The American Academy of Actuaries is the public voice of the actuarial profession on public policy issues. In its June, 2016 Issue Brief, An Actuarial Perspective on the 2016 Social Security Trustees Report, the Social Security committee of the Academy said, “The Social Security Committee believes that any modification to the Social Security system should include sustainable solvency as a primary goal.” The issue brief goes on to define this term as follows:
“Sustainable solvency means the program is not expected to deplete reserves any time in the 75-year projection period, and trust fund ratios are expected to finish the 75-year projection period on a stable or upward trend.” This is essentially the same definition used by the Social Security actuaries, who are a little more precise and talk about Sustainable Solvency “under a given set of assumptions.” This is an important distinction because sustainable solvency depends to a significant degree on exact realization of assumptions made about the next 75 years.
The concept of Sustainable Solvency was developed by the Social Security actuaries to address the problem of unrecognized deficits after the end of the 75-year projection period. This concept did not exist at the time of the 1983 amendments, as discussed on our post of May 17, 2016, “What went wrong with the 1983 Social Security Fix?” when Congress supposedly “solved” the program’s financial problems for the next 75-years by reducing the 75-year actuarial deficit in existence at that time to zero. Note, however, that with the additional requirement with respect to the trend at the end of the 75-year projection period, Sustainable Solvency is essentially the same as the 75-year actuarial balance requirement used in the 1983 Amendments.
As part of the annual Trustee’s report, the Social Security actuaries perform an actuarial valuation of the program by comparing program assets with program liabilities under various sets of assumptions about the future. The most publicized results of these actuarial valuations are the expected trust fund exhaustion date and the 75-year actuarial deficit under the Intermediate (or best estimate) assumptions. For many years now the Trustees and the actuarial profession has been using the results of these valuations to encourage Congress to act sooner rather than later to bring the program back into actuarial balance under the Intermediate set of assumptions. For example, the Academy’s most recent Issue Brief said, “The sooner a solution is implemented to ensure the sustainable solvency of Social Security, the less disruptive the required solution will need to be.”
When reform proposals are now submitted to the Social Security actuaries for scoring, the Social Security actuaries determine whether such proposals meet the requirements for Sustainable Solvency based on the Intermediate assumptions used in the most recent Trustee’s Report. For example, as discussed in our post of June 16, 2016, The Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings Report got very excited when the Social Security Actuaries indicated that their Social Security proposals met the requirements for Sustainable Solvency. Their report erroneously concluded “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…” These statements were erroneous because they were based on the premise that all of the Intermediate assumptions used in the 2015 OASDI Trustees report would be exactly realized in the future, which we know won’t occur.
As discussed in our post of June 16, it is foolish to believe that assumptions made by Social Security actuaries today will be accurate over the next 75 years, so a claim of Sustainable Solvency is shaky at best and potentially misleading. No sound actuarial process proclaims solvency for a period of 75 years without anticipating making periodic adjustments in future years as experience emerges.
Truly Sustainable Solution
The common sense solution to providing true Social Security sustainability is to require that the system automatically be placed in actuarial balance on a periodic basis in the future, as is the case for all sound actuarial processes. For example, current law could be changed to require the program’s tax rate be automatically changed effective for the year following an actuarial valuation that shows the program has fallen out of actuarial balance by 5% or more. Congress could, of course, take other actions to bring the program back into actuarial balance rather than have the automatic tax rate increase (or decrease) take effect.
As an example of how this automatic process might work, let’s look back at the 1983 Amendments, which were supposed to fix the system for 75 years. In 1989 (which by the way, was just 6 years after the 1983 Amendments), the system went out of long-term actuarial balance (as that term was defined at the time using a 5% threshold). If the proposed automatic adjustment had been in place at the time, a small tax increase would have been required to bring the program back into actuarial balance. Additional tax increases would also have been required in subsequent years, unless Congress took other actions. If no benefit reductions were adopted during this period, today we would have a higher tax rate but no impending significant reductions to consider.
Reasons Why the Profession Should Endorse this Solution
Here are some of the reasons why the actuarial profession should advocate in favor of this solution:
- The solution is consistent with the expressed mission statement of the American Academy of Actuaries “to serve the public and the United States actuarial profession.”
- It is consistent with the Academy’s vision statement that “financial systems in the United States be sound and sustainable…”
- According to the Academy’s 2015 Public White Paper, Sustainability in American Financial Security Programs, “The American public relies on the promises made under many different financial security programs—whether they are public programs like Social Security and Medicare or offered through the private sector such as employer-sponsored pension plans or insurance products. The public must have confidence that these programs can be sustained and continue to meet their goals.” I believe adoption of the proposed solution would increase public confidence in the system.
- The proposed solution is consistent with the Academy’s Social Insurance Committee’s belief that, “The sooner a solution is implemented to ensure the sustainable solvency of Social Security, the less disruptive the required solution will need to be.” Clearly, frequent automatic adjustments would involve earlier implementation and would be less disruptive than infrequent, more disruptive reforms.
- The proposed solution is consistent with the Academy’s public policy objective “to address pressing issues that require or would benefit by the sound application of actuarial principles.” If current law already provided for such automatic adjustments, I can’t imagine that the profession would support legislation to eliminate them. So, why the reluctance to endorse them?
- Endorsement of this solution is an opportunity to enhance the profession’s public image. Conversely, failure to endorse this solution increases the possibility of damaging the profession’s reputation. The reputational risk involved with Social Security financing may be even greater than the risk associated with performing actuarial valuations for public pension plans.
Sustainable solvency as defined by the profession and Social Security actuaries is a misnomer and is potentially misleading. It is based on exact realization of assumptions made for the next 75 years that will not come true. True system sustainability can be achieved through periodic adjustments to maintain the system’s actuarial balance as actual experience emerges.
The 1983 Amendments failed to provide us with system sustainability, and we are looking at significant reform proposals as a result. This time around, however, the changes should result in a more sustainable program on which the American public can truly depend. It is time for us to remember the old proverb, “fool me once, shame on you; fool me twice, shame on me.” We shouldn’t just accept a reform “fix” that is similar to the “fix” adopted in 1983. For this reason, I call on the actuarial profession to step up its game and advocate true system sustainability through automatic periodic adjustments to keep the program in actuarial balance on a going forward basis.