Its Not Just for Pension Actuaries What Every Actuary Should Know - - PowerPoint PPT Presentation

It’s Not Just for Pension Actuaries

What Every Actuary Should Know About Social What Every Actuary Should Know About Social Security Funding

Session G-3 Tuesday, November 8, 2011

Janet M. Barr, ASA MAAA EA Stephen C Goss ASA MAAA Stephen C. Goss, ASA MAAA Steven G. Lehmann, FCAS MAAA FSA FCIA Thomas S. Terry, FSA MAAA FCA EA

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• Long-term—Actuarial deficit increased from 1.92

g to 2.22 percent of payroll due primarily to new demographic data and methods

• Combined OASI-DI Trust Fund exhausts 2036 (1 yr earlier)
• Cost exceeds non-interest income permanently 2010+
• Cost exceeds total income starting 2023 (2 years earlier)
• Near-term—Slightly slower economic recovery

b l d l i f i l l but longer delay in recovery of earnings levels

• DI trust fund exhaustion still projected for 2018

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Social Security Trust Fund Ratios

Assets as Percent of Annual Cost Trustees Report Intermediate Projections 400% 450%

OASDI 2011TR

Historical 300% 350%

OASDI 2011TR OASI 2011TR DI 2011TR OASDI 2010TR OASI 2010TR DI 2010TR

200% 250% OASI OASDI 50% 100% 150% DI

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0% 50%

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 Tax Rate Reallocation

20% 25%

Cost: Scheduled and payable benefits Cost: Scheduled but not fully payable benefits

15%

payroll

5% 10%

Income

Payable benefits as percent

• f scheduled benefits:

2011-35: 100%

Expenditures: Payable benefits = income after trust fund exhaustion in 2036

• f taxable

0% 5% 2005 2015 2025 2035 2045 2055 2065 2075 2085 2011-35: 100% 2036: 77% 2085: 74%

% o

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2005 2015 2025 2035 2045 2055 2065 2075 2085 Calendar year

• Reform options to protect the program’s solvency

include: include:

• Raising the Social Security normal retirement age
• Raising the taxable wage base
• Changing the benefit formula
• Full Unreduced Benefit for those newly eligible in 2011
• 90% of first $749 of monthly average earnings (AIME)
• 32% of AIME in excess of $749 and less than $4 517

32% of AIME in excess of $749 and less than $4,517

• 15% of AIME in excess of $4,517
• Changing the cost-of-living adjustments

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g g g j

U.S. Total Fertility Rate: With and Without Adjustment for Survival to Age 10 y j g

4 5 3 4

TFR AdjTFR

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Ave TFR Ave AdjTFR

1875-1925 3.67 2.85

AdjTFR

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1875 1925 3.67 2.85 1926-1965 2.84 2.69 1966-1990 1.99 1.95 1991-2003 2.01 1.99

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1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005

3.3 workers per beneficiary since 1975; just 2 after 2030

Covered Workers Per OASDI Beneficiary

9 10 6 7 8 9

Demographic Change

2 3 4 5

Low Cost Change Program

1 2 1940 1960 1980 2000 2020 2040 2060 2080

High Cost Matures

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1940 1960 1980 2000 2020 2040 2060 2080

It’s All About Demographics

• Average retiree benefit is about $1,000/month
• 3.3 workers have been sharing cost of $300 each
• But paid 13.6% over cost 1990-2008, $341 each
• By 2030 just 2 workers for each beneficiary
• Future benefits will already be reduced another 9%

F NRA d COLA f

• For NRA and COLAs for more years

So ultimately-reduce benefits by another 25%, increase income 33%, or some combination!

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,

Period Life Expectancy at 65 p y

22 24 20

Female

16 18

2011TR2011TR 2011TR 2010TR 2009TR

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2009TR 2008TR Male

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12 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Aged Dependency Ratios, 2011 Social Security T t R t Trustees Report

Intermediate projection compared to no mortality improvement after 2010 0.40 0.45

Intermediate Projection

0.25 0.30 0.35 ency Ratio

No increase in Life expectancy after 2010

d d d i 0.15 0.20 A ged Depende Aged dependency ratio 0.00 0.05 0.10 1975 1985 1995 2005 2015 2025 2035 2045 2055 2065 2075 2085

