Every year, the Social Security trustees release a new report discussing the financial status of the system and every year, the American Academy of Actuaries (AAA) releases their “Actuarial Perspective” issue brief explaining the new report. In an effort to provide our readers a slightly different perspective on the system’s finances, this post will discuss some of the issues we have with the AAA issue brief (and to a lesser degree, with the Trustees’ report). This post updates our post of August 3 from last year which discussed the 2017 Trustees report/AAA issue brief. Clearly, our post from last year had very little effect on the AAA, as most of the language in their 2018 Actuarial Perspective remains unchanged from their 2017 issue brief. Before diving into our issues this year, however, we will attempt to provide just a little background.
As discussed in our post of May 17, 2016 (and noted in the AAA issue brief), the 1983 Amendments to Social Security was a “kick-some-of-the-problem-down-the-road” solution because it ignored significant annual deficits projected after the end of the 75-year projection period used at the time to determine the system’s 75-year actuarial balance. Unfortunately, the time has now arrived to pay the piper for ignoring these deficits. And it is not a small problem. Realizing the potential problem created by ignoring these anticipated deficits, Social Security actuaries developed the concept of “sustainable solvency” as another “more robust” measure of the system’s long-range financial status. This concept is defined in the AAA issue brief and is a lot closer to what I recommended in my 1982 paper, “A Better Financing Approach for Social Security” published in Volume 35 of the Transactions of the Society of Actuaries than what was actually enacted.
I happily support the concept of using the “sustainable solvency” measure (but as discussed below I believe it can be strengthened), and I do believe it represents an improvement over the potentially flawed 75-year actuarial balance measure. I am also pleased to see that the AAA also endorses using it rather than the potentially flawed 75-year actuarial balance measure when it comes to the next round of Social Security reform.
Actuaries are not normally shy when it comes to providing numbers, but neither the Trustees Report nor the AAA Issue Brief really goes out of its way to quantify the shortfall under this “sustainable solvency” measure. Instead, there is a fair amount of discussion about the flawed 75-year actuarial balance measure. And the AAA’s “Social Security Game” also focuses on ways to “solve” the system’s 75-year actuarial balance problem. In light of AAA’s endorsement of the sustainable solvency measure, we find discussion of using the flawed 75-year actuarial balance measure to once again “solve” the system’s long-range financial problems to be potentially misleading.
As discussed in our post of June 19, 2018, a quick look at Figure II.D.2 of the 2018 Trustees Report shows that we are looking at something like a 4% of taxable payroll long-term gap between projected system income and outgo under best estimate assumptions. We indicated that this would involve something like a 22% across the board reduction in benefits or a 28% increase in revenue (or some combination of benefit reductions and tax increases) to close the gap under the best estimate assumptions. In his 2016 article, Understanding Social Security’s Long-Term Fiscal Outlook, Steve Goss the Chief Actuary of Social Security, said, “Remedying OASDI’s fiscal shortfall for 2034 and beyond will require a roughly 25 percent reduction in the scheduled cost of the program, a 33 percent increase in scheduled tax revenue or a combination of these changes.” We assume that this is roughly Steve’s estimate at that time for approximately how much it would take to bring the system into sustainable solvency based on best estimate assumptions.
#1— “Ensuring” Sustainable Solvency and timing of changes. The AAA issue brief states, “The sooner a solution is implemented to ensure the sustainable solvency of Social Security, the less disruptive the required solution will need to be.” As indicated in last year’s post, we have several concerns about this statement. Since there are no mechanisms in current Social Security law to automatically adjust tax rates or benefits when the system falls out of 75-year actuarial balance or falls out of “Sustainable Solvency”, there is no way to “ensure” Sustainable Solvency over a period longer than one year. Thus, it is important to remember that achieving sustainable solvency with reform changes does not mean that the system’s financial problems will be solved forever, as might be implied by common English language interpretation of this term. As with other actuarial projections, future system solvency will depend on future realization of the assumptions made in the measure.
Our second concern with this statement is that there is a difference between the adoption date of reform changes and the effective date of reform changes. While system changes may be implemented (or adopted) today, they may not be effective for many years. To the extent that the effective date is pushed out into the future (and to the extent that the sustainable solvency measure is used to determine required changes), the “disruptiveness” of the necessary changes will be largely unaffected. This argument for sooner action is also in potential conflict with the AAA’s statement that, “Announcing changes to Social Security far in advance of implementation gives future beneficiaries time to plan for all aspects of retirement and modify their own financial planning.”
Issue #2—75-Year Actuarial Balance. The AAA Issue Brief states, “Actuarial balance conveys the long-range solvency of Social Security in one number.” Since AAA acknowledges elsewhere in the Issue Brief that the 75-year actuarial balance measure (which is what they are referring to in the above statement) is flawed and didn’t quite do the job in 1983, we find this statement to be confusing and potentially misleading.
Issue #3—Sustainable Solvency. The AAA Issue Brief notes that Sustainable Solvency is a stronger standard than the flawed 75-year actuarial balance. The AAA also notes that “Adequate financing beyond 2092, or sustainable solvency, would require larger program changes than needed to achieve actuarial balance.” As discussed above, we believe it would be helpful for the AAA to downplay the 75-year actuarial balance numbers and do what actuaries normally do by quantifying just how much “larger” these changes might need to be to achieve sustainable solvency.
We are pleased that the AAA endorses the use of the sustainable solvency measure for measuring the system’s long-range financial shortfall. We believe, however, that it could do a better job by downplaying the flawed 75-year actuarial balance measure and quantifying the more robust sustainable solvency measure.