Actuarial Measures of US Household Income and Wealth from Defined Benefit Pension Plans

Actuarial Measures of US Household

Income and Wealth from Defined Benefit

Pension PlansBy Marshall Reinsdorffor presentation at the

UNECE Group of Experts on National AccountsApril 27, 2010

Agenda item 5

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Institutions for Retirement Income in the US

Pension plans are sponsored by and funded by employers (employees may also contribute some of their pay).

In defined contribution (DC) pension plans, benefits depend on the actual account balance, so actuarial estimates are not needed.

In defined benefit (DB) pension plans, benefits depend on a formula that typically involves pay and years of service.

Most private DB benefit entitlements are insured by the PBGC.

Social security is a government social insurance program, not a pension plan (but design of most pension plans takes it into account.)

Individuals’ own tax-advantaged retirement saving plans are also important, especially for proprietors of unincorporated businesses.

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DB pension plans are generally funded

In principle, assets of pension plan’s trust fund should track the participants’ benefit entitlements.

Sources of growth in plan assets include employer and employee contributions, investment income, and holding gains.

In a fully funded plan, a fall in the number of active employees per retiree does not cause a rise in contribution rate required to pay benefits and keep the plan solvent.

Volatility in holding gains can cause volatility in contributions.

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Cash Approach to Measuring Pensions

At present, we measure pensions on a cash basis.

Pension trust fund is included in household sector wealth, and employer contributions are included in household sector income and saving.

Household saving within pension plan = contributions + investment income on plan assets – benefits – plan administrative expenses.

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Shortcomings of the Cash Approach

Cash approach has some advantages: No need to make debatable assumptions and choices of methods. Availability of data (though data gaps do exist). Easy to integrate with rest of the accounts.

But it also has disadvantages: Timing of contributions can cause distortions and spurious volatility. Can differ from households’ perceptions of pension wealth and income. Omits key information; imbalances may be hidden from view.

Article in August 2009 Survey of Current Business reports on research on developing accrual approach estimates based on actuarial calculations.

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Accrual Approach to Measuring DB Pensions

The actuarial value of the benefit entitlements in a DB plan may not equal the value of the plan assets.

Employer responsible to cover shortfalls of plan assets, so unfunded actuarial liability is part of household wealth.

Households’ wealth = the actuarial value of the benefit entitlement under the accrual approach.

Compensation income = benefits accrued through service.

Property income = interest on the actuarial value of the benefit entitlement, not actual investment income earned on plan assets.

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Data Sources for Accrual Estimates

We have different kinds of data for private, state and local government and Federal government plans.

Private plans: PBGC provided data sets of Form 5500, including the actuarial

schedule, starting with 2000.

Federal government plans: Actuarial estimates from plan actuaries and GAO reports.

State and local government plans: BEA collected data from a sample of large plans/plan families, but

Census Bureau will provide in future.

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Private DB Plans 2000-7, Cash Accounting(billions of dollars; from August 2009 SCB, with revisions)

200

0

2001 2002 2003 2004 2005 2006 2007

Opening balance2011.

71918.

41755.

01657.

61944.

72105.

82249.

72474.

3

Household Income 96.1 106.6 148.9 149.3 148.9 149.5 152.9 143.8

Employer contributions 32.8 48.6 99.8 100.4 95.1 92.4 89.2 74.8

Investment income from assets 63.3 58.0 49.1 48.9 53.8 57.1 63.7 69.0

Administrative expenses 7.3 7.2 6.9 7.4 8.3 8.6 9.2 9.9

Benefits, net of employee contributions 117.4 123.8 133.7 134.8 141.1 138.8 151.7 160.5

Saving -28.6 -24.5 8.3 7.1 -0.5 2.2 -8.1 -26.7

Holding gains/losses on assets -74.1

-139.4

-130.9 277.2 167.3 126.5 252.1 94.2

Net transfers and other changes in reported assets -0.5 -0.8 -6.6 -2.1 10.3 -7.0 -2.0 -5.4

Reported end-of-year assets

1908.5

1753.8

1625.9

1939.7

2121.8

2227.4

2491.6

2536.4

Other Changes in Volume of Assets 9.9 1.3 31.7 5.0 -16.0 -2.5 -17.3 NA

Change in wealth -93.3-

163.4 -97.4 287.1 161.1 119.1 224.6 62.1P

Active participants (millions) 22.4 22.4 22.2 21.6 21.0 20.4 20.0 19.4

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Private Plans 2000-7, Accrual Accounting (ABO approach; in billions

of dollars)2000 2001 2002 2003 2004 2005 2006 2007

Opening ABO, at interest rates assumed by plans 1761.1 1852.2 1932.8 2080.7 2066.2 2278.7 2370.0 2531.6

Effect of change to 6% interest rate assumption 12.9 -7.6 21.6 -9.3 64.7 3.3 -60.9 -59.1

