Automatic Funded Status Adjustments for Social Security is a Great Idea

This month, in Any Social Security Legislative Package Should Include an Automatic Adjustment Mechanism, Alicia Munnell, Director of the Center for Retirement Research at Boston College, recommended that Congress include an automatic adjustment mechanism to maintain Social Security’s desired funded status on an ongoing basis as part of the next round of Social Security reform. 

Actuaries Continue to Ignore the “Valuation Date Creep” Elephant in the Social Security Financing Room

This post is a follow-up to my July 3, 2023 Advisor Perspectives article, Applying the Actuarial Process to Retirement Planning, where I encouraged financial advisors to employ the same actuarial process for retirement planning that Social Security actuaries employ for Social Security financing.  In that article, I outlined the following six-step planning process and included an illustration showing how this process is applied to Social Security:

1. Make reasonable assumptions about the future (generally deterministic, not stochastic).
2. Calculate present values of assets (including future sources of income) and liabilities based on relevant demographic information, system provisions and assumptions made.
3. Periodically (generally annually) compare estimated present values of assets to liabilities to determine the system’s funded status (snapshot comparison).
4. Maintain a history of the system’s funded status over time and note trends.
5. When warranted or required, make changes to assets or liabilities (or both) to restore desired funded status (and/or to address possible cash flow issues).
6. Periodically evaluate/stress test assumptions to see if they need to be changed or to assess risk.

Is It a Good Time to Buy That Single Premium Immediate Life Annuity?

In prior posts, we discussed possible assumptions used by life insurance company actuaries in pricing single premium immediate life annuities (SPIAs). In those posts, we provided implied discount rates consistent with quotes obtained from ImmediateAnnuities.com under two different mortality assumptions:

• based on life expectancy, or 50% probability of survival, and
• based on a 25% probability of survival, which is the longer expected lifetime basis we recommend using in our website for planning purposes.

In this post, we will examine the implied interest rate assumptions built into quotes from ImmediateAnnuities.com as of September 17, 2023 and compare the quotes and the implied interest rates with the results of the similar exercise we performed and summarized in our post of January 9, 2023. We will also discuss a few other considerations that may affect your decision to buy a SPIA at this time.

Manage Your Financial Risks in Retirement Like an Actuary

In his August 7, 2023 Advisor Perspectives article, Larry Swedroe, head of financial and economic research for Buckingham Wealth Partners, discusses what he calls the seven great “challenges” to retirement plans today. According to Mr. Swedroe, these challenges are:

• historically high equity valuations;
• historically low bond yields;
• increasing longevity;
• the potential need for expensive long-term care;
• the failure of government to fully fund the Social Security and Medicare programs;
• the likelihood of slower economic growth due to the rising debt-to-GDP ratio; and
• the end (and even likely reversal) of favorable tailwinds for corporate profits (falling interest rates, profits growing faster than GDP, and falling tax rates).”

Six of Mr. Swedroe’s challenges involve the asset side of a retired household balance sheet while two of them (increased longevity and the potential need for expensive long-term care) primarily involve the spending liability side of the household balance sheet. These challenges (and others discussed below) translate into increased “risks” that the historical assumptions frequently used in retirement planning projections by many financial advisors in Monte Carlo models or in other static planning approaches (like the 4% Rule) may be too optimistic. Fortunately for retirees, these risks can be managed by using the basic actuarial principles and processes advocated in this website and discussed below.