Government of the Federated States of Micronesia

Bill to Amend Social Security Law Passes 2nd Reading

Kolonia, Pohnpei (FSM Social Security): February 13, 2009 - The FSM Social Security Administration proposed Bill No. 15-52 which passed 2nd Reading by the FSM Congress on February 4, 2009. The bill's intention is to help the program survive today and to continue to remain viable for the future generations of the FSM.

As of 2006, benefit payments began to eclipse tax collections. As the FSM Social Security System is a defined benefit program, this presented a large problem. In a defined benefit program, the current work force pays for the current benefits. Since tax collections are the only source of funding for the FSMSSA, the administration had to find ways to create a desirable ratio between the tax it collected and the benefits for which the taxes were to be used for.

In 2006, the total amount of taxes collected was at $12,049,988. Benefit payments, on the other hand, came in at $12,586,560. In 2007, the difference became even more pronounced where total collections amounted to $12,783,551 while benefit payments registered at $13,663,880. 2008 saw collections ending at $14,063,254 while benefits totaled to $14,241,374.

Coupled with administrative costs, Calendar Year 2006 saw a deficit of $1,504,584, Calendar Year 2007 resulted in a deficit of $1,849,358 and Calendar Year 2008 ended with a deficit of $1,171,761.

Because a defined benefit program such as the FSM Social Security System is funded solely by its tax collections, it requires a strong economy to support its benefits and expenses. Just recently, the states of Kosrae and Chuuk laid off a large number of their employees. With the laying off of these employees, coupled with the current stagnant economy, the FSMSSA's tax collections are expected to take a hit that it really can't afford.

Benefit payments continue to increase by 6% to 8% on an annual basis while tax collections haven't been able to keep up.

As of January 1, 2006, the FSM Social Security System was only 16% funded with an accrued unfunded liability of $219.5 million. This means that if the program were to stop today, only 16% of benefits earned up to this point would be funded by the system's total assets and that includes investments. The $219.5 million represents the total funds the system would require to pay off all benefits already earned.

As of December 31st, 2007, out of the 4,876 individuals receiving benefits, 4,493 had exceeded their contributions. This also contributes to the unfunded accrued liability. The desirable funded ratio is 30% and of course, a considerably lower unfunded accrued liability should always be strived for.

The FSM Social Security Administration has an investment portfolio that as of December 31, 2007, was worth $43.3 million. The FSMSSA has been drawing down funds from the portfolio to offset its deficits and although it is fortunate that such a store of funds is available to cover these deficits, it is not the intention of the FSMSSA to continue to do this. On November 25, 2008, due to the economic downturn and withdrawals the investment portfolio's value was $30.04 million. On January 1, 2009, the portfolio increased to $31.8 million.

As it is a trust fund, its purposes are long term. The portfolio is not meant to be subject to such frequent drawdowns and as the market can be quite volatile at times, the FSMSSA does not wish to risk depleting it.

The administration therefore turned to amending the law to create a better ratio between its tax collections and benefit payments for the short term and to improve its funded ratio and decrease its unfunded accrued liability to ensure the long term viability of the system. The amendments were arrived upon after intense study and numerous consultations with the FSMSSA's actuary.

Amendments in Bill No. 15-52

I. Section 603 (9): To clarify the definition of "employer" whether it is an individual, a partnership, a corporation, national government, a municipal or state government or organization or agency thereof, or any other type of business or non-business organization and its responsibilities as far as social security taxes are concerned.

II. Section 603(13)(d)(i): Individuals who attain age 60 or die on or after January 1, 2010, must earn at least 50 quarters of coverage to be fully insured for death or old age benefits. This provision would decrease the FSMSSA's unfunded accrued liability by $6.2 million if it is passed into law.

III. Section 603(13)(d)(ii): Individuals who become disabled on or after January 1, 2010, must earn at least 45 quarters of coverage to be fully insured for disability benefits. This provision would decrease the FSMSSA's unfunded accrued liability by $1 million if it is passed into law.

IV. Section 603(13)(d)(ii): Individuals who become disabled on or after January 1, 2010, must also meet the definition of currently insured to qualify for a disability benefit. To be currently insured, one must have at least 20 quarters of coverage within the 25-quarter period ending with the quarter in which a person retires, dies or becomes disabled. This provision would decrease the FSMSSA's unfunded accrued liability by $16.4 million if it is passed into law.

V. Section 605(1)(7): Impose criminal penalties on an employer for intentional failure to pay taxes and Identify the chief financial officer of the national government, state governments, municipal governments, or any agencies of any of the above as the individual liable to the program.

VI. Section 607(2): Lien for taxes: All taxes, including penalties and interest accrued thereon, imposed or authorized under this subtitle and owed by a state or municipal government, or any agency thereof, shall be subject to a writ of garnishment of all moneys owed by the FSM National Government to any state or municipal government or any agency thereof, and such writ of garnishment shall have priority over any claim for such moneys in any manner by the particular state or municipal government or agency thereof.

VII. Section 804(1)(c): Retirement benefits that begin on or after January 1, 2010, that are paid to individuals aged 60 to 64 are reduced by 50% until the retiree attains age 65, at which time the benefit will automatically be adjusted to what it would have been prior to the 50% reduction. Reduced payments are not subject to the earnings test. Therefore, a retiree aged 60 to 64 will receive 50% of his/her calculated retirement benefit. Additionally, if the retiree works, his/her benefit will not be subject to the earnings test. This provision would decrease the FSMSSA's unfunded accrued liability by $28.5 million if it is passed into law.

VIII. Section 809: Foreigners who are not citizens of the Marshall Islands, Palau or the U.S. will be paid in lump sums equal to their total contributions while employed in the FSM as of the date the employee turns 60 or dies. Further, they must be fully insured to be qualified for this lump sum benefit.

IX. Section 901 & 902: Increase the tax rate paid by employees and employers to 7% each on October 1, 2009, and then to 7.5% each on January 1, 2013. If the tax rate is increased to 7%, with a wage base of $6,000, annual collections would increase by $1,771,610.64. If the tax rate is increased to 7.5%, with a wage base of $7,000, annual collections would increase by $2,748,634.12.

X. Section 1006(2)(c): To allow the FSMSSA to invest in BBB grade bonds.

XI. Section 1006(2)(e): To allow for investments in the international market but only with those who exchange their currency in American Depository Receipts.

XII. Section 1006(2)(e)(ii)(iii)(iv): To change the percentage of the market value of the fund that can be invested in any one industry group from ten to twenty-five percent; and to insert a security measure so as to ensure that the portfolio is being invested only on a recognized national or regional stock exchange, physical or electronic.

With the above amendments, the administration hopes to ensure the viability of the system in this unfortunate economic climate and to ensure that it continues to remain viable for the future working citizens of our nation. If the bill is passed in its current form, it would increase the funded ratio from the current 16% to 19.5% and would decrease the unfunded accrued liability by $52.1 million. The administration, along with members of congress, have already visited the four states of the FSM as well as Hawaii and Guam to disseminate information concerning the bill and to increase our citizens' knowledge concerning the system's current status.

The FSMSSA would very much like to hear comments and concerns pertaining to the amendments found in the bill and we kindly ask that you either submit your input straight to the following address:

P.O. Box L
Kolonia, Pohnpei FM 96941
Phone: 320-2706
Fax: 320-2607


For further information on this release, please contact:

FSM Office of the President
Public Information: Press, Radio, Video
P.O Box 34
Palikir Station, Pohnpei, FM 96941
Tel.: (691) 320-2548/2092
Fax.: (691) 320-4356
e-mail: fsmpio@mail.fm
http://www.fsmpio.fm/