Sunday, May 3, 2015

A Better Financing Approach for Social Security

In my post of March 1, 2015, I briefly discussed Social Security’s financial problem. In this post, I will once again mount my steed and tilt at the Social Security financing windmills by advocating adoption of a more actuarial approach to solving the problem. Readers who desire more background on the problem, the confusion resulting from the different approaches used to measure the size of the problem, how the problem came about and how Canada solved a similar problem can read my article in the May/June issue of Contingencies Magazine, the magazine for the actuarial profession.
Briefly, the 1983 Amendments to Social Security solved the financial problem that existed at that time, which was measured using the 75-year Actuarial Balance. This measurement is still around today and is widely quoted in the press as representing the size of the problem that needs to be solved today, but it was defective as a measure of the size of the problem in 1983, and it remains defective today. The 75-year Actuarial Balance calculation fails to reflect the future deficits expected after the end of the 75-year projection period.  For this reason, the Social Security actuaries have proposed a stronger measure they refer to as “Sustainable Solvency” which would also require, at the time of a measurement, that trust fund ratios at the end of the 75 year projection period be expected to remain stable or on an upward trend. Unlike the 75-year Actuarial Balance calculation, the stronger requirement for Sustainable Solvency is not well quantified in the annual Trustee’s Report and therefore, it tends to get ignored when discussing reform options. 

As noted in the article, Canada faced a similar financing problem with The Canada Pension Plan and implemented sweeping reforms in 1997. These reforms included self-sustaining provisions (automatic adjustments) to safeguard desired levels of funding, which resulted in Sustainable Solvency not only at the time of adoption of the changes, but also provided a mechanism for maintaining Sustainable Solvency in the future. I call this even stronger requirement, “Self-Sustaining Sustainable Solvency.” Actuaries, who work with the concept of automatic adjustments every day, may simply call this approach “actuarial financing.” I believe that the approach adopted in Canada provides a good blue-print for similar action in the U.S. 

From time to time, we hear someone call for a national conversation on retirement in light of the retirement “crisis” in this country. Without a doubt, the first step in addressing this issue has to be making sure that Social Security, the foundation of retirement security for most Americans, is solid. I believe adoption of actuarial financing for Social Security is important for keeping that foundation strong for the future. 

I want to thank Jean-Claude Menard, Chief Actuary for The Canada Pension Plan, for his thoughtful comments on an initial draft of the article and for his patience with me in explaining the process used in Canada. 

Regarding the Don Quixote reference above, this is not the first time that I have advocated consideration of a more actuarial approach for Social Security financing (anticipating a tax rate expected to remain level indefinitely). Back in 1982 when the National Commission on Social Security Reform was working on what would become the 1983 Amendments, I wrote a paper that was subsequently published in the 1983 Transactions of Society of Actuaries entitled, “A Better Financial Approach for Social Security.” While this paper may be available from the SoA library, it is very difficult to find (and probably worth a lot of money).  If you are interested in reading my thoughts on Social Security financing from around that time, a staff member of the Conference of Consulting Actuaries was able to provide me with a pdf version of the transcript of my paper and presentation, “Social Security--There Will Be No Long-Term Solvency With Pay-As-You-Financing” from a 1984 meeting of what was then the Conference of Actuaries in Public Practice.