Academy Warns of Flat-Tax Danger to Pensions

flat tax could erode the foundations of the American system of private pensions, Academy Senior Pension Fellow Bob Heitzman warned in a January statement to the National Commission on Economic Growth and Tax Reform . The commis- sion, established by Republican congressional leaders and chaired by former Housing Secretary Jack Kemp, released its report to the public at a January 17 Washington Anews conference. The radical overhaul of the United States tax system has emerged as While the Kemp Commission offered no specific recommendations, an early key issue in the 1996 presidential campaign, with both publish ' Heitzman has studied the two leading proposals now before Congress . er Steve Forbes and Sen. Phil Gramm (R--Texas) advancing flat--tax plans Under the wage tax bills sponsored by House Majority Leader Dicl The Academy issued its report to en- Armey (R-Texas) and Sen Arlen sure that tax reform's effect on pen- Specter (R-Penn.), return on all in- sion plans is not overlooked in the vestments would be tax-exempt, an ad- public debate. vantage available now only to qualile-, In an exchange following the retirement plans," said Heitzman . Kemp Commission's news confer- Consumption tax proposals sponsored ence, Heitzman asked Kemp if his by Sen. Sam Nunn (D--Ga.) and Sen . group had seriously considered tax Pete Domenici (R-N.M.) would grant reform's effect on employment-re- immediate tax deductions for all lated pension plans. Kemp's response : amounts saved, deferring taxation un- "Yes, we have, and the commission til that money is drawn down for con- considers it imperative that the cur- sumption. For the most part, only rent tax status of pensions not be qualified pension plans are treated like compromised one iota ." According that now. Others are advocating a na- to Heitzman,"While the pension is- tional value-added tax or retail sales sue needs to be followed up as tax tax, replacing the personal income tax reform gets serious congressional at- system altogether. That would make tention, it is comforting to know that the current tax incentives for pensions the actuarial profession's concerns are irrelevant. part of the mix:' The Academy report suggests if any In his statement, delivered to of these legislative proposals were passed the commission before its report was in current form, there could be an in- made public, Heitzman wrote, crease in the total amount saved by in- "Fundamentally changing the tax code will precipitate a ripple of changes dividuals and households in the US., but it likely would be concentrated throughout the entire economy . The country's private pension system among those with higher incomes. Pension plans would quickly dimin- could be an unintended casualty." Since World War II, the private pensions ish in number and size and might gradually disappear. Over time, there have been the most successful form of savings-encouraged by tax in- would be additional pressure and greater need for the government to in- centives for employers and employees built into the present . "If all forms tervene through increases in Social Security benefits or other retirement of savings were given tax-favored treatment, employment-linked pen- income measures . sions. would be jeopardized. Losing this major source of private savings If private pensions are to continue to support the retirement of would ultimately work counter to the goal of increasing the national sav- middle-income workers, the proposals need to provide an alternative tax ings rate," added Heitzman . incentive for employer-sponsored pensions . This can be done through ~n- Heitzman based his statement to the Kemp Commission on his cluding a partial tax credit for contributions to qualified pension p October report, "Pensions in a Flat World" which examines the effects on or mandating employer sponsored retirement plans. private pensions of the flat tax, consumption tax, wage tax, and value- Heitzman's statement to the Kemp Commission yielded media added tax. The study was published to provide the American public and tension for the Academy in the form of a television interview on commission with accurate pension analysis as tax reform is debated Business, a nationwide business news show, and an article in the January I18 throughout the year. USA Today. "This is a good example of the Academy providing information to As the tax reform debate unfolds, the Academy will continue I to the American public and elected officials on an issue important to actu- offer the actuarial profession's analysis of the potential impact of a flat aries. Tax reform will be one of the most contentious issues discussed in on health insurance, annuities, and other private savings mechanisms. 