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The following is the testimony of Mark J. Warshawsky, Ph.D., Director of Retirement Research at Watson Wyatt Worldwide, before the Department of Labor ERISA Advisory Council on Promoting Retirement Literacy and Security by Streamlining Disclosures to Participants and Beneficiaries, July 23, 2009.
Good afternoon. My name is Mark Warshawsky and I am Director of Retirement Research for Watson Wyatt Worldwide. Watson Wyatt is a global consulting firm focused on human capital and financial management, especially related to the myriad aspects of employee compensation and benefits programs of large employers. I am also a member of the Social Security Advisory Board (SSAB), which is an independent, bipartisan board created by Congress and appointed by the President and the Congress to advise the President, the Congress, and the Commissioner on policy and administrative matters related to the Social Security program. Personally, I have conducted and overseen fundamental research on retirement plans, Social Security, health care financing, and insurance products for more than 25 years. I also played a role in retirement policymaking and analysis in the prior Administration as Assistant Secretary for Economic Policy in the Treasury Department.
I appreciate the opportunity to present testimony to the Working Group on Promoting Retirement Literacy. My remarks today reflect my own views, and not necessarily those of Watson Wyatt Worldwide or any of its officers, directors or associates. I will be drawing heavily in my testimony on the recently published report of the SSAB, entitled “The Social Security Statement: How It Can Be Improved,” available at http://www.ssab.gov/documents/Pre-Publication_Version_The_Social_Security_Statement_web.pdf. Although I rely on that report, which was adopted unanimously by the Board, again my remarks here reflect my own views and not necessarily those of my fellow Board members. My testimony will summarize the SSAB report on the annual statement — its purpose, history and current structure, survey and focus group evidence on its use by the public and expert opinion on its design, and areas that need improvement, including resolution of delivery and communications problems, accuracy of benefit projections, and useful additional information. My testimony will then apply briefly the findings of the SSAB report to overall principles to promoting retirement literacy through disclosures and communications for retirement plans. Responding to some of the specific questions you have asked to address, I will also apply the report findings separately to defined benefit and defined contribution plans.
The Social Security Annual Statement
The statement is intended to serve several purposes. It is a tool to encourage workers to validate their earnings history is reflected correctly in the Social Security Administration’s (SSA) databases. The statement is intended to educate workers on how the program works, particularly on how various retirement, disability and survivors benefits are calculated, based on earnings, through personalized illustrations; also note that retirement benefits are illustrated at three different retirement ages. It thereby can serve as an important input into insurance, financial and retirement planning. The statement informs the public of possible points of contact with the agency for service and information. It also serves as a vehicle to assist informed civic discussions about the future of the program through brief disclosure about the program’s finances and personalized information on taxes paid. The benefit projections reflect scheduled law, however, that is, they assume that for all workers, even young ones, the current benefit schedule will continue even past the Trust Fund exhaustion date, although a footnote does say that Congress can change the program at any time and that after Trust Fund exhaustion only about three-quarters of benefits can be paid.
The statement originated in the beginning of the Social Security program with a postcard that could be sent to the agency by the worker asking for his or her earnings record to verify it. Various iterations of the statement advanced in the early 1980s, sent upon worker request, containing estimates of the worker’s projected future benefits. In 1988, then Commissioner Hardy promoted a more refined statement to the public. Impressed by the public’s response, Senator Moynihan introduced a bill, passed into law in 1989, to mandate the annual provision to all individuals age 25 and older. The agency implemented the new law over the period 1995 through 1999, by delivering a more streamlined statement, starting with older workers first, until by 1999 all workers 25 years of age or older were getting their statements annually. The statement has changed only slightly since the late 1990s. One addition was a brief, but obscure, disclosure, pertaining to a small subset of workers earning government-sponsored employee pensions and not paying Social Security taxes. In addition, generic inserts have been added with general (not personalized) information targeting older workers (on claiming retirement benefits) and to young workers (on the importance of saving) and a one-page statement sent to workers with only non-covered earnings. Finally, as a related matter, there is a new online retirement benefit estimator on the Social Security website. The estimator is quite flexible, and unique among such estimators in that it employs the worker’s personal earnings record from the agency’s databases.
The format of the statement is a fairly text-heavy and colorless document composed of four pages. The first page presents an introductory message from the Commissioner that explains, in broad terms, the types of benefits from the Social Security program; it also mentions briefly the program’s finances and status of the Trust Funds. The second page provides personalized projections of retirement, disability and survivors benefits if the worker is eligible for them (“fully insured”), and explains briefly how these projections were calculated. The third page contains a personalized chart showing the worker’s earnings history for Social Security and Medicare purposes, and total taxes paid over the worker’s lifetime to date. The fourth page gives some basic facts about benefits from Social Security, explains some issues surrounding claiming retirement benefits and the earnings test, and where to find more information or to contact the agency. Also here there are general government off-topic issues advertised, such as assistance available to beneficiaries with limited earnings to pay Medicare premiums.
