An Actuarial Perspective on the 2019 Social Security Trustees Report
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The Social Security Trustees Report is a detailed annual assessment that serves as a basis for discussions of Social Security’s financial problems and possible solutions. Social Security’s chief actuary prepares and certifies the financial projections for the Old-Age, Survivors, and Disability Insurance (OASDI) program,1 under the direction of the Social Security Board of Trustees.
|New Trustees Report Extends OASDI Trust Fund Reserve Projected Depletion Date by One Year|
The 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance (OASI) and Federal Disability Insurance (DI) Trust Funds highlights that:
The sooner a solution is implemented to ensure the sustainable solvency of Social Security, the less disruptive the required solution will need to be.
Because future events are inherently uncertain, the report contains three 75-year financial projections to illustrate a broad range of possible outcomes. These projections, each based on a different set of assumptions, are referred to as intermediate, low-cost, and high-cost. The report also provides a sensitivity analysis for key assumptions and a projection based on a probability model (i.e., a stochastic forecast). The trustees consider the intermediate projection to be their best estimate. All information in this issue brief is based on the intermediate projection unless otherwise noted.
When trust fund reserves are depleted, tax income will be sufficient to provide about 75 percent to 80 percent of the scheduled benefits. Any changes to restore long-range solvency would require congressional action. Failure to act would likely cause a delay in some benefit payouts, which, if not addressed by subsequent congressional action, could result in benefit reductions. However, there is no precedent and no legislative guidance for what would happen if reserves are fully depleted.
Overview of Financial Status
The Trustees Report provides separate measures and tests for solvency in the short range and in the long range. Our discussion of the short-range estimate includes details about the progression of the financial status from last year to this year. Our discussion of the long-range estimate includes an analysis detailing the conclusion that income will not be sufficient to pay for scheduled benefits in the long run. The two periods (short-range and long-range) are discussed separately below.
Short-Range Estimates, 2019–2028
Short-range financial adequacy is measured separately for the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) programs, as well as for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) trust funds. The trustees have adopted a test for short-range financial adequacy2 based on projected trust fund ratios. (A trust fund ratio is the ratio of the trust fund assets at the beginning of the year to the benefits payable during the year.) The OASI fund and the combined OASDI fund meet the short-range financial adequacy test while the DI fund fails the test because trust fund ratios are less than 100 percent throughout the short-range period. Although the depletion date for the DI Trust Fund has been extended to 2052 due to favorable recent experience, the level of DI income is not sufficient to rebuild a trust fund balance that is greater than 100 percent.
Social Security’s short-range OASDI financial projection is about the same as the projection made a year ago although moving the projection forward one year decreases the expected trust fund ratio at the beginning of the 10th year. The OASDI trust fund ratio is expected to drop from 273 percent at the beginning of the projection period to 130 percent in the 10th year of the projection period. Last year, the projected OASDI fund ratio in the 10th year was 137 percent. The total change in the projected 10th-year trust fund ratio is a decline of 7 percentage points (137 percent declining to 130 percent). Moving the short-range estimate period one year forward alone caused a decline of 17 percentage points. A reconciliation of the changes in the projected 10th year trust fund ratio from last year to this year is shown below.
- Moving the short-range estimate period forward one year reduced the fund ratio by 17 percentage points.
- Changes in economic data and assumptions had no effect on the fund ratio.
- Changes in legislation and regulations had no effect on the fund ratio.
- Changes in demographic data and assumptions increased the fund ratio by 3 percentage points.
- Changes in programmatic data and assumptions increased the fund ratio by 7 percentage points.
Trust Fund Asset Reserves
Any excess of tax income over outgo is recorded as an asset reserve of the Social Security trust funds. These trust fund asset reserves are held in special U.S. Treasury securities that totaled $2.9 trillion at the end of 2018 and represent the government’s commitment to repay the borrowed funds whenever Social Security needs the money. Disregarding interest earnings on trust fund reserves, income has been less than costs beginning in 2010. From 2010 to date, reserves have been used each year, but the amount used has been less than the interest earnings on the trust fund for that year. As a result, the fund balance has continued to increase.
Trust assets are projected to increase by $1 billion during 2019 (total income including earnings on trust fund assets is projected to be greater than benefit payments during 2019) and then are projected to decrease beginning in 2020 and to continue to decline throughout the remainder of the short-range estimate period and beyond.
Income and Cost
Figure 1 above shows the excess/(deficit) of income over cost after 1975. The historical excess of income over cost has created the current $2.9 trillion in trust fund asset reserves. Starting in 2020, the OASDI trust fund is projected to begin to decline. Using the intermediate assumptions, the current Trustees Report shows the decline is projected to continue until depletion in 2035.
