Social Security Financial

Status
“Understanding Public and Private Pensions”
Program
National Press Foundation
December 4, 2018

Stephen C. Goss, ASA, MAAA

Chief Actuary, Social Security Administration
Karen P. Glenn, FSA, EA, MAAA
Deputy Chief Actuary, Social Security
Administration
Outline
1) What does Social Security do?

2) Update on financial/actuarial status

a) “Solvency” and “sustainability”: baseline
b) Demographic and economic challenges
c) What’s new?

3) Ways to improve financial/actuarial status

a) Increase revenue
b) Lower cost
c) Fundamental/structural change
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1) What Does Social Security Do?
Monthly Income for Insured Workers and Their Families
• Over 95 percent of Americans will be eligible at age 62 and above

• Vast majority of those under 62 are potential survivor or disability beneficiaries

• 61.9 million current beneficiaries at the end of 2017

• About 19 percent of the total US population (about 327 million as of 12/31/2017)
• 45.5 million retirees and dependents
• 6 million survivor beneficiaries
• 10.4 million disabled workers and dependents

• 173.6 million workers contributing payroll taxes in 2017

• 10.5 million earn above the $128,400 taxable maximum

• Benefits are “progressive,” replacing more for lower career earners

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Scheduled Replacement Rates Based on the 2018 TR

Source: Annual Recurring Actuarial Note #9 at www.ssa.gov/oact/NOTES/ran9/index.html

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How About at Age 62, Where Many Start Benefits?

Source: Annual Recurring Actuarial Note #9 at www.ssa.gov/oact/NOTES/ran9/index.html

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Monthly Income for Insured Workers and Their Families
• After becoming eligible, monthly Social Security benefits
increase annually with price inflation (COLA)
• So they do not increase as fast as the average worker’s standard of living
• But they increase faster than most other forms of retirement income
• So they become an increasing share of retirement income after retiring

• Because benefits after eligibility increase slower than

wages…
• Increase in cost from living longer is somewhat mitigated
• But this effect is limited by greater longevity for higher earners—
see Actuarial Study 124: Mortality by Career-Average Earnings Level (
https://www.ssa.gov/OACT/NOTES/pdf_studies/study124.pdf )

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2) Update on Financial/Actuarial Status
SOLVENCY: OASDI Trust Fund Reserve Depletion in 2034 (same as last year)
Reserve depletion date varied from 2029 to 2042 in reports over the past 26 years (1992-2018)
DI Trust Fund — reserve depletion in 2032, four years later than last year
Due largely to lower recent and near-term disability applications and average benefit levels

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OASDI Annual Cost and Non-Interest Income as Percent of Taxable Payroll
Persistent negative annual cash-flow balance starting in 2010
79% of scheduled benefits still payable at trust fund reserve depletion
Annual deficit in 2092: 4.32 percent of payroll—0.21 percent smaller than last year

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SUSTAINABILITY: Cost as Percent of GDP
Rises from a 4.2-percent average in 1990-2008, to about 6.1% by 2038, then declines to 5.9% by 2052, and
generally increases to 6.1% by 2092

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Demographic & Economic Challenge:
OASDI beneficiaries per 100 workers

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Principal Challenge: Aging (Change in Age Distribution)
Mainly due to drop in birth rates

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What’s New This Year for Actuarial Status?
• Elimination of Deferred Action for Child Arrivals:
DACA
• Note: DACA is still being contested in the courts
• Tax legislation: lower income tax on benefits for
2018-25
• Continued low birth rates and slow mortality
improvement
• Economy: recovery in employment, but reduction
in “labor share” of GDP
• Disability: continuing drop in applications
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Birth Rate Still Below 2.0: Slow Wage Growth? Tempo?