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1975 1985 1995 2005 2015 2025 2035 2045 2055 2065 2075 2085 Year

• Some believe that assumptions used to value

Some believe that assumptions used to value Social Security are too conservative

• Low cost scenario assumes every assumption is

Low cost scenario assumes every assumption is most optimistic in range of realistic

• Assumptions are compared against experience
• Assumptions are compared against experience

every year and revised as appropriate

• Panel of demographers statisticians actuaries is
• Panel of demographers, statisticians, actuaries, is

convened every 4 years to review assumptions and ranges

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and ranges

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OASDI Annual Balances 2011TR Intermediate Assumptions: T t F d (Off B d t) P ti T t l I i T t l C t Trust Fund (Off-Budget) Perspective: Total Income minus Total Cost Unified Budget Perspective: Non-Interest Income minus Cost

150

Total Income minus Cost Non-interest Income minus Cost

50 100

nt Dollars

• 50

ns of Curren

• 100
• 50

Billion

13 13 13

• 150

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Social Security Effect on Annual Budget Balance Measures 1957-2085

0.5 1.0

Unified-Budget Effect Equals OASDI Net Cash Flow

0.0 0.5

GDP

On-Budget Effect is Zero under Current Law

• 0.5

Percent of G Under "Budget Scoring Convention" Benefits NOT

• 1.0

Convention Benefits NOT Payable under Current Law Are Assumed to Add to Unified Budget Deficit

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• 1.5

1957 1967 1977 1987 1997 2007 2017 2027 2037 2047 2057 2067 2077

SUSTAINABILITY: Cost as Percent of GDP rises from a 4.4 percent average 1990-2008, to a peak of 6.2 percent in 2035, then roughly stabilizes between 5.9 and 6 0 percent after 2050 and 6.0 percent after 2050.

10%

Historical Estimated

6% 8%

Historical Estimated

Cost

4% 6%

Non-interest Income

2%

15 15 15

0% 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Calendar year

Scheduled Benefit Levels as Percent of Career-Average including Annual Scheduled Benefits in 2011 Earnings by Year of Retirement at age 65

60% 70% Low Earner ($19 583 in 2011; 25th $10,398 40% 50% Low Earner ($19,583 in 2011; 25th percentile) Medium Earner ($43,518 in 2011; 56th percentile) $17,134 20% 30% High Earner ($69,629 in 2011; 81st percentile) Max Earner ($106,800 in 2011; 100th til ) $22,717 $27,004 10% percentile) Source: 2011 OASDI Trustees Report 16 16 1940 1960 1980 2000 2020 2040 2060 2080

Trust Fund

C i t tl f ll t l

• Consists mostly of payroll taxes, plus revenue

from taxation of benefits

• Accumulates with interest
• Accumulates with interest
• Legally can only be used to pay Social Security

benefits and administrative expenses p

• Only source of money available to pay benefits
• Invested in U.S. Government Securities
• Creditor relationship is no different than other

creditor relationships

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F l f P i S h

• Formula for a Ponzi Scheme
• Pyramid; exponentially increasing number of

participants is need to pay beneficiaries

• Madoff; false high rates of return promised
• Formula for a Pay-as-you-go System

E h i d i h i k h i

• Each generation pays during their work years what is

needed for current beneficiaries

• B x number of beneficiaries = C x number of workers
• Social Security Equation of Balance
• Cannot borrow! So cumulative income is always at

least cumulative expenditures

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least cumulative expenditures

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• “Maximum Transition Cost” for Social Security

(like plan termination liability) is $17.4 trillion

• (Irrelevant for a PAYGO System!)
• Total US stock market is < $13 trillion
• Would require government ownership of

private industry, and then some! p y,

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Effect of Immigration

I d I i ti h l S i l S it

• Increased Immigration helps Social Security

financing

• OACT immigration assumptions and effect on deficit:

OACT immigration assumptions and effect on deficit:

Scenario Average Annual Net Immigration Deficit Low Cost 1,385,000

• 2.01

Intermediate 1,075,000

• 2.22

High Cost 785,000

• 2.44
• Higher birth rates for recent immigrants
• Other than legal pay into Social Security and do

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• Other-than-legal pay into Social Security and do

not receive benefits.

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It’s Not Just for Pension Actuaries

Questions

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