The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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JAN 1 ~ 20CS
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Treas.
HJ
10
.A13
P4
v.438
Department of the Treasury
PRESS RELEASES
Press release number HP-378 was not used.
Numbers HP-375, 376 and 377 are in the May volume.
Page 1 of2
April 3, 2007
2007 -4-3-14-31-27 -25992
U.S. International Reserve Position
The Treasury Department today released U.S reserve assets data for the latest week. As indicated in this table, U.s reserve assets
totaled $66,448 million as of the end of that week, compared to $66,328 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
March 23, 2007
II
TOTALj
I
11. Foreign Currency Reserves 1
II
II
I a. Securities
66,328
I
Euro
12,694
I
March 30, 2007
II
II
66,448
Yen
TOTAL
Euro
10,807
23,501
12,758
Of which, issuer headquartered in the US.
I
0
II
II
17,934
II
0
II
I
Yen
II
10,831
TOTAL
I
I
I
23,589
I
0
b. Total deposits with:
IbJ Other central banks and BIS
II
lb. ii. Banks headquartered
I
In
the US
12,667
II
5,267
I
I
I
12,745
5,279
18,024
0
b.il. Of WhiCh, banks located abroad
0
0
b.lii. Banks headquartered outside the US.
0
0
0
0
4,897
4,846
8,956
8,948
11,041
11,041
0
0
I b.iii. Of which, banks located
In
I
the US
I
12. IMF Reserve Position 2
I
I
13 Special Drawing Rights (SDRs) 2
14 Gold Stock 3
15. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
I
1. Foreign currency loans and securities
~
March 23, 2007
Yen
Euro
I
I
II
II
March 30, 2007
II
TOTAL
Euro
I
0
Yen
II
II
I
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
12. a Short positions
12.b Long positions
13 Other
II
II
II
II
II
II
II
0
0
0
II
II
II
II
II
II
II
II
TOTAL
II
0
II
II
0
I
I
I
0
I
I
I
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
March 23, 2007
I
II
I
II
Euro
Yen
I
http://www.treas.goy/press/releases/20074314312725992.htm
March 30, 2007
II
TOTAL
I
I
Euro
II
II
Yen
II
II
TOTAL
I
I
I
5/7/2007
Page 2 of2
0
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
11.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
13 Undrawn, unconditional credit lines
II
"I
0
I
0
I
0
I
II
"II
I
II
I
I
0
"
3.b With banks and other financial institutions
"
"
IHeadquartered in the U. S.
Headquartered outside the U. S.
I
0
I
3.a. With other central banks
3.e. With banks and other financial institutions
II"
II"
II
I
I"
"
"
"
4. Aggregate short and long positions of options
in foreign
0
Currencies vis-a-vIs the US dollar
4.a. Short positIOns
I
"
4a.1. Bought puts
4.a.2. Written calls
I
I
I
I
I
4.b. Long positions
4.b.1. Bought calls
14 .b2
0
I
Written puts
I
"
"
"
"
"
"
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as seCUrities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the offiCial SDRldoliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.treas.gov/press/releases/20074314312725992.htm
5/7/2007
Page 1 of 1
April 4, 2007
HP-338
Treasury Assistant Secretary Swagel to Hold Monthly Economic Briefing
U.S. Treasury Assistant Secretary for Economic Policy Phillip Swagel will hold a
media briefing to review economic indicators from the last month as well as discuss
the state of the U.S. Economy The event is open to credentialed media:
Who
U. S. Treasury Assistant Secretary Phillip Swagel
What
Economic Media Briefing
When
Friday, April 6, 2007,100 p.m. (EDT)
Where
Treasury Department
Media Room (Room 4121 )
1500 Pennsylvania Ave, NW
Washington, DC
Note: Media without Treasury press credentials should contact Frances Anderson
at (202) 622-2960, or frances.anderson@do.treas.gov with the following
information: name, Social Security number and date of birth.
http://www.treas.goY/press/releases/hp.138.htm
5/7/2007
Page 1 of 1
April 4, 2007
HP-339
Lundsager Sworn In as U.S. Executive Director At The International Monetary
Fund
WASHINGTON, D.C.-- Meg Lundsager, appointed by President Bush to serve as
US. Executive Director at the International Monetary Fund. was sworn in today by
Deputy Secretary Robert M. Klnlmitt. The Senate confirmed Ms. Lundsager on
March 29, 2007. Previously, she served as the Alternate US Executive Director at
the IMF since 2000. She has worked for the Treasury Department in numerous
capacities, including Deputy Assistant Secretary for International Trade and
Investment Policy and Director of the Office of Asian and Near East Nations. She
also has served on the National Security Council staff, and was an inaugural
Atlantic Fellow at the London School of Economics. She holds degrees from
American University and the University of Maryland.
-30-
http://www.treas.gov/press/releases/hp339.htm
5/7/2007
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
April 6, 2007
HP-340
Treasury Economic Update
Job Creation Continues:
Job Growth: 180,000 new jobs created in March. In addition, employment
estimates for January and February were revised up, adding 32,000 jobs. Nearly 2
million new jobs have been created over the past 12 months. Since August 2003,
7.8 million Jobs have been created - more jobs than all the other major
industrialized countries combined. Our economy has added jobs for 43 straight
months. Employment has increased in 47 states within the past year. (Last
updated.' April 6. 2007)
Low Unemployment: 4.4% unemployment rate - among lowest readings in 6
years. Unemployment rates have decreased or held steady in 40 states over the
past year. (Last updated' April 6, 2007)
REPORTS
•
Treasury Economic Update
http://www.treas.gov/press/releases/hp340.htm
5/7/2007
TREASURY ECONOMIC UPDATE 4.06.07
Job Creation Continues:
Job Growth: 180,000 new jobs created in March. In addition, employment estimates for January and
February were revised up, adding 32,000 jobs. Nearly 2 million new jobs have been created over the past
12 months. Since August 2003, 7.8 million jobs have been created - more jobs than all the other major
industrialized countries combined. Our economy has added jobs for 43 straight months. Employment has
increased in 47 states within the past year. (Last updated: April 6, 2007)
Low Unemployment: 4.4% unemployment rate - among lowest readings in 6 years. Unemployment
rates have decreased or held steady in 40 states over the past year. (Last updated: April 6, 2007)
The U.S. Economy Remains Healthy and Continues to Grow:
Economic Growth: 2.5% GOP growth in the 4th quarter. Our economy has grown a solid 3.1 % over the
past 4 quarters. (Last updated: March 29, 2007)
Business Investment: Capital investment increased a strong 6.1 % over the 4 quarters of 2006. (Last
updated: March 29, 2007)
Tax Revenues: Tax receipts up 11.8% in fiscal year 2006 (FY06) on top of FY05's 14.6% increase.
Receipts have grown another 9% percent so far in FY07. (Last updated March 12. 2007)
Steady Productivity: Labor productivity has grown at an annual rate of 2.8% over the past five years.
(Last updated: March 6, 2007)
Americans are Keeping More of Their Hard-Earned Money:
Real Wages Increased 1.8% Over the Past 12 Months (ending in February). This translates
into an additional $600 above inflation for the average full-time production worker.
Real After-Tax Income Per Person has Risen 10% - an extra $2,950 per person - since the
President took office.
Pro-Growth Policies will Enhance Long-Term U.S. Economic Strength:
The Administration proposed a budget that reaches a small surplus in 2012. Economic
growth has generated increased tax receipts and dramatically improved the budget outlook. The budget
holds the line on spending. The budget reduces the deficit as a percentage of GOP-the most meaningful
measure of its Size-every year through 2012. The time has come for both political parties to work together
on comprehensive earmark reform that produces greater transparency and accountability to the
congressional budget process, including full disclosure for each earmark and cutting the number and cost
of all earmarks by half.
Page 1 of 1
April 6, 2007
HP-341
Debevoise Sworn In as U.S. Executive Director at the World Bank
Washington, D.C.--E. Whitney Debevoise, appointed by President Bush to serve
as US Executive Director at the World Bank, was sworn in today by Deputy
Secretary Robert M. Klmmltt. The Senate confirmed Debevoise on March 29,
2007. Previously, he served as senior partner at Arnold & Porter LLP where he
was the lead partner of the International Practice for more than 10 years In this
role, he was heavily involved in foreign investment and sovereign lending,
International trade, arbitration, and international law enforcement. He received his
BA from Yale University and his JD from Harvard Law School.
http://www.treas.gov/press/releases/hp341.htm
5/7/2007
Page 1 of 1
April 7, 2007
HP-342
Statement by Deputy Secretary Kimmitt on
the Announcement of the Signing of the
International Compact with Iraq
Washington--Treasury Deputy Secretary Robert M. Kimmitt Issued the following
statement today 011 the Government of Iraq and the United Nations' announcement
that the International Compact with Iraq will be signed in Sharm el-Sheikh on May
3.
"I welcome and applaud this important step and look forward to attending the
signing ceremony as a member of the U.S delegation headed by Secretary of State
Condoleezza Rice. I commend the Iraqi authorities for their sustained commitment
to the Compact. Iraq, together with the United Nations and the World Bank, has
worked diligently since July 2006 to prepare the ambitious economic reform
framework outlined in the Compact. The signing ceremony concludes several
months of hard work and provides a concrete path of reform to financial self
sufficiency. In exchange, the international community will provide continuing
political and economic support to help Iraq achieve sustainable, broad-based
economic growth. Iraq's leaders have already developed an impressive track
record on economic reform under the Compact framework, including Cabinet
approval of a hydrocarbons law, fuel import liberalization, and passage of a
prudent, transparent and fully financed 2007 budget. The United States fully
supports this illitiative, as demonstrated by the President's recent request to
Congress to approve additional funding for Iraq to help realize the objectives of the
Compact."
The Compact is an initiative launched by the UN and Iraq to help Iraq realize its
vision of a stable and prosperous nation underpinned by a self-sustaliling economy
The Compact embodies commitments by Iraq on a plan to achieve economic selfsuffiCiency in return for International support. Iraq presented the final Compact
documents to the international community at the UN on March 16, 2007. Deputy
Secretary Klmmitt serves as the President's SpeCial Envoy for the International
Compact with Iraq.
Additional information on the Compact can be found at: \/, :.' ,I'""
http://www.treas.gov/press/releases/hpJ42.htm
(,r t 'i)
(I ()",
5/7/2007
Page 1 of2
April 9, 2007
2007 -4-9-13-36-48-14 702
U.S. International Reserve Position
The Treasury Department today released U.S reserve assets data for the latest week. As indicated in this table, US. reserve assets
totaled $66,255 million as of the end of that week, compared to $66,448 million as of the end of the prior week.
\. Official U.S. Reserve Assets (in US mJillOns)
March 30, 2007
II
TOTAL,
I
1 Foreign Currency Reserves
12,758
a. Securities
IOf which,
issuer headquartered
In
I
Yen
I
10,831
TOTAL
Euro
I
23,589
12,770
I
Yen
I
10,672
0
b. Total deposits with
"
"I
12,745
b.ii. Banks headquartered in the US.
"
5,279
12,759
"
5,201
"
I
0
b.iil. Of which, banks located in the US
I
23,442
I
0
I
17,960
I
0
0
"
"
0
I
TOTAL
0
"
"
0
II
"II
0
I
I
Banks headquartered outside the US.
"
18,024
I
Ib.ii Of which, banks located abroad
Ib.111
I
the US
b.i. Other central banks and BIS
I
66,255
66,448
Euro
1
April 6, 2007
II
0
"
2. IMF Reserve Position 2
4,846
3. Special Drawing Rights (SDRs) 2
8,948
II
8,959
4. Gold Stock 3
15. Other Reserve Assets
4,853
I
I
11,041
\I
11,041
II
II
0
II
0
I
"
II, Predetermined Short-Term Drains on Foreign Currency Assets
April 6, 2007
March 30, 2007
I
II
Yen
Euro
Euro
TOTAL
I
"
II
I
I
" the U.S. dollar:
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis
12 a Short positions
"
0
I
1 Foreign currency loans and securities
TOTAL
0
12b. Long positions
13 Other
I
Yen
II
"
"
"
"
"
"
"
"
0
0
II
0
0
II
"
"
"
I
"
"
I
I
0
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
March 30, 2007
I
I
II
I
II
Euro
II
II
http://www.treas.gov/press/releases/100 74913364814702.htm
Yen
II
II
TOTAL
I
I
April 6, 2007
II
Euro
Yen
TOTAL
I
5/7/2007
Page 2 of2
1. Contingent liabilities in foreign currency
0
1.a. Collateral guarantees on debt due within 1
year
11.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
I
0
II
II
II"
I"
"I
I
II
"
I
0
I
3. Undrawn, unconditional credit lines
0
0
0
3.a. With other central banks
3.b. With banks and other financial institutions
IHeadquartered in the U. S.
3.e. With banks and other financial institutions
IHeadquartered outside the U. S
4. Aggregate short and long positions of options
III foreign
ICurrencies vis-a-vis the U.S. dollar
I
I
"I
I
"
I
4.a.1. Bought puts
4.a.2. Written calls
I
I
4.a. Short positions
I
"
I
0
0
"
"
4.b. Long positions
14b 1. Bought calls
4b2 Written puts
1
I
I
I
I
I
II"
I
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The Items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRldollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the US. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.treas.goy/press/releasesl20074913364814702.htm
5/7/2007
Page 10f2
April 9, 2007
HP-343
Treasury Releases Schedule for Spring G7 Meeting
us.
Treasury Secretary Henry M. Paulson, Jr. will host a meeting of the G7 finance
ministers and central bank governors tillS Friday, April 13, III Washington, D.C.
Following is a schedule of events
Who
Under Secretary for International Affairs Timothy D. Adams
What
Pre-G7 Press Conference
When
Thursday, April 12, 2 p.m (EDT)
Where
Treasury Department Media Room (4121 )
1500 Pennsylvania Avenue, NW
Washington, DC
Note Media without Treasury press credentials plannlllg to attend must contact
Frances Anderson in Treasury's Office of Public Affairs at (202) 622-2960 or (202)
528-9086 with the following Inforrnation name, Social Secunty number and date of
birth. This information may also be emailedto.!I..····· .. ;· •.•• I . . i i • .'.
Who
G7 Finance Ministers and Central Bank Governors
What
Ministerial Meeting - Photos at the Top
When
Friday. Apnl 13, 230 p.m. (EDT)
Where
Treasury Department Cash Room
1500 Pennsylvania Avenue, NW
Washington, DC
Note ThiS is a pooled photo event - photographers Wishing to participate should
I,: : : 1 ' , , ' .
'.',i"
,.for
contact Brittnl Aldridge at (202)622-2591 or
more Information.
Who
G7 Finance Ministers and Central Bank Governors
What
Family Photo
When
Friday, April 13, 515 p.m. (EDT)
Where
Treasury Department - Bell Entrance Steps (West Side of Building)
1500 Pennsylvania Avenue, NW
Washington, DC
Note Photographers wishing to participate must contact Frances Anderson at (202)
622-2439 or " : l ' I } .
. Photographers
may begin setting
up at 4:00 p.m. (EDT). Photographers must be in place no later than 445 p.m.
(EDT).
http://www.treas.goy/press/releases/hp143.htm
5/7/2007
Page 2 of2
Who
U.S. Treasury Secretary Henry M. Paulson, Jr.
What
Press Conference
When
Friday, April 13, 7:15 p.m. (EDT)
Where
Office of Thrift Supervision Auditorium
1700 G Street, NW
Washington, DC
Note Media may begin setting-up at 5:30 p.m. (EDT). Treasury, White House and
IMF/World Bank Spring Meeting press credentials will be accepted - no additional
clearance is needed.
-30-
http://www.treas.go y/press/releases/hpJ.43.htm
5/7/2007
Page 1 of 1
April 10, 2007
HP-344
Statement on North Korean-Related Funds Frozen at Banco Delta Asia
The United States understands that the Macau authorities are prepared to unblock
all North Korean-related accounts currently frozen in Banco Delta ASia. Based on
previous discussions with Chinese, Macanese, and DPRK officials, as well as
understandings reached with the DPRK on the use of these funds, the United
States would support a decision by the Macau authorities to unblock the accounts
in question. Throughout this process we have appreciated the consistent help,
goodwill, and professionalism shown by the Macanese authorities and look forward
to continued cooperation between the United States and Macau.
- 30 -
http://www.treas.gov/press/releases/hpl44.htm
5/7/2007
Page 1 of 1
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April 10. 2007
HP-345
Treasury, IRS Issue Final Regulations on Nonqualified Deferred
Compensation
WASHINGTON, DC--The Treasury Department and the IRS today issued final
regulations on the treatment of nonqualified deferred compensation plans and
arrangements under section 409A of the Internal Revenue Code.
"Since the enactment of section 409A in 2004. Treasury and the IRS have worked
hard to develop these regulations on the treatment of nonqualified deferred
compensation plans." said Treasury Assistant Secretary for Tax Policy Eric
Solomon. "These regulations comprehensively address how employers can identify
nonqualified deferred compensation plans and arrangements subject to section
409A and provide rules to help employers and employees comply."
The regulations provide guidance regarding the requirements for deferral elections
and payment timing under section 409A. Affected plans and arrangements are
required to comply with documentation requirements established in the final
regulations by December 31.2007.
The final regulations generally implement the rules provided in the proposed
regulations published on September 30, 2005, but include revisions reflecting
numerous comments received from the public. The regulations are in response to
legislation enacted by Congress In 2004 to address concerns involving reported
abuses of nonqualified deferred compensation plans.
Published along with the regulations was Notice 2007-34, which includes additional
guidance regarding the application of section 409A to split-dollar life insurance
arrangements and provides that certain amendments of such arrangements to
comply with section 409A will not be treated as a material modification.
A copy of the final section 409A regulations and a copy of Notice 2007-34 are
attached.
REPORTS
11:,
http://www.treas.gov/press/releases/hpJ.45.htm
"i!
111
'i
r-)I": t ,I i ( "J
C (') rll t: I I'~, I rI - \ 11 ': Tr) , I
r
~ 'r" r j 1 I
5/7/2007
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TO 9321]
RIN 1545-BE79
Application of Section 409A to Nonqualified Deferred Compensation Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations regarding the application
of section 409A to nonqualified deferred compensation plans. The final
regulations are necessary to clarify and explain the rules governing the
application of section 409A to nonqualified deferred compensation plans. The
regulations affect service providers receiving amounts of deferred compensation
and the service recipients for whom the service providers provide services.
FOR FURTHER INFORMATION CONTACT: Stephen Tackney, (202) 927-9639
(not a toll-free number).
DATES: Effective Date: These regulations are effective April 17, 2007.
Applicability Dates: For dates of applicability, see §1.409A-6(b).
SUPPLEMENTARY INFORMATION:
Background
Section 409A was added to the Internal Revenue Code (Code) by section
885 of the American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat.
1418). Section 409A generally provides that unless certain requirements are
met, amounts deferred under a nonqualified deferred compensation plan for all
taxable years are currently includible in gross income to the extent not subject to
a substantial risk of forfeiture and not previously included in gross income.
Section 409A also includes rules applicable to certain trusts or similar
arrangements associated with a nonqualified deferred compensation plan, where
such arrangements are located outside of the United States or are restricted to
the provision of benefits in connection with a decline in the financial health of the
sponsor.
On December 20, 2004, the IRS issued Notice 2005-1 (published as
modified on January 6,2005, in 2005-1 CB 274), setting forth initial guidance
with respect to the application of section 409A, and supplying transition guidance
pursuant to a statutory directive. A notice of proposed rulemaking (REG-15808004, 2005-2 CB 786 [70 FR 57930]) was published in the Federal Register on
October 4, 2005. See §601.601 (a)(3). A public hearing was conducted on
January 25, 2006. In addition, the IRS received written and electronic comments
responding to the notice of proposed rulemaking. After consideration of all the
comments, the proposed regulations are adopted as amended by this Treasury
decision. The amendments are discussed in this preamble.
The Treasury Department and the IRS have also issued six additional
notices providing transition guidance with respect to section 409A: (1) Notice
2005-94, 2005-2 CB 1208 (transition guidance with respect to 2005 reporting and
withholding obligations); (2) Notice 2006-4, 2006-3 IRB 307 (transition guidance
2
with respect to certain outstanding stock rights); (3) Notice 2006-33, 2006-15 IRS
754 (transition guidance with respect to the application of section 409A(b)); (4)
Notice 2006-64, 2006-29 IRS 88 (interim guidance regarding payments
necessary to meet Federal conflict of interest requirements); (5) Notice 2006-79,
2006-43 IRS 763 (additional transition relief); and (6) Notice 2006-100,2006-51
IRS 1109 (transition guidance with respect to 2005 and 2006 reporting and
withholding obligations). See §601.601(d)(2). For a discussion of the continued
applicability of these notices, see the Effect on Other Documents section of this
preamble.
Explanation of Provisions and Summary of Comments
I. Structure and Format of Regulations
The final regulations generally adopt the structure and format of the
proposed regulations. A table of contents has been included in the final
regulations, as well as several additional sets of examples addressing various
topics.
II. Definition of Nonqualified Deferred Compensation Plan
A. Excluded plans
The final regulations exclude the types of plans described in section
409A(d)(1) from the definition of a nonqualified deferred compensation plan, as
well as certain other arrangements that were also set forth in the proposed
regulations. Accordingly, the final regulations generally provide that a
nonqualified deferred compensation plan for purposes of section 409A does not
3
include a qualified plan, a bona fide sick leave or vacation plan, a disability plan,
a death benefit plan, or certain medical expense reimbursement arrangements.
The final regulations clarify that the exemption from coverage under
section 409A for certain welfare plans does not apply to medical expense
reimbursements that constitute taxable income to the service provider. The
coverage exemption applies only to arrangements that provide benefits that are
excludable from gross income under section 105 or section 106.
Several commentators requested clarification of when a leave program will
be treated as a bona fide sick leave or vacation leave plan for purposes of
section 409A. Another commentator requested a clarification of the definition of
a compensatory time plan. Because the definitions of these terms may raise
issues and require coordination with the provisions of section 451, section 125,
and, with respect to certain taxpayers, section 457, the final regulations do not
address these issues.
Notice 2005-1, Q&A-6 provides that, until further guidance, taxpayers
whose participation in a nonqualified deferred compensation plan would be
subject to section 457(f) may rely on the definitions of bona fide vacation leave,
sick leave, compensatory time, disability pay, or death benefit plan applicable for
purposes of section 457(f) as also being applicable for purposes of section 409A.
Until further guidance, such taxpayers may continue to rely on such definitions
for purposes of section 409A.
One commentator requested that a qualified employer plan for purposes
of the exclusion from section 409A include certain plans covered by section
4
402(d) (certain plans with a foreign-situs trust treated as qualified plans with
respect to the taxation of the participants and beneficiaries) and retirement plans
described in section 1022(i)(2) of the Employee Retirement Income Security Act
of 1974, as amended (certain Puerto Rican retirement plans). The final
regulations adopt this suggestion.
B. Section 457 plans
The final regulations provide that section 409A is not applicable to an
eligible deferred compensation plan under section 457(b), but may be applicable
to a deferred compensation plan that is subject to section 457(f). Commentators
requested clarification of the application of the exception in the proposed
regulations from the definition of deferred compensation referred to as the shortterm deferral rule (described in section III.C.1 of this preamble) to a section
457(f) plan. As discussed below, a right to deferred compensation generally
refers to a legally binding right in one taxable year to compensation that is or may
be payable in a subsequent taxable year. For purposes of determining the time
of payment, the term "payment" generally refers to an actual or constructive
payment of cash or property. However, the final regulations provide that for
purposes of the short-term deferral rule, an amount is treated as paid when it is
included in income under section 457(f) whether or not an actual or constructive
payment occurs. Accordingly, where the income inclusion under section 457(f)
stems from the lapse of a substantial risk of forfeiture that is also treated as a
substantial risk of forfeiture for purposes of section 409A, the amount included in
income will be considered a short-term deferral for purposes of section 409A.
5
However, the right to earnings on amounts that have previously been included
under section 457(f) will be deferred compensation for purposes of section 409A
unless the right to the earnings independently satisfies the requirements for an
exclusion.
C. Arrangements with independent contractors
The final regulations provide that section 409A generally does not apply to
an amount deferred under an arrangement between a service provider and an
unrelated service recipient if during the service provider's taxable year in which
the service provider obtains a legally binding right to the deferred amount the
service provider is actively engaged in the trade or business of providing services
(other than as an employee or as a director of a corporation), and provides
significant services to two or more service recipients to which the service
provider is not related and that are not related to one another.
The final regulations retain the safe harbor in the proposed regulations,
under which a service provider is deemed to be providing significant services to
two or more such service recipients for this purpose if the revenues generated
from the services provided to any service recipient or group of related service
recipients during such taxable year do not exceed 70 percent of the total
revenues generated by the service provider from the trade or business of
providing such services. Commentators expressed concern that the safe harbor
did not permit independent contractors to know in advance whether the
arrangements under which an independent contractor deferred compensation
during a taxable year would be subject to section 409A. Commentators
6
requested certain look-back periods, including the ability to use averaging over
the previous three to five years, or to satisfy the 70 percent threshold over a
certain portion of the previous three to five years. The Treasury Department and
the IRS are concerned that the suggested rules would allow service providers to
engage in strategic behavior to ensure that activity in certain years would be
exempt from section 409A. Accordingly, the final regulations adopt an additional
safe harbor that provides that a service provider that has actually met the 70
percent threshold in the three immediately previous years is deemed to meet the
70 percent threshold for the current year, but only if at the time the amount is
deferred the service provider does not know or have reason to anticipate that the
service provider will fail to meet the threshold in the current year.
In response to comments, the final regulations provide that if an
independent contractor qualifies for the safe harbor for exclusion from coverage
under section 409A with respect to arrangements with unrelated service
recipients, an arrangement between the independent contractor and a service
recipient related to the independent contractor will not be subject to section 409A
if the arrangement, and the practices under the arrangement, are bona fide, arise
in the ordinary course of business, and are substantially the same as the
arrangements and practices (such as billing and collection practices) applicable
to one or more unrelated service recipients to whom the independent contractor
provides substantial services and that produce a majority of the total revenue that
the independent contractor earns from the trade or business of providing such
services during the year.
7
The final regulations further clarify that if at the time the legally binding
right to the payment arose, the arrangement was not subject to section 409A
because the service provider was an independent contractor that was eligible for
this exclusion from coverage under section 409A, the amount deferred under the
arrangement during that taxable year (and earnings credited to the deferred
amount) will not become subject to section 409A in a later year if the service
provider becomes an employee, independent contractor, or other type of service
provider subject to the rules of section 409A.
Commentators also requested that a service recipient be permitted to rely
upon a representation of an independent contractor that the independent
contractor meets the exclusion requirements, so that a service recipient will know
whether it is subject to the reporting requirements with respect to amounts
deferred subject to section 409A. The Treasury Department and the IRS are
continuing to study this issue.
D. Anti-abuse rule
If a principal purpose of a plan is to achieve a result with respect to a
deferral of compensation that is inconsistent with the purposes of section 409A,
the Commissioner may treat the plan as a nonqualified deferred compensation
plan for purposes of section 409A.
III. Definition of Nonqualified Deferred Compensation Plan
A. In general
The final regulations provide that a nonqualified deferred compensation
plan is a plan that provides for the deferral of compensation. The final
8
regulations further provide that a plan generally provides for the deferral of
compensation if, under its terms and the relevant facts and circumstances, a
service provider has a legally binding right during a taxable year to compensation
that, pursuant to its terms, is or may be payable to (or on behalf of) the service
provider in a later year. For this purpose, an amount generally is payable at the
time the service provider has a right to currently receive a transfer of cash or
property, including a transfer of property includible in income under section 83,
the economic benefit doctrine or section 402(b). Accordingly, a taxable transfer
of an annuity contract is treated as a payment for purposes of section 409A.
The definition of deferral of compensation in the final regulations excludes
the condition that the amount not be actually or constructively received and
included in income during the taxable year, because that language might cause
confusion with respect to the applicable rules governing deferral elections and
the prohibition on the acceleration of payments For example, if a service
provider has made an irrevocable election to defer an amount of his or her salary
to a future year, that amount is treated as deferred compensation regardless of
whether the service recipient actually pays such amount to the service provider
during the year in which the services are performed. Any early payment of the
deferred compensation (or any right to receive such an early payment) generally
would constitute an impermissible acceleration of the payment of the deferred
amount.
For this purpose, a plan will be treated as providing for a payment to be
made in a subsequent year whether the plan explicitly so provides (including
9
through a service provider election) or the deferral condition is inherent in the
terms of the contract. Where the parties have agreed that a payment will be
made upon an event that could occur after the year in which the legally binding
right to the payment arises, the plan generally will provide for a deferral of
compensation (unless otherwise excluded under a specific exception, such as
the short-term deferral rule).
For example, if a plan provides a service provider a right to a payment
upon separation from service, the plan generally will result in a deferral of
compensation regardless of whether the service provider separates from service
and receives the payment in the same year as the grant, because under the plan
the payment is conditioned upon an event that may occur after the year in which
the legally binding right to the payment arises. Similarly, if an arrangement such
as a stock option or stock appreciation right not otherwise excluded from
coverage under section 409A provides a right to a payment for a term of years
where the payment could be received during the short-term deferral period or a
subsequent period but is not otherwise includible in income until paid, the
arrangement will provide for deferred compensation even though the service
provider could receive the payment during the short-term deferral period (for
example, by exercising the stock option or stock appreciation right). However,
where a plan does not specify a payment date, payment event or term of years,
(or specifies a date or event certain to occur during the year in which the services
are performed), the plan generally will not provide for the deferral of
10
compensation if the service provider actually or constructively receives the
payment within the short-term deferral period.
The proposed regulations provided that earnings on deferred amounts are
generally treated as deferred compensation for purposes of section 409A. Under
the final regulations, whether a deferred amount constitutes earnings on an
amount deferred, or actual or notional income attributable to an amount deferred,
is determined under the principles defining income attributable to the amount
taken into account under §31.3121 (v)(2)-1 (d)(2).
A commentator requested clarification of whether a payment for a
noncompetition agreement could be subject to section 409A. Because such a
payment would occur in connection with the performance or nonperformance of
services, and a covenant not to compete does not create a substantial risk of
forfeiture for purposes of section 409A, a legally binding right obtained in one
year to a payment in a subsequent year in connection with a noncompetition
agreement generally would constitute deferred compensation.
B. Legally binding right
The regulations define deferral of compensation in the context of a legally
binding right to a payment of compensation in a future taxable year.
Commentators requested clarification of the standard that would be used to
determine whether a service provider has a legally binding right. A legally
binding right includes a contractual right that is enforceable under the applicable
law or laws governing the contract. A legally binding right also includes an
enforceable right created under other applicable law, such as a statute.
11
One commentator suggested that no legally binding right exists where the
payment is made only upon the realization of gain from a particular investment.
For example, the commentator argued that a bonus payable based upon the
amount that a service provider obtains in selling property should not be treated
as granting the service provider a legally binding right to the payment until the
property is sold. In such a situation, however, the requirement that the property
be sold is a condition to the right to the payment, but the right to the payment is
still a legally binding right. The service recipient could not simply revoke the
promise, sell the property, and not pay the bonus. However, the condition that
the property be sold before the service provider becomes entitled to payment
may constitute a substantial risk of forfeiture, depending on the specific facts and
circumstances.
C. Short-term deferrals
1. In general
Subject to the modifications described in this section "I.C of the preamble,
the final regulations generally adopt the short-term deferral rule that was
contained in the proposed regulations. Under the short-term deferral rule, a
deferral of compensation does not occur for purposes of section 409A if the
arrangement under which a payment is made does not provide for a deferred
payment and the payment is made no later than the 15th day of the third month
following the later of the end of the service provider's taxable year or the end of
the service recipient's taxable year in which occurs the later of the time the
legally binding right to the payment arises or the time such right first ceases to be
12
subject to a substantial risk of forfeiture (subject to certain extensions for
unforeseeable events). For this purpose, an arrangement provides for a deferred
payment if it provides for a payment that will be made or completed after a date
or an event that will or may occur later than the end of the 2 % month period
described in the preceding sentence, either because of an affirmative election on
the part of the service provider or service recipient or a deferral condition
inherent in the terms of the contract (for example, that the amount will be paid
upon the service provider's separation from service, which may occur in a future
year).
Several commentators requested that additional flexibility be provided to
allow payments to be short-term deferrals. By analogy to the rules in the
proposed regulations concerning when payments of deferred compensation
amounts are considered timely for purposes of the payment date rules, the
commentators suggested that payments should qualify as short-term deferrals if
made by the end of the year after the year in which a substantial risk of forfeiture
lapses, rather than by the 15th day of the third month of that year. The final
regulations do not adopt this suggestion. The short-term deferral rule is based
on the historical treatment of certain payments paid within a short period
following the end of a taxable year as not constituting deferred compensation.
See §1.404(b)-1T, Q&A-2(b). That short period has been defined as ending on
the 15th day of the third month following the end of the year, subject to certain
extensions for unforeseeable events. Extending the payment date by which a
short-term deferral could be paid would be inconsistent with this approach and
13
the legislative history of section 409A (H.R. Conf. Rep. No.1 08-755, at 735
(2004)), and accordingly is not adopted in the final regulations. However, the
final regulations liberalize the standard under which a payment can be a shortterm deferral even if it is delayed due to unforeseeable events. The proposed
regulations provided generally that payment could be delayed if the payment
would jeopardize the service recipient's solvency and such insolvency was
unforeseeable at the time the service provider obtained the right to the payment.
By contrast, the final regulations provide generally that payment may be delayed
where the payment would jeopardize the ability of the service recipient to
continue as a going concern.
Commentators asked how the short-term deferral rule applies to a series
of payments scheduled to commence following the lapse of a substantial risk of
forfeiture. The final regulations provide that the short-term deferral rule applies
separately to each payment, applying the technical definition of "payment" set out
in the regulations, provided that the entire payment is made during the short-term
deferral period. Accordingly, where a payment has been designated as a
separate payment, it may qualify as a short-term deferral (and thus not deferred
compensation) even where the service provider has a right to subsequent
payments under the same arrangement. In contrast, where a payment has not
been designated as a separate payment (such as, for example, a life annuity
payment or a series of installment payments treated as a single payment), any
initial payments in the series will not be treated as a short-term deferral even if
14
paid within the short-term deferral period. For a discussion of the definition of
payment, see §1.409A-3.
Commentators suggested that a right to a reimbursement be treated as
potentially subject to the short-term deferral rule, arguing that the right to the
reimbursement payment is subject to a substantial risk of forfeiture that the
service provider will not incur the expense. Commentators argued that the shortterm deferral rule then could apply if the reimbursement payment were made
within a short period following the occurrence of the expense. Generally, the risk
that a service provider will fail to incur a reimbursable expense will not qualify as
a substantial risk of forfeiture, so the short-term deferral rule will not be
applicable. However, the final regulations provide considerable additional
flexibility with regard to structuring reimbursement arrangements to meet the
requirements of section 409A. For a discussion of these provisions, see section
VII.B.2 of this preamble.
2. Application to event-based payments
Some commentators asked whether any payments based on a legally
binding right arising in the year of a separation from service are excluded from
coverage under section 409A, if paid by the end of the relevant short-term
deferral period. For example, where an employee had accrued benefits under a
defined benefit supplemental executive retirement plan (SERP) during his career
that was payable immediately upon a separation from service, including an
amount accrued in the year of separation from service, commentators asked
whether the payment of the portion of the benefits accrued in that final year is
15
excluded from coverage under section 409A if paid by March 15 of the year
following the separation from service, because the amount is paid within a short
period following the year the service provider obtains a vested legally binding
right to the additional benefit accrual. (This generally would be of most concern
to specified employees subject to the requirement of a six-month delay in
payment following a separation from service.)
The analysis that applies in this situation is similar to that applied to the
general definition of deferral of compensation, discussed in section III.A of this
preamble. The short-term deferral rule does not provide an exclusion from the
requirements of section 409A for such current-year benefit accruals because the
rule does not apply to amounts of compensation subject to a deferral election.
For this purpose, an election to defer includes either an affirmative election on
the part of the service provider or a deferral condition inherent in the terms of the
contract. Where the parties have agreed that a payment will be made upon an
event that does not necessarily coincide with the lapsing of the substantial risk of
forfeiture, and could occur at a time beyond the short-term deferral period, the
arrangement provides for a deferral election such that the short-term deferral rule
does not apply. Accordingly, in this example, because the benefits accrued in
the final year of the SERP could have been paid upon an event occurring after
the short-term deferral period (if, for example, the individual had not separated
from service until a later year), the payment of the benefit accrued in the final
year is subject to section 409A and is not a short-term deferral, even if paid by
March 15 of the year following the separation from service.
16
Also, for example, if a plan that is not subject to section 457(f) provides
that an amount is subject to a substantial risk of forfeiture until the completion of
three years of service, and is payable upon a separation of service following the
three years of service, the right to the amount is not a short-term deferral even if
the service provider separates from service immediately after vesting in the right,
because under the plan the payment is based upon an event other than the
lapsing of the substantial risk of forfeiture and such event may occur in a year
subsequent to the year in which the risk of forfeiture lapses.
Conversely, where a plan specifies no payment date or payment event, or
specifies only the date at which the substantial risk of forfeiture lapses, the plan
may qualify for the short-term deferral rule if the payment is made within the
applicable short-term deferral period. However, such a plan generally would
violate section 409A if the payment were made after the short-term deferral
period.
As discussed in this preamble with respect to the general definition of
deferred compensation, to implement the statutory scheme, including the
applicable reporting and form requirements, taxpayers generally must be able to
determine whether an arrangement provides for a deferral of compensation at
the time the service provider obtains a legally binding right to the compensation.
Although a plan need not specify a payment date to be a short-term deferral that
is excluded from coverage under section 409A, the short-term deferral exclusion
does not apply if the payment event or date is specified and will or may occur
after the end of the short-term deferral period.
17
The preamble to the proposed regulations explained that where a plan
requires that a payment be made on a date within the short-term deferral period,
but the payment is made after the specified date and after the end of the shortterm deferral period, the arrangement will be treated as a nonqualified deferred
compensation plan, but the payment date will be treated as a specified date.
Thus, under such an arrangement, if the service provider receives the payment
after the specified date, but not later than the end of the year in which the
specified date occurs, the payment generally will comply with section 409A.
However, taxpayers should note that a provision requiring only that a payment be
made on or before the end of the short-term deferral period may not qualify as a
permissible specified date for this purpose, if under the facts and circumstances
the payment could have been made in more than one taxable year. For a
discussion of the application of the definition of a specified payment date to this
type of plan, see section VII.S of this preamble.
For a discussion of when rights to compensation upon a separation from
service for good reason may be treated as rights to compensation upon an
involuntary termination, and the potential application of the short-term deferral
exception to these arrangements, see section IILJ.3 of this preamble.
D. Stock options and stock appreciation rights
1. In general
Subject to the modifications described in this preamble, the final
regulations adopt the provisions of the proposed regulations excluding from
coverage under section 409A statutory stock options and certain other stock
18
rights. Generally under the regulations, nondiscounted stock options and
nondiscounted stock appreciation rights issued on service recipient stock that do
not include any additional deferral feature are excluded from section 409A.
2. Statutory stock options
The final regulations adopt the exclusion from coverage under section
409A for statutory stock options, including incentive stock options described in
section 422 of the Code and options granted under an employee stock purchase
plan described in section 423 of the Code. This exclusion applies regardless of
whether the statutory stock option would be excluded if the same option were not
treated as a statutory stock option. For example, an employee stock purchase
plan described in section 423 offering a discounted purchase price is not a
deferred compensation plan for purposes of section 409A.
Commentators requested clarification, however, of the treatment of a
statutory stock option that is modified, or otherwise becomes ineligible to be
treated as a statutory stock option. The final regulations adopt the rule set forth
in the proposed regulations, and provide that at the time of such modification or
event, the modification or other event is treated as the grant of a new option, or
causes the option to be treated as having had a deferral feature from the date of
grant, as applicable, for purposes of section 409A only if such modification or
other event would have been so treated had the option been a nonstatutory stock
option immediately before such modification or other event. For example, where
an incentive stock option is modified through an extension of the option's term,
the extended option will be treated as having had an additional deferral feature
19
from the date of grant for section 409A purposes only if the same extension of a
nonstatutory stock option would have resulted in such treatment.
Commentators also requested that the exclusion from coverage under
section 409A for certain stock rights issued under plans meeting the
requirements of section 423 (employee stock purchase plans) be extended to
employee stock purchase plans offered by foreign employers that do not meet
such requirements, where the shares are made available for purchase at a
discount and substantially all of the participants are nonresident aliens. The
legislative history does not provide a basis for extending the exception applicable
to options meeting the requirements of section 423 to grants of discounted stock
options not meeting the requirements of section 423. Accordingly, this
suggestion is not adopted in the final regulations.
3. Definition of service recipient stock
The final regulations adopt the requirement in the proposed regulations
that for the exclusion for certain stock rights to apply, the stock right must relate
to service recipient stock. Commentators criticized the definition of service
recipient stock contained in the proposed regulations as too restrictive.
Generally such criticisms centered on two different aspects of the definition of
service recipient stock in the proposed regulations - the classes of stock that
may qualify as service recipient stock, and the issuer or issuers whose stock may
constitute service recipient stock, where the service recipient is comprised of
more than one entity.
a. Classes of stock that may qualify as service recipient stock
20
Commentators requested clarification and expansion of the classes of
stock of a corporation that may constitute service recipient stock. Commentators
generally focused on two issues. First, with respect to stock of a particular
service recipient corporation, commentators requested that the stock right be
permitted to relate to any class of common stock, regardless of whether another
class of common stock of that corporation was publicly traded, and regardless of
whether that class of common stock had the greatest aggregate value of all
classes of common stock issued by that corporate entity. Subject to the
restrictions governing certain preferences as to distributions, the final regulations
generally provide that any class of common stock may be used, regardless of
whether another class of common stock that could qualify as service recipient
stock is publicly traded or has a higher aggregate value outstanding, and
regardless of whether the class of stock is subject to transferability restrictions or
buyback rights (provided such buyback rights reflect the fair market value of the
stock at the time of purchase).
Second, commentators suggested narrowing the types of preferences on
a class of common stock that would prohibit that class from being treated as
service recipient stock. One commentator requested that the classes of stock
permitted as service recipient stock include any class of stock that is widely held
by non-service recipients. While it may be unlikely that a widely-held class of
stock was created to facilitate an abusive avoidance of section 409A, it does not
follow that service recipient stock rights issued on such stock necessarily would
be consistent with the intended application of section 409A if, for example,
21
holders of such class enjoyed preferences that would make such stock rights a
suitable substitute for nonqualified deferred compensation.
To be treated as service recipient stock under the final regulations, a class
of stock must qualify as common stock under section 305 of the Code.
Accordingly, the final regulations provide that stock that is not common stock
under section 305 is not service recipient stock for purposes of section 409A.
However, the mere classification of a class of stock as common stock under
section 305 is not sufficient for such stock to be treated as service recipient stock
for purposes of section 409A. The Treasury Department and the IRS are
concerned that classes of stock that are common stock under section 305 may
provide preferences that could permit stock rights with respect to such stock to
resemble traditional nonqualified deferred compensation, such that exclusion of
such stock rights would permit the avoidance of section 409A.
Commentators suggested that a preference with respect to liquidation
rights, without any other preferences such as a preferential right to dividends,
should be permitted under the definition of service recipient stock. A holder of
this class of stock would not be guaranteed any return, but rather would simply
be guaranteed preferred distribution rights upon a complete liquidation of the
service recipient. The final regulations generally adopt this suggestion.
With respect to other preferential rights, commentators were unable to
provide a workable standard under which permissible preferences could be
distinguished from impermissible preferences. Accordingly, the final regulations
do not treat any stock including such preferences as service recipient stock.
22
However, the Treasury Department and the IRS continue to study this area, and
the final regulations authorize the publication of other additional guidance, should
a workable standard be developed.
b. Entities the stock of which may qualify as service recipient stock
Commentators also requested an expansion of the class of entities the
stock of which can qualify as service recipient stock where the service recipient is
comprised of multiple entities. The Treasury Department and the IRS believe
that the stock right exception under section 409A was intended to cover stock
rights directly reflecting the enterprise value of the entity for which the service
provider is providing services. Consistent with this approach, the final
regulations provide that service recipient stock may include the stock of the
corporation for which the service provider was providing services at the date of
grant. In addition, the final regulations provide that service recipient stock may
include stock of any corporation in a chain of organizations all of which have a
controlling interest in another organization, beginning with the parent
organization and ending with the organization for which the service provider was
providing services at the date of grant of the stock right. Similarly to the
proposed regulations, the final regulations provide that the term "controlling
interest" has the same meaning as provided in §1.414(c)-2(b )(2)(i), except that
where that regulation requires at least an 80 percent interest, the final regulations
generally require only a 50 percent interest. In addition, where the use of such
stock with respect to the grant of a stock right to such service provider is based
upon legitimate business criteria, the final regulations generally require only a 20
23
percent interest. For purposes of determining ownership of an interest in an
organization, the attribution rules of §1.414(c)-4 apply, and the exclusion rules of
§1.414(c)-3 also apply. For example, under the final regulations, with respect to
an employee of a subsidiary corporation, the common stock of the ultimate
parent corporation, or of a subsidiary corporation anywhere in the chain of
corporate ownership between the subsidiary that employed the employee and
the ultimate parent corporation (a higher tier subsidiary), could qualify as seNice
recipient stock for purposes of determining whether a stock right issued to such
employee with respect to such stock was excluded from coverage under section
409A, provided that the 50 percent or 20 percent ownership standard, as
applicable, was satisfied by each corporation in the chain.
The proposed regulations contained many requirements for using an
ownership level of less than 50 percent. Commentators requested several
simplifications of these requirements. In response, the final regulations no longer
require a formal election by any corporation. Rather, each individual grant of a
stock right is analyzed to determine whether the stock qualifies as seNice
recipient stock with respect to a seNice provider at the time the stock right is
granted. If a corporation owns at least 50 percent of the stock of one corporation
and owns less than 50 percent of the stock of another corporation, and it intends
to treat its stock as seNice recipient stock with respect to employees of both
corporations, there is no requirement that a legitimate business criteria exist with
respect to the issuance of stock rights on the parent corporation stock to seNice
providers of the first such corporation. The legitimate business criteria standard
24
applies only to stock rights issued to service providers of subsidiaries that are not
majority-owned, because the test of legitimate business criteria relates to the
actual issuance of a stock right to a particular service provider. Accordingly, a
subsidiary may have more than one shareholder corporation the stock of which
qualifies as service recipient stock with respect to a subsidiary employee such
as, for example, where three entities each own a one-third interest in the
subsidiary. However, with respect to each grant of a stock right on stock of a
particular non-majority shareholder corporation to a service provider of a
particular subsidiary, there must exist legitimate business criteria for issuing such
a stock right. Even if legitimate business criteria exist with respect to the
issuance of a stock right on stock of a particular shareholder corporation to a
particular service provider, legitimate business criteria mayor may not exist with
respect to the issuance of a stock right to the same service provider on stock of
another shareholder corporation.
The legitimate business criteria requirement is a facts and circumstances
test, focusing generally on whether there is sufficient nexus between a particular
service provider and the entity, the stock of which underlies the stock right
granted to the service provider, for the grant to serve a legitimate non-tax
business purpose. As provided in the preamble to the proposed regulations, if a
corporation issued a stock right on its stock to a current employee of a joint
venture in which the corporation was a venturer, and the employee was a former
employee of the corporate venturer, generally the issuance would be based on
legitimate business criteria. Similarly, if the corporate venturer issued such a
25
right to an employee of the joint venture who it reasonably expected would
become an employee of the corporate venturer in the future, generally ttie
legitimate business criteria requirement would be met. By contrast, where an
employee has no real nexus with a corporate venturer, such as generally
happens when the corporate venturer is a passive investor in the service
recipient, the use of the investor corporation stock as the stock underlying a
stock right grant to that employee generally would not be based upon legitimate
business criteria. Similarly, where a corporation holds only a minority interest in
an entity that in turn holds a minority interest in the entity for which the employee
performs services, such that the corporation holds only an insubstantial indirect
interest in the entity receiving the services, legitimate business criteria generally
would not exist for issuing a stock right on the corporation's stock to the
employee.
The Treasury Department and the IRS remain concerned that the
manipulation of the structure of a related group of corporations may be used to
allow stock options or stock appreciation rights to mimic the characteristics of
nonqualified deferred compensation, by compensating holders based on
predictable amounts and investment returns unrelated to the enterprise value of
an operating entity. Accordingly, the exception contained in the proposed
regulations under which the stock of a corporation serving as investment vehicle
is not considered service recipient stock has been retained. In addition, an antiabuse rule has been added to address corporate structures, transactions, or
stock right grants, a principal purpose of which is the avoidance of the application
26
of section 409A to an arrangement otherwise providing deferred compensation.
These corporate structures, transactions, and stock right grants generally will
occur where the structure, transaction, or grant is intended to provide enhanced
security for the value of the stock right as a means of providing deferred
compensation, rather than as compensation related to an increase in the true
enterprise value of the service recipient. The regulations provide that if an entity
becomes a member of a group of corporations or other entities treated as a
single service recipient, and the primary $ource of income or value of such entity
arises from the provision of management services to other members of the
service recipient group, if any stock rights are issued with respect to such entity it
is presumed that such structure was established for purposes of avoiding the
application of section 409A.
c. Equity interests in certain non-corporate entities
The final regulations permit certain equity interests in a non-stock mutual
company to be treated analogously to equity interests in a corporation.
Commentators requested that the definition of service recipient stock be
expanded to cover interests in cooperatives and interests in the value of an
Indian tribal enterprise. The regulations do not include such interests in the
definition of service recipient stock, but provide the IRS authority to provide
guidance expanding the definition of service recipient stock. For a discussion of
the application of the exclusion for certain stock rights to rights issued on equity
interests in entities taxed as partnerships, see section III.G of this preamble.
4. Valuation
27
a. In general
The final regulations provide that for the exclusion for stock rights to apply,
the stock right must specify an exercise price of the stock right that may never be
less than the fair market value of the underlying stock on the date the stock right
is granted. For purposes of this discussion and the final regulations, the exercise
price of a stock appreciation right refers to the base stock value from which the
appreciation is measured for purposes of determining the compensation payable
under the stock appreciation right (for example, a stock appreciation right
providing for a payment of the excess of the fair market value of 100 shares over
$100 would have a $1 per share exercise price).
Several commentators expressed concerns regarding the determination of
the fair market value of the underlying stock. Some commentators requested
that the valuation rules applicable to incentive stock options be applied for
purposes of the exclusion from section 409A. Under those rules, if the stock
option would otherwise fail to be an incentive stock option solely because the
exercise price was less than the fair market value of the underlying stock as of
the date of grant, generally the option is treated as an incentive stock option if the
issuer attempted in good faith to set the exercise price at fair market value. See
section 422(c)(1). The Treasury Department and the IRS believe that this is not
the appropriate standard for determining whether stock rights are subject to
section 409A. Incentive stock options are subject to strict limitations on the
amount of such options that may be granted to a particular employee. See
section 422(d). In contrast, there are no such limits applicable to nonstatutory
28
stock options, and grants of nonstatutory stock options often far exceed the
limitation applicable to incentive stock options. In addition, section 422(c)(1)
explicitly provides for the good faith standard with respect to incentive stock
options, while no such provisions exist within section 409A or its legislative
history.
Commentators requested clarification of the consistency standard with
respect to the use of a valuation method. Specifically, commentators asked
whether one valuation method could be used for purposes of establishing the
exercise price while another method could be used for purposes of determining
the fair market value of the stock at the time of the payment (for example, to
determine the amount of payment in the case of a stock appreciation right or a
stock option where the stock is subject to repurchase by the service recipient).
The final regulations clarify that consistency is not required, provided that each
valuation method used otherwise meets the requirements of the final regulations.
Accordingly, a service recipient may use one valuation method for purposes of
establishing an exercise price, but another valuation method for purposes of
establishing the payment amount (in the case of a stock appreciation right) or the
buyback amount (in the case of a stock option where the underlying stock is
subject to a buyback arrangement). However, once an exercise price has been
established, the exercise price may not be changed through the retroactive use
of another valuation method. In addition, where after the date of grant, but
before the date of exercise, of the stock right, the service recipient stock to which
the stock right relates becomes readily tradable on an established securities
29
market, the service recipient must use a valuation method for stock readily
tradable on an established securities market for purposes of determining the
payment amount (in the case of a stock appreciation right) or the buyback
amount (in the case of a stock option where the underlying stock is subject to a
buyback arrangement).
b. Valuation - stock readily tradable on an established securities market
The final regulations adopt the rules under the proposed regulations
governing valuation of stock readily tradable on an established securities market,
generally requiring that the valuation of such stock be based upon the
contemporaneous prices established in the securities market, subject to the
modifications discussed in this preamble. Some commentators requested
additional guidance with respect to when a stock will be treated as readily
tradable. The final regulations adopt the same standard as that set forth in
§1.280G-1, Q&A-6(e), that stock is treated as readily tradable if it is regularly
quoted by brokers or dealers making a market in such stock.
With respect to the rules governing the valuation of stock that is readily
tradable on an established securities market, commentators generally focused on
the provision of the proposed regulations permitting the use of an average selling
price during a specified period that is within 30 days before or 30 days after the
date of grant. Specifically, comments concentrated on the requirement that the
commitment to grant the stock right with an exercise price set using such an
average selling price be irrevocable before the beginning of the specified period.
Commentators questioned both the purpose of the requirement of the
30
commitment to the valuation method, as well as the actions required to satisfy
the rule if averaging were being used.
The rule was intended to prohibit the use of an average price, set on a
look-back basis, to ensure a discounted exercise price. For example, if a
corporation decided to grant a stock option on July 1, and it could set the
exercise price using an average selling price for any period falling within the prior
30 days without having had a prior commitment to a specific averaging period,
the corporation could simply look for the lowest price that occurred during the
prior June. Furthermore, if the corporation were not committed to grant the stock
option on July 1, the corporation could wait until its stock price began to rise and
then grant an option using the selling price on a given day during the previous 30
days to provide a particular discount. Accordingly, the final regulations require
that the commitment to grant the stock right with an exercise price set using such
an average selling price be irrevocable before the beginning of the specified
period. To satisfy this requirement, the service recipient must designate the
recipient of the stock option, the number of shares the stock option will permit the
holder of the stock option to purchase, and the method for determining the
exercise price including the period over which the averaging will occur, before the
beginning of the specified averaging period.
One commentator stated that the requirement of an irrevocable
commitment to the averaging period could not be met under French law, because
French law requires that the stock option exercise price be set based on the
average trading price over the preceding 20 days and the commitment to the
31
grant before the beginning of the period may be viewed as violating that
requirement. The final regulations provide that where applicable foreign law
requires that the compensatory stock right granted by the issuer must be priced
based upon a specific price averaging method and period, a stock right granted
in accordance with such applicable foreign law will be treated as meeting the
requirement, provided that the averaging period may not exceed 30 days.
c. Valuation - stock not readily tradable on an established securities market
i. In general
The final regulations adopt the provisions in the proposed regulations
relating to the valuation of stock not readily tradable on an established securities
market, subject to the modifications discussed in this section IIl.eA.c.
Accordingly, a valuation of stock based upon a reasonable application of a
reasonable valuation method is treated as reflecting the fair market value of the
stock. To meet this standard, it is not necessary that a taxpayer demonstrate
that the value was determined by an independent appraiser. Where the taxpayer
can otherwise demonstrate that the valuation was determined by the reasonable
application of a reasonable valuation method, the standard will be met.
One commentator requested that the factors to be considered in
determining the fair market value of the stock should be modified to include
consideration of any recent equity sales made by the corporation in arm's-length
transactions. The final regulations adopt this suggestion.
The final regulations continue to require that in the case of a stock right
issued with respect to stock that was not publicly traded at the time the right was
32
issued, but becomes publicly traded before the right is exercised, the stock value
for purposes of calculating the payment amount (in the case of a stock
appreciation right) or the buyback amount (in the case of a stock option where
the underlying stock is subject to a buyback agreement) must be based upon the
rules governing stock that is publicly traded. This does not mean that the initial
exercise price determined under the rules governing stock that is not publicly
traded must be reset. Rather, this means only that the value at the time of
exercise used to determine the payment amount or the buyback amount must be
determined under the rules governing stock that is publicly traded. For example,
if a service provider holds an excluded stock appreciation right with an exercise
price of $1 that was fixed based on a valuation of the closely-held corporate
stock at the time of grant, and before exercise the stock becomes readily
tradable on an established securities market, the amount payable upon exercise
must be the excess of the value of the stock based on its trading price over the
$1 exercise price.
ii. Safe harbor presumptions
The final regulations adopt a presumption in specified circumstances that,
for purposes of section 409A, a valuation of stock reflects the fair market value of
the stock, rebuttable only by a showing that the valuation is grossly
unreasonable. The presumption applies where the valuation is based upon an
independent appraisal, a generally applicable repurchase formula (applicable for
both compensatory and noncompensatory purposes) that would be treated as
fair market value under section 83, or, in the case of illiquid stock of a start-up
33
corporation, a valuation by a qualified individual or individuals applied at a time
that the corporation did not otherwise anticipate a change in control event or
public offering of the stock.
Many of the comments with respect to these presumptions related to the
presumption applicable to illiquid stock of start-up corporations. As set forth in
the proposed regulations, the start-up corporation presumption would not apply if
the service recipient or service provider could reasonably anticipate, as of the
time the valuation is applied, that the service recipient would undergo a change
in control event or make a public offering of securities within the 12 months
following the event to which the valuation is applied. Commentators suggested
that a 12-month period is too long, because changes occur so rapidly in the
business world that it often is difficult or impossible to predict so far in advance
whether such an event will occur. Commentators suggested that the service
provider should retain the benefit of the presumption unless the issuing
corporation entered into a definitive agreement or filed its registration statement
with the Securities and Exchange Commission within a period of 15 or 30 days
after issuing the stock right.
The Treasury Department and the IRS believe that a 15-day or a 30-day
period is too short. Although there is always a risk that a public offering will fail or
that a corporate transaction will not occur, the Treasury Department and the IRS
also believe that a person should reasonably be able to anticipate whether such
a transaction will occur during a reasonable period before the transaction.
34
Accordingly, the final regulations provide that the start-up corporation
presumption will not apply if at the time the valuation is made, the service
recipient or service provider may reasonably anticipate that the service recipient
will undergo a change in control event in the next 90 days or an initial public
offering within the next 180 days. As under the proposed regulations, the rule in
the final regulations is concerned with what the parties may reasonably anticipate
at the time the stock right is issued.
Other comments requested examples of persons with sufficient
knowledge, experience, and skill in valuing illiquid stock of a start-up corporation.
Because knowledge, skill and training may be obtained in different ways, the final
regulations do not provide specific examples. However, the regulations clarify
that the standard to be applied is whether a reasonable individual, upon being
apprised of such person's relevant knowledge, experience, education and
training, would reasonably rely on the advice of such person with respect to
valuation in deciding whether to accept an offer to purchase or sell the stock
being valued. The final regulations also clarify that significant experience
generally means at least five years of relevant experience in business valuation
or appraisal, financial accounting, investment banking, private equity, secured
lending, or other comparable experience in the line of business or industry in
which the service recipient operates.
With respect to the presumption based upon a generally applicable
buyback formula, some commentators requested that the presumption apply
where the formula is applicable to all compensatory stock transactions, but not
35
also applicable to all noncompensatory stock transactions. The final regulations
do not adopt this suggestion. However, the final regulations clarify that to meet
the requirements of the presumption, the buyback formula is required to be
applicable to compensatory and noncompensatory transactions with the issuer or
a person owning 10 percent or more of the stock of the issuer, but is not required
to be applicable to transactions with other persons or transactions that are part of
an arm's length transaction constituting the sale of all or substantially all of the
stock of the issuer to an unrelated purchaser.
5. Modification of a stock right
The final regulations continue to apply certain rules addressing
modifications, extensions and renewals of stock rights. Although these rules in
many respects resemble the rules applicable to statutory stock options, the rules
are not intended to incorporate the rules applicable to statutory stock options
except where explicitly provided.
The final regulations generally retain the rules in the proposed regulations
that generally treat extensions of the exercise period of a stock right as an
additional deferral feature as of the date of grant of the right, with an exception
for certain limited extensions following a separation from service. Commentators
characterized these rules as unnecessarily restrictive. Specifically,
commentators argued that the extension of a stock option upon the occurrence of
a separation from service (often in connection with a program of layoffs) or a
corporate transaction is a common practice, and that often these extensions
cover periods longer than the limited period provided in the proposed regulations.
36
In addition, commentators argued that the same sUbstantive results could be
obtained by specifying a longer term for the stock right and providing the service
recipient the discretion to shorten the term, rather than providing discretion to
extend a shorter term, and that the former approach would be permissible under
the proposed regulations. In response, the final regulations provide that the
extension of an option exercise period generally is not treated as an additional
deferral feature or a modification of the stock option for section 409A purposes if
the exercise period is not extended beyond the earlier of the original maximum
term of the option or 10 years from the original date of grant of the stock right.
Many commentators also requested that the extension of the exercise
period of a stock right not be treated as an additional deferral feature for
purposes of section 409A, where at the time of the extension the fair market
value of the underlying stock does not exceed the exercise price (an
"underwater" option). Because the issuance of an otherwise identical option with
an exercise period ending after the end of the exercise period of the underwater
option would be excluded from coverage under section 409A, the final
regulations provide that such an extension does not constitute an additional
deferral feature.
The final regulations adopt the provisions in the proposed regulations
regarding substitution or assumption of stock rights due to a corporate
transaction, which are generally in accordance with the corresponding provisions
governing incentive stock options. The final regulations clarify that the applicable
corporate transactions for this purpose include only those transactions described
37
in §1.424-1 (a)(3). One commentator requested that the provision permitting
substitutions of stock options be modified to reflect that a holder of a nonstatutory
stock option is not required to be employed by the successor entity. The final
regulations adopt this suggestion, so that a substituted nonstatutory stock option
may be treated as a continuation of the initial option even where the holder of the
option is not employed or otherwise providing services to the successor entity,
provided the substitution otherwise meets the rules provided in the regulations.
6. Other stock right issues
The final regulations adopt certain definitions from the regulations
governing statutory stock options, modified as appropriate for purposes of
applying the rules under section 409A. These include the time and date of grant
of an option (§1.421-1 (c)), and the definitions of option (§1.421-1 (a)), stock
(§1.421-1 (d)), exercise price (§1.424-1 (e)), exercise (§1.421-1 (f)), and transfer
(§1.421-1(g)). These definitions apply by analogy to stock appreciation rights.
The final regulations adopt the rule that a right to a payment of
accumulated dividend equivalents at the time of the exercise of a stock right
generally will be treated as a reduction in the exercise price of the stock right,
causing the stock right to be deferred compensation subject to the requirements
of section 409A. The final regulations provide that an arrangement to
accumulate and pay dividend equivalents the payment of which is not contingent
upon the exercise of a stock right may be treated as a separate arrangement for
purposes of section 409A. Such an arrangement generally will be required to
comply with section 409A (unless it independently qualifies for an exception from
38
coverage under section 409A), but will not affect whether the related stock right
qualifies for the exclusion from coverage under section 409A. The right to the
dividend equivalents may be set forth within the stock right plan or the individual
stock right grant, or in a separate document, as long as the payment of the
dividend equivalents is not contingent upon the exercise of the stock right.