Opening ABO, at 6% rate 1773.9 1844.6 1954.4 2071.3 2130.9 2282.0 2309.1 2472.4

Household income 172.3 180.5 192.3 199.7 198.4 211.3 215.0 227.8

Benefits accrued, net 65.8 69.8 75.0 75.4 70.5 74.3 76.4 79.4

Employee contributions 0.8 0.7 1.1 0.9 0.8 1.0 1.0 1.0

Interest cost of current liability 106.4 110.7 117.3 124.3 127.9 136.9 138.5 148.3

Benefits disbursed, net 117.4 123.8 133.7 134.8 141.1 138.8 151.7 160.5

Household saving, at 6% rate 54.8 56.7 58.6 64.9 57.3 72.5 63.3 67.3

Other changes in vol. of assets 15.8 53.1 58.3 -4.3 93.9 -45.3 100.1 NA

Change in ABO 70.7 109.8 116.9 59.5 151.1 27.1 163.3 NA

Change in ABO, at interest rates assumed by plans 91.2 80.6 147.8 -14.5 212.6 91.3 161.6 NA

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Income, Saving and Change-in-Wealth: Private Plans using

Approach of SNA 20082000 2006

Household total contributions 180.3 225.2 Employers' actual contributions 32.8 89.2 Employers’ imputed contributions 40.3 -3.5 Household actual contributions 0.8 1.0 Household contribution supplements 106.4 138.5 Household actual property income 63.3 63.7 Imputed interest on unfunded liability 43.1 74.9Benefits and admin. expenses 125.5 162.0Pension plan total saving 54.8 63.3 Pension plan saving—actual -28.6 -8.1 Pension plan saving--imputed 83.4 71.4Other changes in wealth 15.8 100.1

Holding gains, capital transfers, OCVA-actual -64.7 232.7 OCVA--imputed 80.5 -132.7

Change in pension entitlements 70.7 163.3 Change in actual plan assets -93.3 224.6

Change in unfunded entitlements 164.0 -61.3

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Income, Saving and Change-in-Wealth: Private Plans using

Approach of SNA 20082000 2001 2002 2003 2004 2005 2006 2007

Household total contributions 180.3 188.4 200.3 208.0 207.5 220.8 225.2 238.8

Employers' actual contributions 32.8 52.2 100.2 100.8 95.4 92.7 89.2 74.8

Employers’ imputed contributions 40.3 24.8 -18.3 -18.0 -16.6 -9.8 -3.5 14.6

Household actual contributions 0.8 0.7 1.1 0.9 0.8 1.0 1.0 1.0

Hsehold contribution supplements 106.4 110.7 117.3 124.3 127.9 136.9 138.5 148.3

Household actual property income 63.3 58 49.1 48.9 53.8 57.1 63.7 69.0

Imputed interest on accrued liability 43.1 52.7 68.2 75.4 74.1 79.8 74.9 79.3

Benefits and admin. expenses 125.5 131.7 141.7 143.1 150.2 148.4 162.0 171.5

Pension plan total saving 54.8 56.7 58.6 64.9 57.3 72.4 63.3 67.3

Pension plan saving—actual -28.6 -20.8 8.7 7.5 -0.2 2.4 -8.1 -26.7

Pension plan saving--imputed 83.4 77.5 49.9 57.4 57.5 70.0 71.4 93.9

Other changes in wealth 15.8 53.1 58.3 -4.3 93.9 -45.3 100.1 NA

Holding gains, capital transfers and OCVA-actual -64.7 -142.5 -106.1 279.6 161.3 141.5 232.7 NA

OCVA--imputed 80.5 195.6 164.4 -283.9 -67.4 -186.7 -132.7 NA

Change in pension entitlements

70.7 109.8 116.9 59.6 151.1 27.1 163.3 NA

Change in actual plan assets -93.3 -163.4 -97.4 287.1 161.1 143.9 224.6 NA

Change in unfunded entitlements 164.0 273.2 214.3 -227.5 -10.0 -116.7 -61.3 NA

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What’s Different about Government Employee Pension Plans?

In government sector, DB plans continue to predominate. Employees may not be covered by Social Security. Inflation protection is common. Employee contributions are important source of plan funding. Plan freezes and terminations prohibited by law, which can be

viewed as a rationale for measurement by a PBO approach.

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Federal DB Pensions, 2008

PBO for civilians assumes interest rate of 6.25%, inflation of 3.5%, and salary growth of 4.25%.

