Social Security Update from Washington
The last few days of July produced several reports and discussions on Social Security. The 2014 Annual Report of the Social Security Trustees was released on July 28 with a briefing at the US Treasury. The National Academy of Social Insurance (NASI) held a briefing that same afternoon and made available its report “Social Security Finances: Findings of the 2014 Trustees Report”. Also on that day the Office of the Chief Actuary (OACT) for the Social Security Administration released a memorandum “Potential Reallocation of the Payroll Tax Rate between the Disability Insurance (DI) Program and the Old-Age and Survivors Insurance (OASI) Program”. Next morning the Committee for a Responsible Federal Budget held a panel discussion “Decoding the 2014 Social Security Trustees Report”. Then on July 31 OACT released another memorandum “Estimates of the Financial Effects on Social Security of the Social Security 2100 Act, legislation introduced on July 31 by Representative John Larson”. The OACT also published Actuarial Note 2014-8 “Disaggregation of the Long-Range Actuarial Balance for the OASDI Program since 1983”. Apart from reviewing the main results from the 2014 Trustees Report, much of the focus of attention during the week in Washington was on the issues of financial stability, solvency and sustainability. The reform proposals to strengthen the OASDI program and achieve 100% solvency over the next 75 years contained in the Social Security 2100 Act merit the attention of public policy experts and will provide a source for future discussions; the August edition of Commentary will provide explanations of these proposals.
In 2002, Commentary editor Ken Buffin developed a methodology for the assessment of solvency of the Social Security system based on the relative actuarial values of projected revenues (including trust fund proceeds) to projected outgo for benefits and expenses; this methodology was adopted by NASI in 2012 and has been applied each year since then to develop the solvency measures in the NASI briefs on Social Security Finances. This methodology identifies the degree of solvency, the expected shortfall, and the associated spread of uncertainty in the financial condition of the system. For 2014, NASI reports solvency ratios of 100% for 19 years, 94% for 25 years, 87% for 50 years, and 84% for 75 years. The corresponding expected shortfalls are 6%, 13% and 16% for 25, 50 and 75 years. The range of the uncertainty spread for 25 years is from 84% to 105%.
Our recently published research paper Actuarial Metrics for Monitoring the Sustainability of the US Social Security System that was presented at the 49th Actuarial Research Conference held in July at the University of California, Santa Barbara, presented the results of monitoring the change in the solvency ratios over the period from 2002 to 2013 and indicated the absolute amounts of change and the equivalent annual rates of change over the period. If we had more data available, we would have liked to present results over a longer period going back to 1983 so as to reflect the full extent of changes since the time of the Greenspan Commission when the system was deemed to be 100% solvent for 75 years. Accordingly, the publication by OACT of Actuarial Note 2014-8 is particularly welcome as it presents a detailed year-by-year analysis of the changes in the actuarial balance of the OASDI system since 1983 according to five component factors: valuation period; demographic assumptions; economic assumptions; disability assumptions; and all other factors including methods.
There are two separate Social Security trust funds; one fund is for the Disability Insurance (DI) Program and the other is for the Old-Age and Survivors Insurance (OASI) Program. There have been several occasions in the past where amounts that were designated for one fund were diverted to the other fund when either fund was approaching a point where it might otherwise not have sufficient reserves and incoming revenue to meet its scheduled projected outgo for benefits and expenses. The DI trust fund is expected to be in need of augmentation in 2016 in order to maintain its ability to pay benefits in full. The OACT memorandum “Potential Reallocation of the Payroll Tax Rate between the Disability Insurance (DI) Program and the Old-Age and Survivors Insurance (OASI) Program” addresses this issue and presents a schedule of reallocated payroll tax rates, (currently 6.2% for both employees and employers, comprising 5.3% for OASI and 0.9% for DI), for the period from 2015 to 2025 that would equalize the expected future period over which the respective trust funds would be able to pay scheduled benefits in full until 2033. The amounts of the change in the allocation between the funds would be 0.5% in 2015-16, 0.4% in 2017, 0.2% in 2018-19, 0.1% in 2020-23, and 0.05% in 2024, with the rates reverting to the current 5.3% and 0.9% thereafter.