1996, and the proposed tax initiatives and their impact on pensions are im- portant factors to consider before supporting or opposing any of the To OBTAIN A COPY OFma ACRD IkIY's PLAT TAX REPORT, VAX A REQ plans," said said Academy Executive Director Wilson W V yatt, Jr . To Ctmus DELTA AT 202-872--1948 . Elias Shiu and Bruce Jones of of the Actuarial Standards Board The Myers Award is presented the University of Iowa are coor- and the Code of Professional to an actuary who has made an dinating the conference with the Conduct . Failure to comply could outstanding contribution to the assistance of William Frye of Ball bring an actuary before the common good through service to State University. For more infor- Actuarial Board for Counseling government or other organizations mation, drop by the conference and Discipline, he noted. in the public sector. In addition World Wide Web Site : Wyatt also commented on a to honoring an individual actuary, http://www. cs .bsu/home- December 17 Quinn column that the award also calls attention to the pages/math/31 stARC .html . Or refers to an employer survey con- significant benefits the general pub- contact JudyYore of the Society of ducted by enrolled actuary lic receives from the work of the letter on Kentucky health premium Actuaries at 708-706-3500 . Theodore Konshak . Seventeen of actuarial profession . rate restrictions Pitfalls in Ky. , fax a request to the twenty surveyed companies The award is named for Chris Delta at 202-872--1948. .e. made lower pension contributions Robert J. Myers, who as chief ac- Reforms Cited after replacing their actuary. Wyatt tuary of the Social Security Premium caps could add to the stated that the survey's results do Administration from 1947 70 was risk of health insurer insolvencies if not imply that "circumventing or instrumental in the design and not carefully implemented, the Academy Explains ignoring standards of practice is funding of the U.S. Social Security Academy State Health Committee COLI Okays widespread among actuaries :' system. The first award was pre- cautioned Kentucky Gov. Paul Standards to Quinn Larry Sher, vice chairperson of the sented in 1995 to John O. Patton on December 22 . Two columns by financial writer Academy Pension Practice Montgomery, former chief actuary The Academy letter responded Guideline XXX Jane Bryant Quinn that questioned Council, also wrote Quinn to de- of the California Department of Guideline the professionalism of actuaries to outgoing Gov. Brereton C . tail the flaws in the survey's Insurance. XXX is actu- have drawn an Academy rebuttal Jones's implementation regulations methodology. A postal reply card for nomi- arially sound, for HB 250, the recently passed in a letter from Executive Director nations is included with this according to Kentucky health care reform law. Wilson Wyatt, Jr. month's Actuarial Update,the dead- the Academy Jones accused health insurers of In a January 7 column on life line for nominations is March 15 . Committee insurance illustrations, Quinn called gouging consumers and ordered The award medallion will be pre- on Life actuarial certification a "dear gain companies to lower their rates by sented at the Academy Annual Insurance for consumers ;' but stated that "ac- December 11, his last day in of- Myers Award Meeting in November in Boca Randy Mire (COLT). The fice . tuaries are usually influenced by Raton, Fla . guideline is the National Association State Health Committee what the company wants." Wyatt's of Insurance Commissioners Nominations Chairperson Peter Perkins said, response pointed out that actuar- The Academy Committee on (NAIC) model regulation on the "The risk to the solvency of a ies-insurance company employees Actuarial Public Service is now ac- valuation of life insurance policies, health insurer under health insur- and consultants alike-are gov- cepting nominations for the Robert which the NAIC adopted in ance reform will be greatest dur- erned by the standards of practice J. Myers Public Service Award. March 1995 . ing the initial years of implemen- In June 1995, the NAIC task tation . Reforms can increase risk force requested COLI's analysis of at the onset, in part, because the the controversial guideline, asking benefits, insureds, carriers, and rates specifically if the model regulation are all in a state of flux, thus in- WILSON W. WYATT JR. A was technically correct under the I creasing uncertainty, thus increas- commissioner's reserve valuation ing risk . TI careful con- method (CARVM), and if reserves 0 sideration m ee given by under Guideline XXX were suffi- regulators when such premium cient for insurer solvency. COLT Tagkiff a New Direction limitations are imposed on health responded in a November 29 letter insurer." to Frank Dino, chairman of the The State. Committee n 1995 we set a new course for the NAIC Life and Health Actuarial has provided to ical assistance Task Force . COLI's letter did not to the Kentucky Insurance Ademy, one that allows actuaries to par- endorse the regulation, but answered Department on a number of HB the NAIC's specific questions . ticipate more effectively, on a timely basis, 250 implementation issues, and In the letter, COLT