Social Security: and Sustainability. Presented by Stephen C. Goss, Chief Actuary

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1 Social Security: Part I. The System, Solvency, and Sustainability Presented by Stephen C. Goss, Chief Actuary Social Security Administration, May 12, 2010

2 What We Need to Know (1) System What it is, what it does, how it works (2) Solvency Benefits payable in full on a timely basis (3) Sustainability What Americans want---cost versus benefits (4) Solutions Options to balance income and outgo 2

3 (1) System: What it is Basic level of monthly benefits for aged, disabled, survivors Scheduled Monthly Benefit Levels as Percent of Career- Average Earnings by Year of Retirement at age Low Earner ($16,000 in 2005; 26th percentile) 40 Medium Earner ($36,000 in 2005; 57th percentile) High Earner ($57,000 in 2005; 82nd percentile) Max Earner ($77,000 in 2005; 100th percentile)

4 (1) System: What it is Retirement and survivor benefits start 1940 Eligible age lowered 65 to 62 in 1957F/1962M Full retirement age rises 65 to 67 by 2022 Disability benefits started in 1957 Benefits rise with average wage across generations --- but with CPI after eligible Payroll taxes roughly pay-as-you go Rose from 2% to 12.4% as system matured 4

5 (1) System: Trust Fund Financing OASI, DI and HI cannot borrow Trust Funds enforce long-term budget neutrality Ttl Total spending to date dt cannot exceed dincome to date dt Current OASDI Assets (excess income) $2.5 trillion Available to augment tax income when needed Treasury swaps trust-fund debt for publicly-held debt Total debt subject to limit not affected If Trust Funds Exhaust in 2037 under current law? Spending is limited----no annual budget deficit 5

6 (1) System: Trust Fund Financing Social Security Cost and Expenditures as Percent of Payroll 25% 20% Cost: Scheduled and payable benefits Cost: Scheduled but not payable benefits 15% 10% 5% Income Payable benefits as percent of scheduled benefits: : 100% 2037: 76% 2083: 74% Expenditures: Income = payable benefits starting in the year the trust funds are exhausted (2037) 0% Calendar year 6

7 (2) Solvency: Ability to Pay Benefits Solvent as long as Trust Funds have assets 450 Trust Fund Ratios under Intermediate Assumptions TR 2008 TR OASDI Combined TR 2008 TR DI

8 (2) Solvency: Ability to Pay Benefits If Assets exhaust in 2037, then by Law--- only 75% of scheduled benefits are payable Has this ever happened????? NO. Trust Fund exhaustion forces action» 1977 and 1983 Social Security Amendments Does negative cash flow force action? Consider History 8

9 (2) () Solvency: OASDI Net Cash Flow Past 1.0 Social Security Net Cash Flow nt of GDP Payroll Tax Rate rises from 6% in 1961 to 9% in 1971 as Program Matures 1977 Amend ments 1983 Amend ments Perce Amend ments

10 (2) Solvency: OASDI Net Cash Flow Future 1.0 Social Security Net Cash Flow Perc cent of GDP Trust Funds Redeemed to Pay Benefits: Replaced by Publicly Held Debt Benefits Not Payable under Current Law

11 (3) Sustainability: Two Meanings First: Clearly scheduled benefits NOT sustainable with scheduled income Second: Current program structure IS sustainable with adjustments Or structure can be modified Sustainable is what Americans want and are willing to pay for 11

12 (3) Sustainability: Cost for Scheduled Benefits Social Security Scheduled Cost as Percent of GDP 12

13 (3) Sustainability: Why has cost gone up 3.3 workers per beneficiary since 1975; just 2 after 2030 Covered Workers Per OASDI Beneficiary Program Matures Demographic Change Low Cost High Cost

14 (3) Sustainability: Effect of fewer workers per beneficiary An Example Average Retiree benefit is about $1,000/month 3.33 workers sharing pay $300 each But if 2 workers share they pay $500 each Or if 2 workers pay $300 each» Then average retiree gets $600 per month 14

15 (3) Why the Shift?: We are an Aging society; Not from living longer, but fewer Births s Total and Aged Dependancy Ratios, 2009 Social Security Trustees Report Intermediate projection compared to no mortality improvement after Dependancy Ratio TOTAL dependency ratio AGED dependency ratio Intermediate Projection No increase in Life expectancy after 2008 Intermediate Projection No increase in Life expectancy after Year 15

16 (3) Sustainability: Permanently fewer Births, hl helped somewhat by Immigration i 4.5 Historical and Projected Total Fertility Rate and Augmented Total Fertility Rate to Include Net Immigration: U.S Augmented TFR with Net Immigration Total Fertility Rate

17 (3) Sustainability: We are an Aging society; Longer life---gradual l effect after Total and Aged Dependancy Ratios, 2009 Social Security Trustees Report Intermediate projection compared to no mortality improvement after Intermediate Projection No increase in Life expectancy after 2008 Dependanc cy Ratio TOTAL dependency ratio Intermediate Projection 0.30 No increase in Life expectancy after AGED dependency ratio Year 17

18 (4) Solutions: Get Sustainable Solvency, or at least make progress Eliminate 2.00% Actuarial Deficit Eliminate unfunded obligation 0.7% of GDP or $5.3 trillion over next 75 years BUT, Sustainability is about timingi and trend Meet or reduce obligations when shortfalls occur Enact E soon with changes implemented later Gradual changes with time for planning 18

19 (4) Solutions: No Need to Bend the Cost Curve (% of GDP) for Social Security 12% HI + SMI (including Part D) 10% Historical Estimated 8% 6% OASI + DI 4% 2% 0% Calendar year 19

Testimony for the Senate Finance Committee on February 2, 2005 Stephen C. Goss, Chief Actuary Social Security Administration

Testimony for the Senate Finance Committee on February 2, 25 Stephen C. Goss, Chief Actuary Mr. Chairman, ranking member, and members of the committee, thank you very much for the opportunity to talk with