Actuarial Outpost
 
Go Back   Actuarial Outpost > Actuarial Discussion Forum > Pension - Social Security
FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions


Upload your resume securely at https://www.dwsimpson.com
to be contacted when our jobs meet your skills and objectives.


Reply
 
Thread Tools Search this Thread Display Modes
  #71  
Old 08-10-2016, 11:25 AM
Brian Grinnell Brian Grinnell is offline
SOA
 
Join Date: Mar 2016
Posts: 19
Default

Quote:
Originally Posted by DiscreteAndDiscreet View Post
Should participants be informed of the impact of benefit cuts on the same basis? Should participants be encouraged to think of their plan accruals on this basis as a dollar value of consideration given by the employer for this year's employment? Should participants be informed of the value of an adequate stream of retirement income on this basis?

These are probably all good things for people to think about, period. But does this basis effectively communicate decision-relevant information to all parties? It's not necessarily relevant to a bargaining strategy with their employer or an individual retirement planning strategy for retirement needs not covered by the employer. How does a change in treasury yield that's accompanied by an offsetting change in spreads need to affect their strategies?

I'm bringing this up because any scalar value pension funding metric corresponds with a strategy for satisfying it. Your discount mechanism is predicated on a vehicle that realizes it. I have done public sector work that has used treasury yields as part of a plan termination liability funding metric. This kind of metric corresponds with paying the premium to secure a third party guarantor, today.

If the employee would be more prudent to use a different strategy to value their retirement needs, perhaps reasoning that they're willing to take on risk (either in investment return over the short term or risk of foregone retirement income over the longer term), then they need to make their decisions based on a different number. If that number is lower than the number the employer is being encouraged to use to value the same obligation, the result is likely going to be a cut in total retirement savings.

Metrics are only as good as the strategic decisions that they inform. Promoting a metric promotes a strategy.
Responding to what I think is your general contention (my apologies if I misinterpret or misconstrue your argument), I agree that any one metric has limited usefulness. A single liability value, calculated from a deterministic valuation rate, is always going to be more appropriate in some circumstances than in others. Each participant would need to evaluate the potential contributions to and benefits from the plan according to his or her own risk tolerance and ‘personal discount rate’ to determine if the plan offered them value. However, from an overall funding or valuation perspective, the individual’s risk tolerance is not relevant, it is the plan sponsor’s risk tolerance. That risk tolerance determines the level of investment risk the plan should be willing to take, and the risk premium it can expect to receive. Some would argue that this risky expected return is the appropriate return to use to discount cash flows to determine required contributions.

You could also calculate the total liability and the funded ratio using such a rate. This would give you a benchmark liability to evaluate the health of the plan and, for example, determine the level of future contributions needed to expect to fully fund the promised benefits. However, since this rate is inherently risky, there is an implicit probability that this funding will be insufficient, and in the future contributions will need to increase or benefits decrease (or that the funding will be more than sufficient and future contributions will be reduced or benefits increased). This risk varies from plan to plan, based in part on their investment strategies. This makes it difficult to compare results across plans, or to understand the level of risk. Indeed, since the valuation results are presented as a single, deterministic value, it almost implies that there is no risk. Since we are using this liability value as a benchmark, perhaps it would be more valuable to calculate it on a basis that minimizes the uncertainty (since that is the way the liability is usually interpreted) and makes it easy to compare across plans.

If you’re only going to show one liability value, implying that it is a ‘certainty’, I think the most appropriate would be to show the liability value based on risk-free rates. But maybe the idea of showing a single liability value is so inherently flawed that we should abandon it entirely, and show a range, or somehow explicitly address the risk that contributions/benefits will be higher or lower than expected. In either case, more robust risk disclosures would be valuable to plan sponsors and participants.
Reply With Quote
  #72  
Old 08-10-2016, 11:29 AM
bdschobel's Avatar
bdschobel bdschobel is offline
Past SOA President
SOA AAA
 
Join Date: May 2004
Location: Winter Garden, FL
Studying for FSA '76
College: MIT '74
Posts: 15,629
Default

Quote:
Originally Posted by Brian Grinnell View Post
...But maybe the idea of showing a single liability value is so inherently flawed that we should abandon it entirely, and show a range....
Having worked for a decade in the public sector (for SSA), I'll tell you that ranges are simply unacceptable in that environment. Politicians -- and their budget staffs -- demand point estimates. We actuaries know very well the uncertainty surrounding our estimates, but politicians just can't deal with it.

