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
The Future of Social Security Peter Diamond Society of Actuaries October 17, 2017
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. 2017. Social Security Administration.
History 1977 legislation 1983 Greenspan Commission and legislation 1994-6 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
Actuarial balance in Trustees Reports after 1982 overindexing Report TF ratio 4 years ahead 75-year actuarial balance 1973.76-0.32 1974.51/.48* -2.98 1975.24-5.32 1976.21-7.96 1977.09-8.20 * two projections 3
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
Absent legislation, unable to pay July 1983 benefits on time. Projected deficits: tax revenue gap as a percentage of total cost, 1983-1991 (1982 Trustees Report) 10% 0% 0.3% 1.1% -2.8% -10% -7.2% -20% 1983 1984 1985 1986 1987 1988 1989 1990 1991 Source: U.S. Social Security Administration. 1982. 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
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 1983-89. 6
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 2000. Then adjust the NRA to keep the ratio of retirement-life expectancy to potential working lifetime as it was in 1990. 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
Proposed amendments J.J. Pickle (D-TX) Increase the age for full benefits to 66 by 2009 and to 67 by 2027. 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 12.40 percent to 13.46 in 2010. Rejected: 296 (165-R, 131-D) to 132 (1-R, 131-D) 8
Projected Impact of 1983 Legislation on 1983-1989 Finances and 75-year Balance Provision Percent of Solution Short-term Long-term Coverage extensions 16 20 Changes affecting beneficiaries 39 70 Changes affecting contributors 44 10 Other 1 0 Source: Table 2, 3. Gregory, J., Bethell, T., Reno, V. and Veghte, B.W., 2010. Strengthening Social Security for the long run. Social Security Brief, 35, pp.1-15. 9
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Projected Deficits: Tax Revenue Gap as a Percentage of Total Cost 2017 2050 (2017 Trustees Report) 0% -2.8% -10% -20% -21.4% -20.1% -30% 2017 2021 2025 2029 2033 2037 2041 2045 2049 Source: Data from Social Security Administration OCACT; Social Security Administration Trustees Report (2017) 11
75- year Actuarial Deficit 2017 2034 (projected from 2017 Trustees Report) 5% 4% 4.11% 3% 2.83% 2% 1% 0% 2017 2019 2021 2023 2025 2027 2029 2031 2033 Source: Data from Social Security Administration OCACT; Social Security Administration Trustees Report (2017) 12
Proposals including borrowing from the Treasury PSA proposal from Advisory Council, 1994-96 (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 2054. 13
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. 2005. Private Accounts Would Substantially Increase Federal Debt and Interest Payments. Washington, DC: Center on Budget and Policy Priorities. 14
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 2042 +1.78 No change in payroll tax base Apply OASDI tax rate to earnings above $400k, with an increase in benefits +1.88 15
Comparison of two bills: benefits Social Security Reform Act of 2016 Sam Johnson Change benefit formula +1.19 Increase age for full benefits +0.84 End taxation of benefits -0.40 Social Security 2100 Act John Larson Increase benefit formula -0.24 Change taxation of benefits -0.19 Decrease COLA +1.25 Increase COLA -0.39 Change special minimum -0.23 Other +0.12 Change special minimum -0.13 16
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
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. 191. 18
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
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. 1-2. 20
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. 5. 21
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
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
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
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 50-50 balance between increased revenues and changes to benefits in future years. 25
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Social Security Actuarial Status Update and Perspective Society of Actuaries Annual Meeting, Session 136 Steve Goss, Chief Actuary, Social Security Administration October 17, 2017
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
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 (1992-2017) 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% 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 3
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 200 150 100 "New Economy" irrational exuberance 2008 Recession back to reality 1995TR 2008TR 2016TR 2017TR 50 0 Tax-Rate Reallocation 1990 1995 2000 2005 2010 2015 2020 2025 4
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 2010. In 2016, with the economy still not fully recovered, applications were below the 2007 level. 2017 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) 1.9 1.8 1.7 2012TR 2013TR 2014TR 2015TR 2016TR 1.6 2017TR 1.5 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 5
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 1 0.99 0.98 2017 TR 2016 TR 0.97 0.96 0.95 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 6
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: 2016-27: 100% 2028: 93% 2091: 82% Expenditures: Payable benefits = income after trust fund depletion in 2028 0% 2005 2015 2025 2035 2045 2055 2065 2075 2085 2095 Calendar year 7
OASDI Annual Cost and Non-Interest Income as Percent of Taxable Payroll Persistent Negative Annual Cash-Flow Balance Starting in 2010 77% 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: 2016-33: 100% 2034: 77% 2091: 73% Expenditures: Payable benefits = income after trust fund depletion in 2034 0% 2005 2015 2025 2035 2045 2055 2065 2075 2085 2095 Calendar year 8
SUSTAINABILITY: Cost as Percent of GDP Rises from a 4.2-percent average in 1990-2008, to about 6.1% by 2037, then declines to under 5.9% by 2050, and generally increases to 6.1% by 2091 10% 8% Historical Estimated 6% Cost 4% Non-interest Income 2% 0% 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 Calendar year 9
Why? 0.50 Aging (change in age distribution) mainly due to drop in birth rates Aged Dependency Ratio 2017 TR Population 65+/(20-64) 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 Actual and TR Intermediate TFR remains at 3.0 after 1964 TFR remains at 3.3 after 1964 0.00 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 10
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) 0.60 0.55 0.50 1981 1991 2001 2011 2021 2031 2041 2051 2061 2071 2081 2091 11
But, Wait How About Budget Scoring? How do entitlements affect Federal debt? Source: Congressional Budget Office, June 2016 12
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
So What If We Projected Federal Debt Consistent With the Law? Dramatic difference back in 2015!!!! Publicly Held Debt as a Percentage of GDP 200 180 160 140 120 100 80 60 40 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 20 0 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 14
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 120 100 80 60 40 CBO Baseline July 2016 Less OASDI Unfunded Obligations (2016 Trustees Projections) 20 Less OASDI&HI Unfunded Obligations (2016 Trustees Projections) 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 15
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 2034 16
How to Fix Social Security Long-Term Make choices addressing OASDI deficits 2034-2091: 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 1995---- Kerry/Simpson and the 1994-96 Advisory Council 17
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
For More Information Go To http://www.ssa.gov/oact/ 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