Evidence on Use of the Statement by the Public and Expert Opinion on its Design
From time to time, SSA has conducted surveys and focus groups to gain insights about public knowledge of the program and use of the statement. When the implementation of the new law was complete in 1999, requiring the agency to send out statements, the survey found that the public reaction to the new statements was generally favorable. Moreover, survey evidence seemed to indicate that knowledge about those aspects of Social Security that are related to individuals’ retirement planning improved with receipt of the statement. A subsequent survey in 2004, however, had less encouraging findings. Only about two-thirds of those surveyed recalled receiving a statement within the past year. Moreover, only about two-thirds of those people reported that they had read the statement carefully. The survey found that the most salient items were those directly related to the individuals themselves, that is, the personalized information – the projected benefit amounts, the history of yearly earnings, and to a lesser extent, the total amount of taxes paid. The other, more general, items on the statement, such as information about the program finances and general program facts, were recalled much less frequently.
Other third-party surveys have found fairly widespread misunderstandings about key Social Security facts, such as the impact of late retirement on benefits, the current normal retirement age, and so on.
A focus group organized by SSA confirmed that workers focused on the personalized information in the statement. Group members said that the fourth page of the statement was too wordy, and that the new information specific to government employees was confusing because workers did not understand if the new information applied to them. Another survey found confusion about the role of work credits and earnings in determining eligibility and benefit levels, and disappointment that color and graphics were not used. In a study on the statement, the Government Accountability Office (GAO) noted the positive experience of other countries with more “mass customization,” that is, personalized messaging designed to be of most relevance and interest to various audiences of the populations, say of different ages, work histories, marital statuses, and so on. The GAO also bemoaned the staid and unchanging appearance of the statement, the lack of color and graphics, and the absence of a regular and consistent feedback and analysis mechanism to assess the current statement’s effectiveness and accuracy.
Finally, experts in communication found the most effective statements were simple and compact. Information that is highly programmatic, technical, or complex would be better conveyed separately through pamphlets or other sources. These experts also confirmed the finding mentioned above that individual workers focus on their own personalized information, and that it is particularly effective to customize that messaging further, to communicate issues of special interest to delineated groups to assist in their practical decision-making, such as retirement, work, insurance purchases, and the timing of claims. For example, personalized information about the impact of different retirement ages on benefit levels would be most salient to older workers, while information on how earnings affect benefit levels or eligibility for benefits is more relevant to young and middle-age workers. Some relevant personalized information, such as how a worker’s family structure affects his or her benefits, of course, depends on the availability of the corresponding data, which may be difficult to gather and keep up-to-date.
Areas that Need Improvement
In fiscal year 2008, SSA sent out nearly 150 million statements. The SSAB report found, however, that there may be significant problems with the delivery of the statement; indeed, this may account, in part, for the relatively high percentage of workers surveyed who do not recall receiving a statement. Nearly 2 million Medicare beneficiaries who were not receiving Social Security retirement benefits should be getting statements but are not. This is a system problem; more significant are mailing address problems. Nearly 20 million individuals have “unknown addresses” arising from an inability to match Social Security and IRS records. As many as a million foreign addressees are not delivered owing to data storage issues, and 5 million statements are returned as undeliverable due to incomplete addresses. So, adding up these numbers, the SSAB estimates that about 28 million workers who should be receiving a statement each year are not getting one.
The communications problems with the statement have been foreshadowed by the above review of the survey evidence and expert opinion. The statement attempts to be all things to all people and provides information in a one-size-fits-all manner. Too much programmatic information is provided, the personalized information of most interest is not presented “front and center,” and the statements are not “mass customized,” that is, the personalized information is provided in the same way for all workers, not in ways that would be the most useful to help in decision-making at the relevant times for various large, identifiable, audiences. For example, showing three different retirement ages for projected retirement benefits is highly relevant for older workers, but likely of little real interest to younger workers.
The statement is hard to read, lacking color, border space, and graphics; moreover, the design is static, leading to a certain “boredom” factor that may account for an apparent decline in its effectiveness. The language used is often dense and bureaucratic, for example, on provisions of interest almost exclusively to government workers. Also the language used and personalized illustrations presented seem to influence behavior in perhaps inappropriate ways. For example, by conflating retirement from work with claiming benefits, the statement language may be leading many workers to cease work and claim benefits at the same time, which may not be the best outcome, even for most workers, and is certainly not required. The SSAB also recommended that the statement advertise better the agency’s unique online retirement benefit estimator.
