2017 SOA Annual Meeting & Exhibit

KAREN GLENN

Session 184, Future of Social Security (US & Canada)

October 18, 2017
SOCIETY OF ACTUARIES

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Outline

1) Background and results from the 2017 Trustees Report

2) Challenges and selected issues

• Aging

• Mortality

• Disability

• Earnings dispersion

• Adequacy of benefits

3) Potential long-term solutions

4
Social Security Trust Funds

• Two legally distinct trust funds:

• OASI = Old-Age and Survivors Insurance

• DI = Disability Insurance

• Financial operations are overseen by the Social Security Board of 

Trustees

• The two funds are often looked at on a theoretical combined 

basis and referred to as OASDI

• As of December 31, 2016, the OASDI trust funds hold about $2.85 trillion in asset 

reserves

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How Is Social Security Financed (Income)?

• Payroll taxes

• Employees and employers each pay 6.2% of covered earnings

• The self-employed pay 12.4% of covered earnings

• On earnings up to $127,200 in 2017

• Taxes on Social Security benefits

• High-income beneficiaries pay federal income tax on their benefits

• Interest on trust fund reserves

• Invested in interest-bearing securities of the US government

6
Where Does the Money Go (Outgo)?

• Benefit payments

• About 61 million people getting benefits as of December 2016:

• 44 million retired workers and dependents of retired workers

• 6 million survivors of deceased workers

• 11 million disabled workers and dependents of disabled workers

• Benefits are:

• Calculated using the highest 35 years of wage-indexed earnings

• Calculated using a progressive benefit formula

• Increased each year with COLA based on CPI-W

• Administrative expenses

• Only about 0.7 percent of total expenditures in 2016

7
What Is the Legislative Mandate for the Annual 

Social Security Trustees Report?

1) Trust Fund operations of the past year and the next five years

2) Actuarial status of the trust funds

• This means the ability to meet the cost of scheduled benefits with 

scheduled revenue and trust fund reserves

• And the extent to which scheduled revenue will fall short, forcing cuts or 

delays in benefits in the absence of legislative change

8
SOLVENCY: OASDI Trust Fund Reserve Depletion in 2034

(Same year as in last year’s report)

9

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

Social Security Trust Fund Ratios

Assets as Percent of Annual Cost

Trustees Report Intermediate Projections

OASDI 2017TR

OASI 2017TR

DI 2017TR

OASDI 2016TR

OASI 2016TR

DI 2016TR

Historical

Tax Rate

Reallocation

DI

OASDI

OASI
OASDI Annual Cost and Non-Interest Income as 

a Percent of Taxable Payroll 

10

0%

5%

10%

15%

20%

25%

2005 2015 2025 2035 2045 2055 2065 2075 2085 2095

Calendar year

Cost: Scheduled and 

payable benefits

Non-interest Income

Payable benefits as percent

of scheduled benefits:

2016-33: 100%

2034: 77%

2091: 73%

Cost: Scheduled but not 

fully payable benefits

Expenditures: Payable benefits = income 

after trust fund depletion in 2034
OASDI Beneficiaries per 100 Workers

11

0

10

20

30

40

50

60

70

80

90

100

1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090

Calendar year

Historical Estimated
Increasing Cost as Percent of Taxable Payroll 

and GDP due to Aging

• “Macro Aging”

• Changing age distribution— getting older

• Mainly from permanent drop in birth rates after 1965

• “Micro Aging”

• People are living longer

• Lower death rates

• Higher life expectancy 

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Aging (change in age distribution)

Mainly due to drop in birth rates

13

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Aged Dependency Ratio 2017 TR

Population 65+/(20-64) 

Actual and TR Intermediate

TFR remains at 3.0 after 1964

TFR remains at 3.3 after 1964
Changing Age Distribution Over Last 20 and 

Next 20 Years Mainly Due to Population Aging

14

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Percent of Population at Ages 25+

Age Distribution of the Population Age 25+, 1940 to 2100 (2017TR)

25-44

45-64

65-84

85+

Boomers 

become 

25-44

Boomers 

become 

45-64

Boomers 

become 

65-84
Mortality Experience: All Ages

Reductions continue to fall short of expectations

15
Mortality Experience: Ages 65 and Older

Reductions since 2009 continue to fall short of expectations

16
Mortality Experience: Ages Under 65

Actual increase since 2010

17
Applications for Disability Benefits Continue to Fall

18

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025

(millions)

Total Social Security Disability Receipts by Calendar Year:

