Moderator: Krzysztof M. Ostaszewski, FSA, CERA, MAAA, Ph.D. Presenters: Peter Diamond, Ph.D. Stephen C. Goss, ASA, MAAA

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1 Session 136 PD - Update on the Recent Developments and Financial Status of U.S. Social Security Moderator: Krzysztof M. Ostaszewski, FSA, CERA, MAAA, Ph.D. Presenters: Peter Diamond, Ph.D. Stephen C. Goss, ASA, MAAA SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer

2 The Future of Social Security Peter Diamond Society of Actuaries October 17, 2017

3 OASDI Income, Cost, and Expenditures as Percentages of Taxable Payroll [Under Intermediate Assumptions] Source: Figure II.D2. The 2017 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds Social Security Administration.

4 History 1977 legislation 1983 Greenspan Commission and legislation Advisory Council report but no legislation 2001, 2010 Commissions but no legislation Issues Legislation before 2034 Borrowing by Social Security COLA for benefits in payment 2

5 Actuarial balance in Trustees Reports after 1982 overindexing Report TF ratio 4 years ahead 75-year actuarial balance /.48* * two projections 3

6 After1977 legislation introducing automatic wage indexing for initial benefits 75-year deficit reduced: 1977 Trustees Report: 8.20 percent of taxable payroll 1978 Trustees Report: 1.40 percent of taxable payroll Short run as seen in 1978 Trustees Report: After 1980 it is estimated that income will exceed outgo in every year until after the turn of the century. Source: Annual Reports of the Board of the Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Washington, DC. 4

7 Absent legislation, unable to pay July 1983 benefits on time. Projected deficits: tax revenue gap as a percentage of total cost, (1982 Trustees Report) 10% 0% 0.3% 1.1% -2.8% -10% -7.2% -20% Source: U.S. Social Security Administration The 1982 Annual Report of the Board of the Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. 5

8 Greenspan Commission: short-run problem Recommends that $150-$200 billion in either additional income or in decreased outgo (or a combination of both) should be provided for the OASDI Trust Funds in calendar years

9 Greenspan Commission split on long-term solution (0.58 of the 1.80 deficit) 8 Republican appointees Increase the normal retirement age (NRA) from 65 to 66, starting with those age 62 in Then adjust the NRA to keep the ratio of retirement-life expectancy to potential working lifetime as it was in The minimum age for Medicare eligibility would be the NRA. 5 Democratic appointees Increase the payroll tax rate by 0.92 percent starting in 2010, with the employee s share of the increase offset by a refundable income-tax credit 7

10 Proposed amendments J.J. Pickle (D-TX) Increase the age for full benefits to 66 by 2009 and to 67 by Early retirement stays at 62. Approved: 228 (152-R, 76-D) to 202 (14-R, 188-D) C. Pepper (D-FL) Increase the tax rate from percent to in Rejected: 296 (165-R, 131-D) to 132 (1-R, 131-D) 8

11 Projected Impact of 1983 Legislation on Finances and 75-year Balance Provision Percent of Solution Short-term Long-term Coverage extensions Changes affecting beneficiaries Changes affecting contributors Other 1 0 Source: Table 2, 3. Gregory, J., Bethell, T., Reno, V. and Veghte, B.W., Strengthening Social Security for the long run. Social Security Brief, 35, pp

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13 Projected Deficits: Tax Revenue Gap as a Percentage of Total Cost (2017 Trustees Report) 0% -2.8% -10% -20% -21.4% -20.1% -30% Source: Data from Social Security Administration OCACT; Social Security Administration Trustees Report (2017) 11

14 75- year Actuarial Deficit (projected from 2017 Trustees Report) 5% 4% 4.11% 3% 2.83% 2% 1% 0% Source: Data from Social Security Administration OCACT; Social Security Administration Trustees Report (2017) 12