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Income, Saving and Change-in-Wealth of Federal Government Plans using Approach

of SNA 2008  2001 2007Household total contributions 149.7 180.5 Employers' actual contributions 68.6 98.0 Employers’ imputed contributions -35.5 -57.0 Household actual contributions 4.7 4.2 Household contribution supplements 116.7 139.6 Household actual property income 49.2 50.0 Imputed interest on unfunded liability 67.5 89.6Benefits and admin. expenses 83.7 108.4

Pension plan total saving 66.1 72.1 Pension plan saving—actual 34.1 39.7 Pension plan saving--imputed 32.0 32.6Other changes in wealth -7.2 26.9 Capital transfers/timing adjustments-actual 3.8 -17.6 OCVA—imputed -11.0 44.5Change in pension entitlements 58.9 99.0

Change in actual plan assets 37.9 22.0

Change in unfunded pension entitlements 21.0 77.0

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Income, Saving and Change-in-Wealth of Federal Government Plans using Approach

of SNA 2008  2001 2002 2003 2004 2005 2006 2007

Household total contributions 149.7 154.0 148.7 152.1 164.0 171.0 180.5 Employers' actual contributions 68.6 72.2 70.4 81.3 85.1 91.2 98.0 Employers’ imputed contributions -35.5 -35.0 -36.4 -47.5 -47.1 -53.1 -57.0 Household actual contributions 4.7 4.6 4.6 4.6 4.5 4.4 4.2 Household contribution supplements 116.7 116.9 114.8 118.4 126.9 133.0 139.6 Household actual property income 49.2 49.1 48.2 47.0 49.6 47.9 50.0 Imputed interest on accrued liability 67.5 67.8 66.6 71.4 77.3 85.1 89.6Benefits and admin. expenses 83.7 86.0 87.9 91.9 96.9 102.8 108.4

Pension plan total saving 66.1 68.0 60.8 60.2 67.1 68.2 72.1 Pension plan saving—actual 34.1 35.3 30.7 36.4 37.8 36.3 39.7 Pension plan saving--imputed 32.0 32.8 30.2 23.9 30.2 32.0 32.6Other changes in wealth -7.2 -29.4 8.8 78.3 34.2 78.7 26.9 Capital transfers/timing adjustments-actual 3.8 4.0 3.8 -0.2 1.7 4.2 -17.6 OCVA—imputed -11.0 -33.4 5.0 78.5 32.5 74.5 44.5

Change in pension entitlements 58.9 38.6 69.6 138.5 101.3 146.9 99.0

Change in actual plan assets 37.9 39.3 34.5 36.2 39.5 40.5 22.0

Change in unfunded pension entitlements 21.0 -0.7 35.1 102.3 61.8 106.4 77.0

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State & Local Government Plans, SNA 2008 Approach

2001 2006Household total contributions 244.3 337.8 Employers' actual contributions 39.1 68.0 Employers’ imputed contributions 42.1 42.3 Household actual contributions 26.6 33.9 Household contribution supplements 136.5 193.6 Household actual property income 71.0 94.3 Imputed interest on unfunded liability 65.5 99.3Benefits and admin. expenses 118.7 177.2Pension plan total saving 125.6 160.6 Pension plan saving—actual 18.1 19.0 Pension plan saving—imputed 107.5 141.6Other changes in wealth 49.3 52.9 Holding gains, cap transfers and OCVA-actual -24.7 340.7 OCVA—imputed 74.0 -287.8Change in pension entitlements 174.9 213.5 Change in actual plan assets -60.1 371.1 Change in unfunded pension entitlements 235.0 -157.6

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State & Local Government Plans, SNA 2008 Approach

2001 2002 2003 2004 2005 2006 2007Household total contributions 244.3 261.4 275.8 294.2 311.4 337.8 369.7

Employers' actual contributions 39.1 42.3 53.4 60.2 61.1 68.0 77.2

Employers’ imputed contributions 42.1 43.7 35.4 33.4 37.2 42.3 48.8

Household actual contributions 26.6 27.8 29.3 30.7 32.3 33.9 36.1

Household contribution supplements 136.5 147.6 157.7 169.9 180.8 193.6 207.6

Household actual property income 71.0 68.9 76 81.8 87.8 94.3 93.1

Imputed interest on accrued liability 65.5 78.7 81.7 88.1 93.0 99.3 114.5

Benefits and admin. expenses 118.7 130.3 141.7 152.8 162.8 177.2 190.7

Pension plan total saving 125.6 131.1 134.1 141.4 148.6 160.6 179.0

Pension plan saving—actual 18.1 8.9 17.0 19.8 18.4 19.0 15.8

Pension plan saving—imputed 107.5 122.2 117.1 121.6 130.2 141.6 163.2

Other changes in wealth 49.3 53.8 34.7 61.3 34.3 52.9 52.9

Holding gains, cap transfers and OCVA-actual -24.7 -22.6 139.4 232.9 170.9 340.7 136.7