Commentators also asked whether the exclusion of stock rights from
coverage under section 409A would apply to tandem rights, meaning a stock
right that combines a stock option right and a stock appreciation right,
exercisable on an alternative basis. Similarly, commentators asked whether the
substitution of a stock option for a stock appreciation right, or vice versa, where
all the terms except the mode of payment upon exercise are similar, would be
treated as a modification of a stock right. The application of section 409A
generally is not affected by the medium of a taxable payment (for example, cash
or stock). Accordingly, whether a stock right is expressed as a tandem
arrangement under which the exercise of one right terminates the other right, or
there is a substitution of a stock appreciation right for a stock option identical in
all respects except for the medium of payment, generally does not impact
whether the arrangement is excluded from coverage under section 409A.
Commentators requested further clarification of the application of section
409A to stock option gain deferrals. The ability to defer gain upon the exercise or
exchange (including a purported forfeiture) of a stock right is incompatible with
the exclusion of certain stock rights from the requirements of section 409A
because such exclusion is predicated on the option not having any additional
39
deferral feature. Accordingly, if an arrangement provides for a potential to defer
the payment of cash or property upon the exercise or exchange of a stock right
beyond the year the right is exercised or beyond the original term of the stock
right, the arrangement provides for a deferral feature and must comply with the
requirements of section 409A from the time the legally binding right granted by
the award arises.
Because a stock option with a deferral feature is subject to section 409A
regardless of whether the deferral feature is actually utilized, an option that
includes a provision permitting deferral of option gain generally will not satisfy the
time and form of payment rules under section 409A if the service provider can
exercise the option in more than one taxable year. If a deferral feature is added
to a preexisting option, the option will be treated as having included a deferral
feature as of the original date of grant, generally resulting in a violation of section
409A.
However, the final regulations provide that a stock right will not be treated
as having a deferral feature where the service recipient delays a payment
because the making of the payment would violate applicable Federal, state, local,
or foreign law or jeopardize the ability of the service recipient to continue as a
going concern. Although these provisions permit the delay for purposes of
section 409A, no inference should be drawn as to the Federal tax consequences
of such a delay under any other section of the Code or Federal tax doctrine such
as section 83, section 451, the constructive receipt doctrine, or the economic
benefit doctrine.
40
Commentators requested that the definition of service recipient stock be
expanded to include the stock of a corporation for which a service recipient
provides substantial services, at least with respect to a service provider of the
service recipient that is providing services to the corporation. The legislative
history does not support such a broad interpretation of service recipient stock,
and the final regulations do not adopt this suggestion.
E. Restricted property
The final regulations provide, as did the proposed regulations, that a grant
of restricted property generally will not constitute a deferral of compensation for
purposes of section 409A. Commentators requested that the regulations clarify
that a vested right to receive nonvested property in a future year does not
constitute deferred compensation. Commentators argued that a right to receive
nonvested property is not truly vested. For example, commentators argued that
a right to receive restricted stock that will be subject to a substantial risk of
forfeiture until the service provider completes three years of future services
cannot be a vested right. The final regulations adopt this suggestion, so long as
the risk of forfeiture to which the stock is subject constitutes a substantial risk of
forfeiture for purposes of section 409A.
Commentators specifically requested clarification of the circumstances
under which a service provider may elect to be paid a bonus or other payment in
the form of restricted stock, rather than cash. Generally an election between
compensation alternatives, none of which provides for a deferral of compensation
within the meaning of section 409A, will not cause the election to be subject to
41
the section 409A timing restrictions. Thus, a choice between an award of
restricted stock or stock options that are not subject to section 409A will not be
governed by the section 409A election timing rules. However, where any of the
alternatives involves a deferral of compensation subject to section 409A, the
election must comply with the provisions of section 409A. In addition, no
inference should be drawn as to the Federal tax consequences of such an
election provision under any other section of the Code or Federal tax doctrine
such as section 83, section 451, the constructive receipt doctrine, or the
economic benefit doctrine.
F. Section 402(b) trusts
The final regulations continue to except from coverage under section 409A
transfers of a beneficial interest in a trust, or a transfer to or from a trust, to the
extent such a transfer is subject to section 402(b). The final regulations further
clarify that a right to compensation required to be included in income under
section 402(b)(4)(A) (alternative taxation of highly compensated employees of a
section 402(b) trust that fails to meet the requirements of section 401 (a)(26) or
section 41 O(b)) also is not a deferral of compensation. However, a right to
receive a benefit formulated as a right to a future contribution to a section 402(b)
trust is similar to a right to receive property in a future taxable year, and generally
would constitute deferred compensation.
G. Arrangements between partnerships and partners
The proposed regulations did not address the application of section 409A
to arrangements between partnerships and partners, and these final regulations
42
also do not address such arrangements. The statute and the legislative history
of section 409A do not specifically address arrangements between partnerships
and partners providing services to a partnership and do not explicitly exclude
such arrangements from the application of section 409A. Commentators raised a
number of issues, relating both to the scope of the arrangements subject to
section 409A and the coordination of the provisions of subchapter K and section
409A with respect to those arrangements that are subject to section 409A. The
Treasury Department and the IRS are continuing to analyze the issues raised in
this area. Notice 2005-1, Q&A-7 provides interim guidance regarding the
application of section 409A to arrangements between partnerships and partners.
Until further guidance is issued, taxpayers may continue to rely on Notice 2005-1,
Q&A-7 and section II.E. of the preamble to the proposed regulations.
Notice 2005-1, Q&A-7 provided that until further guidance is issued for
purposes of section 409A, taxpayers may treat the issuance of a partnership
interest (including a profits interest) or an option to purchase a partnership
interest, granted in connection with the performance of services under the same
principles that govern the issuance of stock. For this purpose, taxpayers may
apply the principles applicable to stock options or stock appreciation rights under
these final regulations, as effective and applicable, to equivalent rights with
respect to partnership interests.
Taxpayers also may continue to rely upon the explanation in the preamble
to the proposed regulations regarding the application of section 409A to
guaranteed payments for services described in section 707(c). As stated in that
43
preamble, until further guidance is issued, section 409A will apply to guaranteed
payments described in section 707(c) (and rights to receive such guaranteed
payments in the future), only in cases where the guaranteed payment is for
services and the partner providing services does not include the payment in
income by the 15th day of the third month following the end of the taxable year of
the partner in which the partner obtained a legally binding right to the guaranteed
payment or, if later, the taxable year in which the right to the guaranteed payment
is first no longer subject to a substantial risk of forfeiture.
Commentators raised issues concerning the application of the provision in
Notice 2005-1, Q&A-7 stating that until further guidance is issued, taxpayers may
treat arrangements providing for payments subject to section 736 (payments to a
retiring partner or a deceased partner's successor in interest) as not being
subject to section 409A, except that an arrangement providing for payments that
qualify as payments to a partner under section 1402(a)(10) is subject to section
409A. Section 1402(a)(10) provides for an exception from the Self-Employment
Contributions Act (SECA) tax for payments to a retired partner, provided that
certain conditions are met. Specifically, the payments must be made pursuant to
a written plan of the partnership, must be on account of the partner's retirement
and must continue at least until the partner's death. In addition, to qualify for the
exception, the partner must not have rendered services during the partnership's
taxable year ending within or with the partner's taxable year in which the
amounts were received, as of the close of the partnership's taxable year no
obligation must exist from the other partners to such retired partner except with
44
respect to retirement payments under such plan, and before the end of the
partnership's taxable year such retired partner's share, if any, of the capital of the
partnership must have been paid to him in full.
Commentators questioned the appropriateness of the inclusion of such
arrangements under section 409A, because neither the statute nor the legislative
history refers to section 1402(a)(10). However, the Treasury Department and the
IRS believe it is appropriate for such arrangements to be subject to section 409A
because such arrangements are purposefully created to provide deferred
compensation, and do not raise issues regarding the coordination of the
provisions of section 409A with the provisions of section 736, specifically the
rules governing the classification of payments to a retired partner under section
736(a) (payments considered as distributive share or guaranteed payments) and
section 736(b) (payments for interest in partnership).
However, further clarification and relief is provided concerning the
application of the deferral election timing rules to these payments. Until further
guidance is issued, for purposes of section 409A, taxpayers may treat the legally
binding right to the payments excludible from SECA tax under section
1402(a)(10) as arising on the last day of the partner's taxable year before the
partner's first taxable year in which such payments are excludible from SECA tax
under section 1402(a)(10), and the services for which the payments are
compensation as performed in the partner's first taxable year in which such
payments are excludible from SECA tax under section 1402(a)(10). Accordingly,
for purposes of section 409A, the time and form of payment of such amounts
45
generally may be established, including through an election to defer by the
partner, on or before the final day of the partner's taxable year immediately
preceding the partner's first taxable year in which such payments are excludible
from SECA tax under section 1402(a)(10). However, this interim relief does not
apply a second time where an amount paid under an arrangement in one year
has been excluded from SECA tax under section 1402(a)( 10), and an amount
paid in a subsequent year has not been excluded from SECA tax under section
1402(a)(10) because, for example, the partner performed services in that
subsequent year.
H. Foreign plans
1. Plans covered by an applicable treaty
The proposed regulations provided an exclusion from the definition of a
nonqualified deferred compensation plan for any scheme, trust, or arrangement
maintained with respect to an individual where contributions made by or on
behalf of such individual to such scheme, trust or arrangement are excludable for
Federal income tax purposes under an applicable income tax treaty. The final
regulations retain that exclusion and clarify that the exclusion applies to the
extent contributions made by or on behalf of such individual to such scheme,
trust, arrangement or plan, or credited allocations, accrued benefits, or earnings
or other amounts constituting income, of such individual under such scheme,
trust, arrangement or plan, are excludable by such individual for Federal income
tax purposes pursuant to any bilateral income tax convention to which the United
States is a party.
46
2. Exclusion for benefits earned under a broad-based foreign retirement plan
The proposed regulations contained an exclusion from coverage under
section 409A for amounts deferred under a broad-based foreign retirement plan,
subject to certain conditions, including that the service provider not be eligible to
participate in a qualified employer plan, and that if the person is a U.S. citizen or
lawful permanent resident, the exception only applies to nonelective deferrals of
foreign earned income (as defined in section 911 (b)(1)) that do not exceed the
limits under section 415(b) and (c) that would be applicable if the plan were a
qualified plan. Deferrals by participants that are nonresident aliens are not
subject to the limitation based on section 415. The final regulations adopt this
provision, subject to certain modifications.
Many of the commentators requested expansion of the exclusion for
broad-based foreign retirement plans. One commentator requested that the
exclusion apply to U.S. citizens working in the United States for a foreign
employer. The Treasury Department and the IRS do not believe such an
exception is justified. However, the exception for U.S. citizens or lawful
permanent residents has been expanded to cover nonelective deferrals of foreign
earned income as defined in section 911 (b )(1) without regard to section
911 (b)(1 )(B)(iv) and without regard to the requirement that the income be
attributable to services performed during the period described in section
911 (d)(1 )(A) or (B). Accordingly, the exception may now cover certain
participation by a U.S. citizen or lawful permanent resident who works overseas
during only part of a year, and therefore is not a bona fide resident of a foreign
47
country for an uninterrupted period that includes an entire taxable year, or is not
present in the foreign country at least 330 full days during a period of 12
consecutive months.
The regulations have also been modified to address nonqualified deferred
compensation plans covering bona fide residents of a U.S. possession. Under
the regulations a bona fide resident of a possession who participates in a broadbased foreign retirement plan is not subject to section 409A with respect to
participation in such plan. In addition, a plan substantially all of the participants
in which are bona fide residents of a possession is eligible to be treated as a
broad-based foreign retirement plan, so that U.S. citizens and resident aliens
(other than bona fide residents of a possession) who participate in such a plan
may be eligible for the more limited exclusion for participation in a broad-based
foreign retirement plan.
Another commentator requested that the exclusion apply to a plan that
otherwise meets the requirements for the exclusion, regardless of whether the
plan is sponsored by a foreign or U.S. employer. This suggestion has been
adopted in the final regulations.
Other commentators requested further clarification and revision of certain
of the requirements to qualify for the exclusion. One commentator requested a
safe harbor treating any plan granted favorable tax treatment under the laws of a
foreign jurisdiction as qualifying for the exclusion. The Treasury Department and
the IRS believe this standard is both too broad and not administrable, and this
suggestion has not been adopted in the final regulations.
48
Another commentator requested that the regulations provide a safe harbor
percentage for determining whether substantially all of a foreign plan's
participants are nonresident aliens. The final regulations do not adopt such a
provision. However, the final regulations clarify that in determining whether
substantially all of a foreign plan's participants are nonresident aliens or bona
fide residents of a possession, only active participants are considered. For this
purpose, active participants include individuals who, under the terms of the plan
and without further amendment or action by the plan sponsor, are eligible to
make or receive contributions or accrue benefits under the plan (even if the
individual has elected not to participate in the plan).
A similar standard applies to the requirement that the individual not be
eligible to participate in a qualified employer plan. The final regulations provide
that a service provider will be treated as eligible to participate in a qualified
employer plan if, under the plan's terms and without further amendment or action
by the plan sponsor, the service provider is eligible to make or receive
contributions or accrue benefits under the plan (even if the service provider has
elected not to participate in the plan).
The final regulations also clarify that the exclusion for United States
citizens and lawful permanent residents applies to nonelective deferrals even if
elective deferrals are permitted under the same plan, provided that the amounts
deferred through nonelective deferrals and earnings on such amounts are
distinguishable from amounts deferred through elective deferrals and earnings on
such amounts, such as through the use of separate accounts.
49
3. Tax equalization payments
The proposed regulations excluded from coverage under section 409A
certain arrangements, referred to as tax equalization arrangements, that provide
for payments intended to compensate the service provider for the excess of
taxes actually imposed by a foreign jurisdiction on the compensation paid over
the taxes that would be imposed if the compensation were subject solely to
United States Federal income tax, subject to certain requirements. The final
regulations adopt these provisions, subject to modifications. Based upon the
comments received, the final regulations generally expand the exclusion in two
respects. First, the final regulations extend the tax equalization payments
exception to cover reimbursements of U.S. taxes that exceed foreign taxes.
Second, the final regulations provide that the payment must be made by the end
of the second taxable year of the service provider following the latest of the
deadline for filing a U.S. Federal tax return or the deadline for filing foreign tax
returns (or if a foreign return is not required to be filed, the due date for foreign
tax payments) reflecting the compensation for which the tax equalization
payment is provided.
Commentators also asked how such reimbursement agreements could
address the potential for an audit or other tax controversy, both in the U.S. and
abroad. The same issue arises with respect to tax gross-up payments in
general. For a discussion of the treatment of the right to such payments, see
section VII.BA of this preamble.
4. Certain Limited Deferrals by Nonresident Aliens
50
Part III - Administrative, Procedural, and Miscellaneous
Guidance Regarding the Application of Section 409A to Split-Dollar Life
Insurance Arrangements
Notice 2007-34
I. PURPOSE
This notice provides guidance regarding the application of section 409A of
the Internal Revenue Code (Code) to split-dollar life insurance arrangements.
This notice also provides that certain modifications of split-dollar life insurance
arrangements necessary to comply with, or avoid application of, section 409A will
not be treated as a material modification for purposes of § 1.61-22U) of the
Income Tax Regulations.
II. BACKGROUND
A. Section 409A
Section 409A was added to the Code by section 885 of the American Jobs
Creation Act of 2004, Public Law 108-357,118 Stat. 1418 (AJCA). Section
409A(a) generally provides that unless certain requirements are met, amounts
deferred under a nonqualified deferred compensation plan for all taxable years
are currently includible in gross income to the extent not subject to a substantial
risk of forfeiture and not previously included in gross income. Section 409A(a)
also provides rules under which deferrals of compensation will not result in such
immediate and additional tax liability, including rules about the timing of initial
elections to defer compensation, payments of deferred compensation, and
changes to the time or form of a scheduled payment of previously deferred
amounts.
Section 885(d) of the AJCA and § 1.409A-6 provide that section 409A of
the Code generally applies to amounts deferred after December 31, 2004.
Section 885(d) of the AJCA and §1.409A-6 further provide that section 409A
applies to earnings on deferred compensation only to the extent that section
409A applies to the deferred compensation. Section 885(d) of the AJCA and
§ 1.409A-6 also provide, however, that amounts deferred in taxable years
beginning before January 1, 2005 are treated as amounts deferred in a taxable
year beginning on or after such date if the plan under which the deferral is made
is materially modified after October 3, 2004, except as permitted under transition
guidance.
Notice 2005-1,2005-1 C.B. 274, provides certain transition relief with
respect to the application of section 409A. This relief was modified and partially
extended in the preamble to the proposed regulations regarding the application
of section 409A to nonqualified deferred compensation plans (2005-2 C.B. 786,
70 Fed. Reg. 57930 (Oct. 4, 2005)). This relief was again modified and partially
extended in Notice 2006-79, 2006-43 I.R.B. 763.
Because certain types of split-dollar life insurance arrangements provide
for deferred compensation as defined under § 1.409A-1 (b), the requirements of
section 409A apply to such arrangements. Split-dollar life insurance
arrangements that provide only death benefits (as defined in § 1.409A-1(a)(5)) to
or for the benefit of the service provider are excluded from coverage under
section 409A under the exception for death benefit plans contained in § 1.409A1(a)(5). Similarly, arrangements that provide a legally binding right to amounts
that are included in income in accordance with the exception for short-term
deferrals under § 1.409A-1 (b)( 4) also do not provide for deferred compensation
subject to section 409A to the extent so included.
B. Section 1.61-22 of the Income Tax Regulations
Section 1.61-22 provides rules for the taxation of a split-dollar life
insurance arrangement. Section 1.61-22U)(1 )(i) provides that the regulations
apply to any split-dollar life insurance arrangement entered into after September
17, 2003. Section 1.61-22U)(2)(i) provides that, for purposes of the general
effective date provision, if an arrangement entered into on or before September
17, 2003 is materially modified after September 17, 2003, the arrangement is
treated as a new arrangement entered into on the date of the modification.
Section 1.61-22U)(2)(ii) provides a non-exclusive list of changes that are
not material modifications for this purpose. Section 1.61-22U)(2)(iii) provides that
the Commissioner, in revenue rulings, notices and other guidance published in
the Internal Revenue Bulletin, may provide additional guidance with respect to
other modifications that are not material for this purpose. This notice is intended
to provide such additional guidance with respect to certain modifications related
to split-dollar life insurance arrangements covered by section 409A.
2
Commentators expressed concerns about the impact of changes to a splitdollar life insurance arrangement to comply with section 409A, where the splitdollar life insurance arrangement was entered into on or before September 17,
2003 and is not otherwise subject to the regulations set forth in § 1.61-22.
Commentators suggested that modifications necessary to comply with section
409A may cause the split-dollar life insurance arrangement to be treated as
materially modified for purposes of § 1.61-220)(2). Comments were requested
as to the scope of changes that would be necessary to comply with, or avoid
application of, section 409A, and under what conditions those changes should
not be treated as material modifications for purposes of § 1.61-220)(2). The
Treasury Department and the IRS have considered all of the comments
submitted in formulating this notice providing guidance under which certain
modifications will not be treated as material modifications for purposes of § 1.61220).
C.
IRS Notice 2002-8
Notice 2002-8, 2002-1 C.B. 398, provides guidance regarding split-dollar
life insurance arrangements entered into before the date of publication of final
regulations (i.e., before September 18, 2003). Specifically, Notice 2002-8,
Part IV.2 provides that, for split-dollar life insurance arrangements entered into
before September 18, 2003, in cases where the value of current life insurance
protection is treated as an economic benefit provided by a sponsor to a benefited
person under a split-dollar life insurance arrangement, the IRS will not treat the
arrangement as having been terminated (and thus will not assert that there has
been a transfer of property to the benefited person by reason of termination of
the arrangement) for so long as the parties to the arrangement continue to treat
and report the value of the life insurance protection as an economic benefit
provided to the benefited person. This treatment will be accepted without regard
to the level of the remaining economic interest that the sponsor has in the life
insurance contract.
Notice 2002-8, Part IV.3 also provides that, for split-dollar life insurance
arrangements entered into before September 18, 2003, the parties to the
arrangement may treat premium or other payments by the sponsor as loans. In
such cases, the IRS will not challenge reasonable efforts to comply with the
requirements of sections 1271-1275 and section 7872 of the Code. To qualify for
this treatment, all payments made by the sponsor from the inception of the
arrangement (reduced by any repayments to the sponsor) before the first taxable
year in which such payments are treated as loans for Federal tax purposes must
be treated as loans entered into at the beginning of the first year in which such
payments are treated as loans.
3
III. APPLICATION OF SECTION 409A TO SPLIT-DOLLAR LIFE INSURANCE
ARRANGEMENTS
A. Section 409A Grandfathered Benefits
1. In General
Section 409A is not effective with respect to amounts deferred in taxable
years beginning before January 1, 2005, unless the plan under which the amount
deferred was made is materially modified after October 3,2004 (section 409A
grandfathered benefits). For purposes of determining whether section 409A is
applicable with respect to an amount, the amount is considered deferred before
January 1, 2005 and therefore grandfathered from application of section 409A if,
before January 1, 2005, the service provider had a legally binding right to be paid
the amount, and the right to the amount was earned and vested. See § 1 A09A6(b).
Section 409A is effective with respect to earnings on amounts deferred
only to the extent that section 409A is effective with respect to the amounts
deferred. Accordingly, section 409A is not effective with respect to earnings on
section 409A grandfathered benefits. See § 1A09A-6.
2. Determination of Section 409A Grandfathered and Non-Grandfathered
Benefits under a Split-Dollar Life Insurance Arrangement
For purposes of applying § 1 A09A-6, earnings on section 409A
grandfathered benefits under a split-dollar life insurance arrangement include an
increase in the policy cash value, or an increase in any portion of the policy cash
value, that is attributable to the section 409A grandfathered benefits. For this
purpose, earnings on section 409A grandfathered benefits do not include any
increase in the policy cash value attributable to continued services performed,
compensation earned, or premium payments or other contributions made on or
after January 1, 2005.
Where benefits under a split-dollar life insurance arrangement have a
component that is a section 409A grandfathered benefit and a component that is
a section 409A non-grandfathered benefit, the calculation of the section 409A
grandfathered component of the benefit may be made under any reasonable
method that allocates increases in policy cash value attributable to the section
409A grandfathered benefit. For this purpose, a method will not be treated as
reasonable if it allocates a disproportionate amount of policy costs and expenses
to the section 409A non-grandfathered component.
4
For purposes of this section 111.A.2, the use of the proportional allocation
method described in this paragraph will be treated as a reasonable method. The
proportional allocation method defines the section 409A grandfathered benefit
(including grandfathered earnings) as of any valuation date as equal to the
greater of:
(1) the portion of the policy cash value at December 31, 2004 that was
earned and vested (as defined in § 1.409A-6(b)) reduced by any
amount securing an amount owed to the service recipient; and
(2) an amount equal to the policy cash value on the valuation date
multiplied by a fraction, the numerator of which is the sum of the
grandfathered premiums actually paid on the policy and the
denominator of which is the sum of all premiums actually paid on the
policy by the valuation date.
For purposes of this paragraph, grandfathered premiums include both premiums
actually paid on or before December 31,2004 that were earned and vested (as
defined in § 1.409A-6(b)) as of such date and premiums paid after such date
pursuant to a legally binding right that was earned and vested (as defined in
§ 1.409A-6(b)) as of such date.
B. Arrangements Subject to § 1.61-22
This section III.B addresses a split-dollar life insurance arrangement, or a
portion of a split-dollar life insurance arrangement, that is not grandfathered
under § 1.409A-6, but is subject to the rules under § 1.61-22 (but not § 1.787215) (including an arrangement or portion thereof that defers compensation in
taxable years beginning before January 1, 2005, if the arrangement is materially
modified (within the meaning of § 1.409A-6(d)) after October 3,2004). Except
where such an arrangement provides for only a short-term deferral excluded from
coverage under § 1.409A-1(b)(4), a split-dollar life insurance arrangement the
taxation of which is governed by the rules of § 1.61-22(d) - (g) generally provides
for deferred compensation if, under the terms of the arrangement and the
relevant facts and circumstances, the service provider has a legally binding right
during a taxable year of the service provider to compensation that, pursuant to
the terms of the arrangement, is or may be includible in the income of the service
provider in a later taxable year of the service provider.
A split-dollar life insurance arrangement does not constitute a nonqualified
deferred compensation plan for purposes of section 409A to the extent the
arrangement constitutes a death benefit plan. See § 1.409A-1(a)(5). For
purposes of this section III.B, the right to compensation described as the cost of
current life insurance protection in § 1.61-22(d)(2)(i) and (3) is treated as
provided under a death benefit plan under § 1.409A-1(a)(5) and thus is excluded
from the requirements of section 409A, even if additional economic benefits are
5
available under the arrangement that are subject to the application of section
409A.
Accordingly, a split-dollar life insurance arrangement covered by this
section III.B provides for deferred compensation for purposes of section 409A if,
under the terms of the arrangement and the relevant facts and circumstances,
the service provider has a legally binding right during a taxable year of the
service provider to economic benefits described in § 1.61-22(d)(2)(ii) (policy cash
value to which the service provider has current access within the meaning of
§ 1.61-22(d)(4)(ii)) or § 1.61-22(d)(2)(iii) (any other economic benefits provided to
the service provider) that, pursuant to the terms of the arrangement, are payable
to (or on behalf of) the service provider in a later taxable year of the service
provider, and such legally binding right does not qualify as a short-term deferral
for purposes of § 1.409A-1 (b)( 4). For purposes of the application of section
409A, the excess of the policy cash value over the aggregate premium payments
is treated as earnings. See §1.409A-3(e) for the treatment of earnings for
purposes of satisfying the requirements of section 409A.
c.
Arrangements Subject to § 1.7872-15.
This section lll.e addresses any split-dollar life insurance arrangement, or
portion of a split-dollar life insurance arrangement, that is not grandfathered
under § 1.409A-6, but is subject to § 1.7872-15 (and not § 1.61-22) (including an
arrangement or portion thereof that defers compensation in taxable years
beginning before January 1, 2005, if the arrangement is materially modified
(within the meaning of § 1.409A-6(d)) after October 3, 2004). Split-dollar life
insurance arrangements pursuant to which payments are treated as split-dollar
loans under § 1.7872-15 generally will not give rise to deferrals of compensation
within the meaning of section 409A. However, in certain situations, such an
arrangement may give rise to deferrals of compensation for purposes of section
409A, for example, if amounts on a split-dollar loan are waived, cancelled, or
forgiven.
D. Arrangements Grandfathered under § 1.61-22(j)
1. In General
This section 111.0 addresses a split-dollar life insurance arrangement, or a
portion of a split-dollar life insurance arrangement, that is not grandfathered
under § 1.409A-6, but is grandfathered under § 1.61-22 (and thus is not covered
by § 1.61-22 or § 1.7872-15 unless materially modified).
A split-dollar life insurance arrangement addressed by this section 111.0
provides for deferred compensation for purposes of section 409A if, under the
terms of the arrangement and the relevant facts and circumstances, the service
provider has a legally binding right during a taxable year to compensation that
6
pursuant to the terms of the arrangement is payable to (or on behalf of) the
service provider in a later year (for example, upon termination of the split-dollar
arrangement), and such legally binding right does not qualify as a short-term
deferral for purposes of § 1.409A-1(b)(4), and is not treated as provided under a
death benefit plan for purposes of § 1.409A-1 (a)(5). Notice 2002-8 provides that,
in cases where the value of current life insurance protection is treated as an
economic benefit provided by a sponsor to a benefited person under a split-dollar
life insurance arrangement, the IRS will not treat the arrangement as having
been terminated for so long as the parties to the arrangement continue to treat
and report the value of the life insurance protection as an economic benefit
provided to the benefited person. In such cases, provided that all other
requirements of Notice 2002-8 are satisfied, the IRS will not assert that there has
been a transfer of property to the benefited person by reason of termination of
the arrangement for purposes of section 409A. In addition, in such cases, the
IRS will not treat the right to the economic benefit of current life insurance
protection (within the meaning of Notice 2002-8) as deferred compensation for
purposes of section 409A.
For split-dollar life insurance arrangements entered into before September
18, 2003, the parties to the arrangement may be eligible to treat premium or
other payments by the sponsor as loans under either Part IV.3 or Part IV.4 of
Notice 2002-8. In such a situation, the arrangement generally will not give rise to
deferrals of compensation within the meaning of section 409A. However, in
certain situations, the arrangement may give rise to deferrals of compensation for
purposes of section 409A, for example, if all or a portion of the payments on the
loans are waived, cancelled, or forgiven.
2. Additional Transition Relief under § 1.61-22(j)
For purposes of § 1.61-22U), a modification of a split-dollar life insurance
arrangement necessary to bring such arrangement into compliance with section
409A, or to avoid application of section 409A, will not be treated as a material
modification of such arrangement. For this purpose, a modification of a splitdollar life insurance arrangement is considered necessary to bring such
arrangement into compliance with section 409A only if each of the following
requirements is met:
(1) The service recipient or service provider participating in the split-dollar
life insurance arrangement has made a determination, based upon a
reasonable application of section 409A, the regulations, and other
guidance, that section 409A is applicable to the arrangement, and that the
arrangement does not comply with the requirements of section 409A;
(2) The service recipient or service provider participating in the split-dollar
life insurance arrangement has made a determination, based upon a
reasonable application of section 409A, the regulations, and other
7
guidance, that the modification causes the arrangement to comply with
section 409A or results in section 409A no longer being applicable to the
arrangement, or that the modification is a necessary part of a number of
actions that together cause the arrangement to come into compliance with
section 409A or result in section 409A no longer being applicable to the
arrangement;
(3) The modification to the arrangement consists solely of changes to the
applicable definitions (such as, the definition of a separation from service
or a disability) or changes to the payment timing requirements, including
election provisions related to the time and form of payment, or changes to
the conditions under which all or part of the benefit under the arrangement
will be forfeited (such as, an acceleration of a vesting requirement),
reasonably intended to conform the arrangement to the requirements of,
or to qualify for an exclusion from, section 409A;
(4) The modification establishes a time and form of payment, or
establishes potential times and forms of payment that are consistent with
times and forms of payment under which the benefits could have been
paid under the terms of the arrangement before the modification (including
through the exercise of service recipient or service provider discretion in
accordance with the terms of the arrangement before modification); and
(5) The modification does not materially enhance the value of the benefits
to the service provider under the arrangement.
IV. CONTINUED APPLICATION OF SECTION 409A
This notice does not affect the application of section 409A, including the
application of the treatment of certain plans that are materially modified after
October 3,2004 as subject to section 409A. In addition, this notice does not
affect the application of any transition relief under section 409A. Final
regulations under section 409A were released on April 10, 2007. The final
regulations generally are applicable for taxable years beginning on or after
January 1, 2008. However, taxpayers may rely on the final regulations for
purposes of applying this notice to prior periods.
V. DRAFTING INFORMATION
The principal author of this notice is Stephen Tackney of the Office of
Division Counsel/Associate Chief Counsel (Tax Exempt and Government
Entities). However, other personnel from the Treasury Department and the IRS
participated in its development. For further information regarding the application
of section 409A, contact Stephen Tackney at (202) 927-9639 (not a toll-free call).
8
Page 1 of 3
April 11, 2007
hp-346
Prepared Remarks of Pat O'Brien
Assistant Secretary Terrorist Financing and
Financial Crimes
Before the U.S.-Latin America Private Sector Dialogue on
Combating
Money Laundering and Terrorist Financing
Bogota, COLOMBIA - Good afternoon. I first want to welcome and thank VicePresident Francisco Santos and FlU Director (Mario) Aranguren of Colombia. I
would also like to thank U.S Deputy Chief of Mission (Milton) Drucker for your
encouragement and support of this initiative. Colombia is a regional leader in the
fight against money laundering and we are honored to be here today in your
country. I also would like to thank the members of the private sector who have
chosen to attend and participate in the Inaugural Private Sector Dialogue between
the United Status and Latin America starting today here in Bogota. The audience
represents an extremely capable and diverse group of financial industry leaders.
As you know, today marks an important chapter in what we would like to be a
continuing dialogue between the U.S. and the Latin American financial sectors. Our
objective is to establish better relations between financial institutions from our
respective regions and to encourage jOlllt efforts aimed at controlling money
laundering, drug trafficking, and terrorist financing activities Your partiCipation is a
testament to your belief in and willingness to see through this important initiative.
We want this dialogue to build on the United States' continued commitment to
supporting the economic development of Latin America, including developing
engines of growth, opportunity, and reducing poverty. During Secretary Paulson's
speech to the Governors of the Inter-American Development Bank in Guatemala
last month, he elaborated on President Bush's commitment to your region, outlining
three central economic priorities for the US. and Latin Amenca: working together to
promote more opportunity and prosperity for all people, creating an environment
that nourishes the growth of small and medium-sized businesses, and developing
the region's infrastructure.
Economic development requires the free movement of capital and a strong,
transparent financial system. Central to achieving this goal is the importance of
continued cooperation between the public and private sectors in our collective effort
to promote the continued strength, safety, and integrity of the global financial
system. Our work to maintain a sound financial system must include efforts to stem
transnational threats such as drug trafficking, money laundering, terrorist financing,
and proliferation. All of us here today have an obligation to mitigate these very real
threats.
At the U.S. Treasury Department, we recognize how strong relationships and
multilateral efforts such as this dialogue further strengthen our abilities to detect and
disrupt illicit financial activity. A sound financial system means that our businesses
and our citizens have a stronger economy and have greater access to opportunity.
A sound financial system also guards against potentially devastating economic,
security, and social consequences worldwide. Cooperation among nations' public
and pnvate sectors can help guarantee the continued health of the global finanCial
system
Safeguarding the integrity of the financial system is now more complicated than
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5/7/2007
Page 2 of3
ever. Globalization creates an environment of great efficiency for legitimate
commerce, however, it just as easily aids those involved in Illicit financial activity.
For example, online and remote banking, stored value cards, electronic payment
systems, and other mechanisms can be of immense value to the public, but they
also pose a regulatory and enforcement challenge. This challenge, wherever It
exists, must be overcome to ensure a sound global financial system which In turn
ensures safe, transparent, efficient, free flows of capital Within and across borders.
Unchecked, illicit activity can erode the integrity of a nation's financial institutions
regardless of the size of the market In question - leaving in its wake serious longterm consequences.
The ever present threat of illicit financial activities has pushed finance ministries
and other government authOrities to re-examine, and in some cases to examine for
the first time, their economic and financial security infrastructure both in their
respective countries and as a part of the global community. In the US., the
Treasury Department marshals its policy, enforcement, regulatory, and intelligence
functions with the tWin aims of safeguarding the financial system against illicit use
and combating terrorist facilitators, proliferators, money launderers, drug kingpins,
and other national security threats.
To date, international efforts to cooperatively identify and combat illicit finance have
seen significant results - but most relevant to this group, we have seen important
successes in Latin America. A key example is GAFISUD. As a Financial Action
Task Force - or FATF - Style Regional Body, GAFISUD plays a critical role in
coordinating anti-money laundering/combating the financing of terrorism (AMLlCFT)
training and Improving implementation of the FATF AMLlCFT standards across the
region. Moreover, GAFISUD has been a leader in identifying and addressing
emerging threats to the region, such as trade based money laundering. GAFISUD's
newly released typology report on complex money laundering schemes IS important
in that it highlights money-laundering/terrorist financing vulnerabilities particular to
the region. We applaud GAFISUD's continued efforts.
Our international cooperation is also yielding operational successes. For example,
as a result of deep and longstanding cooperation With the Colombian authorities,
the Treasury Department's Office of Foreign Assets Control (OFAC), in consultation
with the Departments of Justice, State, and Homeland Security deSignated five
Individuals and twenty entitles all assOCiated with SDNT principal indiViduals Raul
Alberto Grajales Lemos and Carlos Alberto Renteria Mantilla last year. The
individuals and companies comprised an international financial network for
Colombia's North Valle drug cartel and are located in Colombia (8), Panama (5),
the British Virgin Islands (1) and the United States (6). The 20 companies
encompass a wide range of services including real estate, investment, construction,
property management and manufacturing. Simultaneous with OFAC's action,
Colombian authorities arrested the five designated individuals under Colombian
money laundering charges. This is an example of how our regions can work
together to combat a significant threat
The development of effective and long-term AMLlCFT regimes ultimately requires
collaboration not only between governments, but also between the publiC and
private sectors. Government-to-government engagement on illiCit financing has
been a central pillar of Treasury's poliCY for many years. That ongoing conversation
has been beneficial and has set the stage for increased coordination in our public
sectors. However, It is our private sectors - including thiS group that SitS before me
today - that serve on the front lines, protecting in the first instance our financial
systems from the threats we face. Our financial sectors must continue to further
integrate with one another and work seamlessly to make our respective efforts as
effective and effiCient as possible. Recognizing the need for greater outreach and
collaboration, the Treasury Department has engaged in a number of efforts to
provide outreach to the private sector. These efforts are both formal and informal.
Last summer, the U.S Treasury hosted an initial roundtable event for private sector
representatives and senior U.S. regulatory officials and their counterparts from Latin
America. Roundtable participants spent the day discussing private sector
perspectives on AMLlCFT implementation. The roundtable identified a number of
issues for further work and discussion and participants agreed to cooperatively plan
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5/712007
Page 3 of3
conferences and seminars dedicated to addressing core areas of mutual interest
and concern.
Today represents the first fruits of that roundtable, the U.S.-Latin America Private
Sector Dialogue (US-LA PSD) and IS a significant milestone for the private sectors
of Latin America and the United States. This event has brought together leaders
from the Latin American and U.S financial sectors to discuss timely issues related
to the sound Implementation of AMLlCFT measures It has also set the stage for
future dialogue and long-term cooperation.
The goal of the inaugural US-LA PSD is to encourage direct dialogue between the
financial sectors in the United States and Latin America in order to
•
•
•
•
Raise awareness of money laundering and terrorist financlllg risks;
Facilitate a better understanding of effective practices and programs to
combat such risks;
Strengthen implementation of effective AMLlCFT controls; and
Exchange information and improve understanding of business cultures and
norms.
Over the next three days, four United States/Latin America plenary sessions will be
held to advance a variety of critical issues stemming from the illitial roundtable
diSCUSSions. These Issues IIlclude:
•
•
•
•
Supervision and AMLlCFT Compliance Including regulations, liability, and
cross-border barrrers in both regions:
Correspondent Bankrng: Including due diligence, correspondent relations,
and shell bank situations;
Non-Bank Financial Institutions: rncluding aspects of payment systems and
the management and risk of those systems; and
Cross-Border Transfers/Economic Sanctions Including aspects of due
diligence, know your customer (KYC), and economic sanctions and financial
measures.
ThiS event has been made pOSSible through the work of last summer's roundtable
and through the dedication, hard work, and fine leadership of Asobancaria,
FELEBAN, the Florida International Bankers Association, and the American
Bankers Association, as well as government entities throughout Latin America and
especially the Government of Colombia and others, such as Argentina. We deeply
appreciate your efforts.
In sum, I look forward to our time together over the next couple of days. Dialogues
like thiS are vital as we strive to always stay one step ahead of the threat, and I
would again like to thank you for your strong participation. Ultimately, our progress
will be measured in part by our commitment to collaborate and create highly
effective and integrated AMLlCFT regimes. May we all be equal to this task and
achieve the desired success of a more secure, prosperous region and world.
Thank you
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5/7/2007
Page I of I
April 9, 2007
HP-347
Deputy Secretary Kimmitt To Deliver Speech on the
U.S.-Japan Economic Relationship
Washlngton--U.S. Treasury Deputy Secretary Robert M. Kimmltt Will deliver a
speech next week on the U.S.-Japan economic relationship The speech, entitled
"Japan and the United States Indispensable Partners, in Asia and Beyond," will
focus on Issues that are critical to the continued success of the U.S.-Japan
economic relationship.
Who
Deputy Secretary Robert M. Klmmitt
What
Speech on U.S.-Japan Economic Relationship
When
Tuesday, April 17, 12 p.m. EDT
Where
Senate Russell 325
Washington, D.C.
Note
Media must pre-register for thiS event. Please contact Ann Marie
Hauser at 202-622-2960 or Mary-Jane Atwater at 111,11'·i. !I,"I I} ; IL I[ I'.f[,- [I Ii: "(i or
202-347-1994.
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5/7/2007
Page I of2
April 12, 2007
HP-348
Prepared Statement by Treasury Under
Secretary Timothy D. Adams
in Advance of the Spring Meetings of G-7
Finance Ministers and Central Bank
Governors, the International Monetary
Fund, and the World Bank
Washington, DC - Welcome. We have a very busy set of meetings over the next
several days, and I would hke to layout some of the key items on the agenda.
As you know, Secretary Paulson will host the G-7 Finance Ministers and Central
Bank Governors here at the Treasury on Friday. They Will discuss the global
economy, capital markets issues, trade, and IMF reform, among other things. This
G-7 meeting Will include an outreach dinner with China and counterparts from
Russia, Saudi Arabia, and the United Arab Emirates to discuss investment flows
from oil exporters.
The IMF's International Monetary and Financial Committee (IMFC) will meet
Saturday, and the World Bank's Development Committee will meet Sunday. Also on
Sunday, G-7 Finance Ministry Deputies will have an educational outreach meeting
on hedge fund industry practices and developments with representatives from the
hedge fund industry.
At the G-7 and IMFC meetings we will be able to share views with our colleagues
from around the world on a wide range of issues - global imbalances, IMF reform,
capital market developments, debt sustalilability in low-income countries,
combatlllg terrorism fillancing, and the Doha round Additionally, the Development
Committee will discuss countries' progress towards meeting development goals and
assess the Bank's work In Africa. Let me just make a few comments on some of
these issues.
The global economic environment continues to be very favorable, but our
colleagues will be interested in the health of the United States economy, especially
against the background of developments in the sub-prime mortgage sector. We Will
emphasize that the United States economy continues to perform well, with solid
growth of 3.1 % over the past 4 quarters and a healthy labor market. Unemployment
has declined to 4.4% while real wage growth is strong. Inflation appears contained.
The deficit has shrunk by half in two years. That is three years ahead of schedule.
•
•
We are reaching a critical time on reform of the IMF. The IMF needs a
package of meaningful reforms to safeguard its relevance and legitimacy.
The IMF has a unique and serious responsibility for exchange rate
surveillance, and the Managing Director's proposals to revise the IMF's 30year old principles make great sense. The rise of dynamic emerglllg
markets along with a static governance structure means the IMF no longer
reflects the global economy. We will urge the major shareholders to be bold
and follow through With fundamental reform of IMF quotas. In this regard,
the United States will reiterate our offer to forgo any increase in our preSingapore voting share that might result from a new formula: we continue to
call upon all similarly-situated industrial countries to join us.
And there is clear interest among major emerging markets for a new reserve
augmentation facility. I want to welcome the Malan Report on IMF-World
Bank Collaboration for its recommendations on sharpening the IMF's shortterm financial role III low-income countries. Lastly, we Will discuss the IMF's
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longer-term finances and the Crockett Report, though with ample reserves
to cover shortfalls In the medium-term the Fund need not rush to action. If
revenues do not rebound, expenditure measures - and difficult choices on
priorities - will require serious consideration.
• We will be discussing hedge funds and highlighting the approach of the U.S.
President's Workll1g Group on Financial Markets (PWG) to private pools of
capitaL The PWG guidelines are II1tended to gUide all market participants counterparties and creditors, private pool managers, investors, fiduciaries,
and financial regulators - in addressing issues associated with the growth
and dynamism of these investment vehicles. They do so through a flexible,
principles-based treatment of systemic risk and investor protection issues.
We will discuss how robust domestic bond markets are necessary for the
growth and stability of all economies, including the emerging markets. The
weekend's agenda also addresses the II1teresting idea of mutual recognition
of comparable regulatory regimes, which we continue to discuss with our
securities regulators
• We will be urging our colleagues to reinVigorate the Doha Round of trade
negotiation, especially 111 the area of financial services, which playa critical
role in facilitating economic development. We will also be promoting
responsible lending practices, such as the IMF/World Bank Joint Debt
Sustainability Framework, to enhance debt sustainability among developing
countries.
• Finally, we Will of course be eager to collaborate with our colleagues on
ways to more vigorously counter money laundering, terrorist financing, and
other illicit finance to promote the stability and integrity of the International
financial system.
Also, on Monday, Treasury will host a meeting of the U.S.-China Joint Economic
Committee (JEC), an important forum for discussing macroeconomic and financial
issues in our two countries. These issues will playa central role in the upcoming
Strategic Economic Dialogue meeting in May. To achieve sustained growth, China
needs to rebalance ItS economy. Creating an efficient and competitive financial
sector IS a key component of this rebalancing and is critical to ensuring future
growth in China, as well as the global economy.
I am happy to take your questions on any of these pOints or anything else that will
arise this weekend. Thank you.
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April 13,2007
HP-349
Statement by Treasury Secretary
Henry M, Paulson, Jr.
Following Meeting of G-7 Finance Ministers and
Central Bank Governors
Washington, DC--I was pleased to host the G-7 Finance Ministers and Central
Bank Governors today here in Washington. We addressed many important issues
on a very full agenda.
The current global expansion provides a positive backdrop to our discussions. The
U.S economy IS healthy and IS making a transition to a sustainable expansion.
GOP growth in the 4th quarter was 2.5 percent and U.S. output IS up by 3.1 percent
over the past 4 quarters. Inflation remains moderate and the U.S. labor market is
healthy, with low unemployment, steady job gains, and strong real wage growth.
The overall strength of the U.S economy has led to an improved federal budget
situation over the past two years. The deficit, which was 1.9 percent of GOP in
FY2006, has been cut In half three years ahead of schedule and the
Administration's budget projects a return to a surplus by 2012. We continue to
watch developments in the subprime mortgage market. While challenges in this
market do not appear to pose a serious risk to the overall economy, many families
have been affected. As I testified before Congress earlier this month, we are
working closely with hOUSing sector regulators on this issue.
Nevertheless, we remain aware of risks to the world economy. Fuel prices remain
high and volatile. Protectionist pressures are rising. Global financial markets are
vulnerable to reversals, as we saw earlier this year, though the system has proved
to be resilient and adjustments orderly. My colleagues and I discussed the initial
progress made towards implementing policies to help reduce global imbalances,
including some rebalanCing of global demand. However, more needs to be done.
We need global demand to be underpinned by strong domestic demand in major
economies such as Japan and Europe, and the cyclical upswings need to be
translated into lasting improvements in potential growth. Greater exchange rate
flexibility and stronger domestic demand in China are critical parts of rebalancing,
and it is crucial that China move now with greater urgency. Oil exporters also need
to undertake measures to Increase investment and consumption. Tonight I will have
a working dinner with my G-7 and Chinese colleagues. We will be joined by our
counterparts from Russia, Saudi Arabia, and the United Arab Emirates to discuss
investment flows from oil exporters to gain a sharper understanding of this
increasingly important issue.
I have emphasized that our capital markets in the United States and abroad are
vital to global economic growth. At our meetings today, I talked with my colleagues
about the United States' approach to private pools of capital, Including hedge funds,
provided by the US. President's Working Group on Financial Markets (PWG) The
PWG recognized the rapid growth of thiS industry and the Increasing compleXity of
the financial instruments that hedge funds use. The U.S federal regulators and
policymakers unanimously moved in February to give unified, forward-leaning
guidance for market participants for enhanced vigilance and market discipline. The
PWG will continue to encourage market participants to take up this guidance. In our
meetings today, we also discussed how robust domestic bond markets are
necessary for the growth and stability of all economies, including the emerging
markets. We continued our discussion about securities and mutual recognition
among comparable regulatory regimes. In today's global marketplace, I believe this
is an idea well worth considering and I will be supportive of our regulators' efforts to
make progress In this area.
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We are at a critical juncture for progress on the Doha Development Round of trade
negotiation, and we had a serious discussion on the way forward I urged my fellow
Finance Ministers to encourage their trade ministers to achieve an ambitious deal
because of the Round's potential to stimulate growth and economic development.
Substanlial progress on services, including financial services, must be Integral part
of a development round, so Finance Ministries need to work together to reinvigorate
the financial services negotiations. Progress must be based on a substantive breakthrough
As major shareholders of the IMF, the G-7 have a strong interest in safeguardillg
the legitimacy and effectiveness of that IIlstitutlon. To do so, we must make the IMF
look more like the world economy ill which it operates. The rise of emerging
markets needs to be reflected in the IMF's governance structure. That is why It is
essential, first and foremost, that we be bold and follow through With fundamental
reform of IMF quotas. I thlilk there is a path forward that could achieve this
objective, but dOing so will require a rededication by many countries to the
understandlllg that a strong IMF benefits us all. A more representative IMF,
however, will mean little without significant improvements In the Institution's
surveillance over exchange rate policies. For this reason, the G-7 reaffirmed our
strong support for quick action to update the IMF's 30-year-old prinCiples and
procedures for exchange rate surveillance.
We had a good discussion on policies to promote development in low-income
countries, especially ways to address debt sustainability concerns. Responsible
lending policies and praclices are fundamental to our efforts to enhance support to
low-income countries. The key to preserving debt sustainability is to build upon and
support the work reflected In the IMF/World Bank Joint Debt Sustainability
Framework, and for all creditors to incorporate the framework into their lending
practices.
We reaffirmed our commitment to vigorously counter money laundering, terrorist
financing, and other illiCit finance to promote the stability and integrity of the
international financial system. We called on the Financial Action Task Force (FATF)
to address emerging threats, Including the threat of WMD proliferation finance, and
to enhance implementation of FATF standards around the world.
Energy efficiency and security were also on the agenda. The United States is
committed to improving energy security and tackling the important issue of climate
change, as evidenced by the Administration's January announcement of the
"Twenty In Ten" initiative. I urged my colleagues to explore creative poliCies to
address these issues that will engage developing countries. We also need to
explore options for accelerating market penetration of low-carbon energy
technologies. Solving climate change is fundamentally a technology challenge, so
we must consider how best to achieve this goal.
Thank you.
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April 13, 2007
HP-350
Statement of G-? Finance Ministers and
Central Bank Governors
Washington, DC- We, Finance Ministers and Central Bank Governors, met today to
evaluate the global economic outlook. Although risks remain, the global economy is
having its strongest sustained expansion in more than 30 years and is becoming
more balanced. In our economies, US. economic activity remains solid even as
domestic demand moderates to a more sustainable growth path. The euro-area is
experiencing a healthy upswing. UK growth remains robust and Canadian growth IS
accelerating. Japan's recovery IS on track and expected to continue. We remain
confident that the implications of these developments will be recognized by market
participants and will be incorporated In their assessments of risks.
Further strengthening and rebalancing of domestic demand is desirable to help
ensure the global economic expansion remains robust. We continue to be
committed to maintaining price stability as the best contribution that monetary policy
can make to sustained global growth. We will do more to increase trend economic
growth rates, especially through structural reforms such as improving labor markets
and long-term fiscal sustalnabllity. We are confident that the continuation of our
poliCies will support economic growth and contribute to reduce International
imbalances. We Will continue to work together to support the global adjustment
process and urge others to do likewise.
We reaffirm that exchange rates should reflect economic fundamentals. Excess
volatility and disorderly movements in exchange rates are undesirable for economic
growth. We continue to monitor exchange markets closely, and cooperate as
appropriate. In emerging economies with large and growing current account
surpluses, especially China, it is desirable that their effective exchange rates move
so that necessary adjustments Will occur.
We believe that a successful conclusion of the Doha Development round is
imperative. We are committed to resisting protectionist sentiment. Substantially
lowering tariffs and other barriers is essential to spur new growth In global trade and
reduce poverty. We welcome recent steps to intensify engagement, recognizing
that substantive movement towards a comprehensive final outcome requires all
parties to make additional efforts. We expect spending on Aid for Trade to increase
to $4 billion, Including through enhancing the Integrated Framework. We support
initiatives to enhance cooperation to enforce intellectual property rights and combat
counterfeiting which are crucial to our knowledge-based economies.
We continued our discussions on how to develop local currency bond markets to
enhance the contribution of financial markets to sustainable economic growth and
to reduce emerging market economies' vulnerability to external shocks and financial
crises. We look forward to the results of the high level conference on May 9-10 in
Frankfurt, which will help to identify concrete recommendations to sustain the
momentum of reform.
We discussed recent developments in global financial markets, including hedge
funds, which along with the emergence of advanced financial techniques such as
credit derivatives, have contributed significantly to the efficiency of the financial
system We will continue to monitor the implications of these developments.
Market-led and official initiatives focused on issues around private pools of capital
intended to strengthen market discipline, risk management, market Infrastructure,
information and valuation practices, are essential contributions to global financial
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stability. In this context, we welcomed the work of the United States' President's
Working Group on Financial Markets and its "Principles and Guidelines Regarding
Prrvate Pools of Capital" and look forward to the Financial Stability Forum's update
of Its 2000 Report on Highly Leveraged Institutions. We discussed the issue of
mutual recognition of comparable regimes and look forward to further
progress being made on cross-border access by investors to our securities
markets.
We agree to push forward the ambitious package of bold and fundamental reforms
order to retain the IMF's relevance and legitimacy. Reforms should ensure that
actual IMF quota shares, especially those of the most dynamic members, many of
which are emerging markets, better reflect relative weights and roles In the global
economy. We agree that the voice of low-income countries should be enhanced. A
necessary element of IMF reform is improved surveillance over exchange rates.
Surveillance must focus on external stability and be applied equally and evenhandedly without creating new obligations. In this context, we welcome the
Managing Director's proposals to update the 1977 Decision on Surveillance over
Exchange Rate Policies and to develop a surveillance remit. We look forward to
finalizing these proposals rapidly after the Spring Meetings We took note of the
work of the External Review Committee on IMF-World Bank Collaboration as well
as of the report of the Committee to Study Sustainable Long-term Financing of the
IMF. We agreed to consider the latter proposal in time alongside measures to
further reduce administrative expenditures.
In
We encourage the use of the debt sustalnability framework by all borrowers and
creditors. We welcome continued work on principles for responsible lending and
seek to involve other mterested parties. We advocate a rapid resolution to Liberia's
arrears to the international financial institutions. Available internal resources should
be fully used to this end. We are prepared to make additional financial
contributions. We look forward to the forthcoming International Conference on
Education In Brussels.
In order to ensure energy security and to address climate change, we consider
energy efficiency and the promotion of energy diversification to be Important issues
for both developed and developing economies. Diversification can include
advanced energy technologies such as renewable, nuclear, and clean coal. We
agree that market based policy measures should be effectively designed to meet
specific conditions in each country.
We commit to continue the fight against money laundering, terrorist financing, and
other illicit finance that risks the stability and integrity of the global financial system.
We call for the effective and timely Implementation of UN Resolutions 1540, 1718,
1737 and 1747. We commend the Financial Action Task Force on its commitment
to examine the risks of weapons of mass destruction proliferation finance. We urge
that as it reviews its strategic direction, the FATF consider expanding its mandate,
enhanCing global Implementation of its standards, improving its strategic
surveillance, and examining ways to bolster accountability and outreach activities.
We look forward to the successful launch of the International Compact for Iraq in
Sharm EI Sheik on May 3. We discussed economic prospects in the West Bank and
Gaza Strip, and agreed to keep this under review.
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April 14,2007
HP-351
Statement by U.S, Treasury Secretary Henry M. Paulson, Jr.
at the International Monetary and Financial Committee Meeting
WASHINGTON, DC--Today's meeting IS taking place against the backdrop of a
continued strong and resilient global economy, which provides a favorable setting
for overcoming the challenges we face. Both advanced and emerging economies
have put In place Improved policy frameworks that are underpinning sustained
growth. With global growth expected to be near 5% this year, the past five years
mark the strongest period of world growth since the early 1970s. Recent bouts of
moderate financial turbulence, in mid-2006 and again in early 2007, have tested the
system, but it has performed well. While ongoing vigilance is required, Inflation risks
appear contained and international trade continues to expand.
Prospects for the US. economy are good. While economic activity slowed below
potential in late 2006, we expect GDP growth to rebound to 3% by the end of this
year. Inflation risks appear to be contained, while the labor market is healthy - with
7.8 million new jobs created since mid-2003, low unemployment and strong real
wage growth. I am happy to report that the U.S. continues to make excellent
progress in steadily shrinking our federal fiscal deficit, which fell from 3.6% In
FY2004 to 1.9% in FY2006, a pace faster than most thought likely. We are
committed to keeping the US. economy open to trade and investment, which
underpins our economic strength, and to opposing protectionism whenever and
wherever it arises
Trade liberalization remains essential to economic growth for all countries and a
key catalyst for poverty reduction in the less developed countries. Now that Doha
Round negotiations have resumed, we must seize the opportunity to reach
agreement. All countries will benefit from an agreement, and all countries - both
developed and developing - must contribute through real market access
commitments in agriculture, manufacturing, and services, including financial
services. The finanCial sector in particular is the backbone of a modern economy
with virtually every other sector of the economy depending on Its services.
Over the last several months, the United States has been a partiCipant In the IMFsponsored Multilateral Consultations on global imbalances. While these
consultations were never Intended to produce joint policy commitments, they have
still contributed importantly to improved understanding about the participants'
shared responsibilities for promoting adjustment of imbalances. Indeed, there has
been some re-balancing of global demand over the last year, but it is important to
ensure that the cyclical upturn now underway in many countries is translated into
lasting improvements In underlYing potential growth. Looking forward, we hope for
faster sustained demand growth from Europe and Japan, more demand growth
from major surplus countries, and greater exchange rate flexibility in Asian
emerging economies, especially China. The counterpart to a falling US trade
deficit, by definition, is falling trade surpluses in other economies.
Progress on IMF Reform
The IMF is an essential organization for international monetary cooperation It has
proven this since Its inception - fostering growth and integration in the wake of
World War II; strengthening international surveillance after the breakdown of the
Bretton Woods System; helping the global financial system overcome the debt
crises of the 1980s and 1990s; and facilitating the transition of command
economies. In serving the global economy, the Fund has adapted to changing times
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while adhering to its basic principles The world is fast changing again. For the IMF
to remain modern and relevant, it must re-invent itself. That is what our discussions
on the Medium Term Strategy are all about.
First and foremost, the IMF must fundamentally reform its approach to surveillance
over exchange rates. Let us be clear: exercising firm surveillance over members'
exchange rate policies is the core funclion of the institution. The 1977 DeciSion on
Surveillance over Exchange Rate Policies must be updated to reflect the dramatic
rise of capital flows and the wider use of market-determined floating exchange
rates, and to sharpen the focus on fundamental exchange rate misalignment. This
should enable firmer surveillance In areas where market forces are not the
prevailing paradigm, such as insufficiently flexible exchange rate regimes, or areas
where macroeconomic poliCies and performance are poor even if the exchange rate
freely floats. The updating should be accomplished in a manner that creates no new
obligations under the IMF Articles. It should also incorporate the realities of how
surveillance is actually undertaken in this day and age, and ensure that the conduct
of surveillance is even-handed and candid. If exchange rate issues are not debated
critically and openly at the Fund, alternative venues and approaches will
necessarily emerge. For us, reform of the IMF's foreign exchange surveillance is
the Iynchpin on which other reforms depend, and we look forward to action in thiS
important area very soon after these meetings. Moreover, it is not simply enough to
revise the 1977 Decision. The IMF staff must do a better job in addressing foreign
exchange surveillance on a day-to-day basis, particularly in Article IV reports.
Second, as part of the modernization and re-invention process, the IMF's
governance structure needs to be overhauled. The Fund no longer looks like the
world economy in which we live. Marginal reforms that do not fundamentally alter
relative quota shares are insufficient - bold action is needed to boost the share of
dynamic emerging market countries. Major emerging markets are producing an
Increasing share of global output, assuming greater responsibility for the functioning
of the system, and will Increasingly drive global growth. We continue to support
protecting the shares of the poorest countries through an increase in basic votes.
We reiterate the commitment of the United States to forgo the additional quota due
us in the second stage ad hoc increase beyond what we need to maintain our preSingapore voting share and we reiterate our as of yet largely unheard calion other
Similarly situated countries to Join us in doing this.
As part of this broader reform package, we have listened to our colleagues in
emerging markets and we will support a new liquidity instrument to promote further
reduction of vulnerabilities to capital account crises, provided the instrument is welldesigned. We expect the instrument to include a high standard for qualification and
provide that a country, which fully draws its funding under the instrument and
subsequently reqUires additional resources, do so under a new IMF program. Policy
actions to deepen domestic local currency capital markets should be an important
part of efforts to mitigate the risks to national balance sheets.
Two important external reports have been issued since we last met, both of which
have provided useful insights on key issues facing the Fund.
The Malan Repol1 on Bank/Fund Collaboration provides recommendations on
sharpening the focus of the IMF's work in low-income countries. We very much
agree with these recommendations. The Fund has a very important role to play In
poor countries, through surveillance, technical assistance, and financing when
appropriate. But the IMF is not a development agency, and we strongly concur with
the report's recommendation that the IMF's finanCing role in low-income countnes
should focus on actual balance of payments needs, as it does in emerging market
members.
The Crockett Report will help catalyze the Executive Board's thinking on the
Important issue of how the IMF finances Itself in the longer-term. The IMF has
ample reserves to cover shortfalls in the immediate term, permitting time to fully
consider the merits of the Report's recommendations. In parallel, options for further
budget restraint must also be fully explored. If low levels of credit persist, the Board
will need to give serious consideration to the appropriate role and size of the IMF
going forward. The Report puts forward a number of financing options, and we are
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prepared to consider each on their merits in time.
Since we last met, there has been important progress on strengthening the joint
World Bank/iMF Debt Sustainability Framework and Debt Sustainability Analyses
(DSAs) for low-income countries. Vigilance will be required to deter the rapid reaccumulation of debt for post-MDRI countries, and we urge emerging bilateral
creditors to exercise good Judgment and lend responsibly. To this end, we hope that
lenders and borrowers will use the DSAs as a tool for analysIs and decIsion making.
Vigorous global efforts to combat terrorist financing, WMD proliferation financing,
and other forms of illicit financing are necessary to promote international financial
stability and global security. We must continue to assist countries in Implementing
the Financial Action Task Force's (FATF's) international standards on money
laundering and terrorist financing. The IMF and World Bank have been major
partners in this vital global effort, and we look for their continued close collaboration
with FATF going forward. We also call on all countries to fulfill their UN obligations
by implementing UN Security Council Resolutions 1540, 1718, 1737, and 1747
against WMD proliferation, particularly the economic and financial provisions of
those resolutions. We commend FATF's effort to examine the risks of WMD
proliferation financing and to enhance surveillance of emerging threats to the
financial system
Thank you.
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April 15, 2007
HP-352
Prepared Statement by Secretary Henry M. Paulson, Jr.
at the Development Committee Meeting
Washington, DC--Over the past five years the world economy has grown at a pace
not seen in over three decades. This robust growth has been particularly strong in
low income countries and has helped reduce poverty. The world is well on its way
to halving the share of people living in extreme poverty. While this is a remarkable
accomplishment, progress is neither great enough nor balanced enough for us to
congratulate ourselves. The Global Monitoring Report appropriately highlights the
difficulties with progress In fragile states, many of which are located in sub-Saharan
Africa, and draws attention to the need to ensure that the benefits of growth are
equally open to all members of society, both male and female.
While the community of donors recognizes the need for continuing substantial aid
flows, one of the most critical of the many lessons we have learned in the 50-year
history of the World Bank is that higher aid flows by themselves do not guarantee
less poverty. Assuring that our assistance is directed to effective, efficient, wellcoordinated projects that can make lasting changes in people's lives remains a key
and daunting challenge. It requires Intellectual vigor, the willingness to constantly
reassess and question the effectiveness of our approaches, and a true hard-nosed
dedication to the pursuit of measurable results at all levels of our programs. It also
means that resources need to be applied to their most effiCient use, and that
institutions focus on their core competencies.
