Last week, the American Academy of Actuaries (AAA) released An Actuarial Perspective on the 2024 Social Security Trustees Report. This Issue Brief was released about six months after the release of the brief covering the 2023 Trustees Report that we discussed in our post of January 20, 2024.
Like the previous issue brief, the 2024 brief includes a shaded [added emphasis] area entitled, “Why Didn’t the 1983 Social Security Reform Work Out as Expected?” These briefs imply that, for the most part, the shortfall since 1983 resulted primarily from economic factors, including the growth of taxable payroll falling below expectations and lower than expected portfolio returns.
Substitution of Facts for Appearances
As discussed in our post of January 20, 2024 and our Advisor Perspectives article of February 26, 2024, SSA Actuarial Note 2023. 8 showed that actuarial losses from economic assumptions and changes in economic assumptions accounted for only 30% of the system’s total actuarial losses since 1983, while annual changes in the valuation period accounted for almost 64% of system’s actuarial losses since 1983. Updated Actuarial Note 2024.8 shows that only 27% are attributable to economic factors and 68% are attributable to passage of time.
Clearly, a much larger percentage of the system’s funded status deterioration since 1983 has been attributable to the assumption implied in the current valuation process that system cost will equal system income for years following the end of the 75-year projection period. And here is the big gotcha resulting from use of this implied assumption that is not addressed in the annual Trustees Reports or the AAA issue briefs:
These “valuation date creep” actuarial losses are projected to increase in future years, even if all other trustee assumptions are realized. So, even if trustee assumptions are accurate for the next 10 years, the long-range actuarial deficit will likely be around 4% of taxable payroll in 2034, not the current 3.5%. And, if actual experience is less favorable than assumed for the next 10 years, for example because of continuation of lower than assumed fertility or other unfavorable factors, the long-range actuarial deficit will be even greater than 4% of taxable payroll in 2034.
Why aren’t these future expected actuarial losses discussed and projected in the annual Trustees Reports or in the AAA Issue Briefs? Good question. These aren’t difficult calculations and actuarial standards of practice for pension actuaries require such disclosure for pension plan actuaries under similar circumstances.
In 1983, Congress adopted a package of reforms designed to bring the system back into long-range actuarial balance (from -2.09%, adjusted for TEFRA, to 0.02%). I don’t believe it was their intent to partially advance-fund baby boomer benefits as implied by the AAA. Notwithstanding, to be consistent with historical practice, future reform is likely to focus on rebalancing the system and adopting a package of system changes that will once again achieve long-range actuarial balance (or something close). Such reform will involve increasing the long-range actuarial balance from a negative 3.5% of taxable pay (or even more as discussed above) to zero. It will not involve only a 1%-ish increase in taxable payroll which is the approximate magnitude of the economic factors to which the AAA refers. Even the AAA Social Security Challenge points out that we are talking about a menu of items totaling 3.5% of taxable payroll, not 1%, to “fix” the system.
Other Comments
I was also disappointed to see deletion in this year’s AAA brief of the suggestion included in the previous brief for future system reform to consider automatic adjustments in tax rates/benefits whenever the system significantly deviates from close actuarial balance in the future.
Readers interested in Social Security funding may also find the Alicia Munnel/ Center for Retirement Research take on this subject to be of interest. I believe you will find her analysis and views more closely aligned with mine.