15 Proposals including borrowing from the Treasury PSA proposal from Advisory Council, (Clinton) Issue bonds to the public for the next 40 years to be fully repaid. President's Commission to Strengthen Social Security, 2001 (Bush) Temporary transfers from general revenue would be needed to keep the Trust Fund solvent between 2025 and

16 In the early 2000s, all of the GOP plans for Social Security would have borrowed to cover the transition costs of setting up individual accounts. Increase / reduction of federal debt in 2050 (as percent of GDP) resulting from proposed Social Security plans Bush Pozen Hagel Graham Johnson Kolbe/Boyd Demint (2003) Shaw Sununu/Ryan Diamond/Orszag Ball -25.9% -28.2% 19.3% 3.8% 26.5% 20.8% 1.2% 40.1% 65.3% 79.7% 93.7% -50% 0% 50% 100% Source: James Horney and Richard Kogan Private Accounts Would Substantially Increase Federal Debt and Interest Payments. Washington, DC: Center on Budget and Policy Priorities. 14

17 Comparison of two bills: tax revenue Social Security Reform Act of 2016 Sam Johnson No change in payroll tax rate Social Security 2100 Act John Larson Increase the payroll tax rate, reaching 14.8% in No change in payroll tax base Apply OASDI tax rate to earnings above $400k, with an increase in benefits

18 Comparison of two bills: benefits Social Security Reform Act of 2016 Sam Johnson Change benefit formula Increase age for full benefits End taxation of benefits Social Security 2100 Act John Larson Increase benefit formula Change taxation of benefits Decrease COLA Increase COLA Change special minimum Other Change special minimum

19 Cost-Of-Living Adjustment and the Consumer Price Index Current law: CPI-W: Consumer Price Index for Urban Wage Earners and Clerical Workers. Johnson: Chained CPI (C-CPI-U): OACT estimates a decrease of 0.3 percentage point per year. Increase benefits for all beneficiaries who have been eligible for at least 20 years. Larson: CPI-E: OACT estimates an increase of 0.2 percentage point per year. 17

20 At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes it is important that public policy makers and private users understand the relationships between the ways in which price indexes are designed and how they serve or fail to serve the various purposes for which they are employed. Panel on Conceptual, Measurement, and Other Statistical Issues in Developing Cost-of-Living Indexes, Charles Schultze and Christopher Mackie, Editors, National Academies Press (2002), p

21 Purposes for indexed changes of benefits in payment Intertemporal patterns of benefits in payment retirees would want subject to a budgetary lifetime PDV constraint. Suitable relationships between incomes of retirees and their earlier earnings. Suitable relationship between incomes of retirees and earnings of contemporaneous workers. Reflects overall resources available. 19

22 At What Price? A cost-of-goods index (COGI): measures the change in expenditures required by a household to purchase a fixed weight basket of goods and services A cost-of-living index (COLI): measures the change in expenditures a household would have to make in order to maintain a given standard of living. P

23 At What Price? the price data used to produce the CPI are collected from retail stores and not directly from households, as a consequence, it is impossible to investigate satisfactorily the two major aggregation issues: To what extent does inflation or changes in living costs differ among the various economic and demographic groups? And to what extent would a democratic index behave differently from a plutocratic one? P

24 Shortcomings of a COLI Assumes the same indifference curve in two years. But preferences change with aging, with consumption history, and with the consumption of others. Uses a "representative consumer" with the average consumption of the entire economy. But consumption patterns vary greatly. Medical costs reflect both changes in health and a changing commodity with special social concern. Products change and enter and exit the market, making some comparisons difficult. 22

25 Indexed adjustments of defined benefits in payment Price changes: Canada, France, USA. Wage changes minus a constant: Norway, Sweden Mix of price and wage changes: Finland, Switzerland Includes adjustment for financial balance: Germany, Spain, Sweden Source: OECD, Pensions at a Glance 2015: OECD and G20 indicators. 23

26 Reform legislation questions Last minute is inevitable? Waiting for last minute legislation favors tax increases relative to benefit cuts? Last minute is OK: see 1983? Just form a commission? What type of commission? Role of public views 24