Chairperson Perkins invited the department to Randy Mire wrote that the regu- in the discussion of public issues in contact the Academy to discuss lation "provides a reasonable inter- ways to minimize the risk of in- pretation of the statutory reserving Washington and at the state level . In setting this solvency. method for certain types of poli- In his letter to Gov. Patton, new direction, we are carrying out a vision ar- cies . . . at a consistent level as oth- Academy Executive Director er policies covered by CARVM:" Wilson Wyatt warned that ticulated by leaders of the entire profession . Our wiison w wyei On the question of solvency, "Fundamental changes in how the Mire noted competing notions of private health insurance market charge is to raise the visibility and credibility of the actuarial pro- the public interest. It's a public operates could increase the sol- policy decision whether larger re- fession with those who make our laws and regulate our businesses, vency risk of health insurers as well serves should be required at the as threaten the objectives of the expense of higher premium costs as well as with the media and the general public . health care reform legislation ." to consumers, he stated. The re- Wyatt's letter also points out serves under the regulation "are Actuaries are uniquely placed to offer significant, unbiased knowledge to the public policy process, yet their that in HB 250, premium limita- more consistent with the level of contributions are often unrecognized. Our task is to build understanding of those contributions . tions and rate restrictions limit a reserves required of other life in- Too little is known about the important standard-setting and counseling and disciplinary activities that the health insurer's ability to reflect surance policies." Academy supports on behalf of the entire profession . These professionalism responsibilities involve a con- expected costs or changes in costs, tinuous-and remarkable-volunteer effort that demonstrates the seriousness with which the profession and they can add to the carrier's upholds its standards . To build the profession's credibility with employers and regulators, the Academy also financial risk . Health insurance must make this effort known . premiums are normally set for Over the past year we have succeeded in raising actuaries' visibility with audiences important to the only one year. The ability for in- profession. During recent meetings on Capitol Hill, congressional staff have eagerly sought our assistance on dividual health plans to adjust pre- Applying Theory Is a wide range of issues-tax policy, Superfund, retirement income, Medicare, managed care, and a variety of miums annually limits their ftnan.- insurance-related questions. In 1996, we plan to meet more frequently with members of Congress and to reach cial risks . Any restriction, Conference Focus out to states that have a vital need for our assistance on emerging issues of great public importance . including a premium cap, that lim- Applying economic theory to actu- The Academy will also conduct a more aggressive communications program . We will intensify our efforts its the ability to raise rates or the arial science is the theme of the 1996 to inform the news media and research organizations about actuaries' public policy contributions . And frequency with which rates can be Actuarial Research Conference . more than ever before, we will communicate the profession's successes to the business community, where f i - adjusted could increase the health Cosponsored by the Academy ture employment opportunities for actuaries will be found . plan's risk ." and the Society of Actuaries, the Wyatt also outlined the conference will be held August Working together through the Academy, individual actuaries from all practice areas can have a significant Academy's view in letters to the 15-17 at Ball State University in impact on the public issues that affect their work and professional interests . In 1996 the Academy with the editors of the Louisville Courier- Muncie, Indiana. Presentations re- support of our members and the energy of our volunteers-will continue on its new direction of building Journal and the Lexington Herald- lating to the theme or other actu- greater credibility and visibility for the entire profession . Leader that were published in mid arial topics are welcome ; confer- January. ence papers will be published in the e To obtain a copy of the Academy Actuarial Research Clearing House. 0 `Actuaries Are Essential to Financial Reporting'

financial reporting is an increasingly important professional responsibility for actuaries . In 1994 the Academy established a steering committee to coordinate activities regarding fi- nancial reporting across all practice areas. Barbara Snyder, the current chairperson of the Financial Reporting Steering Committee , recently answered a few questions for the Update about financial reporting and the work of her conm-Attee.

