This month, the National Academy of Social Insurance (NASI) released “Social Security at 90: Policy Options for Strengthening the Program’s Finances and Avoiding Automatic Benefit Cuts.” In their report, NASI examines “lessons from Social Security’s history that can help inform a potential path forward.” With respect to the causes of system’s current long-term financing problem, the report concludes:
“Much of the program’s long-term shortfall stems from the legacy costs of paying benefits to early generations of recipients after the program’s inception. More recently, the further deterioration in Social Security’s financial outlook since 1983 is largely due to the rise in earnings inequality that has eroded the program’s tax base, along with a failure to adjust tax rates in recent decades.”
In this post, we will disagree with NASI’s conclusions with respect to the primary cause(s) of the system’s long-range funded status deterioration and several other suggestions they make. This is a subject that we have written about extensively in the past, and one which we feel compelled respond to by “substituting facts for appearances” (part of the actuarial profession’s motto).
Readers may wish to visit the following prior posts and article for additional discussion of this subject:July 27, 2024--Actuaries Double Down on Questionable Primary Cause of Social Security’s Financial Deterioration
January 20, 2024—Actuaries Confuse the Primary Causes of Social Security’s Funding Shortfall
September 23, 2023—Actuaries Continue to Ignore the “Valuation Date Creep” Elephant in the Social Security Financing Room
May 21, 2023—Unfortunately, Congress Did Not Adopt a Better Financing Approach for Social Security in 1983
February 26, 2024 Advisor Perspectives—Social Security’s Deterioration and Implications for Future Reform
Readers can refer to our previous post for a brief description of the system’s current long-range funded status.
SSA Actuarial Note 2025.8
As part of its annual actuarial valuation process, SSA actuaries release several actuarial notes to supplement the results summarized in the annual OASDI Trustees Report. Actuarial Note Year.8 (2025.8 this year) is a marvelous document that tracks the year-by-year causes for changes in the system’s long-range actuarial balance from 1983 to the current valuation year. It is what pension actuaries refer to as a gain and loss analysis by source. It should be the go-to source document for anyone looking to quantify the specific causes of the changes in the system’s long-range (or long-term) funded status since 1983.
The key take-aways from Actuarial Note 2025.8 include:
- The system’s long-range actuarial deficit in 1982 was -1.80% of taxable payroll, or about 2% of payroll smaller than the 2025 measure of the long-range deficit. Before enactment of the 1983 Amendments, Social Security Actuaries changed the 1982 long-range deficit to -2.09% of payroll to reflect passage of the Tax Equity and Fiscal Responsibility Act (which angered congressmen who were working hard to try to bring this measure down to zero percent to achieve actuarial balance of system income and outgo for the long-term).
- Enactment of the 1983 Amendments “solved” the long-range problem, and in the 1983 Trustees Report, the long-range actuarial balance was a positive .02% of payroll
- The system’s long-term actuarial balance funded status has declined fairly continuously over the past 42 years from a positive 0.02% of taxable payroll in 1983 to -3.82% of payroll in 2025.
- Of this decline,
- 64% is attributable to annual changes in the valuation period (which I refer to as “the Valuation Date Creep”,
- 26% of the decline is attributable to economic data and assumptions,
- about 9% of the decline is attributable to disability data and assumptions, and
- about 1% is due to other causes.
- In terms of the 3.44% of payroll decline in the long-range actuarial balance since 1983,
- 44% of payroll is due to the Valuation Date Creep,
- 1% of payroll is due to economic data and assumptions,
- 33% of payroll is due to disability data and assumptions, and
- 07% of payroll is due to other causes.
- Even if all assumptions are realized in the future, the system’s funded status is expected to keep deteriorating under current law because of the “Valuation Date Creep.” Unfortunately, the Trustees’ Reports do not include projections of expected long-term actuarial balances reflecting expected Valuation Date Creep.
Note that while Actuarial Note 2023.8 does support NASI’s conclusion that less favorable than assumed economic experience contributed to the current funding shortfall, it shows that this source is only 26% of the total shortfall and less than one-half of the size of the Valuation Date Creep source, and therefore, the deterioration of the system’s funded status since 1983 certainly cannot be said to be “largely due to the rise in earnings inequality that has eroded the program’s tax base.”
As discussed in our post of September 23, 2023, the Valuation Date Creep results from the implicit assumption adopted by the Trustees and system’s Chief Actuary that system revenue will equal system income for years after the 75-year projection period. This has been an unreasonable implicit assumption since 1983. In our opinion, this assumption should be fixed, and until it is fixed, its negative effect on the system’s funding should be highlighted and disclosed, not hidden.
1994-1996 Social Security Advisory Council and Valuation Date Creep
While we are on the subject of “lessons to learn from Social Security’s history that can help form a path forward,” I’d like to direct interested readers to the 1994-1996 Advisory Council Report. The long-range actuarial balance for 1996 (a mere 13 years after enactment of the 1983 Amendments) was -2.17% of taxable payroll (larger than the actuarial balance deficit “solved” by the 1983 Amendments). This was clearly a source of concern for the Advisory Council members, But they were also keenly aware of the Valuation Date Creep problem. They said,
“The second major problem [after the 2.17% of payroll long range deficit] with Social Security financing is the deterioration in the program's long-range balance that occurs solely because of the passage of time. Because of the aging of the U.S. population, whenever the program is brought into 75-year balance under a stable tax rate, it can be reasonably forecast that, without any changes in assumptions or experience, the simple passage of time will put the system into deficit. The reason is that expensive years previously beyond the forecasting horizon, with more beneficiaries getting higher real benefits, are then brought into the forecast period. There is no simple answer to the question of how much higher the long-term actuarial deficit is above the 2.17 percent to bring Social Security into balance beyond the 75-year horizon, but there could be a significant increase2 . All members of the Council agree that it is an unsatisfactory situation to have the passage of time alone put the system into long-run actuarial deficit [emphasis added], though there are again differences on how the problem should be corrected.”