Sub-Saharan Afnca
We are heartened by the early indications of success with the Bank's Africa Action
Plan (AAP). It is too early to determine the long-term effectiveness of the AAP, but
there is sufficient evidence that results are moving in the right direction. We are
particularly pleased With positive country policy performance, a key ingredient for
development results. One area highlighted in the AAP where more work should be
done is statistical capacity building. Without data, African countries will always be at
a disadvantage in poliCy creation and adaptation, and private sector firms will be
less confident in investing.
As we think about a post-2015 Africa, many areas of activity, such as infrastructure,
the private sector, and governance deserve significant attention. While we support
the IDA-IFC micro, small and medium-size enterprise facility, the AAP needs a
greater focus on private sector support and Improving financial sector access. It is
the financial sector that provides a loan to start an enterprise, grow a business, or
buy a house. Access to capital helps people acquire assets that give them a
foothold In the economy - personal financial wherewithal they can leverage into
greater prosperity and economic security.
Trade
Reducing trade barriers is also essential for providing people opportunities. The
best way to alleviate poverty and raise living standards is through greater
openness, so more people can benefit from the expanding global economy. The
most important dnver for poverty reduction has been the rapid growth of developing
countries that opened to trade, notably in several Asian economies. For instance,
Mexico's poverty rate fell by more than 20% and its rate of extreme poverty fell by
more than 30% between 1994 and 2005 - the years following the passage of
NAFTA.
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We need to continue pushing forward on the trade agenda, including a successful
Doha Round of negotiations, to keep all our economies growing. The case for trade
liberalization is clear and compelling. And If we want more people to support it, we
need to ease anxieties and help more people realize the benefits of trade. The Aid
for Trade agenda launched at the Hong Kong Ministerial can help allay these fears.
Fragile States
Fragile states pose a special development challenge because they are frequently
unable to sustain any forward momentum on reforms and growth. As such, fragile
states do not typically respond to standard development interventions and require a
rethinking of donor engagement to ensure positive results. Paramount among these
is careful consideration of resource investment. Due to weak governance and weak
Institutional capacity, the ability of fragile states to absorb and effectively utilize
resources IS limited. ThiS is particularly relevant given the potentially negative
macroeconomic implications of scaling up In low-capacity countries.
Given the challenges posed by fragile states and the limited applicability of
standard development tools to their situations, a new framework needs to be
developed to assist donor institutions to engage effectively. Key elements of such a
framework include: (1) developing a cohesive definition of fragility that focuses on
the sources of fragility and not its outcomes; (2) developing and adopting an
approach of selective intervention; and (3) developing a high quality and integrated
monitoring and evaluation system.
Governance
Finally, we welcome and support the updated version of the World Bank Group's
Governance and Anticorruption (GAC) strategy. We applaud the Bank for an
extensive public consultation process, which has helped to sharpen the GAC's
approach and has opened the door to new partnerships.
We are confident that the strategy Will strengthen the Bank's role In helping
borrowing countries promote good governance and fight corruption and in playing a
leadership role with global partners. We believe the GAC rightly focuses on the
most important issues: building effective and accountable institutions; country
ownership; and government commitment to governance and anti-corruption.
Further, we support the call to help countries address the problem of asset seizure
and repatriation and greater disclosure of assets by publiC officials. The core
proposal to revamp the country assistance strategy (CAS) process to systematically
address governance issues in country strategies assumes a continuing framework
for fighting corruption in a way that applies central principles to country-specific
circumstances. Going forward, we would like to see more use of the Public
Expenditures and Financial Accountability indicators within the Bank fiduciary
diagnostics and their link to the preparation of country assistance strategies.
Conclusion
The challenge of global poverty can be overcome only when the appropriate
resources are married to the right policies. The MDGs intentionally set a very high
bar, and achieVing them will require that we remain focused In our purpose and
efficient in our methods. We look forward to working closely with all our partners to
achieve our common goal: to create the conditions and opportunities for the world's
poor to improve their livelihoods and overcome poverty.
http://www ,treas,gov/press/releases/hp3 52 htm
5/7/2007
3: Treasury -!"I .. rn'~li, .. ,;1
I', j,;."l
wta for February
Page 1 of 3
FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend pnntlng this release using the PDF file be/ow.
To view or pont the PDF content on this page, down/oacl the free Adobe® Acrobat® Reader®,
April 16, 2007
HP-353
Treasury International Capital (TIC) Data for February
Washington, DC - Treasury International Capital (TIC) data for February are released today and posted on the U,S, Treasury web site
The next release, which will report on data for March, is scheduled for May 15, 2007.
Net foreign purchases of long-term securities were $58.1 billion .
• Net foreign purchases of long-term U.S, securities were $77,9 billion. Of this, net purchases by foreign official institutions were
purchases by private foreign investors were $65.3 billion,
•
U,S. residents purchased a net $19,8 billion in long-term foreign securities,
Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $43.2 billion,
Foreign holdings of dollar-denominated short-term US. securities, including Treasury bills, and other custody liabilities increased $20.8
holdings of Treasury bills Increased $53 billion
Banks' own net dollar-denominated liabilities to foreign residents increased $30A billion.
Monthly net TIC flows were $94.5 billion. Of this, net foreign private flows were $61,6 billion and net foreign official flows were $32,9 bil
TIC Monthly Reports on Cross-Border Financial Flows
(Billions of dollars, not seasonally adjusted)
2005
2006
12 Months Through
Feb-06
Feb-07 Noy-06 Dec-Ot
Foreigners' Acquisitions of Long-term Securities
1
2
3
Gross Purchases of Domestic U ,S, Securities
Gross Sales of Domestic U.S. Securities
Domestic Securities Purchased, net (line 1 less line 2) 11
17157.5 21104.2
16145.9 19966.0
1011.5 1138.2
17713.0
16690.6
1022.4
21744.8
20603.2
1141.6
1925.6
1807.2
118.5
184<;
3i
4
5
6
7
8
Private, net 12
Treasury Bonds & Notes, net
GOy't Agency Bonds, net
Corporate Bonds, net
Equities, net
891.1
269.4
187.6
353.1
81.0
941.6
128.0
196.9
472.2
144.5
896.6
212.3
205.4
369.4
109.4
958.7
162.3
167.3
490.8
138.2
112.4
32.3
11.8
59.1
9.2
9
10
11
Official, net /3
Treasury Bonds & Notes, net
GOy't Agency Bonds, net
120.4
68.7
31.6
196.6
69.6
92.6
125.9
69.4
33. I
183.0
46.4
100.8
6.1
1.0
4.0
http://www.treas.gov/press/releases/hp353,htrn
178~
61
4
12
32
-11
24
t
IS
5/7/2007
3:
Treasury~nt~m~tion'll ("'l"it"t ~ta
12
13
14
15
16
17
18
for February
Corporate Bonds, net
Equities, net
Gross Purchases of Foreign Securities from U.S. Residents
Gross Sales of Foreign Securities to U.S. Residents
Foreign Securities Purchased, net (line 14 less line 15) /4
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
19
Net Long-Term Securities Transactions (line 3 plus line
20
Other Acquisitions of Long-term Securities, net /5
21
22
23
24
25
26
27
28
29
Net Foreign Acquisition of Long-Term Securities
(lines 19 and 20):
11
/4
/5
/6
17
/8
2
19.1
1.0
28.6
5.8
21.7
1.7
30.4
5.3
3.2
-2.1
-C
3700.0
3872.4
-172.4
5572.2
5819.4
-247.1
4016.8
4193.4
-176.6
5894.6
6152.6
-258.0
536.9
571.0
-34.1
521
57C
-48
-45.1
-127.3
-139.8
-107.4
-46.9
-129.7
-145.0
-113.0
-14.2
-19.9
-IS
839.1
891.1
845.8
883.6
84.4
13
-140.0
-153.3
-150.2
-159.5
-20.4
-13
699.1
737.8
695.6
724.1
64.1
-47.6
-58.9
-15.6
-43.3
134.4
-9.0
16.0
-25.0
-42.1
-30.3
-10.6
-19.8
168.8
-18.8
14.8
-33.7
15.5
9.5
1.8
7.7
11.4
10.6
0.8
143.4
163.2
-19.8
-11.8
-13.0
1.2
187.6
192.3
-4.6
6.0
7.1
-1.1
11
t
16.4
166.6
148.0
130.0
39.5
-1~
667.9
1038.8
801.5
1023.0
119.0
-11
580.6
87.3
897.2
141.6
688.2
113.3
848.2
174.7
108.8
10.3
-41
2S
-25
Increase in Foreign Holdings of Dollar-denominated ShortU.S. Securities and Other Custody Liabilities: /6
U.S. Treasury Bills
Private, net
Official, net
Other Negotiable Instruments
and Selected Other Liabilities: 17
Private, net
Official, net
Change in Banks' Own Net Dollar-Denominated Liabilities
30 Monthly Net TIC Flows (lines 21,22,29) /8
of which
31
Private, net
32
Official, net
12
/3
Page 2 of3
6
-4
4
-s
(
Net foreign purchases of U.S. securities (+)
Includes international and regional organizations
The reported division of net purchases of long-term securities between net purchases by foreign official institutions and r
of other foreign investors is subject to a "transaction bias" described in Frequently Asked Questions 7 and I O.a.4 on tl
Net transactions in foreign securities by U.S. residents. Foreign purchases of foreign securities = U.S. sales offoreign se
Thus negative entries indicate net U.S. purchases of foreign securities, or an outflow of capital from the United State~
indicate net U.S. sales of foreign securities.
Minus estimated unrecorded principal repayments to foreigners on domestic corporate and agency asset-backed securitie:
estimated foreign acquisitions of U.S. equity through stock swaps estimated U.S. acquisitions of foreign equity through stock swaps +
increase in nonmarketable Treasury Bonds and Notes Issued to Official Institutions and Other Residents of Foreign C
These are primarily data on monthly changes in banks' and broker/dealers' custody liabilities. Data on custody claims an
quarterly and published in the Treasury Bulletin and the TIC web site.
"Selected Other Liabilities" are primarily the foreign liabilities of U.S. customers that are managed by U.S. banks or bro~
TIC data cover most components of international financial flows, but do not include data on direct investment flows, whi
and published by the Department of Commerce's Bureau of Economic Analysis. In addition to the monthly data surr
http://www.treas.gov/press/releases/hp35'3:htm
5/7/2007
Page 3 of3
TIC collects quarterly data on some banking and nonbanking assets and liabilities. Frequently Asked Question I on t
site describes the scope of TIC data collection.
REPORTS
• (PDF) TIC Monthly Reports on Cross-Border Financial Flows (Billions of dollars, not seasonally adjusted)
http://www.treas.gov/press/releases/hp353 htm
5/7/2007
'\
,.
, '..i:·., ;;,
u.s. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
EMBARGOED UNTIL 9a.m. (EDT), April 16 2007
CONTACT Ann Marie Hauser, (202) 622-2920
TREASURY INTERNATIONAL CAPITAL DATA FOR FEBRUARY
Treasury International Capital (TIC) data for February are released today and posted on the U.S.
Treasury web site (\\ \\\\.trcas.!,!,o\ Itic). The next release, which will report on data for March, is
scheduled for May 15,2007.
Net foreign purchases of long-term securities were $58.1 billion.
•
Net foreign purchases of long-term U.S. securities were $77.9 billion. Of this, net purchases
by foreign official institutions were $12.6 billion, and net purchases by private foreign
investors were $65.3 billion.
•
U.S. residents purchased a net $19.8 billion in long-term foreign securities.
Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have
been $43.2 billion.
Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and
other custody liabilities increased $20.8 billion. Foreign holdings of Treasury bills increased $5.3
billion.
Banks' own net dollar-denominated liabilities to foreign residents increased $30.4 billion.
Monthly net TIC flows were $94.5 billion. Of this, net foreign private flows were $61.6 billion and
net foreign official flows were $32.9 billion.
TIC Monthly Reports on Cross-Border Financial Flows
(Billions of dollars not seasonally adjusted)
2005
2006
12 Months Through
Feb-06
Feb-07 Nov-06
Oec-06
Jan-07
Feb-07
Foreigners' Acquisitions of Long-term Securities
1
2
3
Gross Purchases of Domestic U.S. Securities
Gross Sales of Domestic U.S. Securities
Domestic Securities Purchased, net (line 1 less line 2) /l
2023.7
1945.7
77.9
958.7
162.3
167.3
490.8
138.2
112.4
32.3
11.8
59.1
9.2
37.9
4.3
12.3
32.4
-11.1
104.5
20.5
20.0
40.7
23.3
65.3
145
-2.2
39.9
13.2
9
Official, net /3
Treasury Bonds & Notes, net
Gov't Agency Bonds. net
Corporate Bonds. net
Equities, net
120.4
68.7
31.6
19.1
1.0
196.6
69.6
92.6
28.6
5.8
125.9
69.4
33.1
21.7
1.7
183.0
46.4
100.8
30.4
5.3
6.1
1.0
4.0
3.2
-2.1
24.0
6.1
15.5
2.9
-0.5
12.3
-5.3
15.8
2.4
-0.6
12.6
2.5
4.2
5.5
0.3
3700.0
3872.4
-172.4
5572.2
5819.4
-247.1
4016.8
4193.4
-176.6
5894.6
6152.6
-258.0
536.9
571.0
-34.1
521.3
570.1
-48.7
558.0
576.0
-18.0
600.0
619.7
-19.8
-45.1
-127.3
-139.8
-107.4
-46.9
-129.7
-145.0
-113.0
-14.2
-19.9
-29.2
-19.5
-4.8
-13.2
-4.5
-15.3
839.1
891.1
845.8
883.6
84.4
13.2
98.8
58.1
-140.0
-153.3
-150.2
-159.5
-20.4
-13.1
-15.1
-15.0
699.1
737.8
695.6
724.1
64.1
0.1
83.7
43.2
-47.6
-58.9
-15.6
-43.3
134.4
-9.0
16.0
-25.0
-42.1
-30.3
-10.6
-19.8
168.8
-18.8
14.8
-33.7
15.5
9.5
1.8
7.7
6.9
-4.9
4.4
-9.3
17.9
J.2
-3.3
4.5
20.8
5.3
4.8
0.4
11.4
10.6
0.8
143.4
163.2
-19.8
-11.8
-13.0
1.2
187.6
192.3
-4.6
6.0
7.1
-1.1
11.8
6.0
5.8
16.7
20.4
-3.7
15.6
14.6
1.0
16.4
166.6
148.0
130.0
39.5
-18.7
-22.0
30.4
667.9
1038.8
801.5
1023.0
119.0
-11.8
79.6
94.5
580.6
87.3
897.2
141.6
688.2
113.3
848.2
174.7
108.8
10.3
-41.4
29.7
54.3
25.3
61.6
32.9
Gross Purchases of Foreign Securities from U.S. Residents
Gross Sales of Foreign Securities to U.S. Residents
Foreign Securities Purchased, net (line 14 less line 15) /4
Foreign Bonds Purchased. net
Foreign Equities Purchased, net
19
Net Long-Term Securities Transactions (line 3 plus line 16):
20
Other Acquisitions of Long-term Securities, net /5
21
22
Net Foreign Acquisition of Long-Term Securities
(lines 19 and 20):
28
Increase in Foreign Holdings of Dollar-denominated Short-term
U.S. Securities and Other Custody Liabilities: /6
U.S. Treasury Bills
Private, net
Official, net
Other Negotiable Instruments
and Selected Other Liabilities: /7
Private, net
Official, net
29
Change in Banks' Own Net Dollar-Denominated Liabilities
23
24
25
26
27
30 Monthly Net TIC Flows (lines 21,22,29) /8
of which
31
Private, net
32
Official, net
17
1824.4
1707.6
116.8
896.6
212.3
205.4
369.4
109.4
17
18
/8
1849.9
1788.0
61.9
941.6
128.0
196.9
472.2
144.5
16
/6
1925.6
1807.2
118.5
891.1
269.4
187.6
353.1
81.0
IS
/5
21744.8
20603.2
1141.6
Private, net/2
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
14
/4
17713.0
16690.6
1022.4
4
5
6
7
8
10
11
12
13
/I
/2
/3
17157.5 21104.2
16145.9 19966.0
1011.5 1138.2
Net foreign purchases of U.S. securities (+)
Includes international and regional organizations
The reported division of net purchases of long-term securities between net purchases by foreign official institutions and net purchases
of other foreign investors is subject to a "transaction bias" described in Frequently Asked Questions 7 and 10.a.4 on the TIC web site.
Net transactions in foreign securities by U.S. residents. Foreign purchases offoreign securities ~ U.S. sales of foreign securities to foreigners.
Thus negative entries indicate net U.S. purchases of foreign securities. or an outflow of capital from the United States; positive entries
indicate net U.S. sales offoreign securities.
Minus estimated unrecorded principal repayments to foreigners on domestic corporate and agency asset-backed securities +
estimated foreign acquisitions of U.S. equity through stock swapsestimated U.S. acquisitions offoreign equity through stock swaps +
increase in nonmarketable Treasury Bonds and Notes Issued to Official Institutions and Other Residents of Foreign Countries.
These are primarily data On monthly changes in banks' and broker/dealers' custody liabilities. Data on custody claims are collected
quarterly and published in the Treasury Bulletin and the TIC web site.
"Selected Other Liabilities" are primarily the foreign liabilities of U.S. customers that are managed by U.S. banks or broker/dealers.
TIC data cover most components of international financial flows, but do not include data on direct investment flows, which are collected
and published by the Department of Commerce's Bureau of Economic Analysis. In addition to the monthly data summarized here, the
TIC collects quarterly data on some banking and nonbanking assets and liabilities. Frequently Asked Question I on the TIC web
site describes the scope of TIC data collection.
2
Page 1 of I
April 16. 2007
HP-354
G-7 Deputies Exchanged Views With
the Private Sector on Hedge Funds
Washington. DC- In the follow up of G-7 Finance Ministers' discussion in Essen on
the role of hedge funds. G-7 Deputies had an exchange of views with hedge fund
managers. prime brokers and counterparties at the margins of the spring meeting of
the Bretton Woods institutions in Washington DC.
The meeting was co-chaired by the G-7 presidency. State Secretary Thomas Mlrow
and Under Secretary of the Treasury. Tim Adams.
After hearing a presentation by Under Secretary of the Treasury. Robert Steel. on
the "Principles and Guidelines Regarding Private Pools of Capital" of the
President's Working Group on Financial Markets. a progress report was given by
the chairman of the Financial Stability Forum. Mario Draghi. on the update of the
instltution's 2000 report on Highly Leveraged Institutions. In addition. the chairman
of the "Counterparty Risk Management Policy Group II". E. Gerald Corrigan. briefed
participants on the Implementation of the group's 2005 report's findings. The
diSCUSSion with private sector participants focused on best practices on risk
management. current hedge fund and private equity regulations and disclosure
issues. including a discussion of best practices.
G-7 Deputies agreed to keep the matter under further consideration.
http://www.treas.gov/press/releases/hp.l54.btm
51712007
Page 1 of 2
April 16. 2007
2007 -4-16-15-28-59-18278
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in thiS table, U.S reserve assets
otaled $66,618 million as of the end of that week, compared to $66.255 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US miliJons)
I
I
April 6, 2007
April 13, 2007
66,255
66,618
TOTAL
1. Foreign Currency Reserves 1
Euro
a. Securities
II
12,770
Of which, issuer headquartered in the US.
Yen
II
TOTAL
10,672
I
I
23,442
II
"
b. Total deposits with:
bi. Other central banks and BIS
12,759
b.ii. Banks headquartered in the US.
II
5,201
Euro
II
Yen
12,893
I
I
10,678
0
17,960
12,900
II
"
b.iii. Banks headquartered outsIde the US
b.iii. Of which, banks located in the US.
2. IMF Reserve Position 2
3. Special Drawing Rights (SDRs) 2
t Gold Stock 3
"I
0
II
0
II
II
II
II
0
I
4,853
I
II
8,959
II"
5,204
0
18,104
0
I
I
I
"II
0
0
0
4,884
"
9,018
11,041
II
0
I
I
') Other Reserve Assets
TOTAL
23,571
0
II
b.ii. Of which, banks located abroad
"
II"
11,041
I
I
0
"
II. Predetermined Short-Term Drains on Foreign Currency Assets
I
April 6, 2007
II
. Foreign currency loans and securities
I
I
Euro
Yen
II
II
TOTAL
II
II
0
I
April 13, 2007
Yen
Euro
II
II
II
"
II
TOTAL
I
I
0
I
II
0
I
I
0
I
I
'. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
'.a. Short positions
~b
Long positions
, Other
I
0
I
II
II
0
I
I
0
I
0
III. Contingent Short-Term Net Drains on Foreign Currency Assets
April 6, 2007
=
II
I
II
Euro
II
II
http://www.treas.gov/press/releases/2007 41615285918278.htm
Yen
I
I
April 13, 2007
II
Euro
TOTAL
I
"
I
I
Yen
I
TOTAL
5/7/2007
Page 2 of2
1. Contingent liabilities in foreign currency
I
la. Collateral guarantees on debt due within 1
year
I
II
[l.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
~. Undrawn, unconditional credit lines
~.a With other central banks
I
0
I
0
I
I
I
I
I
I
I
I
/I
0
I
0
/I
/I
I
I
I
I
I
,
,
I
/I
0
I
0
I
I
3,b. With banks and other financial institutions
IHeadquartered in the US
3,c. With banks and other financialmstitutions
'HeadqUartered outside the US.
I
I
I
II
II
I
I
4. Aggregate short and long positions of options
in foreign
Currencies vis-a-vis the U.S dollar
I
0
I
I
II
,I
0
Short positions
4.a.l. Bought puts
,
4.a.2. Written calls
,14.b Long pOSitions
14b.1. Bought calls
14b .2 Written puts
I
I
I
II
I
I
II
II
II
II
I
I
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
jeposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
~eserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
Jalued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
lecessary adjustments, including revaluation, by the US. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.treas.goy/press/releasesI20Q741615285918278.htm
5/7/2007
Page 1 of 1
April 17, 2007
HP-355
Under Secretary Steel to Discuss Domestic
Finance Priorities
US. Treasury Under Secretary for Domestic Finance will give luncheon remarks
before the Exchequer Club In Washington, D.C. Wednesday. The Under Secretary
will discuss Treasury's domestic finance agenda, including capital markets
competitiveness, government sponsored enterprise reform and other issues critical
to U.S. capital markets, financial institutions and federal finance. The following
event is open to credentialed media
Who
U S. Treasury Under Secretary for Domestic Finance Robert K. Steel
What
Keynote Address
When
Wednesday, April 18, 12:30 p.m. (EST)
Where
The University Club
1135 16th Street, NW
Washington, DC
http://www.treas.gov/press/releases/hp3S5 hm
5/7/2007
Page 1 of7
April 17, 2007
HP-356
Deputy Secretary Robert M. Kimmitt's
Remarks on Japan and the United States:
Indispensable Partners, in Asia and Beyond
Thank you, Charlie. It is a pleasure to be with you today, and especially to be
hosted by the Maureen and Mike Mansfield Foundation. In the late 1930's, my
father, Stan Kimmitt. was majonng in football and minonng in bartending at the
University of Montana. Fortunately, he did attend relatively regularly the Asian
History course taught by a young professor named Mike Mansfield. That began an
almost 60-year relationship between these two Montanans, which included working
closely together for over a decade in the Senate. And my father was later a strong
supporter of the Mansfield Foundation
I want to thank Gordon Flake and his entire team for arranging today's event. Since
its inception, I have both observed and benefited from the work of the Mansfield
Foundation, and during my years in the private sector I had the honor of being a
member of the Mansfield Foundation Board. The programs of the foundation are
rich and varied, and two in particular are especially beneficial. First, the foundation
takes Members of Congress from both sides of the aisle to Asia -- not for quick
visits but rather for in-depth conversations on areas of concern in the trans-Pacific
relationship. And, second, perhaps the most Important program developed by the
Foundation is their Mansfield Fellowships. Over the years, the program has helped
to strengthen the US-Japan relationship by providing 70 officials from 20 U.S.
government agencies with an opportunity to spend a year working in Japanese
government offices. I am very pleased that we are joined today by seven Mansfield
fellows, two of whom, Chris Winship and Logan Sturm, now serve at the Treasury
Department.
My first visit to Japan was in April 1970, when the military transport aircraft on which
200 soldiers and I were passengers stopped at Yokota Air Force Base en route to
combat duty in Vietnam. I returned in October 1983 as a passenger on Air Force
One, when I accompanied President Reagan during his histonc visit to Japan to
meet with Prime Minister Nakasone. And I traveled frequently to Japan from 1989
- 1991 when I was Under Secretary of State for Political Affairs, as Japan and the
United States worked in especially close cooperation as the Cold War came to an
end. To this day, I stay closely in touch with my Japanese colleagues from those
years. My teachers, or sensei, have included important Japanese government
officials named Owada, Utsumi, Arima, Kuriyama, Murata, Satoh, and, of course,
Kato, as well as private sector leaders like Hiroshi Okuda and Jack Murofushi. And
I speak today as a friend and admirer of these men and the great country and
people they represent and serve.
Over four decades, I have seen the relationship between Japan and the United
States change in significant ways, and both the Asia-Pacific region and the world
today look very different than they did when I first visited Japan. But one
fundamental fact has remained constant: the US.-Japan partnership is and will
continue to be the strong foundation for a more peaceful and prosperous AsiaPacific region, and an essential contributor to peace and prosperity in regions far
from Asia.
Indispensable Partners: Economic Priorities in the U.S.-Japan Economic
Relationship
The indispensable partnership between Japan and the United States is built on
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mutual interests and common values. Our security relationship has been rock solid
and constant, promoting peace and stability in the East Asian region and beyond.
Our economic relationship, on the other hand, has gone through cycles, and this
fact is particularly evident to those of us who remember the trade tensions of the
1980s. For today and the future, both security and economiC relations must be
integral, active, and strong components of our partnership and alliance.
Although bilateral issues remain in our economic relationship, today that
relationship is more cooperative and less confrontational than in the past. The
economic relationship remains critical to our mutual success and that of the global
economy, and we must ensure that the relationship remains vital and active. In
order for Japan and the United States to realize the full potential of our partnership,
we must set our sights higher Within our own borders and across the Pacific, we
must take steps toward reform in order to reinvigorate our economic relationship
and work together to address bilateral and global priorities
The economic situation in the United States serves as a solid basis for enhanced
cooperation. Even though growth has slowed to a more moderate pace, the
prospects for the U.S. economy remain good. Our economy continues to perform
well, and we expect GOP growth to rebound to 3 percent by the end of this year.
Although the residential housing market has been sluggish, it appears to be
stabilizing, and continued Job creation and wage growth should prevent the housing
market from spilling over significantly Into consumer spending, which remains
strong. And the rest of the economy is In good shape - unemployment is low,
manufacturing production is up, and Inflation risks appear to be contained.
One of our greatest economic assets IS our flexible labor market: it fosters an
innovative and productive workforce. motivated by healthy competition and meritbased compensation. Data on labor demand in the United States show that during
2006, hires exceeded separations by the widest margin since the U.S. government
began tracking this information in 2000. In fact, 7.8 million jobs have been created
in the United States since August 2003 - more jobs during that period than all the
other major industrialized countries combined. I might note, since today IS Tax Day,
that August 2003 is when the economy began to feel the effects of the tax reform
signed earlier that year. That reform reduced personal tax rates and cut taxes on
capital gains and dividends. To continue the country's solid economic growth, it is
important that this tax relief be made permanent.
The role of the United States as an engine of global growth is well-established.
Still, the global economy clearly benefits from multiple engines running strongly.
The recovery of the Japanese economy, and its continued growth in the future. IS of
utmost importance in sustaining strong global growth.
Japan is now experiencing the longest economic expansion In its post-war history,
thanks in part to the reforms launched by former Prime Minister Koizumi. There are
signs that domestic demand -- consumption in particular -- is beginning to serve as
a stronger driver of growth. Prime Minister Abe described his economic agenda
earlier this year, saying that Japan is seeking to "strongly advance a new growth
strategy," with reform goals for the next five years designed to ride the wave of
Asian growth and innovation. We welcome Prime Minister Abe's commitment to
press forward with economic reform in Japan that seeks to raise productivity
growth; create new investment opportunities; stimulate competition; and foster a
stronger business climate. The challenge now is specifying and carrying out
concrete reform measures that will ensure strong growth for the long term.
In our view, these reforms should include the following areas, which are now being
actively discussed in Japan:
1.
Japan needs to make It easier for workers to change jobs and re-enter the
labor force during their careers. Full and efficient utilization of Japan's labor
resources and the ability to shift workers to more productive occupations are critical
in light of Japan's demographic challenges and a rapidly changing global economy.
As Prime Minister Abe said in his policy speech last fall, Japan should aim to be "a
society ... where everyone has the opportunity to take on a new challenge." Greater
labor force mobility would Increase earning potential and raise the employment
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security of Japanese workers. Measures that could help create greater flexibility
and more second chances include expanding the use of portable, definedcontribution pension plans and more rapid vesting of company-defined benefit
pensions.
2.
To raise productivity, the government of Japan should encourage
competition, the entry of new firms, and the introduction of new technologies and
products. We are all familiar With manufactured products in which Japanese
technology leads the world. Yet some Japanese Industries maintain surprisingly
low levels of productivity relative to their foreign counterparts. In many cases, these
are industries with extensive regulations on entry, products, and technologies.
These regulations have sheltered industries from foreign and domestic competition,
even though many of these regulated industries - such as business serVices,
communications, and health care - offer the greatest potential for growth in today's
economy. To raise productivity and realize the growth potential of these industries,
Japan should implement structural reform and deregulation to remove barriers to
competition, new entry, and new product introduction
3.
Both Japan and the United States recognize that efficient capital markets are
the lifeblood of a strong economy, and investor confidence and appropriate
regulation are necessary to ensure competitiveness in a rapidly changing global
economy The key IS striking the right balance between market integrity and
entrepreneurship - a balance that must be continually reviewed as markets evolve.
In the United States, Secretary Paulson recently hosted a conference to examine
issues affecting U.S capital markets competitiveness. Japan has made progress In
advancing financial market reform since the late 1990s and in improving the
financial regulatory environment since the creation of the Financial Services
Agency. But Tokyo still has a way to go to be competitive with other major financial
markets. We welcome the goal of the Abe Administration to have Tokyo take its
rightful place as a global financial center.
Greater regulatory transparency and predictability could help encourage financial
services providers to introduce new savings and Investment products that benefit
Japanese consumers. Using regulatory safeguards rather than enforcing specific
institutional structures would reduce compliance costs, allow for better risk
management by firms, and enhance the ability of financial groups to provide
comprehensive services to their clients. Lower costs and Improved operations of
exchanges would help attract more domestic and foreign listings, providing more
chOice for domestic and international investors.
4.
Reduction of the government's role in financial intermediation is also critical
for more efficient and competitive Japanese financial markets. The government of
Japan has taken important steps in thiS regard with its plans to privatize Japan Post
and to streamline or privatize a number of other government financial institutions.
Since Japan Post operates the world's largest savings and life insurance
operations, postal privatization will have an enormous impact on the Japanese
economy -- and the manner in which this process unfolds is Critical. In making thiS
transition, it is important that Japan establish a level playing field for the privatized
postal financial institutions before they Introduce new products so that private sector
firms from all countries can compete fairly.
The preceding points are not to suggest that only Japan needs to take action. The
United States must do its part, especially regarding our low saving rate. Like
Japan, we need to reduce our fiscal defiCit In light of an aging population. In the
United States, we have made substantial progress in cutting the U.S. fiscal deficltit has already been cut In half three years ahead of President Bush's 2009 goal.
The deficit was 1.9 percent of GOP In 2006 and is expected to come down further
this year. The President's 2008 budget envisions further declines in the deficit over
the next five years to produce a balanced budget by 2012.
But the recent progress on the budget deficit and efforts to boost private saving Will
have a limited impact if more is not done to address the long-term growth in
spending on entitlement programs: Social Security, Medicare, and Medicaid.
Without fundamental reform, entitlement spending as a percent of GOP is set to rise
by nearly half from 2010 to 2040, thereby significantly impairing our fiscal
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sustainability by crowding out all discretionary spending over tile next several
decades. Without reform, these programs will also erode our competitiveness by
placing massive obligations on the backs of 21 st Century American workers and
their families.
The Importance of Open Investment and the U.S.-Japan Relationship
As we work to address these important reforms in our economies, our common
interests make Japan and the United States natural partners in advancing the
fundamental prinCiples of a healthy world economy: free and fair trade: flexible
exchange rates set in open, competitive markets based on underlying
fundamentals: and the free flow of capital across borders, based on open
investment policies. But we must also confront the threat of growing protectionist
sentiment and new obstacles to trade and investment. We often discuss
protectionism in the context of trade. But since Investment flows are many times
larger than trade flows, we must also pay close attention to cross-border capital
flows and maintaining open investment policies. We must come together to make
clear on both sides of the Pacific that we are open to investment and trade, and
actively reject the rise of Investment protectionism across the Pacific or elsewhere
in the world
The United States greatly benefits from strong foreign direct investment inflows,
which have averaged 1.6 percent of GOP over the past decade. Our cumulative
stock of foreign investment now exceeds 28 percent of our GOP on a market value
basis. That foreign investment translates into high-paying jobs for American
workers, while promoting innovation and generating increases in productivity. In
the United States, over five million Americans work for companies headquartered
overseas. Although these jobs comprise only around five percent of our workforce,
they account for 10 percent of our capital investment, 15 percent of our annual
research and development, and 20 percent of our exports. And over 30 percent of
these Jobs are in manufacturing, roughly three times the overall U.S. workforce level
in this sector.
Foreign direct investment flows into Japan, by comparison, have averaged Just 0.1
percent of GOP over the same period, and the Finance Ministry estimates the stock
value of foreign direct investment at Just 2.4 percent of GOP. We welcome Prime
Minister Abe's pledge to double incoming foreign direct investment by 2010. One
tool that would help realize this goal IS Japan's implementation of legislation to
allow foreign firms to use their own stock as consideration in cross-border mergers
and acquisitions, as they can do in the United States and other markets. Continued
deregulation and structural reform to remove barriers to entry will also encourage
foreign direct investment.
In the United States, we are focused on maintaining our open investment policy
while addreSSing national security concerns, and we believe we are making
significant progress in striking that important balance. Even In the wake of
controversial cases like CNOOC and Oubai Ports World, the vast majority of foreign
investments reviewed by the Committee on Foreign Investment in the United States
(CFIUS) continue to be processed expeditiously and without controversy within the
initial 30-day review period. In fact, since Oubai Ports World, more than 100
transactions have been reviewed by CFIUS without objection and notified to
Congress.
Toshiba's acqUisition of the Westinghouse Electric Company and its 6,000 U.S
workers IS a good example. ThiS transaction went through the CFIUS process Just
months after Oubai Ports World. Especially since the case Involved U.S.
commercial nuclear power, the companies understood the importance of discussing
the implications of this transaction on both ends of Pennsylvania Avenue. The
companies spent a Significant amount of time informing lawmakers about the
transaction as soon as it was publicly announced, and the CFIUS review was
completed in a first-stage, 30-day investigation period. We are working to ensure
that proposed changes to the process for reviewing foreign Investments do not
create unnecessary and counterproductive barriers to participation in the US.
market. Let me make my message crystal clear: the United States is open to
investment from abroad, and we hope Japan will become more open to investment
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51712007
Page 5 of7
as well.
Indispensable Partners: In Asia and Beyond
As both Japan and the United States strengthen the economic foundation of our
relationship, we create increased opportunities for partnership around the world.
One such opportunity for partnership is the Doha Round. As Secretary Paulson
said following this weekend's meeting of G-7 Finance Ministers and Central Bank
Governors, we are at a critical Juncture for progress on the Doha Round. We
believe that trade expansion is one of the most important catalysts for economic
growth, and all countries must contribute through real market access commitments
in manufacturing, services, and agriculture Both Japan and the United States
would benefit from an agreement. and, in some sectors, Japan has even more to
gain from global trade liberalization than the United States.
While both countries will benefit strongly from freer trade in services, one study
suggests that global free trade in manufacturing and agriculture would generate
annual economic gains of more than $54 billion for Japan. compared to $16 billion
for the United States. In spite of these potential benefits, domestic opposition to
agricultural reform has prevented Japan from playing a leading role in the Doha
Round negotiations and in other international trade liberalization efforts. Japan has
taken some steps toward agricultural reform, but its agricultural sector still remains
heavily subsidized and highly protected. This imposes a heavy burden on
Japanese consumers, who pay much more for food and other basic daily
necessities than citizens in other highly-developed economies. Japan's unique
conditions on imports of U.S beef are most prominent, and we continue to discuss
ways that we can mutually agree upon sCientifically valid and internationally
recognized standards.
Even as we push for a successful conclusion of the Doha Round, we are also
reviewing existing structures to reduce regulatory burdens in both Japan and the
United States - and then converge, harmonize, and mutually recognize the lower
level of regulation that remains. The Regulatory Reform Initiative launched by
President Bush and Prime Minister Koizumi several years ago has been a good
step in this direction, but more can be done. We have a number of other very
important dialogues with Japan, and we need to ensure that these dialogues are
active and results-oriented.
On global issues of concern to both our countries, such as energy security and
climate change, Japan and the United States have taken a number of important
steps. We recognize that tackling global climate change will require global
solutions that include fast-growing countries such as India and China. This is why
we together launched the Asia-Pacific Partnership on Clean Development and
Climate with Australia, China, India, and South Korea - countries that represent 50
percent of the world's economy - to speed up the transfer of clean energy
technologies. We have also recently made significant efforts to broaden and
strengthen the U.S. -Japan nuclear energy partnership in support of global
expansion of nuclear energy and specifically in support of a healthy, sustainable,
and growing nuclear commercial sector. Japan was also one of the first countries
to endorse our Global Nuclear Energy Partnership initiative, and will be the first to
sign a joint action plan that supports the safe and secure expansion of nuclear
energy in a manner that is commercially sustainable, proliferation resistant, and
environmentally sustainable.
As the second-largest donor to the United Nations, the World Bank, and the
International Monetary Fund, Japan leads the international community in action
through multilateral organizations. The United States and Japan have worked
closely together on bold and fundamental reform of the International Monetary
Fund, to ensure that IMF governance reflects the changes in the global economy
and that the IMF remains relevant in today's international financial system. The
IMF Managing Director's deciSion to revise the 1977 DeciSion on Exchange Rate
Surveillance - a deciSion welcomed by the G-7 last week - is a very important step
in this process.
Japan is also poised starting next year to playa particularly important leadership
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Page 6 of7
role in multilateral organizations -- as the chair of the G-7 and the G-8 in 2008 and
as the host of APEC in 2010 When I first starting working on these issues, th~re
was a G-5. Subsequently, it expanded to a G-7, then to a G-8, and now we also
have important Institutions like APEC and the G-20, which provide excellent forums
for us to reach out to increaslllgly IIlfluentlal countries with strong emerging
economies - Brazil, Russia, India, and particularly, China.
As leaders in the global economy, both Japan and the United States have recently
IntenSified the dialogue with Ctllna. Premier Wen Jlabao was in Tokyo last week,
reciprocating Prime Minister Abe's viSit immediately after he took office. And next
month multiple Chinese ministers III a delegation led by Vice Premier Wu YI will visit
Washington for the second meeting of the new U.S-China Strategic Economic
Dialogue. It IS in both our interests for bilateral relations With China to improve, for
the benefit of both Asia and the rest of the world. But these initiatives with China
proceed with a clear understanding that Japan and the United States are and will
remain indispensable partners in Asia and throughout the world. And we must
IIlvest as much energy and Initiative In the U.S-Japan relationship as each of us
will invest In our growing relationships with China.
Foreign Minister Aso has described his government's international efforts by saying
that the Japanese are now "viewed as people who will stand alongside and
undertake efforts hand-In-hand .. " Japan continues to work hand-in-hand with
countries such as Afghanistan - where it has contributed more than $1.45 billion
since 2002 to enhance domestic security and promote economic development.
This assistance has helped to bUild roads and airports, bolster health and education
services, and implement the disarmament and demobilization of combatants.
In Iraq, Japan's C-130s provide vital airlift missions, and when Prime Millister Abe
met last week In Tokyo with Prime Minister Malikl, he committed to extend the airlift
acllvities by two years. Japan also contillues to be an aclive partner in the
reconstruction effort in Iraq, providing assistance to IraqiS on essentialillfrastructure
such as water pUrification and electricity generation. Since 2003, Japan has
pledged a total of $5 billion to Iraq, and thiS financial assistance Will help Iraq to
establish an economic foundation built upon good governance, the rule of law, a
solid budgetary framework, and strong, credible Institutions. We expect that Japan
will be represented at the ministerial level at next week's launch in Sharm EI Sheikh
of the International Compact With Iraq, and that Japan will jOin us In making a
significant new pledge of support for Iraq.
Japan has also jOllled forces with the international community in the fight agalilst
terrOrist and proliferation fillancillg. At the United Nations, we have worked
together to pass critical resolutions to cut off the flow of Illicit finance to weapons
proliferators. Not only did Japan push for tough measures In UN Security Council
Resolutions 1695 and 1718 on North Korea's proliferation network, the government
followed through on its diplomatic commitments by implementing targeted financial
sanctions. Japan is now in a unique position to exercise the same kind of
leadership in the fight against Iranian proliferation activities. Iranian state-owned
Bank Sepah, now deSignated under UN Security Council Resolution 1747, has
facilitated business between North Korea's chief ballistic missile-related exporter,
KOMID, and Iran's Aerospace Industries Organization, which we have deSignated
under U.S. authorities.
Japan can again demonstrate its global leadership by taking swift action to
implement UN Security Council Resolution 1747, which obligates states to freeze
the assets of entitles and Individuals associated With Iran's nuclear and missile
programs.
In the United States, we have worked hard, particularly since 9-11, to put Into place
the legal authorities and operational capacity to allow us to take prompt action both
to respond to threats to our financial system and also to implement qUickly UN
Security Council resolutions and other international obligations. To help prevent the
flow of illicit finance to terrorists and prollferators, Japan should ensure that it, too,
can take action to freeze assets related to terrorism, proliferation, and other illicit
activities. Japan should also improve its efforts to IIlvestigate and prosecute
financial crimes-related offenses when its institutions knowingly launder money.
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Page 70f7
We cannot allow terrorists and proliferators to gain any advantage because of a
failure to enact laws and procedures that target illicit finance, the lifeblood of their
dangerous activities.
Ladles and gentlemen, let me close by reiterating that our common values,
convergent interests, and combined weight In the global economy make Japan and
the United States indispensable partners for good in Asia and beyond. But our
security and economic relationship IS one that requires careful tending, active
management. and continuous renewal. An important milestone In this ongoing
effort will take place next week when President Bush and Prime Minister Abe meet
in Washington. But all of us - both In government and the private sector - must
complement the work of our leaders by doing our part to broaden and deepen this
partnership, to the benefit of our two countries, the region, and the rest of the
world.
Thank you for your attention
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Page 1 of 1
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April 17.2007
HP-357
Secretary Paulson to Speak at Committee
of 100 16th Annual Conference in New York
Treasury Secretary Henry M. Paulson, Jr. will deliver remarks at the Committee of
th
1~O's 16 Annual Conference in New York City Fnday. Secretary Paulson's
remarks will focus on the importance of the U.S.-Chtna economic relationship and
both countnes' efforts to strengthen that relationship through the U.S.-China
Strategic Economic Dialogue (SED) The second meeting of the SED will occur in
Washlllgton next month.
When
Friday. April 20, 1200 p.m EDT
Where
Waldorf Astoria
Grand Ballroom
301 Park Avenue
New York. NY
Note
Media must RSVP by filling out the attached form and emailing it to
ping_an@committee100org or faxing it to (212) 371-9009. For more information
contact An Ping at (212) 371-6565.
REPORTS
•
Media Registration
http://www.treas.gov/press/releases/hp3.S7 htm
5/7/2007
MEDIA REGISTRATION
Name:
Publication:
Position:
Cell phone:
Telephone:
E-mail address:
Fax:
---------------------------
Please make "X" in front of events you plan to attend, and fax it to 212371-9009.
For more information, contact Ms. An Ping, Director of Public Relations,
at 212-371-6565 or ping_an@committeeIOO.org.
Thursday, April 19,2007
_ noon-2:00pm
Luncheon Keynote #1: Henry R. Kravis
_ 2:15-3:30pm
Panel: On the Ground: Doing Business in China
_ 3:45-5:00pm
Panel: Investing in China: Opportunities and
Risks
Friday, April 20, 2007
8:00-9:00am
Breakfast Keynote #2: William R. Rhodes
9 :00-10: 15am
Panel: Attracting the Best and Brightest in
China
10:30-11 :45am
Consumers
_ noon-2:00pm
_ 2: 10-3:45pm
Common Solutions
3:50-5:00
7:45-9:30
journalists)
Panel: The Changing Face of China's
Luncheon Keynote #3: Henry M. Paulson,
Jr.
Panel: China & Energy - Working Toward
Panel: China Going Green?
Awards Program (limited seating offered to
Saturday, April 21, 2007
9:00-10: 15am
Panel: Just One Click - New Media in China
10:30-11 :30am
Panel: Technology and Partnership NVIDIA and TSMC
11 :45-1 : 15pm
Luncheon Conversation: Personal Journey
with Steve Chen, Co-Founder & Chief
Technology Officer of YouTube
Page 1 of 1
April 17, 2007
HP-358
Treasury Hosts State, Local Governments
to Discuss US Financial Education
Washington, DC- The Treasury Department today hosted the first meeting of the
National Financial Education Network, a coalition of federal, state and local
governments working to improve financial education at the local and regional level.
"AII of us in government are in the business of helping people achieve their life
goals. When we equip those we serve with financial knowledge we enable them to
do just thaI," said Deputy Assistant Secretary for Financial Education Dan
lannicola, Jr, who led the meeting.
"We also try to help them protect themselves from financial products and services
that may not be in their best interests," lannicola continued. "This is why financial
literacy matters. By launching thiS national network of federal, state and local
governments we hope to pool our efforts to help Americans learn more about their
money and improve their own lives."
The conference was part of the continuing implementation of the Financial Literacy
and Education Commission's National Strategy for Financial Literacy. The meeting
served as a venue for sharing financial education programs, ideas, and resources
so that governments and local organizations may better help the constituents of
their state, region, or locality.
State and local governments that participated In today's conference Included
representatives from Alabama, Pennsylvania, New York City, New York state, New
Jersey, Florida, Texas, Oregon, Maryland, Kansas, Tennessee, Illinois, Delaware,
Washington state, Virginia and WisconSin. Non-profit organizations attending
included the National League of Cities, National Association of Government Defined
Contribution Administrators, the United States Conference of Mayors, National
Association of Insurance Commissioners, North American Securities Administrators
Association and the National Association of Attorneys General.
The Financial Literacy and Education Commission, headed by the Treasury and
comprised of 20 federal agencies, released its strategy report in 2006. The report
is a bluepnnt for improving Amencans' understanding of issues like
homeownership, credit management, and retirement savings and can be found at
www.mymoney.gov.
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April 18, 2007
hp-359
Testimony of Treasury Secretary Henry M. Paulson, Jr.
Before the Senate Finance Committee On
Ways to Reduce the Tax Gap
Chairman Baucus, Senator Grassley, Members of the Committee, thank you for
conSidering this important topic and for inviting me to speak about it It is very
appropriate that we have this conversation the day after tax day. Over the last few
months, millions of Americans have collected their W-2's, their 1099's, their home
mortgage interest statements, and countless other pieces of paper to fill out their
tax returns. This is an annual ritual for Americans, completed without great
enthusiasm, but with remarkable honesty and effort. The vast majority of Americans
pay their taxes without additional prodding by the IRS, out of a sense of fairness
and civic duty. They understand the importance of paying what they owe, and they
know that when people fail to pay their taxes, it serves as a de facto tax increase on
everyone else.
While the current compliance rate is high, it can and should be improved. Our
objective must be to tncrease tax compliance without over-burdening the tens of
millions of taxpayers who already pay their taxes honestly and on time.
The amount of taxes that are owed but not paid is commonly referred to as the tax
gap. An important part of addressing the tax gap is to understand not only the types
of taxpayers - individuals, small businesses, corporations - that don't comply, but
also why these taxpayers fail to comply. Answering these questions will help us
improve taxpayer service and better target our enforcement efforts.
In September of last year, we released a comprehensive seven-point strategy to
address the tax gap The budget we put forward for 2008 is critical to Implementing
that strategy. It requests new fundtng for taxpayer services, research, improved
technology, and targeted enforcement We ask for your help in working with the
Appropriations Committee to make sure the IRS has the resources it needs to
improve compliance while maintatning Its commitment to taxpayer service.
The budget also includes 16 legislative proposals that, if enacted, will help to
narrow the tax gap without Imposing excessive burdens on compliant taxpayers.
Since I last appeared before this committee, my staff has been meeting with your
staff on a regular basis to review the 16 legislative proposals Treasury's Assistant
Secretary for Tax Policy, Eric Solomon, and IRS Commissioner Mark Everson are
here with me today to provide more detail about these proposals and the IRS's
budget request
Our legislative proposals attempt to balance the burden they impose on taxpayers
against the impact they Will have on improving compliance. Even so, some of the
proposals have generated concern from those who could be affected by them. We
must consider the impact of any new rules on the vast majority of Americans who
already pay what they owe, and better target our enforcement efforts to minimize
additional burdens.
Since I last testified before you, Treasury has explored ways to improve
compliance. We held a public discussion a few weeks ago, and heard from a broad
cross-section of stakeholders, including a former IRS Commissioner, tax preparers,
and bustness representatives. Several insights emerged: first, we need to know
more about the specific sources and causes of the tax gap so we can focus our
efforts more preCisely: second, great care must be given to ensure that those efforts
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5/7/2007
Page 2 of3
do not impose unreasonable burdens on already compliant taxpayers: third,
simplification of the tax code, as well as taxpayer education and services, would
help improve compliance: and fourth, we need to manage expectations, recognizing
that every potential solution carries consequences
I know you have spent a great deal of time exploring this issue. And since I came to
Washington, I have taken a hard look as well. The most recent data we have on the
tax gap comes from 2001. It indicates that the vast majority of the tax gap was
attributable to underreporting of income. Most of the underreporting is attributable to
individuals with business Income and corresponding self-employment tax liabilities.
This includes small businesses, farms, and ranches. It's unclear whether this
underreporting is the result of deliberate deception or a simple misunderstanding of
what needs to be reported and how to do it.
To substantially improve compliance in this regard. Congress would have to
mandate additional requirements. which would affect not only those who don't
report all of their income, but also those who already do. I have come to the
conclusion that there is a big part of the tax gap we simply won't be able to reach
without adding draconian and painful requirements on all taxpayers. And I don't
believe any of us really want to do that. We must remember that the tax gap is
simply not a pot of gold that we can dip into every time we want to pay for a new or
expanded program. Nor should it be viewed as an easy solution to eXisting
challenges, such as the alternative minimum tax.
As you know. narrowing the tax gap is about improving compliance. It is not about
changing the baseline to raise more revenue. The budget resolution passed by the
Senate assumes revenue collections are raised by hundreds of billions of dollars.
Some believe this level of revenue can be achieved largely through measures to
reduce the tax gap I believe it is unrealistic to assume that reducing the tax gap will
yield that level of additional revenue.
In developing our 16 proposals, we focused on changes that would narrow the tax
gap with minimal additional burdens. Some have suggested that far more
expansive proposals should be put forward. Most of these proposals would require
steps that I would not recommend because they are bad tax policy and would be
unnecessarily painful, expensive, and time-consuming for taxpayers - for example.
requiring individuals to file 1099's reporting their transactions with service providers.
such as their doctor. auto mechanic, and dry cleaner; eliminating cash transactions
in favor of electronic transactions, with card issuers and banks providing statements
to the IRS so the payments can be matched with a business's reported income: or
doubling or tripling the number of IRS agents and audits. In theory, each of these
measures could bring in some additional revenue. but the cost of compliance for
individuals and businesses - most of whom already pay what they owe - would far
outweigh the gains. In many cases, such measures would also raise privacy
concerns due to the government's heavier focus on the daily transactions in each of
our lives.
I hope we can all agree that such extreme measures are not the approach we
should take. Instead, as a strong first step toward narrowing the tax gap. I hope you
will work with us to approve the additional IRS funding and enact the legislative
proposals the President has requested. I am pleased that Congress has recently
taken up a number of these proposals. By capitalizing on the direct and indirect
effects of IRS enforcement, and by making focused legislative changes, I am
confident we can make measurable progress toward reducing the tax gap without
adversely affecting already compliant taxpayers.
We should also look for ways to reduce the complexity of the U.S. tax code. Making
the tax code simpler and fairer for the average American could help to improve
compliance by reducing the number of honest mistakes, removing incentives for
cheating, and providing fewer places for tax cheats to hide.
It is critical that we manage expectations and view efforts to reduce the tax gap
over the long-term and with a clear understanding of both the costs and the benefits
of any action. Making significant progress will require a sustained, focused effort by
the Administration, Congress, and the American people. Honest American
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taxpayers are our allies in this effort, and we must always put their interests first.
Thank you, and I now welcome your questions.
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April 18,2007
HP-360
Testimony of Treasury Assistant Secretary For Tax Policy
Eric Solomon
Before the Senate Finance Committee on
Ways to Reduce the Tax Gap
Mr. Chairman, Ranking Member Grassley, and distinguished Members of the
Committee, thank you for the opportunity to discuss our strategy to reduce the tax
gap, including the legislative proposals included in the President's Fiscal Year (FY)
2008 Budget request to Congress.
The vast majority of Americans pay their taxes voluntarily and on time The
voluntary compliance rate is approximately 85 percent. Nonetheless, there remains
a substantial difference between what taxpayers should pay and what they actually
pay. The IRS estimates that the tax gap was $290 billion in 2001, after accounting
for late payments and enforcement activities. Each year, compliant taxpayers are
required to make up for thiS shortfall.
The Administration is committed to reducing the tax gap without unduly burdening
honest taxpayers who currently meet their tax obligations. In September 2006, the
Office of Tax Policy released a comprehensive strategy (the Treasury Strategy) to
reduce the tax gap. This strategy forms the basis for our legislative and IRS
appropriation proposals in the FY 2008 Budget, while also emphasizing that any
strategy must take into account additional components such as a commitment to
research, improvements to information technology, and strengthening taxpayer
service.
Magnitude and Source of Tax Gap
In recent months, there has been a significant level of discussion about the tax gap.
Much of thiS diSCUSSion has focused on the IRS's release last February of estimates
of the tax gap in 2001. These estimates included the results from the 2001 National
Research Program (NRP), which examined compliance with the individual income
and self-employment (SECA) taxes. The estimates of compliance with other types
of taxes were projections derived from older studies
Before focusing on our proposals, it is Important to differentiate between the gross
tax gap and the net tax gap. The "gross tax gap" is the difference between the
amount of tax that taxpayers should pay under the tax law and the amount they
actually pay on time. The IRS estimates that the gross tax gap was $345 billion in
tax year 2001, resulting in a vOluntary compliance rate of 83.7 percent. This
estimate, however, does not take into account taxes that were paid voluntarily but
late, or recoveries from IRS enforcement activities. Taking these factors into
account, the "net tax gap" was an estimated $290 billion in tax year 2001, which
represents a net compliance rate of 86.3 percent. Thus, $55 billion of the gross tax
gap for 2001 is in the government coffers.
These compliance rates are consistent with historical patterns. IRS estimates of
voluntary compliance rates have ranged between 80 and 85 percent for over two
decades, although research limitations generally prevent us from measuring
fluctuations during thiS time period. The tax gap is not a new problem, and it will not
be eliminated overnight.
The tax gap results from a variety of errors, including non-filing, underreporting of
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taxes, or underpayment of taxes. It is estimated that over 80 percent of the gross
tax gap is attributable to underreporting of tax (including underreported income or
overstated deductions and credits). Over 40 percent of the gross tax gap is
attributable to underreportlng of net business Income by individuals (affecting both
individual income and self-employment taxes).
Noncompliance IS highest among taxpayers whose income IS not subject to thlrdparty information reporting or withholding requirements. For 2001, it was estimated
that 54 percent of net income from proprietors (including businesses, farms, and
ranches), rents and royalties was misreported In contrast, only one percent of tax
due on wage income, which is reported by employers and subject to withholding,
was not reported to the I RS by return filers in 2001.
IRS data do not reveal the extent to which the tax gap results from intentional
evasion rather than unintentional errors by well-meaning taxpayers who are
confused by the Increasing complexity of the tax law. Determining taxpayer Intent
during a regular examination is very difficult. For obvious reasons, taxpayers do not
concede that their erroneous reporting is intentional, and any analysis of the nature
of the error by IRS examillers is inherently subjective. Moreover, complexity
provides those taxpayers who are predisposed to taking aggressive positions the
opportunity to argue that their errors were unintentional.
It is safe to assume that both IIltentional and unintentional errors contribute to the
tax gap and that any strategy to reduce the gap must address both intentional
evasion as well as taxpayer confusion due to the complexity of the tax code.
Treasury's Tax Gap Strategy
These findings suggest the need for a targeted response designed to address the
most significant sources of noncompliance. Four key principles have guided the
development of our tax gap strategy:
•
•
•
•
Unintentional taxpayer errors and intentional taxpayer evasion should both
be addressed.
Sources of noncompliance should be targeted with specificity
Enforcement should be combined with a commitment to taxpayer service
Tax policy and compliance proposals should be sensitive to taxpayer rights
and maintain an appropriate balance between enforcement activity and
imposition of taxpayer burden.
These principles point to the need for a comprehensive, integrated, multi-year
strategy to improve tax compliance. Components of this strategy must include: (1)
legislative proposals to reduce opportunities for evasion; (2) a multi-year
commitment to compliance research; (3) continued Improvements III information
technology; (4) improvements in IRS compliance activities; (5) enhancements of
taxpayer service; (6) simplification of the tax law; and (7) coordination between the
government and its partners and stakeholders.
Since release of the Treasury Strategy last September, the Administration has
taken a number of steps to implement each of its seven components. The FY 2008
Budget requests $4095 million in new funding for initiatives aimed at reducing the
tax gap. These initiatives include additional compliance research, investments III
information technology, enhancements of front-line enforcement activities, and
improvements in taxpayer service aimed at increasing VOluntary compliance The
Budget also includes 16 legislative proposals designed to reduce opportunities for
evasion. In addition, the FY 2008 Budget contains legislative proposals to simplify
the tax treatment of families and savings incentives which, if enacted, would help to
eliminate some of the complexity that gives rise to unintentional noncompliance.
We have also been working with our partners and stakeholders to develop and
refine our tax gap strategy. CommiSSioner Everson and I held a public roundtable at
the IRS last month to discuss ways to address the tax gap. Panelists at the
roundtable IIlcluded a former IRS Commissioner and a former Assistant Secretary
for Tax Policy, researchers, and members of organizations representing businesses
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and preparers. In addition, we have been meeting regularly with Finance
Committee staff to discuss and refine our legislative proposals to reduce the tax
gap.
Legislative Proposals
As outlined above, development of legislative proposals to reduce opportunities for
evasion is one element of our broader strategy to increase taxpayer compliance,
improve tax collection, and reduce the tax gap. As presented in the FY 2008
Budget, our compliance legislative proposals fall into four categories: (1) expand
information reporting: (2) Improve compliance by businesses: (3) strengthen tax
administration; and (4) expand penalties On the front end, the legislative proposals
would help to apprise the IRS of the payment of income through third-party
information reporting, one of the most effective tools in Improving compliance. On
the back end, the legislative proposals would increase incentives to comply with
eXisting law through strengthened penalties. The package of legislative proposals
includes targeted provisions that, If enacted, would assist the IRS in enforcing the
tax law more efficiently and effectively in targeted areas that present risks of
noncompliance.
The legislative proposals are designed to reduce the tax gap, not to raise revenue
through a change in the baseline against which compliance is measured. In
addition, the legislative proposals attempt to reduce the tax gap by making
compliance more efficient while balancing the burden placed on compliant
taxpayers. If, on the other hand, draconian measures were to be enacted, they
could become so burdensome as to detract from voluntary compliance,
compounding rather than reducing the tax gap.
Although the legislative proposals set forth an approach toward improved tax
compliance, we recognize that they do not come close to eliminating the tax gap.
Making collection of the entire tax gap a reality, however, would require universal
audits followed by draconian collection practices, imposing prohibitive costs and
burdens on taxpayers as well as the IRS, and fundamentally changing the
relationship between taxpayers and the government. Through the multi-pronged
approach set forth in the Treasury Strategy, however, we can make significant
progress in improving compliance.
In addition to the sixteen legislalive proposals, the FY 2008 Budget indicates that
the Treasury is continuing to develop proposals to improve compliance and reduce
the tax gap. In particular, the Budget mentioned that IRS coordination with State
governments could be improved. Under current law, State tax agencies may adjust
taxpayer returns in response to an IRS audit. A proposal under development would
permit reciprocal adjustments by the IRS in response to a State audit determination.
This proposal raises technical issues relating to the assessment limitations period
that we are currently working to resolve. Another aspect of Federal-State tax
coordination could involve expanded information sharing. In particular, State
governments maintain databases in connection with numerous licenses issued
pursuant to State law, such as driver's and professional licenses. In some cases,
States may suspend certain licensing privileges in connection with State tax
noncompliance. Access to such State data could assist the IRS in improving
Federal tax compliance. The Treasury Department continues to consider the
advantages and disadvantages of these additional proposals to improve tax
compliance.
Technical Issues
The President's FY 2008 Budget recommends sixteen changes to the tax code that,
if enacted, would improve compliance and reduce the tax gap. Since the Budget
was released in early February, members of my staff and I have been meeting
regularly with Finance Committee staff to discuss and refine the Administration's
proposals and to address a number of technical issues that they present. Those
discussions have been useful both in improving the proposals and in helping to
highlight the challenges that we face in reducing the tax gap through targeted
changes to the tax law. A brief description of some of the technical issues arising
under several of the legislative proposals will help to frame the issue and Illustrate
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the limitations of legislative solutions to this problem
Basis Reporting. One of the Budget proposals would require that brokerage firms
report to their customers basis information In connection with the sale of certain
publicly traded securities. This proposal bUilds on section 6045 of the Code. which
requires reporting of gross sale proceeds, which must be combined with basis
information to determine the tax treatment of the sale. The proposal also builds on a
growing trend in the securities industry to provide basis information voluntanly to
customers.
The basis-reporting proposal raises a number of technical issues that are derived
from the complex treatment of securities sales under our tax laws. Those issues
include, for example: (1) defining the universe of "securities" subject to basis
reporting; (2) putting mechanisms in place to ensure that brokers subject to the
proposal have relevant basis information from both their customers and from
issuers of securities; (3) determining basIs for so-called "transferred-in" securities
that were not purchased through the broker, Including securities purchased
separately and transferred into a brokerage account, gifts and inheritances; (4)
addressing the interaction of the proposal with taxpayer-specific basis adjustment
provisions that operate Independently of the broker, such as the wash-sale rules in
section 1091, the straddle rules In section 1092, and rules requiring capitalization of
certain interest and carrying costs under section 263(g); and (5) determining an
appropriate effective date to ensures a smooth transition to the new basis reporting
regime.
Payment Card Reporting. Technical issues presented by the Budget proposal
regarding information reporting on merchant payment card reimbursements also
highlight the challenges of our work in this area. Proprietors, merchants, and other
business taxpayers frequently receive income through their customers' use of credit
or debit cards. While the use of such payment cards creates a paper trail, that trail
does not lead to the IRS, unless a revenue agent were to seek it on a case-by-case
basis. At the same time, that existing paper trail would make it relatively easy to
generate information reports to the IRS, systematically addressing the possibility of
unreported income. Because the existing payment-card system routinely delivers
exact dollar and cents amounts to the correct payees, often at the speed of
electronic dispatch, it is certain that the information that the IRS needs is
accessible. Information reports regarding payment-card reimbursements would
result in better compliance by merchants who accept these cards.