Why is financial reporting Important to the actuari- Actuaries develop reports for many differ- as a liaison to other committees within the not feel that every issue that is brought up re- al profession? ent regulatory entities. Some are required profession and to the accounting professions quires cross-functional attention, we have a Financial reporting is important not only to reports, such as those required by state insur- and regulatory bodies . It creates and over- chance to determine which are cross-func- the actuarial profession but to the insurance ance department or the Securities and sees special cross-disciplinary task forces on tional and which need particular attention by and pension business, the business commu- Exchange Commission, and some are infor- an as-needed basis. The committee also serves one practice area. In the case where the issue nity, and to the public-especially policy- mational reports, such as white papers on cer- as a counterpart to the AICPA's Committee needs to go back to one practice area, I make holders. As a professional, the actuary is tain topics for the Federal Accounting on Relations with Actuaries, which provides sure that the appropriate committee is ad- uniquely qualified to contribute meaningful Standards Board. a facility for communication between the ac- dressing it . information to the financial reporting process tuarial and accounting professions. for insurance and other similar enterprises, What is the actuarys relationship to other finan- In the long term, how important is the financial re- and to ensure that the financial reports pro- cial professionals-accountants, for instance-in How does the committee interact with other Academy porting function to the profession's future? Is it a duced are appropriate, accurate and clear. the financial reporting arena? committees, such as the Committee no Property source of new employment ? A high-profile rule Our relationship is much the same as that be- liability Financial Reporting and the Committee an that will upon other doors? What types of f nhtl reports do not na iias prepare? tween any other professionals . That is, as ac- Life Insurance Financial Reporting? I think a better questions is how important is Actuaries prepare many different types of fi- tuaries, we have a unique set of skills and The other committees focus on issues for one the actuary to the financial reporting func- nancial reports. These reports may be pro- knowledge about our field of expertise with- practice area. The chairs of these commit- tion, and the answer to that is, not only very duced for use by internal management, to in the insurance and pension industries that is tees or their representative serve on the important, but essential . meet the needs of the business community, needed to produce sound financial reports . Financial Reporting Steering Committee. I As financial requirements become more stockholders, employees, or policyholders, or We work with accountants, as well as other act as a liaison to bring to these committees complex and more numerous, as we have to satisfy specific regulatory requirements . professionals, to meet the needs of the con- issues that need coordinated attention across seen recently in the valuation actuary re- Some types of reports are similar by actuari- stituencies involved . practice lines, and the other members of the quirements for life and property/casualty ac- al specialty, w~hhers relate only to a spe- dial Reporting Steering Committee give tuaries, actuaries must be c~ highly trained cific area of e .g. federal government How does the Ahmdemy's Financial Reporting Stee put as to approach to address particular is- and knowledgeable abo a. pects of the forms required for pension plans. Haard improve the professions ability to respond sues, reaction and action by their various com- business . This could certainly lead to many to financial reporting issues? mittees, and help in forming tasks forces as opportunities in any practice area for actu- For which regulatory entities do actuaries develop The committee coordinates all financial re- necessary to address particular issues. aries as their knowledge, skills, and contri- reports? porting activities across practice lines. It actor Communication is key. Although we do bution are recognized . 0-1 0

Clinton, Congress Don't Get Medicare Reform Right: Academy Work Group Points Out the Flaws