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Mortality Experience: All Ages
Reductions continue to fall short of expectations

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Labor Force and Employment
Employment has recovered: note disparity with measured labor force

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But Labor Productivity Has Lagged, and Labor Share of
GDP Has Dipped, Slowing Recent Average Wage Growth
Non-Farm Business Productivity Labor Share of GDP
Growth Rate7%

6% 2018 TR ultimate assumption 2.06%

Average for 65 years (1952-2017) 2.06%

5%

4%
percent per year

3%

2%

1%

0%
8 1 4 7 0 3 6 9 2 5 8 1 4 7 0 3 6 9 2 5 8 1 4 7
194 195 195 195 196 196 196 196 197 197 197 198 198 198 199 199 199 199 200 200 200 201 201 201
-1%

-2%

-3%

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Recent Favorable Disability Experience Continues
• Applications and incidence are at historic low levels
• Numbers of beneficiaries have been declining since
2013
• Prevalence rates have peaked and are dropping
• What about the future?
• Are declines temporary, or the new state?
• Possibilities:
• Economy and jobs—temporary?
• Drop in hearings allowance rates—temporary?
• Increased health care (ACA)
• Field office consolidations
• Attorney representation
• Something more fundamental?
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Disability Applications Still Dropping Into 2018

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Disability Incidence Rate Has Fallen to Historic Low
Note the small increase in 2017 is from reversal of the increase in ALJ pending through 2016

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Reserve Depletion Date for DI May Move Beyond
OASI in the Next Trustees Report

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3) Ways to Improve Financial/Actuarial
Status
What Does Congress Need To Do To Eliminate
Social Security’s Long-Term Underfinancing?
By 2034 (preferably sooner), Congress will
need to:
• Lower cost (reduce benefits) by about 25%
• Increase revenues by about 33%
• Or some combination of these approaches
• Also consider benefit adequacy?

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If the Law is NOT Changed: Full Benefits Will Not
Be Payable on a Timely Basis Starting in 2034

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Ways to Lower Cost
• Lower benefits for retirees—not disabled
• Increase normal retirement age (lowers OASDI cost, but increases DI cost)
• Can increase gradually, maintaining balance between work and retirement
years, which would reduce long-range shortfall by about 20 percent
• Can exempt long-career low earners

• Lower benefits mainly for high earners

• Reduce PIA above some level
• Flatten the “benefit” level, making monthly benefits more progressive
• Note higher earners live longer, but become disabled somewhat less frequently
• Often combined with increasing PIA below some level, subject to work year
requirements

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Ways to Lower Cost (continued)
• Lower benefits mainly for the oldest old
• Reduce the COLA by using a chain-weighted CPI (reduces shortfall by
20%)
• Lessens the ability of Social Security to offset declines in other income
• Some say instead raise the COLA by using the CPI-E (based on
purchases of consumers over age 62) (increases the long-range shortfall
by 14%)

• Increase the number of years used in benefit calculation

(currently 35)
• In conjunction with increasing NRA, assuming people work longer
• But hurts those who have gaps in work, or who cannot work to older
ages

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Ways to Increase Revenue
• Raise tax rate on all earners
• Increasing rate from current 12.4 percent to about 15.3 percent is
projected to completely eliminate the long-range shortfall

• Raise tax on highest earners

• Increase taxable maximum amount
• 83% of earnings below the max now, was 90% back in 1982-3
• Raising max to 90% again would eliminate over 1/4 of the long-range shortfall
• Eliminating the max (as for HI) would eliminate over 2/3 of the shortfall
• Some tax on all earnings above the maximum (even if not the full 12.4
percent)?
• For each option, extra benefit credit? Or not?

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Ways to Increase Revenue (continued)
• Tax employer-sponsored group health insurance
premiums (eliminates 1/3 of shortfall)
• The main form of employee compensation not now taxed
• Affects only middle class if taxable maximum is not increased

• Maintain larger trust fund reserves, and invest for

higher return
• Could do this by investing some portion of reserves in equities
• Added interest/yield can lower needed taxes

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More Fundamental Changes
• “Privatize”: Partially or fully replace Social Security
retirement benefits with personal accounts

• Means-test Social Security benefits

• Reduce benefits based on assets and/or total income

• Tax additional forms of income

• Investment income: like ACA approach
• Inheritance tax
• Value-added tax (VAT)

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Finally, Timing for Change
• Historically, Congress has waited until reserve depletion is imminent

• Given uncertainties, difficult to lower benefits or raise taxes until you

must

• Enacting “sooner” allows more options, more gradual phase in, and
more advance notice
• Best example: 17-year delay in implementing NRA increase in 1983 amendments

• OASDI reserve depletion now projected for 2034

• The date has varied between 2029 and 2042 over the past 26 years
• So we may still have some time for study and careful consideration

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For More Information Go To http
://www.ssa.gov/oact/
There you will find:
• The 2018 and all prior OASDI Trustees Reports, back to 1941
• 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
• Presentations, like this one
• Congressional testimonies

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