Nevertheless, there are numerous technical issues to be addressed. The paymentcard system IS complex, involving payment-card organizations, merchant acquiring
banks, various service proViders, and other entities. In the case of a payment card
branded With the name of a particular retail chain, the bank may reimburse the retail
chain, which in turn may reimburse a franchise proprietor. In this situation, who
should obtain the merchant's Taxpayer Identification Number and generate an
information report? We have met with representatives of the payment card industry
to understand their concerns with the proposal. Many in this industry are concerned
with the incremental burden of reporting, including potential duplication of reporting
responsibilities, and have requested greater clarity regarding the party responsible
for the reporting when there are other agents involved as intermediaries between
the banks and the merchants. Others are concerned about how the IRS will use the
data. We recognize these concerns and, while the gross reimbursements reported
would not be an equivalent to gross income, the proposed information reporting
would assist the IRS by providing the merchant's overall volume of payment card
sales in relation to expenses claimed and cash transactions reported. The reporting
would also assist the IRS in analyzing the accuracy of reporting for payment card
sales.
There are also other technical issues presented by the proposal, such as treatment
of "charge backs," In which a merchant is debited for the amount that a credit-card
company refunded to a consumer attnbutable to a defective item, as well as
payment-card transactions in which a merchant may sell some goods but also
provide "cash back" to consumers. The Budget proposal would grant explicit
authority to promulgate administrative rules that address such technical
complications, by eliminating duplication of reporting requirements and creating
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exceptions to reporting of amounts that are not useful for compliance purposes.
Erroneous Refund Penalty. Another legislative proposal raising some technical
questions is the erroneous refund penalty. Under current law, the accuracy-related
penalty that a taxpayer might pay generally would depend on the amount of
underpayment of tax. If a taxpayer wrongfully claims a refund, however, there may
be no penalty as long as no additional tax liability is attributable to the wrongful
claim, as often happens when there has been overwithholding. Consequently, the
IRS has observed aggressive behavior that is undeterred by the tax code's current
accuracy-related penalty framework, which IS geared toward deterrence of reported
tax deficiencies. As a practical matter, some taxpayers and their advisors may be
taking advantage of the existing penalty structure by aggressively claiming credits
that generate refunds, In an effectively risk-free gamble To address thiS problem,
our proposal would impose a penalty on an unreasonable claim for refund or credit.
The proposal seeks to create a parallel system of deterrence applicable even if the
taxpayer is in a refund, rather than a deficiency, procedural posture, thus stemming
the tide of aggressive claims that are made without reasonable basis or reasonable
cause, regardless of the procedural context. There remain open questions about
the scope of this proposal. In addition to refunds, should the proposal cover
erroneous claims that purport to reduce tax liability? Should there be a threshold
amount below which the proposed penalty would not apply? If a taxpayer were
subject to penalties in addition to the proposed penalty, In which stacking order
should the multiple penalties apply? Should the proposed penalty apply to excise or
other types of taxes in addition to income taxes? The goal of the Treasury proposal
would be to assert the highest applicable penalty, without duplication of penalties.
In this regard, the Treasury proposal's creation of the new penalty would carve out
Earned Income Tax Credit (EITC) refund claims from the scope of the penalty
because these claims are already governed by their own compliance regime.
Prison Scam Disclosure Authorization. The Treasury Department's proposal for
disclosure of certain tax violations by Federal and State prisoners would allow the
IRS to disclose limited Information about such violations so that prison officials
could deter such conduct through administrative sanctions. Under existing law,
when the IRS discovers that prison Inmates are making fraudulent refund claims,
taxpayer privacy laws do not permit the IRS to share this Information with prison
officials, who may be most proximately pOSitioned to address this misconduct.
While cooperation among law enforcement officials would appear to be reasonable,
numerous technical questions have arisen. What information should be disclosed?
When would be the proper time for disclosure, during or after an investigation? To
whom should a disclosure be made, Federal officials, State employees, or local
wardens? What limitations should be Imposed on further use of the IRS
information? Does the proposal properly preserve prisoner rights?
Collection Due Process. Similar questions may arise regarding the Treasury
Department's proposal to amend the Collection Due Process (COP) procedures as
they apply to employment taxes. Employment taxes include employer and
employee shares of Federal Insurance Contribution Act (FICA) tax as well as
Federal Unemployment Tax Act amounts and income tax withheld from employee
wages. Employee FICA shares and withheld income tax constitute the largest
portion of employment taxes. These taxes are often referred to as "trust fund"
taxes, because employers are supposed to hold them in trust for the government
after they are withheld from employee wages. These amounts include SOCial
Security Trust Fund taxes credited to employees, whether or not actually paid to the
Treasury
Unpaid employment tax liabilities are some of the most difficult taxes for the IRS to
collect. In some cases, an employer may be able to retain employees and stay In
business by paying only net wages, even if he or she cannot pay employment tax.
Employment taxes are due quarterly and, when there are successive failures to pay
quarterly employment tax installments, they continue to accrual over successive
periods resulting in a "pyramid" of liability. In a case like this, employment taxes
often pile up while the IRS attempts to collect, ultimately by imposing a levy. Under
the COP provisions in the Code, the IRS generally must proVide the taxpayer with
notice and an opportunity for an administrative hearing, With Judicial review, before
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levy. In the employment tax context, an opportunity for a COP hearing must be
provided for every quarter that there are unpaid taxes the IRS seeks to collect. By
the lime this COP procedure IS completed, the employment taxes Illay have
become uncollectible, even if determined to be due by the end of the review.
The Treasury Department's proposal would add employment taxes to the exception
that allows a COP hearing to be held within a reasonable time after. rather than
before levy. While collection of employment taxes would be In the best interest of
employees and the Federal Trust Fund, there nevertheless may be concerns that
amendment to the COP provision might abridge taxpayer rights. On the other hand,
the opportunities available to the taxpayer who in good faith seeks to address an
unpaid employment tax balance prior to levy and the urgency of the pyramiding
problem are factors that support the adoption of the proposal. To be clear, under
the proposal, employment tax returns showing a balance due would not be subject
to levy until after the IRS has made several attempts to correspond with the
taxpayer regarding the balance due a process whereby taxpayers have several
opportunities to contact the IRS and enter into a voluntary payment arrangement
prior to enforced collection. Those taxpayers who fail to address payment would be
subject to a levy, and would have the opportunity for a post-levy COP hearing.
We are pleased that a number of the Budget proposals have been Introduced and
considered in different legislative vehicles this year. We look forward to working
with the Committee to address the technical issues so these proposals can achieve
their intended purposes.
Regulatory Projects and Other Initiatives
The Treasury Strategy identified our published guidance program as an important
component of the multi-pronged strategy to improve compliance. Published
guidance clarifies ambiguous areas of the law, Increasing voluntary compliance.
With the increaSing complexity of the tax law, it is more important than ever for us to
publish timely guidance to give direction to those taxpayers who make a good faith
effort to comply With the law, but have difficulty doing so because of uncertainty in
its application Published guidance IS also an important tool to target specific areas
of noncompliance and prevent abusive behavior.
Each year, the Treasury Department and the IRS publish a Priority Guidance Plan.
The 2006-2007 plan Includes 264 guidance projects scheduled for completion
between July 2006 and June 2007. Numerous projects are added during the year
as new tax laws are enacted or new compliance Issues are identified.
Recent published guidance projects that Will improve compliance and that target
potential areas of abuse include:
Transfer Pricing: We have produced, and continue to produce, significant guidance
in the area of transfer pricing. In an Increasingly globalized economy, cross-border
transactions between controlled entities present significant compliance challenges,
making guidance In the transfer pricing area an important part of our administrative
efforts to address the tax gap. In August 2006, we issued temporary and final
regulations addreSSing the treatment of cross-border services, and followed them
up with additional guidance in December 2006. We issued proposed transfer pricing
regulations addressing cost-sharing in August 2005. We intend to finalize both sets
of regulations, with appropriate modifications.
Foreign Tax Credit We have taken strong steps to halt misuse of the foreign tax
credit. Last month we issued proposed regulations that would disallow foreign tax
credits tied to participation in certain artificially engineered, highly structured
transactions. In August 2006, we issued proposed regulations that would address
the inappropriate separation of creditable foreign taxes from foreign source income.
We intend to make appropriate modifications and finalize both sets of regulations as
soon as possible.
Information Sharing: We continue to update and expand our network of tax treaties
and tax information exchange agreements ("TIEAs"). We are also renegotiating tax
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treaties that do not have sufficient limitation on benefits or exchange of information
provisions. We are entering into new TIEAs, such as the one signed with Brazil in
March 2007, and bringing signed TIEAs into force, with jUrisdictions such as the
Netherlands Antilles, the British Virgin Islands, and the Cayman Islands. These
information-sharing agreements are critical tools for the IRS to combat crossboarder aspects of compliance.
Private Annuities. In October 2006, we published proposed regulations regarding
the Federal tax treatment of private annuity contracts. Recent Congressional
hearings have highlighted how taxpayers were applying prior law treatment of these
contracts to facilitate abusive private annuity arrangements, often involving off
shore issuers. The proposed regulations, when adopted as final, will shut down
those arrangements.
Trust Information Reporting In 2006, we published a series of regulations that
provide a comprehensive set of Information reporting rules for grantor trusts where
ownership interests in those trusts are held indirectly. Historically, taxpayers who
held such interests were often unable to comply fully with their tax obligations
because they lacked necessary information about the activities of the trust. This
project highlights work that can be done administratively to ensure that taxpayers
who make every effort to meet their obligations have the information they need to
determine and report their liability accurately.
Reportable Transaction Rules: In the American Jobs Creation Act, Congress
enacted a number of changes to the statutory rules requiring disclosure to the IRS
of potentially abusive transactions, strengthening the IRS' hand in this area. In
October 2006, we published proposed regulations that follow prior interim guidance
and, when adopted as final, will build on the expanded statutory provisions to
ensure that the IRS knows about and is able to react quickly to, emerging
problematiC transactions.
Conclusion
An effective approach to dealing with the tax gap requires multiple, interrelated
strategies. I have discussed the work that the Treasury Department IS doing with
regard to the legislative and regulatory components of the Treasury Strategy. Each
of the multiple components of the strategy is necessary, but none is sufficient in
isolation We look forward to continuing our work with thiS Committee and others 111
Congress to implement our strategy and looking for new ways to reduce the tax
gap.
Thank you again, Mr. Chairman, Ranking Member Grassley, and other Members of
the Committee for the opportuility to appear before you today. I would be pleased to
answer any questions you may have.
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April 18, 2007
HP-361
Joint Testimony
Daniel Glaser, Deputy Assistant Secretary for Terrorist Financing
and Financial Crimes
Adam J. Szubin, Director of the Office of Foreign Assets Control
Before
The Foreign Affairs Subcommittee on Terrorism, Nonproliferation,
and Trade
The Financial Services Subcommittee on Domestic and International
Monetary Policy, Trade, and Technology
U.S. House of Representatives
Isolating Proliferators and Sponsors of Terror: The Use of Sanctions and the
International Financial System to Change Regime Behavior
Chairmen Sherman and Gutierrez, Ranking Members Mr. Paul and Mr. Royce, and
distinguished members of the Subcommittees, thank you for this opportunity to
discuss the use of sanctions and other financial tools as a means of combating
proliferation and terrorism - two of the most deadly threats of our time.
The United States has marshaled its full range of powers to stop the proliferation of
weapons of mass destruction and to isolate and undermine terrorist groups. As the
past few years have demonstrated, sanctions and other financial measures
administered by the Treasury Department can playa meaningful role in isolating
and pressuring national security threats, when applied in an aggressive and
targeted manner. Sanctions can have a powerful impact but they are not a silver
bullet and cannot be pursued In isolation. These measures work best when applied
in concert with the diplomatiC, intelligence, law enforcement, export, and military
measures that our colleagues across the government are pursuing in such a
dedicated manner.
Our testimony today will focus on the use and impact of financial measures,
particularly in countering the threats posed by Iran and North Korea. We thank
both of the Committees present for your strong leadership in confronting these
threats and safeguarding our national security.
I.
The Office of Terrorism and Financial Intelligence
Congress established the Office of Terrorism and Financial Intelligence (TFI)
following the September 11, 2001 terrorist attacks, to marshal the Treasury
Department's unique regulatory, enforcement, intelligence, and policy capabilities
against threats to our financial system and national security. It is the only office of
its kind in the world. Under the leadership of Under Secretary Stuart Levey, TFI
incorporates five components. Appearing at this hearing are representatives of the
Office of Terrorist Financing and Financial Crime (TFFC) and the Office of Foreign
Assets Control (OFAC). We work closely with our TFI colleagues - the Office of
Intelligence and AnalysiS (OIA), the Financial Crimes Enforcement Network
(FinCEN), and the Executive Office of Asset Forfeiture (TOEAF) - to identify and
disrupt the finanCial networks of our enemies as well as to safeguard the U.S. and
international finanCial systems.
OFAC, with approximately 135 staff, is charged with administering and enforcing
economic and trade sanctions in furtherance of U.S. foreign policy and national
security goals OFAC administers approximately 30 economic sanctions programs
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against international terrorists, proliferators of weapons of mass destructions
(WMD), state sponsors of terrorism, narcotics traffickers, and other threats to our
national security. Although these programs differ in terms of their scope and
application, they all involve the exercise of the President's constitulional and
statutory wartime and national emergency powers to Impose controls on
transactions and trade, and to regulate or freeze foreign assets that come within the
jurisdiction of the United States.
TFFC, with a staff of approximately 30, IS TFI's policy and outreach apparatus on
terrorist financing, money laundering, financial crime, and sanctions issues. It
develops and Implements strategies, policies and initiatives to identify and address
vulnerabilities in the U.S and international financial system and to disrupt and
dismantle terrorist and WMD proliferation financial networks, and it formulates and
promotes policies domestically and internationally to combat terrorist financing and
financial crime.
We in TFI collaborate on a regular basis with our counterparts across the Treasury
Department. and with a broad range of federal agencies, including the Departments
of State, Commerce, Homeland Security, Defense and Justice, including the
Federal Bureau of Investigation and the Drug Enforcement Administration; the bank
regulatory agencies; and other law enforcement and intelligence agencies. We also
work very closely with the private sector and our foreign counterparts abroad to
Identify and address threats to our collective security and the international financial
system.
II.
General Overview of Sanctions and Their Impact
Applying effective economic measures requires careful strategic, economic, legal,
and policy analysis to ensure that the measures are calibrated to meet their goals
and minimize unintended consequences. The objectives for these measures are
typically to isolate the target as a means of inducing it to abandon harmful or
threatening policies. Sanctions should not be expected to empty a regime's coffers
and bring It to its knees. But they can alter the deCision-making calculus of a
regime by Illustrating the costs that It faces in pursuing a dangerous or
confrontational policy.
Because our tools are aimed at isolating our targets, we are most effeclive when we
proceed multilaterally, either with a coalition or with the consensus of the United
Nations. We work closely with the State Department and With our fellow finance
ministries and central banks abroad to build consensus on financial measures.
At times, though, it is necessary for us to adopt unilateral sanctions. As it turns out,
even when we initially act alone we can have a dramatic impact. There are two
main reasons for this. First, because the United States is the world's leading
banking and financial center and the dollar is the world's dominant currency, funds
transfers often pass through U.S. banks. If a U.S. bank tries to send U.S. dollars
somewhere in the world, the chances are that the money will pass through a U.S.
bank. The result will be a funds freeze and a call to OFAC's compliance office. In
this regard, It is important to remember that U.S. persons and U.S. branches
situated abroad are subject to US law and must comply with OFAC's sanctions as
if they were in the United States.
The second contributor to our sanctions' effecliveness IS that non-U.S. international
financial institulions frequently implement our targeted sanctions voluntarily, even
when they are under no legal obligation from their host countries to do so. These
institutions may Implement our sanctions because they do not want to engage in
business with terrorist organizations or WMD prollferators, even if it IS legally
permissible. They may cooperate because of the reputational and business risks
involved. Whatever the reason, thiS cooperation can provide a decisive "force
multiplier."
We have learned that the key to obtaining such voluntary cooperation is directing
our sanctions in a "targeted" fashion - namely, against those individuals or entities
that have violated international codes of behavior, whether they be counter-
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proliferation, counter-terrorism, or anti-money laundering norms. This is why we
take such pains to build the evidentiary packages needed to effectuate targeted
sanctions as well as to provide a public explanation of the basIs for our actions for
the benefit of governments and private institutions around the world
We are frequently asked how we measure the impact of sanctions or financial
measures. Metrics can be difficult to come by, and can vary by context. An
important measure of impact is our success in disrupting or disabling key support
nodes, sllch as key financial Institutions, trade partners, or donors. Another metric
may be the extent to which foreign financial institutions and centers take similar
steps to isolate the target. Ultimately, the most revealing indicator will be how the
target Itself sees our measures Although such information can be fragmentary and
highly classified, we have seen high-ranking officials within terrorist or criminal
organizations or regimes subject to our sanctions programs struggling to manage
the effects of our measures and worrying about what may be coming next.
III.
North Korea and Iran
In the aftermath of the September 11, 2001 attacks, the prospect of WMD falling
into the hands of terrorists or state sponsors of terrorism has become an
inescapably real threat. The Treasury Department has drawn upon its full range of
authorities and Influence to combat these threats.
Counter Proliferation Actions
President Bush Issued Executive Order 13382 in 2005, adding powerful tools - a
broad-based transactions prohibition and an asset freeze - to the array of options
available to combat WMD trafficking. By prohibiting U.S persons from engaging in
transactions with entitles and individuals targeted by the order, we can effectively
deny proliferators and their supporters access to the U.S financial and commercial
systems, cutting them off from the benefits of our economy. These prohibitions
have a powerful effect, as the suppliers, financiers, transporters, and other
facilitators of WMD networks tend to have commercial presences and accounts
around the world that make them vulnerable to exactly this kind of financial action,
particularly since so many of the transacllons are denominated in dollars.
In issuing Executive Order 13382, the President identified and targeted eight
entities in North Korea, Iran, and Syria, thereby prohibiting U.S. persons from
engaging in transactions with them and requiring any assets of those entities within
their control to be frozen. The North Korean entities listed In the Annex to the order
include Korea Mining Development Trading Corporation (KOMID); Korea Ryonbong
General Corporation; and Tanchon Commercial Bank. Iranian entities in the Annex
include the Atomic Energy Organization of Iran (AEOI): Aerospace Industries
Organization (AIO): Shahid Hemmat Industrial Group (SHIG); and Shahid Bakeri
Industrial Group (SBIG). The President then authorized the Secretary of State and
the Secretary of the Treasury to designate additional proliferators of WMD and their
supporters under the authorities provided by the Order.
Treasury has to date deSignated fifteen Iran-related and ten North Korea-related
individuals and entities supporting Iran and North Korea's WMD and missile
programs. One of the recent Iran-related designations was the fifth-largest Iranian
state-owned financial institution, Bank Sepah, in January of this year. Bank Sepah
has provided extensive financial services to Iranian entities responsible for
developing missiles capable of carrying weapons of mass destruction. It has been
a key provider of finanCial services to SHIG and SBIG, two Iranian missile firms
listed in the Annex to UN Security Council Resolution 1737 for their role in
advancing Iran's ballistic missile programs. Bank Sepah also provides financial
services to SHIG's and SBIG's parent entity, AIO, which has been deSignated as a
proliferator by the United States for its role in overseeing all of Iran's missile
industries.
Since at least 2000, Bank Sepah has also proVided a variety of Critical financial
services to Iran's missile industry, arranging financing and processing dozens of
multi-million dollar transactions for AIO and its subordinates. The bank has also
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51712007
Page 4 of II
facilitated business between AIO and North Korea's chief ballistic missile-related
exporter, KOMID. The financial relationship between Iran and North Korea, as
reflected In the business handled by Sepah, IS indeed of great concern to the
Uillted States.
Our designation of Sepah under E.O. 13382, and the subsequent Imposition of
sanctions on Sepatl by UN Security Council Resolution 1747, has had a significant
Impact. By cutting off Sepah from the U.S. and the international financial system,
we have commercially isolated Bank Sepah and may have made It more difficult for
Iran to finance some of ItS proliferation-related activities.
Counter Terrorism Actions
Treasury took action late last year to cut off a second Iranian bank from the US.
financial system because of its ties to terrorist support - Bank Saderat Iran. one of
the largest Iranian state-owned financial Institutions. Saderat is used by the
Government of Iran to transfer money to terrorist organizations, most notably
Hizballah. Since 2001, for example, a Hizballah-controlled organization received
$50 million directly from Iran through Saderat. Iran and Hizballah also use Saderat
to transfer money to other designated terrorist groups, such as Hamas, the PFLPGC, and the Palestinian Islamic Jihad.
Treasury has also u!llized Executive Order 13224 to target Iran's terronst support
networks. This Executive Order, Issued Immediately after September 11 attacks,
has proven to be a powerful and flexible tool - it allows us to designate and block
the assets of individuals and entitles controlled by, or acting on behalf of, or
proViding support to named terrorist organizations, freezing any of the target's
assets that are held by U.S persons and preventing US. persons from having any
future dealings with them. To date, the United States has designated
approximately 460 Individuals and entities pursuant to E.O. 13224. We have use
this tool, In close coordination With colleagues in Departments of State and Justice,
to expose and disrupt the financial networks of terrorist groups including al Qaida,
Hizballah, Hamas, Jemmah Isalmiyya, and the GSPC, and to deSignate finanCiers
and supporters In Southeast Asia, the Persian Gulf, the Horn of Africa, South
America's Tn-Border Area, Europe, and the United States.
Engaging the Financial Community
In concert with the targeted measures we have taken, Treasury has engaged in
unprecedented, high-level outreach to the international pnvate sector that is
focused on the potential for abuse of the financial system by Iran Treasury officials
have met with more than 40 banks worldwide to discuss the threat Iran poses to the
international financial system and to their institutions. Secretary Paulson kicked off
this effort last fall in Singapore, in discussions during the annual IMF/World Bank
meetings, where he met With the executives from major banks throughout Europe,
the Middle East. and Asia. Secretary Paulson, Deputy Secretary Kimmltt, Under
Secretary Stuart Levey, and Assistant Secretary Patrick O'Bnen have continued to
engage with these institutions abroad, as well as in WaShington and New York.
Through thiS outreaCh, we have shared information about Iran's deceptive financial
behavior and raised awareness about the high financial and reputational nsk
associated with doing business with Iran. We share common interests and
objectives with the financial community when it comes to dealing with threats to the
financial system. Financial institutions want to identify and avoid dangerous or risky
customers who could harm their reputations and business. And we want to isolate
those actors and prevent them from abusing the financial system.
By partnering with the private sector, Including by sharing information and concerns
with financial institutions, we are Increasingly seeing less of a tendency to work
around sanctions. We are finding that even those institutions that are not formally
bound to follow U.S. law pay close attention to our targeted actions and often adjust
their business activities accordingly, primarily for two reasons First, most bankers
truly want to avoid faCilitating proliferation, terrorism, or crime These are
responsible corporate citizens. Second, avoiding government-identified risks is
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5/7/2007
Page 5 of 11
simply good business. Banks need to manage risk in order to preserve their
corporate reputations. Keeping a few customers that we have identified as
terrorists, terrorist supporters, or proliferators and their supporters is not worth the
risk of facing public scrutiny or a regulatory action that may Impact on their ability to
do business with the United States or the responsible international financial
community.
As evidence of Iran's deceptive practices has mounted, financial institutions and
other companies worldwide have begun to reevaluate their business relationships
with Tehran. Many leading financial institutions have either scaled back
dramatically or even terminated their Iran-related business entirely. They have
done so of their own accord, many concluding that they did not Wish to be the
banker for a regime that deliberately conceals the nature of its dangerous and illicit
business. It has been reported that many global financial institutions, have curbed
dealings with Iran. In addition to complying with the global sanctions Imposed
against Bank Sepah through UN Security Council Resolution 1747, certain foreign
banks have also stopped handling dollar transactions for Saderat. forCing Saderat
to conduct its foreign exchange transactions in euros. Regardless of the currency,
the core risk with Iranian business - that you simply cannot be sure that the party
with whom you are dealing is not connected to some form of illicit activity - remains
the same. Scaling back dollar-business reduces, but does not eliminate, the risk.
As further evidence of the change in tide, a number of foreign banks are refusing to
issue new letters of credit to Iranian businesses. And in early 2006, the OECD
raised the risk rating of Iran, reflecting this shift in perceptions and sending a
message to those institutions that have not yet reconsidered their stance.
Additionally, many other companies have scaled back on their investments or
projects In Iran, concluding that the risks of expanding operations in the country are
too great. Multinational corporations have held back from investing in Iran,
including limiting investment in Iran's oil field development. These companies have
done their risk analyses, and they have realized that the Iranian regime's behavior
makes it impossible to know what lies ahead in terms of Iran's future and stability.
All of these developments have a mutually-reinforcing effect, producing a worldwide
reevaluation of dealings with Iran.
This extensive and innovative private sector outreach, combined with our targeted
sanctions and other diplomatic efforts of the US Government, has paved the way
for International pressure on the Iranian regime to stop its illicit activities.
International partners who originally resisted the idea of applying pressure to Iran
have reversed this position and now support pressuring the Iranian regime to
renounce its support for terrorism and WMD proliferation and to comply with its
international obligations. This reversal only occurred through balanced and
targeted sanctions against Iran, coupled with strong and persistent diplomacy.
United Nations Security Council Resolutions 1737 and 1747
The impact of these efforts has been amplified and reinforced with the passage of
UN Security Council Resolutions 1737 and 1747. Thanks to the tireless efforts of
our State Department and other concerned countries, the UN Security Council
unanimously passed Resolution 1737 on December 23, 2006, requiring
governments worldwide to take steps to combat Iran's illicit actiVities, including
freezing the assets of named entities and individuals associated with Iran's nuclear
and missile programs, as well as the assets of entities owned or controlled by
them. The resolution also requires states to prevent the provision to Iran of any
financial assistance, or the transfer of any financial resources or serVices, related to
the supply, sale, transfer, manufacture, or use of prohibited items associated with
Iran's nuclear and missile programs. Several of the entities named in UN Security
Resolution 1737, Including the AEOI, SBIG, SHIG, Mesbah Energy Company, and
Kalaye Electric Company, have already been designated by the United States.
UN Security Council Resolution 1747, unanimously adopted on March 24, 2007,
builds upon the asset-freezing provisions found in UN Security Resolution 1737.
The new resolution identifies additional Iranian entities and individuals for
designation, some of which have already been publicly designated by the Treasury
Department. Significantly, among these entities was Bank Sepah.
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Page 7 of 11
articulates standards in the form of recommendations, gUidelines, and best
practices. These standards aid countries in developing their own specific antlmoney laundering and counter-terrorist financing laws and regulations that protect
the international financial system from abuse.
Since before the terrorist attacks of September 11, 2001, we have consistently
engaged the FATF to expand and strengthen these international standards to
address the systemic vulnerabilities that terrorists and other criminals exploit,
including through the development of Nine Special Recommendations on Terrorist
Financing and the revIsion and strengthening of the FA TF 40 Recommendations.
Most recently, we have successfully engaged the FATF to adopt a new
international standard to combat the illicit use of cash couriers, and we have
enhanced the international standard for combating terrorist abuse of charities. We
have also recently finalized a number of technical but critical aspects to the
international standard governing the availability and integrity of originator
information on cross-border wire transfers.
Reinforcing AMLlCFT Framework to Isolate WMD Pro/iferators and their
Support Networks
In February, we launched a diSCUSSion within the FATF of how the eXisting AntiMoney Laundering/Counter-Terrorist Financing (AMLlCFT) international standards
should be supplemented, amended or applied to address the vulnerabilities
associated with WMD proliferation finance. Although there are a number of longstanding instruments and organizations to prevent and counter the proliferation of
WMD, their means of delivery and related materials, as well as numerous export
control regimes, there is a lack of international focus and no international standards
related to preventing financing of illicit proliferation activity and to isolating WMD
proliferators from the international financial system. A FATF working group charged
with matters related to terrorist finanCing and money laundering deCided in February
to hold a special session in May to discuss the issue of proliferation finance, and to
consider whether the FA TF should adopt guidance to assist countries In their efforts
to counter WMD proliferation finance. This urgent work Will focus, in particular, on
gUidance for countries on the implementation of sanctions and finance-related
provIsions 111 a growing number of UN Security Council Resolutions related to
proliferation actiVities In North Korea and Iran, as well as the threat of non-State
actors' ability to procure and use WMD. In addition, we will explore in the FATF the
broader potential of applylllg the existing framework of the AMLlCFT international
standards against WMD proliferation finance, beginning With a focus on "typologies"
to better understand the nature of this threat. This study will provide the foundation
for a broad assessment of the types of actions countries could take to isolate WMD
proliferators from the financial system.
These standard-setting efforts at the FATF create an international obligation and
framework for countries to implement AMLlCFT regimes that promote transparency
and effectively protect the International financial system from various forms of illicit
finance, including terrorist financing and WMD proliferation finance. This framework
provides a baSIS for multilateral consideration of additional ways that we can
effectively degrade WMD proliferators' ability to access and use the financial
system, Crippling their ability to finance their pursuit of WMD.
Taking Protective Action against Systemic Vulnerabilities
In those instances where Jurisdictional or Institutional deficiencies present ongoing
systemic vulnerabilities that create substantial money laundering or terrorist
financing threats to the international financial system, Treasury can take
appropriate protective action under Section 311 of the USA PATRIOT Act. Section
311 authorizes Treasury to designate a foreign Jurisdiction, foreign financial
institution, type of account or class of transactions as a primary money laundering
concern, thereby enabling Treasury to impose anyone or combillation of a range of
special measures that U.S. financial Institutions must take to protect against illicit
financing risks associated with the designated target. These special measures
range from enhanced due diligence, record keeping, and reporting requirements up
to and including termination of any and all correspondent accounts or activities with
the deSignated target.
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51712007
Page 9 of 11
money laundering and terrorist financing, including the laundering of proceeds from
the illicit sale of Iraqi oil and the channeling of funds to terrorists and terrorist
financiers. In March 2006, Treasury issued a final rule, pursuant to Section 311,
designating CBS as a primary money laundering concern and requIring US.
financial institutions to close correspondent relationships with CBS. Consequently,
prominent international financial institutions have begun to reassess their
relationships with Syria and a number of Syrian entities.
Conducting Private Sector Outreach
In addition to the targeted economic sanctions and protective measures discussed
above. Treasury has launched a comprehensive outreach campaign that Includes
efforts to educate the private sector about the potential for abuse by terrOrists, state
sponsors of terror and WMD proliferators.
Treasury launched this international private sector outreach effort by initiating
private sector AMLlCFT dialogues linking the US banking sector together with
those from the Middle East/North Africa (MENA) region and the Latin American
region, with the support of relevant financial and regulatory authOrities. The purpose
of these dialogues IS to
•
•
•
raise awareness of domestic and regional money laundering and terrorist
financing risks, international AMLlCFT standards and regional
developments, and U.S government policies and private sector measures
to combat terrorist financing and money laundering;
assess the impact of AMLlCFT international standards and U.S. law and
regulation on AMLlCFT development and Implementation in the U.S and
foreign banking and financial service industries; and
strengthen development and implementation of effective AML / CFT
measures, particularly in regions of strategic importance and jurisdictions
that lack fully-functional AMLlCFT regimes.
In collaboration with its Interagency and regional partners, Treasury successfully
facilitated the launch of the U.S.-MENA Private Sector Dialogue on AMLlCFT with
an initial AMLlCFT Conference in Cairo in March 2006. Bankers and financial and
regulatory authOrities from the US. and the region discussed a range of challenges
associated with the development and Implementation of effective AMLlCFT
jUrisdictional and institutional measures A follow-on conference at the Federal
Reserve Bank of New York in December 2006 was equally successful.
Treasury has initiated a similar dialogue with the Latin American banking
community, hosting a roundtable diSCUSSion of U.S. and regional interests at
Treasury in June 2006 to help frame thiS initiative. Based on this roundtable
discussion, Treasury assisted In organizing an inaugural United States-Latin
America Private Sector Dialogue conference on AMLlCFT in Bogota, Colombia last
week. Private sector participants and regulators from both regions partiCipated in
the conference, where challenges in AMLlCFT implementation were discussed.
This direct private sector outreach to the International financial community
complements our other work to address vulnerabilities in the international financial
system by providing a mechanism to explain our money laundering and terrorist
financing concerns, assess and facilitate AMLlCFT progress and implementation,
and receive feedback on the effectiveness of our efforts from key regional
participants in the international financial system.
Encouraging Multilateral Action
A Significant part of Treasury's mission is also devoted to U.S. government efforts
to secure international support and implementation of targeted economic sanctions
and financial actions like those we have described. As we noted above, the
effectiveness of these authorities IS significantly enhanced when other countries
support U.S. efforts by freeZing terrorist assets in their own jUrisdictions, and
prohibiting their nationals from dealing with terrorists. In coordination with the
Department of State, Treasury facilitates such action through a variety of actiVities,
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5/7/2007
Page 11 of 11
U.S financial system. along with outreach to the private sector. are indeed having
an impact. particularly on the ability of Iran and North Korea to misuse the financial
system to carry out their dangerous activities. Together with my colleagues at this
table and throughout the government. we will contillue to employ all of our
resources and authorities to keep our country safe.
I look forward to working closely with you, other members of the Subcommittees,
and your staff on these important Issues. Thank you again for tile opportunity to
testify today.
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5/7/2007
Page 1 of 1
April 18, 2007
HP-362
Statement by Treasury Secretary
Paulson on IRS Commissioner
Mark Everson
"Over the past four years Mark Everson has held one of the toughest Jobs in the
country Commissioner of the Internal Revenue Service-the nation's tax collector.
"In those four years Commissioner Everson has taken up the challenge of both
increasing enforcement activities to deal with those who don't pay their fair share of
taxes, while, at the same time, significantly improving the services and outreach
activities the IRS provides to taxpayers.
"I want to thank Commissioner Everson for his hard work and service over the past
four years. I Wish him well In his new position at the American Red Cross."
http://www.treas.gov/press/releases/hp362_htm
5/7/200]
Page 1 of 1
April 19, 2007
HP-363
Treasury Secretary Paulson to Host Press Briefing on the Social Security and
Medicare Trustees Reports
Treasury Secretary and Managing Trustee Henry M. Paulson, Jr. will be Joined by
members of the Social Security and Medicare Trustees Board for a press bnefing to
discuss the release of the annual trustees reports on Monday.
Who
Secretary of Treasury and Managing Trustee Henry M Paulson, Jr.
Secretary of Labor and Trustee Elaine L. Chao
Secretary of Health and Human Services and Trustee Michael Leavitt
Commissioner of Social Security and Trustee Michael J. Astrue
Public Trustee John Palmer
Public Trustee Thomas Saving
What
Press Conference to discuss Social Security and Medicare Trustees Reports
When
Monday, April 23, 2007, 315 p.m. EDT
Where
Treasury Department
Media Room (Room 4121)
1500 Pennsylvania Ave. NW
Washington. DC
Note:
Copies of the Social Security and Medicare Trustees Report will be available at the
briefing
A pen and pad background briefing will follow the press conference at 3:45 p.m. In
the same room.
Media without Treasury press credentials should submit full name, Social Security
number, and date of birth to Frances Anderson at 202-622-2960 or
frances.anderson@do.treas.gov
http://www.treas.gov/press/releases/hp363.htm
5/7/2007
Page 1 of 1
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
April 19.2007
HP-364
Statement by Under Secretary Levey on Transparency in Payment Message
Standards
Treasury Under Secretary Stuart Levey made the following statement today in
response to a call by leading international financial institutions to enhance
transparency regarding parties to transactions in international payments:
Today's announcement by the Wolfsberg Group and the Clearing House
Association. LLC to enhance transparency in international payments is a welcome
step in ongoing efforts to ensure the global financial system is safe, sound, and
secure from abuse.
The financial community's expertise places it in an ideal position to identify
vulnerabilities In the financial system with respect to money laundering, terrorist
financing. and other illicit activity, and to develop efficient solutions.
By enhancing transparency in international wire transfers, institutions will have
greater inSight into the parties that are on the sending and receiVing ends of
transactions, helping banks to better understand possible risks associated with the
underlYing transactions and helping to ensure that they are not engaged in
transactions involving terrorists. money launderers. WMD proliferators, and others
involved In criminal activity.
The Treasury Department and federal banking regulators applaud the groups'
proactive efforts. and encourage financial inslltutions worldwide to take steps to
adopt this robust proposal. In turn, we pledge to work with our international
counterparts to help bolster support for the initiative as we continue our joint effort
with the industry to develop standards to strengthen the financial system.
Please visit the following link to read the announcement by the Wolfsberg Group
and the Clearing House Association. LLC. I ill I 'i"I\/\/J '.'/()II ,I)t r Jf:ff',( Ipll~,-,
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http://www.treas.gov/press/releases/hp364.htm
517/2007
THE CLEARING HOUSE
i~c.iva..lcing Pa'y'f!iC:I[ 5U1U! i():I~ WU{
icivlic.ic
the
Wolfsberg
Group
For Immediate Release
PRESS RELEASE
Banks Endorse Measures to Enhance
Transparency in International Payments
New York - April 19, 2007 - The Wolfsberg Group and The Clearing House Association l.l.c. today
issued a statement endorsing measures to enhance the transparency of international wire transfers to
promote the effectiveness of global anti-money laundering and anti-terrorist financing programs. The
measures include both the development of an enhanced payment message format, which would include
more detailed information about those conducting wire transfers in certain instances, as well as calling for
the global adoption of basic messaging principles aimed at promoting good practice with respect to the
payment system.
Over the last 30 years, the world's banks have developed an efficient and effective international payment
system. The smooth functioning of this system is vital to global financial stability. The steps outlined
above will both better protect the integrity of the system and help ensure its continued efficient
functioning.
With the support of the global regulatory community and subject to acceptance by the membership of
the SOCiety for Worldwide Interbank Financial Telecommunication (SWIFT), the co-operative supplying
secure standardized messaging services and interface software, it is anticipated that an enhanced
payment message format will be developed.
The statement, including the messaging principles, is available on www.wolfsberg-principles.com
Members of the Wolfsberg Group are ABN AMRO, Banco Santander Central Hispano, Bank of Tokyo Mitsubishi UFJ, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan
Chase, Societe Generale, and UBS.
Members of The Clearing House Association l.l.c. are Bank of America, National Association; The Bank
of New York; Citibank, N.A.; Deutsche Bank Trust Company Americas; HSBC Bank USA, National
Association; JPMorgan Chase Bank, National Association; LaSalle Bank, National Association; UBS AG;
U.S. Bank National Association; Wachovia Bank, National Association; and Wells Fargo Bank, National
Association.
Media contact: For the Wolfsberg Group
David Bagley, Co-Chair, davidbagley@hsbc.com, (44) (20) 7991 8645
Philipp von Turk, Co-Chair, philipp.von.turk@jpmorgan.com, Telephone: 212.464-1226
Media contact: For The Clearing House Association l.l.c.
Greg Berardi, Office: 415.239.7826, Mobile: 415.672.2377, greg@bluemarlinpartners.com
Chip Savidge, Office: 212.613.9896, Mobile: 917.576.0957, chip.savidge@theclearinghouse.org
Page 1 of 1
April 20, 2007
HP-365
Secretary Paulson to Visit Mexico City
Treasury Secretary Henry M. Paulson, Jr. will travel to Mexico City next week to
meet with President Calderon, Finance Minister Carstens, and Foreign Affairs
Secretary Espinosa to underscore his support for their strong economic policy
agenda. While in Mexico, he will receive a briefing from the Mexican Financial
Intelligence Unit (FlU). The briefing will focus on information sharing between the
Treasury Department's Fillancial Crimes Enforcement Network (FInCEN) and the
Mexican FlU that IS designed to help combat money laundering and financial
crimes. Secretary Paulson also will meet with small businesses and students to
discuss how to expand opportunity. The following event is open to credentialed
media:
Who
Treasury Secretary Henry M. Paulson, Jr.
What
Conversation with Small Business Owners and Finance Providers
When
Tuesday, April 24, 1130 a.m (EDT)
Where
Bebldas Sanas SA de CV
Avenue Popocatepetl 421 L-7B
Colonia Pedro Marla Anaya
CP 03340 Mexico
-30-
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5/7/2007
Page I of I
April 23, 2007
HP-366
US Treasurer to Deliver Remarks at Native Financial Education Briefing
US Treasurer Anna Escobedo Cabral will deliver keynote remarks at the 3rd
Annual Native Financial Education Coalition Policy Bneflng Thursday. Treasurer
Cabral's remarks Will focus 011 Treasury's efforts to Improve finallclalliteracy In
Nalive communities. The follOWing event IS open to credentialed media:
Who
Treasurer Anna Escobedo Cabral
What
Keynote Remarks on Financial Literacy in Native Communities
When
Thursday, Apnl 26, 915 a.m. EDT
Where
Mashantucket Pequot Tnbal Nation
101 Constitution Ave
Chamber Room, 9th Floor
Washington, DC
Note
Media must RSVP by contactlflg Joanna Donohoe at (561) 762-8237 or email
joanna@oweesta.org .
http://www.treas.gov/p!..c33/rcleutJetJ/hp366.11 (~n
5/7/2007
Page 1 01'2
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April 23, 2007
HP-367
Treasury Secretary Henry M. Paulson, Jr. Statement on the 2007 Social
Security and Medicare Trust Fund Reports
WASHINGTON--The Social Security and Medicare Board of Trustees met this
afternoon to complete their annual financial review of the programs and to transmit
the Trustees Reports to Congress I welcome my Cabinet colleagues and the
Public Trustees, Tom Saving and John Palmer, two well-respected experts in their
field. The nation is Indeed fortunate to have your service.
For decades, Social Security and Medicare have provided vital support for
Americans. As the baby boom generation moves Into retirement, these programs
face progressively larger fmanclal challenges If we do not take action soon to
reform Social Security and Medicare, the coming demographic bulge will jeopardize
the programs' ability to support people who depend on them. Without change, rising
costs will drive government spendmg to unprecedented levels, consume nearly all
projected federal revenues, and threaten America's future prosperity. I urge my
friends In Congress to join me in a bipartisan effort to strengthen both programs for
future retirees.
This year's Social Security report agam demonstrates that the Social Security
program is financially unsustamable and reqUires reform In just 10 years, cash
flows are prOjected to turn negative, and the Trust Funds are projected to be
exhausted In 2041. Reform IS needed and time is of the essence The longer we
delay, the larger the required adjustments will be - and the burden of making those
adjustments will fall more heavily on future generations
Social Security's unfunded obligation - the difference between the present values of
Social Security inflows and outflows less the existmg trust fund - equals $4.7 trillion
over the next 75 years and $136 trillion on a permanent basis. The actuarial
imbalance expressed as a percent of taxable payroll is 1.95 percent over 75 years
and 3.5 percent over the indefinite future. This means that, to make the system
whole on a permanent basis, the combined payroll tax rate would have to be raised
immediately by about one-third from 12.4 percent to about 15.9 percent, or benefits
reduced Immediately by 22 percent.
ThiS report confirms the need for action: the sooner we take action to strengthen
Social Security's financial footmg, the less drastic the needed reforms will be.
President Bush has called for solutions that generate a permanently sustainable
Social Security system through bipartisan efforts. The President has put forward a
number of well-considered ideas. And he has asked me to reach out to lawmakers
in both parties and listen to all Ideas. We need serious and thoughtful engagement
from all Sides to make sure Social Security IS strengthened and sustained for future
generations.
The 2007 Medicare Trustees Report shows even greater financial challenges
Medicare faces the same demographic trends as Social Security, and, In addition,
the system must cope With large increases In health care costs
Cash flow for the Hospital Insurance (HI) Trust Fund is projected to be negative this
year and for ali subsequent years. The HI Trust Fund is projected to become
insolvent in 2019, one year later than projected in last year's report, and the 75-year
estimated actuarial imbalance as a percent of payroll is 355, a slight deterioration
http://www.treas.gov/p:-c33/rcleutJetJ/hp367,htnl
"
5/7/2007
Page 2 of2
from last year's report. On a permanent basis, ttle Imbalance IS unchanged at 5.8
percent of payroll
The Supplementary Medicaiinslirance (SMI) Trust Fund, which Includes Part B for
outpallent services and the Ilew Part 0 prescription drug benefit, IS financed In large
part by general revenues as well as beneficiary premiums. SMI expenditures are
projected to increase rapidly, resulting m growing pressures on future federal
budgets and, In turn, the U S economy General revenue financing for SMlls
expected to Increase from about 1 percent of GOP in 2006 to nearly 5 percent In
2081.
Today, seniors allover America have guaranteed access to affordable prescription
drug coverage. The mal'ket-based structure of the new preScription drug benefit
appears to be working Avel'age premiullls fOl' Part 0 have come down thiS year.
The facts are clear. refOl'llls to both Medicare and Social Security are urgently
needed. The serious concems raised by the Trustees Reports demand the
attention of America's pollcymakers and the public. Americans who depend on
Social Security and Medicare are relylllg on those of us In public to address the
long-term fundmg Issues Successful long-term reform of these programs is a
shared responsibility and we all have to rise to the challenge
LINKS
•
•
•
Medicare Report
Social Security Report
Summary of Reports
http://www. treas.gov/~c33/releat)etJ/hp 367 .htH)
51712007
2007 ANNUAL REPORT OF
THE BOARDS OF TRUSTEES OF THE
FEDERAL HOSPITAL INSURANCE AND
FEDERAL SUPPLEMENTARY MEDICAL INSURANCE
TRUST FUNDS
COMMUNICATION
From
THE BOARDS OF TRUSTEES,
FEDERAL HOSPITAL INSURANCE AND
FEDERAL SUPPLEMENTARY MEDICAL INSURANCE
TRUST FUNDS
Transmitting
THE 2007 ANNUAL REPORT OF
THE BOARDS OF TRUSTEES OF THE
FEDERAL HOSPITAL INSURANCE AND
FEDERAL SUPPLEMENTARY MEDICAL INSURANCE
TRUST FUNDS
LETTER OF TRANSMITTAL
BOARDS OF TRUSTEES OF THE
FEDERAL HOSPITAL INSURANCE AND
FEDERAL SUPPLEMENTARY MEDICAL INSURANCE TRUST FUNDS,
Washington, D.C., April 23, 2007
HONORABLE Nancy Pelosi
Speaker of the House of Representatives
Washington, D.C.
HONORABLE Richard B. Cheney
President of the Senate
Washington, D.C.
DEAR MADAM SPEAKER AND MR. CHENEY:
We have the honor of transmitting to you the 2007 Annual Report of the Boards of Trustees
of the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical
Insurance Trust Fund, the 42nd such report.
Respectfully,
Henry M. Paulson, Jr.,
Secretary of the Treasury,
and Managing Trustee of
the Trust Funds.
Elaine L. Chao, Secretary of
Labor, and Trustee.
Michael O. Leavitt, Secretary
of Health and Human
Services, and Trustee.
Michael J. Astrue, Commissioner
of Social Security, and Trustee.
John L. Palmer, Trustee.
Thomas R. Saving, Trustee.
Leslie V. Norwalk, Esq., Acting
Administrator of the Centers for
Medicare & Medicaid Services, and
Secretary, Boards of Trustees.
CONTENTS
I. INTRODUCTION ................................................................................. 1
II. OVERVIEW ........................................................................................ 2
A. Highlights ....................................................................................... 2
B. Medicare Data for Calendar Year 2006 ........................................ 5
C. Economic and Demographic Assumptions .................................... 6
D. Financial Outlook for the Medicare Program ............................. 10
E. Financial Status of the HI Trust Fund ....................................... 15
F. Financial Status of the SMI Trust Fund ..................................... 20
G. Conclusion ..................................................................................... 27
III. ACTUARIAL ANALYSIS ............................................................... 29
A. Medicare Financial Projections ................................................... 29
B. HI Financial Status ...................................................................... 40
1. Financial Operations in Calendar Year 2006 .......................... 40
2. 10-Year Actuarial Estimates (2007-2016) ............................... 46
3. Long-Range Estimates .............................................................. 54
4. Long-Range Sensitivity Analysis ............................................. 69
C. SMI Financial Status ................................................................... 75
1. Total SMI ................................................................................... 75
a. 10-Year Actuarial Estimates (2007-2016)... ........................ 75
b. 75-Year Actuarial Estimates (2007-2081) ........................... 77
c. Implications of SMI Cost Growth ........................................ 78
2. Part B Account .......................................................................... 82
a. Financial Operations in Calendar Year 2006 ..................... 82
b. 10-Year Actuarial Estimates (2007-2016) ........................... 89
c. Long-Range Estimates ....................................................... 102
3. Part D Account ........................................................................ 106
a. Financial Operations in Calendar Year 2006 ................... 107
b. 10-Year Actuarial Estimates (2007-2016) ......................... 112
c. Long-Range Estimates ....................................................... 118
IV. ACTUARIAL METHODOLOGY .................................................. 123
A. Hospital Insurance ..................................................................... 123
B. Supplementary Medical Insurance ........................................... 136
1. Part B ....................................................................................... 136
2. Part D ....................................................................................... 151
C. Long-Range Medicare Cost Growth Assumptions .................... 160
V. APPENDICES ................................................................................. 163
A. Medicare Amendments since the 2006 Report ......................... 163
B. Average Medicare Expenditures per Beneficiary ..................... 165
C. Medicare Cost Sharing and Premium Amounts ....................... 168
D. Supplementary Assessment of Uncertainty in Part B Cost
Projections ................................................................................... 175
E. Medicare and Social Security Trust Funds and the Federal
Budget ......................................................................................... 185
F. Fiscal Year Historical Data and Projections through 2016 ..... 192
G. Glossary ...................................................................................... 203
List of Tables ............................................................................... 222
List of Figures ............................................................................. 226
H. Statement of Actuarial Opinion ................................................ 228
v
I. INTRODUCTION
The Medicare program has two components. Hospital Insurance (HIl,
or Medicare Part A, helps pay for hospital, home health, skilled
nursing facility, and hospice care for the aged and disabled.
Supplementary Medical Insurance (SM!) consists of Medicare Part B
and Part D.' Part B helps pay for physician, outpatient hospital, home
health, and other services for the aged and disabled who have
voluntarily enrolled. Part D initially provided access to prescription
drug discount cards and transitional assistance to low-income
beneficiaries. In 2006 and later, Part D provides subsidized access to
drug insurance coverage on a voluntary basis for all beneficiaries and
premium and cost-sharing subsidies for low-income enrollees.
The Medicare Board of Trustees was established under the Social
Security Act to oversee the financial operations of the HI and SMI
trust funds.' The Board comprises six members. Four members serve
by virtue of their positions in the Federal Government: the Secretary
of the Treasury, who is the Managing Trustee; the Secretary of Labor;
the Secretary of Health and Human Services; and the Commissioner
of Social Security. The other two members, John L. Palmer and
Thomas R. Saving, are public representatives initially appointed by
President William J. Clinton on October 28,2000, and reappointed by
President George W. Bush on April 18,2006. The Administrator of
the Centers for Medicare & Medicaid Services (CMS) is designated as
Secretary of the Board.
The Social Security Act requires that the Board, among other duties,
report annually to the Congress on the financial and actuarial status
of the HI and SMI trust funds. This 2007 report is the 42nd to be
submitted.
'Medicare also has a Part C, which provides Part A and Part B coverage and.
optionally, Part D coverage through private health insurance plans.
'Technically, separate boards are established for HI and SMI. Because both boards
have the same membership, for convenience they are collectively referred to as the
Medicare Board of Trustees in this report.
1
Overview
II. OVERVIEW
A HIGHLIGHTS
The major findings of this report under the intermediate set of
assumptions are summarized below.
In 2006
In 2006, 43.2 million people were covered by Medicare: 36.3 million
aged 65 and older, and 7.0 million disabled. Total benefits paid in
2006 were $402 billion. Income was $437 billion, expenditures were
$408 billion, and assets held in special issue U.S. Treasury securities
grew to $339 billion.
Short.Range Results
The HI trust fund is not adequately financed over the next 10 years
under the intermediate assumptions. From the beginning of 2007 to
the end of 2016, the assets of the HI trust fund are projected to
decrease from $305 billion to $221 billion, which would be less than
the recommended minimum level of 1 year's expenditures.
The SMI trust fund is adequately financed over the next 10 years and
beyond because premium and general revenue income for Parts Band
D are reset each year to match expected costs. Progress has been
made toward rebuilding Part B assets, following significant declines
in 1999-2004. Part B costs have been increasing rapidly, however,
having averaged 11.0 percent annually over the last 6 years, and are
likely to continue doing so. Under current law, an average annual
growth rate of 6.6 percent is projected for the next 10 years. This rate
is unrealistically constrained due to multiple years of physician fee
reductions that would occur under current law. If Congress continues
to override these reductions, as they have for 2003-2007, the Part B
growth rate would instead average roughly 8 to 9 percent. For Part D,
the average annual increase in expenditures is estimated to be
12.6 percent through 2016. The U.S. economy is projected to grow by
4.8 percent on average during this period, significantly more slowly
than either Part B or Part D.
The difference between Medicare's total outlays and its "dedicated
financing sources" is estimated to reach 45 percent of outlays in fiscal
year 2013, the seventh year of the projection. As a result, under
section 801 of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (also known informally as the Medicare
2
Highlights
Modernization Act, or MMA), the Board of Trustees is issuing a
determination of projected "excess general revenue Medicare funding"
in this report. Since this is the second consecutive such finding, a
"Medicare funding warning" is triggered, which will require the
President to submit to Congress, within 15 days after the release of
the Fiscal Year 2009 Budget, proposed legislation to respond to the
warning. Congress is then required to consider the legislation on an
expedited basis.
Long-Range Results
Under the intermediate assumptions the HI trust fund is projected to
be exhausted in 2019, 1 year later than in last year's report, due to
slightly higher projected payroll tax income and slightly lower
projected benefits than previously estimated. For the 75-year
projection period, the actuarial deficit is little different from that in
last year's report, at 3.55 rather than 3.51 percent of taxable payroll.
The HI annual cost rate is projected to increase from 3.01 percent of
taxable payroll in 2006 to 11.79 percent in 2081-8.38 percent of
taxable payroll more than the projected income rate for 2081.
Expressed in relation to the projected Gross Domestic Product (GDP),
HI cost is estimated to rise from the current level of 1.4 percent of
GDP to 5.0 percent in 2081.
Part B outlays were 1.3 percent of GDP in 2006 and are projected to
grow to about 4.0 percent by 2081. These cost projections, however,
are understated as a result of the substantial reductions in physician
payments that would be required under current law. Actual future
Part B costs will depend on the steps Congress takes to address the
situation but could exceed the current-law projections by 7 to
9 percent in 2010, growing to roughly 25 to 40 percent for 2030 and
later.
Part D outlays are estimated to increase from 0.4 percent of GDP in
2006 to about 2.4 percent by 2081. Initially, these outlay projections
are significantly lower than those shown in last year's report. The
primary reason for the reduction is that the 2007 prescription drug
plan bid submissions were about 10 percent lower than in 2006. In
the long range, the outlay projections return to, and eventually
exceed, the prior projected level.
3
Overview
Conclusion
The financial outlook for the Medicare program continues to raise
serious concerns. In particular, a "Medicare funding warning" is
triggered by the findings of this report. Total Medicare expenditures
were $408 billion in 2006 and are expected to increase in future years
at a faster pace than either workers' earnings or the economy overall.
As a percentage of GDP, expenditures are projected to increase from
3.1 percent in 2006 to 11.3 percent by 2081 (based on our
intermediate set of assumptions). Growth of this magnitude, if
realized, would substantially increase the strain on the nation's
workers, Medicare beneficiaries, and the Federal Budget.
HI tax income is estimated to fall short of HI expenditures in 2007
and is projected to do so in all future years. The HI trust fund does
not meet our short-range test of financial adequacy, and fund assets
are projected to be exhausted in 2019. In the long range, projected
expenditures and scheduled tax income are substantially out of
balance, and the trust fund does not meet our test of long-range close
actuarial balance. Currently, this imbalance is relatively small, with
tax income is estimated to cover 99 percent of costs in 2007, but will
grow rapidly in the absence of changes to current law: taxes would
cover 79 percent of estimated costs in 2019, and only 29 percent at
the end of the long-range period. Closing deficits of this magnitude
will require very substantial increases in tax revenues and/or
reductions in expenditures.
The Part B and Part D accounts in the SMI trust fund are adequately
financed under current law, since premium and general revenue
income are reset each year to match expected costs. Such financing,
however, would have to increase rapidly to match expected
expenditure growth under current law and to finish rebuilding Part B
assets to an appropriate level.
These projections demonstrate the need for timely and effective
action to address Medicare's financial challenges. Consideration of
such reforms should occur in the relatively near future. The sooner
the solutions are enacted, the more flexible and gradual they can be.
Moreover, the early introduction of reforms increases the time
available for affected individuals and organizations-including health
care providers, beneficiaries, and taxpayers-to adjust their
expectations. We believe that prompt, effective, and decisive action is
necessary to address these challenges-both the exhaustion of the HI
trust fund and the anticipated rapid growth in HI, 8MI Part B, and
SMI Part D expenditures.
4
Medicare Data
B. MEDICARE DATA FOR CALENDAR YEAR 2006
HI and SMI have separate trust funds, sources of revenue, and
categories of expenditures. Table n.Bl presents Medicare data for
calendar year 2006, in total and for each part of the program. The
largest category of HI expenditures is inpatient hospital services,
while the largest SMI expenditure categories are physician services
and prescription drugs.
Table II.B1.-Medicare Data for Calendar Year 2006
SMI
Assets at end of 2005 (billions)
Total income
Payroiliaxes
Interest
Taxation of benefits
Premiums
General revenue
Transfers from States
Other
Tolal expenditures
Benefits
Hospital
Skilled nursing facility
Home health care
Physician fee schedule services
Managed care
Prescription drugs
Other
HI or Part A
PartB
$285.8
$24.0
$211.5
$177.3
$48.2
1.8
0.0
42.9
132.7
3.5
39.2
5.5
181.3
15.7
10.3
2.6
0.5
Part D
Total
$309.8
$437.0
181.3
17.5
10.3
48.9
172.4
5.5
10
1.0
0.0
$1919
$1690
$47.4
$408.3
189.0
121.0
19.9
6.0
165.9
27.2
47.1
402.0
148.2
19.9
13.1
58.4
64.4
47.1
51.0
32.9
7.2
58.4
31.5
9.3
417
47.1
$2.9
$3.1
$0.3
$6.3
$19.6
$8.3
$0.8
$28.7
$305.4
$32.3
$08
$3385
35.9
7.0
42.9
34.1
6.1
40.3
n/a
n/a
27.9
36.3
7.0
43.2
$1,690
Average benefit per enrollee
$4,410
$4,121
Notes: 1 Totals do nol necessarily equal the sums of rounded components.
2. "n/a" indicates data are not available.
$10,221
Administrative expenses
Net change in assets
Assets at end of 2006
Enrollment (millions)
Aged
Disabled
Total
For HI, the primary source of financing is the payroll tax on covered
earnings. Employers and employees each pay 1.45 percent of wages,
while self-employed workers pay 2.9 percent of their net income.
Other HI revenue sources include a portion of the Federal income
taxes that people pay on their Social Security benefits, and interest
paid on the U. S. Treasury securities held in the HI trust fund.
For SMI, transfers from the general fund of the Treasury represent
the largest source of income, currently covering about 79 percent of
program costs. Also, beneficiaries pay monthly premiums for Parts B
and D that finance a portion of the total cost. As with HI, interest is
paid on the U. S. Treasury securities held in the SMI trust fund.
5
Overview
C. ECONOMIC AND DEMOGRAPHIC ASSUMPTIONS
Actual future Medicare expenditures will depend on a number of
factors, including the size and composition of the population eligible
for benefits, changes in the volume and intensity of services, and
increases in the price per service. For HI, future trust fund income
will depend on the size and characteristics of the covered work force
and the level of workers' earnings. These factors will depend in turn
upon future birth rates, death rates, labor force participation rates,
wage increases, and many other economic and demographic
circumstances affecting Medicare. To illustrate the uncertainty and
sensitivity inherent in estimates of future Medicare trust fund
operations, projections have been prepared under a "low cost" and a
"high cost" set of assumptions as well as under an intermediate set.
Table II.Cl summarizes the key assumptions used in this report.
Many of the demographic and economic variables that determine
Medicare costs and income are common to the Old-Age, Survivors,
and Disability Insurance (OASDl) program and are explained in
detail in the report of the OASDI Board of Trustees. These variables
include changes in the Consumer Price Index (CPl) and wages, real
interest rates, fertility rates, and mortality rates. ("Real" indicates
that the effects of inflation have been removed.) The assumptions
vary, in most cases, from year to year during the first 5 to 30 years
before reaching their so-called "ultimate" values for the remainder of
the 75-year projection period. Other assumptions are specific to
Medicare.
As with all of the assumptions underlying the Trustees' financial
projections, the Medicare-specific assumptions are reviewed annually
and updated based on the latest available data and analysis of trends.
In addition, the assumptions and projection methodology are subject
to periodic review by independent panels of expert actuaries and
economists. The most recent such review was conducted by the 2004
Medicare Technical Review Panel, which issued its findings in
December 2004.
6
Economic and Demographic Assumptions
Table II.C1.-Ultimate Assumptions
Intermediate
Economic:
Annual percentage change in:
Gross Domestic Product (GOP) per capita' ..
Average wage in covered employment..
Consumer Price Index (CPI) ..
Real-wage differential (percent) ..
Real interest rate (percent) ..
Demographic
Total fertility rate (children per woman)
Average annual percentage reduction in total
age-sex adjusted death rates from 2031 to 2081
Low Cost
High Cost
4.1
3.5
4.6
3.9
34
44
2.8
1.1
2.9
1.8
1.6
3.6
3.8
2.1
2.00
2.30
1.70
0.6
0.33
0.70
121
Health cost growth:
Annual percentage change in per beneficiary
Medicare expenditures (excluding demographic
impacts)'..
5.1'
'The assumed ultimate increases in per capita GOP and per beneficiary Medicare expenditures can also
be expressed in real terms. adjusted to remove the impact of assumed inflation growth. When adjusted
by the chain-weighted GOP price index. assumed real per capita GOP growth is 1.5 percent. and real
per beneficiary Medicare cost growth is 2.5 percent.
'Cost growth assumptions in the last 50 years of the projection vary year by year and follow a smooth
downward path that generates the same 75-year HI actuarial balance as a level growth assumption of
GOP plus 1 percent for the last 50 years (5.1 percent).
)See section III.B for further explanation.
The assumed long-range rate of growth in annual Medicare
expenditures per beneficiary is one of the most critical determinants
of the projected cost of Medicare-covered health care services in the
more distant future. Prior to last year's report, the increase in
th
average expenditures per beneficiary for the 25 through 75 th years of
the projection was assumed to equal the growth in per capita GDP
plus 1 percentage point.' This assumption was recommended by the
2000 Medicare Technical Review Panel. With the inclusion of infinitehorizon projections starting in the 2004 Trustees Report, per
beneficiary expenditures after the 75 th year were assumed to increase
at the same rate as per capita GDP. The 2004 Technical Review
Panel recommended that these assumptions continue to be used,
given the limits of current knowledge, but that further research also
be conducted.