The Valuation Date Creep is still around in 2025, and has only worsened since 1996.
Sustainable Solvency
To address the Valuation Date Creep problem and to give policymakers the opportunity to try to avoid imposing higher tax rates on future Social Security taxpayers, Social Security actuaries developed a stronger metric for measuring the system’s long-range actuarial funded status, referring to it as “Sustainable Solvency,” which in addition to requiring positive projected trust fund balances throughout the entire 75-year projection period under the intermediate assumptions, projected trust fund ratios are projected to be either stable or rising at the end of the 75-year projection period. Unfortunately, this metric is not quantified in the annual Trustees Reports, and few in the media or elsewhere (like NASI) even acknowledge its existence. While adopting changes in the system to achieve Sustainable Solvency would increase the system’s sustainability, it would not “fix” the system as both metrics rely on assumptions about the future that will not necessarily be realized.
In 1982 and prior to enactment of the 1983 Amendments, I wrote a paper published in Volume XXXV of the Transactions of the Society of Actuaries called, “A Better Financing Approach for Social Security.” In this paper, I advocated financing Social Security with a level tax rate as opposed to the approach adopted subsequently by Congress that anticipated level tax rate financing from 1990 to 2058 and increased tax rates thereafter. I estimated that the level tax rate I proposed would be about 1.5% higher (.75% employer/.75% employee) than the 12.4% level tax rate actually adopted. Of course, if Congress felt that this tax rate were too high, it could always make downward adjustments in benefits to balance system assets and liabilities under this stronger approach. My proposed approach also included actuarial algorithms to maintain the balance between system assets and liabilities over time when future experience deviated from actual experience. I assume that if Sustainable Solvency had been used as the 1983 actuarial balance target, it would have involved comparable levels of additional revenue or benefit reductions to achieve long-term balance as the level tax rate approach I proposed.
When Congress adopted the 1983 Amendments, they understood that the changes in the Act, including a level combined employer/employee tax rate for much of the foreseeable future) would bring the system back into actuarial balance over the “long-term.” It is unreasonable to assume, as some experts do, that Congress adopted the changes because they understood that large trust fund assets would accumulate over the next 40 years to be used to fund benefits for the subsequent 35 years leaving large unaddressed deficits thereafter.
Some Other Questionable Statements in NASI Report
I didn’t have a problem with everything in the NASI report. However, here are a few additional comments with which I disagreed:
“The Trustees Report projects that Social Security is fully funded until 2034, but faces a long-term shortfall thereafter.”
The system has a long-term funding problem today and has had one for over 30 years, largely due to the Valuation Date Creep problem. It is not fully funded, but has a long-term deficit of 3.82% of taxable payroll that is expected to increase in the future even if all assumptions are realized. Yes, Social Security also has a short-term cash flow problem.
“Most of Social Security’s Funding Gap Reflects ‘Legacy Costs’”
Legacy costs have nothing to do with Social Security’s long range actuarial balance metric or the stronger metric of Sustainable Solvency. These metrics compare the present value of system assets with the present value of system liabilities with the distinction between the two being the long-range actuarial balance metric does not require positive annual balances near the end of the projection period while the Sustainable Solvency measure does. To the extent there are “Legacy Costs”, they are built into the present value of the system benefit liabilities under these metrics.
“In sum, erosion of the payroll tax base explains most of the deterioration in Social Security’s financial outlook since 1983. Other factors are secondary.”
As discussed above, this is simply not true. Stunningly, the NASI report fails to even mention the largest cause, the Valuation Date Creep problem (or Sustainable Solvency for that matter).
“The annual Trustees Reports project Social Security’s future finances over a 75-year window, intended to cover the remaining lifespan of even the youngest current workers. As a result, policymakers often aim to design solutions for 75 years—as they did in 1983, although later developments accelerated trust fund depletion, as discussed above. However, there is no requirement that changes address the entire 75-year future of the program all at once; Congress could consider changes designed to put the program on sound financial footing for a shorter period, such as 25 or 50 years.”
To ensure true long-term sustainability of the system (with the implication that tax rates (or other sources of revenue) should not be anticipated to be significantly higher in the future than today under a sustainable system), it is important to look at sufficiently long periods of time and to examine the anticipated trends near the end of selected projection periods. What history and the Valuation Date Creep tell us is that a pretty substantial mistake was made by ignoring annual balances near the end of the 75-year projection period when Congress adopted the 1983 Amendments. We are just asking for more “kick-the-financing-can-down-the-road-to-future-generations-of-taxpayer” problems like the current one we are facing if we limit Social Security’s projection period to just 25 or 50 years.
It should be noted that while Canada uses a 75-year projection period for the funding of its Canada Pension Plan (CPP), it anticipates maintaining a level tax rate in all future years if all assumptions are realized, it has fixed the 75-year Valuation Date Creep problem and it has also implemented algorithms for automatically adjusted the tax rate for their system when it falls out of long-term actuarial balance. So, it can be done. We just need to look to the North for answers to our current funding problem.
Summary
We agree with NASI that lessons from Social Security’s history can help inform future reform. The lessons we hope get incorporated into future system reform include:
- It is important to measure and monitor the system’s long-term funded status on a reasonable basis
- It is important to fix the Valuation Date Creep
- True system sustainability will not be achieved by assuming higher levels of revenue will be generated by future taxpayers, and
- Reform should incorporate automatic algorithms to keep the system in long-term actuarial balance when future experience inevitably differs from assumed experience.