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AAA, Actuarial Update, 199602 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 .
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