This post is a follow-up to our post of July 29, 2023 where we took the Academy to task for removing three important caveats about the Social Security Challenge tool and, therefore, potentially misleading the public about the long-term effectiveness of possible system “fixes.” In this post, we will discuss yet another feature of the tool that may also mislead the public about the effectiveness of these possible “fixes.” This feature ignores the potential negative impact on system assets of overly deferring the revenue increases or benefit reductions necessary to restore system’s actuarial balance. Thus, while certain changes may achieve actuarial balance (and even earn a “You’ve Solved It” pat on the back from the tool), these changes aren’t expected to keep the OASDI Trust fund from running out of money during the entire 75-year projection period, and therefore, should not be considered as viable, much less as a “fix.” After providing some background, we will discuss an example.
Background
The figure below from the 2023 OASDI Trustees report shows the projection of OASDI income and cost measured a percentage of projected taxable payroll under the Trustees intermediate assumptions.
Figure II.D2.—OASDI Income, Cost, and Expenditures as Percentages of Taxable Payroll
[Under intermediate assumptions]
This figure shows, that without adoption of reform changes, system costs are expected to increase rapidly relative to system income until 2034, at which time system assets are expected to be completely exhausted. At that time, system income is expected to be sufficient to cover 80% of system cost. The annual shortfall is estimated to be 3.21% of taxable payroll in 2035 (expected cost of 16.48% of taxable payroll and expected income of 13.27% of taxable income), increasing to 5.02% of taxable payroll in 2075 and 2080 and then decreasing to only 4.42% of estimated taxable payroll in 2100.
Social Security’s funded status is measured each year by comparing the present value of expected system revenue with the present value of the expected expenditures over the next 75 years under the Intermediate assumptions. Long-range actuarial balance (a snapshot measurement) is achieved by balancing the present value of system costs and revenues. Projected costs and revenues after the 75-year projection period are ignored, but enter the funded status measurements in subsequent years. The above figure shows that the system is clearly not currently in actuarial balance and the actuarial balance measure is expected to deteriorate in future years as the significant shortfalls in years subsequent to the current 75-year projection period are recognized.
The figure also shows that system costs are not expected to increase all that much after 2060, so any system reform enacted after 2030 that solves the funding problem for thirty years stands a reasonably good chance of solving the system’s funding problems over much longer periods based on the Intermediate assumptions.
Under current law, Congress decides when (and what) changes are necessary to strengthen the system’s financing. There is no requirement under current law for system changes to be made automatically to maintain the system’s actuarial balance from year to year. Further, there is no requirement under current law for reform changes to restore the system’s long-range actuarial balance, but congressional action in the past has generally also restored it. Most experts agree that changes are required at this time (or, more accurately, are long overdue) to strengthen system financing.
The figure above clearly shows that if the next round of Social Security reform anticipates grandfathering of benefits for those in or close to beneficiary status (e.g., reforms that involve no benefit reductions for those age 60 and over as of the effective date of reform), it will be very difficult (or impossible) to accomplish such grandfathering without increasing system revenue in some manner, particularly if the effective date of reform changes continues to be deferred. Therefore, reform proposals that involve significantly deferring reductions in benefits and/or increases in revenue need to be closely scrutinized to make sure trust fund assets will be sufficient to support such reform proposals.
Restoring Social Security’s long-range actuarial balance will not necessarily ensure that trust fund assets will be expected to be positive throughout the 75-year projection period. If actuarial balance is achieved by “back-loading” increases in expected system revenue or benefit reductions, assets may reasonably be expected to be exhausted during the projection period. Since the Academy’s tool focuses only on achieving actuarial balance, it does not address this potential cash-flow issue, and therefore reform options in the tool that involve significant deferrals of increased revenue or decreased benefits will probably not “solve” the system’s funding problem.
Example
Let’s assume we select the following three system changes in the Academy’s tool. The following chart below shows the tool results for the expected impact on the 2022 Actuarial Balance deficit of 3.42% of taxable payroll associated with each change as well as the total expected impact. References in parenthesis describe the Office of the Actuary change menu provision used in the tool. The Office of the Actuary change menu also provides the percentage of the 4.25% annual shortfall for the 75th year expected to be eliminated by each provision.
System Change | % Reduction in Actuarial Balance | % Reduction in 75th-year Shortfall |
Increase Normal Retirement Age by 2 months per year until is 69, then increase 1 month every 2 years (C.1.4) | 38% | 57% |
Reduce benefits for future higher-earner retirees starting in 2030 | 23% | 44% |
Raise tax rate 0.1% per year starting in 2023 for 20 years until it reaches 14.4% | 44% | 47% |
Total | 105% | 148% |
This example package of reform options backloads benefit reductions and slightly backloads revenue increases and would not be expected to maintain positive trust fund balance over the entire 75-year projection period, and especially not if tax rate increases are deferred even later than 2023 (which seems pretty likely at this time). While this package of reforms accomplishes actuarial balance (and earns a “You Solved It” pat on the back from the tool), it does this by anticipating that system revenue will significantly exceed system costs in the later years of the 75-year projection period and that this excess system revenue over costs will somehow be used to fund excesses of costs over revenue in the early part of the projection period. Since this package of reform changes isn’t viable, we conclude that it is not effective as a “fix’ to the system and it shouldn’t be expected to “solve” Social Security’s financing problem.
Summary
As I indicated in my March/ April Letter to the Editor of Contingencies Magazine, I believe that the Academy should take reasonable steps to make sure that its new Social Security change menu tool does not mislead the public about Social Security financing and the effectiveness of packages of system reform options. I believe those steps should include restoring the caveat language that was included in the prior version of the tool for almost seven years. It should also include a caution about the potential cash flow issue discussed in this post as well as any other significant limitations of the tool. While I understand that the Academy would like to keep the tool simple and easy to understand by system stakeholders, I don’t find inclusion of these limitations to be any more confusing than the current tool caveat language below:
“The
interactions among the various provision changes which would change
their combined effect on the actuarial balance are not reflected in this
activity.”
