SOCIAL SECURITY: HOW BIG IS THE FINANCING PROBLEM, AND HOW CAN WE - - PowerPoint PPT Presentation

SOCIAL SECURITY: HOW BIG IS THE FINANCING PROBLEM, AND HOW CAN WE PAY FOR WHAT WE WANT? NASI Academy for Interns, July 22, 2010 Presented by Stephen C. Goss, Chief Actuary Social Security Administration

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What We Need to Know

(1) System

– What it is, what it does, how it works

(2) Solvency

– Benefits payable in full on a timely basis

(3) Sustainability

– What Americans want---cost versus benefits

(4) Solutions

– Options to balance income and outgo

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(1) System: What it is

 Retirement and survivor benefits start 1940  Eligible age lowered 65 to 62 in 1957F/1962M

– Full retirement age rises 65 to 67 by 2022

 Disability benefits started in 1957  Benefits rise with average wage across

generations --- but with CPI after eligible

 Payroll taxes roughly pay-as-you go

– Rose from 2% to 12.4% as system matured

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(1) System: What it is

Basic level of monthly benefits for aged, disabled, survivors

Scheduled Monthly Benefit Levels as Percent of Career- Average Earnings by Year of Retirement at age 65

10 20 30 40 50 60 70 1940 1960 1980 2000 2020 2040 2060 2080

Low Earner ($19,553 in 2010; 25th percentile) Medium Earner ($43,451 in 2010; 56th percentile) High Earner ($69,522 in 2010; 81st percentile) Max Earner ($106,800 in 2010; 100th

Source: 2009 OASDI Trustees Report

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(1) System: Trust Fund Financing

 OASI, DI and HI cannot borrow

Trust Funds enforce long-term budget neutrality Total spending to date cannot exceed income to date

 Current OASDI Assets (excess income) $2.5 trillion

Available to augment tax income when needed Treasury swaps trust-fund debt for publicly-held debt Total debt subject to limit not affected

 If Trust Funds Exhaust in 2037 under current law?

– Spending is limited----NO annual budget deficit

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(1) System: Trust Fund Financing

Social Security Cost and Expenditures as Percent of Payroll

0% 5% 10% 15% 20% 25% 2005 2015 2025 2035 2045 2055 2065 2075 2085

Calendar year

Cost: Scheduled and payable benefits Income

Payable benefits as percent

• f scheduled benefits:

2009-36: 100% 2037: 76% 2083: 74%

Cost: Scheduled but not payable benefits Expenditures: Income = payable benefits starting in the year the trust funds are exhausted (2037)

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(2) Solvency: Ability to Pay Benefits

Solvent as long as Trust Funds have assets

Trust Fund Ratios under Intermediate Assumptions

50 100 150 200 250 300 350 400 450 2005 2010 2015 2020 2025 2030 2035 2040 2045

OASDI Combined DI

2008 TR 2008 TR 2009 TR 2009 TR

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(2) Solvency: Ability to Pay Benefits

If Assets exhaust in 2037, then by Law---

– only 75% of scheduled benefits are payable

Has this ever happened?????

– NO. Trust Fund exhaustion forces action

» 1977 and 1983 Social Security Amendments Does “negative cash flow” force action?

– Consider History

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(2) Solvency: OASDI Net Cash Flow Past

Social Security Net Cash Flow 1957-2009

• 0.4
• 0.2

0.0 0.2 0.4 0.6 0.8 1.0 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007

Percent of GDP

1983 Amend ments 1977 Amend ments

Payroll Tax Rate rises from 6% in 1961 to 9% in 1971 as Program Matures

1972 Amend ments

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(2) Solvency: OASDI Net Cash Flow Future

Social Security Net Cash Flow 1957-2085

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1957 1967 1977 1987 1997 2007 2017 2027 2037 2047 2057 2067 2077

Percent of GDP

Benefits Not Payable under Current Law

Trust Funds Redeemed to Pay Benefits: Replaced by Publicly Held Debt

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(3) Sustainability: Two Meanings

First:

– Clearly scheduled benefits NOT sustainable with scheduled income

Second:

– Current program structure IS sustainable with adjustments – Or structure can be modified – Sustainable is what Americans want and are willing to pay for

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(3) Sustainability: Cost for Scheduled Benefits Social Security Scheduled Cost as Percent of GDP

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(3) Sustainability: Why has cost gone up

3.3 workers per beneficiary since 1975; just 2 after 2030

1 2 3 4 5 6 7 8 9 10 1940 1960 1980 2000 2020 2040 2060 2080

Covered Workers Per OASDI Beneficiary

Low Cost High Cost Demographic Change Program Matures

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(3) Sustainability: Effect of fewer workers per beneficiary An Example

– Average Retiree benefit is about $1,000/month – 3.3 workers sharing pay $300 each – But if 2 workers share they pay $500 each

– Or if 2 workers pay $300 each » Then average retiree gets $600 per month

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(3) Why the Shift?: We are an “Aging” society; Not from living longer, but fewer Births

s

Total and Aged Dependancy Ratios, 2009 Social Security Trustees Report

Intermediate projection compared to no mortality improvement after 2008 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Year Dependancy Ratio

No increase in Life expectancy after 2008 Intermediate Projection Intermediate Projection No increase in Life expectancy after 2008

TOTAL dependency ratio AGED dependency ratio

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(3) Sustainability: Permanently fewer Births, shift age distribution for the future

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

1 2 3 4 5 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005

Ave TFR Ave AdjTFR

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

TFR AdjTFR

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(3) Sustainability: We are an “Aging” society; Longer life---gradual effect after 2030

Total and Aged Dependancy Ratios, 2009 Social Security Trustees Report

Intermediate projection compared to no mortality improvement after 2008 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1975 1985 1995 2005 2015 2025 2035 2045 2055 2065 2075 2085 Year Dependancy Ratio

No increase in Life expectancy after 2008 Intermediate Projection Intermediate Projection No increase in Life expectancy after 2008

TOTAL dependency ratio AGED dependency ratio

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(4) Solutions: Get Sustainable Solvency,

• r at least make progress

 Eliminate 2.00% Actuarial Deficit (0.7% GDP)  Sustainable Solvency– Stable Trust Fund Ratio

– Largely reduce the 2083 annual deficit

» 4.34% of payroll, 1.45% of GDP

 BUT, Sustainability is about timing and trend

– Meet or reduce obligations when shortfalls occur

 Enact soon with changes implemented later

– Gradual changes with time for planning

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(4) Solutions: No Need to “Bend” the Cost Curve (% of GDP) for Social Security

0% 2% 4% 6% 8% 10% 12% 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 Calendar year

Historical Estimated

OASI + DI HI + SMI (including Part D)