27 Bipartisan Policy Center Commission on Retirement Security and Personal Savings (Conrad-Lockhart) 2016 In the interest of encouraging compromise and informing the public debate, the commissioners operated under the restriction of a roughly balance between increased revenues and changes to benefits in future years. 25

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29 Social Security Actuarial Status Update and Perspective Society of Actuaries Annual Meeting, Session 136 Steve Goss, Chief Actuary, Social Security Administration October 17, 2017

30 Method for Social Security Financing 1) Payroll tax invested in Trust Funds Also tax on benefits and interest income 2) Pay-As-You-Go Financing Maintain contingency reserve because---- No significant borrowing authority Must warn Congress to act in time 3) Annual Trustees Reports since 1941 Congress has always acted in time Trust fund reserve depletion is the trigger 2

31 SOLVENCY: OASDI Trust Fund Reserve Depletion 2034 (same as last year) o Reserve depletion date varied from 2029 to 2042 in reports over the past 25 years ( ) o DI Trust Fund reserve depletion in 2028, five years later than last year o Due largely to lower recent and near-term disability applications and incidence rate 450% 400% 350% 300% Social Security Trust Fund Ratios Assets as Percent of Annual Cost Trustees Report Intermediate Projections Historical OASDI 2017TR OASI 2017TR DI 2017TR OASDI 2016TR OASI 2016TR DI 2016TR 250% 200% 150% OASDI OASI 100% DI 50% Tax Rate Reallocation 0%

32 Changes in Solvency Projections for the DI Trust Fund; 2008 Recession Offset New Economy ; Cycles Still Happen 250 DI Trust Fund Ratio in 1995, 2008, 2016, 2017 Trustees Reports Reserves as % of Annual Cost "New Economy" irrational exuberance 2008 Recession back to reality 1995TR 2008TR 2016TR 2017TR 50 0 Tax-Rate Reallocation

33 Big News: Applications for Disability Benefits Still Falling At the peak of the last economic cycle in 2007, applications were low, but increased rapidly in the recession to over 2 million in In 2016, with the economy still not fully recovered, applications were below the 2007 level even lower!! 2.1 Total Social Security Disability Receipts by Calendar Year: Historical and Intermediate Assumptions for 2012 through 2017 Trustees Reports 2.0 (millions) TR 2013TR 2014TR 2015TR 2016TR TR

34 Even with the Economy NOT Yet Back to Mid-Cycle Despite the low unemployment rate (4.8 percent in 2016), employment is estimated to be about 2 percent below full employment level 1.01 Ratio of Current Employment to Full Employment TR 2016 TR

35 So What is the Cash-Flow Shortfall for DI? DI Annual Cost and Non-Interest Income as Percent of Taxable Payroll 93% of scheduled benefits still payable at trust fund reserve depletion 5% 4% 3% Cost: Scheduled and payable benefits Cost: Scheduled but not fully payable benefits 2% 1% Non-interest Income Payable benefits as percent of scheduled benefits: : 100% 2028: 93% 2091: 82% Expenditures: Payable benefits = income after trust fund depletion in % Calendar year 7

36 OASDI Annual Cost and Non-Interest Income as Percent of Taxable Payroll Persistent Negative Annual Cash-Flow Balance Starting in % of scheduled benefits still payable at trust fund reserve depletion 25% 20% Cost: Scheduled and payable benefits Cost: Scheduled but not fully payable benefits 15% 10% 5% Non-interest Income Payable benefits as percent of scheduled benefits: : 100% 2034: 77% 2091: 73% Expenditures: Payable benefits = income after trust fund depletion in % Calendar year 8

37 SUSTAINABILITY: Cost as Percent of GDP Rises from a 4.2-percent average in , to about 6.1% by 2037, then declines to under 5.9% by 2050, and generally increases to 6.1% by % 8% Historical Estimated 6% Cost 4% Non-interest Income 2% 0% Calendar year 9