Long-Range Estimates, 2019–2093
Long-range estimates are based on a 75-year projection that covers the future lifetimes of nearly all current participants (those paying payroll taxes and those already retired) along with future expected participants in the program. Figure 2 shows that, beginning in 2035, trust fund asset reserves are projected to be depleted and the system is expected to revert to a fully pay-as-you-go (PAYGO) system. This date is one year later than estimated in last year’s report. After the projected depletion of reserves in 2035, Social Security income is projected to be sufficient to pay only 80 percent of scheduled benefits initially. This ratio decreases to 75 percent by 2093.
The net annual amounts of income (excluding interest) to, and outgo from, Social Security are expressed in the Trustees Report as percentages of taxable payroll. These percentages are known respectively as the income rate and cost rate. During the long-range estimate period of 2019–2093, the income rate will increase (due to taxation of Social Security benefits) from 12.85 percent to 13.36 percent of annual taxable payroll. The cost rate, meanwhile, will rise from 13.91 percent to 17.47 percent of taxable payroll. The difference between these two rates, called the annual balance, ranges from a deficit of 1.06 percent to a deficit of 4.11 percent of taxable payroll during the period from 2019 to 2093.
Using the intermediate assumptions, the projections show expenditures exceeding non-interest income in every year (as has been the case since 2010) and rising rapidly through 2038 as the baby-boom generation retires. While costs are expected to increase quickly, tax revenue is also expected to grow, but more slowly. After 2040, cost rates are projected to decrease through 2052 as the aging baby-boom generation dies and new retirees come from lower-birth-rate generations. After 2052, projected cost rates increase through the end of the projection period primarily due to expected reductions in death rates at older ages.
Actuarial balance conveys the long-range solvency of Social Security in one number. It is the present value over the 75-year projection period of all income (including the current trust fund balance) less all costs (including a one-year cost reserve at the end of the period), divided by the present value of the taxable payroll over the same period. A positive ratio represents the average annual amount (expressed as a percent of taxable payroll) by which income exceeds the level necessary to have a projected trust fund balance at the end of the 75-year projection period equal to the projected scheduled benefits for the following year. A negative ratio indicates a deficiency in the income needed to meet this goal.
The actuarial balance improved from a negative 2.84 percent in the 2018 report to a negative 2.78 percent in the 2019 Trustees Report. This improvement is due mainly to higher-than-expected death rates and changes in future rates of disability which take into account recent experience. Refer to the appendix for an expanded definition of actuarial balance.
The long-range expected increase in Social Security program costs relative to program income is caused principally by demographic trends. These demographic trends are very well known and are generally referred to as “aging” or, sometimes, as “the aging of America.” It is useful to further separate the aging trend into two components:
- macro-aging, which is observed at the population level and refers to a shift in the age distribution of the population caused by the large decrease in birth rates beginning in the mid-1960s (the fertility drop after the large baby-boom generation); and
- micro-aging, which can be observed at an individual level and refers to the expected long-term increase in life expectancies caused by individuals living longer, on average, in each succeeding generation.
A third demographic component, which acts to partially offset macro-aging, is net immigration. Due to immigrants tending to be younger than the average covered OASDI worker, higher immigration can offset some of the change in the age distribution of the population caused by lower birth rates.
The ratio of covered workers to Social Security beneficiaries is expected to decrease significantly from 2.8 in 2018 to 2.3 in 2035, primarily due to macro-aging, and then micro-aging will cause the ratio to further decline, albeit more slowly, to 2.1, by the end of the 75-year projection period. This decrease over the projection period of approximately 25 percent is important in a system in which the dollars paid in must equal the dollars paid out—a PAYGO system.
Figure 3 shows the projected growth in the number of Social Security beneficiaries relative to the covered working population under the three sets of assumptions.
In order to achieve viability of Social Security in the foreseeable future, any modifications to the system should include sustainable solvency as a primary goal. Sustainable solvency means that not only will the program be solvent for the next 75 years under the reform methods adopted, but also that the trust fund reserves at the end of the 75-year period will be stable or increasing as a percentage of the annual program cost. Refer to the appendix for a more complete explanation of sustainable solvency.
Providing for solvency beyond the next 75 years will require changes to address micro-aging, as beneficiaries will likely be receiving benefits for ever- longer periods of retirement.
Regardless of the types of changes ultimately enacted into law, measures to address Social Security’s financial condition will best serve the public if implemented sooner rather than later. Some advantages of acting promptly are:
- Announcing changes to Social Security far in advance of implementation gives future beneficiaries time to plan for all aspects of retirement and modify their own financial planning.
- Implementation of program changes can be more gradual and span multiple generations of retirees.
- Public trust in the financial soundness of the Social Security program will improve.
Providing for solvency both during and after the period where the macro-aging trend impacts Social Security requires a timely and thoughtful solution. At the same time that changes are made to address the baby-boom generation bulge, changes could be made to address the ongoing micro-aging trends.