Starting with last year's report, the Board of Trustees adopted a
slight refinement of the long-range growth assumption that provides
a more gradual transition from current health cost growth rates,
which have been roughly 2 to 3 percentage points above the level of
GDP growth, to the ultimate assumed level of GDP plus zero percent
just after the 75'h year and for the indefinite future. The year-by-year
growth assumptions are based on a simplified economic model and
'This assumed increase in the average expenditures per beneficiary excludes the
impacts of the aging of the population and changes in the gender composition of the
Medicare population. which are estimated separately.
7
Overview
are determined in a way such that the 75-year actuarial balance for
the HI trust fund is consistent with that generated by the "GDP plus
1 percent" assumption. An independent group of experts in health
economics and long-range forecasting reviewed the model and advised
that its use for this purpose is appropriate. Consistent with the
recommendations of this group and the 2000 and 2004 Technical
Panels, further research is being conducted on long-range health cost
growth trends.
As in the past, detailed growth rate assumptions are established for
the next 10 years by individual type of service (for example, inpatient
hospital care, physician services, etc.), reflecting recent trends and
the impact of specific statutory provisions. Under the economic model,
in 2031 the growth rate for all Medicare services is assumed to be
about 1.4 percentage points above the level of GDP growth for that
year. This differential gradually declines to about 0.8 percent in 2051
and to 0.2 percent in 2081.' Compared to the assumptions used in
several reports prior to last year, the new growth assumption is
initially higher but subsequently lower than the constant "GDP plus
1 percent" assumption. Beyond 75 years, the assumed growth rate of
GDP plus zero percent is essentially unchanged.
In HI, for the high cost assumptions, the annual increase in
aggregate costs (relative to increases in taxable payroll) during the
initial 25-year period is assumed to be 2 percentage points greater
than under the intermediate assumptions. Under low cost
assumptions, the increase during the same period is assumed to be
2 percentage points less than under intermediate assumptions. The
2-percentage-point differentials are assumed to decline gradually
until 2056, when the same rate of increase in HI costs (relative to
taxable payroll) is assumed for all three sets of assumptions.
Because of its automatic financing provisions for Parts Band D, the
8MI trust fund is expected to be adequately financed into the
indefinite future, so a long-range analysis using high cost and low
cost assumptions has not been conducted. The 2004 Technical Panel
recommended refining the presentation of long-range uncertainty
through stochastic techniques or long-range high- and low-cost
alternatives for Parts A, B, and D. The trustees and their staffs
intend to consider alternative methods to illustrate the long-range
uncertainty in the Medicare projections.
'The cost growth assumptions thus follow a smooth, downward path over the last
50 years of the projection rather than remaining constant.
8
Economic and Demographic Assumptions
While it is reasonable to expect that actual trust fund experience will
fall within the range defined by the three alternative sets of
assumptions, no assurance can be given in light of the wide variations
in experience that have occurred since the beginning of the Medicare
program. In general, a greater degree of confidence can be placed in
the assumptions and estimates for the earlier years than for the later
years. Nonetheless, even for the earlier years, the estimates are only
an indication of the expected trend and the general range of future
Medicare experience. For simplicity of presentation, much of the
analysis in this overview centers on the projections under the
intermediate assumptions.
9
Overview
D. FINANCIAL OUTLOOK FOR THE MEDICARE PROGRAM
This report evaluates the financial status of the HI and 8MI trust
funds. For HI, the Trustees apply formal tests of financial status for
both the short range and the long range; for 8MI, the Trustees assess
the ability of the trust fund to meet incurred costs over the period for
which financing has been set.
HI and 8MI are financed in very different ways. Within 8MI, Part B
and Part D premiums and general revenue financing are
reestablished annually to match expected costs for the following year.
In contrast, HI is subject to substantially greater variation in asset
growth, since financing is established through statutory tax rates
that cannot be adjusted to match expenditures except by enactment
of new legislation.
Despite the significant differences in benefit provisions and financing,
the two components of Medicare are closely related. Most
beneficiaries are enrolled in both HI and 8MI Part B, and a majority
have enrolled in 8MI Part D. Many receive health care services from
both HI and 8MI in a given year. Thus, efforts to improve and reform
either component must necessarily involve the other component as
well. In view of the anticipated growth in Medicare expenditures, it is
also important to consider the distribution among the various sources
of revenues for financing Medicare and the manner in which this
distribution will change over time under current law.
In this section, the projected total expenditures for the Medicare
program are considered, along with the primary sources of financing.
Figure H.Dl shows projected costs as a percentage of GDP. Medicare
expenditures represented 3.1 percent of GDP in 2006. Costs increase
to about 7.3 percent of GDP by 2035 under the intermediate
assumptions and to 11.3 percent of GDP by the end of the 75-year
period. However, it is important to note that, after 2007, Medicare
expenditures are understated because of unrealistic substantial
reductions in physician payments scheduled under current law.
10
Medicare Financial Outlook
Figure II.D1.-Medicare Expenditures as a Percentage
of the Gross Domestic Product
12% r---------------------------------------------------~
10%
8%
6%-1--HI
Part D
2%
0%
2000
2010
2020
2030
2040
2050
2060
2070
2080
Calendar year
The Medicare projections reflect (i) continuing growth in the volume
and intensity of services provided per beneficiary throughout the
projection period, (ii) the impact of a large increase in beneficiaries
starting in about 2010 as the leading edge of the 1946-65 baby boom
generation reaches age 65 and becomes eligible to receive benefits,
and (iii) the introduction of the Part D program in 2004, along with
the other provisions of the Medicare Modernization Act of 2003, the
Deficit Reduction Act of 2005, and the Tax Relief and Health Care Act
of 2006. Other key demographic trends are also reflected, including
future birth rates at roughly the same level as during the last
2 decades and continuing improvements in life expectancy.
The past and projected amounts of Medicare revenues, under current
law, are shown in figure ILD2. Interest income is excluded since it
would not be a significant part of program financing in the long
range. Medicare revenues-from HI payroll taxes, HI income from
the taxation of Social Security benefits, SMI Part D State transfers
for certain Medicaid beneficiaries, HI and SMI premiums, and HI and
SMI statutory general revenues-are compared to total Medicare
expenditures. For the next 3 years, such Medicare revenues are
estimated to be slightly above program expenditures, reflecting the
automatic financing of SMI Part D plus a surplus in Part B financing
(designed to restore assets to a more appropriate level) that is slightly
greater than the small but increasing deficit of HI expenditures over
tax income. Thereafter, overall expenditures are projected to exceed
11
Overview
aggregate revenues to an increasing extent, as a result of the
projected large financial imbalance in the HI trust fund.
Figure II.D2.-Medicare Sources of Non-Interest Income and Expenditures
as a Percentage of the Gross Domestic Product
12% r------------------r----------------------------------~
Historical
Estimated
9%
t--~------.--------_t------------~-----~~--.----------.~
General revenue
transfers
State tr nsfers
3% T------------------£
Premiums
0% +-~_r~__~T_~~-+~--~"-aX~O-n-b~e-n~efi~lt~s--~T_~____P~a~yr~o~lI~ta~xe~s~
1966
1976
1986
1996
2006
2016
2026
2036
2046
2056
2066
2076
Calendar year
As shown in figure II.D2, payroll tax revenues increased steadily as a
percentage of GDP in the historical period, due to increases in the HI
payroll tax rate and the limit on taxable earnings, the latter of which
was eliminated in 1994. In the future, however, payroll taxes are
projected to grow more slowly than GDP.' HI revenue from income
taxes on Social Security benefits will likely increase as a share of
GDP as additional beneficiaries become subject to such taxes.
By comparison, growth in SMI Part B and Part D premiums and
general fund transfers is expected to continue to outpace GDP growth
and HI payroll tax growth in the future. This phenomenon occurs
primarily because, under current law, SMI revenue increases at the
same rate as expenditures, whereas HI revenue does not. Thus, as
the HI sources of revenue become increasingly inadequate to cover HI
costs, SMI revenues are projected to represent a growing share of
total Medicare revenues. Within the next 10 years, general revenue
transfers are expected to constitute the largest single source of
income to the Medicare program as a whole-and would add
'Although total worker compensation is projected to grow at the same rate as CDP,
wages and salaries are expected to increase more slowly and fringe benefits (health
insurance costs in particular) more rapidly. Thus, earnings are projected to gradually
decline as a percentage of CDP. Absent any change to the tax rate scheduled under
current law, HI payroll tax revenue would similarly decrease as a percentage ofCDP.
12
Medicare Financial Outlook
significantly to the Federal Budget pressures. Although a smaller
share of the total, SMI premiums would grow just as rapidly as
general revenue transfers, thereby also placing a growing burden on
beneficiaries.
The interrelationship between the Medicare program and the Federal
Budget is an important topic-one that will become increasingly so
over time as the general revenue requirements for SM! continue to
grow. While these transfers are an important source of financing for
the SMI trust fund, and are central to the automatic financial balance
of the fund's two accounts, they represent a large and growing
requirement for the Federal Budget. SM! general revenues currently
equal 1.3 percent of GDP and would increase to an estimated
4.7 percent in 2081 under current law. Moreover, in the absence of
corrective legislation, the difference between HI tax revenues and
expenditures would be met for a number of years by interest earnings
on trust fund assets and by redeeming those assets. Both of these
financial resources for the HI trust fund require cash transfers from
the general fund of the Treasury, placing a further obligation on the
budget. In 2018, these transactions would require general fund
transfers equal to 0.4 percent of GDP. (After asset depletion in 2019,
no provision exists to use general revenues to cover the HI deficit.)
Appendix E describes the interrelationship between the Federal
Budget and the Medicare and Social Security trust funds and
illustrates the programs' long-range financial outlook from both a
"trust fund perspective" and a "budget perspective."
The Medicare Modernization Act requires the Board of Trustees to
test whether the difference between program outlays and dedicated
financing sources exceeds 45 percent of Medicare outlays.' If this level
is attained within the first 7 fiscal years of the projection, a
determination of projected "excess general revenue Medicare funding"
is required. This determination was made in the 2006 report-the
first such finding-since the difference was projected to initially reach
the 45-percent level in fiscal year 2012. If such determinations are
present in two consecutive Trustees Reports, then a "Medicare
funding warning" is triggered. In this year's report, the difference is
projected to exceed 45 percent in 2013, once again inside the first
7 years of the projection period (2007-2013). Therefore, a finding of
projected "excess general revenue Medicare funding" is again made in
'The dedicated financing sources are HI payroll taxes, the HI share of income taxes on
Social Security benefits, Part D State transfers, and beneficiary premiums. These
sources are the first four layers depicted in figure II.D2.
13
Overview
this report, and a "Medicare funding warning" is triggered. (Section
lILA contains additional details on these tests.)
This section has summarized the total financial obligation posed by
Medicare and the manner in which it is financed. Under current law,
however, the HI and SMI components of Medicare have separate and
distinct trust funds, each with its own sources of revenues and
mandated expenditures. Accordingly, the financial status of each
Medicare trust fund must be assessed separately. The next two
sections of the overview present such assessments for the HI trust
fund and the SMI trust fund, respectively.
14
HI Financial Status
E. FINANCIAL STATUS OF THE HI TRUST FUND
1. 10-Year Actuarial Estimates (2007-2016)
Over the next 10 years, HI expenditures are expected to grow faster
than income. Expenditure growth is estimated to average 7.2 percent
per year. HI income growth averages 4.9 percent per year over this
period. Currently, the HI trust fund is experiencing small annual
surpluses of total income over expenditures. If interest earnings and
general revenues are excluded from income, then expenditures are
expected to exceed tax income in 2007 and thereafter. Therefore,
interest and trust fund assets would be needed to pay expenditures in
full and on time beginning in 2007. Total expenditures will exceed
total income and deficits will begin to emerge in 2011. The HI trust
fund is projected to become exhausted in 2019.
Table II.El presents the projected operations of the HI trust fund
under the intermediate assumptions for the next decade. At the
beginning of 2007, HI assets significantly exceeded annual
expenditures. The Board of Trustees has recommended that assets be
maintained at a level at least equal to annual expenditures, to serve
as an adequate contingency reserve in the event of adverse economic
or other conditions.
Based on the 10-year projection shown in table II.El, the Board of
Trustees applies an explicit test of short-range financial adequacy,
which is described in section III.B of this report. The HI trust fund
does not meet this test because assets are estimated to fall below
100 percent of annual expenditures within the next 10 years.
Table II.E1.-Estimated Operations of the HI Trust Fund
under Intermediate Assumptions, Calendar Years 2006-2016
Calendar year
Total income'
[Dollar amounts in billions]
Total
Change in
fund
Fund at year end
expenditures
RatiO of assets to
expenditures'
$305.4
$191.9
2006'
$211.5
$19.6
2082
15.4
320.8
223.6
2007
10.1
224.2
2008
330.9
234.3
240.7
7.1
337.9
2009
247.8
2577
3.1
341.0
2010
260.9
275.1
-0.7
340.4
2011
274.4
-6.1
334.3
287.8
293.9
2012
320.8
301.0
314.5
-135
2013
298.3
313.9
336.4
-22.5
2014
-32.8
2655
3598
327.0
2015
2205
340.4
385.4
-44.9
2016
'Includes interest income.
'Ratio of assets in the fund at the beginning of the year to expenditures during the year
'Figures for 2006 represent actual experience.
149%
147
143
137
131
124
116
106
95
83
69
Note: Totals do not necessarily equal the sums of rounded components
15
Overview
A comparison with last year's estimates reveals that actual payroll
tax income in 2006 and projected future amounts are slightly higher
than previously projected. This results from higher average wages
than previously assumed. In addition, projected HI expenditures are
slightly lower over the 10-year period. The result is a slower depletion
of trust fund assets than previously estimated, as well as increased
interest earnings. The cumulative effect of these factors is a higher
level of projected HI assets relative to annual expenditures.
2. 75-Year Actuarial Estimates (2007-2081)
Each year, 75-year estimates of the financial and actuarial status of
the HI trust fund are prepared. Although financial outcomes are
inherently uncertain, particularly over periods as long as 75 years,
such estimates can indicate whether the trust fund-as seen from
today's vantage point-is considered to be in satisfactory financial
condition.
Because of the difficulty in comparing dollar values for different
periods without some type of relative scale, income and expenditure
amounts are shown relative to the earnings in covered employment
that are taxable under HI (referred to as "taxable payroll"). The ratio
of tax income (including both payroll taxes and income from taxation
of Social Security benefits, but excluding interest income) to taxable
payroll is called the "income rate," and the ratio of expenditures to
taxable payroll is the "cost rate."
Since HI payroll tax rates are not scheduled to change in the future
under current law, payroll tax income as a percentage of taxable
payroll will remain constant at 2.90 percent. Income from taxation of
benefits will increase only gradually as a greater proportion of Social
Security beneficiaries become subject to such taxation over time.
Thus, the income rate is not expected to increase significantly over
current levels. The cost rate, though, will sharply escalate due to
retirements of those in the baby boom generation and continuing
health services cost growth, as mentioned in the prior section.
Figure H.E1 compares projected income and cost rates under the
intermediate assumptions. As indicated, HI expenditures are
projected to continue to exceed tax income by a rapidly growing
margin. In 2019, for example, taxes would cover only 79 percent of
estimated expenditures and, in 2050, only 38 percent. By the end of
the 75-year period, HI costs would be over three times the level of
scheduled tax revenues-a substantial deficit by any standard.
16
HI Financial Status
The shaded area in figure II.E1 represents the excess of expenditures
over tax income that could be met by interest earnings and the
redemption of trust fund assets. Both types of transactions occur
through transfers from the general fund of the Treasury. Starting in
2007, the fund is expected to begin using interest earnings to cover
the excess of expenditures over tax income. Starting in 2011, trust
fund assets will begin to be used also, to cover the excess. In the
absence of other changes, this process will continue through 2019, at
which time the fund is projected to be exhausted. The HI trust fund's
projected year of exhaustion often receives considerable attention. In
practice, however, the demands on general revenue (to pay interest
and redeem the Treasury bonds held by the trust fund) have already
begun, some 12 years before the exhaustion date. By 2018, in the
absence of legislation to address the HI deficits, an estimated
19 percent of HI expenditures would have to be met by redeeming
assets as opposed to being covered by tax income for that year.
Figure II.E1.-Long-Range HI Income and Cost as a Percentage of Taxable Payroll,
Intermediate Assumptions
12% r-----------------r-------------------------------~
10%
8%
6%
4%
2%
0% L-________________
1967
1977
1987
1997
~
________________________________
2007
2017
2027
2037
2047
2057
2067
~
2077
Calendar year
The year-by-year cost rates and income rates shown in figure II.E1
can be summarized into single values representing, in effect, the
average value over a given period. Based on the intermediate
assumptions, an actuarial deficit of 3.55 percent of taxable payroll is
projected for the 75-year period, representing the difference between
the summarized income rate of 3.40 percent and the corresponding
cost rate of 6.95 percent. Based on this measure, the HI trust fund
continues to fail the Trustees' test for long-range financial balance.
17
Overview
The long-range financial imbalance could be addressed in several
different ways. In theory, the 2.90-percent payroll tax could be
immediately increased to 6.45 percent, or expenditures could be
reduced by a corresponding amount. Note, however, that these
changes would require an immediate 122-percent increase in the tax
rate or an immediate 51-percent reduction in expenditures.? More
realistically, the tax and/or benefit changes could be made gradually,
rather than immediately, but would ultimately have to reach much
more substantial levels to eliminate the deficit throughout the
long-range period. At the end of the 75-year period, for example, the
tax rate would have to be more than three times its current level, or
benefit expenditures would have to be less than one-third of their
projected amount (or some combination). These examples illustrate
the severe magnitude of the projected long-range deficits for the HI
trust fund and the need for reform.
Under the intermediate assumptions, the assets of the HI trust fund
would continue decreasing, as a percentage of annual expenditures,
from about 147 percent of annual expenditures at the beginning of
2007 until becoming exhausted in 2019, as illustrated in figure II.E2.
This date is 1 year later than estimated in the 2006 annual report,
due to the slightly higher projected income and lower projected
expenditures mentioned earlier.
7Under either of these two scenarios, tax income would initially be substantially
greater than expenditures, and trust fund assets would accumulate rapidly.
Subsequently, however, financing would be increasingly inadequate, and assets would
be drawn down to cover the difference. At the end of the 75-year period, tax income
would cover only about 60 percent of annual expenditures. Level changes in either
taxes or benefits, consequently, would not permanently address the long-range
financial imbalance and would result in unusual patterns of asset accumulation and
redemption.
18
HI Financial Status
Figure II.E2.-HI Trust Fund Balance at Beginning of Year as a Percentage
ofAnnualExpend~ures
175% r-------------------------~----------------------------~
Historical
Estimated
150%
125%
100%
75%
50%
25%
0% ~------------------------~------------------~~----~
2015
2010
2020
1990
1995
2000
2005
2025
Beginning of January
To the extent that actual future conditions vary from the
intermediate assumptions, the date of exhaustion could differ
substantially in either direction from this estimate. Under the low
cost assumptions, trust fund assets would not be depleted until 2042.
Under the high cost assumptions, however, asset depletion would
occur in 2014.
19
Overview
F. FINANCIAL STATUS OF THE SMI TRUST FUND
SMI differs fundamentally from HI in regard to the nature of
financing and the method by which financial status is evaluated. As a
result of the Medicare Modernization Act, SMI is now composed of
two parts, Part B and Part D, each with its own separate account
within the SMI trust fund. The financial status of the SMI trust fund
must be determined by evaluating the financial status of each
account separately, since there is no provision in the law for
transferring assets between the Part B and Part D accounts. The
nature of the financing for both parts of SMI is similar, in that the
Part B premium and the Part D premium, and the corresponding
transfers from general revenues for each part, are established
annually at a level sufficient to cover the following year's estimated
expenditures. Thus, each account within SMI is automatically in
financial balance under current law. For OASDI and HI, however,
financing established many years earlier may prove significantly
higher or lower than subsequent actual costs. Moreover, Part Band
Part D are voluntary (whereas OASDI and HI are generally
compulsory), and income is not based on payroll taxes. These
disparities result in a financial assessment that differs in some
respects from that for OASDI or HI, as described in the following
sections.
1. 10-Year Actuarial Estimates (2007-2016)
Table II.F1 shows the estimated operations of the Part B account, the
Part D account, and the total SMI trust fund under the intermediate
assumptions during calendar years 2006 through 2016. For Part B,
expenditures grew at an average annual rate of 10.8 percent over the
past 5 years, primarily as a result of significant increases in the
volume and complexity of most types of covered services. The Part B
growth rate exceeded GDP growth by 5.3 percent annually, on
average. Part B cost increases are estimated to average about
6.6 percent for the 10-year period 2007 to 2016, about 1.8 percent per
year faster than GDP, in part as a result of unrealistic reductions in
physician payments required by current law. Legislative changes to
physician payments are likely and could increase the projected Part B
growth rates to roughly 8 to 9 percent.
Part B income growth normally matches expenditure growth fairly
closely. During the last few years, however, premiums and general
revenue financing have been increased at a faster pace than
expenditures in an effort to rebuild Part B account assets to an
20
SM! Financial Status
adequate contingency reserve. Under current law, assets are
projected to fall just within the desired range by the end of 2007 (but
would not do so if legislation is enacted to address a scheduled
lO-percent reduction in physician fees for 2008):
As noted, the projected Part B expenditure and income growth is
unrealistically low, due to the structure of physician payment
updates under current law. Future physician payment increases must
be adjusted downward if cumulative past actual physician spending
exceeds a statutory target. Prior to the Consolidated Appropriations
Resolution (CAR), past spending was already above the target level.
CAR raised the physician fee update for 2003, but without raising the
target. The Medicare Modernization Act and the Deficit Reduction
Act again raised the physician fee schedule updates for 2004, 2005,
and 2006 without raising the target. The Tax Relief and Health Care
Act raised the physician fee schedule update for 2007, increased the
target for 1 year, and specified that the 2008 physician fee schedule
conversion factor be computed as if the 2007 physician fee schedule
update had not been changed. Together, these factors yield projected
physician updates of about ~10 percent for 2008 and about -5 percent
for at least 8 consecutive years, from 2009 through 2016.
Given recent history, multiple years of significant reductions in
physician payments per service are very unlikely to occur before
legislative changes intervene. Scheduled negative physician fee
updates in 2003 through 2007 have already been avoided by
legislation, and the negative physician fee update scheduled for 2008
is larger than any of those previously avoided. However, these
unlikely payment reductions are required under the current-law
payment system and are reflected in the Part B projections shown in
this report. Therefore, the Part B, total SMI, and total Medicare
estimates shown for 2008 and thereafter are likely understated and
should be interpreted cautiously.
The Part B projections, in particular, may be understated by 25 to
40 percent in the long range and thus have limited usefulness. At the
request of the Trustees, the Office of the Actuary at the Centers for
Medicare & Medicaid Services (CMS) has prepared two illustrative
sets of Part B projections under theoretical alternatives to current
'The traditional measure used to evaluate the status of the Part B account of the SMI
trust fund is defined as the ratio of the excess of Part B assets over Part B liabilities to
the next year's Part B incurred expenditures. The desired range for this ratio is 15 to
20 percent, and was developed based on past studies which indicated that this level of
excess assets is sufficient to protect against adverse events.
21
Overview
law. These projections are available at http://www.cms.hhs.gov/
ReportsTrustFunds/05_alternativePartB.asp. No endorsement of
these alternatives to current law by the Trustees, eMS, or the Office
of the Actuary should be inferred.
Table II.F1.-Estimated Operations of the SMI Trust Fund
under Intermediate Assumptions, Calendar Years 2006-2016
Calendar l'ear
Total income'
[Dollar amounts in billions]
Change in fund
Total exeenditures
Fund at l'ear end
Part B account·
2006'
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$177.3
188.0
198.3
223.5'
201.0'
232.5
248.6
266.1
284.7
331.8'
300.4'
$169.0
179.6
1908
202.9
216.1
229.3
244.4
261.6
2799
299.5
321.6
$83
8.4
7.5
20.7
-152
32
4.2
4.5
47
32.3
-212
$32.3
40.7
48.2
68.8
53.7
56.9
61.1
65.6
70.3
102.5
81.4
Part D account:
2006'
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
48.2
50.1
61.9
69.6'
78.7'
89.1
101.4
112.0
124.8
139.3'
155.7'
47.4
50.1
61.9
69.6
78.6
89.0
101.3
111.9
124.8
1392
155.6
0.8
0.0
0.0
0.0
0.0
01
0.1
0.1
0.1
01
01
0.8
0.8
0.8
0.9
0.9
1.0
1.0
1.1
1.2
1.3
1.4
Total SM!:
33.1
91
216.4
225.5
2006'
415
8.4
229.7
238.1
2007
49.0
7.5
252.6
260.2
2008
697
207
272.4
293.1'
2009
546
-151
294.7
279.6'
2010
57.9
33
318.3
321.6
2011
621
4.3
345.7
350.0
2012
66.7
46
373.5
378.1
2013
715
48
404.7
409.5
2014
103.8
32.3
438.7
471.1'
2015
82.8
-211
477.2
456.1'
2016
'Includes interest income.
'Figures for 2006 represent actual experience.
'Section 708 of the Social Security Act modifies the provisions for the delivery of Social Security benefit
checks when the regularly designated day falls on a Saturday, Sunday, or legal public holiday. Delivery
of benefit checks normally due January 3, 2010 is expected to occur on December 31,2009.
Consequently, the Part B and Part D premiums withheld from the checks and the associated Part B
general revenue contributions are expected to be added to the Part B account and Part D account.
respectively, on December 31,2009. These amounts are excluded from the premium income and
general revenue income for 2010. Similarly, delivery of benefit checks normally due January 3,2016 IS
expected to occur on December 31,2015.
In general, Part B income and outgo will remain in approximate
balance as a result of the annual adjustment of premium and general
revenue income to match costs. Over temporary periods, it is possible
22
SMI Financial Status
for these amounts to differ, sometimes significantly. For example,
financing rates for 2004 were set with the intention of increasing the
assets in the Part B account of the trust fund to a more adequate
level. The subsequent enactment of the MMA, however, increased
Part B expenditures significantly above the level anticipated when
the financing was set. Moreover, other factors in 2004 also raised
costs faster than anticipated. As a result, Part B assets declined by
$4.5 billion in 2004. This deficit brought the total asset loss during
1999 through 2004 to $26.8 billion, leaving assets at the end of 2004
substantially below the normal level that is optimal for the Part B
account.
Therefore, the financing rates for 2005, 2006, and 2007 were set with
the intention of taking steps toward restoring the assets to a more
adequate level. However, the financing rates for 2004, 2005, and 2006
were determined before actual costs were known for these years. In
addition, the Deficit Reduction Act (ORA) increased Part B costs for
2006 and later after the 2006 financing had been determined, and the
Tax Relief and Health Care Act (TRA) increased the costs for 2007
after the 2007 financing had been determined. Because of higherthan-anticipated 2004 and 2005 costs, the DRA, and the TRA, the
increase in the Part B account assets was less than desired in 2005
and 2006, and the asset increase is now expected to be restricted
again in 2007. The result is that the Part B assets will likely remain
below the desired level. Under current law, correcting this situation
would require a 3-percent increase in the 2008 premium, along with
the corresponding general revenue transfers. However, should
legislative changes block the negative physician updates that will
otherwise occur for 2008 and later under current law, this increase
would need to be larger. After 2007, assets held in the Part B account
are projected to maintain an adequate contingency reserve for the
Part B account of the trust fund, under current law.
The Part D account of the 8MI trust fund was established in 2004 for
Medicare prescription drug coverage, which began in 2006. For 2004
and 2005, the Transitional Assistance Account handled the
transactions for transitional assistance under the prescription drug
card program, with any remaining assets transferred to the Part D
account in 2006.' Income and expenditures for the Part D account are
projected to grow at an average annual rate of 12.6 percent for the
10-year period 2006 to 2016, in part due to expected further increases
in enrollment. As with Part B, income and outgo are projected to
'For simplicity, the Transitional Assistance Account is treated in this report as if it
were included in the Part D account.
23
Overview
remain in balance through the annual adjustment of premium
general revenue income to match costs. As a result of
appropriations process for Part D general revenues, it is
necessary to maintain a contingency reserve in the account
section IlLe3 for further details).
and
the
not
(see
The projected Part D costs shown in this report are significantly
lower than those in the 2006 report. The reduction is primarily
attributable to the 2007 prescription drug plan bid submissions. The
average 2007 plan bid was about 10 percent lower than in 2006. This
extraordinary change reflected a number of factors, including a
significant drop in plans' expectations for preferred brand name drug
use and an associated increase in generic utilization. The decrease is
also believed to reflect the substantial competition among Part D
plans, together with much slower growth in prescription drug costs,
generally, in 2004 through 2006 compared with prior years.
The primary test of financial adequacy for Parts Band D pertains to
the level of the financing that has been formally established for a
given period (normally, through the end of the current calendar year).
As noted, the financial adequacy must be determined for Part Band
Part D separately. The financing for each part of 8MI is considered
satisfactory if it is sufficient to fund all services, including benefits
and administrative expenses, provided through a given period.
Further, to protect against the possibility that cost increases under
either part of 8MI will be higher than expected, the accounts of the
trust fund need assets adequate to cover a reasonable degree of
variation between actual and projected costs. For Part B, the
financing established through December 2007 is estimated to be
sufficient to cover benefits and administrative costs incurred through
that time period. As a result of the current higher-than-anticipated
Part B expenditure level and the TRA, however, limited progress is
expected in 2007 toward restoring the account balance to a more
adequate contingency reserve level. The financing established for
Part D is estimated to be sufficient to cover benefits and
administrative costs incurred through 2007.
The amount of the contingency reserve needed in Part B is much
smaller (both in absolute dollars and as a fraction of annual costs)
than in HI or OA8DL This is so because the premium rate and
corresponding general revenue transfers for Part B are determined
annually based on estimated future costs, while the HI and OA8DI
payroll tax rates are set in law and are therefore much more difficult
to adjust should circumstances change. Part D revenues are also
24
SM! Financial Status
established annually to match estimated costs. Moreover, general
revenue transfers for Part D will be made as funds are needed,
thereby eliminating the need for a contingency reserve to cover
unexpectedly higher costs.
2. 75-Year Actuarial Estimates (2007-2081)
Figure ILFl shows past and projected total SMI expenditures and
premium income as a percentage of the Gross Domestic Product
(GDP). As noted, 8MI expenditures are significantly understated as a
result of unrealistic physician payment reductions required under the
current-law sustainable growth rate system. As a result, the 8MI
estimates after 2007 should be interpreted cautiously. Annual 8MI
expenditures grew from about 1.2 percent of GDP in 2005 to
1.6 percent of GDP in 2006 with the commencement of the general
prescription drug coverage. Under the intermediate assumptions,
8MI expenditures would grow to almost 4 percent of GDP within
25 years and to more than 6 percent by the end of the projection
period.
Figure II.F1.-SMI Expenditures and Premiums as a Percentage
of the Gross Domestic Product
7%r----------r----,----,----------,---------,----------,
6%+---------~----~--~----------T---~~=-~r_------_i
Part 0
5%
+-________~-----~---_4------~~~----------~~e~x~e~ndlliit~ure~s_i
4%
t-----------j
3% +----------r-----t---+~---~~r--------~~--------1
expenditures
1%[~ad3~~=I[C~
0%
1960
1990
2020
2050
2080
2110
Calendar year
The projected 8MI cost under current law would place steadily
increasing demands on beneficiaries and society at large. Average
per-beneficiary costs for Part B and Part D benefits are projected to
increase after 2007 by at least 5 percent annually, despite the
significant reductions in Part B physician payments under current
25
Overview
law. The associated beneficiary premiums would increase by
approximately the same rate, as would the average levels of
beneficiary coinsurance for covered services. In contrast, from one
generation to the next, scheduled Social Security benefit levels
increase at about the rate of growth in average earnings (estimated at
roughly 3.8 percent).'" Over time, the Part B and Part D premiums
and coinsurance amounts paid by beneficiaries would typically
represent a growing share of their total Social Security and other
income. (Beneficiaries who qualify for Medicaid and the Part D
low-income subsidy are an important exception to this trend, since
they generally pay little or no premiums and cost-sharing amounts.)
Similarly, aggregate SMI general revenue financing for Parts Band
D is expected to increase by roughly 6.5 percent annually, well in
excess of the projected 4.4-percent growth in GDP. As a result, if
personal and corporate Federal income taxes are maintained at their
long-term historical level, relative to the national economy in the
future, then SMI general revenue financing would represent a
growing share of the total income tax revenue of the Federal
Government.
"'For each generation, after beneficiaries are initially eligible, their benefit level is
adjusted to keep up with inflation (estimated at 2.8 percent),
26
Conclusion
G. CONCLUSION
Total Medicare expenditures were $408 billion in 2006 and are
expected to increase in future years at a faster pace than either
workers' earnings or the economy overall. As a percentage of GDP,
expenditures are projected to increase from 3.1 percent currently to
11.3 percent by 2081 (based on our intermediate set of assumptions).
The level of Medicare expenditures is expected to exceed that for
Social Security in 2028 and, by 2081, to be 80 percent more than the
cost of Social Security. Growth of this magnitude, if realized, would
place a substantially greater strain on the nation's workers, Medicare
beneficiaries, and the Federal Budget.
Total Medicare outlays, less dedicated revenues, are projected to first
exceed 45 percent of outlays in 2013. Since this is within the first
7 fiscal years of the projection period, the Board determines that a
condition of projected "excess general revenue Medicare funding"
exists for the second consecutive year. This determination triggers a
"Medicare funding warning," as required by the Medicare
Modernization Act.
The HI trust fund ratio is expected to decline steadily after 2006. The
trust fund is projected to be exhausted in 2019-1 year later than
estimated in last year's report, primarily as a result of slightly higher
projected payroll tax income and slightly lower expenditures than
previously estimated. The HI trust fund fails to meet our short-range
test of financial adequacy.
The long-range financial projections for HI continue to show a
substantial financial imbalance. The long-range HI actuarial deficit
in this year's report is 3.55 percent of taxable payroll, up slightly from
3.51 percent in last year's report. Tax income is expected to be less
than expenditures in all future years, and trust fund assets would
begin to decline in 2011. Without legislation to address these deficits,
HI would increasingly rely on interest income and the redemption of
fund assets, thereby adding to the draw on the Federal Budget.
Scheduled HI tax income would cover only 79 percent of estimated
expenditures in 2019 and only 38 percent in 2050. By the end of the
75-year period, less than one-third of HI costs could be paid from HI
tax revenues. Accordingly, bringing the HI program into long-range
financial balance would require very substantial increases in
revenues and/or reductions in expenditures. As in past reports, the
HI trust fund fails to meet our long-range test of close actuarial
balance.
27
Overview
The financial outlook for 8MI is fundamentally different than for HI,
as a result of the statutory differences in how these two components
of Medicare are financed. However, rapid expenditure growth is a
serious issue for both. The Medicare Modernization Act established a
separate account within the 8MI trust fund to handle transactions for
the new Medicare drug benefit. Because there is no authority to
transfer assets between the new Part D account and the existing
Part B account, it is necessary to evaluate each account's financial
adequacy separately. Part B assets minus liabilities at the end of
2004 were at their lowest level, relative to annual outlays, in nearly
30 years. Moreover, while the financing established for the Part B
account for calendar year 2007 is adequate to cover 2007 expected
expenditures, the financial status of the Part B account in 2007
remains below the optimal level. Thus, the Part B financing rates for
2008 will have to be increased-for the fifth year in a row-in an
effort to return to an adequate contingency reserve.
No financial imbalance is anticipated for the Part D account, since
the general revenue subsidy for this benefit is drawn on a daily,
as-needed basis. The projected Part D costs shown in this report are
significantly lower than in previous reports, reflecting the latest data
on drug cost trends generally and Part D bid levels.
For both the Part B and Part D accounts, income is projected to equal
expenditures for all future years-but only because beneficiary
premiums and general revenue transfers will be set to meet expected
costs each year.
The projections shown in this report continue to demonstrate the
need for timely and effective action to address Medicare's financial
challenges-both the long-range financial imbalance facing the HI
trust fund and the heightened problem of rapid growth in
expenditures. We believe that solutions can and must be found to
ensure the financial integrity of HI in the long term and to reduce the
rate of growth in Medicare costs. Consideration of such reforms
should occur in the relatively near future. The sooner the solutions
are enacted, the more flexible and gradual they can be. Moreover, the
early introduction of reforms increases the time available for affected
individuals and organizations-including health care providers,
beneficiaries, and taxpayers-to adjust their expectations. We believe
that prompt, effective, and decisive action is necessary to address
these challenges.
28
III. ACTUARIAL ANALYSIS
A. MEDICARE FINANCIAL PROJECTIONS
Medicare is the nation's second largest social insurance program,
exceeded only by Social Security (OASDl). Although Medicare's two
components-Hospital Insurance and Supplementary Medical
Insurance-are very different from each other in many key respects,
it is important to consider the overall cost of Medicare and the
manner in which that cost is financed. By reviewing Medicare's total
expenditures, the financial obligation posed by the program can be
assessed. Similarly, the SOurces and relative magnitudes of HI and
SMI revenues are an important policy matter. It should be noted that
the Part B expenditures, and therefore the SMI and total Medicare
expenditures, are substantially understated because projected
current-law physician payment updates are unrealistically reduced
under the sustainable growth rate system. Consequently, the
estimates after 2007 should be used cautiously in evaluating the
financial obligation posed by Medicare.
The issues of Medicare's total cost to society and how that cost is met
are different from the question of the financial status of the Medicare
trust funds. The latter focuses on whether a specific trust fund's
income and expenditures are in balance. As discussed later in this
section, such an analysis must be performed for each trust fund
individually. The separate HI and SMI financial projections prepared
for this purpose, however, can be usefully combined for the broader
purposes outlined above. To that end, this section presents
information on combined HI and SMI costs and revenues.
Sections III.B and III.C of this report present detailed assessments of
the financial status of the HI trust fund and the SMI trust fund,
respectively.
1. 10-year Actuarial Estimates (2007-2016)
Table IILA1 shows past and projected Medicare income,
expenditures, and trust fund assets in dollar amounts for calendar
years." Projections are shown under the intermediate set of
assumptions for the short-range projection period 2007 through 2016
based on current law (including the unrealistic reductions in
physician payment rates). A more detailed breakdown of
"Amounts are shown on a "cash" basis, reflecting actual expenditures made during the
year, even if the payments were for services performed in an earlier year. Similarly,
income figures represent amounts actually received during the year, even if incurred in
an earlier year.
29
Actuarial Analysis
expenditures and income for HI and SMI is provided in tables III.B4
and IlLel, respectively.
Table III.A1.-Total Medicare Income, Expenditures, and Trust Fund Assets
during Calendar Years 1970-2016
[In billions]
Calendar year
Histoncal data:
1970
1975
1980
1985
1990
1995
2000
2001
2002
2003
2004
2005
2006
Total income
$8.2
17.7
370
76.5
126.3
175.3
2571
273.3
2848
2916
3177
3575
4370
Total
ex~enditures
Net change in
assets
$7.5
16.3
36.8
72.3
111.0
184.2
221.8
244.8
265.7
280.8
308.9
336.4
408.3
$0.7
1.3
0.1
4.2
15.3
-8.9
35.3
28.5
19.1
10.8
8.8
21.0
28.7
Assets at end of
year
$3.4
12.0
18.3
31.4
114.4
143.4
221.5
250.0
269.1
280.0
288.8
309.8
338.5
Intermediate estimates:
2007
461.7
437.9
23.8
362.2
2008
494.4
476.8
17.7
379.9
2009
540.9'
513.1
27.8
407.7
2010
540.5'
552.5
-12.0
395.6
2011
595.9
593.4
2.6
398.2
2012
637.7
639.6
-1.8
396.4
2013
679.1
688.0
-8.9
387.4
2014
723.4
741.1
-17.7
369.7
2015
798.1'
798.5
-0.4
369.3
2016
796.5'
862.5
-66.0
303.3
, Section 708 of the Social Security Act modifies the provisions for the delivery of Social Security benefit
checks when the regularly deSignated day falls on a Saturday. Sunday. or legal public holiday. Delivery
of benefit cheCks normally due January 3, 2010 will occur on December 31, 2009. and delivery of benefit
checks normally due January 3. 2016 will occur on December 31, 2015.
Note: Totals do not necessarily equal the sums of rounded components
As indicated in table III.AI, Medicare expenditures have increased
rapidly during most of the program's history and are expected to
continue doing so in the future. Health care cost increases, including
those for Medicare, Medicaid, and private health insurance, are
affected by the following factors:
•
Growth in the number of beneficiaries;
•
Increases in the prices paid per service, which reflect both higher
wages for health care workers and inflation in the goods and
services purchased by health care providers;
•
Increases in the average number of services per beneficiary
("utilization"); and
•
Increases in the average complexity of services ("intensity").
30
Financial Projections
Medicare expenditures are projected to increase at an average annual
rate of 7.8 percent during 2007-2016. The average growth rate
reflects the continuing impact of each of the factors listed above,
together with the effects of the provisions of the Medicare
Modernization Act, the Deficit Reduction Act, and the Tax Relief Act,
and the unrealistic physician payment reductions.
Through most of Medicare's history, trust fund income has kept pace
with increases in expenditures." In the future, however, Medicare
income is projected to increase less rapidly than expenditures,
primarily because HI payroll tax revenues would not keep pace with
HI benefits under current law. In contrast to the growth factors listed
above for health care costs, HI payroll taxes increase only as a
function of the number of workers and increases in their average
earnings. Moreover, with past declines in birth rates, continuing
improvements in life expectancy, and prevailing rates of disability
incidence, the number of workers is expected to grow slowly while the
number of beneficiaries increases much more rapidly.
Past excesses of income over expenditures have been invested in
U.S. Treasury securities, with total fund assets accumulating to
$339 billion at the end of calendar year 2006. Combined assets are
projected to continue increasing until reaching about $398 billion in
2011 and to begin declining thereafter."
2. 75-year Actuarial Estimates (2007-2081)
Expressing Medicare expenditures as a percentage of GDP gives a
relative measure of the size of the Medicare program compared to the
general economy. The projection of this measure affords the public an
idea of the relative financial resources that will be necessary to pay
for Medicare services. However, after 2007, the projected SM! Part B
and total Medicare expenditures are unrealistically low because of
the current-law physician payment reductions. Should these payment
rates, by new legislation, be prevented from declining, the overall
Medicare costs shown in this section would be increased-possibly by
10 to 15 percent for 2030 and later (and by lower percentages prior to
2030), depending on the specific changes enacted.
"'This balance resulted from periodic increases in HI payroll tax rates and other HI
financing, from annual increases in SMI premium and general revenue financing rates
(to match the following year's estimated expenditures), and from frequent legislation
designed to slow the rate of growth in expenditures.
L'See sections IILB and IILe regarding the asset projections for HI and 8MI,
separately.
31
Actuarial Analysis
Table III.A2 shows past and projected Medicare expenditures
expressed as a percentage of GDP." Medicare expenditures
represented 0.7 percent of GDP in 1970 and had grown to 2.7 percent
of GDP by 2005, reflecting rapid increases in the factors affecting
health care cost growth, as mentioned previously. Starting in 2006,
Medicare provided subsidized access to prescription drug coverage
through Part D, increasing projected Medicare expenditures to
3.1 percent of GDP.
Continuing rapid growth is expected thereafter, with total Medicare
expenditures projected to reach about 11.3 percent of GDP by 2080.
For comparison, projected Medicare costs would exceed those for
Social Security in 2028 and would continue to grow more rapidly
until, in 2081, the expenditure level for Medicare would be 80 percent
more than that for Social Security. Another comparison would be that
over the last 50 years, total Federal income tax receipts have
averaged 11 percent of GDP.
As indicated, part of the projected substantial increase is attributable
to the new prescription drug benefit in Medicare. In its first (partial)
year of operation, this benefit increased aggregate Medicare costs by
over one-eighth.!C' With continuing faster growth in drug costs,
relative to the traditional HI and SMI Part B expenditures, this new
benefit is projected to increase costs by roughly one-fourth for 2020
and later.16
The cost projections shown in table III.A2 for total Medicare, as well
as for Parts A, B, and D, are somewhat different than those in the
2006 annual report. These differences arise for a number of reasons,
which are described in sections III.B and IItC.
l'In contrast to the expenditure amounts shown in table lII.Al, historical and projected
expenditures are shown on an incurred basis. Incurred amounts relate to the
expenditures for services performed in a given year, even if those expenditures are paid
in a later year.
l'Although the Part D drug benefit became available on January 1, 2006, beneficiaries
had until May 1516 to enroll. About 62 percent of the ultimate number of enrollees had
enrolled as of January r'.
"Costs beyond the first 25 years for HI, 8MI Part B, and 8MI Part D are each based on
the assumption that age-sex-adjusted per beneficiary expenditures will increase at the
rate determined by the economic model mentioned earlier. This rate is about
1.4 percent faster than the per capita GDP in 2031, decelerating to about the same rate
as per capita GDP by 2081.
32
Financial Projections
Table III.A2.-HI and SMI Incurred Expenditures as a Percentage
of the Gross Domestic Product
Calendar year
HI
Part A
Part B
0.52%
073
0.91
1.12
1.14
1.58
1.33
140
144
142
143
146
143
149
1.52
1.55
1.58
1.60
1.63
1.67
1.71
1.75
2.00
2.35
2.75
3.15
348
3.74
395
4.13
4.33
4.53
4.71
4.87
500
8MI
Part 0
Total
022%
0.30
041
0.56
076
0.90
0.95
1.03
1.08
1.14
1.19
123
1.28
0.00%
0.01
0.37
074%
1.03
1.32
168
1.90
248
228
243
2.52
2.56
2.63
270
3.07
1.31
1.32
1.33
1.35
1.36
1.39
142
145
148
1.71
2.00
2.32
2.61
2.83
3.00
3.16
3.31
348
3.64
3.76
3.85
3.94
0.39
042
045
049
0.52
0.57
0.60
0.64
0.69
0.93
1.20
143
1.58
1.70
1.80
1.90
2.00
210
2.18
224
2.30
2.35
Historical data:
1970
1975
1980
1985
1990
1995
2000
2001
2002
2003
2004
2005
2006
Intermediate estimates:
2007
2008
2009
2010
2011
2012
2013
2014
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
3.18
325
3.33
341
349
3.59
3.69
3.81
3.92
4.64
555
651
7.34
8.01
8.54
9.00
944
9.91
10.35
1072
11.02
11.29
The 75-year projection period fully allows for the presentation of
future developments that are expected to occur, such as the impact of
a large increase in enrollees that will begin within the next 10 years.
This increase in the number of beneficiaries will occur because the
relatively large number of persons born during the period between
the end of World War II and the mid-1960s (known as the baby boom
generation) will reach eligibility age and begin to receive benefits.
Moreover, as the average age of Medicare beneficiaries increases,
these individuals will experience greater health care utilization and
costs, thereby adding further to growth in program expenditures.
Table III.A3 shows past and projected enrollment in the Medicare
program.
33
Actuarial Analysis
Table III.A3.-Medicare Enrollment
Calendar year
Historical data:
1970
1975
1980
1985
1990
1995
2000
2001
2002
2003
2004
2005
2006
HI
Part A
20.104
24.481
28.002
30.621
33,747
37.175
39.257
39.669
40.065
40.738
41,485
42,181
42,852
[In thousands]
8MI
Part B
Part D
19,496
23.744
27.278
29.869
32.567
35.641
37.335
37.667
37.982
38.584
39.123
39,698
40,271
1.217
1,841
27.854
Part C'
842
1.181
2.714
6.233
5.608
5.005
4.655
4.683
5.084
6,550
Total'
20.398
24.864
28,433
31.081
34.251
37.594
39.688
40.103
40.508
41.188
41.902
42.588
43,249
Intermediate estimates:
2007
43,772
40.726
30,957
7.644
44.160
44,679
41,480
32,299
8,571
45,057
2008
45.655
42.294
33.679
9,414
46,022
2009
2010
46,581
43,055
35,036
10,122
46.936
2011
47.647
43,901
36.511
10.717
47.992
2012
49,054
45.082
38.266
11,323
49,390
2013
50,587
46,404
39,448
11,891
50,915
47,693
40,589
12,462
52,388
2014
52,067
2015
53,571
48,999
41,748
13,002
53,884
2016
55,118
50,349
42,942
13,565
55.426
2020
61,927
56,342
48,203
15,924
62,216
2025
71,001
64,449
55,228
19,193
71,283
2030
78,813
71,528
61,283
22,308
79,098
2035
83,640
75,937
65,026
'
83,930
2040
86,578
78,675
67,306
86,872
2045
88,702
80,578
68,955
89,000
2050
91,140
82,802
70,846
91,441
93,927
85.305
73,006
94.229
2055
2060
97.283
88.386
75,607
97,587
2065
100,285
91.110
77,929
100,583
93.651
80,069
103,345
2070
103,056
105,926
2075
105,651
96,009
82,068
2080
108,366
98,477
84,158
108,623
'Number of beneficiaries enrolled in a Medicare Advantage plan. Figures from the early 1980s to 1997
represent those enrolled in a risk HMO, and figures from 1998 to 2003 represent those enrolled in a
Medicare+Choice plan. In order to enroll in a Medicare Advantage plan, a beneficiary must be enrolled in
both Part A and Part B. Therefore, Part C enrollment is a subset of both Part A and Part B enrollment
'Number of beneficiaries with HI anclior 8MI coverage.
'Enrollment in Medicare Advantage plans is not explicitly projected beyond 2030.
The past and projected amounts of Medicare revenues as a
percentage of total non-interest Medicare income are shown in
Table III.A4, based on the intermediate assumptions. Interest income
is excluded, since, under current law, it would not be a significant
part of program financing in the long range.
34
Financial Projections
Table III.A4.-Medicare Sources of Income as a Percentage of Total Income
Calendar
year
Historical data:
1970
1980
1990
2000
2006
Payroll taxes
61.8%
68.0
62.2
59.8
43.3
Tax on
benefits
Premiums'
00%
00
00
3.6
2.5
Intermediate estimates:
2010
43.1
2.9
32.7
3.7
2020
2030
25.3
3.7
2040
21.7
3.4
2050
19.7
3.1
2060
17.9
2.9
2070
16.5
2.8
2080
15.6
2.7
'Includes premium revenue from HI and both accounts in
State
transfers
13.7%
8.6
9.8
9.1
11.7
12.3
14.2
15.7
16.7
17.4
18.2
18.9
19.7
the SMI trust fund.
0.0%
00
0.0
0.0
General
revenue
1.3
24.6%
23.4
27.9
27.6
41.2
1.5
1.9
2.4
2.4
2.5
2.6
2.6
2.6
40.2
47.4
53.0
55.8
57.3
58.5
59.2
59.4
Note: Due to rounding, the sum of these percentages may not exactly equal 100 percent.
In 2006, HI payroll taxes represented 43 percent of total non-interest
income to the Medicare program. General revenues (primarily those
for 8M!) were the next largest source of overall financing, at
41 percent. Beneficiary premiums (again, primarily for 8M!) were
third, at 12 percent. Under current law, HI tax revenues are projected
to fall increasingly short of HI expenditures after 2006. In contrast,
8MI premium and general revenues will keep pace with 8MI
expenditure growth, and, once fully phased downl" state payments
(on behalf of Medicare beneficiaries who also qualify for full Medicaid
benefits) will grow with Part D expenditures. Consequently, in the
absence of legislation, HI tax income would represent a declining
portion of total Medicare revenues, In 2018, for example, just prior to
the projected exhaustion of the HI trust fund, currently scheduled HI
payroll taxes would represent about 34 percent of total non-interest
Medicare income. General revenues and beneficiary premiums would
equal about 46 and 14 percent, respectively,I'
The Medicare Modernization Act (MMA) requires an expanded
analysis of the combined expenditures and dedicated revenues of the
HI and 8MI trust funds. In particular, a determination must be made
as to whether projected annual "general revenue funding" exceeds
45 percent of total Medicare outlays within the next 7 fiscal years
17State payments amounted to 90 percent of their projected foregone prescription drug
costs in 2006, with this percentage phasing down over a 10-year period to 75 percent in
2015.
I'The general revenue share of total Medicare revenues cannot be directly compared to
the difference between outlays and dedicated revenues as a share of outlays (described
previously). Although somewhat similar in magnitude, the former measure does not
reflect the HI deficit, whereas the latter measure does.
35
Actuarial Analysis
(2007-2013). For this purpose, general revenue funding is defined in
the law as total Medicare outlays minus dedicated Medicare financing
sources. Dedicated Medicare financing sources include HI payroll
taxes; income from taxation of Social Security benefits; State
transfers for the prescription drug benefit; premiums paid under
Parts A, B, and D; and any gifts received by the Medicare trust funds.
The test is applied using incurred expenditures and revenues to avoid
temporary distortions arising from the payment of Medicare
Advantage capitation amounts in September when the normal
October payment date is a Saturday or Sunday. Figure IILAI shows
the projected difference between total Medicare outlays and dedicated
funding sources as a percentage of total outlays over the long-range
projection period.
In the 2006 report, it was estimated that "general revenue funding"
would exceed 45 percent in 2012, which was within the first 7 fiscal
years. Therefore, a determination of "excess general revenue funding"
was made. As indicated in figure III.Al, the difference between
annual outlays and dedicated financing is now expected to first
exceed 45 percent of total expenditures in 2013 under the
intermediate assumptions. Since this estimate is within the 7-year
test period prescribed in the law, a determination of projected "excess
general revenue Medicare funding" is made for the second
consecutive year in this report. Since it has been determined in two
consecutive reports that the difference between Medicare outlays and
dedicated financing sources is projected to reach 45 percent within
the first 7 years, a "Medicare funding warning" is triggered,
indicating that a trust fund's financing is inadequate or that the
general revenues provided under current law are becoming unduly
large. This finding requires the President to submit to Congress,
within 15 days after the date of the next budget submission, proposed
legislation to respond to the warning." Congress is then required to
consider this legislation on an expedited basis. This new requirement
will help call attention to Medicare's impact on the Federal Budget.
"The next such budget submission will be the President's Fiscal Year 2009 Budget,
which will be released in early February 2008.
36
Financial Projections
Figure III.A1.-Projected Difference between Total Medicare Outlays
and Dedicated Financing Sources, as a Percentage of Total Outlays
75%
r---------------------------------~==::::::::====~
60%
45%
r-----------------~~----------------------------~
30%
15%
0%
-15%
~------------------~--------------------~----__~
1970
2000
2030
2060
Calendar year
As is also indicated in figure IILA1, the difference between outlays
and dedicated funding sources is projected to continue growing
throughout the 75-year period, reaching 63 percent of total outlays in
2031 and 73 percent in 2081. Although the law characterizes this
difference as "general revenue funding," it is important to recognize
that current law provides for general revenue transfers only for
certain purposes related to Parts A, B, and D, as follows:
• Financing specified portions of 8MI Part Band 8MI Part D
expenditures;
• Reimbursing the HI trust fund for the costs of certain uninsured
beneficiaries;
• Paying interest on invested assets of the trust funds; and
• Redeeming the special Treasury securities held as assets by the
trust funds.
The difference between outlays and dedicated funding sources, as
shown in figure III.A1, will reflect all of these general revenue
transfers, plus the imbalance between HI expenditures and dedicated
revenues after HI asset exhaustion in 2019, for which there is no
provision under current law to cover the shortfall. In particular,
37
Actuarial Analysis
transfers from the general fund of the Treasury could not be made for
this purpose without new legislation.
The MMA also requires that projected growth in the difference
between outlays and dedicated revenues be compared with other
health spending growth rates. Table IILA5 contains this comparison.
Table III.AS.-Comparative Growth Rates of Medicare, Private Health Insurance,
and National Health Expenditures
Calendar year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Average annual growth in:
Incurred outlays
minus dedicated
Incurred
National health
revenues
Medicare outlaz:s
GOP
ex~enditures '
29.7%
22.0
23.1
16.6
6.1
38.5
10.7
9.5
9.4
9.8
8.8
10.1
10.3
10.2
10.0
10.7
10.2%
7.2
6.2
9.8
9.2
21.0
8.5
7.3
7.7
7.6
7.4
7.8
7.8
7.7
7.8
8.0
3.2%
3.4
4.7
6.9
6.3
6.3
4.6
5.0
5.2
5.1
5.1
4.9
4.7
4.6
4.7
4.7
8.6%
9.1
8.1
7.2
6.9
6.8
6.6
7.0
7.3
6.9
6.8
7.0
7.0
6.9
6.8
6.8
Private health
insurance'
9.6%
10.5
9.6
7.9
6.6
4.8
6.7
7.0
7.3
6.7
6.5
6.5
6.7
6.3
6.0
5.8
2017-2031
8.0
9.9
4.5
2032-2056
5.5
4.4
5.9
2057-2081
5.0
4.4
5.1
'According to the national health expenditure (NHE) projections article, which was published on
February 21, 2007. This article, along with the paper outlining the methodology, is available at
hUp:1Iwww.cms.hhs.gov/NationaIHealthExpendOata/03_National Hea IthAccou ntsP rojeded. asp.
As shown in table IILA5, the gap between outlays and dedicated
revenues, and Medicare outlays, both increased substantially when
the prescription drug benefit was fully implemented in 2006. In
addition, the outlay gap will increase faster than outlays throughout
the 75-year period, since the dedicated sources of income to the HI
trust fund will cover a decreasing percentage of HI outlays.
In addition to projected Medicare outlay growth, table IILA5 shows
projected growth in GDP, total expenditures on health care in the
U.S., and private health insurance expenditures. Each of the health
expenditure categories is expected to increase more rapidly than
GDP, continuing a longstanding trend. Private health insurance
expenditures equal the total premiums earned by private health
insurers, including benefits incurred and the net cost of insurance.
The net cost of insurance includes administrative costs, additions to
reserves, rate credits and dividends, premium taxes, and profits or
38
Financial Projections
losses. Comparisons between aggregate Medicare and private health
insurance cost growth are affected by several factors:
• The number of Medicare beneficiaries is currently increasing by
about 1.5 percent per year, and this growth rate will approximately
double after 2010 when the post-World War II baby boom
generation reaches eligibility age. In recent years, the number of
individuals with private health insurance has declined and is
projected to increase only slowly in the future.
• The benefits covered by Medicare and private health insurance
plans can vary. In particular, though most prescription drugs are
currently covered by Medicare, this was not the case prior to 2006.
Moreover, many Medicare beneficiaries who had private drug
insurance coverage (such as Medigap policies) switched to the
subsidized Part D coverage in 2006, thereby accelerating Medicare
outlay growth while slowing private health insurance growth.
• The use of health care services differs significantly between
Medicare beneficiaries (who are generally over 65) and individuals
with private health insurance (who are predominantly below
age 65). The former group, for example, has a higher incidence of
hospitalization, skilled nursing care, and home health care. For the
latter group, physician services represent a greater proportion of
their total health care needs. Different cost growth trends by type
of service will affect overall growth rates, reflecting the distribution
of services for each category of people.
A number of research studies have attempted to control for some or
all of these differences in comparing growth trends. Over long
historical periods, average, demographically adjusted, per capita
growth rates have been similar for Medicare and private health
insurance. For shorter periods, however, the rates of growth have
often diverged substantially. More information on past and projected
national and private health expenditures, and comparisons to
Medicare growth rates, is available in the sources cited in
table III.A5.
Under current law, the HI and 8MI trust funds are separate and
distinct, each with its own sources of financing. There are no
provisions for using HI revenues to finance 8MI expenditures, or vice
versa, or for lending assets between the two trust funds. Moreover,
the benefit provisions, financing methods, and, to a lesser degree,
eligibility rules are very different between these Medicare
components. In particular, both accounts of the 8MI trust fund are
39
Actuarial Analysis
automatically in financial balance under current law, whereas the HI
fund is not.
For these reasons, the financial status of the Medicare trust funds
can be evaluated only by separately assessing the status of each fund.
The following two sections of this report present such assessments for
HI and SMI, respectively.
B. HI FINANCIAL STATUS
1. Financial Operations in Calendar Year 2006
The Federal Hospital Insurance Trust Fund was established on
July 30, 1965 as a separate account in the U.S. Treasury. All the HI
financial operations are handled through this fund.
A statement of the revenue and expenditures of the fund in calendar
year 2006, and of its assets at the beginning and end of the calendar
year, is presented in table IILB1.
The total assets of the trust fund amounted to $285.8 billion on
January 1,2006. During calendar year 2006, total revenue amounted
to $211.5 billion, and total expenditures were $191.9 billion. Total
assets thus increased by $19.6 billion during the year, to
$305.4 billion on December 31,2006.
40
HI Financial Status
Table III.B1.-Statement of Operations of the HI Trust Fund
during Calendar Year 2006
[In thousands)
Total assets of the trust fund, beginning of period.
Revenue:
Payroll taxes.
Income from taxation of OASDI benefits.
Interest on investments ..
Premiums collected from voluntary participants.
.., ...... '
Premiums collected from Medicare Advantage participants,
Transfer from Railroad Retirement account..
Reimbursement, transitional uninsured coverage.,
Reimbursement, program management general fund.
Interest on reimbursements, SSA' ..
Interest on reimbursements, CMS' ..
Interest on reimbursements, Railroad Retirement,
Other ...
Reimbursement, Union Activity ...
Fraud and abuse control receipts:
Criminal fines ..
Civil monetary penalties ..
Civil penalties and damages, CMS.,
Civil penalties and damages, Department of Justice ..
3% administrative expense reimbursement, Department of Justice ..
Fraud and abuse appropriation for FBI,
Total revenue ....
Expenditures:
Net benefit payments ....
Administrative expenses:
Treasury administrative expenses ..
Salaries and expenses, SSA' ..
Salaries and expenses, CMS' ..
Salaries and expenses, Office of the Secretary, HHS '
Medicare Payment Advisory Commission.
Fraud and abuse control expenses:
HHS Medicare integrity program ...
HHS Office of Inspector General ...
Department of Justice.
FBI,
Total expenditures ..
Net addition to the trust fund.
Total assets of the trust fund, end of period
$285,769,529
$181,274,266
10,319,000
15,736,764
2,644,550
30,262
439,900
408,000
130,797
1,334
o
31,597
2,622
720
143,760
19,086
-6,736
216,376
8,873
114,000
$211,515,171
$188,989,159
125,577
676,084
1,025,898
35,273
6,040
732,757
184,189
43,814
114,000
$191,932,792
19,582,379
$305,351,908
'A positive figure represents a transfer to the HI trust fund from the other trust funds. A negative figure
represents a transfer from the HI trust fund to the other funds.
'For facilities, goods, and services provided by SSA.
'Includes administrative expenses of the intermediaries.
Note: Totals do not necessarily equal the sums of rounded components
a. Revenues
The trust fund's primary source of income consists of amounts
appropriated to it, under permanent authority, on the basis of taxes
paid by workers, their employers, and individuals with
self-employment income, in work covered by HI. Included in HI are
41
Actuarial Analysis
workers covered under the OASDI program, those covered under the
Railroad Retirement program, and certain Federal, State, and local
employees not otherwise covered under the OASDI program.
HI taxes are payable on a covered individual's total wages and
self-employment income, without limit. For calendar years prior to
1994, taxes were computed on a person's annual earnings up to a
specified maximum annual amount, called the maximum tax base.
The maximum tax bases for 1966-1993 are presented in table III.B2.
(Legislation enacted in 1993 removed the limit on taxable income
beginning in calendar year 1994.)
The HI tax rates applicable in each of the calendar years 1966 and
later are also shown in table III.B2. For 2008 and thereafter, the tax
rates shown are the rates scheduled in current law.