Bruce
Reply With Quote
  #73  
Old 08-10-2016, 11:46 AM
Helen Sass Helen Sass is offline
Member
SOA AAA
 
Join Date: Oct 2015
Location: Nearby
Studying for Colorectal Exam
College: SUNY Alumni
Favorite beer: #1 - Free; #2 - Cold
Posts: 2,715
Default

Quote:
Originally Posted by exactuary View Post
I believe several systems have "temporarily" eliminated COLAs on benefits in pay status. While you may argue that this is a prospective cut, the automatic COLAs were clearly part of the accrued benefit.
Yes, I am aware that for private sector plans automatic COLAs are considered by the IRS to be part of the accrued benefit and subject to protection under 411(d)(6). You are also aware that in the real world most people do not consider a decrease in the rate of acceleration the same thing as slowing down.

My initial question was in regards to a question on how we communicate the impact of benefit cuts to participants. It would seem fairly easy and uncontroversial to disclaim that future increases may not occur if future circumstances do not allow for them. It would be more difficult to communicate that your current monthly benefit may actually decrease if the plan falls short on its expected future rates of return. The point is that has never yet happened. Do you expect it to?
__________________
Spoiler:
Quote:
Originally Posted by pete5383 View Post
Whew!!~ I can finally stop this continuous drawer-shitting that I've been doing for the past week or so.
Reply With Quote
  #74  
Old 08-10-2016, 11:48 AM
Helen Sass Helen Sass is offline
Member
SOA AAA
 
Join Date: Oct 2015
Location: Nearby
Studying for Colorectal Exam
College: SUNY Alumni
Favorite beer: #1 - Free; #2 - Cold
Posts: 2,715
Default

Quote:
Originally Posted by bdschobel View Post
Having worked for a decade in the public sector (for SSA), I'll tell you that ranges are simply unacceptable in that environment. Politicians -- and their budget staffs -- demand point estimates. We actuaries know very well the uncertainty surrounding our estimates, but politicians just can't deal with it.

Bruce
To Bruce's point, how many people are even aware of the more and less conservative estimates for SS prepared each year along with the "best-estimates"?
__________________
Spoiler:
Quote:
Originally Posted by pete5383 View Post
Whew!!~ I can finally stop this continuous drawer-shitting that I've been doing for the past week or so.
Reply With Quote
  #75  
Old 08-10-2016, 12:02 PM
JMO's Avatar
JMO JMO is offline
Carol Marler
Non-Actuary
 
Join Date: Sep 2001
Location: Back home again in Indiana
Studying for Nothing actuarial.
Posts: 37,643
Default

Quote:
Originally Posted by Helen Sass View Post
You are also aware that in the real world most people do not consider a decrease in the rate of acceleration the same thing as slowing down.
your rong.

I remember a lot of complaining about rate cuts when the over-generous Soc. Sec. increase formula was cut back. And that was on a prospective reduction to the increase formula.

As they used to say back in Wyoming, it depends on whose ox is gored.
__________________
Carol Marler, "Just My Opinion"

Pluto is no longer a planet and I am no longer an actuary. Please take my opinions as non-actuarial.


My latest favorite quotes, updated Nov. 20, 2018.

Spoiler:
I should keep these four permanently.
Quote:
Originally Posted by rekrap View Post
JMO is right
Quote:
Originally Posted by campbell View Post
I agree with JMO.
Quote:
Originally Posted by Westley View Post
And def agree w/ JMO.
Quote:
Originally Posted by MG View Post
This. And everything else JMO wrote.
And this all purpose permanent quote:
Quote:
Originally Posted by Dr T Non-Fan View Post
Yup, it is always someone else's fault.
MORE:
All purpose response for careers forum:
Quote:
Originally Posted by DoctorNo View Post
Depends upon the employer and the situation.
Quote:
Originally Posted by El Actuario View Post
Therapists should ask the right questions, not give the right answers.
Quote:
Originally Posted by Sredni Vashtar View Post
I feel like ERM is 90% buzzwords, and that the underlying agenda is to make sure at least one of your Corporate Officers is not dumb.
Reply With Quote
  #76  
Old 08-10-2016, 12:07 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 93,076
Blog Entries: 6
Default

Quote:
Originally Posted by Helen Sass View Post
Not really.

