While this year’s AP does include several new charts and interesting observations, it is particularly disappointing to us that it
- almost completely ignores the concept of “Sustainable Solvency”,
- does a poorer job than it has in past of distinguishing between the 75-year actuarial balance and “Sustainable Solvency” measures of the program’s long-term financial status (solvency measures)
- fails to highlight the significant limitations of these two solvency measures, and
- implies that certain system changes (which the AAA claims to be “solutions”) will actually “ensure sustainable solvency.”
What Happened to Sustainable Solvency?
The key recommendation from the 2019 AP was:
“In order to achieve viability of Social Security in the foreseeable future, any modifications to the system should include sustainable solvency as a primary goal. Sustainable solvency means that not only will the program be solvent for the next 75 years under the reform methods adopted, but also that the trust fund reserves at the end of the 75-year period will be stable or increasing as a percentage of the annual program cost.”And while the bolded language on the front page of the 2020 AP makes the same statement as the 2019 AP that,
“The sooner a solution is implemented to ensure the sustainable solvency of Social Security, the less disruptive the required solution will need to be.”there is no discussion in the 2020 AP about Sustainable Solvency, and this solvency measure is not defined like it was in the 2019 AP (and is in the 2020 Trustees Report). Therefore, the reader is left to rely on a common usage interpretation of this term as implying long-term solvency not only now but, in the future, as well.
Not only is Sustainable Solvency not defined in the 2020 AP, but the immediate actions needed to achieve what the AAA calls “solvency” in Table 5 of the 2020 AP (possible solutions to ensure Sustainable Solvency?) are not immediate actions to achieve Sustainable Solvency today at all, but are immediate actions that would be expected under the Intermediate assumptions to achieve a 75-year actuarial balance today. We hope this confusing oversight by the AAA is unintentional.
75-year Actuarial Balance is not Sustainable Solvency
The 75-year Actuarial Balance ignores expected deficits after the end of the 75-year projection period used by the Social Security actuaries in their annual valuation of the program. The 1983 Amendments solved the 75-year Actuarial Balance problem in existence at that time but ignored significant deficits projected after the end of the 75-year projection period in 1983. This flaw in the 75-year actuarial balance calculation used in 1983 contributed significantly to the problem we currently are experiencing and subsequently led to development of the stronger requirements for the Sustainable Solvency measure.
It is clear from looking at the graph of projected income and expenses in AP 2020 (chart 4) that if the intermediate assumptions are accurate, the Sustainable Solvency measure in 2035 under the intermediate assumptions will require something like a 33% increase in tax rates, a 25% decrease in benefits or some combination of tax increases and benefit decreases at that time that produces equivalent long-term program balance of expected income and outgo.
While an immediate 25% increase in tax rates from 12.4% to 15.54% (an increase of 3.14% of taxable payroll) suggested by the AAA would eliminate the current 75-year deficit as noted in Table 5 of the 2020 AP, it would not produce Sustainable Solvency today as the deficits expected after the end of the current 75-year projection period would be expected to gradually increase the long-range actuarial balance as time passed (just like it did after the 1983 Amendments). A similar “creeping deficit” result would be expected to occur in the future if Congress adopted the 19% immediate across the board decrease in benefits shown in Table 5 even if all assumptions were realized in the future.
Neither the 2020 Trustees Report nor the 2020 AP disclose what immediate tax rate increases or benefit reductions would be required to produce Sustainable Solvency today, but we assume they would be a little bit less than required to produce our estimate of Sustainable Solvency in 2035 discussed above.
Will Sooner Implementation of a Solution to Ensure Sustainable Solvency be less disruptive?
As noted above, the AAA believes
“The sooner a solution is implemented to ensure the sustainable solvency of Social Security, the less disruptive the required solution will need to be.”To examine this statement, let’s look at three alternative benefit reduction “solutions” presented in the 2020 Trustees report. Note that the first two are not expected to satisfy the conditions for Sustainable Solvency but provide some basis for comparison:
- 19% immediate across the board reduction in benefits for all current and future beneficiaries
- No reduction for current beneficiaries and those currently eligible to receive benefits and 23% immediate across the board reduction for all others
- 25% across the board reduction in benefits for all beneficiaries and future beneficiaries effective in 2035.
“If timely changes are not made, cutting benefits for future beneficiaries only will not be enough to achieve solvency. Instead, benefits for those retirees already receiving benefits would have to be cut or Social Security’s income would need to be increased.”The question is which of the above three benefit reduction alternatives will be “less disruptive?” Since I am currently eligible for benefits, I would certainly answer that Alternative 2 above would be less disruptive for me, but I wonder how individuals who are not currently eligible for benefits (but who might become eligible in the next 15 years) would answer the question.
Will Future System Reform “Ensure” Solvency or Sustainable Solvency?
Once again, let’s examine the bolded statement from the 2020 AP from the perspective of “ensuring” Sustainable Solvency (or just solvency). For this purpose, we assume that the AAA is defining solvency as being in long-range actuarial balance over the 75-year projection period.
Unlike automatic adjustment processes utilized by actuaries for most other financial security systems, there are no mechanisms in current Social Security law to keep the program in long-range actuarial balance or “Sustainably Solvent” via automatic changes in future tax rates or benefits after reform proposals have been adopted. Since these measures of program solvency are based on assumptions for the next 75-years, it is highly likely that future experience will differ from these assumptions and the program will cease to meet the solvency requirements when measured in the future (although it is also possible that future experience will be more favorable than assumed).
In fact, under current law, I believe it is quite misleading to imply that any specific system changes to benefits or tax rates adopted today will ensure system solvency or sustainable solvency over the next 75-years. I suggest that the AAA might want to consult Precept 8 of its own Code of Conduct (and/or Sections 3.1.2 and 3.4.1 of ASOP 41) to make sure that it is taking reasonable steps to ensure that it is not misleading the public with this AP. I also suggest that the future APs should more fully disclose the limitations of solvency measures that require reliance on 75-years of assumptions for a program that has no automatic adjustment mechanisms to maintain solvency.
I have previously suggested that the AAA consider suggesting that Congress might want to consider such automatic actuarially balancing provisions as part of the next round of program reform, and I have written about how this process works very well in Canada, but the actuarial profession in the U.S. is resistant to even suggesting to our policymakers that such a provision even be considered.
Summary
Whether intentional or not, we believe the AAA is potentially understating the magnitude of the Social Security financial problem by utilizing the flawed 75-year actuarial balance measure rather than the stronger 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. Also, we believe changes to Social Security to achieve Sustainable Solvency will generally involve some level of disruption to workers and perhaps retirees and that the level of disruption will depend on whose benefits are reduced (and by how much) and/or who will pay more (and how much more), rather than the timing of the necessary changes. Finally, we believe the Academy should recommend that Congress consider implementing automatic adjustments to System taxes/benefits as part of the next round of Social Security reform to maintain Sustainable Solvency and to truly improve public trust in the financial soundness of the program.
