million per year for the next 3 to 4 years. This would push the exhaustion of trust assets out past 20 years. Alternately or in addition to a single payment, some of the funding received through Compact II could be allocated to Social Security on an annual basis.
Limiting benefit growth
1. Increase normal retirement age to 65 - this change would decrease the unfunded AAL by approximately $30 million. It would also decrease the annual cost of the benefits from 11.5% to 9% and extend the date assets are exhausted out about 5 additional years;
2. Freeze benefits - this change would decrease the unfunded AAL by approximately $22 million. It would also decrease the annual cost of the benefits from 11.5% to about 8% and extend the date assets are exhausted well beyond the 20 year projection.
3.
Freeze benefits and increase normal retirement age to 65 - this change would decrease the unfunded AAL by approximately $43 million. It would also decrease the annual cost of the benefits from 11.5% to about 6% and extend the date assets are exhausted well beyond the 20 year projection;
4.
An additional plan design was to look at converting the social security system from a defined benefit (DB) plan to a defined contribution (DC) plan. Due to the poor funded ststus of the system, this conversion would be difficult without a large contribution from the RMI Government. For example, if the approximately $50 million in accumulated contributions were refunded to active workers in exchange for any benefit, this would leave $13.2 million to pay for those currently receiving benefits. The full 14% contributions would need to be put in the frozen DB plan for 15 years, leaving no contributions for current workers. SO not only would the workers be, in aggregate, forfeiting over 1/2 of their accrued benefits, they would receive no benefits for the next 15 years. It does not mean that a DC plan is not feasible. It means that no change is feasible unless benefit reductions involve both active workers and those currently in pay status.
5.
In each of the above scenarios, drastic changes to the active worker benefits only is not enough to sustain the System. Without additional funding, the only ways to make the System sustainable is to lower benefit for both active workers and those currently in pay status. One option is a flat percentage decrease to all benefits - for active workers and for those workers currently in pay status. For example, if all benefits were decreased by 25%, the funded percent would increase to about 37% and remain there for 8 to 10 years. Without additional funding, benefits across the board must be changed.
There has been discussion to cap payments to a percent of contributions. Approximately 90% of those in pay status have already received benefits greater than the sum of the taxes related to their benefit. If benefits were limited to 100% of the taxes, only 10% would continue receiving benefits. For active workers, if benefits were limited to the sum of the taxes, they would be paid for, on average, 5 years. This is a significant decrease in liabilities - over half.