FSMSSA Proposes Congressional Bill No. 15-52

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 $12,836,339 while benefit payments registered at $13,663,880.
Coupled with administrative costs, Calendar Year 2006 saw a deficit of $1,504,584 while Calendar Year 2007 resulted in a deficit of $1,796,570.
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. 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. 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:

I. Section 603 (9): To clarify the definition of “employer” whether it is an individual, a partnership, a corporation, a municipal or state 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. The main purpose of the amendment is to improve tax collections by clearly outlining employer tax responsibilities so as to prevent employers from failing to pay taxes.

II. Section 603(13)(c)(iv): Individuals who attain age 60 or die after December 31, 2007, must earn at least 50 quarters of coverage and have contributed at least $2,500 to the Social Security System 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. Since December 31, 2008 has already come to pass, the effective date of the provision would be the date the bill is passed into law or a date deemed appropriate by congress.

III. Section 603(13)(c)(v): Individuals who become disabled on or after January 1, 2008, must earn at least 45 quarters of coverage and have contributed at least $1,500 to the Social Security System 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. Since January 1, 2008, has already come to pass, the effective date of the provision would be the date the bill is passed into law or a date deemed appropriate by congress.

IV. Section 603(13)(c)(v): Individuals who become disabled on or after January 1, 2008, 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. Since January 1, 2008, has already come to pass, the effective date of the provision would be the date the bill is passed into law or a date deemed appropriate by congress.

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

VI. Section 607(b): 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 803(2): Limit surviving child’s benefit to age 20 for students.

VIII. Section 804(1)(c): Retirement benefits that begin on or after January 1, 2008, 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. In other words, a retiree aged 60 to 64 will receive 50% of his/her calculated retirement benefit while still working full-time. This provision would decrease the FSMSSA’s unfunded accrued liability by $28.5 million if it is passed into law. Since January 1, 2008, has already come to pass, the effective date of the provision would be the date the bill is passed into law or a date deemed appropriate by congress.

IX. Section 812: Fully insured individuals who are also citizens of the Federated States of Micronesia may elect to receive a lump sum payment equal to all amounts contributed by him or her at the time of application for this lump sum, which will be paid when the individual attains age 60. If the lump sum is greater than $5,000, the payment will be divided into 6 month payments. If the lump sum is greater than $10,000, the lump sum payment will be divided into 12 month payments. Upon election of the lump sum the individual shall forfeit credit for all quarters of coverage earned up to the date of application. This means that if an individual opts for this lump sum, his or her survivors won’t be eligible for anything once he or she dies. It is important to note that this is optional and if a person chooses, he or she may receive the regular monthly benefit instead of this lump sum. This provision would decrease the FSMSSA’s unfunded accrued liability by $2.6 million if it is passed into law.

X. Section 813: For retirement benefit payments that begin or continue after January 1, 2008, the Administration will pay a retirement benefit until the sum of retirement benefits paid to the retiree exceeds retiree’s total contributions into the system, which also includes the employer’s share. In the calendar year following this event, the retiree’s monthly retirement benefit shall be reduced by 30%. This reduction will not apply to any disability or survivor benefits. In the event that this provision is passed into law, the FSMSSA’s unfunded accrued liability would be decreased by $29 million.

XI. 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 five years later. 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.

XI. Section 1006(b)(iii): To allow the FSMSSA to invest in BBB grade bonds.

XII. Section 1006(c): To allow for investments in the international market but only with those who exchange their currency in American Depository Receipts.
XIII. Section 1006(c)(ii)(iii)(iv): To change the percentage of the market value of the fund that can be invested in the stock of any one corporation from five to ten percent; and 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.

XIV. Section 1006(e): The establishment of an FSM Social Security Credit Union, which could then invest locally by making loans and taking deposits. The establishment of such a credit union can be accomplished by Board action and through the issuance of regulations.

With the above amendments, the administration hopes to ensure the viability of the system during 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 entirety, it would increase the funded ratio from the current 16% to 24% and would decrease the unfunded accrued liability by $84.9 million. The administration, along with members of congress, has already visited the four states of the FSM as well as Hawaii and Guam to disseminate information concerning the bill and to increase our people’s 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 congress or to the FSMSSA.

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