This post is a follow-up to my post of January 22, 2016, where I noted that relatively small tweaks in assumptions about the future appeared to have a fairly large impact on Social Security’s 75-year actuarial balance calculation, and my post of July 30, 2016, where I called upon the actuarial profession to advocate adoption of automatic approaches to maintain Social Security’s actuarial balance as part of the next round of system reform to enhance the system’s sustainability.
This week, Keith Hall, the Director of the Congressional Budget Office (CBO), appeared before the House Subcommittee on Social Security to explain why CBO’s calculation of Social Security’s 75-year actuarial deficit was so much higher than the deficit calculated by Social Security’s actuaries and included in the official Trustee’s report. Here is a link to his testimony. Mr. Hall explained that by tweaking a few assumptions, the CBO calculated the 2016 75-year actuarial deficit to be 4.68% of the system’s taxable payroll vs. the 2.66% figure calculated by the Trustees. In other words, the CBO calculated deficit, when measured as a percentage of taxable payroll was about 75% higher than the deficit calculated by the Trustees. It is also important to note that neither of these two calculations recognizes the significant deficits projected for years after the 75-year projection period under current law, and therefore both actually understate the long-term problem.
As discussed in my post of January 22, I have no idea whose assumptions are more accurate, and frankly that is not the point of this post anyway. The point is that no one can predict the next 75 years accurately, and it is just foolish to believe that changes made today, tomorrow or five years from now based on 75 years of assumptions about the future are definitely going to solve the system’s long-term funding problems for 75 years or more. Yet that is just what we heard when Congress supposedly solved the system’s problem for 75 years back in 1983, and that is just what we heard more recently from the Bipartisan Policy Commission when they proudly announced that, “the commission’s package of recommendations would extend Social Security’s ability to pay benefits without abrupt reductions through the end of the 75-year projection period” and “if adopted, the commission’s recommendations would secure the program’s trust funds for 75 years and beyond…” Statements such as these are conditioned on future experience closely following the assumptions made by the Trustees. So, if actual future experience is just a little worse (say like experience assumed by the CBO), all bets are off.
Common sense tells us that rather than waiting to have Congress make very significant changes to the Nation’s retirement program every thirty years or so to put it back into actuarial balance, it would be preferable to have minor changes made on a more frequent basis. This why I have recommended consideration of automatic adjustments to the system’s tax and/or benefit structure to maintain the system’s actuarial balance. This is what they do in Canada for the Canada Pension Plan. This is what is done in almost all financial programs funded using basic actuarial principles. I believe that adoption of such an automatic adjustment approach would go a long way to enhancing the sustainability of and faith in this critical program.
So, in my post of July 30, 2016 I called on my profession to fulfill its duty to the public and advocate automatic adjustments to maintain the program’s actuarial balance. I also sent a link to my post to all of the leaders of all of the U.S. actuarial organizations. Despite my many years of volunteering for most of these organizations, I received essentially no response, and certainly nothing resembling an explanation of why the profession wouldn’t even consider suggesting or recommending such an approach to Congress.
I believe that the actuarial profession fumbled the Social Security football back in 1983. With potential and significant Social Security reform on the horizon, it looks like the actuarial profession will be given another chance to carry the ball. Unfortunately, based on actions I’ve observed to date, it appears the profession will once again fumble the ball. One has but to look at the American Academy of Actuaries’ Social Security Game for an example. Simply make a couple of changes in the current tax/benefit structure to solve the 2015 Trustees estimate of the 75-year actuarial deficit and the Game congratulates you for winning the Game by fixing Social Security. If only it were that easy.