38 Why? 0.50 Aging (change in age distribution) mainly due to drop in birth rates Aged Dependency Ratio 2017 TR Population 65+/(20-64) Actual and TR Intermediate TFR remains at 3.0 after 1964 TFR remains at 3.3 after

39 How About Labor Force Participation Trustees: Age-sex adjusted labor force participation rate recovers; rises with longevity Recent Technical Panel: No further recovery; then males drop, females stable 0.80 Labor force participation rate (16 and older, age-sex adjusted to 2011 population) 0.75 Historical Projected Males (age adjusted) 0.70 Age-sex adjusted 0.65 Females (age adjusted)

40 But, Wait How About Budget Scoring? How do entitlements affect Federal debt? Source: Congressional Budget Office, June

41 Take Note. Budget Scoring Is Inconsistent with the Law, and All Past Experience. See Actuarial Opinion in the 2017 TR (also 2014, 2015, and 2016 TR) 1) Reserve redemptions through 2034 just spend the excess revenues collected and invested in earlier years. This just replaces debt owed to the TF with debt owed to the public 2) If reserves deplete in 2034, the $12.5 trillion unfunded obligation through 2091 cannot be paid under the law. Budget deems these expenditures creating publicly held debt!!! 3) Therefore-----Trust Fund operations have NO direct effect on total Federal debt subject to ceiling in any year and no net effect on publicly held debt over time. 13

42 So What If We Projected Federal Debt Consistent With the Law? Dramatic difference back in 2015!!!! Publicly Held Debt as a Percentage of GDP Projected Federal Debt Held by the Public: CBO Baseline (Assuming OASDI & HI Unfunded Obligations Are Paid by Borrowing From the Public) vs. Assuming Current Law CBO Baseline July 2015 Less OASDI Unfunded Obligations (CBO Dec 2015) Less OASDI (CBO Dec 2015) and HI (Trustees 2015) Unfunded Obligations

43 But starting 2016, CBO projects the total Federal Budget only 30 years! 160 Projected Federal Debt Held by the Public: CBO Baseline (Assuming OASDI & HI Unfunded Obligations Are Paid by Borrowing From the Public) vs. Assuming Current Law 140 Debt as Percent of GDP CBO Baseline July 2016 Less OASDI Unfunded Obligations (2016 Trustees Projections) 20 Less OASDI&HI Unfunded Obligations (2016 Trustees Projections)

44 The Bottom Line Long-term projections provide information to assess solvency and changes needed to eliminate shortfalls If trust fund reserves were to deplete: Full benefits cannot be paid timely NO pressure on the Budget or Federal Debt So Congress must and WILL act, as always Straightforward solutions: Add revenue and/or lower cost for OASDI Comprehensive changes implemented by

45 How to Fix Social Security Long-Term Make choices addressing OASDI deficits : Raise scheduled revenue after 2033 by about 33%: increase revenue from 4.6 to 6.1% of GDP Reduce scheduled benefits after 2033 by about 25%: lower benefits from 6.1 to 4.6% of GDP Or some combination of the two Achieve sustainable solvency Trust Fund reserves stable or rising as percent of annual cost This is a new concept since about Kerry/Simpson and the Advisory Council 17

46 Questions If aging is the problem, what to do? Index the normal retirement age after it hits 67?? Remember longevity is just a small part of the future aging How to address the lower birth rate?? Fewer children pay more of their earnings? Increase payroll tax rate, or Tax investment income (like the ACA) Elders get lower monthly benefits? Reduce the benefit replacement rate below 40% average? What implications given the demise of private defined benefit pension plans? 18

47 For More Information Go To There you will find: 2017 and all prior OASDI Trustees Reports Detailed single-year tables for recent reports Our estimates for comprehensive proposals Our estimates for the individual provisions Actuarial notes; including replacement rates Actuarial studies Extensive databases Congressional testimonies Presentations like this 19

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