The 2018 Social Security Trustees Report (continued)

The July edition of Commentary presented the main results from the 2018 Annual Report of the Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds regarding the financial status of the U.S. Social Security system. The main purpose of the trustees’ report is to evaluate the relationship between the actuarial values of the system’s expected future projected cash flows for income and expenditures as provided under current law. For this purpose, future projections are made over periods of 25 years, 50 years, and 75 years. The results of these projections provide a useful guide to the solvency and sustainability of the system. In this context, solvency refers to the extent of the adequacy of revenue cash flows (including the invested reserve assets) to meet scheduled benefits and administrative expenses. The results may also be applied to determine the requisite payroll tax rate necessary to establish an equal balance between projected cash flows for income and expenditures. As reported in the July edition, on a low-cost projection basis, the solvency metrics (or cash flow adequacy) for 25 years, 50 years and 75 years are respectively 104.66 percent, 102.30 percent, and 102.10 percent. On an intermediate-cost projection basis, the corresponding metrics are 92.81 percent, 86.59 percent and 83.78 percent. On a high-cost projection basis, the corresponding metrics are 82.49 percent, 73.23 percent, and 68.80 percent. The solvency equilibrium payroll tax rates, corresponding to the current 6.20 percent rate, that would be required to meet in full the projected expenditures for all scheduled benefits and administrative expenses, are useful guides to the solvency and sustainability of the system. On a low-cost projection basis, the payroll tax equilibrium metrics for 25 years, 50 years and 75 years are respectively, 5.88 percent, 6.05 percent, and 6.06 percent. On an intermediate projection basis, the corresponding metrics are 6.77 percent, 7.29 percent, and 7.54 percent. On a high-cost projection basis, the corresponding metrics are 7.78 percent, 8.82 percent, and 9.42 percent.

The annual Trustees Reports are essentially actuarial reports prepared by the Office of Chief Actuary at the Social Security Administration. This Office is staffed by highly-qualified, experienced and dedicated professionals who produce a vast amount of information that is included in the detailed tables, charts and exhibits in the 261-page trustees report. Some of this information is presented in a much shorter 25-page Message to the Public by the Social Security and Medicare Boards of Trustees that shows just a summary of the key results.  Media reports typically quote selectively from this summary with a major focus on the trust fund and its expected future decline. The Social Security financing arrangement, with a fixed payroll tax over a 75-year period means that the trust fund is merely a stabilization reserve fund and is expected to accumulate in the early years while the revenue exceeds outgo, and then decline in later years when the outgo exceeds revenue. It was designed to reach a maximum approximately around the middle of a 75-year period from a 1983 base year and to reach zero at the end of the 75-year period. This so-called “trust fund exhaustion” is not unexpected; it is inherent in the financing arrangements. At the present time the trust fund amounts to $2.892 trillion representing only a small fraction (about 3.5 per cent) of the 75-year projected costs of $81.146 trillion, whereas future payroll tax revenue amounts to $60.776 trillion (about 75 percent). Future revenues also include $4.312 trillion from the taxation of benefits. The actuarial value of the difference between the projected 75-year revenue and expense streams, taking the trust fund into account, is $13.166 trillion or about 16 percent of the 75-year cost. Media reports typically do not present a full and proper perspective on the relative magnitude of the various components of the 75-year projected cost and typically focus only on the relatively small trust fund balance. Media reports also do not typically explain the inconsistency that is built into the system by legislation that specifies certain amounts of scheduled benefits, but provides for a fixed payroll tax rate that is not responsive to dynamic demographic and economic conditions that impact the level of financing required to maintain equilibrium between projected revenue and expenditure. As more academic work is undertaken to analyze the issues of solvency and sustainability of the system and to produce appropriate and meaningful metrics for measuring and monitoring the complexities of an ever-changing dynamic financial system, the challenge facing the actuarial profession is how to achieve an effective means of communicating the technical actuarial perspectives relating to Social Security finance. It is apparent that media and policymakers, as well as influential think-tanks and other research organizations, could benefit substantially from gaining a better comprehension of the actuarial perspective.