Measures of Financial Status
The metrics used by the trustees to present the program’s financial status are discussed in more detail below.
Actuarial balance is calculated as the difference between the summarized income rate and the summarized cost rate over a period of years. The summarized income rate is the ratio of any existing trust fund plus the sum of the present value of scheduled tax income for each year of the period to the sum of the present value of taxable payroll for each year of the period. The summarized cost rate is the ratio of the present value of cost for each year of the period, including one year’s outgo at the end of the period, to the sum of the present value of taxable payroll for each year of the period. “Achieving actuarial balance” means having a non-negative actuarial balance. Table 1 shows the components of actuarial balance.
In the 75-year period, 2019–2093, the actuarial deficit is 2.78 percentage points. The actuarial deficit decreased from the comparable figure of 2.84 percentage points a year ago due mainly to higher-than-expected death rates and changes is future rates of disability which take into account recent experience. Generally, the factors affecting the change in the actuarial deficit include the change in the valuation period; changes in demographic data and assumptions; changes in economic data and assumptions; disability data and assumptions; and method and programmatic data changes.
An immediate increase of 2.70 percentage points in the payroll tax (from 12.40 percent of payroll to 15.10 percent of payroll), a benefit reduction of about 17 percent, or some combination of the two, would pay all scheduled benefits during the period, but would not end the period with any trust fund reserve.
The high-cost 75-year projection in the Trustees Report shows a far greater actuarial deficit—6.60 percent of taxable payroll. The low-cost projection is much more favorable, with a small positive actuarial balance for the 75-year period.
Trust Fund Ratios
The trust fund ratio, equal to trust fund assets as a percentage of the following year’s cost, is an important measure of short-term solvency. A trust fund ratio of at least 100 percent indicates the ability to cover the expected scheduled benefits and expenses for the next year without any additional income.
Figure 4 shows projected trust fund ratios under all three sets of assumptions.
As a measure of long-range solvency, the trust fund ratio shows when the program is expected to deplete reserves and become unable to pay full benefits scheduled under current law. Though Figure 4 illustrates the OASI and DI trust fund ratios separately, the combined OASDI trust fund reserve depletion (not shown in Figure 4) occurs in 2035 under the intermediate projection.
Sustainable solvency means the program is not expected to deplete reserves any time in the 75-year projection period, and trust fund ratios are expected to finish the 75-year projection period on a stable or upward trend.
Sustainable solvency is a stronger standard than actuarial balance in two ways. First, actuarial balance is based on averages over time, without regard to year-by-year figures that could indicate an inability to pay full benefits from trust fund assets at some point along the way. Second, a positive actuarial balance can exist even when trust fund ratios toward the end of the period are trending sharply downward.
Sustainable solvency, in contrast, requires strict year-by-year projected solvency AND trust fund ratios that are level or trending upward toward the end of the period. For example, following the last major Social Security reform in 1983, the 1983 Trustees Report projected a positive actuarial balance under the intermediate assumptions, but the annual balances (annual difference between the income rate and the cost rate) were negative and declining at the end of the 75-year period. That report showed a positive actuarial balance but did not show sustainable solvency. As a result, the actuarial balance generally has been declining since then, primarily as a consequence of the passage of time. It is important to note that this result was exactly what the Trustees Report projected in 1983. More than 35 years later, it should be no surprise that large and growing actuarial deficits are now projected at the end of the long-range projection period. Adequate financing beyond 2093, or sustainable solvency, would require larger program changes than needed to achieve actuarial balance.
The unfunded obligation is another way of measuring Social Security’s long-term financial commitment. To compute it, the year-by-year streams of future estimated cost and income are discounted with interest and then summed to obtain their present values. Based on these present values, the general formula for computing the unfunded obligation is: Present value of future cost (benefits and expenses) minus the present value of future income from taxes minus current trust fund assets.
Present value of future cost (benefits and expenses)
minus the present value of future income from taxes
minus current trust fund assets.
The unfunded obligation may be computed and presented in several ways. Perhaps the most useful way is based on taxes and benefits for an open group of participants over the next 75 years, including many people not yet born, the same as was calculated in the basic projections. That methodology is consistent with the primarily pay-as-you-go way the program is designed and run. Although the trustees provide alternative calculations based on the closed group of current participants, we believe the open group basis avoids certain misleading outcomes. For example, if the program had an actuarial balance of exactly zero (i.e., projected resources match projected obligations), the open-group measure of the unfunded obligation would be zero, while the closed-group measure would show a substantial unfunded obligation.