he Academy Medi- "The bad news is that in fall into its current finan- zation able to ensure quality care and assume care Work Group hasT discovered flaws in solving these budgetary cial state:' the attendant financial risk . both Republican and Democratic Medicare problems, the MPA may The Academy report Both programs rely heavily on reductions reform plans, according to the report of the jeopardize access to high- did more than criticize, in unit payments to physicians and other Academy Medicare Work Group released on quality care for all those however. The group pro- health care providers to achieve savings . December 21. who remain in the tradi- posed seven measures for "Reducing unit payments won't produce The future of Medicare is at the center of tional fee-for-service sound reform, including incentives for reducing the rate of growth the current budget impasse between Medicare plan." less reliance on provider in health expenditures," said King . In addi- Congress and the administration and is ex- The Academy report payment reductions to tion, both plans give health care providers pected to be a key issue in the November also leveled sharp criti- achieve savings and long- an alternative payment mechanism that they elections . The Academy group studied the cism at an accounting range recognition of HI can choose from to maximize their revenues Republican-sponsored Medicare Preservation trick in the president's financial problems from Medicare. Therefore, it's not likely that Act (MPA) at the request of House Speaker proposal that makes the Medicare Hospital The report also endorsed stronger finan- the MedicarePlus program will have a fa- Newt Gingrich and also examined President Insurance (HI) program appear to meet short cial incentives for Medicare beneficiaries to vorable impact on Medicare costs Clinton's counterproposal. range solvency standards established by the use managed care plans, called MedicarePlus Other members of the Academy While the Academy group was critical of HI Board ofTrustees . "This sort of fiscal under the Republican proposal . Currently, Medicare Work Group are David Axene, the details, it praised both proposals for at- sleight of hand gives the appearance of hav- the Medicare capitation program is restrict- Ron Bachman, David Kerr, Water Liptak, tempting to improve Medicare's financial ing solved a problem, but in reality only ed to HMOs . The new proposals would Robert Lynch, Harry Sutton, John Wilkin, status . For example, according to Work serves to undermine fiscal discipline' said open Medicare up to provider service orga- and David Whte. Group Chairperson Guy King, the fiscal King. "The President's proposal has more nizations capable of assuming risk and pro- controls in the MPA, which Clinton vetoed important defects than the MPA and can be viding health care to the Medicare popula- To OBTAIN A COPY OF THE ACADEMY in December, would go a long way toward considered only a stopgap measure. It is sim- tion. The president's proposal is considerably MEDICARE REPORT, FAX A REQUEST TO solving the program's long-term economic ilar to the quick fixes enacted in the past more restrictive than the MPA, which would Cirrus DELTA AT 202-872-1948 . problems . "That's the good news, said King. that have allowed the Medicare program to open the program to virtually any organi-

0 I As a life, accident, and health actuary with the; Academy Progress Praised Hampshire Insurance Department, I would like to I'm very impressed and encouraged by the relevance the EXECUTIVE DixacTOR in what capacity was this advice offered? Did these states Wilson W Wyatt, Jr . Academy has achieved as it plays its unique role of approach the Academy? Was such advice offered and ser- providing objective information to regulators and vices performed on a fee-for-service basis? Are the legislators on complex insurance and benefit ques- recommendations, findings, and advice that was pro- tions . Equally impressive is the work of the Actuarial vided these eleven states available to other states PRESIDENT ELECT Larry Zimpleman Standards Board in what must be a herculean task of defining or the public? standards of practice for actuaries in diverse areas of activities . This department may be interested in seeking similar VICE PRESIDENTS The goals that all of us, as past leaders of the Vince Amoroso services from the Academy We look forward to John M . Bertko Academy, had hoped to achieve now seem to be com- your reply. Arnold A. Dicke ing into fruition through the dedicated work of so many. DAVID SKY David P, Flynn I'm also taken by the excellent publications of the Academy, such CONCORD, N .H. Charles Barry H . Watson as your 1995 Report to the Membership The progress, and the effort, seem SECRETARY TREASURER very obvious . Keep it up! The managing editor replies : Stephen R,Kern Bin HAL'VORSON Part of the Academy's mission is ensuring that regulators have the technical EXECUTIVE UFFICE NAPLES, RA. actuarial advice they need to make sound policy decisions. The Academy does The American Academy Halvorson was president of the Academy in 1981-82 . not charge for the services of its volunteers. Your letter has been forwarded to the of Actuaries State Health Committee, which will contact you to discuss specific assistance for 1100 Seventeenth Street, NW the New Hampshire department . 