The SSAB looked closely, in a highly analytical fashion, at the accuracy of the benefit projections presented in the statement. It did so by reviewing the underlying assumptions and methods of the projections. More significantly and uniquely, however, it compared historically the actual retirement benefits of a cohort of workers born in years 1940 through 1943 that they were eligible to receive at age 62 with what that cohort of workers would have had projected for them, if the statement had then existed, using current statement assumptions and methods and current law, at various ages over their working lifetimes.
The report found that, on average, the statement projections are fairly accurate. The averages hide, however, some problems – accuracy is considerably lower for women than men, for young workers than older workers, and for lower-wage workers than higher-wage workers. Moreover, most often the lack of accuracy is an underestimate in the projection. Upon closer examination, this may be traced to the assumption that real wage levels do not increase (particularly inaccurate for younger workers) and that if a worker has not received earnings in the past two years, he or she will not receive any earnings in any future years (inaccurate for women and lower-wage workers).
Therefore the SSAB report recommended that the SSA examine more realistic assumptions and methods about earnings to use in projections of retirement benefits. It also suggested for consideration that an additional set of projections of retirement benefits be presented, for younger and middle-age workers. That would be a calculation of monthly retirement benefits, payable at the normal retirement age, that the worker has already earned based on her earnings to date and assuming she has no future wages. This is a conservative projection, but it is particularly educational in illustrating, over the years, how benefits are related to earnings. Such a “dynamic” illustration would also add interest to the statement. Indeed, if this suggestion were to be implemented, it could then make sense to provide a projection of retirement benefits, assuming continued work, even to those young workers not yet fully insured (current agency policy does not show projections to such workers). The worker’s lack of eligibility would be indicated in the second calculation (a zero would be shown), but the statement would do a better job helping the young worker with financial planning using the statement because the first calculation would also be shown, and, in the most likely scenarios, he would indeed be getting retirement benefits from Social Security.
Brief Application of SSAB Report Findings to Best Practices for Retirement Plan Disclosures
Certain overall and general principles are apparent from the SSAB report and applicable, as best practices, to disclosures for retirement plans, promoting retirement literacy and security.
- There needs to be discrete, finite and realistic goals leading the design and administration of communications, including annual statements, with plan participants.
- Annual statements need to highlight personalized information of most relevance to the decision-making of plan participants at their various stages of work and life. Therefore it is a best practice to design variable messaging for different audiences, for example, by age, earnings, or work history.
- Statements should use easy-to-read language and be compact, colorful and use graphics. Their design should also be changed periodically. Static communications with dense bureaucratic language are especially not useful.
- General programmatic, complex, or fairly obscure information is best provided in separate specialized documents advertised and available to those who need to know.
- Different media are most useful and effective for different types of workers, for example, print, online, videos, and so on.
- Care should be taken that all people eligible for annual statements, in fact, get them. Also, in general, eligibility for the statements should be broad, without, however, also incorrectly implying actual eligibility for benefits to groups that are, in fact, not eligible.
- Information should be as accurate as possible, and accuracy, including underlying assumptions and methods, needs to be tested and evaluated periodically.
- Language used in statements should be unbiased and lead workers to make decisions in their best interests.
- While, in principle, the more detailed the personalized information, the better, in reality, certain relevant sets of information, such as family structure (spouses, beneficiaries, and so on), will not be available in an accurate and timely fashion, and therefore practical constraints will apply. In these situations, the best that can often be accomplished is generic explanations and illustrations.
Social Security obviously is a defined benefit plan, and therefore the SSAB report's recommendations on retirement benefit projections have particular relevance to best practices for employer-sponsored defined benefit plans. A realistic reflection of likely future earnings growth is appropriate for projected retirement benefits, but it is also useful for participants to know what benefits they have accrued to date. Personalized information with both types of projections gives workers a “min” and a “max,” and moreover is helpful in educating them over time on how their defined benefit plan is designed and works. This should be beneficial to the plan sponsor, who after all has presumably designed its plan with incentives to lead to the attainment of certain workforce goals. Showing estimated benefits at various retirement ages is also useful, particularly if there are subsidies for early retirement, but obviously it is most relevant to older workers.
You specifically asked whether participants in defined contribution plans should receive statements of estimated monthly annuity payments associated with their account balances. While in principle I would agree that this is an appropriate and useful disclosure, particularly if there is no active defined benefit plan covering the worker, in practice, the disclosure may be misleading if there is no annuity distribution option available in the plan. Indeed, according to Watson Wyatt Worldwide data, less than 30 percent of defined contribution plans currently offer an annuity option.
In conclusion, communications and especially annual statements are essential components of making the most of any type of retirement plan, for workers and sponsors. We therefore need to devote some sophisticated thought and resources to the best design elements and communication strategies. Thank you for your attention to my testimony and I am glad to answer your questions.
August 2009
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