Table III.B2.-Tax Rates and Maximum Tax Bases
Calendar years
Past experience:
1966
1967
1968·71
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994·2007
Scheduled in current law:
2008 & later
Maximum tax base
$6,600
6,600
7.800
9,000
10,800
13,200
14,100
15,300
16,500
17,700
22,900
25,900
29,700
32,400
35,700
37,800
39,600
42,000
43,800
45,000
48.000
51,300
125,000
130,200
135,000
no limit
no limit
Tax rate
(Percentage of taxable earnings)
Employees and
Self·employed
employers, each
0.35%
0.50
0.60
0.60
1.00
0.90
0.90
0.90
0.90
1.00
1.05
1.05
1.30
1.30
1.30
1.30
1.35
1.45
1.45
1.45
1.45
1.45
1.45
1.45
1.45
1.45
0.35%
0.50
060
0.60
1.00
0.90
0.90
0.90
0.90
1.00
1.05
1.05
1.30
1.30
1.30
2.60
2.70
2.90
2.90
2.90
2.90
2.90
2.90
2.90
2.90
2.90
1.45
2.90
Total HI payroll tax income in calendar year 2006 amounted to
$181.3 billion-an increase of 5.8 percent over the amount of
$171.4 billion for the preceding 12-month period, This increase in tax
42
HI Financial Status
income resulted from an increase in the number of workers and their
earnings.
Up to 85 percent of an individual's or couple's OASDI benefits may be
subject to Federal income taxation if their income exceeds certain
thresholds. The income tax revenue attributable to the first
50 percent of OASDI benefits is allocated to the OASI and DI trust
funds. The revenue associated with the amount between 50 and
85 percent of benefits is allocated to the HI trust fund. Income from
the taxation of OASDI benefits amounted to $10.3 billion in calendar
year 2006.
Another substantial source of trust fund income is interest credited
from investments in government securities held by the fund. In
calendar year 2006, $15.7 billion in interest was credited to the fund.
The trust fund's investment procedures are described later in this
section.
Section 1818 of the Social Security Act provides that certain persons
not otherwise eligible for HI protection may obtain coverage by
enrolling in HI and paying a monthly premium. Premiums collected
from such voluntary participants in fiscal year 2006 amounted to
about $2.6 billion.
The Railroad Retirement Act provides for a system of coordination
and financial interchange between the Railroad Retirement program
and the HI trust fund. This financial interchange requires a transfer
that would place the HI trust fund in the same position in which it
would have been if railroad employment had always been covered
under the Social Security Act. In accordance with these provisions, a
transfer of $440 million in principal and about $17 million in interest
from the Railroad Retirement program's Social Security Equivalent
Benefit Account to the HI trust fund balanced the two systems as of
September 30, 2005. This amount, together with interest to the date
of transfer totaling about $14 million, was transferred to the trust
fund in June 2006.
Two sections of the statute authorize HI benefits for certain
uninsured persons aged 65 and over. Entitlement to HI benefits was
provided to almost all persons aged 65 and over, or near that age,
when the HI trust fund first began operations. Legislation in 1982
added similar transitional entitlement for those Federal employees
who would retire before having had a chance to earn sufficient
quarters of Medicare-qualified Federal employment. The costs of this
coverage, including administrative expenses, are reimbursed from the
43
Actuarial Analysis
general fund of the Treasury. In calendar year 2006, such
reimbursement amounted to $408 million: $407 million for estimated
benefit payments and $1 million for administrative expenses. The
$407 million for benefit payments consisted of $201 million for
non-Federal uninsured and $206 million for Federal uninsured
beneficiaries.
The Health Insurance Portability and Accountability Act of 1996
established a health care fraud and abuse control account within the
HI trust fund. Monies derived from the fraud and abuse control
program are transferred from the general fund of the Treasury to the
HI trust fund. During calendar year 2006, the trust fund was credited
with about $495 million in receipts from this program.
b. Expenditures
Expenditures for HI benefit payments and administrative expenses
are paid out of the trust fund. All expenses incurred by the
Department of Health and Human Services, the Social Security
Administration, the Department of the Treasury (including the
Internal Revenue Service), and the Department of Justice in
administering HI are charged to the trust fund. Such administrative
duties include payment of benefits, the collection of taxes, fraud and
abuse control activities, and experiments and demonstration projects
designed to determine various methods of increasing efficiency and
economy in providing health care services, while maintaining the
quality of such services, under HI and SM!.
In addition, Congress has authorized expenditures from the trust
funds for construction, rental and lease, or purchase contracts of
office buildings and related facilities for use in connection with the
administration of HI. These costs are included in trust fund
expenditures. The net worth of facilities and other fixed capital
assets, however, is not carried in the statement of trust fund assets
presented in this report, since the value of fixed capital assets does
not represent funds available for benefit or administrative
expenditures and is not, therefore, considered in assessing the
actuarial status of the funds.
Of the $191.9 billion in total HI expenditures, $189.0 billion
represented net benefits paid from the trust fund for health services.'"
'''Net benefits equal the total gross amounts initially paid from the trust fund during
the year, less recoveries of overpayments identified through fraud and abuse control
activities.
44
THE 2007 ANNUAL REPORT OF THE BOARD OF
TRUSTEES OF THE FEDERAL OLD-AGE AND SURVIVORS
INSURANCE AND FEDERAL DISABILITY INSURANCE
TRUST FUNDS
COMMUNICATION
FROM
THE BOARD OF TRUSTEES, FEDERAL OLD-AGE AND
SURVIVORS INSURANCE AND FEDERAL DISABILITY
INSURANCE TRUST FUNDS
TRANSMITTING
THE 2007 ANNUAL REPORT OF THE BOARD OF TRUSTEES OF THE
FEDERAL OLD-AGE AND SURVIVORS INSURANCE AND FEDERAL
DISABILITY INSURANCE TRUST FUNDS
LETTER OF TRANSMITTAL
BOARD OF TRUSTEES OF THE
FEDERAL OLD-AGE AND SURVIVORS INSURANCE AND
FEDERAL DISABILITY INSURANCE TRUST FUNDS,
Washington, D.C., April 23, 2007
The Honorable Nancy Pelosi
Speaker of the House of Representatives
Washington, D.C.
The Honorable Richard B. Cheney
President of the Senate
Washington, D.C.
Dear Madam Speaker and Mr. Cheney:
We have the honor of transmitting to you the 2007 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability
Insurance Trust Fund, the 67th such report.
Respectfully,
lSI
Henry M. Paulson, Jr., Se("l"('!arr oillie
TrClISllrr. 1I11d MOllllgillg
"fi"lIslec o(tll{' "fi"usl Fllllds
lSI
Michael O. Leavitt, Secrelor)" 01
Hellilli 1I1/d Hllmllll Se/Tices.
1I11d 7)-uslee
lSI
John L. Palmer. Truslee
lSI
Elaine L. Chao, SecrctlllT
o/LoiJOI: 1I11d ?i·lIslee.
lSI
Michael J. Astrue, Commissioner
"rSocial Securilr. (/Ild Truslee
lSI
Thomas R. Saving, Trusl('e
lSI
Andrew G. Biggs, DCPIII\' COli/missioner
orSoci(Ii Sccliritl·. alll! Sccr('/ar)". Board or Tl"Ilslces
CONTENTS
I. INTRODUCTION .................................. .
II. OVERVIEW
A.
B.
C.
D.
E.
2
HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TRUST FUND FINANCIAL OPERATIONS IN 2006 .......
ASSUMPTIONS ABOUT THE FUTURE. . . . . . . . . . . . . . ..
PROJECTIONS OF FUTURE FINANCIAL STATUS . . . . . ..
CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
2
4
6
7
16
III. FINANCIAL OPERATIONS OF THE TRUST FUNDS AND
LEGISLATIVE CHANGES IN THE LAST yEAR..... . ....
18
A. OPERATIONS OF THE OLD-AGE AND SURVIVORS
INSURANCE (OAS!) AND DISABILITY INSURANCE
TRUST FUNDS, IN CALENDAR YEAR 2006 . . . . . . .
1. OASI Trust Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. DI Trust Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. OASI and 01 Trust Funds, Combined. . . . . . . . . . . . .
B. SOCIAL SECURITY AMENDMENTS SINCE THE
2006 REPORT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(01)
. . . ..
. . . ..
. . . ..
. . . ..
18
18
23
25
. . . ..
29
IV. ACTUARIAL ESTIMATES . ...........................
30
A. SHORT-RANGE ESTIMATES ........................
J. Operations of the OASI Trust Fund. . . . . . . . . . . . . . . . . . ..
2. Operations of the 01 Trust Fund. . . . . . . . . . . . . . . . . . . . ..
3. Operations of the Combined OASI and 01 Trust Funds. . . ..
4. Factors Underlying Changes in 10-Year Trust Fund Ratio
Estimates From the 2006 Report. . . . . . . . . . . . . . . . . . . . ..
B. LONG-RANGE ESTIMATES. . . . . . . . . . . . . . . . . . . . . . . ..
1. Annual Income Rates, Cost Rates, and Balances . . . . . . . . ..
2. Comparison of Workers to Beneficiaries ................
3. Trust Fund Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
4. Summarized Income Rates, Cost Rates, and Balances . . . . ..
5. Additional Measures ofOASDI Unfunded Obligations. . . ..
6. Test of Long-Range Close Actuarial Balance ............
7. Reasons for Change in Actuarial Balance From Last Report..
30
31
34
38
(V)
39
41
42
47
50
54
58
61
65
v. ASSUMPTIONS
A~D METHODS Ul\DERLYIl'IG
ACTUARIAL ESTIMATES. . . . . . . . . . . . . . . . . . . . . . . . . . .. 70
A. DEMOGRAPHIC ASSUMPTIONS AND METHODS. . . . . ..
1. Fertility Assumptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
2. Mortality Assumptions. . . . . . . . . . . . . . . . . . . . . . . . . . . ..
3. Immigration Assumptions. . . . . . . . . . . . . . . . . . . .
4. Total Population Estimates. . . . . . . . . . . . . . . . . . . . . . . . ..
5. Life Expectancy Estimates. . . . . . . . . . . . . . . . . . . . . . .
B. ECONOMIC ASSUMPTIONS AND METHODS. . . . . . . . . ..
I. Productivity Assumptions . . . . . . . . . . . . . . . . . . . . . . . . ..
2. Price Inflation Assumptions. . . . . . . . . . . . . . . . . . . . . . . ..
3. Average Eamings Assumptions. . . . . . . . . . . . . . . . . . . . ..
4. Assumed Real-Wage Differentials. . . . . . . . . . . . . . . . . . ..
5. Labor Force and Unemployment Projections. . . . . . . . . . . ..
6. Gross Domestic Product Projections. . . . . . . . . . . . . . . . . ..
7. Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
C. PROGRAM-SPECIFIC ASSUMPTIONS A0:D METHODS. ..
I. Automatically Adjusted Program Amounts. . . . . . . . . . . . ..
2. Covered Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Taxable Payroll and Payroll Tax Revenue ...............
4. Insured Population . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5. Old-Age and Survivors Insurance Beneficiaries.
. ......
6. Disability Insurance Beneficiaries .....................
7. Average Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8. Benefit Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9. Administrative Expenses . . . . . . . . . . . . . . . . . . . . . . . .
10. Railroad Retirement Financial Interchange ..............
II. Benefits to Cninsured Persons . . . . . . . . . . . . . . . . . . . . . . .
. .......
12. Military-Service Transfers. . . . . . . . . . . . . . .
13. Income From Taxation of Benefits . . . . . . . . . . . . . . . . . . . .
(\'I )
71
71
72
74
77
79
83
83
84
85
87
89
91
92
96
96
103
104
105
107
113
120
121
121
121
122
122
122
VI. APPENDICES . ..................................... 124
A. HISTORY OF OASI AND DI TRUST FUND OPERATIONS ..
B. HISTORY OF ACTUARIAL BALANCE ESTIMATES ......
C. FISCAL YEAR HISTORICAL DATA AND
PROJECTIONS THROUGH 2016 ......................
D. LONG-RANGE SENSITIVITY ANALYSIS ..............
1. Total Fertility Rate ...............................
2. Death Rates .....................................
3. Net Immigration .................................
4. Real-Wage Differential ............................
5. Consumer Price Index .............................
6. Real Interest Rate ................................
7. Disability Incidence Rates ..........................
8. Disability Termination Rates ........................
E. STOCHASTIC PROJECTIONS ........................
I. Background .....................................
2. Methodology ....................................
3. Results ........................................
F. ESTIMATES FOR OASDI AND HI, SEPARATE AND
COMBINED ......................................
1. Estimates as a Percentage of Taxable Payroll. ............
2. Estimates as a Percentage of Gross Domestic Product ......
3. Estimates in Dollars ...............................
G. ANALYSIS OF BENEFIT DISBURSEMENTS FROM THE
OASI TRUST FUND WITH RESPECT TO DISABLED
BENEFICIARIES ..................................
H. GLOSSARY ......................................
124
137
142
148
148
ISO
151
152
154
155
156
157
159
159
159
161
165
165
170
175
188
191
LIST OF TABLES .................................... 208
LIST OF FIGURES ................................... 212
INDEX .............................................. 213
STATEMENT OF ACTUARIAL OPINION ............... 218
(VII)
THE 2007 ANNUAL REPORT OF THE BOARD OF
TRUSTEES OF THE FEDERAL OLD-AGE AND
SURVIVORS INSURANCE AND FEDERAL DISABILITY
INSURANCE TRUST FUNDS
I. INTRODUCTION
The Old-Age, Survivors, and Disability Insurance (OASDI) program in the
United States makes available a basic level of monthly income upon the
attainment of retirement eligibility age, death, or disability by insured workers. The OASOl program consists of two separate parts which pay benefits to
workers and their families-Old-Age and Survivors Insurance (OAS!) and
Disability Insurance (Ol). Under OAS!, monthly benefits are paid to retired
workers and their families and to survivors of deceased workers. Under DI,
monthly benefits are paid to disabled workers and their families.
The Board of Trustees was established under the Social Security Act to oversee the financial operations of the OASI and 01 Trust Funds. The Board is
composed of six members. Four members serve by virtue of their positions
in the Federal Government: the Secretary of the Treasury, who is the Managing Trustee; the Secretary of Labor; the Secretary of Health and Human Services; and the Commissioner of Social Security. The other two members,
John L. Palmer and Thomas R. Saving, are public representatives initially
appointed by President William J. Clinton on October 28, 2000, and reappointed by President George W. Bush on April 18, 2006. The Deputy Commissioner of the Social Security Administration (SSA) is designated as
Secretary of the Board.
The Social Security Act requires that the Board, among other duties, report
annually to the Congress on the financial and actuarial status of the OAS!
and Ol Trust Funds. This annual report, for 2007, is the 67th such report.
Overview
II. OVERVIEW
A. HIGHLIGHTS
The report's major findings are summarized below.
In 2006
At the end of 2006, 49 million people were receiving benefits: 34 million
retired workers and their dependents, 7 million survivors of deceased workers, and 9 million disabled workers and their dependents. During the year an
estimated 162 million people had earnings covered by Social Security and
paid payroll taxes. Total benefits paid in 2006 were $546 billion. Income was
$745 billion, and assets held in special issue U.S. Treasury securities grew to
$2.0 trillion.
Short-Range Results
The OASI and or Trust Funds, individually and combined, are adequately
financed over the next 10 years under the intermediate assumptions. The
combined assets of the OASI and or Trust Funds are projected to increase
from $2,048 billion at the beginning of 2007, or 345 percent of annual
expenditures, to $4,210 billion at the beginning of 2016, or 407 percent of
annual expenditures in that year. Combined assets were projected in last
year's report to rise to 344 percent of annual expenditures at the beginning of
2007, and 407 percent at the beginning of 20 16.
Long-Range Results
Under the intermediate assumptions, OASDI cost will increase more rapidly
than tax income between about 2010 and 2030, due to the retirement of the
large baby-boom generation. After 2030, increases in life expectancy and relatively low fertility rates will continue to increase Social Security system
costs relative to tax income, but more slowly. Annual cost will exceed tax
income starting in 2017 at which time the annual gap will be covered with
cash from redemptions of special obligations of the Treasury that make up
the trust fund assets. until these assets are exhausted in 2041. Separately, the
DJ fund is projected to be exhausted in 2026 and the OASI fund in 2042. For
the 75-year projection period. the actuarial deficit is 1.95 percent of taxable
payroll, 0.06 percentage point smaller than in last year's report. The open
group unfunded obligation for OASor over the 75-year period is $4.7 trillion
in present value, and is $0.1 trillion above the measured level of a year ago.
In the absence of any changes in assumptions, methods, and starting values,
2
Highlights
the unfunded obligation would have risen to $4.8 trillion due to the change in
the valuation date.
The OASOI annual cost rate is projected to increase from 11.21 percent of
taxable payroll in 2007, to 16.59 percent in 2030, and to 18.55 percent in
2081, or to a level that is 5.20 percent of taxable payroll more than the projected income rate for 2081. In last year's report the OASOI cost for 2080
was estimated at 18.74 percent, or 5.38 percent of payroll more than the
annual income rate for that year. Expressed in relation to the projected gross
domestic product (GOP), OASOI cost is estimated to rise from the current
level of 4.3 percent of GOP, to 6.2 percent in 2030, and to 6.3 percent in
2081.
Conclusion
Annual cost wi II begin to exceed tax income in 20 17 for the combined
OASDI Trust Funds, which are projected to become exhausted and thus
unable to pay scheduled benefits in full on a timely basis in 2041 under the
long-range intermediate assumptions. For the trust funds to remain solvent
throughout the 75-year projection period, the combined payroll tax rate could
be increased during the period in a manner equivalent to an immediate and
permanent increase of 1.95 percentage points, benefits could be reduced during the period in a manner equivalent to an immediate and permanent reduction of 13.0 percent, general revenue transfers equivalent to $4.7 trillion in
present value could be made during the period, or some combination of
approaches could be adopted. Significantly larger changes would be required
to maintain solvency beyond 75 years.
The projected trust fund deficits should be addressed in a timely way to
allow for a gradual phasing in of the necessary changes and to provide
advance notice to workers. Making adjustments sooner will allow them to be
spread over more generations. Social Security plays a critical role in the lives
of this year's (2007) 50 million beneficiaries and 163 million covered workers and their families. With infomled discussion, creative thinking, and
timely legislative action, we will work with Congress and others to ensure
that Social Security continues to protect future generations.
3
Oq:rview
B. TRUST FUND FINANCIAL OPERATIONS IN 2006
The table below shows the income, expenditures, and assets for the OASI,
the Dl and the combined OASDI Trust Funds in calendar year 2006.
Table II.Bl.-Summary of 2006 Trust Fund Financial Operations
Amounts (in billions)
Assets at the end of 2005 .
Total income in 2006 .
Net contributions ...
Taxation of benefits .
Interest.
...........
Total expenditures in 2006.
Benefit payments ..
Railroad Retm~ment tinancial interchange.
Administrative expenses.
............
Net Increase in assets in 2006 ..
Assets at the end of 2006
OASI
01
OASOI
$ \ ,663.0
$195.6
$ \ .858.7
642.2
102.6
744.9
90.8
1.2
10.6
625.6
16<)
102.4
46\ 0
94.5
5554
454.5
3.5
3.0
91.7
4
2.3
546.2
3.8
5.3
181.3
8.2
189.5
1.844.3
203.8
2.048.1
---
---
534.8
15.6
91.8
Note: Totals do not necessarily equal the sums of rounded components.
In 2006, net contributions accounted for 84 percent of total trust fund
income. Net contributions consist of taxes paid by employees, employers and
the self-employed on earnings covered by Social Security. These taxes were
paid on covered earnings up to a specified maximum annual amount, which
was $94,200 in 2006 and is increased each year automatically (to $97,500 in
2007) as the average wage increases. The tax rates scheduled under current
law for 2006 and later are shown in table II.B2.
Table II.B2.-Tax Rates for 2006 and Later
Tax rate for employees and employers. each (in percent).
Tax rate for self-employed persons (in percent) .
OASI
01
OASOI
5.30
0.90
6.20
10.60
1.80
1240
Two percent of OASDI Trust Fund income came from subjecting up to
50 percent of Social Security benefits above specified levels to Federal personal income taxation, and 14 percent of OASDI income came from interest
earned on investment of OASDI Trust Fund reserves. Social Security's assets
are invested in interest-bearing securities of the U.S. Government. In 2006
the combined trust fund assets earned interest at an effective annual rate of
4
Ca/enc/ar Year 2006 Operations
5.3 percent. More than 98 percent of expenditures from the combined
OASDI Trust Funds in 2006 went to pay retirement, survivor, and disability
benefits totaling $546.2 billion. The financial interchange with the Railroad
Retirement program resulted in a payment of$3.8 billion from the combined
OASDI Trust Funds, or about 0.7 percent of total expenditures. The administrative expenses of the Social Security program were $5.3 billion, less than
1.0 percent of total expenditures.
Assets of the trust funds provide a reserve to pay benefits whenever total program cost exceeds income. Trust fund assets increased by $189.5 billion in
2006 because income to each fund exceeded expenditures. At the end of
2006, the combined assets of the OASI and the DI Trust Funds were
345 percent of estimated expenditures for 2007, up from an actual level of
335 percent at the end of 2005.
5
Overvie\\'
C ASSUMPTIONS ABOUT THE FUTURE
The actual future income and expenditures of the OASI and DI Trust Funds
depend on many factors, including the size and characteristics of the population receiving benefits, the level of monthly benefit amounts, the size of the
workforce, and the level of workers' earnings. These factors will depend in
tum upon future birth rates, death rates, immigration, marriage and divorce
rates, retirement-age patterns, disability incidence and termination rates,
employment rates, productivity gains, wage increases, inflation, and many
other demographic, economic, and program-specific factors.
The intermediate demographic and economic assumptions shown in table
II.C I, designated as alternative II, reflect the Trustees' best estimates of
future experience, and therefore most of the figures in this overview depict
only the outcomes under the intermediate assumptions. Any projection of the
future is, of course, uncertain. For this reason, alternatives I (low cost) and
III (high cost) are included to provide a range of possible future experience.
The assumptions for these two alternatives are also shown in table II.C I, and
their implications are highlighted in a separate section on the uncertainty of
the projections.
Assumptions are reexamined each year in light of recent experience and new
information. This careful review and updating of the assumptions on an
annual basis helps ensure that they provide the Trustees' best estimate of
future possibilities.
Table Il.eL-Ultimate l Values of Key Demographic and Economic Assumptions
for the Long-Range (7S-year) Projection Period
Ultimate assumptions
Total fertility rate (children per woman) ..
Average annual percentage reduction in total age·sexadjusted death rates from 2031 to 2081 .
Annual net immigration (in thousands) .
Intennediate
Low Cost
High Cost
2.0
2.3
1.7
.70
900
.33
1.300
1.21
673
Annual percentage change in:
Productivity (total U.S. economy) .
I 7
2.0
1.4
Average wage in covered employment. .
3.9
2.8
3.4
1.8
4.4
3.8
1.1
1.6
.6
5.5
2.9
4.5
6.5
2.1
Consumer Price Index «,PI).
Real-wage differential (percent) ..
. .........
Unemployment rate (percent). ........ . . ........
Annual trust fund real interest rate (percent) .....
3.6
I Ultimate values are assumed to be reached within 2 to 25 years. See chapter V for details. including historical values and projected values prior to reaching the ultimate.
6
Future Fillancia! Status
D. PROJECTIONS OF FUTURE FINANCIAL STATUS
Short-Range Actuarial Estimates
For the short range (2007-2016), the Trustees measure financial adequacy by
comparing assets at the beginning of each year to projected program cost for
that year under the intermediate set of assumptions. Having a trust fund ratio
of 100 percent or more-that is, assets at the beginning of each year at least
equal to projected cost for the year-is considered a good indication of a
trust fund's ability to cover most short-term contingencies. Both the OAS!
and the 01 trust fund ratios under the intermediate assumptions exceed
100 percent throughout the short-range period and therefore satisfy the Trustees' short-term test of financial adequacy. Figure 11.01 below shows that the
trust fund ratios for the combined OASI and Dl Trust Funds reach a peak
level in 2014 and begin declining thereafter.
Figure II.DI.-Short-Range OASDI Trust Fund Ratios
[Assets as a percentage of annual expenditures J
550%
500'Yo
Estimated
Historical
400%
350%
250%
200%
150°;;,
"Minimum" level for shorHenn financial adequacy
100%
0%
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Calendar year
Long-Range Actuarial Estimates
The financial status of the program over the next 75 years is measured in
terms of annual cost and income as a percentage of taxable payroll, trust fund
ratios, the actuarial balance (also as a percentage of taxable payroll), and the
open group unfunded obligation (expressed in present-value dollars). Con-
7
sidering Social Security's cost as a percentage of the total U.S. economic
output (gross domestic product or GOP) provides an additional perspective.
The year-by-year relationship between income and cost rates shown in figure
Il.D2 illustrates the expected pattern of cash flows for the OASDI program
over the full 75-year period. Under the intermediate assumptions, the OASDI
cost rate is projected to decline slightly in 2008 and then increase up to the
2007 level within the next 2 years. It then begins to increase rapidly and first
exceeds the income rate in 2017, producing cash-flow deficits thereafter.
Cash-flow deficits are less than trust fund interest earnings until 2027.
Redemption of trust fund assets will allow continuation of full benefit payments on a timely basis until 2041, when the trust funds will become
exhausted. This redemption process will require a flow of cash from the
General Fund of the Treasury. Pressures on the Federal Budget will thus
emerge well before 2041. Even if a trust fund's assets are exhausted, however, tax income will continue to flow into the fund. Present tax rates would
be sufficient to pay 75 percent of scheduled benefits after trust fund exhaustion in 2041 and 70 percent of scheduled benefits in 2081.
Figure II.D2.-0ASDI Income and Cost Rates Under Intermediate Assumptions
[As a percentage of taxable payroll]
25%
Cost: Scheduled but not
fully payable benefIts
1
Cost: Scheduled and
15'%
"""'hL...--------------i
:;7
IneLe
Expenditures: income = payable
benefits slartlllg If1 the year the
trust funds arc exhausted (2041)
! Payable b-~~tits as percent I
5%
of scheduled bcncflb'
2007-40:
IOO'~"
2041.
75"·"
70~'()
2081.
I
I
I
O'Yo '
2005
2015
2025
2035
2045
2055
2065
2075
2085
Calendar year
Social Security's cost rate generally will continue riSing rapidly through
about 2030 as the baby-boom generation reaches retirement eligibility age.
Thereafter, the cost rate is estimated to rise at a slower rate for about 5 years
8
Future Financia! Status
and then stabilize for the next 15 years as the baby-boom ages and decreases
in size. Continued reductions in death rates and maintaining birth rates at
levels well below those from the baby-boom era and before will cause a significant upward shift in the average age of the population and will push the
cost rate from 17.3 percent of taxable payroll in 2050 to 18.5 percent by
2081 under the intermediate assumptions. In a pay-as-you-go system (with
no trust fund assets or borrowing authority), this 18.5-percent cost rate
means the combination of the payroll tax (scheduled to total 12.4 percent)
and proceeds from income taxes on benefits (expected to be 0.9 percent of
taxable payroll in 2081) would have to equal 18.5 percent of taxable payroll
to pay all currently scheduled benefits. After 2081, the upward shift in the
average age of the population is likely to continue and to increase the gap
between OASDI costs and income.
The primary reason that the OASDI cost rate will increase rapidly between
20 I 0 and 2030 is that, as the large baby-boom generation bom in the years
1946 through 1965 retires, the number of beneficiaries will increase much
more rapidly than the number of workers. The estimated number of workers
per beneficiary is shown in figure II.D3. In 2006, there were about 3.3 workers for every OASDI beneficiary. The baby-boom generation will have
largely retired by 2030, and the projected ratio of workers to beneficiaries
will be only 2.2 at that time. Thereafter, the number of workers per beneficiary will slowly decline, and the OASDI cost rate will continue to increase
largely due to projected reductions in mortality.
9
Ol'erview
Figure I1.D3.-Number of Covered Workers Per OASDJ Beneficiary
3
2
Historical
Estimated
o
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
Calendar year
The maximum projected trust fund ratios for the OASI, DI, and combined
funds appear in table II.D I. The year in which the maximum projected trust
fund ratio is attained and the year in which the assets are projected to be
exhausted are shown as well.
Table I1.D1.-Projected Maximum Trust Fund Ratios Attained and
Trust Fund Exhaustion Dates Under the Intermediate Assumptions
Maximum trust fund ratio (percent).
Year attained ..
Year of trust fund exhaustion.
OASI
DI
OASDI
463
200
2007
2026
409
2014
2041
2015
2042
The actuarial balance is a measure of the program's financial status for the
75-year valuation period as a whole. It is essentially the difference between
income and cost of the program expressed as a percentage of taxable payroll
over the valuation period. This single number summarizes the adequacy of
program financing for the period. When the actuarial balance is negative, the
actuarial deficit can be interpreted as the percentage that could be added to
the current law income rate for each of the next 75 years, or subtracted from
the cost rate for each year, to bring the funds into actuarial balance. Because
the timing of any future changes is unlikely to follow this pattern, this measure should be viewed only as providing a rough indication of the average
10
Future Financial Status
change that is needed over the 75-year period as a whole. In this report, the
actuarial balance under the intermediate assumptions is a deficit of
1.95 percent of taxable payroll for the combined OAS! and 01 Trust Funds.
The actuarial deficit was 2.02 percent in the 2006 report and has been in the
range of 1.86 percent to 2.23 percent for the last ten reports.
Another way to illustrate the financial shortfall of the OASDI system is to
examine the cumulative value of taxes less costs, in present value. Figure
1I.04 shows the present value of cumulative OASDl taxes less costs over the
next 75 years. The balance of the combined trust funds peaks at $2.6 trillion
in 2017 (in present value) and then turns downward. This cumulative amount
continues to be positive, indicating trust fund assets, or reserves, through
2040. However, after 2040 this cumulative amount becomes negative, indicating a net unfunded obligation. Through the end of 2081, the combined
funds have a present-value unfunded obligation of $4.7 trillion. This
unfunded obligation represents 1.8 percent of future taxable payroll and
0.7 percent of future GOP. through the end of the 75-year projection period.
Figure II.D4.-Cumulative OASDllncome Less Cost, Based on Present Law Tax Rates
and Scheduled Benefits
(Present value as ofJalluary I. 2007. in trillions]
$3 ,
$2
(poSItIve)
$1
$0
-$1
,
Unfunded obiJgation
-$2
(negative)
-$3
-$4
-$5
2006
2021
2036 2041
2051
2066
2081
Ending year of valuation period
Still another important way to look at Social Security's future is to view its
cost as a share of U.S. economic output. Figure 11.05 shows that Social
Security's cost as a percentage of GOP will grow from 4.3 percent in 2007 to
II
Overview
6.2 percent in 2030, and then slightly increase to 6.3 percent in 2081. However, Social Security's scheduled tax income is projected to be about
4.9 percent of GOP in both 2007 and 2030, and then to decrease to
4.5 percent in 2081. Income from payroll taxes declines generally in relation
to GOP in the future because an increasing share of employee compensation
is assumed to be provided in fringe benefits, making wages a shrinking share
of GOP. Between 2010 and 2030, however, the total non-interest income
does not decline as a percent of GOP because benefits, and thus income to
the trust funds from taxation of these benefits, are rising rapidly as a percent
of GOP during the period.
Figure II.05.-0ASOI Cost and Scheduled Tax Revenue as a Percentage of GOP
10'!·o
, Historical
Estimated
8%
Cost
6%
Scheduled Tax Revenue
2%
0%
1990
2000
20 I 0
2020
2030
2040
Calendar year
2050
2060
2070
2080
Consideration of a 75-year period is not enough to provide a complete picture of Social Security's financial condition. Figures 11.02, Il.04, and 11.05
show that the program's financial condition is worsening at the end of the
period. Overemphasis on summary measures for a 75-year period can lead to
incorrect perceptions and to policy prescriptions that do not achieve sustainable solvency. Thus, careful consideration of the trends in annual deficits and
unfunded obligations toward the end of the 75-year period is important. In
addition, summary measures for a time period that extends to the infinite
horizon are included in this report. These measures provide an additional
indication of Social Security's very long-run financial condition, but are subject to much greater uncertainty. These calculations show that extending the
12
Futllre Financial Statlls
horizon beyond 75 years increases the unfunded obligation. Over the infinite
horizon, the shortfall (unfunded obligation) is $13.6 trillion in present value,
or 3.5 percent of future taxable payroll and 1.2 percent of future GDP. These
calculations of the shortfall indicate that much larger (Ohanges may be
required to achieve solvency beyond the 75-year period as compared to
changes needed to balance 75-year period summary measures. The measured
unfunded obligation over the infinite horizon increases from $13.4 trillion in
last year's report to $13.6 trillion in this report. In the absence of any
changes in assumptions, methods, and starting values, the unfunded obligation over the infinite horizon would have risen to $14.1 trillion due to the
change in the valuation date.
Changes From Last Year's Report
The long-range OASDI actuarial deficit of 1.95 percent of taxable payroll for
this year's report is smaller than the deficit of 2.02 percent of taxable payroll
shown in last year's report under intermediate assumptions. Changes in
methodology and assumed rates of disability incidence are the main reasons
for the decrease in the deficit. For a detailed description of the specific
changes identified in table II.D2 below, see section IV.B.7 on page 65.
Table II.D2.-Reasons for Change in the 7S-Year Actuarial Balance
Under Intermediate Assumptions
[As a percentage of taxable payroll J
Item
Shown in last year's report:
Income rate ...
Cost rate.
Actuarial balance.
Changes in actuarial balance due to changes in:
Legislation I Regulation.
Valuation period I .
Demographic data and assumptions
Economic data and assumptions.
Disability data and assumptions
Programmatic data and methods .
Total change in actuarial balance.
Shown in this report:
Actuarial balance.
Income rate.
Cost rate.
OASI
01
OASOI
II .95
13.63
1.93
2.27
13.88
15.90
-1.68
-.33
-2.02
00
-05
+.01
-.02
+.09
00
-01
.00
+01
+.08
-.01
.00
-.06
-.03
+02
+.06
+.08
-01
+.07
+.06
-1.69
-.27
1.93
2.19
13.92
15.87
-.1)3
11.99
13.68
-1.95
I In changing from the valuation period of last years repon. which was 2006-80. to the valuation period of
this repon, 2007-8 I, the relatively large negative annual balal~ce for 208 I IS mcluded. ThIS results m a larger
long-range actuarial deficit. The fund balance at the end of 2006, I.e., at the begmnmg of the projectIOn
period, is included in the 75-year actuanal balance.
Note: Totals do not necessarily equal the sums of rounded components.
13
Overview
The open group unfunded obligation over the 75-year projection period has
increased from $4.6 trillion (present discounted value as of January 1,2006)
to $4.7 trillion (present discounted value as of January 1, 2007). The measured increase in the unfunded obligation would be expected to be about
$0.3 trillion due to advancing the valuation date by I year and including the
additional year 2081. Changes in methods and assumptions offset most of
this expected increase.
Figure II.D6 shows that this year's projections of annual balances are generally higher than those in last year's report principally because of the changes
in methods and assumptions. Annual balances are similar between the two
reports through about 2030. Thereafter, annual balances are somewhat higher
for the rest of the long-range projection period. Section IV.B.7 on page 65
provides a detailed presentation of these changes.
Figure II.D6.-0ASDI Annual Balances: 2006 and 2007 Trustees Reports
(As a percentage of taxable payroll under the intcm1cdlate assumptions]
2"lu'
O'Yu
-4lyu :
2006 Report
-
2007 Report .
-8%
2005
2015
2025
2035
2045
2055
2065
2075
2085
Calendar year
Uncertainty of the Projections
Significant uncertainty surrounds the intermediate assumptions. The Trustees
have traditionally used low cost (alternative I) and high cost (alternative Ill)
assumptions as an indication of this uncertainty. Figure II.D7 shows the projected trust fund ratios for the combined OASI and DI Trust Funds under the
intermediate, low cost, and high cost assumptions. The low cost alternative is
characterized by assumptions that improve the financial condition of the trust
funds, including a higher fertility rate, slower improvement in mortality, a
14
Future Final/cial Status
higher real-wage differential, and lower unemployment. The high cost alternative, in contrast, features a lower fertility rate, more rapid declines in mortality, a lower real-wage differential, and higher unemployment. While it is
extremely unlikely that all of these parameters would move in the same
direction over the 75-year period relative to the intermediate projections,
there is a not-insignificant-though quite low-probability that the actual
outcome for future costs could be as extreme as either of the outcomes portrayed by the low and high cost projections. The method for constructing
these high and low cost projections does not allow for the assignment of a
specific probability to the likelihood that actual experience will lie within or
outside the range they entail. However, an alternative approach to illustrating
the uncertainty inherent in such long-term projections discussed in Appendix
E suggests that the low and high cost projections bound a range that encompasses something on the order of 95 percent of possible future financial outcomes. Given there is an equal probability that the actual outcome will be
either more or less favorable than that portrayed by the intermediate cost projection, this implies that there is something on the order of only a 2.5 percent
probability that it will be as favorable as that portrayed by the low cost projection or as unfavorable as that portrayed by the high cost projection.
Figure II.D7.-Long-Range OASDI Trust Fund Ratios Under Alternative Assumptions
[Assets as a percentage of annual cost}
700%
Historical
Estimated
600':;u
500%
400%
200%
100%
0%
1990
2000
20 I 0
2020
2030
2040
2050
2060
2070
2080
Calendar year
15
Overview
E. CONCLUSION
Under current law the cost of Social Security will soon begin to increase
faster than the program's income, because of the aging of the baby-boom
generation, expected continuing low fertility, and increasing life expectancy.
Based on the Trustees' best estimate, program cost will exceed tax revenues
starting in 2017 and throughout the remainder of the 75-year projection
period. Social Security's combined trust funds are projected to allow full
payment of scheduled benefits until they become exhausted in 2041. At that
time annual tax income to the trust funds is projected to equal about
75 percent of program costs. Separately, the OASI and 01 funds are projected to have sufficient funds to pay full benefits on time until 2042 and
2026, respectively. By 2081, annual tax income is projected to be about
70 percent as large as the annual cost of the OASDI program.
Over the full 75-year projection period the actuarial deficit estimated for the
combined trust funds is 1.95 percent of taxable payroll-somewhat smaller
than the 2.02 percent deficit projected in last year's report. This deficit indicates that financial adequacy of the program for the next 75 years could be
restored if increases were made equivalent to increasing the Social Security
payroll tax immediately and permanently from its current level of
12.4 percent (for employees and employers combined) to 14.35 percent.
Alternatively, changes could be made equivalent to reducing all current and
future benefits by about 13 percent. Other ways of reducing the deficit
include making transfers from general revenues or adopting some combination of approaches.
If no action were taken until the combined trust funds become exhausted in
2041, then the effects of changes would be more concentrated on fewer
years:
• For example, payroll taxes could be raised to finance scheduled benefits
fully in every year starting in 2041. In this case, the payroll tax would
be increased to 16.41 percent at the point of trust fund exhaustion in
2041 and continue rising to 17.60 percent in 2081.
• Similarly, benefits could be reduced to the level that is payable with
scheduled tax rates in each year beginning in 2041. Under this scenario,
benefits would be reduced 25 percent at the point of trust fund exhaustion in 2041, with reductions reaching 30 percent in 2081.
Either of these examples would eliminate the shortfall for the 75-year period
as a whole by specifically eliminating annual deficits after trust fund exhaustion. Because of the increasing average age of the population (due to
16
Conclusion
expected improvement in life expectancy and continued low birth rates),
Social Security's annual cost will very likely continue to grow faster than
scheduled tax revenues after 2081. As a result, ensuring solvency of the system beyond 2081 would likely require further changes beyond those
expected to be needed for 2081.
The projected trust fund deficits should be addressed in a timely way to
allow for a gradual phasing in of the necessary changes and to provide
advance notice to workers. Making adjustments sooner will allow them to be
spread over more generations. Social Security plays a critical role in the lives
of this year's 50 million beneficiaries, and 163 million covered workers and
their families. With informed discussion, creative thinking, and timely legislative action, we will work with Congress and others to ensure that Social
Security continues to protect future generations.
For further information related to the contents of this report, see the following websites.
• www.socialsecurity.gov/OACT/TRJTR07Iindex.html
• www.cms.hhs.gov/ReportsTrustFunds/
• www.treas.gov/offices/economic-pol icy/social_security.html
17
Financial Operations & Legislatil'c Changes
III. FINANCIAL OPERATIONS OF THE TRUST FUNDS AND
LEGISLATIVE CHANGES IN THE LAST YEAR
A. OPERATIONS OF THE OLD-AGE AND SURVIVORS INSURANCE
(OASI) AND DISABILITY INSURANCE (DI) TRUST FUNDS, IN
CALENDAR YEAR 2006
Detailed infonnation on the operations of the OASI and DI Trust Funds I
during calendar year 2006 is presented in this section. Chapter IV provides
projections for calendar years 2007 through 2085.
1.
OASI Trust Fund
A statement of the income and disbursements of the Federal Old-Age and
Survivors Insurance Trust Fund in calendar year 2006, and of the assets of
the fund at the beginning and end of the calendar year, is presented in table
III.A 1. As shown in the table, total trust fund receipts in 2006 amounted to
$642.2 billion, while disbursements totaled $461.0 billion, resulting in an
increase in trust fund assets during 2006 of $181.3 billion.
The reported income and disbursements for 2006 were both affected by special transfers from the General Fund of the Treasury to the trust funds to correct the effects of a clerical error which resulted in overpayments to the
Internal Revenue Service (IRS) related to a provision in the law which permits beneficiaries to have income tax payments withheld from their Social
Security benefits.2 The overpayments to IRS began with the inception of
voluntary income tax withholding in 1999, and SSA detected and corrected
the ongoing problem in early 2006. The reimbursements to the trust funds for
the overpayments during the period 1999-2005 occurred, with interest, in
two stages; the first reimbursement was in August 2006 for overpayments in
2002-05, while the final reimbursement was in December 2006 for overpayments in 1999-200 I. 3 In table lILA I, the reimbursement of the nominal
amount overpaid to IRS over the period 1999-2005 (approximately $5.9 billion) is shown as a reimbursement of benefit payments, while the $0.8 billion
in interest reimbursed to the trust fund to compensate the OASI Trust Fund
for the investment income lost over that period is shown as part of interest on
reimbursements. Further details of the various components of trust fund
income and disbursements are discussed in the following paragraphs.
I Trust fund data are available by month. quarter. or year on the Social Security website at wwwsocialsecu·
rity.gov/OACT/ProgDataifundsQuery.html.
2 The overpayments to the IRS had no efTect on beneficiaries. The correct amounts of net benefits were paid
to these beneficiaries. with the appropriate withholding amounts reported to them on the,r annual Fom1s
1099.
) Because the first reimbursement was limited by statute to the last 4 calendar years (2002-05). legislation
(P.L. 109-465) was required to authorize the final reimbursement.
18
Calendar Year 2006 Operations
Included in total receipts during calendar year 2006 were $536.7 billion in
employment tax contributions. These contributions were partially offset by
transfers totaling $1.9 billion to the general fund for the estimated amount of
refunds to employees who worked for more than one employer during a year
and paid contributions on total earnings in excess of the contribution and
benefit base.
Net contributions thus amounted to $534.8 billion, an increase of 5.5 percent
over the amount in the preceding year. The increase in OASI tax contributions from calendar year 2005 to calendar year 2006 is due to increased earnings and the increase in the contribution and benefit base. (Table VI.A I
shows the tax rates and contribution and benefit bases in effect for past
years.)
Income based on taxation of benefits amounted to $15.6 billion in 2006.
About 99 percent of this income represents amounts credited to the trust
funds, on an estimated basis, generally in advance of the actual receipt of
taxes by the Treasury. The remaining I percent of the total income from taxation of benefits represents amounts withheld from the benefits paid to nonresident aliens.
19
Finallcial Operatiolls & Legislalive Changes
Table III.AI.-Operations of the OASI Trust Fund, Calendar Year 2006
[In millions]
Total assets, December 3 I , 2005 .
Receipts:
Contributions:
Employment taxes
. . . . .. . ................... .
Payments Irom the General Fund of the Treasury lor contributions subject to
reh~.. . . . . . . . . . .
Net contributions. ......... .. . ... .
Income based on taxation of bene lit payments:
Withheld from benefit payments to nonresident aliens ..
All other, not subject to withholding
Total income from taxation of benetits ............................. .
ReImbursement from the General Fund of the Treasury lor costs of payments
to umnsured persons who attained age 72 before 1968.. . ............. .
Investment income and interest adjustments:
Interest on investments.
Interest adjustments 2
$1,663,037
$536,679
- --1,892
-143
- -15,485
--
Total disbursements.
Net increase in assets.
Total assets, December 3 I, 2006 .
15,628
11
90,978
839
Total investment income and interest adjustments.
Gifts.
Total receipts
Disbursements:
Benefit payments:
Gross benelit payments.
Olfset for collected overpayments .............. ........ . ... .
Reimbursement from the general fund for excess amounts of voluntary
. ..
income tax withholding. .
Reimbursement from the general fi.md lor unnegotiated checks.
Net benelit payments.
. ...
Transfer to the Railroad Retirement "Social Security Equivalent Benelit Account"
Payment for costs of vocational rehabilitation servIces for disabled beneliciaries .
Administrative expenses:
Costs incurred by:
Social Security Administration ..
Department of the Treasury.
Offsetting receipts from sales of supplies, materials, etc.
Miscellaneous reimbursements from the general fund J .
Net administrative expenses.
534,787
91,8/7
1/
642,231
461,658
-1,201
-5,912
-52
454,493
3,458
4
2,458
557
11
-4
3,010
460,965
181,266
1,844,304
I Between -$500,000 and $500.000.
2 Includes (I) interest on transfers between the trust fund and the general fund account for the Supplemental
Security Income program due to adjustments in the allocation of administrative expenses, (2) interest arising
from the revised allocation of administrative expenses among the trust funds, and (3) interest on certain reimbursements to the trust fund .
.1 Reimbursements for costs incurred in perfonning certain legislatively mandated activities not directly
related to administering the OASI program.
Note: Totals do not necessarily equal the sums of rounded components.
Special payments are made to uninsured persons who meet certain requirements. The costs associated with providing such payments are largely reimbursed from the General Fund of the Treasury. Accordingly, transfers
totaling $15,922 were made in 2006, reflecting costs incurred in fiscal year
2005.
The OASI Trust Fund was credited with interest netting $91.8 billion, which
consisted of (l) interest earned on the investments of the trust fund, (2) inter-
20
Calendar Year 2006 Operations
est on transfers between the trust fund and the general fund account for the
Supplemental Security Income program due to adjustments in the allocation
of administrative expenses, (3) interest arising from the revised allocation of
administrative expenses among the trust funds, and (4) interest on certain
reimbursements to the trust fund, including the interest on special reimbursements related to voluntary income tax withholding described earlier. The
remaining $49,668 of receipts consisted of gifts received under the provisions authorizing the deposit of money gifts or bequests in the trust funds.
Of the $461.0 billion in total OAS! disbursements, $454.5 billion was for net
benefit payments. Excluding the effect of special reimbursements totaling
$5.9 billion in principal related to voluntary income tax withholding, net
benefit payments would have been $460.4 billion. This higher amount of net
benefit payments in calendar year 2006 represents an increase of 5.8 percent
over the corresponding amount in calendar year 2005. This increase is due
primarily to (I) an increase in the total number of beneficiaries and (2) an
increase in the average benefit amount. The increase in the average benefit
amount in 2006 was due in large part to the automatic cost-of-Iiving benefit
increase of 4.1 percent which became effective for December 2005 under the
automatic-adjustment provisions in section 215(i) of the Social Security Act.
Provisions of the Railroad Retirement Act require an annual financial interchange between the Railroad Retirement and OASD! programs. The purpose
of such provisions is to put the OAS! and D! Trust Funds in the same financial position they would have been had railroad employment always been
covered by Social Security. Under those provisions, the Railroad Retirement
Board and the Commissioner of Social Security determined that a transfer of
$3.5 billion to the Social Security Equivalent Benefit Account from the
OAS! Trust Fund was required in June 2006.
A disbursement of $4 million was made in 2006 to cover the costs of vocational rehabilitation services furnished to disabled widow( er) beneficiaries
and to those children of retired or deceased workers who were receiving benefits on the basis of disabilities that began before age 22. Reimbursement
from the trust funds for the costs of vocational rehabilitation services is made
only in those cases where the services contributed to the successful rehabilitation of the beneficiary.
The remaining $3.0 billion of disbursements from the OAS! Trust Fund represented net administrative expenses. The expenses of administering the
OASDI and Medicare programs are allocated and charged directly to each of
the various trust funds through which those programs are financed, on the
basis of provisional estimates. Similarly, the expenses allocated for administering the Supplemental Security Income program are charged directly to the
General Fund of the Treasury on a provisional basis. Periodically, as actual
experience develops and is analyzed, adjustments to the allocations of
21
Financial Operations & Legislative Changes
administrative expenses for prior periods are effected by interfund transfers
and transfers between the OASI Trust Fund and the general fund account for
the Supplemental Security Income program, with appropriate interest adjustments. As described earlier, the interest adjustments arising from the reallocation of administrative expenses are recorded in the trust fund accounting
under investment income.
Over 80 percent of OASI net administrative expenses represent the cost of
administering the program and are charged to the trust fund by the Social
Security Administration ($2.5 billion in 2006). In addition, the Department
of the Treasury charges directly to the trust fund certain expenses
($0.6 billion in 2006) that it incurs in helping to administer the OASI program. In addition a relatively small adjustment to administrative expenses is
an offset ($372,967 in 2006) representing income from the sale of excess
supplies and equipment.
Finally, certain net reimbursements are made from the General Fund of the
Treasury for administrative costs incurred by the Social Security Administration in performing certain legislatively mandated activities that are not
directly related to the OASI program. These reimbursements include the
costs associated with union activities related to administering the OASI program and providing information to participants in certain pension plans.
Such reimbursements totaled $4 million in 2006.
The assets of the OASI Trust Fund at the end of calendar year 2006 totaled
$1,844.3 billion, consisting of $1,845.3 billion in U.S. Government obligations and, as an offset, an extension of credit amounting to $1.0 billion
against securities to be redeemed within the following few days. The effective annual rate of interest earned by the assets of the OASI Trust Fund during calendar year 2006 was 5.3 percent, as compared to 5.4 percent earned
during calendar year 2005. Table VI.A5, presented in appendix A, shows a
detailed listing ofOASI Trust Fund holdings by type of security, interest rate,
and year of maturity at the end of each year 2005 and 2006.
All securities held by the trust funds are backed by the full faith and credit of
the United States Government, as required by law. Those currently held by
the OASI Trust Fund are special issues (i.e., securities sold only to the trust
funds). These are of two types: short-term certificates of indebtedness and
long-term bonds. The certificates of indebtedness are issued on a daily basis
for the investment of receipts not required to meet current expenditures, and
they mature on the next June 30 following the date of issue. Special-issue
bonds, on the other hand, are normally acquired only when special issues of
either type mature on June 30. The amount of bonds acquired on June 30 is
equal to the amount of special issues maturing, less amounts required to meet
expenditures on that day.
22
Calendar Year 2006 Operations
Section 20 I (d) of the Social Security Act provides that the obligations issued
for purchase by the OASI and 01 Trust Funds shall have maturities fixed
with due regard for the needs of the funds. The usual practice has been to
spread the holdings of special issues, as of each June 30, so that the amounts
maturing in each of the next 15 years are approximately equal. Accordingly,
the amounts and maturity dates of the OASI special-issue bonds purchased
on June 30, 2006, with an interest rate of 5. I 25 percent, were selected so that
the maturity dates of the total portfolio of special issues were spread evenly
over the IS-year period 2007-21. The amount of bonds purchased on June
30,2006 is shown in table lIl.A 7.
2.
DI Trust Fund
A statement of the income and disbursements of the Federal Disability Insurance Trust Fund in calendar year 2006, and of the assets of the fund at the
beginning and end of the calendar year, is presented in table 1I1.A2.
Line entries in the DI statement are similar to those in the OASI statement
and the explanations of the OAS! entries generally apply to DI as well.
Net contributions amounted to $90.8 billion, an increase of 5.5 percent from
the amount in the preceding calendar year. This increase is attributable to the
same factors, insofar as they apply to the DI program, which accounted for
the change in contributions to the OASI Trust Fund.
Of the $94.5 billion in total disbursements, $91. 7 billion was for net benefit
payments. Excluding the effect of special reimbursements totaling $0.7 billion in principal related to voluntary income tax withholding, net benefit payments would have been $92.4 billion. This higher amount of net benefit
payments in calendar year 2006 represents an increase of 8.2 percent over
the corresponding amount of benefit payments in calendar year 2005. This
increase in Dr benefit payments was due to the same factors that resulted in
the net increase in benefit payments from the OAS! Trust Fund. However,
the number of persons receiving benefits from the 01 Trust Fund increased
more rapidly in 2006 than the number receiving benefits from the OAS!
Trust Fund largely due to a) the current ages of the baby-boom generation, b)
the scheduled increase in the normal retirement age (NRA), and c) the special administrative action, undertaken by SSA beginning in 2001, to identify
and award benefits from the D! Trust Fund to a substantial number of current
and former recipients of SS! benefits whose disability-insured status under
the DI program was not previously recognized. Total DI disbursements,
which started to exceed non-interest income in 2005, continue to exceed such
income in 2006. However, as in 2005, total DI income (including interest) in
2006 exceeds total disbursements.
23
Financial Operations & Legislative Changes
Table III.A2.-0perations of the DI Trust Fund, Calendar Year 2006
[In millions)
Total assets. December 31. 2005 .
Receipts:
Contributions:
Employment taxes .............................................. .
Payments from the General Fund of the Treasury for contributions subject to
refu~ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net contributions .
Income based on taxation of benefit payments:
Withheld from benetit payments to nonresident aliens ..
All other, not subject to withholding.
Total income from taxation of benetits
Investment income and interest adjustments:
Interest on investments.
Interest adjustments J
$195,623
$91,129
-321
90,808
4
1,226
1,230
10,518
_ _8_5
Total investment income and interest adjustments.
Total receipts .
Disbursements:
Benetit payments:
Gross benetit payments
93,113
OfTset for collected overpayments. .
-729
Reimbursement from the general fund for excess amounts of voluntary
income tax withholding
-678
Reimbursement from the general fund for unnegotiated checks. .
-26
Net benefit payments.
Transfer to the Railroad Retirement "Social Security Equivalent Benetit Account" .
Payment for costs of vocational rehabilitation services for disabled beneficiaries.
Administrative expenses:
Costs incurred by:
Social Security Administration.
2,220
Department of the Treasury.
98
Miscellaneous reimbursements from the general fund 2
___
8
Total admimstrativc expenses.
Total disbursements.
Net increase in assets.
Total assets, December 31, 2006 .
10,603
102,641
91,680
388
61
2,326
94,456
8,185
203,808
J Includes ( I) interest on transfers between the trust fund and the general fund account for the Supplemental
Security Income program due to adjustments in the allocation of administrative expenses, (2) interest arising
from the revised allocation of administrative expenses among the trust funds, and (3) interest on certain
reimbursements to the trust fund.
2 Reimbursements for costs incurred in per/orming certain legislatively mandated activities not directly
related to administering the DI program
Note: Totals do not necessarily equal the sums of rounded components.
The assets of the DI Trust Fund at the end of calendar year 2006 totaled
$203.8 billion, consisting of $203.9 billion in U.S. Government obligations
and, as an offset, an extension of credit amounting to $0.1 billion against
securities to be redeemed within the following few days. The effective
annual rate of interest earned by the assets of the DI Trust Fund during calendar year 2006 was 5.4 percent, compared to 5.5 percent earned during calendar year 2005. Table VI.A6, presented in appendix A, shows a detailed
listing of DI Trust Fund holdings by type of security, interest rate, and year
of maturity at the end of each year 2005 and 2006.
24
Calendar Year 2006 Operations
3.
OASI and OJ Trust Funds, Combined
A statement of the operations of the income and disbursements of the OAS!
and DI Trust Funds, on a combined basis, is presented in table IILA3. The
entries in this table represent the sums of the corresponding values from
tables lILA I and IILA2. For a discussion of the nature of these income and
expenditure transactions, reference should be made to the two preceding subsections covering OAS! and DI separately.
Table III.A3.-0perations of the Combined OASI and DI Trust Funds,
Calendar Year 2006
[In millions]
Total assets. December 3 I. 2005 .
Receipts:
Contributions:
Employment taxes . . . . .. .......... . ........................... .
Payments from the General Fund of the Treasury for contributions subject to
refund.
Net contributions
Income based 011 taxation of benefit payments:
Withheld from benefit payments to nonresident aliens
All other. not subject to withholding.
Total income from taxation of bendits ..
Reimbursement from the General Fund of the Treasury for costs of payments
to uninsured persons who attained age 72 bef()re 1968 ..
Investment income and interest adjustments:
Interest on investments ..
Interest adjustments 2 .
Total investment income and interest adJustments.
Gifts.
Total receipts ..
Disbursements:
Benefit payments:
Gross benefit payments.
Offset for collected overpayments ..
Reimbursement from the general fund for excess amounts of voluntary
income tax withholding.
Reimbursement from the general fund for unnegotiated checks.
Net benefit payments.
Transfer to the Railroad Retirement "Social Security Equivalent Benefit Account"
Payment for costs of vocational rehabilitation services for disabled beneficiaries.
Administrative expenses:
Costs incurred by:
Social Security Administration.
Department of the Treasury.
Offsetting receipts from sales of supplies. materials. etc ...
Miscellaneous reimbursements trom the general fund J .'
Net administrative expenses.
Total disbursements.
Net increase m assets.
Total assets. December 3 I. 2006 ..
$1.858.660
$627.808
·2,213
625.594
147
16.711
16,858
l'
101,496
924
102,420
II
744,873
554,771
·1,930
-6,590
-78
546,173
3,840
65
4.677
656
11
4
5,337
555,421
189,452
2,048,112
Between -$500,000 and $500,000.
Includes (I) interest on transfers between the trust funds and the general fund account for the Supplemental
Security Income program due to adjustments in the allocation ofadmmistratlve expenses. (2) mterest ansmg
from the revised allocation of administrative expenses among the trust funds. and (3) IIlterest on certalll
reimbursements to the trust funds .
.1 Reimbursements for costs incurred in performing certain legislatively mandated actiVIties not directly
related to administering the OASI and DI programs.
I
2
Note: Totals do not necessarily equal the sums of rounded components.
25
Fil/al/cial Operatiolls & Legi.<;lalil'e Changes
To provide a context for estimates of future trust fund income and expenditures provided later in this report, table III.A4 compares past estimates of
contributions and benefit payments for calendar year 2006, as shown in the
2002-06 Annual Reports, with the corresponding actual amounts in 2006. I
Table III.A4.-Comparison of Actual Calendar Year 2006 Trust Fund Operations
With Estimates Made in Prior Reports I
[Amounts in billions]
Benclit payments·1
Net contributions 2
Amount
DifTerence
from actual
(percent)
Amount
DifTerence
from actual
(percent)
$4592
450.4
443.2
450.0
-0.3
-2.2
-3.7
-2.3
461.7
.3
OASI Trust Fund:
Estimate
Estimate
Estimate
Estimate
Es\lmate
in
in
in
in
in
2002
2003
2004
2005
2006
report
report
report
report
report
.
.
.
.
.
Actual amount ..
$558.3
542.9
528.1
528.8
532.6
4.4
1.5
-1.2
-1.1
-4
4460.4
534.8
DI Trust Fund:
Estimate
Estimate
Estimate
Estimate
Es\lmale
in 2002
2003
in 2004
in 2005
in 2006
111
report
report
report
report
report
.
.
.
94.8
92.2
89.7
89.S
.
904
Actual amount
4.4
1.5
-1.2
-11
-.4
87.6
88.8
86.4
89.0
93.5
-5.2
-4.0
-6.5
-3.7
1.2
492.4
90.8
OASI and DI Trust Funds, combined:
Esttmate
Estimate
Estimate
Estimate
Estimate
in
in
in
in
in
2002 report .
2003 report
2004 report .
2005 report
2006 report .
Actual amount ..
653.2
635.1
617.8
618.6
623.1
625.6
4.4
1.5
-1.2
-1.1
-4
546.7
539.2
529.6
539.0
555.2
-1.1
-2.5
-4.2
-2.5
.4
4552.8
The estimates shown are based on the intermediate assumptions
contributions for 2006 rellect adjustments for prior calendar years (see appendix A on page 126
for description of these adjustments). "Estimated" contributions also include such adjustments. but on an
estimated basis.
3 Includes payments. if any. for vocational rehabilitation services furnished to disabled persons receiving
benetits because or their disabilities
4 Excludes reimbursements in 2006 for excess amounts of voluntary income tax withholding in 1999-2005.
Reimbursements are $5.9 billion and $0.7 btllion for OASI and 01. respecttvely
I
2 "Actual"
A number of factors can contribute to differences between estimates and subsequent actual amounts, including actual values for key demographic, economic, and other variables that di ffer from assumed levels. In addition, new
legislation or other administrative initiatives that were unanticipated at the
time the earlier estimates were completed can contribute to such di fferences.
I Estimated amounts used to calculate percentage errors are before rounding to anllllll1ts shO\\ n
reports.
26
III
the annual
Calendar Year 2006 Operations
At the end of calendar year 2006, about 49.1 million persons were receiving
monthly benefits under the OASDI program. Of these persons, about
40.S million and 8.6 million were receiving monthly benefits from the OASI
Trust Fund and the OJ Trust Fund, respectively. The number of persons
receiving benefits from the OASJ and OJ Trust Funds grew by 1.0 percent
and 3.7 percent, respectively, during the calendar year. The estimated distributions of benefit payments in calendar years 200S and 2006, by type of beneficiary, are shown in table I1I.A5 for each trust fund separately.
Table III.A5.-Distribution of Benefit Payments by Type of Beneficiary or Payment,
Calendar Years 2005 and 2006
[Amounts in millions1
Calendar year 2006 1
Calendar year 2005
Total OASDI benelit payments.
OASI benelit payments.
DI benefit payments
OASI benefit payments. total
Monthly benefits:
Retired workers and auxiliaries.
Retired workers .
Spouses ..
Children.
Survivors of deceased workers.
Aged widows and widowers.
Disabled widows and widowers ...
Parents ..
Children ....
Widowed mothers and bthers
caring for child beneficiaries.
Uninsured persons generally aged 72
before 1968 .
Lump-sum death payments .
DI benefit payments. total
Disabled workers.
Spouses.
Children.
Amount
Percentage
of total
Amount
Percentage
of total
$520.699
435.325
85.373
100.0
83.6
16.4
$522.763
460.405
92.358
100.0
83.3
16.7
435.325
\00.0
460,405
\00.0
345.056
321.670
20,497
2.888
90.064
7\.745
1.659
24
15.101
79.3
73.9
4.7
.7
20.7
16.5
.4
79.7
74.5
4.6
.7
20.3
16.1
.4
3.5
366,9\ I
342.826
21.003
3.082
93,290
74.134
1,758
24
15.812
.4
1.562
~!
1.535
JI
~,
f'
206
85.373
78.361
483
6,529
100.0
91.8
.6
7.6
Ji
204
92.358
84,928
509
6.921
"I
3.4
.3
~/
f/
100.0
92.0
.6
7.5
1 Excludes reimbursements in 2006 for excess amounts of voluntary income tax withholding in 1999-2005.
Reimbursements are $5.9 billion and $0.7 billion for OASI and DI. respectively.
2 Less than 0.05 percent.
3 Less than $500.000.
Note: Totals do not necessarily equal the sums of rounded components.
