American Academy of Actuaries Doubles Down on Misleading Answer to Cause of Social Security Funding Deterioration

In my Letter to the Editor in the May/June edition of Contingencies (a publication of the American Academy of Actuaries), I took the Academy’s Senior Pension Fellow, Linda Stone, to task for claiming that Social Security’s financial challenges were primarily the result of demographics. I disagreed with Ms. Stone’ claim in my letter and noted that a breakdown of the sources of Social Security’s funding status deterioration since 1983 is shown in Table 1 of Social Security Administration Actuarial Note (Year).8. In the letter, I said,

“This table shows that out of the total 2022 long-range actuarial balance of -3.43% of taxable payroll, 0.14, or -4%, was attributable to “Demographic Data and Assumptions.” Therefore, I conclude that the demographic assumptions used in the 1983 Trustees Report were pretty darned good, and demographics doesn’t appear to be the primary source of the growth in the system’s long-range actuarial deficit since 1983.”

Systematic Comparison of Assets and Liabilities, Part 2

This post is a follow-up to our post of April 11, 2023 entitled, “Systematic Comparison of Assets and Liabilities—Its How We Actuaries Roll.” In this post we will describe the general process actuaries use to systematically compare assets and liabilities for many financial systems such as pension plans, Social Security and, as recommended in this website, personal financial retirement plans. We believe this general actuarial process is just as important, if not more important, in the management of a system’s finances than the models or assumptions actually used to project or calculate a system’s assets and liabilities.

Wade Pfau Touts Use of Basic Actuarial and Financial Principles for Retirement Planning

Thanks to Dr. Wade Pfau,

• Founder of Retirement Researcher,
• Principal and Director of Retirement Research for McLean Asset Management,
• Research Fellow with the Alliance for Lifetime Income and Retirement Income Institute,
• Professor at the American College of Financial Services, and
• Widely recognized retirement thought leader,

for once again advocating the use of essentially the same basic actuarial and financial economics principles for retirement planning for retirees and near retirees that we have advocated in this website for years.

You can read Dr. Pfau’s thoughts on comparing household assets and spending liabilities and assumptions to use for this purpose in this May 26, 2023 Financial Advisor article.

Ken Steiner Interviewed on Money Mountaineering Podcast

Check out my interview with Pete Neuwirth on his 9th episode of Money Mountaineering.   You will quickly discover why I made my living as an actuary rather than as a tv personality. 

Unfortunately, Congress Did Not Adopt a Better Financing Approach for Social Security in 1983

In 1982, I wrote a paper for the Transactions of the Society of Actuaries entitled, “A Better Financing Approach for Social Security¹”. At the time, the National Commission on Social Security Reform was studying ways to solve the system’s impending short-term funding crisis and long-term funding imbalance, which eventually led to adoption of the 1983 Amendments to the system.

My proposed approach was relatively simple and anticipated:

• Making reasonable deterministic assumptions about the future
• Annual valuations to systematically compare the present values of system assets and liabilities
• A level tax rate if all assumptions about the future were realized (and no future changes in assumptions or benefits),
• Significant trust fund accumulation,
• Automatic adjustments of future tax rates to amortize:
  • Gains and losses from experience more or less favorable than assumed
  • Changes in actuarial assumptions
  • Changes in system benefits

I also discussed in the paper that if Congress did not want to implement the automatic tax rate changes (or didn’t like the expected trust fund accumulation), it could always decide to adjust benefits accordingly.

Don’t Forget Your Taxes

Taxes (federal, state, local, real-estate, Social Security, Medicare, etc.) are essential expenses that, unfortunately, must be planned for in retirement. As is the case with other expenses expected in retirement, we must make assumptions about how current tax expenses will change in the future to develop a reasonable estimate of the total present value of future household expenses (i.e., household spending liabilities), against which the total present value of household assets is compared. This post will address assumptions for projecting tax expenses using the Actuarial Financial Planner (AFP) and will include an example.

Would You Trade Your Pension for What is Behind Door #2?

Every so often we read something in the retirement-advice media with which we simply cannot agree. Recently, we ran across a video from Kiplinger entitled, “Why A Pension Lump Sum is Better than An Annuity Payment.” This video appears to be based on the May 5, 2022 article by Brian Skrobonja, CHFC, (updated on January 27, 2023) entitled, “Pension Lum Sum vs. Annuity Option, Which Is Better?” When the article was first released last year, we took issue with it and discussed its shortcomings in our post of May 5, 2022. If you are interested in this subject, we encourage you to re-read our post of May 5, 2022.

Plan on Future Adjustments to Your Retirement Plan

Ongoing retirement planning involves making best estimate (or conservative) assumptions about the future and making necessary adjustments to your retirement plan when those assumptions inevitably turn out to be incorrect. At How Much Can I Afford to Spend, we believe using our Actuarial Financial Planner (AFP) model annually to calculate your funded status can best help you with ongoing (or dynamic) retirement planning. 

On the other hand, some financial advisors and academics encourage use of “safe” alternatives (like the 4% Rule or Monte Carlo model results with 90% or greater probability of success) where future retirement plan adjustments are generally not anticipated. This type of planning is referred to as “one-and-done” (or static) retirement planning. We also refer to this second type of retirement planning as “head-in-sand” retirement planning as it is very difficult to predict the future accurately and, as a result, it is very easy to either overspend or underspend relative to your spending goals when using these static approaches. For more discussion of ongoing vs. static planning, see our post of January 15, 2023. 

Systematic Comparison of Assets and Liabilities—It’s How We Actuaries Roll

In our last post, we discussed how Social Security actuaries compare system assets with system liabilities on an annual basis to determine the system’s funded status (long-range actuarial balance). We noted that the process used for this purpose for Social Security is very similar to the process we recommend for developing a spending plan in retirement.

What is Social Security’s Funded Status?

This post is a geeky dive into the primary metric used to measure Social Security’s funded status and how similar this metric is to the Funded Status measure generated by the Actuarial Financial Planner (AFP) that we encourage retired households to use in their financial planning.