Every year, the Social Security trustees release a new report discussing the financial status of the Social Security system and every year, the American Academy of Actuaries (AAA) releases their “Actuarial Perspective” issue brief explaining the new report and the Academy’s recommendations for possible system changes. In an effort to provide our U.S. readers a slightly different perspective on the system’s finances (so they can attempt to plan for future possible changes to the program), this post will discuss some of the issues with which we agree and disagree with the AAA issue brief. This post updates our posts of June 27, 2018 and August 3, 2017 on this subject. Clearly, the comments in our previous posts had very little effect on AAA thinking, as most of the language in their 2019 Actuarial Perspective remains unchanged from the language contained in their prior issue briefs. For additional discussion of the various points discussed below, we encourage you to revisit our prior posts.
As in previous years, this years’ AAA recommendation is essentially, “The sooner a solution is implemented to ensure the sustainable solvency of Social Security, the less disruptive the required solution will need to be.”
In summary, while we agree with the Academy’s recommendation that System reform should satisfy the Social Security actuaries’ test of “sustainable solvency,” we believe the Academy should also recommend that Congress consider adopting automatic tax increases/benefit reductions on a going forward basis so that sustainable solvency can be maintained in the future without specific Congressional action. Our comments on specific issues discussed in the AAA Issue Brief follows.
Issue #1—“Ensuring” Sustainable Solvency of Social Security. While we agree with the AAA that the test of “sustainable solvency” (as defined by the Social Security actuaries) is a better, and a stronger, test of the system’s long-range financial condition than the 75-year actuarial balance test, and should be used to test various system reform proposals (and ongoing financial viability), it suffers from the same general deficiency as the 75-year actuarial balance test: It presumes that assumptions made this year for the next 75 years will be accurate. In this regard, it should be noted that there is no adjustment mechanism in the current Social Security law to automatically maintain sustainable solvency (or actuarial balance) from year to year in the likely event that assumptions made this year about the next 75 years prove to be inaccurate. Therefore, under current law, there is no practical way to “ensure” sustainable solvency of Social Security for longer than one year.
For this reason, we believe that the AAA should also recommend that Congress consider adopting an automatic adjustment mechanism to maintain sustainable solvency as part of System reform. The AAA discussed a number of possible approaches to do this in its Issue Brief entitled, Social Security—Automatic Adjustments, published just last year. We believe it is important to have a discussion about whether it is preferable to have relatively minor adjustments to the system on a periodic basis or relatively disruptive changes (like we are facing) more infrequently. Automatic adjustment of actuarial gains and losses is a basic actuarial principle employed in most other financial systems (including the Actuarial Approach advocated in this website), and this principle works very well for the Canada Pension Plan, so we see no reason why the Academy should refrain from making this recommendation as part of its mission to serve the public.
Issue #2—Timing of reform changes. The AAA claims that timing of reform changes is important, and that changes adopted sooner will result in less “disruption” and will improve “public trust in the financial soundness of the Social Security program.” Ignoring discussion of “adoption dates” vs. “effective dates” of changes (which could have some effect), we generally disagree with these claims. In order to achieve sustainable solvency, the magnitude of the changes discussed above will not differ significantly if adopted this year or in 2034. And, without automatic adjustments to maintain sustainable solvency, we question how much public trust will be improved by action that takes place sooner rather than somewhat later.
Issue #3—75-year Actuarial Balance vs. Sustainable Solvency. We agree with the example described in the AAA Issue Brief that discusses the problems that occurred after adoption of the 1983 Amendments resulting from reliance on the faulty 75-year Actuarial Balance measure. For this reason, we wonder why the AAA issue brief (and Trustee’s report) continues to focus on quantifying the faulty 75-year actuarial balance measure rather than quantifying the more robust sustainable solvency measure that they believe should be applied.
A quick look at the last several Trustees’ reports shows that sustainable solvency under the intermediate assumptions will involve something like a 30% increase in the current tax rate or a 23% decrease in benefits or some combination of the two. These tax increases/benefit reductions are much larger than percentages developed using the faulty 75-year actuarial balance measure (using the same assumptions). As discussed in our post of June 27, 2018, these higher tax increase/benefit decrease percentages are very close to percentages previously cited by the System’s Chief Actuary In his 2016 article, Understanding Social Security’s Long-Term Fiscal Outlook.
Issue #4—Projection of Actuarial Balances. Because the 75-year Actuarial Balance used for the 1983 amendments ignored projected annual deficits after the end of the 75-year projection period used in 1983 (and was therefore faulty), the AAA Issue Brief says,
“As a result, the actuarial balance generally has been declining since then, primarily as a consequence of the passage of time. It is important to note that this result was exactly what the Trustees Report projected in 1983. More than 35 years later, it should be no surprise that large and growing actuarial deficits are now projected at the end of the long-range projection period.”
This a garbled and potentially misleading paragraph. While the 1983 Trustees Report projected annual deficits for specific years at the end of the 75-year projection period, it did not project (future) declining 75-year actuarial balances (“this result”) for any period of time. In fact, up until the 2016 Trustees Report, there were no projections of future expected 75-year actuarial balances in the Trustees reports. Starting in 2016, the Trustees included a projection of what the 75-year actuarial balance deficit was expected to be at the time of expected trust fund exhaustion. And while this projection (and projections of the 75-year actuarial balance in general) would be something that the AAA might find useful to discuss in their issue briefs, they have ignored such projections.
Issue #5—The Trustee’s Intermediate assumptions about the next 75-years will be wrong. No one, not even actuaries, can predict the future. We note that the Congressional Budget Office makes different assumptions about the future, and their 75-year actuarial balance measure is more conservative than the measure developed by the Social Security actuaries. We don’t know which set of assumptions will be more accurate, but we do know that since there are currently no mechanisms in the current law to automatically adjust tax rates or benefits to maintain actuarial balance or sustainable solvency from one year to the next, it will only be a matter of time after reform passes that the system will once again be “out of balance.”
We aren’t big fans of the name used for the test of “sustainable solvency.” We believe it misleadingly implies that if this test is passed, the system will be sustainable and solvent for longer than 75 years. As discussed above, this is unlikely to be the case without automatic adjustment of taxes/benefits in the future.
Conclusion
We are pleased that the AAA endorses the use of the sustainable solvency test for measuring the system’s long-range financial status. We believe, however, the AAA (and the Trustees) could do a better job of avoiding misleading the public by downplaying the faulty 75-year actuarial balance measure and quantifying the more robust sustainable solvency measure. In addition, we believe the AAA (and Trustees) should emphasize the uncertain nature of actuarial projections rather than claiming that certain changes may somehow “ensure” sustainable solvency. Finally, we believe the Academy should recommend that Congress consider implementing automatic adjustments to System taxes/benefits to maintain sustainable solvency and to truly improve “public trust in the financial soundness of the Social Security program.”