The dollar amount of unfunded obligation is easier to interpret if put in perspective—for example, by comparing it with the size of the economy over the same period. The unfunded obligation is often presented as a percentage of the present value of either taxable payroll or of gross domestic product (GDP). At the beginning of 2019, the open-group unfunded obligation over the next 75 years was $13.9 trillion (up from $13.2 trillion last year). This now represents 2.61 (2.68 last year) percent of taxable payroll, or 0.9 (1.0 last year) percent of GDP.
In recent years, the Trustees Reports have also presented the unfunded obligation based on stretching the 75-year projection period into infinity. The infinite horizon projections project all annual balances beyond 75-years assuming that the current law, demographic assumptions, and economic trends from the 75-year projection continue indefinitely; in practice, this is highly problematic. Projections over an infinite time period have an extremely high degree of uncertainty. Troublesome inconsistencies can arise among demographic and program-specific assumptions. By assuming that longevity keeps increasing forever while retirement ages remain static, for example, the infinite time period forecast will eventually result in an extremely long period of retirement.
Measures of Uncertainty
Because the future is unknown, the trustees use alternative projections and other methods to assess how the financial results may vary with changing economic and demographic experience.
Alternative Sets of Assumptions
Table 2 shows a comparison between recent values and ultimate long-range values of five key assumptions used in each of the three projections. The fertility assumption has not changed from last year’s report. The ultimate values of the mortality reduction assumption were the same as last year’s report except for a 0.01 percentage point increase in the high-cost assumption. The ultimate values for annual net immigration have decreased from the ultimate values in last year’s report due to an expected increase in the number of other-than- lawful permanent residents leaving the country or changing their status to lawful permanent resident. The ultimate productivity growth assumptions each decreased by 0.05 percentage points from the prior valuation. The real-wage growth assumption increased by 0.01 percentage points for the intermediate assumption and 0.02 percentage points for the low- and high-cost assumptions.
The low-cost and high-cost projections change all the major intermediate assumptions at once in the same direction, either favorably or unfavorably. In contrast, there might be some interest in how the projections change when only one key assumption is changed at a time, either favorably or unfavorably. A sensitivity analysis shows exactly this. Just one assumption is changed at a time to determine the financial impact. Table 3 gives results of three sensitivity tests focusing on total fertility rate, mortality reduction, and real-wage growth. A significant component of the differences between low-cost, intermediate, and high-cost projections is the real-wage growth (specifically the difference between inflation and real wages, or the real-wage differential). Actuarial balance and projected depletion date both change materially based on either a favorable or unfavorable shift to this component.
If the real-wage growth assumption was favorably changed from 1.21 percent to 1.84 percent, for example, the actuarial deficit would be reduced from 2.78 percent of taxable payroll to 1.70 percent, and the year of trust fund asset reserve depletion would be extended from 2035 to 2038.
Annual Trustees Report and related Social Security Administration publications (http://www.ssa.gov/OACT/pubs.html)
American Academy of Actuaries issue briefs on Social Security
- Social Security - Automatic Adjustments (May 2017)
- Women and Social Security (May 2017)
- Helping the ‘Old-Old’—Possible Changes to Social Security to Address the Concerns of Older Americans (June 2016)
- Social Security Disability Program: Shortfall Solutions and Consequences (August 2015)
- Social Security Individual Accounts: Design Questions (May 2014)
- Quantitative Measures for Evaluating Social Security Reform Proposals (May 2014)
- A Guide to Analyzing Social Security Reform (December 2012)
- Means Testing for Social Security (December 2012)
- Understanding the Assumptions Used to Evaluate Social Security’s Financial Condition (May 2012)
- Significance of the Social Security Trust Funds (May 2012)
- Automatic Adjustments to Maintain Social Security’s Long-Range Actuarial Balance (August 2011)
- Raising the Retirement Age for Social Security (October 2010)
- Social Security Reform: Possible Changes to the Benefit Formula and Taxation (June 2010)
- Social Security: Evaluating the Structure for Basic Benefits (September 2007)
- Investing Social Security Assets in the Securities Markets (March 2007)
- A Guide to the Use of Stochastic Models in Analyzing Social Security (October 2005)
- Social Adequacy and Individual Equity in Social Security (January 2004)
- Annuitization of Social Security Individual Accounts (November 2001)
Craig Hanna, Director of Public Policy
Members of the Social Security Committee include: Janet Barr, MAAA, ASA— chairperson; Gordon Enderle, MAAA, FSA, EA; Gerhard Gebauer, MAAA, EA; Ronald Gebhardtsbauer, MAAA, FSA, EA; Amy Kemp, MAAA, ASA, EA; Eric Klieber, MAAA, FSA; Alex Landsman, MAAA, FSA, EA; Jeffrey Leonard, MAAA, FSA, EA; Leslie Lohmann, MAAA, FSA, FCIA, EA, ECA; Gerard Mingione, MAAA, FSA, CERA, EA; and Jeffery M. Rykhus, MAAA, FSA.
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