Almost seven years ago, the American Academy of Actuaries added the following language to its Social Security Game to avoid misleading the public regarding changes that may be required to bring the system back into actuarial balance:
“The following should be noted when interpreting results from the Social Security Game:
- The 75-year actuarial balance calculation used in the game does not consider significant revenue shortfalls expected to occur after the end of the 75-year projection period, and thus possible solutions illustrated in this game are generally not sufficient to achieve “sustainable solvency,” a concept discussed in the Trustees Report.
- The possible solutions assume immediate adoption of System changes, rather than gradual implementation. If changes to the System are gradually implemented, the required increases in tax revenue or benefit decreases will need to be larger than noted in the game to achieve actuarial balance.
- The success of reforms will depend on how well actual future experience compares with the assumptions made by the trustees and the Social Security actuaries. There is no mechanism in current Social Security law to maintain the program’s actuarial balance once it has been achieved. Thus, there can be no guarantee that the System’s long-term problem will be “solved” for any specific length of time by enacting various system changes. “
This year, the Academy introduced a new version of the Social Security Game and renamed it “the Social Security Challenge.” Notably, while all three of the above caveats are still very much applicable today, this language has been removed from the new version. It appears that this removal was intentional and not an oversight on the part of the Academy. Apparently, the above language was removed because, according to Linda Stone, the Academy’s Senior Pension Fellow (in the July/August issue of Contingencies magazine), the Challenge
“was designed with the public in mind, and so we started with the basics—and used easy-to understand language. We were positively recognized for this approach in many media stories about the Challenge—one of which offered praise since it did not present like a ‘dense actuarial report’.”
In the same issue of Contingencies, Ted Gotsch, the Academy’s senior policy analyst for content and publications, doubled down on the Academy decision to eliminate the caveat language in an article entitled, ’Challenge’ is Embraced by Stakeholders Seeking Social Security Solution.
While we support the Academy’s efforts to educate the public about Social Security and changes that may be required to bring the system back into actuarial balance (and we believe that the new version of this tool is an improvement over the older version), we strongly disagree with its decision to remove the caveat language from the updated version of the change menu tool. We believe this decision is shamefully inconsistent with:
- The profession’s Code of Conduct and Actuarial Standard of Practice (ASOP) No. 41,
- The profession’s Strategic Plan (Including three of the four goals enumerated in its Strategic Goals and Objectives),
- The profession’s prior communications on Social Security,
- The profession’s recent guidance on fixed-rate pension plans, and
- Possibly several other professional communications
I’m not going to bore you with discussion of the profession’s standards of practice regarding communications or the professions strategic plan, but I will briefly discuss the profession’s prior communications on Social Security and their recent guidance on fixed-rate pension plans and how that guidance can be interpreted to apply to Social Security.
Sustainable Solvency and the 75-year Valuation Period Problem (caveat #1 above)
The Academy is keenly aware of the potential problems created by limiting the valuation period for determining the system’s long-range actuarial balance to 75 years. Sustainable solvency is a stronger requirement than the actuarial balance measure used in the Social Security Challenge. In its Actuarial Perspective on the 2019 Social Security Trustees Report, the Academy said,
“The sooner a solution is implemented to ensure the sustainable solvency of Social Security, the less disruptive the required solution will need to be”
and
“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 is not addressed or discussed in the new or old versions of the Social Security Challenge.
Recent Guidance on Fixed-Rate Pension Plans (caveat #3 above)
As discussed in our post of April 11, 2023, Social Security is essentially a Fixed-Rate Pension Plan as defined by the Academy in its practice note, Fixed-Rate Pension Funding. That practice note suggests seven items for an actuary to consider when consulting on fixed rate plans. Items 6 and 7 are:
“6. Work to establish procedures to evaluate and update the fixed rate and possibly benefits in a timely, systematic manner [emphasis added].
7. Ensure that stakeholders are aware of the significant risks associated with pension funding— most notably investment risk—and that a combination of fixed benefits and contributions cannot persist indefinitely.”These two items relate to the third caveat above. Item 7 tells us that a system (or plan) actuary has a responsibility to educate stakeholders about the limitations of actuarial funded status calculations. He or she should stress that even if actuarial balance is restored for a system (or plan) such a snapshot balance does not guarantee that the system will remain in actuarial balance for any specified period of years. Item 6 suggests that system (or plan) sustainability can be significantly enhanced if there exists some systematic mechanism for adjusting benefits or income sources when the system falls out of actuarial balance.
Summary
The American Academy of Actuaries has removed caveat language from the Social Security Challenge that had helped explain the limitations of this tool to stakeholders for almost seven years. Apparently, this intentional removal was done to make the tool simpler to understand. In their Contingencies letters and articles, Ms. Stone and Mr. Gotsch both described the new tool as way for the public to learn “about Social Security and the reform options to keep the system strong for generations to come.” Mr. Gotsch also describes the tool as a way “to consider different scenarios that would close the financial gap so it [Social Security] could continue to fully fund the benefits older Americans are entitled to receive under the program.”
It is important to note that Social Security Challenge “solutions” are not necessarily solutions to Social Security’s funding problems. They are reform options that would restore the system’s actuarial balance on a snapshot basis with no guarantee as to how long the resulting system would remain in balance. Restoring the system’s actuarial balance this year or in a future year definitely does not guarantee that the system will be “strong for generations to come” or that the system will be fixed or fully funded. The mere fact that we have to mention this fact points to the potential misleading nature of the Challenge itself and the need to restore the caveat language to accurately describe the limitations of the game.
If Ms. Stone, Mr. Gotsch and the Academy
truly wanted to ensure that our Social Security system will remain
strong for generations to come, they should suggest that in addition to
restoring the system’s actuarial balance, Congress should also consider
implementing automatic (or systematic) adjustment guardrails to maintain
the system’s actuarial balance (similar to what the Academy recommended
for fixed rate pension plans and what we recommended for individual
households in our post of January 7, 2023) on a going-forward basis.