Net administrative expenses charged to the OASJ and OJ Trust Funds in calendar year 2006 totaled $S.3 billion. This amount represented 0.9 percent of
contribution income and 1.0 percent of expenditures. Corresponding percentages for each trust fund separately and for the OASDJ program as a whole
are shown in table IlI.A6 for each of the last S years.
27
Financial Operations & Legislative Changes
Table III.A6.-Administrative Expenses as a Percentage of Contribution Income and of
Total Expenditures, Calendar Years 2002-06
OASI Trust Fund
Calendar year
Contribution
Total
income expenditures
2002.
2003 .
2004.
2005.
2006.
0.5
.6
.5
.6
.6
OASI and DI
Trust Funds,
combined
DI Trust Fund
Contribution
Total
mcome expenditures
27
0.5
.6
.6
.7
.7
2.6
2.7
2.7
2.6
Contribution
Total
incume expenditures
3.0
2.7
2.7
2.6
2.5
0.9
\.0
.9
1.0
1.0
0.8
.9
.8
.9
.9
Changes in the invested assets of the OAS! and DI funds between the end of
2005 and the end of 2006 are a result of the acquisition and disposition of
securities during calendar year 2006. Table liLA 7 presents these investment
transactions for each trust fund separately and combined.
Table III.A 7.-Trust Fund Investment Transactions, Calendar Year 2006
(In millions]
Invested assets, December 31. 2005
Acquisitions:
Special issues:
Cerliticates of indebtedness.
Bonds I .
Total acquisitions.
Dispositions:
Special issues'
Cerlificates of indebtedness.
Bonds ..
Total dispositions.
Net increase in invested assets.
Invested assets, December 3 I, 2006
I
OASI
Trust Fund
DI
Trust Fund
OASI and DI
Trust Funds,
combined
$1,663,726
$195,715
$1.859,441
605.932
280,103
98,532
22.888
704,464
302,992
886.036
121.420
1.007,456
577,034
127.389
98,618
14,595
675,652
141,984
704,423
113,213
817,636
181.613
8.207
189.820
1,845,339
203,922
2,049,260
Amounts shown were purchased 011 June 30, 2006. The interest rate on such purchases was 5.125 percent.
Note: All investments are shown at par value.
28
Social Security Amendments in 2006
B. SOCIAL SECURITY AMENDMENTS SINCE THE 2006 REPORT
Since the 2006 Annual Report was transmitted to Congress on May I, 2006,
one law was enacted that had a direct financial effect on the OASDI program.
The Social Security Trust Funds Restoration Act of 2006, Public Law 109465, required the General Fund of the Treasury to reimburse the combined
OASl and 01 Trust Funds to fully correct the effects of a clerical error that
resulted in excess transfers to the Internal Revenue Service for years 1999
through 2005 for voluntary income tax withholding by Social Security beneficiaries. This reimbursement occurred in December 2006, and is reflected in
the reported OASI and DI Trust Fund balances as of December 31, 2006.
See section lILA. I. for more details.
29
Actuarial Estimates
IV. ACTUARIAL ESTIMATES
This chapter presents actuarial estimates of the future financial condition of
the Social Security program. These estimates include projected income and
cost of the OASI and DI Trust Funds, in dollars over the next 10 years and as
a percentage of taxable payroll or in present-value dollars over the full
75-year period, along with a discussion of a variety of measures of the adequacy of current program financing. In this report we carefully distinguish
between (\) the cost (or obligations) of the program, which includes, for the
future, all benefits scheduled under current law, and (2) expenditures (disbursements or outgo), which include actual payments for the past and only
the portion of the cost of the program that is projected to be payable with the
financing provisions in current law.
As described in the Overview section of this report, these estimates depend
upon a broad set of demographic, economic, and programmatic factors.
Since assumptions related to these factors are subject to uncertainty, the estimates presented in this section are prepared under three sets of assumptions,
to show a range of possible outcomes. The intermediate set of assumptions,
designated as alternative II, reflects the Trustees' best estimate of future
experience; the low cost alternative I is more optimistic and the high cost
alternative III more pessimistic for the trust funds' future financial outlook.
The intermediate estimates are shown first in the tables in this report, followed by the low cost and high cost estimates. These sets of assumptions,
along with actuarial methods used to produce the estimates, are described in
chapter Y. In this chapter, the estimates and measures of trust fund financial
adequacy for the short range (2007-16) are presented first, followed by estimates and measures of actuarial status for the long range (2007-81) and for
the infinite future. As an additional illustration of uncertainty, estimated
probability distributions of certain measures are presented in appendix E.
A. SHORT-RANGE ESTIMATES
Financial adequacy, or solvency, of the trust funds is generally measured on a
year-by-year basis using the "trust fund ratio," which is defined to be the
assets at the beginning of the year expressed as a percentage of the projected
cost for the year. Thus, the trust fund ratio represents the proportion of a
year's cost which can be paid with the funds available at the beginning of the
year. During periods when trust fund income exceeds disbursements, the
excess is held in the trust funds which serve to advance fund a portion of the
Social Security program's future financial obligations. During periods when
trust fund disbursements exceed income, as might happen during an economic recession, trust fund assets are used to meet the shortfall. In the event
of recurring shortfalls for an extended period, the trust funds can allow time
for the development, enactment, and implementation of legislation to restore
financial stability to the program.
30
Short-Rallge Estimates
The test of financial adequacy over the short-range projection period is applicable to the OASI and DI Trust Funds individually and on a combined basis.
The requirements of this test are as follows: If the estimated trust fund ratio
is at least 100 percent at the beginning of the projection period, then it must
be projected to remain at or above 100 percent throughout the 10-year projection period. Altematively, if the ratio is initially less than 100 percent,
then it must be projected to reach a level of at least 100 percent within
5 years and to remain at or above 100 percent throughout the remainder of
the 10-year period. In addition, the fund's estimated assets at the beginning
of each month of the I O-year period must be sufficient to cover that month's
disbursements. This test is applied on the basis of the intermediate estimates.
Failure to meet this test by either trust fund is an indication that solvency of
the program over the next 10 years is in question and that legislative action is
needed to improve the short-range financial adequacy of the program.
1.
Operations of the OASI Trust Fund
This subsection presents estimates of the operations and financial status of
the OASI Trust Fund for the period 2007-16, based on the assumptions
described in chapter V. No changes are assumed to occur in the present statutory provisions and regulations under which the OASDI program operates. I
These estimates are shown in table IVA I and indicate that the assets of the
OAS! Trust Fund would continue to increase rapidly throughout the next 10
years under all three sets of assumptions. Also, based on the intermediate
assumptions, the assets of the OASI Trust Fund would continue to exceed
100 percent of annual expenditures by a steadily increasing amount through
the end of 2016. Consequently, the OASI Trust Fund satisfies the test of
short-range financial adequacy by a wide margin. The estimates in table
IVA I also indicate that the short-range test would be satisfied even under
the high cost assumptions (see figure IVA I for graphical illustration of these
results ).
The increases in estimated income shown in table IVA I under each set of
assumptions reflect increases in estimated OASDI taxable eamings and
growth in interest eamings on the invested assets of the trust fund. For each
altemative, employment and eamings are assumed to increase in every year
through 2016. The number of persons with taxable eamings would increase
on the basis of altematives I, II, and III from 162 million during calendar
year 2006 to about 177 million, 173 million, and 170 million, respectively, in
2016. The total annual amount of taxable eamings is projected to increase
from $5,057 billion 111 2006 to $8,112 billion, $8,145 billion, and
I The estimates shown in this subsection reflect 12 months of benefit payments in each year of the shortrange projection period. In practice. the actual payment dates have at times been shifted over calendar year
boundaries as a result of the statutory requirement that benefit checks be delivere9 early when the normal
check delivery date is a Saturday. Sunday. or legal public holiday. The annual benefit figures are shown as If
those benetit checks were delivered on the usual date.
31
Actuarial Estimates
$8,463 billion, in 2016, on the basis of alternatives I, II, and III, respectively.1 These increases in taxable earnings are due primarily to (1) projected
increases in employment levels as the working age (20-64) population
increases, (2) increases in average earnings in covered employment (reflecting both real growth and price inflation), and (3) increases in the contribution
and benefit base in 2007-16 under the automatic-adjustment provisions.
Growth in interest earnings represents a signi ficant component of the overall
increase in trust fund income during this period. Although interest rates payable on trust fund investments are not assumed to change substantially from
current levels, the continuing rapid increase in OAS! assets will result in a
corresponding increase in interest income. By 2016, interest income to the
OAS! Trust Fund is projected to be about 20 percent of total trust fund
income on the basis of the intermediate assumptions, as compared to
14 percent in 2006.
Figure IV.Al.-Short-Range OASI and 01 Trust Fund Ratios
[Assets as a percentage of annual cost]
550%
I.
500%
Historical
450°;',
III
400% '
350%
300%
'-OASI'
01
I
; - ..
.. .. .. ..
200'Yo
150%
..
:..
.........
.. - .. - .. - ..
,
~
"Minimum" level for short-term financial adequacy
~
..
100'Yo
50%
0%
1996
.
Jll
,
1998
I
2000
2002
2004
2006
2008
2010
2012
2014
i
I
",
2016
Calendar year
1 Note that the pattern, by alternative, of these nominal amounts of total taxable earnings is not what mlghl
be expected, but the reverse, because of the varying inflatIOn assumptIOns embedded 111 the respective estimates
32
Short-Range Estimates
Table IV.A I.-Operations of the OASI Trust Fund. Calendar Years 2002-16 1
[Amoullts in billions]
Income
Cost
Net
Taxacontri- tion of
Calendar
year
Total 2 butions benefits
Historical data:
2002 .. $539.7 $455.2
2003 .. 543.8
456.1
2004.
566.3
472.8
2005
506.9
604.3
2006.
642.2
534.8
Intermediate:
2007 .. 675.7
559.9
589.1
2008 ..
715.0
2009.
762.S
623.2
2010.
810.3
655.1
2011
688.2
8608
Net
interest
Assets
Net
AdmJJ1Benetit iSlraRRB Increase
paylive interduring
Total ments
year
costs change
$393.7 $388.1
406.0 399.8
421.0 415.0
441.9 435.4
461.0 454.5
$12.9
12.5
14.6
13.8
15.6
$71.2
75.2
79.0
84.0
91.8
17.3
IS.8
20.8
492.2
511.1
539.5
573.5
610.6
$2.1
2.6
2.4
3.0
3.0
$3.5
3.6
3.6
485.8
504.5
532.9
566.9
604.0
2.9
3.1
3.1
3.1
3.1
3.5
3.4
3.5
3.5
3.6
36
3.5
Amount Trust
at end fund
of year rati0 3
$146.0 $1,217.5
137.8
1,355.3
145.3
1,500.6
1,663.0
162.4
1,844.3
181.3
272
300
322
340
361
IS3.4
204.0
223.3
236.8
250.1
2,027.7
2,23l.7
2,455.1
2,691.8
2,941.9
375
397
414
428
441
25.8
9S.5
1071
IIS.9
132.3
146.8
911.4
2012.
2013 .
962.1
2014 .. 1,013.7
2015 .. 1,067.4
2016
1,122.8
Low Cost:
2007.
678.2
2008
721.7
2009 .. 7661
2010.
810.7
2011
858.2
721.2
753.1
786.4
821.5
858.1
28.5
31.8
34.4
37.6
41.0
161.7
177.2
192.9
208.3
223.7
652.0
699.1
750.5
805.4
864.4
645.1
692.0
743.2
797.9
856.8
3.2
3.2
3.3
3.3
3.4
3.8
3.9
4.0
4.2
4.3
259.4
262.9
2632
262.0
258.3
3,201.4
3,464.3
3,727.5
3,989.5
4,2478
451
458
462
463
462
562.2
595.5
627.7
658.9
690.7
17.2
18.7
20.6
22.4
25.0
987
107.5
117.8
129.3
142.5
492.0
509.5
535.0
563.4
593.6
485.5
503.0
528.5
556.8
587.0
2.9
3.1
3.1
3.1
3.1
35
3A
3.4
3.5
3.5
186.2
212.2
231.1
247.3
264.6
2,0305
2,242.7
2,473.8
2,721.1
2,985.7
375
398
419
439
458
2012
906.9
956.7
2013.
2014 .. 1,008.4
2015. 1,060.8
2016. 1,114.8
High Cost:
2007.
667.6
2008
696.3
2009 ..
746.9
788.9
2010.
849.3
2011
722.6
754.1
787.2
820.4
854.7
27,4
30.3
32.4
35.1
37.9
156.8
172.3
1889
205.3
222.1
627.1
665.6
707.4
751.9
799.4
620.4
658.8
700.5
744.8
792.3
31
3.1
3.2
3.2
3.2
3.6
3.7
3.8
3.9
3.9
279.7
291.0
301.0
308.9
315.4
3,265.5
3,5565
3,857.5
4,166.3
4,481.7
476
491
503
513
521
553.0
571.9
608.6
635.5
674.4
17.3
18.9
210
23.2
26.7
97.3
105,4
117.3
130.2
148.2
492.5
515.5
546.6
583.1
632.1
486.0
508.9
540.0
576.4
625.2
2.9
3.1
3.1
3.1
3.2
3.5
35
3.6
37
175.2
180.8
200.3
205.8
217.2
2,019.5
2,200.2
2,400.6
2,606.3
2,823.5
375
392
403
412
412
724.9
768.7
809.7
850.4
891.3
30,4
34.7
38.2
42.1
46.3
175.8
196.5
211.0
223.0
234.9
694.5
763.8
833.5
902.4
976.6
687.3
756.1
825.5
893.9
967.9
3.3
3.4
3.5
3.6
3.6
4.0
4.2
4.6
4.9
5.1
236.6
236.2
225.3
213.1
195.9
3,060.1
3,296.3
3,521.7
3,734.7
3,930.6
407
401
395
390
382
2012.
2013.
2014.
2015.
2016.
931.1
1,000.0
1,058.9
1,115.5
1,172.5
228
3.4
I A detailed description of the components of income and cost, along with complete histoncal values, is presented in appendix A.
2 "Total Income" column includes transfers made between the OASI Trust Fund and the General Fund of the
Treasury that are not included III the separate components of income shown. These transfers consist of payments for (I) the cost of noncontributory wage credits for military service before 1957, and (2) the cost of
benefits to certain uninsured persons who attained age 72 before 1968. Transfers for the cost of pre-1957
military service noncontributory wage credits were: (I) $414 million from the General Fund of the Treasury
to the OASI Trust Fund in February 2002, and (2) $350 million from the trust fund to the general' fund in
December 2005. After 2006 such transfers are estimated to be less than $500.000 in each year
.1 The "Trust fund ratio" column represents assets at the beginning of a year (which are identical to assets at
the end of the prior year shown in the "Amount at end of year" column) as a percentage of cost for the year.
Note: Totals do not necessarily equal the sums of rounded components.
33
Actuarial Estimates
Rising expenditures during 2007-16 reflect automatic benefit increases as
well as the upward trend in the number of beneficiaries and in the average
monthly earnings underlying benefits payable by the program. The growth in
the number of beneficiaries in the past and the expected growth in the future
result both from the increase in the aged population and from the increase in
the proportion of the population which is eligible for benefits.
The estimates under all three sets of assumptions shown in table IVA I indicate that income to the OASI Trust Fund would substantiaIly exceed expenditures in every year of the short-range projection period, and assets are
therefore estimated to increase substantially.
The portion of the OASI Trust Fund that is not needed to meet day-to-day
expenditures is used to purchase financial securities, generally special public-debt obligations of the U.S. Government. The cash used to make these
purchases flows to the General Fund of the Treasury and is used to meet various Federal outlays or to reduce the amount of publicly-held Federal debt.
Interest on these securities is credited to the trust fund and, when the securities mature they are reinvested in new securities if not immediately needed to
pay program costs. When securities are redeemed prior to maturity in order
to pay program costs, general fund revenues flow to the trust fund. Thus, the
investment operations of the trust fund result in various credits and cash
flows between the trust fund and the General Fund of the Treasury.
2.
Operations of the DI Trust Fund
The estimated operations and financial status of the Dl Trust Fund during
calendar years 2007-16 under the three sets of assumptions are shown in
table IVA2, together with values for actual experience in 2002-06. Income is
generaIly projected to increase steadily under each alternative, reflecting
most of the same factors described previously in connection with the OASI
Trust Fund. The estimates indicate that the assets of the or Trust Fund would
also continue to increase throughout the next 10 years under the low cost
assumptions, but would peak in 2012 and then begin to decline under the
intermediate assumptions. Under the high cost assumptions, DI assets would
increase through 2007 and decline steadily thereafter until exhaustion in
2016.
Cost is estimated to increase in part due to increases in average benefit levels
resulting from (I) automatic benefit increases and (2) projected increases in
the amounts of average monthly earnings on which benefits are based. In
addition, under all three sets of assumptions, the number of DI beneficiaries
in current-payment status is projected to continue increasing throughout the
short-range projection period. Over the period 2006-16, the projected annual
average growth rate in the number of DI worker beneficiaries is roughly 1.7,
2.5, and 3.9 percent under alternatives I, II, and III, respectively. Growth is
34
Short-Range Estimates
largely attributable to the gradual progression of the baby-boom generation
through ages 50 to normal retirement age, at which higher rates of disability
incidence are experienced.
Annual increases in incidence rates over the period 2001-03 represented a
notable departure from the experience of the preceding decade, which generally showed modest annual declines in the age-sex-adjusted disability incidence rate. I During 2004 and 2005 however, this growth in the incidence
rate subsided, and the incidence rate even declined in 2006. Nevertheless,
incidence rates are still at a level somewhat higher than experienced during
the late 1990s. The increases in 2001-03 were likely due in large part to the
slowdown in economic growth experienced during that period. However, a
special administrative activity undertaken by SSA beginning in 200 I has
also contributed slightly to the upsurge in disabled worker awards. This special workload was the result of discovering a substantial number of current or
fonner recipients of Supplemental Security Income (SSI) benefits whose disability-insured status under the DI program was not previously recognized.
As this special disability workload continues to be processed over the next
several years, the resulting disability awards will contribute to temporarily
higher incidence rates than would have been expected as part of longer tenn
underlying trends.
Estimates of the total size of this special workload, and the schedule for processing these cases, remain roughly the same as assumed for the 2006 report.
After the last of these special workload cases is processed in about 2010, the
incidence of disability is projected in this report to drop back somewhat from
then current levels, and to remain roughly level over the remainder of the
short-range period under the three alternative sets of assumptions.
I Historical and projected patterns of disability incidence rates are described in greater detail in section
V.e.G.
35
Actltariul Estimates
Table IY.A2.-Operations of the 01 Trust Fund. Calendar Years 2002-16 1
[.-\mounts
In
b1Iilon;]
Income
Calendar
:
~3.r
Assets
Cost
"d
.-\dmlnBendlt 15traRRB m.:rcaSe
pa:tJ\C
mterdunng
fotal ments
COilS change
>car
"et
T3\a(on tn- Hon of
Towl: bUllOn> ~ndlt;
Amount Trust
at end fund
of :-ear rallO
Historical data:
2rjCJ:~
21)1)'
21Jl.J-\ .
2()05
2IfI/)
S~-.-l
SII.4
S6-.9
S65.-
~S.I
9
-31
-rJ 9
S 19.5
15 1 )
! .
S,I).6
-.~.2
:() ~
.,
~~.(J
~5
..;.
9-1
94.'
91 -
,~.2
I (j2.;
11)6.:-
993
I I)] ..
II') IJ
Ii -.-\
123.3
::.5
132e)
I ~9 S
1'+- ! 56.2
3.2
91 -I
9-.4
11)26
Intermediate:
1(,-.::
2rjfJ2()(IS
2rj()9
201 I)
2011
.
2(J12
21J13
2 1)1-1
21) 15
2')16
Lo" Cost:
112 -I
95. :
I I),) e)
lh~
1(,5 3,
12-1I ~1)9
111.2
116.9
13-.0
lJ2.S
122.5
I-lS.6
15-16
ib')'
2(11 !
11)-6
1;.'I: 9 S
125S
1.'21
2(112
1385
2(113
2(j()~.(J(JS
2(1)9
2 1)10
I _
2(ti~
1"5()
151 -
2 1)IS
15~.5
21) 16 .
1656
]1). -
1(J ~
II I
li-l
II -
II ~
:I 9
Ij ~
]16
i: 3
12- 9
I.' .'.'
10 9.5
:-15.-
4'
; (j 1
1119
11-.'
3 ::
i f)5.9
IIj9 I)
2fJ(J9
I: 53
~.r)! (I
21)] I
I: 96
12'9
21)1)-
; 23.:
21)12 .
2();;'
2') l-\
2()] 5
~.r)l6
, I
151A
9-'
1(/)5
If)5 ::
-1.1)
22-1.8
2289
·u
-.9
,
"
1; 3. ~
: 23.2
119
<)
31
128.-1
1.;36
1'93
IFI
12-+.-
3.3
129.1352
1-1(19
3.-1
: 'j5 .4
\1)2.5
i 12.:: 219
~ 32.4
: -+36
11)95
1/8 "
1296
I.V)
-3.2
~
2.6
i: .5
i 2.3
1-19
-l
I' ,
16.6
18 1
19.3
2(J.5
-I
-3.3
-6.6
.5
6
3.S
2
-I
-I
.4
~
f)
-II)
":'.5
: ~S 2
J ~3 ~
6
6
-l-l
::.3
2(J2.(J
19- -I
6
2:6.-
~I
6
i.9
22(J 8
23(J 2
229.3
2261
22(1.2
211.5
21 1).S
221 I
2326
2-W.9
259 -
2-5/)
2916
3()93289
349.5
2(.1-\3
2()1 I
19-1.-l
-I ~.2
-1-.'1
I~ I 2
-
13 - I ()3 ~
,~
: ~9 6
: -c).2
-\.9
21A9
21).1
U
3.5
195.6
2()3.8
5. !
62
5.8
165 ')
<)
1...j.!)-!.
1-l6 1)
151 i
.5
2.6
2.S
2.9
: 13
High Cost:
21)I)S
;f/l.5
164 ...
I -
,14.
122.1281
139.'
1':51
1~ 1. ~
11").6
: 1,3.-1
~
1
j!)6.6
113 1)
12!).: 26.5
2.5
S i6'))
1-5-1
1862
-334
-42.2
-5(J.9
16:\-1
211
214
21S
'"
193
1~2
165
1.. 6
126
616
JI) -
.-\ derailed descnpllon of the components ofmcome and cost. along \\ ah compiete hlStoncal \alues. 15 presented 10 appendl\ .-\
: "Towl Income" column meludes transfers made ~r.\een the 01 Trust Fund and the General Fund of the
Treasur: that are not 1021udeJ 10 the separate ~omp\...\nents ofw,:omc sho\\n. These transfers ~onSJSl ofpi3:.ments for the cost ofnon~ontnbutor: ",\ a~e .:redlt5 for mllnar::. sen l':C bcfore 195- In panl.:ular. a transfer IS
npected to be made 10 December 21'.1- 10 the amount of5- - milllOn from the General Fund of the Treasu"
to the 01 Trust Fund. Therealier such transfer< are e;tlmated to ~ less than S'(y)(jj) 10 each \ear
, The "Trust fund ratio" column represents assets at the ~gmnmg of a \ car 1\\ hlCh arc 1denllcal to aSSets at
the end of the pnor : car sho\\ n in the" -\mount at end of: ear" column I as a p<rcenrage of cost for the \ ear.
" Lnder the high COSt as;umpllons. the Of Trust Fund lS proJected to be ",hausted 10 carl> 2"11, Therefore.
ceTtam trust fund op<ratlon \ alues for that \ car arc not meanmgful under preient la\\ and arc not sho\\ n <n
th1S rabie.
"Ote Towls do not nece>sanl:. e~UJI the sum; of rounded (omronent;.
36
Short-Range Estimates
The proportion of 01 beneficiaries whose benefits terminate in a given year
has also tluctuated in the past. Over the last 20 years, the rates of benefit termination due to death or conversion to retirement benefits (at attainment of
normal retirement age) have declined very gradually. This trend is attributable, in part, to the lower average age of new beneficiaries. Declines in mortality for the general population have also led to improved mortality
experience among the DI disabled worker beneficiaries. In addition, conversions to old-age benefits are at a temporarily reduced level for years 2003
through 2008 due to the gradual increase in the normal retirement age. The
termination rate due to recovery has been much more volatile. Currently, the
proportion of disabled beneficiaries whose benefits cease because of their
recovery from disability is very low in comparison to levels experienced
throughout the 1970s and early 1980s. Projected rates of recovery terminations in this year's report are somewhat lower initially due to resource constraints which temporarily limit the number of continuing disability reviews
conducted by SSA. Following this temporary resource constraint, recovery
termination rates are projected to return to levels consistent with last year's
report. The overall termination rate (retlecting all causes) is projected in
2007-08 to remain near levels experienced since 2003, before returning to
higher levels in 2009 when the gradual increase in the normal retirement age
temporarily ceases.
At the beginning of calendar year 2006, the assets of the DI Trust Fund represented 207 percent of annual expenditures. During 2006, DI expenditures
continued to exceed non-interest income. While total 01 income exceeded 01
expenditures by $8.2 billion, the trust fund ratio for the beginning of 2007
still decreased, to about 200 percent. Under the intermediate set of assumptions, total income is estimated to exceed expenditures through 2012. The
projected expenditures in excess of income beginning in 2013 result in a
decline in the projected trust fund ratio to 130 percent by the beginning of
2016.
Under the low cost assumptions, the trust fund ratio would increase to
227 percent at the beginning of 2016. Under the high cost assumptions, the
assets of the OI Trust Fund would decline steadily, dipping below the level
of I year's expenditures near the beginning of 2012, and becoming completely depleted early in 2016.
Because 01 assets were greater than I year's expenditures at the beginning of
2007 and would remain above that level through 2016, the DI Trust Fund
satisfies the Trustees' shOli-range test of financial adequacy under both the
intermediate and low cost assumptions. However, under the high cost
assumptions the DI Trust Fund fails to meet the short-range test of financial
adequacy, because assets fall below I year's expenditures by the end of the
short-range period, as described above (see also figure IVA I).
37
Actllarial Estimate.)'
3.
Operations of the Combined OASI and DI Trust Funds
The estimated operations and status of the OASI and DI Trust Funds, combined, during calendar years 2007-16 on the basis of the three alternatives,
are shown in table IVA3, together with figures on actual experience in
2002-06. Because income and cost for the OASI Trust Fund represent over
80 percent of the corresponding amounts for the combined OASI and DI
Trust Funds, the operations of the OASI Trust Fund tend to dominate the
combined operations of the two funds. Consequently. based on the strength
of the OASI Trust Fund over the next 10 years, the combined OASI and DI
Trust Funds meet the requirements of the short-range test of financial adequacy under all three alternative sets of assumptions.
While combining the operations of the OASI and DI Trust Funds permits an
assessment of the short-range test for the two programs on a combined basis,
in practice assets from one trust fund cannot be shared with another trust
fund without legislative changes to the Social Security Act For example,
under the high cost scenario, table IVA2 shows that the DI Trust Fund
becomes exhausted in 2016. The value of the combined OASI and DI Trust
Funds in that year shown in table IVA3 shows that OASI assets could be
made available to pay DI benefits through 2016, but only with legislation to
permit this action.
Table IV.A3.-0perations of the Combined OASI and DI Trust Funds,
Calendar Years 2002-16 1
[Amounts in billions]
Income
Calendar
year
Net
contri·
2012
2013.
2014
2015 ..
2016 ..
38
Taxa·
tlon of
Total 2 butions benefits
Historical data:
$627 I $532.5
2002.
533.5
2003.
631.9
657.7
553.0
2004.
592.9
701.8
2005.
744.9
625.6
2006.
Intermediate:
655.0
782.8
2007
689.2
2008.
827.5
729.0
2009.
881.6
935.0
766.3
2010.
805.1
991.6
201 I
1,048.4
843.6
1.104.9
881.0
1,162.3
920.0
1,221.9
961.0
1,283.5 1,003.8
Assets
Cost
Net
inter·
est
Total
$453.8
470.8
493.3
520.7
546.2
$4.2
4.6
4.5
5.3
5.3
$36
37
3.8
3.9
38
737A
585.0
607.9
642.9
684.3
727.2
5.4
5.6
5.7
5.9
6.1
3.9
38
3.9
4.0
4.1
787.6
842.8
902.3
965.9
1,033.8
777.0
831.8
890.9
954.1
1,021.8
6.3
6.6
6.8
7.0
7.3
4.3
4.4
4.6
4.7
4.8
$13.8
13.4
15.7
14.9
16.9
$80.4
84.9
89.0
94.3
102.4
$461.7
479.\
501.6
529.9
18.7
22.6
24.9
28.1
109.2
I 17.9
130.0
143.7
158.5
594.3
617.3
6525
694.2
3L2
34.8
37.6
4L1
44.8
173.6
189.1
204.7
219.9
235.0
20A
Admin·
Net
RRB Increase
Benefit istra·
during
lIve inter·
pay·
costs change
year
ments
555A
Amount Trust
at end fund
of year ratio)
$165.4 $1,378.0
1,5308
\52.8
1,686.8
156.1
171.8
1.858.7
189.5 2,048.1
263
288
305
318
335
188.5
210.2
229.1
240.7
254.2
2,236.6
2,446.8
2,675.9
2,916.6
3,170.8
345
362
375
385
396
260.7
262.1
260.0
256.1
249.7
3,431.5
3,693.6
3,953.6
4,2097
4,459.3
403
407
409
409
407
Short-Range Estimates
Table JV.A3.-0perations of the Combined OASJ and DJ Trust Funds,
Calendar Years 2002-16 1 (Cont.)
[Amounts in billions]
Income
('051
Net
Taxacontri- tion of
Total" but ions benefits
Calendar
year
Net
inter-
As"cls
AdminNet
Benetit
istraRRB IIlcreasc
paytive interduring
ments
costs change
year
est
Total
$18.6 $109.5
20.3 118.5
22.3 129.3
243 141.3
27.2 155.1
$592.6
613.0
643.3
676.9
710.8
$5833
603.6
633.7
667.1
700.8
$5.4
5.6
5.7
5.9
6.0
$3.9
3.8
3.9
4.0
4.0
Amount Trust
at end
fund
of year ratio)
Low ('ost:
2007.
2008.
2009.
2010.
2011.
$7858 $657.7
835.4
696.6
885.9
734.3
936.5
770.8
990.2
807.9
2012.
2013.
2014.
2015.
2016.
1,045.4
1,101.7
1,160.2
1,219.3
1,280.4
$193.2 $2,241.3
222.5 2.463.8
242.6 2,706.4
259.6 2,966.0
279.4 3,245.4
346
366
383
400
417
845.3
882.2
920.8
959.7
999.9
29.8
33.0
35.3
38.1
41.1
170.2
186.5
204.1
221.5
239.4
750.4
794.1
841 I
891.2
944.5
740.1
783.5
830.2
880.0
933.1
6.2
6.4
6.6
6.8
7.0
4.1
4.2
4.2
4.3
4.3
295.0
307.6
319.1
328.1
335.9
3,540.5
3,848.1
4,167.2
4.495.3
4,831.2
433
446
458
468
476
646.9
669.0
711.9
743.4
788.9
18.7
20.6
230
25.5
29.3
107.8
115.7
127.3
139.7
156.9
597.8
627.8
668.5
716.0
775.7
588.5
618.4
658.9
706.0
765.2
5,4
56
5.7
5.9
6.3
3.9
3.8
3.9
4.1
4.2
175.7
177.5
193.7
192.6
199.4
2,2238
2.401.3
2,595.0
2,787.5
2,986.9
343
354
359
362
359
1,065.0 848.0
1,140.4 899.3
1,204.9 947.2
1,2666 994.8
1.327.7 1,042.7
33.5
38.4
42.2
46.5
51.2
183.5
202.7
215.5
225.3
2339
854.2
938.1
1,021.7
1,104.4
1,193.3
843.0
9263
1,009.3
1,091.4
1,179.8
6.7
7.0
7.3
7.6
7.9
4.5
4.8
5.2
5.5
5.7
210.9
202.3
183.2
162.2
134.4
3,197.8
3,400.1
3,583.3
3,745.4
3,879.9
350
341
333
324
314
High ('osl:
2007.
2008.
2009.
2010.
2011.
2012.
2013.
2014.
2015.
2016.
773.5
805.3
862.2
908.5
975.1
I A detailed description of the components of income and cost, along with complete historical values, is presented in appendix A.
""Total Income" column includes transfers made between the OASI and DI Trust Funds and the General
Fund of the Treasury that are not included in the separate components of income shown. These transfers consist of payments for (I) the cost of noncontributory wage credits for military service before 1957, and (2) the
cost of benefits to cerlain uninsured persons who attained age 72 before 1968.
3 The "Trust fund ratio" column represents assets at the beginning of a year (which are identical to assets at
the end of the prior year shown in the "Amount at end of year" column) as a percentage of cost for the year.
Note: Totals do not necessarily equal the sums of rounded components.
4. Factors Underlying Changes in to-Year Trust Fund Ratio Estimates
From the 2006 Report
The factors underlying the changes in the intermediate estimates for the
OASI, DI and the combined funds from last year's annual report to this
report are analyzed in table IV.A4. In the 2006 Annual Report, the trust fund
ratio for OASI was estimated to reach 462 percent at the beginning of
20 l5~the tenth projection year from that report. If there had been no
changes to the projections, the estimated ratio at the beginning of 2016
would be 1 percentage point lower than at the beginning of 2015, or
461 percent. There were changes, however, to reflect the latest actual data, as
well as adjustments to the assumptions for future years. The resulting ratio
shown in this report for the tenth projection year (2016) is 462 percent. The
net effect of changes in demographic assumptions over the short-range
period resulted in a reduction in the tenth-year trust fund ratio of 3 percent39
Actuarial Estimates
age points. The cumulative net effects of changes in economic data and
assumptions resulted in essentially no change in the trust fund ratio by the
beginning of 2016. There were several relatively minor changes in the shortrange projection methodology since the 2006 report. The changes included
improvements in our methods for estimating the numbers of persons satisfying the program's insured status requirements, and the seasonal pattern of
benefit receipt. The combined effects of these methodological improvements
was to decrease the ending trust fund ratio by about 4 percentage points.
Finally, an increase in the 2016 trust fund ratio of 8 percentage points
resulted from the conection of the clerical enor related to voluntary income
tax withholding described in section lILA. A relatively small portion of that
increase is attributable to a reimbursement authorized by Public Law 109465 (its effect is shown in table IVA4 attributed to "Legislation"). The
majority of the effect due to this conection, including the effect on projected
benefit levels, is shown under "Programmatic data and assumptions."
Conesponding estimates of the factors underlying the changes in the financial projections for the Dl Trust Fund, and for the OAS! and DI Trust Funds
combined, are also shown in table IVA4. The largest effect on the DI trust
fund ratio at the beginning of 2016 was due to the change in the valuation
period, making up essentially all of the total 9 percentage point reduction.
Revised economic assumptions, updates for a variety of programmatic
assumptions, and the voluntary income tax withholding conection contributed minor and offsetting changes.
Table IV.A4.-Reasons for Change in Trust Fund Ratios at the Beginning
of the Tenth Year of Projection
[In percent]
Item
OASI
Trust Fund
Trust fund ratio shown in last year's report lor calendar year 2015
Change in trust fund ratio due to changes 10:
Legislation .
Valuation period.
Demographic data and assumptions ..
EconomIc data and assumptions ..
Programmatic data and assumptions .
Projection methods and data ..
Total change in trust fund ratio ..
Trust fund ratio shown in this report for calendar year 2016 ..
I
Change in trust fund ratio of less than 0.5 percentage point.
Note: Totals do not necessarily equal the sums of rounded components.
40
OASI and 01
01 Trust Funds,
Trust Fund
combmed
462
139
409
1/
1I
11
-I
-3
-9
1/
-2
-2
1/
1/
8
-4
1
-I
6
-4
1/
-9
-2
462
130
407
Long-Range Estimales
B. LONG-RANGE ESTIMATES
Three types of financial measures are useful in assessing the actuarial status
of the Social Security trust funds under the financing approach specified in
current law: (I) annual cash-flow measures, including income and cost rates,
and balances, (2) trust fund ratios, and (3) summary measures like actuarial
balances and unfunded obligations. The first long-range estimates presented
are the series of projected annual balances (or net cash flow), which are the
differences between the projected annual income rates and annual cost rates
(expressed as percentages of the taxable payroll). In assessing the financial
condition of the program, particular attention should be paid to the level of
the annual balances at the end of the long-range period and the time at which
the annual balances may change from positive to negative values.
The next measure discussed is the pattern of projected trust fund ratios. The
trust fund ratio represents the proportion of a year's projected cost that could
be paid with the funds available at the beginning of the year. Particular attention should be paid to the level and year of maximum trust fund ratio, to the
year of exhaustion of the funds, and to the stability of the trust fund ratio in
cases where the ratio remains positive at the end of the long-range period.
When a program has positive trust fund ratios throughout the 75-year projection period and these ratios are stable or rising at the end of the period, the
program financing is said to achieve sustainable solvency.
The final measures discussed in this section summarize the total income and
cost over valuation periods that extend through 75 years, and to the infinite
horizon. These measures indicate whether projected income will be adequate
for the period as a whole. The first such measure, actuarial balance, indicates
the size of any surplus or shortfall as a percentage of the taxable payroll over
the period. The second, open group unfunded obligation, indicates the size of
any shortfall in present-value dollars. This section also includes a comparison of covered workers to beneficiaries, a generational decomposition of the
infinite future unfunded obligation, the test of long-range close actuarial balance, and the reasons for change in the actuarial balance from the last report.
If the 75-year actuarial balance is zero (or positive), then the trust fund ratio
at the end of the period will be at 100 percent (or greater), and financing for
the program is considered to be adequate for the 75-year period as a whole.
(Financial adequacy, or solvency, for each year is determined by whether the
trust fund asset level is positive throughout the year.) Whether or not financial adequacy is stable in the sense that it is likely to continue for subsequent
75-year periods in succeeding reports is also important when considering the
actuarial status of the program. One indication of this stability, or sustainable
solvency, is the behavior of the trust fund ratio at the end of the projection
41
Actllarial Estimates
period. If tmst fund ratios for the last several years of the long-range period
are positive and constant or rising, then it is likely that subsequent Tmstees
Reports will also show projections of financial adequacy (assuming no
changes in demographic and economic assumptions, or the law). The actuarial balance and the open group unfunded obligation for the infinite future
provide additional measures of the financial status of the program for the
very long range.
1.
Annual Income Rates, Cost Rates, and Balances
Basic to the consideration of the long-range actuarial status of the tmst funds
are the concepts of income rate and cost rate, each of which is expressed as a
percentage of taxable payroll. Other measures of the cash flow of the program are shown in appendix F. The annual income rate is the sum of the tax
contribution rate and the ratio of income from taxation of benefits to the
OASDI taxable payroll for the year. The OASDI taxable payroll consists of
the total earnings which are subject to OASD[ taxes, with some relatively
small adjustments. I As such, it excludes net investment income and reimbursements from the General Fund of the Treasury for the costs associated
with special monthly payments to certain uninsured persons who attained
age 72 before 1968 and who have fewer than 3 quarters of coverage.
The annual cost rate is the ratio of the cost of the program to the taxable payroll for the year. The cost is defined to include scheduled benefit payments,
special monthly payments to certain uninsured persons who have 3 or more
quarters of coverage (and whose payments are therefore not reimbursable
from the General Fund of the Treasury), administrative expenses, net transfers from the trust funds to the Railroad Retirement program under the financial-interchange provisions, and payments for vocational rehabilitation
services for disabled beneficiaries. For any year, the income rate minus the
cost rate is referred to as the balance for the year. (In this context, the term
balance does not represent the assets of the trust funds, which are sometimes
referred to as the balance in the trust funds.)
Table [VB [ presents a comparison of the estimated annual income rates and
cost rates by trust fund and alternative. Detailed long-range projections of
trust fund operations, in current dollar amounts, are shown in table Vl.F8.
The projections for OAS[ under the intermediate assumptions show the
income rate rising due to the gradually increasing effect of the taxation of
I Adjustments are made to include deemed wage credits based on military service for 1983-2.0.01. and to
reflect the lower effective tax rates (as compared to the combined employee-employer rate) which apply to
multiple-employer "excess wages." and which did apply. before 1984. to net earnmgs from selt-employmcnl
and, before 1988, to income from tips.
42
A MESSAGE TO THE PUBLIC:
Each year the Trustees of the Social Security and Medicare trust funds
report on the current and projected financial status of the two programs.
This message summarizes our 2007 Annual Reports.
The financial condition of the Social Security and Medicare programs
remains problematic,· we believe their currently projected long run
growth rates are not sustainable under current financing arrangements.
Social Security s current annual surpluses of tax income over expenditures will soon begin to decline and then turn into rapidly growing deficits
as the baby boom generation retires. Medicare sfinancial status is even
worse. Medicare s Hospital Insurance (HI) Trust Fund is already
expected to payout more in hospital benefits this year than it receives in
taxes and other dedicated revenues. The growing annual deficits in both
programs are projected to exhaust HI reserves in 2019 and Social Security reserves in 2041. In addition, the Medicare Supplementary Medical
Insurance (SMI) Trust Fund that pays for physician services and the new
prescription drug benefit will continue to require general revenue financing and charges on beneficiaries that grow faster than the economy and
beneficiary incomes over time.
The drawdown of Social Security and HI Trust Fund reserves and the
general revenue transfers into SMI will place mounting pressure on the
Federal budget. In fact, this pressure is already evident. For thefirst time,
a "Medicare funding warning" is being triggered, signaling that nondedicated sources of revenues-primarily general revenues- will soon
account for more than 45 percent of Medicare s outlays. By law, this
warning requires that the President propose, and the Congress consider,
remedial action.
We are increasingly concerned about inaction on the financial challenges
facing the Social Security and Medicare programs. The longer we wait to
address these challenges, the more limited will be the options available,
the greater will be the required adjustments, and the more severe the
potential detrimental economic impact on our nation.
Social Security
The annual cost of Social Security benefits represented 4.2 percent of
Gross Domestic Product (GDP) in 2006, is projected to increase to 6.2
percent ofGDP in 2030, and then rise slowly to 6.3 percent ofGDP in
2081. The projected 75-year actuarial deficit in the combined Old-Age
and Survivors and Disability Insurance (OASDI) Trust Fund is 1.95 percent of taxable payroll, down from 2.02 percent in last year s report. This
decrease is due primarily to revisions in key assumptions and to changes
in methods. Although the program passes our short-range test o.ffinancial
adequacy, it continues to fail our long-range test of close actuarial balance by a wide margin. Projected OASDI tax income will begin to fall
short of outlays in 2017, and will be sufficient to finance only 75 percent
ofscheduled annual benefits in 2041, when the combined OASDI Trust
Fund is projected to be exhausted.
Social Security could be brought into actuarial balance over the next 75
years in various ways, including an immediate increase of 16 percent in
payroll tax revenues or an immediate reduction in benefits of 13 percent
or some combination of the two. Ensuring that the system is solvent on a
sustainable basis beyond the next 75 years would require larger changes.
To the extent that changes are delayed or phased in gradually, larger
adjustments in scheduled benefits and revenues would be required that
would be spread over fewer generations.
Medicare
As we reported last year, Medicare sfinancial difficulties come soonerand are much more severe-than those confronting Social Security. While
both programs face demographic challenges, the impact is greater for
Medicare because health care costs increase at older ages. Moreover,
underlying health care costs per enrollee are projected to rise faster than
the wages per worker on which payroll taxes and Social Security benefits
are based. As a result, while Medicare s annual costs were 3.1 percent of
GDP in 2006, or about 72 percent of Social Security s, they are projected
to surpass Social Security expenditures in 2028 and exceed 11 percent of
GDP in 2081.
The projected 75-year actuarial deficit in the Hospital Insurance (HI)
Trust Fund is now 3.55 percent of taxable payroll, up slightly from 3.51
percent in last year s report. The fund again fails our test of short-range
financial adequacy, as projected annual assets drop below projected
annual expenditures within 10 years-in 2013. The fund also continues to
fail our long-range test of close actuarial balance by a wide margin. The
projected date ofHI Trust Fund exhaustion is 2019, one year later than in
last year s report, when tax income will be sufficient to pay only 79 percent of HI costs. HI tax income falls short of outlays in this and all future
years. The program could be brought into actuarial balance over the next
75 years by an immediate 122 percent increase in the payroll tax, or all
immediate 51 percent reduction in program outlays or some combination
of the two. As with Social Security, adjustments ofgreater magnitude
would be necessary to the extent changes are delayed or phased in gradually, or to make the program solvent on a sustainable basis beyond the 75year horizon.
Part B of the Supplementary Medical Insurance (SMI) Trust Fund, which
pays doctors' bills and other outpatient expenses, and Part D, which pays
for access to prescription drug coverage, are both projected to remain
adequately financed into the indefinite future because current law automatically provides financing each year to meet next year s expected costs.
However, expected steep cost increases will result in rapidly growing general revenuefinancing needs-projected to rise from 1.3 percent ofGDP
in 2006 to 4.7 percent in 2081-as well as substantial increases over time
in beneficiary premium charges.
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 requires that the Medicare Report include a determination of
whether the difference between total Medicare outlays and dedicated
financing (such as premiums and payroll taxes) exceeds 45 percent of
total outlays within the first 7 years of the projection period (2007-2013
for the 2007 Report). The Act requires that an affirmative determination
in two consecutive reports be treated as a "funding warning" for Medicare that would, in turn, require a Presidential proposal to respond to the
warning and expedited Congressional consideration of such proposal.
The 2007 Report projects that the difference will surpass 45 percent in
2013 and therefore makes a determination of excess general revenue
funding. Because the 2006 report also made such a determination, a
"Medicare funding warning" is hereby triggered that requires the President to propose legislation that responds to this warning within 15 days of
the submission of the Fiscal Year 2009 budget and for Congress to consider the proposal on an expedited basis. This requirement will help call
additional attention to Medicare s impact on the Federal budget.
Conclusion
The financial difficulties facing Social Security and Medicare pose enormous, but not insurmountable, challenges. The sooner these challenges
are addressed, the more varied and less disruptive their solutions can be.
We urge the public to engage in informed discussion and policymakers to
think creatively about the changing needs and preferences of working and
retired Americans. Such a national conversation and timely political
action are essential to ensure that Social Security and Medicare continue
to playa critical role in the lives of all Americans.
By the Trustees:
Henry M. Paulson, Jr.,
Secretary of the Treasury,
and Managing Trustee
Elaine L. Chao,
Secretary of LabO/:
and Trustee
Michael O. Leavitt,
Secretary of Health
and Human Services,
and Trustee
Michael 1. Astrue,
Commissioner of
Social Security,
and Trustee
John L. Palmer,
Trustee
Thomas R. Saving,
Trustee
A SUMMARY OF THE 2007 ANNUAL SOCIAL SECURITY
AND MEDICARE TRUST FUND REPORTS
Who Are th.e Tru.s~ees ~ There are six Trustees, four of whom serve by
virtue of theIr posItIOns In the Federal Government: the Secretary of the
Treasury, the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security. The other two Trustees
are public representatives appointed by the President: John L. Palmer,
University Professor and Dean Emeritus of the Maxwell School of Citizenship and Public Affairs at Syracuse University, and Thomas R. Saving,
Director of the Private Enterprise Research Center and Professor of Economics at Texas A&M University.
What Are the Trust Funds? Congress established the trust funds in the
U.S. Treasury to account for all program income and disbursements.
Social Security and Medicare taxes, premiums, and other income are
credited to the funds. Disbursements from the funds can be made only to
pay benefits and program administrative costs.
The Department of the Treasury invests program revenues not needed in
the current year to pay benefits and administrative costs in special nonmarketable securities of the U.S. Government on which a market rate of
interest is credited. Thus, the trust funds represent the accumulated value,
including interest, of all prior program annual surpluses and deficits, and
provide automatic authority to pay benefits.
There are four separate trust funds. For Social Security, the Old-Age and
Survivors Insurance (OAS!) Trust Fund pays retirement and survivors
benefits, and the Disability Insurance (DI) Trust Fund pays disability benefits. (The two trust funds are jointly designated as OASDI.) For Medicare, the Hospital Insurance (HI) Trust Fund pays for inpatient hospital
and related care. The Supplementary Medical Insurance (SMI) Trust Fund
comprises two separate accounts: Part B, which pays for physician and
outpatient services, and Part D, which covers the prescription drug benefit
that began in 2006. Medicare benefits are provided to most people age 65
and over and to most individuals who receive Social Security disability
benefits.
What Were the Trust Fund Results in 2006? In December 2006,
40.5 million people received OASI benefits, 8.6 million received DI benefits, and 43.2 million were covered under Medicare. Trust fund operations, in billions of dollars, are shown below (totals may not add due to
rounding). All four trust funds showed net increases in assets in 2006.
Assets (end of 2005) .............. .
Income during 2006 ............... .
oUtgo d'
urIng 20 06 ................ .
Net increase in assets .......... .
Assets (end of 2006) .............. .
GASI
$1,663.0
642.2
461.0
181.3
1,844.3
1
DI
$195.6
102.6
94.5
8.2
203.8
HI
$285.8
211.5
191.9
19.6
305.4
SMI
$24.0
225.5
216.4
9.1
33.1
How Has the Financial Outlook for Social Security and Medicare
Changed Since Last Year? Under the intermediate assumptions, the
combined OASDI Trust Funds show a 75-year actuarial deficit equal to
1.95 percent of taxable payroll, slightly smaller than last year's estimate
of 2.02 percent. That change is largely due to improved methodology and
lower assumed rates of disability incidence. The OASDI Trust Funds,
separately and combined, are adequately financed over the next 10 years.
Medicare's HI Trust Fund now has a projected 75-year actuarial deficit
equal to 3.55 percent of payroll compared with last year's estimate of
3.51 percent under the intermediate assumptions. That change is primarily
caused by moving the valuation period forward by one year from 2006-80
to 2007 -81, which adds a year (2081) with a high projected deficit into the
estimate. The HI Trust Fund is also inadequately funded over the next 10
years, with trust fund assets projected to fall short of 100 percent of
annual expenditures in 2013.
The SMI Trust Fund is adequately financed in both the short and long
term because of the automatic financing established for Medicare Parts B
and D. Nonetheless, projected SMI cost growth over the long term will
require increased general revenue funding that will average 6.5 percent
annually, placing an ever-increasing burden on Federal revenues.
Although there have been no substantial changes in the overall Medicare
outlook, this year's Trustees Report is the second consecutive report in
which the annual general revenue funding contribution to total Medicare
expenditures is projected to exceed 45 percent within the first 7 years of
the 75-year projection period. Therefore, by law, a "Medicare funding
warning" is triggered by the report's findings. This warning requires the
President to respond by submitting proposed legislation within 15 days of
the next budget submission (early February, 2008) to address the problem,
and for Congress to consider the proposal on an expedited basis.
How Are Social Security and Medicare Financed? For OASDI and HI,
the major source of financing is payroll taxes on earnings that are paid by
employees and their employers. The self-employed are charged the equivalent of the combined employer and employee tax rates. During 2006, an
estimated 162 million people had earnings covered by Social Security and
paid payroll taxes; for Medicare, the corresponding figure was 166 million people. The payroll tax rates are set by law and for OASDI apply to
earnings up to an annual maximum ($97,500 in 2007) that increases with
the growth in nationwide average wages. HI taxes are paid on total earnings. The tax rates (in percent) for 2007 and later are:
OASI
5.30
Employees ......
5.30
Employers ......
Combined total ... 10.60
DI
0.90
0.90
1.80
2
OASDI
6.20
6.20
12.40
HI
1.45
1.45
2.90
Total
7.65
7.65
15.30
About 75 percent of SMI Part B and Part D expenditures are paid from
Federal general fund revenues, with most of the remaining costs covered
by monthly premiums charged to beneficiaries. Part B and Part D premium amounts are based on methods defined in law and increase as the
estimated costs of those programs rise.
In 2007, the Part B standard monthly premium paid by most enrollees is
$93.50. During 2007-09, an income-related premium surcharge is being
phased in for Part B beneficiaries whose modified adjusted gross income
exceeds inflation-indexed thresholds (in 2007, $80,000 for individual tax
returns, $160,000 for joint returns).
In 2007, the national average Part D base monthly premium is estimated
to be $27.35. (Actual premium amounts charged to Part D beneficiaries
depend on the specific plan in which they are enrolled.) Part D also
receives payments from States for the Federal assumption of Medicaid
responsibilities for prescription drug costs for individuals eligible for both
Medicare and Medicaid. In 2007, State payments are estimated to cover
13 percent of Part D costs, but that percentage is projected to decline to 9
percent by 2012 as Part D outlays increase.
Income to each trust fund, by source, in 2006 is shown in the table below
(totals may not add due to rounding).
Source (in billions)
Payroll taxes ...........
General fund revenue ....
Interest earnings .........
Beneficiary premiums ....
Taxes on benefits ........
Other .................
Total ..................
OASI
$534.8
DI
$90.8
91.8
10.6
15.6
1.2
*
642.2
102.6
HI
$181.3
0.5
15.7
2.6
10.3
1.0
211.5
SMI
$171.9
1.8
46.3
5.5
225.5
* Less than $50 million.
What Were the Administrative Expenses in 2006? Administrative
expenses, as a percentage of total expenditures, were:
OASI
Administrative expenses 2006. .. 0.7
DI
2.5
HI
1.5
SMI
1.6
How Are Estimates of the Trust Funds' Future Status Made?
Short-range (1 O-year) and long-range (75-year) projections ar.e reported
for all funds. Estimates are based on current law and assumptIOns about
factors that affect the income and outgo of each trust fund. Assumptio~s
include economic growth, wage growth, inflation, unemployment, fertll-
3
ity, immigration, and mortality, as well as factors relating to disability incidence and the cost of hospital, medical, and prescription drug services.
Because the future is inherently uncertain, three alternative sets of economic and demographic assumptions are used to show a range of possibilities. The intermediate assumptions (alternative II) reflect the Trustees'
best estimate of future experience. The low-cost alternative I is more optimistic for trust fund financing, and the high-cost alternative III is more
pessimistic; they show trust fund projections for more and less favorable
economic and demographic conditions for trust fund financing than the
best estimate. The assumptions are reexamined each year in light of
recent experience and new information about future trends, and are
revised as warranted. In general, greater confidence can be placed in the
assumptions and estimates for earlier projection years than for later years.
The statistics and analysis presented in this Summary are based on the
intermediate assumptions.
What is the Short-Range Outlook (2007-2016) for the Trust Funds?
For the short range, the adequacy of the GASI, DI, and HI Trust Funds is
measured by comparing their assets at the beginning of a year to projected
costs for that year (the "trust fund ratio"). A trust fund ratio of 100 percent
or more-that is, assets at least equal to projected benefit payments for a
year-is considered a good indicator of a fund's short-term adequacy.
This level of projected assets for any year means that even if expenditures
exceed income, the trust fund reserves, combined with annual tax revenues, would be sufficient to pay full benefits for several years, allowing
time for legislative action to restore financial adequacy.
By this measure, the GASI and DI funds are considered financially adequate throughout the short range because the assets of each fund exceed
the 100 percent level through the year 2016. The HI fund does not meet
the short-range test of financial adequacy because its assets fall below the
100 percent level of one year's outgo during 2013. Chart A shows these
trust fund ratios under the intermediate assumptions through 2025.
For SMI Part B, a less stringent annual "contingency reserve" asset test
applies because the bulk of the financing for that account is provided by
beneficiary premiums and Federal general fund revenue payments automatically adjusted each year to meet expected costs. Part D is similarly
financed on an annual basis. Moreover, the operation of Part D through
private insurance plans, together with a flexible appropriation for Federal
costs, eliminates the need for a contingency reserve in that account. Note,
however, that the cost estimates for Part B are likely to be too low (perhaps by 25 to 40 percent in the long range) because they assume that current law governing the structure of physician payment updates will
persist. That would lead to substantial reductions in physician payments
per service during 2008-16 and slow the growth of projected Part B costs.
4
Chart A-OASI, 01, and HI Trust Fund Ratios
[Assets as a percentaRe olannll(ll expenditllre.s}
500%
Historical
450%
400%
Estimated
OASI
- DI
HI
350%
300%
250%
,- ...
200%
150% ,- ..
100%
.... .... ...
,
. ... .
. ..
I
I
50%
.. ..
.. ..
I
.. ..
. ..
..
0%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Calendar year
In each year since 2001, Congress has passed legislation to increase physician payments rather than allow the current law reductions. Thus, experience indicates that the apparent reductions are unlikely to occur before
legislative changes intervene. The underestimated physician payments
affect projected costs for Part B, total SMI, and total Medicare.
The following table shows the projected income and outgo, and the
change in the balance of each trust fund, excepting SMI, over the next 10
years. SMI income and expenditures are shown in separate columns for
Parts Band D. Changes in the SMI Trust Funds are not shown because of
the automatic annual adjustments in program income to meet the following year's projected expenditures.
ESTIMATED OPERATIONS OF TRUST FUNDS
(In billions-totals may not add due to rOllnding)
Expenditures
Income
SMI
SMI
Year OASI
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Change in fund
D OASI DI
HI
DI
HI
8
8
D OASI DI
HI
-----------------
$676 $107 $224 $188 $50 $492 $102 $208 $180
715 112 234 198 62
511 106 224 191
763 119 248 224 70 539 113 241 203
810 125 261 201
79 574 121 258 216
861 131 274 232 89
611 127 275 229
911 137 288 249 101
652 136 294 244
962 143 301 266 112 699 144 314 262
1,014 149 314 285 125 750 152 336 280
1,067 155 327 332 139 805 160 360 300
1,123 161 340 300 156 864 169 385 322
5
$50
62
70
79
89
101
112
125
139
156
$183
204
223
237
250
259
263
263
262
258
$5
6
6
4
4
1
-1
-3
-6
-9
$15
10
7
3
-1
-6
-14
-23
-33
-45
What is the Long-Range (2007-2081) Outlook for Social Security and
Medicare Costs? An instructive way to view the projected cost of Social
Security and Medicare is to compare the financing required to pay all
scheduled benefits for the two programs with gross domestic product
(GDP), the most frequently used measure of the total U.S. economy
(Chart B). Costs for both programs rise steeply between 2010 and 2030
because the number of people receiving benefits will increase rapidly as
the large baby-boom generation retires. During those years Medicare
costs increase at an even faster rate than Social Security because of the
rising cost of health services, increasing utilization rates, and anticipated
increases in the complexity of services. Beyond 2030, Social Security
costs grow slowly but continue to increase primarily because of projected
increases in life expectancy. Medicare costs, however, continue to grow
rapidly after 2030 due to expected increases in the cost of health care.
The 75-year projected cost outlook for Social Security and Medicare is
similar to that described in last year's report. In 2006, the combined cost
of the Social Security and Medicare programs represented roughly 7.3
percent of GDP. Social Security outgo amounted to 4.2 percent of GDP in
2006 and is projected to increase to 6.3 percent of GDP in 2081. Medicare's cost was smaller in 2006-3.1 percent ofGDP- but is projected to
surpass the cost of Social Security in 2028, growing to 11.3 percent of
GDP in 2081 when it will be 80 percent larger than Social Security'S cost.
In 2081, the combined cost of the programs will represent 17.6 percent of
GDP. As a point of comparison, in 2006 all Federal receipts amounted to
18.5 percent of GDP.
Chart B-Social Security and Medicare Cost as a Percentage of GDP
12%
HI +SMI
(including Part 0)
10%
Historical
Estimated
8%
6%
OASI + 01
4%
2%
0%
1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080
Calendar year
6
What is the Outlook for OASDI and HI Costs Relative to Tax
Income? Both Medicare and Social Security costs are projected to grow
substantially faster than the economy over the next several decades, but
unless current law is changed, tax income to the HI and OASDI Trust
Funds will not. Because the primary source of income for HI and OASDI
is the payroll tax, it is customary to compare the programs' income and
costs expressed as percentages of taxable payroll. These income and cost
rates are shown in Chart C. Although both the Medicare and Social Security annual cost rates increase markedly from their 2006 levels (3.01 and
11.02 percent), income rates increase very little over the long run. The
reason is that payroll tax rates are not scheduled to change and income
from the other tax source to these programs, taxation of OASDI benefits,
will increase only gradually as a greater proportion of beneficiaries is subject to taxation in future years.
Chart C-Income and Cost Rates
[Percentage o/'taxable payroll}
20%
Historical
L
15%
-
Estimated
OASDI
10%
5%
Income rates
-Cost rates
HI
0%
1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080
Calendar year
What is the Long-Range Actuarial Balance of the OASI, DI, and HI
Trust Funds? The traditional way to view the outlook of the payroll tax
financed trust funds is in terms of their actuarial balances for the 75-year
valuation period. The actuarial balance of a fund is essentially the difference between annual income and costs, expressed as a percentage of taxable payroll, summarized over the 75-year projecti?n p~riod. Because
SMI is brought into balance annually through premIUm m~reases and general revenue transfers, actuarial balance is not an appropnate concept for
that program.
The OASI DI and HI Trust Funds each have an actuarial deficit under
the interm~diate assumptions, as shown in the following table. Each actu7
arial deficit can be interpreted as the percentage points that could be either
added to the current law income rate or subtracted from the cost rate for
each of the next 75 years to bring the funds into actuarial balance, defined
as a terminal trust fund balance equal to the following year's expenditures. Because large and growing annual deficits are projected at the end
of the long-range period, adequate financing beyond 2081 would likely
require even larger changes than are needed for solvency in 2007-81.
LONG-RANGE ACTUARIAL DEFICIT OF THE
OASI, DI, AND HI TRUST FUNDS
(As a percentage (~l{{/x{/hle payroll: fotal may 1701 add d1!e fo rOl/llelin!!)
OASI
Actuarial
Deficit. . . . . . . . . . . . . . . . .. 1.69
DI
OASDI
HI
0.27
1.95
3.55
What Are Key Dates in Long-Range OASI, DI, and HI Financing?
When costs exceed income excluding interest (Chart C), use of trust fund
assets occurs in stages. For HI, the process is expected to start in 2007,
when interest earnings on trust fund assets will be used to help pay benefits. Beginning in 2011, costs are projected to exceed income including
interest, and assets must be redeemed each year until the trust fund is
exhausted in 2019. Those dates are one year later than reported last year
due to slightly higher projected payroll tax income and slightly lower projected benefits than previously estimated. In 2019, tax income is estimated to be sufficient to pay 79 percent of HI costs-and by 2081 only 29
percent.
For OASDI, interest income will first be needed to pay a portion of benefits in 2017, although the trust funds will continue to accumulate assets. In
2027, trust fund assets will begin to be depleted and are projected to be
exhausted in 2041-a year later than indicated in last year's reportwhen tax income would cover 75 percent of costs. By 2081, tax income
would cover 70 percent of scheduled benefits. The key dates regarding
cash flows are shown below.
KEY DATES FOR THE TRUST
OASI
First year outgo exceeds income
excluding interest .................... 2018
First year outgo exceeds income
including interest .................... 2028
Year trust fund assets are exhausted ...... 2042
FUNDS
DI
OASDI
HI
2005
2017
2007
2013
2026
2027
2041
2011
2019
How Do the Sources of Medicare Financing Change? As Medicare
costs grow over time, general revenues and beneficiary premiums will
playa larger role in financing the program. Chart 0 shows expenditures
and current law non-interest revenue sources for HI and SMI combined as
8
a percentage of GDP. The total expenditure line is the same as displayed
in Chart B and shows Medicare costs rising to 11.3 percent of GOP by
2081. Revenues from taxes are expected to remain at about 1.5 percent of
GDP, while general fund revenue contributions are projected to increase
from 1.3 percent in 2007 to 4.7 percent in 2081, and beneficiary premiums from 0.4 to 1.6 percent of GOP. Thus, revenues from taxes will fall
substantially as a share of total non-interest Medicare income (from 46
percent to 18 percent) while general fund revenues will rise (from 41 to
59 percent), as will premiums (from 12 percent to 20 percent). The gap
between total non-interest income and expenditures steadily widens due
to growing annual HI deficits, which reach 3.4 percent of GOP by 2081.
