Friday, June 10, 2011
In a 244 page report dated May 13, 2011, the Social Security Board of Trustees released their 2011 report on the financial status of the Old-Age and Survivors Insurance and Disability Insurance (OASDI), otherwise known as Social Security. In their report, the Trustees Old-Age and Survivors Insurance (OAS) funds are projected to be exhausted in 2036. The Disability Insurance (DI) funds are expected to be exhausted in 2018. The report also projects that OASDI program costs will exceed non-interest income in 2011 and demand for program benefits are expected to remain higher than normal when compared to the program’s 75-year history.
The signcanace of the report, the 71st such report in the life time of the Social Security, is that those employer sponsored programs which are integrated with Social Security benefits could see a rise in their own costs if Social Security benefits are reduced. Take for an example a defined benefit pension plan which offsets 50% of the retirees monthly pension benefit with Social Security benefits. Assume two otherwise equal retirees, “A” who retirees before a reduction in Social Security benefits and “B” who retires after a reduction in Social Security benefits.
Assume the Social Security benefits for retiree “A” was unreduced at $1,300 monthly and one year later Social Security benefits for retiree “B” was reduced at $1,100 monthly. The plan’s simplified monthly pension benefit formula is: 75% of Final Average Monthly over 36 months, times Years of Service over 20, less 50% of the retirees estimated Social Security Award amount at age 65. Both retirees were age 65, their Normal Retirement Age for Social Security and the private pension plan.
In the above simplified example, a 15% reduction in the retiree’s estimated Social Security Award amount leads to a 5% increase in the retirees pension benefit and a 2% decrease in Income Replacement Ratio for “B”. While a 5% increase in the retirees pension benefit may seem small, consider this for hundreds or thousands of employees who will consider retirement in the coming years. Consider also the poor performance of the current financial markets and you may see that changes in Social Security benefits (Social Security Reform) has a potential ripple effect into any private employer sponsored defined benefit pension and long term disability plans which offset (integrate) Social Security Award amounts.
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