7th Floor Washington, DC 20036 Was Report Necessary? (202) 223-8196 Fax: (202) 872-19.48 I recently received a copy of the 1995 Report to the Membership, print- ed in multiple colors on quality paper . Is the information in this re- Standing on Principle MEMBERSHIP port so important that it justifies the expense? Couldn't all the perti- Two items in the December 1995 Update touch on very imps NISTRATION nent information have been published in the Update? I'm not issues for the Academy and the actuarial profession . oodfield Corporate Center convinced that it was money well spent . The Academy Board of First, I would like to see more dissenting opinions on important is- 475 N . Martingale Road Directors should consider very carefully whether to authorize any S _ umbu _IL 6{11732226- Wilson- W. Wyatt Jr.: fulfilling Our Mission sues such as those presented by Fred Kilbourne ("The Emperor's (708) 706-3513 such reports in future years. Wardrobe "). Whether one agrees or not, it is refreshing to see that an WILLIAM E. NEAT. ASB member can publicly disagree with the majority on an important CINCINNATI, OHIO issue. I don 't know enough to comment on the merits of the partic- ular issue (certification of small employer health plans ), but I agree The managing editor replies: wholeheartedly with his general comments on the responsibility of Over the course of the last year, the Update reported on all the issues covered Medium r. Reb-1'm tt the actuarial profession when confronted with conflicts between pro- by the report . However, not all members read the newsletter as thoroughly EDITOR as we'd fessional principles and standards drafted to comply with government' like. The goal of the 1995 Report was to summarize a year of Academy ac- Adam Reese regulations . tivities in a brief` easily accessibleform. After all, the Academys work on be- AssocIATE EDITORS The second item was from the interview with John Montgomery, William Carroll half of the profession depends on members' volunteer eforts, and making sure that former Chief Actuary of the California Insurance Department, who Ronald Gebhardtsbauer you're informed is a top priority. The cost considerations you raise were tak- made the very important point that the profession needs to maintain Patrick J . Grannan i Letters: en into account when theAcademy communications staff planned the report, and -~~ Prn9q ress, Principle, and an Academy hpiart its independence from both industry and regulators . It is easy to un- MANAGING EDITOR_, we continue to believe it was a good use of our communications resources . Jeffrey Speicher derstand how some regulators at times have the perception that actu- The following letter might convince you that the 1995 Report was an ef- 74764,[email protected] aries use the Academy to do the bidding of their employers . If we are fective vehicle for communicating the Academy's message. CONTRIEIPI'ING.EDITOR to be respected as a profession, as opposed to just an industry's technical Ken Krehbiel group, then we should be willing to take stands and express opinions PRODUCTION MANAGER based on principles, even when those principles appear to conflict Renee Saunders Report Yields Regulator Request with the apparent interests of our employers or regulatory bodies . By openly acknowledging these differences, we will be encourag- Statements of fact and opinion in this publics- In the 1995 Annual Report to the Membership, under the Health/States ing both the reality and perception of our professional independ including editorials and letters to the ed- Section, the following was reported are made on the responsibility : "As the health care reform debate As a result , it will be more likely that we'll have the courage to say w of the au- In Search Of • ASH Botscore • New ASH Table of Contents ors alone and do not necessarily imply or moved out of Washington, the Academy StamEealth Committee ad- we believe is right, regardless of whom we may be at odds with . It will vised governments and regulators in eleven state capitals on such issues -represent- the -position -of -the American- • Robert J . Myers Public Service Award Nomination Card also be more likely that others will actually believe what we have to say. Academy ofActuaries the editors, or the mem- as risk adjustment, , community rating, risk-based capital, and small- CHUCK Rrrzrc bers of the Academy. group market reform" WEST DUNDEE, ILL . VIA COMPUSERVE