Thursday, August 3, 2017

The American Academy of Actuaries Stumbles on Social Security “Sustainable Solvency”

This week, the American Academy of Actuaries (AAA) released An Actuarial Perspective on the 2017 Social Security Trustees Report.  Their primary recommendations were:
  • “Social Security’s financial soundness should be addressed now”, and
  • “The sooner a solution is implemented to ensure the sustainable solvency of Social Security, the less disruptive the required solution will need to be”
And while these recommendations appear to be non-controversial, this post will discuss the one big problem we have with the AAA’s actuarial perspective as well as several smaller concerns.


In our post of November 23, 2016, we asked the question of why the AAA was painting such a rosy picture of Social Security’s financial problems with its Social Security Game.  In response to our post, we were contacted by the Pension Fellow of the AAA to discuss our concerns about the “Game.”  We suggested some caveat language be added to the Game to avoid potentially misleading the public.  In response, on December 8 of last year the AAA added the following caveat language to the Game:

“The following should be noted when interpreting results from the Social Security Game:

  • The 75-year actuarial balance calculation used in the game does not consider significant revenue shortfalls expected to occur after the end of the 75-year projection period, and thus possible solutions illustrated in this game are generally not sufficient to achieve “sustainable solvency,” a concept discussed in the Trustees Report. 
  • The possible solutions assume immediate adoption of System changes, rather than gradual implementation. If changes to the System are gradually implemented, the required increases in tax revenue or benefit decreases will need to be larger than noted in the game to achieve actuarial balance. 
  • The success of reforms will depend on how well actual future experience compares with the assumptions made by the trustees and the Social Security actuaries. There is no mechanism in current Social Security law to maintain the program’s actuarial balance once it has been achieved. Thus, there can be no guarantee that the System’s long-term problem will be “solved” for any specific length of time by enacting various system changes.”
The Big Problem—Sustainable Solvency

The major problem we have with the recently released AAA actuarial perspective is their call for Congress to adopt a solution that will “ensure the sustainable solvency of Social Security.”  The concept of “Sustainable Solvency” was developed by the Office of the Actuary after the 1983 Amendments to the System in an attempt to correct the serious deficiency in the 75-year actuarial balance calculation discussed in the first caveat bullet above.  While this was a move in the right direction, the name of this concept is potentially misleading, as it conflicts with common language usage and the AAA’s own definitions of “sustainability” and “solvency” included in its Sustainability in American Financial Security Programs White Paper.  The condition of “Sustainable Solvency” developed by the SSA actuaries is based on exact realization of assumptions made today about the next 75 years.  Therefore, the System could meet the conditions for “Sustainable Solvency” this year, but not next year.  As noted in the third caveat bullet above, there exists no mechanism in current Social Security law to maintain actuarial balance (or Sustainable Solvency) over time.  Therefore, a condition of Sustainable Solvency achieved at the time of eventual System reform will not guarantee or “ensure” sustainable solvency for any specific period of time, and the AAA’s call for implementation of a solution “to ensure sustainable solvency of Social Security” is, in our opinion, potentially misleading to the public, Congress and other intended users of the AAA’s Issue Brief.

We would like to see the AAA recommend adoption of mechanisms to maintain the System’s actuarial balance (or the condition of Sustainable Solvency) over time.  Adjustments for experience gains and losses is a fundamental actuarial concept that actuaries generally use to keep financial security systems solvent and sustainable.  We are not sure why the AAA is reluctant to make such a recommendation for Social Security.   However, if it is reluctant to do so, it should, at a minimum, take reasonable steps to make sure the public and Congress appreciate the limitations of not having such mechanisms. 

Smaller Concerns in the Issue Brief

We have several other smaller concerns about this AAA Issue Brief, in no particular order:

Adoption date of reform changes vs. effective date of changes

We believe the Issue Brief could be clearer about the implications of when reform changes are adopted vs. when they become effective.  The longer the delay in the effective date, the more significant the changes needed to achieve actuarial balance or the condition of sustainable solvency as of the reform date.   This is clearly stated in the middle paragraph on page 5 of this year’s Trustee’s Report but not adequately addressed in the AAA Issue Brief.

Giving Baby Boomers adequate time to adjust?

The Issue Brief implies that something should be done to address the Baby Boom bulge at the same time it argues that prompt action will enable affected individuals to modify their plans in response to changes in the System.  It isn’t clear to us how these AAA recommendations would work for Baby Boomers who are close to retirement or who have already retired. 

Significant changes on the horizon—What’s the big deal?

We are now looking at significant reform changes.  For some reason, the AAA wants to tell us that when the System was last amended in 1983, the SSA actuaries knew about the deficiency in the 75-year Actuarial Balance calculation, so “more than 30 years later it should come as no surprise that large and growing actuarial deficits are now projected at the end of the long-range projection period.”  We note that the System went out of close actuarial balance in 1990, just 7 years after adoption of the 1983 Amendments and that no actions have been taken since that time to place the System back into actuarial balance.  We find the Academy’s 30 year reference to be confusing, and the tone of this paragraph is inconsistent with the AAA’s expressed desire to improve public trust in the System. 


It will not be an easy task for Congress to make the significant changes necessary to bring the System into a condition of “Sustainable Solvency.”  And without additional changes in the law to maintain this condition over time, it is unlikely that the condition of sustainable solvency will persist indefinitely.  We believe the public and Congress would be better served by adopting automatic adjustment mechanisms normally found in most financial security systems, but if these mechanisms are not adopted, the public and Congress need to fully understand the limitations of the actuarial term “sustainable solvency.”