Changes in the Measurement of Pensions in the US National Income and Product Accounts Brent Moulton Group of Experts on National Accounts – UNECE Geneva May 7, 2014

2 Overview ▪ SNA 2008 introduced major changes in the treatment of defined-benefit pensions ▪ In 2013 US national accounts implemented these changes  Joint implementation by Bureau of Economic Analysis (production, income and saving) and Federal Reserve Board (financial account, assets and liabilities) ▪ Paper covers:  Overview of institutional setting in the US  SNA 1993 treatment (not covered in these slides)  SNA 2008 treatment  Conceptual and practical issues in implementation

SNA 2008 – new conceptual framework ▪ “The 2008 SNA recognizes that employment-related pension entitlements are contractual engagements, that are expected or likely to be enforceable. They should be recognized as liabilities towards households, irrespectively of whether the necessary assets exist in segregated schemes or not.” (A3.127) ▪ The level of the employer’s contribution and the liability of the pension fund to the employee are based on actuarial calculations of the net present value of future benefits. ▪ Any excess of the liabilities of the pension fund over the available assets may represent a claim on the sponsor. 3

Employment-based pensions in the US ▪ In private industry, defined-benefit plans are in decline  49% of private workers participate in a pension plan  Only 16% participate in a defined-benefit plan  Regulated by federal government  Growing use of defined-contribution plans ▪ Public-sector plans – state & local government  85% of workers participate in a retirement plan  78% in a defined-benefit plan ▪ Federal government  Military and civilian plans cover almost all workers  Funds hold only special Treasury securities 4

SNA 2008 – compensation of employees ▪ Defined-benefit plan promises to pay future benefits according to a formula based on level of pay and time in service ▪ Pension component of compensation of employees is based on future benefits accrued through service  Claims to benefits accrued through service (or “normal cost”)  Add service charge (for expenses of administering fund) and subtract employees’ actual contributions to get total employers’ pension contributions ▪ Employers’ imputed pension contributions  Subtract employers’ actual pension contributions from total employers’ pension contributions 5

SNA 2008 – property income ▪ Under SNA 1993, property income earned by pension fund was shown flowing to households  Property income attributable to policyholders  Flow from pension fund to households in allocation of primary income account ▪ Under SNA 2008, property income payable to households is based on “unwinding” of the discount rate for the pension entitlement  Property income payable on pension entitlements  Increase in pension entitlement coming from past service 6

SNA 2008 – claim of pension fund on pension sponsor ▪ If pension plan sponsor (usually the employer) is responsible for meeting the liabilities of the pension fund in case of any shortfall:  Any excess of pension entitlements over assets held by fund is a liability of the sponsor and asset of the pension fund  Any excess of assets over pension entitlements is an asset of the sponsor and liability of the pension fund  Net worth of the pension fund exactly zero at all times 7

Conceptual issue – interest on claim on sponsor ▪ SNA 2008 doesn’t give much guidance on transactions or other changes in assets required to keep net worth of pension fund exactly zero ▪ If fund is persistently underfunded, unwinding of the discount rate also affects claim of pension fund on pension sponsor ▪ Consistent with general SNA principles to treat the unwinding of the discount rate as property income ▪ US national accounts have added Imputed interest on plans’ claim on sponsor  Calculated applying same discount rate used in actuarial calculations to claims of pension funds on pension sponsors  Payable by sponsor to pension fund 8

Conceptual issue – Expected holding gains ▪ Most pension funds invest in diversified portfolios that include equity shares ▪ Because pension funds expect part of their return on investment to come in the form of holding gains, able to assume a discount rate that is larger than the rate of return in the form of property income ▪ Consequently, under SNA 2008 recommendations, pension funds show persistent negative saving  In US data, about 1% of GDP per year ▪ Does it make sense for pension funds, which have net worth of zero, to have persistent dissaving?  In US accounts, property income paid to households = fund’s property income (including interest on claim on sponsor)  Pension fund saving = 0 9

Source data and methods ▪ Private plans – annual reports show actuarial data  Accumulated benefit obligation (ABO) method  Convert to common interest rate (AAA bond rate) ▪ State & local government plans – large sample of actuarial reports  BEA converted from projected benefit obligation (PBO) to ABO method  Used same interest rate as used for private plans ▪ Federal government plans  Actuarial reports prepared by government  Maintained PBO method and interest rates used by actuaries 10

Results for United States ▪ In 2012, employers’ imputed pension contributions about –0.4% of GDP  Negative for private and federal government plans  Positive for state & local government ▪ Imputed property income on plans’ claims on sponsors  0.1% of GDP for private plans in 2012  0.5% for state & local government  0.6% for federal government ▪ Claims on sponsors (unfunded pension entitlements)  2.7% of GDP for private plans in 2012  9.1% for state & local government  11.0% for federal government 11

Shares of US DB plans funded by assets 12