These "cuts" are expected decreases in future scheduled benefit increases and reduced benefits for new employees. No one's benefit accrued to date has been or will be reduced, unless you count slowing the rate of increase as a decrease.

We are actuaries, not politicians, right?
Actually, in Illinois, they considered cutting COLAs to be a reduction of benefits.

http://www.chicagotribune.com/ct-ill...508-story.html

Would you argue with the Illinois Supreme Court?
__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #77  
Old 08-10-2016, 12:26 PM
Don Quijote Don Quijote is offline
Member
 
Join Date: Sep 2001
Posts: 1,407
Default

Quote:
Originally Posted by Helen Sass View Post
It would be more difficult to communicate that your current monthly benefit may actually decrease if the plan falls short on its expected future rates of return. The point is that has never yet happened. Do you expect it to?
Central Falls, RI
Pritchard, Alabama
Reply With Quote
  #78  
Old 08-10-2016, 01:38 PM
whisper's Avatar
whisper whisper is offline
Member
CAS AAA
 
Join Date: Jan 2002
Location: Chicago
Favorite beer: Hefewizen
Posts: 39,291
Default

As a P&C actuary, I am pretty independent and admittedly ignorant of the issues involved. With that said, to me there appears to be an air of impropriety wafting around what occurred.
Reply With Quote
  #79  
Old 08-10-2016, 03:22 PM
Helen Sass Helen Sass is offline
Member
SOA AAA
 
Join Date: Oct 2015
Location: Nearby
Studying for Colorectal Exam
College: SUNY Alumni
Favorite beer: #1 - Free; #2 - Cold
Posts: 2,715
Default

Quote:
Originally Posted by JMO View Post
your rong.

I remember a lot of complaining about rate cuts when the over-generous Soc. Sec. increase formula was cut back. And that was on a prospective reduction to the increase formula.

As they used to say back in Wyoming, it depends on whose ox is gored.
Rong is a pretty strong word. I think.

I am not arguing against human nature. People will always complain whenever they feel something is being taken away from them whether they actually had it or not. Complaining does not prove that the basis of their complaints was correct.

So if they called you in (when you were still employed) and told you they were reducing your salary by 10%, and then called you back in a week later to say they were only going to cut it by 5%, you would be happy because you got a raise?

As they used to say back in Idaho, as long as the person whose ox is gored lives in Wyoming we don't care.
__________________
Spoiler:
Quote:
Originally Posted by pete5383 View Post
Whew!!~ I can finally stop this continuous drawer-shitting that I've been doing for the past week or so.
Reply With Quote
  #80  
Old 08-10-2016, 03:44 PM
Helen Sass Helen Sass is offline
Member
SOA AAA
 
Join Date: Oct 2015
Location: Nearby
Studying for Colorectal Exam
College: SUNY Alumni
Favorite beer: #1 - Free; #2 - Cold
Posts: 2,715
Default

Quote:
Originally Posted by campbell View Post
Actually, in Illinois, they considered cutting COLAs to be a reduction of benefits.

http://www.chicagotribune.com/ct-ill...508-story.html

Would you argue with the Illinois Supreme Court?
I'm not arguing with them. I said in many cases (including all private sector plans) COLAs are legally considered part of the accrued benefit that cannot be reduced. However, they are still just COLAs. I will stand by my statement that taking away something you have not yet earned is different from taking away something you already have.

Quote:
Originally Posted by Don Quijote View Post
Central Falls, RI
Pritchard, Alabama
Good try.

In Central Falls, the Police and Firefighters agreed to the cuts beforehand. The city would not have reduced them otherwise.

In Pritchard, the entire city just went bankrupt and stopped paying everything including retirees' benefits. Not exactly the same as a specific reduction in benefits, but I'll give it to you if you insist.

Others?
__________________
Spoiler:
Quote:
Originally Posted by pete5383 View Post
Whew!!~ I can finally stop this continuous drawer-shitting that I've been doing for the past week or so.
Reply With Quote
Reply

Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off


All times are GMT -4. The time now is 03:11 PM.


Powered by vBulletin®
Copyright ©2000 - 2020, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.27333 seconds with 10 queries