November 29, 2016
The Issue: The report produced each year by the Trustees of the OASDI (Social Security) on the operations and financial condition of the Social Security system in the US makes clear that the system is not currently on a financially sustainable long-term path.
The Proposition: Information in the Trustees’ report also underscores the fact that the cost and
challenges related to fixing the system increase significantly if our elected officials continue to delay addressing the problem.
The problem – defined using the assumptions principally applied by the Trustees (the so-called
intermediate assumptions) – is that projected OASDI costs already exceed participant contributions
and have since the year 2010 (as illustrated in the chart shown above). Costs will exceed total income including investment income starting in 2020, and the dollar level of the combined trust fund reserves thereafter declines until reserves are fully depleted In 2034.
Addressing the problem requires Presidential leadership and Congressional action, and every day that our elected leaders do not act, the price for fixing the problem goes up. Consider, for example:
- The actuaries’ solvency test in 2016 concludes that the current combined tax rate of 12.40% November 29, 2016 solvency throughout the measurement period. This change represents an increase of 20.8%. If, however, any increase is postponed until the trust fund is depleted (projected to be 2034), then the needed increase would be 3.58% of payroll, an increase of 28.9% (an increase nearly 40% more).
- If our elected leaders were instead to seek to create a solvency balance by reducing benefits, the today’s reduction would need to be 16% for all beneficiaries including current retirees. The equivalent figure at reserve exhaustion in 2034 would be 21%. If current retirees and those nearing retirement were to continue to receive benefits at current level, then future retirees would necessarily receive even larger benefit cuts.
As noted above, beneficiary payments currently exceed income from payroll taxes and taxation of benefit payments. That difference is currently about $70 billion for 2016 on a Gross Domestic Product (GDP) of roughly $19 trillion. If no changes are made, that shortfall is projected to balloon to roughly $500 billion in 2034 based on an estimated GDP of $44 trillion.
All figures included here, as noted, use the OASDI actuaries “intermediate assumptions”. They make no claim that these are “best estimates”. Worse results obtain with the actuaries’ “high cost” assumptions, and better follow from their “low cost” assumptions. A review by the Concerned Actuaries Group’s of the assumptions leads us to believe that the intermediate set likely understates costs.
[Note: For those seeking more information join this issue, we recommend the Committee for a Responsible Federal Budget”s 2013 article entitled Social Security Reform and the Cost of Delay. The article can be found at http://crfb.org/document/report-social-security-reform-and-cost-delay.
Questions for the actuarial community: No attempt is made here to propose solutions other than a clear call for action sooner rather than later. The range of possibilities is broad but not limitless: some combination of higher taxes, higher normal retirement age, expanded taxable wage base, means testing, reduced inflation indexing, and outright benefit reductions, shared or not with current retirees, are changes most frequently mentioned. That said, in an effort to encourage dialogue about this important – and expensive – issue, we offer the following questions:
- Are we, as actuaries with responsibilities to the public, prepared to let our elected officials continue to “kick the can down the road” when the facts and the need for action seem so clearly apparent today?
- What combination of changes (and it will take more than a single change) are seen to be both fair and politically feasible?
- As part of a corrective update to the program, should there be included some type of selfcorrecting mechanism, so that the system’s integrity in the future does not depend on law makers and legislation?