OCVA—imputed 74.0 76.4 -104.7 -171.6 -136.6 -287.8 -83.8

Change in pension entitlements 174.9 184.9 168.8 202.7 182.9 213.5 231.9

Change in actual plan assets -60.1 17.5 176.7 252.4 193.1 371.1 81.0

Change in unfunded pension entitlements 235.0 167.4 -7.9 -49.7 -10.2 -157.6 150.9

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All DB Pensions (percents of disposable personal income)

2001 2004 2007

Household total contributions 7.6 7.4 7.6 Employers' actual contributions 2.1 2.7 2.4 Employers’ imputed contributions 0.4 -0.3 0.1 Household actual contributions 0.4 0.4 0.4 Household contribution supplements 4.8 4.7 4.8 Household actual property income 2.3 2.1 2.0 Imputed interest on accrued liability 2.4 2.6 2.7Benefits and admin. expenses 4.4 4.4 4.5Pension plan total saving 3.2 2.9 3.1 Pension plan saving—actual 0.4 0.6 0.3 Pension plan saving—imputed 2.8 2.3 2.8Other changes in wealth 1.2 2.6 0.8 Holding gains+cap transfers+OCVA--actual -2.1 4.4 1.1 OCVA—imputed 3.4 -1.8 -0.4Change in pension entitlements 4.5 5.5 3.2 Change in actual plan assets -2.4 5.1 1.0 Change in unfunded pension entitlements 6.9 0.5 2.2

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All DB Pensions (percents of disposable personal income)

2001 2002 2003 2004 2005 2006 2007

Household total contributions 7.6 7.7 7.5 7.4 7.5 7.4 7.6

Employers' actual contributions 2.1 2.7 2.7 2.7 2.6 2.5 2.4

Employers’ imputed contributions 0.4 -0.1 -0.2 -0.3 -0.2 -0.1 0.1

Household actual contributions 0.4 0.4 0.4 0.4 0.4 0.4 0.4

Household contribution supplements 4.8 4.8 4.7 4.7 4.8 4.7 4.8

Household actual property income 2.3 2.1 2.1 2.1 2.1 2.1 2.0

Imputed interest on accrued liability 2.4 2.7 2.7 2.6 2.7 2.6 2.7

Benefits and admin. expenses 4.4 4.5 4.4 4.4 4.4 4.5 4.5

Pension plan total saving 3.2 3.2 3.1 2.9 3.1 2.9 3.1

Pension plan saving—actual 0.4 0.7 0.7 0.6 0.6 0.5 0.3

Pension plan saving—imputed 2.8 2.6 2.4 2.3 2.5 2.5 2.8

Other changes in wealth 1.2 1.0 0.5 2.6 0.3 2.3 0.8

Holding gains+cap transfers,+OCVA--actual -2.1 -1.6 5.0 4.4 3.4 5.8 1.1

OCVA—imputed 3.4 2.6 -4.6 -1.8 -3.1 -3.5 -0.4

Change in pension entitlements 4.5 4.2 3.6 5.5 3.4 5.3 3.2

Change in actual plan assets -2.4 -0.5 5.9 5.1 4.1 6.4 1.0

Change in unfunded pension entitlements 6.9 4.8 -2.4 0.5 -0.7 -1.1 2.2

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What’s Different about the Accrual Estimates?

Less volatile.

Compensation income is slightly lower than in the cash estimates.

Imputed interest is higher than investment income on assets. Assets < actuarial liabilities.

Investment income on assets excludes capital gains, but interest rates in actuarial calculations reflect expected total returns on assets.

Total household income is higher by enough to add more than 2 percentage points to the personal saving rate.

Accrual estimates are sensitive to assumptions/methods.

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Government Social Insurance Programs

Pension Benefit Guarantee Corp. (PBGC) is a public financial corporation that pays benefits to retired participants in DB plans whose sponsor has declared bankruptcy.

Railroad Retirement Board is a public financial corporation that provides pension benefits to retirees from the railroad industry.

My Survey of Current Business article has actuarial estimates for pensions from the PBGC and Railroad Retirement Tier II.

Actuarial information on Social Security and Railroad Retirement Tier I will take different approach from the information provided for defined benefit pensions because they are government social insurance schemes.

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Social Security

Social security actuaries calculate “open group unfunded obligation”, “closed group liability” and “maximum transition liability”.

Maximum transition liability resembles the ABO of a pension plan. Yet it is not so useful for analytical purposes—it is very large because

benefit entitlement grows rapidly in the early part of career. But participation in the remainder of the career can’t be avoided.

Closed group liability is useful for inter-generational accounting. Open group unfunded obligation is useful as a measure of solvency.Open group future benefits less taxes for next 75 years, as of 01-2009

Open group obligation

Trust Fund Assets

Unfunded Open Group Obligation

$7.7 trillion(2.71% of covered

payroll)

$2.4 trillion(0.86% of covered

payroll)

$5.3 trillion(1.86% of covered

payroll)