All told, by 2081 the Medicare program is projected to require SMI general revenue transfers equal to 4.7 percent of GOP. Moreover, the HI deficit would equal another 3.6 percent of GOP, and there is no provision to
address this deficit under current law through general fund transfers or
any other means.
Chart D-Medicare Expenditures and Non-Interest Income by Source
as a Percent of GDP
12%
Estimated
Historical
10%
I
HI
Total Expenditures
Deficit
8%
--l
o
6%
,
,
1
E.
-
'
General Revenue:
z
o
=7
S-
4%
ro
(il
~
2%
Premiums
I
::-~~-;:--
I
rT~x ~n B~netits
r
P
Sf")
o
3
I,
Payroll Taxes
'"
0%
1971 1981 1991 2001 20 I I 2021 2031 2041 2051 2061 2071 2081
'
Calendar year
The Medicare Modernization Act (2003) requires that the Board of Trustees determine each year whether the annual difference between program
outlays and dedicated revenues (the bottom fo~r l,ayers of Chart 0)
exceeds 45 percent of total Medicare outl~ys wIthlll t~e first 7 years of the
75-year projection period. The law effec~Ively estabh~he~ a ,threshold condition that signals that a trust fund 's d~dIcat,ed finan~lllg IS llla~equate or
that general revenue financing of MedIcare IS becon:lllg, excessI~e, A first
"excess general revenue Medicare funding" detennlllatlOn was Issued by
9
the Trustees in their 2006 Report. This year's Report estimates that the
difference between projected outlays and dedicated financing revenues
will exceed 45 percent in 2013 (compared with 41 percent in 2006), again
leading to an "excess general revenue Medicare funding" determination.
Because the Trustees have made this determination in two consecutive
reports, a "Medicare funding warning" is triggered.
Why is Reform to Improve the Social Security and Medicare Financial Imbalances Needed? Concern about the long-range financial outlook for Medicare and Social Security often focuses on the exhaustion
dates for the HI and OASDI Trust Funds-the time when projected
finances under current law would be insufficient to pay the full amount of
scheduled benefits. A more immediate issue is the growing burden that
the programs will place on the Federal budget well before the trust funds
are exhausted.
The Federal general fund revenues that would be needed to finance currently scheduled benefits for Social Security and Medicare are shown in
Chart E for selected years during the 2007-81 projection period. The total
draw on general fund revenues (as a percentage of GDP) has three components: the gaps between tax income and the cost of scheduled benefits
for the OASDI and HI programs, as well as the general fund revenue
requirements to finance SMI's Parts Band D (75 percent of expenditures).
Chart E- Projected OASDI and HI Tax Income Shortfall
plus the 75-Percent General Fund Revenue Contribution to SMI
(Percen/age vfGDP)
14%
12%
SMI (B&D)
10%
II HI
8%
OASDI
6%
4%
- •
II
2%
0%
I I
I I
2050
2070
-2%
2007
2010
2020
2030
2040
2060
2081
Calendar year
The initial negative amounts shown for OASDI indicate that tax income
exceeds outgo (which occurs during 2007-16) and represent net revenues
10
to the Treasury that result in the issuance of Treasury bonds to the trust
funds. Those OASOI. net revenues are more than offset by the Medicare
general revenue reqUIrements under current law. For instance, in 2007 the
Social Security tax income surplus ($85 billion) is estimated to be significantly smaller than the statutory Medicare Part B and Part 0 general revenue transfers, resulting in an overall cash requirement of $100 billion (0.7
percent of GOP) from the general fund of the Treasury.
The combined difference grows each year, so that by 2018, net revenue
flows from the general fund will total $545 billion (2.3 percent of GOP).
The positive amounts that begin in 2017 for OASOI, and in 2007 for HI,
initially represent payments the Treasury must make to the trust funds
when assets are redeemed to help pay benefits in years prior to exhaustion
of the funds. Note that neither the redemption of trust fund bonds, nor
interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through
some combination of increased taxation, reductions in other government
spending, or additional borrowing from the public.
Chart E shows that the difference between outgo and dedicated payroll
tax and premium income will grow rapidly in the 2010-30 period as the
baby-boom generation reaches retirement age. Beyond 2030, the difference continues to increase nearly as rapidly due primarily to health care
costs that grow faster than GOP. After the trust fund exhaustion dates
(2041 for OASOI, 2019 for HI), the increasing positive amounts for
OASOI and HI depict the excess of scheduled benefits over projected program income. When the statutory SMI general fund revenue requirements
are added in, the projected combined Social Security and Medicare general fund revenues needed in 2081 equal 10.1 percent of GOP. A similar
burden today would require nearly all Federal income tax revenues,
which amounted to 10.8 percent of GOP in 2006.
To put these magnitudes into historical perspective, in 2006 the combined
annual cost of HI, SMI, and OASOI amounted to 40 percent of total Federal revenues, or about 7 percent of GOP. That cost (as a percentage of
GOP) is projected to double by 2042, and then to increase further to
nearly 18 percent of GOP in 2081. It is noteworthy that over the past four
decades, the average amount of total Federal revenues as a percentage of
GDP has also been 18 percent, and has never exceeded 21 percent in a
given year. Assuming the continued need to fund a wide range of other
government functions, the projected growth in Social Security and Medicare costs would require that the total Federal revenue share of GOP
increase to wholly unprecedented levels.
This year's Trustees Reports describe large long-term financial imbalances for Social Security and Medicare, and demonstrate the need for
timely and effective action. The sooner that solutions are adopted, the
more varied and gradual they can be.
11
A MESSAGE FROM THE PUBLIC TRUSTEES
These are the seventh annual Trustees Reports issued since our initial
appointments as Public Trustees by President Clinton and subsequent
reappointments by President Bush. They are also the last to be issued Oil
our watch, since our second terms will end later this year. Our goal as
Public Trustees has been to work in a nonpartisan way to ensure the
integrity of the process by which the reports are prepared and the objectivity and credibility of the information they contain. We believe the role
of the Public Trustees is important and urge the President to norninate,
and the Senate to confirm, our successors as soon as possible, so that they
can participate fully in the process leading up to next year s reports.
The projections in the reports are based on a number of underlying
assumptions. While any projections are inherently uncertain, we believe
the Trustees' intermediate ones, which are the basis for our following discussion, provide the most reliable available picture of the financial outlook under current law for Social Security and Medicare. This outlook
continues to be highly problematic.
Social Security
This year s OASDI report shows little deviation from last year s in the
intermediate projections for Social Security. There has been a slight
improvement in the outlook for the combined trust funds throughout the
75-year projection period, due to the positive effects of updates in program data and minor changes in methods and assumptions that more than
offset the negative consequences of extending the valuation period by one
year. As a result, the date of trust fund exhaustion has moved from 2040
back to 2041, the actuarial deficit for the 75-year projection period has
declinedfrom 2.02 to 1.95 percent of taxable payroll, and the end-year
(now 2081) annual deficit is lower (5.20 percent of taxable payrollfor
2081, compared with last year s 5.38 percent for 2080). Despite the
improvement, the projected costs ofscheduled benefits as a percentage of
GDP remain the same as described in last year s report, risingfrom a
2007 level of 4.3 to 6.2 in 2030 and to 6.3 in 2080. Again, the projected
cost ofscheduled future benefits is far greater than projected revenues. III
consequence, Social Security poses a significant challenge to Federal
government finances.
The difference between the costs of currently scheduled benefits and tax
revenues for the Social Security program over the 75-year projection
period provides a summary measure of the magnitude of this challenge.
This difference is projected to total $6.8 trillion in present value, or about
1 percent of the present value ofCDP over the same period. While current
trust fund reserves provide the authority to cover the first $2.0 trillion of
this funding shortfall before being depleted, Treasury must still come up
with this amount in future cash as the special issue Treasury securities
that make up trust fund reserves are redeemed. Because the deficits for
Social Security continue to increase beyond the 75-year horizon, the magnitude of the fiscal problem over the very long run is much greater than
the 75-year picture conveys.
Thus, the fundamentals remain the same this year as for all the years of
our tenure as Public Trustees. Current annual surpluses of tax income
over expenditures for the combined OASDI trust funds will soon begin to
decline with the retirement of the baby-boom generation and, in 10 years,
become rapidly growing deficits that must be covered with cash from the
General Fund of the Treasury until trust fund reserves are exhausted a
few decades later. At that time (2041), current law would no longer
require Treasury to cover the annual trust fund defiCits, and annual trust
fund tax revenues would be sufficient to pay only 75 percent of currently
scheduled Social Security benefits. Additional revenues initially equivalent to 13 percent of Federal income tax revenues (projected at their historical average share of GDP over the past four decades) and growing
over time-would be necessary to fill this gap.
As we have noted in our past two years' Messages, demographic change
is the major force shaping the financial outlook for Social Security, and
only highly unlikely deviations in actual experience from the Trustee s
intermediate assumptions for expected rates offertility, mortality, and
immigration could dramatically alter this outlook. The same is true of the
long-term growth rate of the economy. Were the economy to expand as
rapidly in future decades as in past ones, the financial outlook for Social
Security would improve somewhat, though not nearly enough to eliminate
its long-term deficit. But the marked slowdown in the growth of the labor
force over the next several decades virtually precludes this.
Medicare
The outlook for Social Security presents a fiscal challenge that pales in
comparison to that posed by Medicare. The big news in this year s report
is the triggering of the "Medicare funding warning. " While the warning
is new, it simply reflects the same dire financial outlook for the program
we have be.e~ reporting for years and which was exacerbated by the
recent addItlon of the Part D prescription drug benefit.
Projected Medicare costs are even more sensitive to population aging
than Social Security s. But they are also projected to grow faster than
those of Social Security over the entire projection period for a far more
important second reason: the expectation that per capita health care costs
will continue to grow faster than per capita CDP in the future, as they
have in the past. As a result, this year s report-as did last year sprojects overall Medicare expenditures to increase from their 2007 level
of 3.2 percent ofCDP to 6.5 percent by 2030, and to 11.3 percent by the
end of the 75-year period. In the absence ofreform that greatly restrains
these cost increases, taxes on the working age population and out-ofpocket payments by beneficiaries will both have to rise far faster than
incomes in the decades ahead.
The Medicare program s Hospital Insurance (HI) component is inadequately financed over the next 10 years, is already running an annual deficit in tax income relative to expenditures, and is expected to exhaust its
Trust Fund reserves in 2019. By then, annual revenues to the Trust Fund
(generated primarily by Medicare s 2.9 percent payroll tax) would cover
less than 80 percent ofprojected costs. The gap between projected costs
and revenues grows so rapidly thereafter that projected revenues are less
than 40 percent ofprojected costs by 2050, and less than 30 percent by
the end of the 75-year projection period. The present value difference
between projected expenditures and dedicated revenues for the 75-year
horizon for just the HI component ofMedicare is $11.6 trillion, 70 percent
higher than the analogous $6.8 trillion measure of the budgetary challenge represented by OASDI as noted above.
The Supplementary Medical Insurance (SMI) component of Medicarewhich covers outpatient services (Part B) and prescription drugs (Part
D)-never experiences a shortfall between projected costs and revenues,
since under current law, beneficiary premium income and general revenue transfers to the SMI trust fund are assumed to increase each year to
match expected costs. But per capita expenditures for this program component, as for HI, are projected to grow in line with per capita health care
costs over the long run. Thus, SMI trust fund revenues from premiums and
general revenue transfers are expected to account for a growing share of
beneficiary incomes and Federal general revenues over time. The level of
general revenue transfers in excess of their current share of total Federal
revenues amounts to $13.2 trillion over the next 75 years, and is an
appropriate measure of the additional burden projected SMI expenditures
will place on Federal finances during this period. Thus, if program costs
grow as currently projected, the total additional burden that would be
imposed on Federalfinances by Medicare (HI plus SMI) over the 75-year
projection period would be $24.8 trillion. This is more than five times the
current outstanding Federal (publicly-held) debt and amounts to 3.4 percent of projected CDP over the same period.
On a cash-flow basis, last year s general revenue transfers to Medicare
were equivalent to 12.3 percent of Federal income tax revenues. To fully
fund currently projected Medicare costs would require-in addition to
currently dedicated sources of income from payroll taxes, premiums and
the like-the equivalent in such transfers of nearly double this percentage
of Federal income tax revenues (again, projected at their historical average share of CDP over the past four decades) within 15 years and more
than triple in 25 years. Such transfers would require that over the next 25
years either Federal spending on government programs other than Social
Security and Medicare fall by almost 25 percent, or that income tax revenues increase by more than 25 percent from their historical shares of
GDP
We should note that long-term projections of Medicare costs are subject
to more sources of unexpected variation than are those for Social Security. In addition to the uncertainty inherent in the economic and demographic assumptions used in common with the Social Security projections, factors specific to health care-such as the rate of scientific breakthroughs, the frequency of the development of new "blockbuster" drugs,
the possibility of new diseases or wide reoccurrence of older ones, the
development of new medical treatment techniques, and the preferences of
the population for particular kinds of care-introduce further uncertainty
into the future course of Medicare costs. The most important Medicarespecific assumption embodied in the Trustees' long-term projections is
that health care cost inflation, which has historically exceeded the growth
in GDP on a per capita basis by more than two percentage points annually, will gradually decline over the 75-year projection period until it simply equals CDP growth at the period s end. This assumption seems
reasonable, since per capita expenditures on health care cannot grow
faster than per capita CDP indefinitely without all other forms of consumption trending to zero. Our citizenry has demonstrated a strong propensity over the past half-century to increase the share of income spent on
health care, and there is, as yet, no clear evidence of when, or even how,
this trend might abate. But if it does not do so soon, then the bleak fiscal
picture portrayed in these reports will be bleaker still. Thus, along with
the overall imperative to reform Medicare funding comes an urgent need
for better understanding of the factors contributing to the growth of
health care spending and how these factors might be moderated in the
future. We encourage further work on this important issue.
Conclusion
Social Security and Medicare both present daunting fiscal challenges,
though Social Security s is far more manageable analytically and dollarwise. Their fiscal problems are driven by inexorable demographic change
and, in the case ofMedicare, relentless increases in health care costs, and
are not likely to be greatly ameliorated by economic growth or mere tinkering with program financing. Prudence dictates action sooner rather
than later to address these fiscal challenges.
John L. Palmer,
Trustee
Thomas R. Saving,
Trustee
Page 1 of 1
/0 view or pl/nt tne f-JU~ content on tnlS page Clown/oao tne free AOOIJelf'J Acrol)atlV KeaOerlV.
April 23, 2007
HP-368
Treasury Statement on Release of President
Bush's
10 Theft Task Force Strategy
Washington, DC- President Bush's Identity Theft Task Force today released ItS
strategic plan for combating Identity theft, the top consumer fraud reported to the
Federal Trade Commission
Treasury Deputy Assistant Secretary for Critical Infrastructure Protection and
Compliance Policy D. Scott Parsons, who led the Department's efforts With the
taskforce, released the followlIlg statement today
"President Bush recognized that identity theft is a crime With global reach and
potentially serious consequences for our security and economic well-being. The
criminals are sophisticated and the crimes can have a lastlllg Impact on viclims'
lives.
"Many agencies, like the Treasury, have eXisting plans to combat identity theft, but
this strategy promotes enhanced coordrnatlon among federal, state, and local
authorities and recognizes the need for private sector participation. The report will
serve as a blueprint for preventing and tracking down Identity thieves and giving
them due justice More Importantly, It charts a course to Improve publiC awareness
and data security, to prevent the opportunities for these crimes and to assist
victims."
The Treasury Department is a member of the 17 -agency task force, co-chaired by
Attorney General Alberto GOllzales and FTC Chairman Deborah Majoras. The
group, created by executive order in May 2006, developed 31 major
recommendations for the plan. More information can be found at www.idtheft.gov,
REPORTS
•
ID Theft Task Force Release
http://www.t!.eas.gov/press/reJeaseS/hp368.htl11
51712007
ilepnrtment of 311t11tlre
Federal Trade Commission
FOR IMMEDIATE RELEASE
MONDA Y, APRIL 23, 2007
WWW.USDOJ.GOV
AG
(202) 514-2007
TOO (202) 514-1888
THE PRESIDENT'S IDENTITY THEFT TASK FORCE
RELEASES COMPREHENSIVE STRATEGIC PLAN
TO COMBAT IDENTITY THEFT
WASHINGTON - Attorney General Alberto R. Gonzales and Federal Trade Commission
Chairman Deborah Platt Majoras today announced the completion of the President's Identity
Theft Task Force strategic plan to combat identity theft.
The strategic plan is the result of an unprecedented federal effort to formulate a
comprehensive and fully coordinated plan to attack this widespread and destructive crime. The
plan focuses on ways to improve the effectiveness of criminal prosecutions of identity theft;
enhance data protection for sensitive consumer information maintained by the public sector,
private sector, and consumers; provide more comprehensive and effective guidance for
consumers and the business community; and improve recovery and assistance for consumers.
"Identity theft is a crime that goes far beyond the loss of money or property," said
Attorney General Gonzales. "It is a personal invasion, done in secret, that can rob innocent men
and women of their good names. The strategic plan we are releasing today is part of a
comprehensive effort to fight this crime, protect consumers, and help victims put their lives back
together. "
"Identity theft is a blight on America's privacy and security landscape," said FTC
Chairman Majoras. "Identity thieves steal consumers' time, money, and security, just as sure as
they steal their identifying information, and they cost businesses enormous sums. The Strategic
Plan submitted to the President provides a blueprint for increased federal prevention and
protection. "
Although much has been done to combat identity theft, the specific recommendations
outlined in the Strategic Plan - from broad policy changes to small steps - are necessary to wage
a more effective fight against identity theft and reduce its incidence and damage. Highlights of
the recommendations include the following:
•
Reduce the unnecessary use of Social Security numbers by federal agencies, the most
valuable commodity for an identity thief;
•
Establish national standards that require private sector entities to safeguard the personal
data they compile and maintain and to provide notice to consumers when a breach occurs
that poses a signi ficant risk of identity theft;
•
Implement a broad, sustained awareness campaign by federal agencies to educate
consumers, the private sector and the public sector on methods to deter, detect and defend
against identity theft; and
•
Create a National Identity Theft Law Enforcement Center to allow law enforcement
agencies to coordinate their efforts and information more efficiently, and investigate and
prosecute identity thieves more effectively.
The Task Force's recommendations also include several legislative proposals designed to
fill the gaps in current laws criminalizing the acts of many identity thieves, and ensure that
victims can recover the value of the time lost attempting to repair damage inflicted by identity
theft. These proposals include the following actions:
•
Amending the identity theft and aggravated identity theft statutes to ensure that identity
thieves who misappropriate information belonging to corporations and organizations can
be prosecuted;
•
Adding new crimes to the list of offenses which, if committed by identity thieves in
connection with the identity theft itself, will subject those criminals to a two-year
mandatory sentence available under the "aggravated identity theft" statute;
•
Broadening the statute that criminalizes the theft of electronic data by eliminating the
current requirement that the information must have been stolen through interstate
communications;
•
Amending existing statutes to assure the ability of federal prosecutors to charge those
who use malicious spyware and keyloggers; and
•
Amending the cyber-extortion statute to cover additional, alternate types of cyberextortion.
The plan was released at an authentication workshop which resulted from an earlier
recommendation of the Task Force. In addition to the release of the Task Force's Strategic Plan,
a Web site was launched today, http://www.idtheft.gov, which contains the full Strategic Plan,
and will eventually serve as clearinghouse for educational resources for consumers, businesses,
and law enforcement on ways to prevent and detect identity theft, and help victims recover.
The Identity Theft Task Force, co-chaired by the Attorney General and the FTC
Chairman, was established by Executive Order of the President on May 10,2006, and is now
2
comprised of 17 federal agencies and departments. The Task Force will continue its work over
the coming months, and playa central role in the implementation of the Strategic Plan.
###
07-277
3
Page 1 of 1
April 24, 2007
HP-369
Under Secretary Steel to Deliver
Remarks in NYC on US Capital Markets
US Treasury Under Secretary for Domestic Finance Robert K. Steel will deliver
remarks before the Manllattan Institute's Conference on Capital Markets on
Thursday, Aprrl 26 In New York City. The Under Secretary will discuss Issues
surrounding the competitiveness of U.S capital markets. The following event IS
open to credentialed media
Who
U.S Treasury Under Secretary for Domestic Finance Robert K. Steel
What
Keynote Address before the Manhattan Institute's Conference on Capital Markets
When
Thursday, April 26, 100 p.m (EST)
Where
The Down Town Association
60 Pine Street
New York, NY
http://www.t!'eas.gov/presslreleases/hp369. htill
5/7/2007
Page 1 of 1
Aprr125,2007
HP-370
Chin Sworn In as U,S. Executive Director at the Asian Development Bank
Washington. D.C.--Curtls S Chill, apPointed by President Bush to serve as U.S
Executive Director' at the Asran Development Bank. was sworn In today by
Secretary Henry M Paulson, Jr He was confrrmed by the Senate on March 29,
2007 PreViously, Chin served as a managing director wrth Burson-Marsteller
where he worked In various capacities, focusing most recently on such Issues as
corporate responsibility, stakeholder engagement and public-private sector
partnerships. He has Irved and worked throughout the United States and ASia. He
previously served on the Department of State's Advisory Committee on Cultural
Diplomacy. and during the George H.W. Bush Administration served as a Special
Assistant to the Secretary of Commerce He holds degrees from Northwestern
University and Yale UniverSity
http://www.t!.eas.gov/presslreleaseS/ho370.htm
5/7/2007
Page 1 of 2
April 27, 2007
HP-371
Treasury Releases 'Choose to Save
Television Commercial during National
Financial Literacy Month
Washington, DC - The US Treasury launched Its first financial education
television commercial this week to encourage Amencans to save for important life
events. The "Choose to Save" public service announcement, a product of a
partnership with the American Savings Education Council (ASEC), arrives during
national financial literacy month and promotes free government resources for
financial planning available on the website www.MyMoney.gov and toll-free hotllne
1-888-MyMoney
The 30-second publiC service announcement, part of ASEC's broader Choose to
Save series of radio and television spots. can be found at
www.lreas.govffinancialeducatlon. The National Association of Broadcasters is
nationally distributing the commercial, which was created at WJLA-TV in
Washington, D.C.
"The goal of this television spot IS to make more Americans aware of the federal
governrnent's treasure of free. non-biased financial planning resources." said
Deputy Assistant Secretary for Financial Education Dan lannlcola. Jr. "Before the
MyMoneygov website, this Information was all a hidden treasure, spread across
more than 20 government web sites. ThiS commerCial tells everyone that now they
only need to know one place to VISit"
The ad directs viewers to the federal government's one-stop shop website for
personal finance information The MyMoney gov website. available In both English
and Spanish. has links to matenals that teach the Importance of saving for
retirement. managing credit cards. Investing. aVOiding scams and many other useful
subjects. Users can also test their financial literacy knowledge with the Money 20
qUIz.
The Apnl release of the Ciloose to Save commercial coincides with Financial
Literacy Month, a national observance to promote wise money management The
month has been recognized by resolutions by both houses of Congress and with
events across the country.
"Managing your money IS a year-round Job. but thiS month we JOin with our financial
literacy partners III government, bUSiness and the non-profit world to encourage
Amencans to take the first steps to learning more about tileir money," lannlcola
said "With that knowledge Americans have the power to plan a secure finanCial
future."
Treasury heads the Congressionally-mandated FinanCial Literacy and Education .
Commission The 20-agency federal commission created the MyMoney.gov webSite
and toll-free hotlme in October 2004 and released a national strategy for finanCial
literacy In April 2006.
ASEC and ChoosetoSaveorg are educational programs of the nonpartisan
Employee Benefit Research Institute
http://www.treas.gov!presslreleaseS/hp371.htm
51712007
Page 2 of2
LINKS
•
C~loose to Save Commercial
http://www.treas.gov/pressireleaseS/hp371.htm
5/7/2007
U.S. Treasury - Unicc of Domestic Flll;l~;Ce
-0 ~ I TED
S T :\ T E .,
Dt}Pf'RTltIE~~T
fUr.
HOME
CONTACT US
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Office of Financial Education
MISSION
The Department of the Treasury is a leader in promoting financial
education. Treasury established the Office of Financial Education
in May of 2002. The Office works to promote access to the
financial education tools that can help all Americans make wiser
choices in all areas of personal financial management, with a
special emphasis on saving, credit management, home ownership
and retirement planning. The Office also coordinates the efforts of
the Financial Literacy and Education Commission, a group chaired
by the Secretary of Treasury and composed of representatives
from 20 federal departments, agencies and commissions, which
works to improve financial literacy and education for people
throughout the United States.
My Money PSA - The "Choose to Save" public service
announcement, a product of a partnership with the American
Saving Education Council (ASEC), promotes free government
resources for financial planning available on the website
MyMoney.gov and toll-free hotline 1-888-MyMoney.
Text Version for the hearing impaired
View in Real Player format ItII
View in Windows Media ItII
ORGANIZATION
Key Personnel
IE
TECHNICAL
ASSISTANCE
CENTER
Contact Us
MYMONEY.GOV
The one stop shop
for the Federal
Government's
financial education
resources
FINANICAL
EDUCATION
MATERIALS ON:
Basic Savings
Credit Management
Home Ownership
STATISTIC OF THE WEEK
Did you know that on average, adults get a grade of 70 (C) for
their knowledge of economics and personal finance, based on a 24
question quiz and students' average score is 53 (F)?
Retirement Planning
En EspaNol
FIRST ACCOUNTS
PROGRAM
National Council on Economic Education's (NCEE) What American Teens
and Adults Know about Economics. Released in April 2005.
FINANCIAL EDUCATION NEWSLETTER
Get the Financial Education Newsletter via E-Mail
FINANCIAL LITERACY AND EDUCATION
COMMISSION - RESOURCES AND UPDATES
CONTENTS
To view or print the PDF content on this page, download the free Adobe®
Acrobat® Reade{1'fi).
Office of Financial Education Overview
http://www.treas.gqv/offices/domestic-financeifinanc ial- insti tution /fi n-education/
5/7/2007
U.S. Treasury - :'Jfticc of Domestic Flll;P:('c
Page 2 of 2
Press Releases
The John Shennan Award for Excellence in Financial
Education
Reference Materials
Speeches & Testimony
Last Updated: May 7. 2007
http://wWw.treas.gov/ofIices/domestic- finance/fi nancial- insti t ut ion 'fi n-cd ucationl
5/7/2007
Page 1 of 2
April 30, 2007
2007 -4-30-13-15-38-23036
U.S. International Reserve Position
The Treasury Department today released U S reserve assets data for the latest week As indicated In this table, US reserve assets
totaled $66,734 million as of the end of that week, compared to $66, 889 million as of the end of the prior week.
I. Official U,S. Reserve Assets
(In
US mJlllOns)
April 20, 2007
II
TOTALI
I
11. Foreign Currency Reserves
1
II
la Securities
II
Of WhiCh, issuer headqual1erec/ In the U S
April 27, 2007
66,889
Euro
II
12,984
II
II
Yen
II
10,714
II
II
"II
TOTAL
II
23,698
II
0
II
66,734
Euro
II
12,896
II
II
Yen
10,648
II
II
II
1\
TOTAL
23,544
0
I b Total deposits with
Ibi Other central banks and BIS
II
Ibll Banks headquartered in the US
Ibii Of which, banks located abroad
b.lli. Banks headquartered outslc/e the US
12,989
5,225
II
II
II
II
II
I
II
II
II
12 IMF Reserve Position 2
II
13
II
II
II
II
14 Gold Stock 3
15
II
Other Reserve Assets
I
II
I
13,021
18,213
5.192
0
0
0
0
0
II
Iblil Of which, banks located in the US
Special DraWing Rights (SDRs) 2
18,214
I
I
I
0
0
0
4,896
4,896
9,040
9,040
I
11,041
I
0
II
11,041
I
II
I
0
II. Predetermined Short-Term Drains on Foreign Currency Assets
[
April 20, 2007
II
Euro
I
Yen
II
April 27,2007
II
TOTAL
II
Euro
II
Yen
II
0
1 Foreign currency loans and securities
II
II
II
II
JI
2. Aggregate short and long positions in forwards and futures in foreign currenCies Vis-a-VIS the U.S. dollar
[2a
Short posilions
[2b Long positions
[3
Other
0
II
II
II
0
II
II
II
0
II
II
II
II
II
II
II
II
II
0
II
0
II
II
II
I
TOTAL
II
0
0
I
I
I
I
I
III. Contingent Short-Term Net Drains on Foreign Currency Assets
-----------------,I[
April 20, 2007
II
April 27, 2007
I
I
I
[
[~==E=ur=o~IIF==Y=en~~II==T=o~TA=L~I'I==~Eu=ro==~11===Y=en==~II==T=oT=A=L~1
I
I
http://www.t!.eas.go v/presslreleasesn(}n743013153X:23036.htl11
I
I
5/7/2007
Page 20[2
1. Contingent liabilities in foreign currency
I
1.a Collateral guarantees on debt due within 1
year
I
~b Other contillgent liabilities
2. Foreign currency seCUrities with embedded
options
I
3. Undrawn, unconditional credit lines
13.a
IHeadquartered 111 tile US
ICurrencies vis-a-vIs the U S
dollar
0
II"
I
0
I
"
"
"
I
II"
0
"
"
4.a.1. Bought puts
4.a.2. Written calls
II
I
I
114b2 Written puts
"
I
I
I
"
,14b 1 Bought calls
"
I
0
0
4.a. Short posillons
4.b. Long positions
II"
I
"
"I
I
I
I
"I
II
I"
3.c With banks and other flnancialmstitutlons
4. Aggregate short and long positions of options
in foreign
"
/I"
I
I
"II
3.b. With banks and other flnancia/mstlfutlOns
IHeadquartered outslcle the US.
II"
II"
0
With other central banks
0
0
"
"
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market eXChange rates. Foreign currency holdings listed as seCUrities reflect marked-to-market values, and
depOSits reflect carrylllg values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are fill a I
21 The Items, "2. IMF Reserve Position" and "3 Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued In dollar terms at the offiCial SDRldoliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S Treasury to IMF data for the prior month end
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://www.treas.gov/pressireleaseS/2007430 13153R23036.htll1
5/7/2007
Page 1 of 1
I () view ur prlill (I](' /-,UI-- COlllem Oil IllIS peU)" (/OWI1/0ClCl Ille flee A(/OlJefl) AcrOlJat,,') KeaCler'O.
April 30, 2007
HP-373
Treasury Announces Market Financing Estimates
Washington, DC- Treasury announced Its current estimates of net marketable
financing today for the April - June 2007 and July - September 2007 quarters
•
•
Over the April - June 2007 quarter, the Treasury expects to pay down $145
billion of net mal'ketable debt, assumrng an end-of-June cash balance of
$30 billion. The current estimated paydown is $15 billion greater than
announced in January 2007. The decrease in borrowing is primarily the
result of higher net issuances of State and Local Government Serres
securrtles
Over the July - September 2007 quarter, the Treasury expects to borrow
$43 billion of net marketable debt, assuming an end-of-September cash
balance of $45 billion
During the January - March 2007 quarter, Treasury borrowed $126 billion of net
marketable debt, finishing with a cash balance of $6 billion at the end of March. In
January 2007, Treasury announced net marketable borrowing of $141 billion,
assuming an end-of-March cash balance of $10 billion. The decrease in borrowing
was primarily the result of hlgher-than-expected net issuances of State and Local
Government Serres securities.
Since 1997, the average absolute forecast error rn net borrowing of marketable debt
for the current quarter is $11 billion and the average absolute forecast error for the
end-of-quarter cash balance IS $9 billion Similarly, the average absolute forecast
error for the following quarter is $33 billion and the average absolute forecast error
for the end-of-quarter cash balance is $11 billion.
Additional financing details relating to Treasury's Quarterly Refunding will be
released at 900 a.m. on Wednesday, May 2
REPORTS
•
Sources alld Uses Table
http./Jwww.tr~as.gov/press/reJeases/hp373.htl1l
5/7/2007
Sources and Uses Reconciliation Table
Quarter
AIl1l01ll1CL'JJI(,flf
Date
Financing
Need
Marketable
(1)
(~ )
Borrowmg
Financing
All Other
Sources
(3)
Oct - Dec
2006
Total
(4)
= (2)
+ (3)
Elld-OrQuartcr
(5) - (4) - (1)
(6)
Co."h Balancl'
........
, .....
2005
Jan - Mar
Afemo
Change in
Cash Balance
93
6
98
I ............. .
37
.-------.------------------------------- -------.----------- ---------------. --------------- .----------------- ----------------- ---------------------~-~~~-~~---------------------------n______1_5__8.________ I ____ JL~L __________ !:I..~ ____________ J~_~L _____________~_________ _
_________ J?L ______
Apr - Jun
2006
Actual
______Q!..?L _________(?~L _________ i?L _________ J?2L ____ I_______~! ________________ ~_~ ________ _
------- ..6--------
Oct - Dec
2006
52
---------------------
:~:~~~:~~::::::::::::::::::::::::::::::: ;:::::::7:~:::::::: I::::::~~:::::::I:::::::~:::::::I::::::::~~::::::::j ::::::~~!i:::::: I:::::::::~:!:::::::::
Notes All data reported on a cash basis
Page lof2
April 30, 2007
HP-374
Treasury Assistant Secretary for Economic
Policy
Phillip Swagel
Statement for the Treasury Borrowing Advisory
Committee of the Securities Industry and
Financial Markets Association
Washington, DC- Economic growth slowed at the start of 2007, but is expected to
strengthen through the balance of the year to a sustainable pace Core inflation
appears to be contained and the labor market remains broadly healthy, with low
unemployment, steady job creation, and ongoing wage gains supporting consumer
spending. These developments provide a solid foundation for the economy and
should support faster growth In the remainder of the year
Real GOP grew by 1.3 percent at an annual rate In the first quarter of 2007.
Consumer spending remained str-ong but, as expected, residential construction
subtracted about a full percentage point from growth BUSiness investment turned
up follOWing a late-2006 pullback, but Ule increase in capital outlays was offset by a
slowdown In inventory accumulation and downturn in net exports A declrne in
federal government spending reflected lower defense outlays In the first quarter of
2007
The decline In residential building activity has subtracted from GOP growth since
late 2005 Although the reSidential sector remains weak, there are signs that the
housing market is stabilizing HOUSing starts have recovered modestly from the low
levels recorded in the fall of 2006 and sales of existing single-family homes (over 80
percent of the one-family market) edged higher In the first quarter following little
change in the fourth quarter However, sales of new Single-family homes continued
to decline in the first quarter, and the overhang of both new and eXisting homes for
sale remains substantial. Private analysts expect that declining hOUSing activity will
continue to act as a damper on growth at least through mid year.
Thus far, the slowdown in hOUSing activity does not appear to have had an
appreCiable impact on consumer spending, WhlCil accounts for about 70 percent of
economic activity. Real personal consumption expenditures rose by 3.8 percent at
an annual rate In the first quarter. Robust Income growth has buoyed consumer
spending, with real disposable personal rncome rose by 4.5 percent at an annual
rate In the first quarter. Household balance sheets appear healthy, with household
net worth reaching a new high In tile fourth quarter of 2006, boosted by strong
equity gains and rising real estate wealth
Steady job gains and a low unemployment rate have also lent support to
consumption Nonfarm payroll employment expanded by 180,000 in March and the
Job gains for January and February were revised up, bringing the net job gain for
the first three months of 2007 to 455,000 Altogether, the economy has generated
78 million jobs, or 181,000 jobs per Illonth on average, since the employment
trough in August 2003. The unemployment rate dipped to 4.4 percent In March,
matching the 5-1/2-year low recorded in October
Business investment turned up in the first quarter of 2007, with nonreSidential fixed
investment gaining by 2.0 percent at an annual rate In the first quarter after a
decline at the end of 2006. Spending on equipment and software rebounded slightly
and outlays for structures accelel-ated somewhat There are signs that capital
http./Jwww.tr~as.gov/presslreJeases/hp174.htm
5/712007
Page 2 of2
spending is poised to strengthen further in the coming quarters. New orders of core
capital goods (non-defense capital goods excluding aircraft) rose in March,
retl'aclng about half of the two prevIous monthly declines In addition, hiring and
consumption are both solid, corporate profits as a share of GOP are near a 57-year
high, and corporate balance sheets are healthy.
The Adl1lllllstratlon's most recent economic forecast, prepared In November,
projects 2.9 percent real GOP growth over the four quarters of 2007 - Similar to the
U.S historical average over the last 20 years. The pace of economic activity IS
expected to pick up as the year progresses. Recent private forecasts call for growth
of 2-1/2 percent dUring 2007, with the pace expected to accelerate throughout the
year.
Inflationary pressures remained broadly contained in the first quarter. Headline
consumer price Inflation rose by 2.8 percent over the twelve months ended in
March, down from a 3.4 percent gain In the year-earlier perrod. Energy prices
increased Just 4.4 percent in the latest twelve-month period compared to year-overyear gains averaging 21 percent per month in the first half of 2006 Excluding both
energy and food, core consumer prices advanced by 2.5 percent III the year ended
in March, slower than the 2.9 percent gain posted over the year ending in
September
In sum, the economy remains In transition but growth is expected to accelerate,
returning to its long-term trend by the end of the year. The labor market remains
firm and inflation appears contained.
http://www,treas,gov/p!"c33/rcleutJetJ/hp174,htlll
5/7/2007
Page 1 of 7
April 30, 2007
HP-379
Testimony of Dan lannicola, Jr.
Deputy Assistant Secretary for Financial Education
Before the U,S. Senate Subcommittee on Oversight of
Government Management, the Federal
Workforce, and the District of Columbia
Washington, DC- Good aftemoon Chairman Akaka, Ranking Member VOlnovlch
and distinguished members of the Subcommittee. Thank you for this opportunity to
appear before you today to talk about the important Issue of financial literacy In
America. As Financial Literacy Month comes to a close, I would like to recognize
the strong bi-partlsan emphasis on thiS Important tOPIC. Thank you for sponsoring
the Senate resolution supporting April as Financial Literacy Month I would like to
commend the House for their recognition of Financial Literacy Month as well.
Additionally, President Bush issued a statement observing April as Financial
Literacy Month.
Secretary Paulson, along with the rest of the Admlllistratlon, believes in the
Importance of increasing financial literacy levels across our nation In fact, Just last
week President Bush recommitted his Administration to the cause of financial
literacy and charged Secretary Paulson with building on the Financial Literacy and
Education Commission's efforts to bring financial education to all Americans. Mr.
Chairman, I commend you for your continued leadership on the Issue of financial
education and for fOCUSing a national spotlight on thiS critical tOpiC.
I would like to briefly discuss the financial literacy Issue we are faced with, then
discuss the responses to that issue to date and conclude with a diSCUSSion of next
steps.
The Issue
Today Americans are faced with a robust marketplace of finanCial products and
services which give them many more options than ever before In structuring their
finances. However thiS has not always been the case. For example, there used to
be only a few ways to flilance a home, now there are numerous mortgage options
Credit cards used to be hard to come by, now consumer credit IS Widely available
At one time your employer managed your retirement, now with the steady migration
from defliled benefit plans to defined contribution plans, the Individual has much
more to think about
Times have changed on us. This generation doesn't know any less about money
than our parents or grandparents It is Simply that we need to know more now than
they did then. It IS as If every American has awoken to find himself or herself
promoted to the position of CFO of hiS or her own household Are we ready for the
Job? And if not, how do we address the new reality that our economic chOices have
simply outpaced our financial knowledge?
The answer, of course, IS flilancial education Only when we learn more about our
money will we be able to move forward confidently 111 the modern finanCial
marketplace As a nation we need to learn more about savlllg and investlllg, uSing
credit Wisely, aVOiding fraud and a number of other flilancial topics
The Response
http://www.treas.gov/p:-c33/rclem;etJ/hp379.htm
5/7/2007
Page 2 of7
Three players are responding to the financial literacy issue
and the government.
non-profits. businesses
Non-profits
Non-profit organizations of many varieties are Involved in financial education.
Some are large national organizations. while others are community-based groups
that operate on tile grass roots level They address a variety of financial education
issues for adults like banking the unbanked. providing credit counseling or free tax
preparation. or helping people build assets to prepare for financial emergencies or
to achieve financial goals. Other non-profits, Including schools, center their efforts
on young people Some of these groups focus on school based programs that train
students and teachers on money matters while other groups focus on reaching
youth outside of the classroom
Businesses
Many companies have also wisely recognized financial education as a cause
worthy of their attention Some companies develop cUrricula or donate funds for
use in support of youth and adult financial education programs Other companies
encourage their associates to volunteer their lime on financial literacy programs of
non-profit organizations. Still other private sector firms devote resources to
financially educate their own employees on money matters.
Federal Government
While the efforts of state and local governments to spread financial education have
been commendable. thiS testimony will focus on the efforts at the federal level.
The Department of the Treasury supports the expansion of financial education both
through its own work and through its leadership of a multi-agency commission. I will
descrliJe both roles.
Department of the Treasury
Several bureaus and offices within the Treasury Department work in the field of
financial education These include the Bureau of Public Debt (BPD), Internal
Revenue Service (IRS), MlIlt, Office of the Comptroller of the Currency (OCC),
Office of Thrift Supervision (OTS). and the Office of the Treasurer. While all of
these offices perform important tasks In financial education, Treasury's main effort
in the field is conducted by its Office of Financial Education.
In 2002 Treasury established the Office of Financial Education SlIlce that time, the
office has developed rapidly and now stands as a poliCY leader in the field of
financial education In the US and around the world The office has five key
functions
1) Outreach
First, the office promotes and delivers financial education across the country
through its ambitious outreach efforts. The Office has traveled to 42 states and
held 304 flllancial education sessions reaching over 24.000 people and generating
470 media stories. Many of the people reached are educators, counselors,
journalists, community leaders, or service providers who themselves engage in
financial literacy outreach to many more Americans. This creates a multiplier effect
which only IIlcreases the office's total Impact
The office has performed its work wherever needed. ranglllg from classrooms to
corporate boardrooms to military iJases. and even to the Gulf Coast region to
counsel Katrina victims. The office has reached out to students of all ages,
teachers, lenders, credit counselors. accountants, attorneys. community activists.
the media and the publiC at large. The message to each group varied accordlllg to
http://www.treas.gov/p!..c33/rcleutJetJ/hp379.htm
5/7/2007
Page 3 of 7
its specific needs but the theme has been the same, that financial knowledge is an
empowenng force that Ilelps people Improve their lives and realize their dreams.
2)
Settlllg Standards for Quality Programs
The office's second function IS to set standards for quality fillancial education It
does thiS ttlrough the development and dissemination of the "Eight Elements for
Successful Fillancial Education" programs Financial educators across the country
have been uSing these qualitative standards to evaluate and enhance fillancial
education programs
3) Tecllnical Assistance
Third, the office operates a Technical Assistance Center In English and Spanish for
those seeklllg adVice on establishing or Illlprovlllg financial education programs In
their communities.
4) Brokerlng Partnerships
Fourth, the office uses ItS unique position within the financial education community
to broker partnerships between the supply side and demand side of fillancial
education Some organizations have financial education resources to offer, while
other organizations are In need of such resources The office works With groups
nationWide to help the nght people get connected With the nght resources to
advance financial education.
5) Federal Government Coordlrlatlon
The fifth and final role of the office is to coordinate financial education efforts across
the federal government. Treasury's office of Financial Education performs thiS task
by coordinatlllg the activIties of the Financial Literacy and Education Commission.
Tile details of thiS function are described below
The Fillancial Literacy and Education Commission
The Fair and Accurate Credit Transactions (FACT) Act of 2003 established a twenty
agency group called the FlllanCial literacy and Education Commission. The FACT
Act Ilamed the Secretary of the Treasury as chair of the CommiSSion and gave the
CommisSion and Treasury four Illandates a Web Site, a hotline, a multimedia
campaign and a national strategy.
I will desCribe progress on each of these proJects.
1) Web Site
In October 2004, the CommisSion launched MyMoney.gov, a Web site designed to
be a one-stop shop for federal finanCial education IIlformation which IS available In
English and Spanish. Operated by the General Services Administration (GSA), the
Web site is organized intuitively, the way Americans live their lives Instead of the
way their government is structured--organlzed by topic rather than agency. TopIcs
Include Paying for Education, Saving and Investlllg, Horne Ownership and Privacy.
and Frauds and Scams. MyMoney.gov also provides llilks to fillancial education
grants offered by different CommiSSion agencies. The site has 399 links and has
had 1,717,247 VISitors, 1,053,004 In 2006 alone. On the site, vIsitors can also
access an Interactive. IIlstructlonal qUIz on fillancial literacy, view a publiC service
announcement promotlllg MyMoneygov and get information on the activities of the
Commission
2)
Toll Free Hotlille
In October 2004, the Comillissioll also laullched a toll free hotlille called 1-888-
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MyMoney. Operated by the GSA, the hotline is available In English and Spanish
and permits callers to order a free MyMoney toolkit The English language toolkit
contalils eight federal publications covering tOPICS from savings to investing to
understanding the Social Security system The Spanish language toolkit has SIX
publications To date, the MyMoney Hotlille has received 18.781 calls, 15,508 calls
III 2006 a lone.
3)
Multlilledia Campaign
The Treasury is working with the Ad Council on the production of a campaign that
will address the tOPIC of credit literacy. emphasIzing tile Illlpact of one's credit
score The project has progressed through the research and focus group stages
and IS IlOW In the creative stage where advertiSing professionals are working to
develop creative concepts to communicate the campaign message The campaign
IS scheduled to launch in the fall of 2007
4)
National Strategy
The FACT Act also required the Commission to develop a national strategy for
financial literacy. In April of 2006, the Commission released Takmg Ownership of
the Future - the National Strategy for FinancJ81 Literacy. The Strategy is a
comprehensive blueprillt for Improvlllg financial literacy in America, covering 13
areas of financial education in 13 chapters At the end of each chapter are specific.
numbered calls to action Most of the aclions are assigned to the federal
government, but some of the activities are recommendations to the private sector or
to individuals.
Sillce the launch of the Strategy Just over a year ago, the Commission has been
busy executlllg these "calls to action" These calls to action are milestones for the
Commission which allows us to Illeasure its performance and could not have been
accomplished Without the cooperation of all 20 member agencies. Below is a
summary of progress on tile Strategy's calls to aclion.
Chapter 1. General Savlllg
1·1
In April of 2007, Treasury and the American Savings Education Council
launched a publiC service announcement on the Importance of saving The PSA
promotes the webSite, MyMoneygov and toll-free hotlllle, 1-888-MyMoney.
Chapter 2 Homeownership
2·1
In July of 2006, the Department of Housing and Urban Development
(HUD) and Treasury co-hosted a roundtable which highlighted successful
partnerships that have advanced homeownershlp. During the meetlllg, the
complexity of identifying partners to advance homeownership was discussed at
length. Participants cited best practices which have helped With foreclosure
prevention. non-traditional mortgage products, and the identification of a variety of
hidden costs.
Chapter 3 Retirement SavlIlg
3.2
In April of 2006, the Small Business Administration (SBA) linked ItS
online retirement training tools for small busillesses to MyMoney.gov. In addition.
the Department of Labor (DOL) and IRS developed and released a new publication,
Payroll Oeduc/Jon IRAs, to complement a series on retirement plan options for small
employers DOL conducted SIX fiduCiary education semillars III coordination With
IRS. the American Institute of Certified Public Accountants and the Society of
Human Resources Management.
Chapter 4 Credit
4-1
In 2005. Treasury entered Into an agreement with the Ad Council to
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develop and execute a multimedia public service announcement campaign 011
credit literacy for young adults The campaign IS scheduled to launch In the fall of
2007 It will also be available In Spanish
Chapter 5 Consumer Protection
5-2
In April of 2006, TI'easury released the DVD "Identity Theft Outsmarting
the Crooks," and made It available to the public through MyMoneygov and 1-888My Money, To date, 60.750 copies have been distributed
Chapter 6 Taxpayer Rights
6-2
In the first full year of the "Go Direct" campaign, which ended in June of
2006, Treasury and the Federal Reserve Banks converted 600,000 paper check
recIpients to direct deposit enrollees. An additional 160,000 people were enrolled
as of December of 2006 The Success of the program would not be pOSSible
without the cooperation and support of finanCial institutions across the country. The
program will continue through 2007
6-3
As a result of the Department of Health and Human Services' (HHS)
publiC awareness campaign on the new Medicare drug benefit that encourages
seniors and people With disabilities to take a look at their prescription drug coverage
options, over 90 percent of those With Medicare have some form of drug coverage.
Of those, almost 24 million have prescription drug coverage through the new
Medicare Part D benefit HHS worked With 40,000 partners and conducted more
than 12,000 events to educate taxpayers and beneficiaries on enrolling in the Part
D program, As of late January 2007, more than 14 million benefiCiaries have
enrolled in Medicare's Part D program since June of 2006, bringing the total
number of people with Medicare receiVing comprehenSive prescription drug
coverage to more than 39 million.
Chapter 8: The Unbanked
8-1
To date, three regional conferences have been held on how to reach the
unbanked The conferences were held In Chicago, IL In May 2006: Edinburg, TX In
December 2006: and Seattle, WA In March 2007. The conferences have touched
on tOPICS such as bUilding partnerships and Identifying solutions, serving immigrant
communities, reaching young customers, and providing financial education to help
new and potential bank customers. Ttle conferences were accomplished by the
Federal DepOSit Insurance Corporation (FDIC), National Credit Uilion
Administration (NCUA), OCC, OTS, Treasury, the Federal Reserve Banks of
Chicago, Dallas, and San Francisco, along with assistance from HUD, partnering to
bring a wide range of attendees together on the topic of the unbanked population.
After the final regional conference is completed In the fall of 2007, a white paper will
be released which will summarize the conferences findings and make
recommendations based on them
Chapter 9 Multilingual/Multicultural Populations
9-1
In March of 2007, the first roundtable took place at Treasury and was
focused on the Native populations. The roundtable touched on the needs and wants
of Native populations and how fillancial education can help. Other topics Included
publiC and private partnerships, access to finanCial institutions and serVices, and
public awareness events on reservations
Chapter 10 Killdergarten - Postsecondary FinanCial Education
10-1
in February of 2007, the Department of Education (ED) and Treasury
co-hosted a two-day summit on killdergarten through postsecondary finanCial
education, The summit brought together teachers, students, program prOViders and
researchers from across the country to diSCUSS the role of finanCial education at
school, non-school venues and college level programs to assist others who are
starting or enhanCing programs The summit findings Will be made available to the
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public In the summer of 2007
Chapter 12 Coordination
12-1
The Commission continues to enhance MyMoneygov In 2006. the
"Money 20" Interactive qUIz was added to the Web site. where vIsitors can test their
knowledge with a 20-question online qUIz which covers a variety of personal finance
Issues. C,urrently. all Commission members have links to MyMoneygov from their
agencies Web sites.
In August of 2006, GSA and Treasury completed the first survey of
12-2
Federal fmanclal education programs and resources Findings have shown very
little overlap or duplication among Federal financial education efforts The overlap
noted was found to be minor and necessary to the completeness of a particular
resource or tOPIC.
12-5
In April of 2007. Treasury and Office of Personnel Management (OPM)
hosted the Inaugural meeting of the "National Financial Education Network" of
federal, state and local governments. The network will meet regularly by phone to
discuss topics related to financial education.
Efficiency
Since part of the focus of thiS Subcommittee IS government management. I wanted
to comment briefly on the manner In which this CommiSSion has been managed
During ItS work. the Commission has sought to carry out the purpose of the FACT
Act by coordinating the federal effort and helping the 20 agencies to work together
more efficiently on the Issue of financial education. Many of the mandates of the
FACT Act can be met through such cooperation. The consequence of this IS that,
In many cases. the Commission has been able to add value Without needing to add
resources As good stewards of federal funds, the Commission is obligated to seek
the least costly way to meet its obligations under the law. With a number of
accomplishments and few expenditures. the Commission has been successful thus
far in achieving good value for Congress, the Administration and the American
taxpayer.
Government Accountability Office ReView of the Commission
In December of 2006, the Government Accountability Office (GAO) Issued a report
on the CommiSSion We on the CommisSion welcomed the inSights of GAO on how
we could better accomplish our Important misSion on behalf of the American
people The CommiSSion chose to consider the GAO recommendations as part of
the Commission's annual review of the Strategy which IS required by the FACT Act
During that review the Commission Incorporated many of the GAO
recommendations Into ItS 2007 revisions to the Strategy For Instance, GAO
recommended that definitions to "fillancial education" and "financial literacy" be
added to the Strategy: In response the Commission defined and incorporated both
terms. Also consistent With GAO's recommendations, the CommiSSion plans to
conduct usability testing of and measure customer satisfaction With MyMoney.gov
by 2009.
Additionally. GAO suggested an independent review of the federal financial
education programs and resources Although the FACT Act does not require an
Independent review of such plOgrams and resources. the Commission deCided to
pursue such a reView, With the first series of assessments to be completed In 2009
Lastly. GAO recommended that the CommiSSion work closely With private entities
and state and local governments to Illlprove finanCial literacy. In response. on April
17. 2007 Treasury and OPM co-hosted the Commission's Inaugural meeting of the
"National Financial Education Network" of federal. state and local governments at
Treasury This network will faCilitate precisely the type of cooperation called for In
the GAO report.
Next Steps
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The Strategy outlines clear steps for the Commission to Implement In the next few
years
In the remainder of 2007, the Commission Will continue working on Issues
pertaining to credit literacy, general savings, retirement planning, homeownersl1lp
preservation and youth financial education while performing special outreach to
minOrity conmlUllltles. To succeed, we Will convene those leading efforts in the
private and publiC sectors through regional conferences, national roundtables and
an International summit. The Commission Will Issue poliCY papers and meeting
flndlllgs to further national efforts on financial education In addition, Treasury
plans to launch a multimedia campaign. Lastly, the Commission will contillue
performing regular enhancements to MyMoney.gov and 1-888-MyMoney.
In 2008, the Commissloll will host a roundtable diSCUSSion on Insurance issues as
well as an academic research symposium on financial education
Later In 2009, the Commission intends to conduct a usability testing and customer
satisfaction survey of MyMoneygov as well as complete the first senes of
Independent assessments of federal financial education programs and resources.
Conclusion
I hope this discussion has given an insightful overview of Treasury's and the
Commission's work on financial literacy.
While it is valuable to look at this issue from a high level as a poliCY matter, it IS also
helpful to view It In terms of the indiVidual and the difference It can make to hiS or
her future. Put simply, there are two paths before each persoll we are all trYing to
help. The first IS a rocky path that leads to a place where the compleXity of the
marketplace appears overwhelming, where people are easy prey for fraud and
where bad choices lead to bad outcomes that can last a lifetime.
The other path travels through finanCial literacy and It takes people to a place where
understanding replaces apprehension, where people make the most of their
abundant options and where they have a tangible, enduring stake in their futures It IS a place some of us refer to as the Ownership Society. It comes from the Idea
that a true community IS based more on shared aspirations than shared
geography. Each of us wants to prOVide for our families, have a comfortable
retirement and achieve financial secunty. These goals become more obtainable
when we are finanCially literate, and that is why finanCial education is a pnonty for
Secretary Paulson and for this Administration. We hope that through our emphaSIS
on increased financial literacy people gain the skills to make better decisions and
live better lives.
Now, I will be happy to answer any questions from the Subcommittee concerning
financial literacy.
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April 30, 2007
HP-380
Prepared Remarks of Ahmed Saeed
Deputy Assistant Secretary for Africa and the Middle East
On the Signing of the International Compact with Iraq
Nine months ago - on July 27,2006 - the Government of Iraq and the United
Nations announced the launch of the International Compact with Iraq. Under this
initiative, the Government of Iraq reached out to key partners In the International
community to establish a collaborative process for developing policy commitments
to put ItS economy on a path to self-sufficiency and sustainable growth, while also
creating safeguards to protect the most vulnerable groups in its society.
The Government of Iraq and the UN established a preparatory group to help
develop the Compact, based on best practices and lessons derived from the
experiences of other transition economies. Between July and December, Iraq
consulted regularly With members of thiS group, including the World Bank, the IMF,
and the Arab Fund for Economic and Social Development, as well as
knowledgeable government offiCials from the Gulf, Europe, and ASia. The US
Government also played a strong supporting role.
The UAE and Kuwait each hosted preparatory group meetings, and the UN briefed
ItS members on progress under the Compact on September 18, November 13, and
March 16. The World Bank and IMF also hosted a Compact briefing dUring their
annual meetlllgs in Singapore In September 2006.
The final Compact document was presented at a meeting attended by over seventy
countries and Institutions and hosted by Secretary General Ban KI Moon in New
York on March 16. It is significant In many respects
The Compact is compl'ehensive in scope, ranging from commitments to strengthen
publiC expenditure management, to policies deSigned to improve health, education,
and the environment. It IS also underpinned by clear, measurable benchmarks
The Compact commits to a number of Significant unifYing principles, Including the
adoption of policies to ensure that all IraqiS benefit from the country's vast
hydrocarbons resource base, Important anti-corruption practices, and the
accelerated development of Iraq's private sector.
The Compact document was unanimously endorsed by the Cabinet of Ministers last
December, estabilshlllg a clear consensus on the direction and strategy for
realizing Iraq's economic potential
The Compact has been a Critical vehicle for Iraq's engagement With its neighbors preparatory group meetings were hosted In the UAE and Kuwait, and the final
slgnlllg is III Egypt.
The Compact has provided the Iraqi government an opportunity to draw attention to
its own very significant economic accomplishments a sound macroeconomiC
framework and management of IIlflatlon, adherence to the strict criteria of an IMF
Stand-By Arrangement and reduction of fuel subSidies, bank restructuring, pension
reform, passage of an investment law, and forward movement on hyrdrocarbons
legislation and a revenue management law.
The next step is for Iraq and the international community to formally endorse thiS
Compact at a Ministerial-level meeting In Sharm el Sheikh on May 3 At thiS event.
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participants have been Invited to offer their support for the Compact. To be clear,
this IS not a gap-filling exercise the IIlternational community has not been asked to
Illeet a speCific fundralslng target However, they have been asked to prOVide other
forms of SUppOl't
Chief aillong them IS dellt relief. With Iraq's focus on fillancial sustalllabillty, nddlng
the balance sheet of Saddam el'a debts IS one of the most Importallt. and prudent
steps it can take. It IS expected that Saudi Arabia will announce at Sharm el Sheikh
a commitment to prOVide debt relief and that others, Including, the UAE, will follow
suit
Other countnes are expected to offer support III the form of loans, grants, and
technical assistance The United States will also offer a generous bilateral pledge
Secretary Rice will attend the signing, supported by Treasury Deputy Secretary
Kimlllitt. who IS also the President's SpeCial Envoy on the Compact. The UN and
Iraq expect the meetlllg to be attended by over 35 countries and organizations.
Ministers will be attending from the UK, Germany, Italy, Denmark, Bulgaria, Poland,
China, Korea, Saudi Arabia, the UAE, Bahrain, Kuwait, Egypt, Turkey, and Greece,
among others. Other countries, including Russia and Japan, are expected to be
represented at senior levels UNSYG Ban Ki Moon will co-chair the event with
Prime Minister Mallkl.
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April 30, 2007
HP-381
Secretary Paulson to Speak This Week on U,S. - China Economic
Relationship
Secretary Henry M Paulson, Jr Will speak at a conference hosted by the Peterson
Institute for International Economics on Wednesday and to students at Harvard's
Business School, Law School, and Kennedy School of Government In Boston on
Thursday Secretary Paulson's remarks will focus on the Importance of the U.SChina economic relationship and both countries' efforts to strengthen that
relationship through the U s'-Chlna Strategic Economic Dialogue The second
rneetlng of the SED will occur In Washington in May The following events are
opened to credentialed media
Who
Treasury Secretary Henry M Paulson, Jr.
What
Remarks at the Peterson Institute for International Economics
When
Wednesday, May 2, 11 am EDT
Where
Peterson Institute of International Economics
1750 Massachusetts Avenue, NW
C Fred Bergsten Auditoriulll, 1st Floor
Washington, DC
Note:
Media IllUSt pre-set by 10:45 a.m. and RSVP to Katharine Keenan at
kkeenan@petersoninstituteorg or 202-454-1334.
***
Who
Treasury Secretary Henry M Paulson, Jr
What
Remarks at Harvard Business School
When
Thursday, May 3, 1 pm EDT
Where
Harvard Business School
Burden Auditorium
Boston, MA
Note:
Media must RSVP to Jim Aisner (617-495-6157 or jaisner@hbscedu) or Kerry
Parke (617-495-6931 or kparke@hbs.edu) at Harvard Business School
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April 26. 2007
HP-382
Secretary Henry M. Paulson, Jr.
Remarks at Screening of Alexander Hamilton
The Cash Room
Thursday, April 26, 2007
Thank you very much and welcome to the Treasury Department We're pleased to
host ttle prell1lel'e screenlllg of Alex31lcfer Hamilton Thank you to Bruce Cole and
the National Endowment for the Humanities for supportlllg thiS proJect; to PBS for
sponsoring and airing the movie as part of the "American Experience" series: to
TWin CIties Public TelevIsion and Mlddlemarch Films for brlnglllg the movie to life:
and to the scholars alld actors who put so much energy IIltO the production I'd also
like to extend a special welcome to former Treasury Secretary Nick Brady and his
wife. Kitty Wendy and I have very much appreciated their hospitality and friendship
as they have welcomed us to Washlllgton Welcome back to Treasury. Mr.
Secretary
Alexander Hamilton IS very important to thiS Department - he was its foundlllg
Secretary As you all know he was one of our truly great Founding Fathers. Though
Hamilton never sel'ved here III Washlllgton, Treasury employees are frequently
remillded of hiS role In our history - as they walk down Alexander Hamilton Place.
pass the statue of Alexander Hamilton on the south Side of the building. or see the
portrait of Hamilton outside the Secretary's suite. A select few Treasury employees
are recognized for their service to the Department and to our country with the
Alexander Hamilton Award. which IS the highest honor bestowed by Treasury. And
when visitors come to see me. I like to show off the Alexander Hamilton Silver,
which is on display In the conference room next to my office.
For most Americans. their most frequent interaction with Hamilton IS when they use
a ten-dollar bill. Many of us remember from school days that Hamilton was killed in
a duel With Vice President Aaron Burr on the cliffs of Weehawken, New Jersey.
As an author of the Federalist Papers, Hamilton rallied support for the federal
Constitution. As the first Treasury Secretary, he bUilt confidence In our nation's
ability to repay ItS obligations by assuming state war debts. He also promoted
commerce and manufactUring as the route to prosperity, and helped establish a
national bank to support a growing finanCial system In many ways he was the
father of our nation's finanCial system. Alexander Hamilton saw the vast economic
potential of the United States and he set us on the path to achieving it The fact that
I have always been a great admirer of Hamilton makes the opportunity to serve as
Treasury Secretary particularly meaningful to me.
The movie we're about to see will offer Americans a detailed view of this very
Important yet often overlooked Foundlllg Father. I am really looklllg forward to the
show. But first. I'd like to introduce the Chairman of the National Endowment for the
Humanities. Bruce Cole. to say a few words.
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