Historical and Intermediate Assumptions for 2012 through 2017 Trustees Reports 

2012TR

2017TR

2016TR

2015TR

2014TR

2013TR
Disability Incidence Rate Falls to Historic Lows

19

4

4.5

5

5.5

6

6.5

1990 1995 2000 2005 2010 2015 2020 2025 2030

DI Age-Sex-Adjusted Incidence Rates:

Historical and Intermediate Assumptions for 2012 through 2017 Trustees Reports

2012TR

2017TR

2016TR

2015TR

2014TR

2013TR

Average 1990-2016 5.27

Ultimate Assumption 5.40
Fewer Disabled Worker Beneficiaries

Fewer now and in near term based on recent applications and incidence rates

20

6,000

7,000

8,000

9,000

10,000

11,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Disabled Worker Beneficiaries

In Current Payment Status at End of Year (in thousands)

2008 TR (no recession)

2017 TR

2016 TR
Taxable Ratio

Declined over time: concentration of earnings at the top of the income distribution

21

0.8

0.82

0.84

0.86

0.88

0.9

1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026

Taxable Ratio

Historical Projected
Trend in Wages in Excess of OASDI Taxable Maximum

22

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Share of workers and share of wages above OASDI taxable maximum.

Workers

Wages
Share of Wages Earned by the Top 1% of Wage Earners

Rises throughout 1980s and 1990s, but fairly flat since 2000

23

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Replacement Rates Based on the 2017 Trustees Report

Source: Annual Recurring Actuarial Note #9 at www.ssa.gov/oact/NOTES/ran9/index.html

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0

10

20

30

40

50

60

70

1940 1960 1980 2000 2020 2040 2060 2080

Scheduled Monthly Benefit Levels as Percent of Career-Average Earnings 

by Year of Retirement at age 65

Low Earner ($23,091 for 2017; 25th percentile)

Medium Earner ($51,314 for 2017; 57th percentile)

High Earner ($82,103 for 2017; 82nd percentile)

Max Earner ($127,200 for 2017; 100th percentile)
How About at Age 62, When Most Start Benefits?

Source: Annual Recurring Actuarial Note #9 at www.ssa.gov/oact/NOTES/ran9/index.html

25

0

10

20

30

40

50

60

70

1960 1980 2000 2020 2040 2060 2080

Scheduled Monthly Benefit Levels as Percent of Career-Average Earnings 

by Year of Retirement at age 62

Low Earner ($23,091 in 2017; 25th percentile)

Medium Earner ($51,314 in 2017; 57th percentile)

High Earner ($82,103 in 2017; 82nd percentile)

Max Earner ($127,200 in 2017; 100th percentile)
Payable Benefits Under the Law, After Trust 

Fund Reserves Are Depleted, Are Even Lower

Source: Annual Recurring Actuarial Note #9 at www.ssa.gov/oact/NOTES/ran9/index.html

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0

10

20

30

40

50

60

70

1960 1980 2000 2020 2040 2060 2080

PAYABLE Monthly Benefit Levels as Percent of Career-Average Earnings by Year 

of Retirement at age 62

Low Earner ($23,091 in 2017; 25th percentile)

Medium Earner ($51,314 in 2017; 57th percentile)

High Earner ($82,103 in 2017; 82nd percentile)

Max Earner ($127,200 in 2017; 100th percentile)
How to Fix Social Security Long-Term

How can the financing shortfalls be covered?

• Lower cost (reduce benefits) by about 25%

• Increase revenues by about 33%

• Or some combination of approaches

• Also consider benefit adequacy?

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Ways to Lower Cost

• Lower benefits for retirees—not disabled

• Increase normal retirement age (lowers OASDI cost, but increases DI cost)

• Can exempt long-career low earners

• Lower benefits mainly for high earners

• Reduce PIA above some level

• Often combined with increasing PIA below some level, subject to work 

year requirements

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Ways to Lower Cost (continued)

• Lower benefits mainly for the oldest old

• Reduce the COLA by using a chained version of the CPI

• Some say instead raise the COLA by using the CPI-E (based on purchases 

of consumers over age 62)

•Increase the number of years used in calculation 

(currently 35)

• Especially hurts those who haven’t been in the workforce for more than 

35 years

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Ways to Increase Revenue

• Raise tax rate on all earners

• Increasing rate from current 12.4 percent to about 15.3 percent is 

projected to eliminate the long-range shortfall

• Raise tax on highest earners

• Increase taxable maximum amount

• Some tax on all earnings above the maximum

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Ways to Increase Revenue (continued)

• Tax employer group health insurance premiums

• Affects only middle class if taxable maximum remains the same

• Tax certain investment income

• Consistent with ACA approach?

•Maintain larger trust fund reserves

• Could do this by investing some portion of reserves in equities

• Added interest/yield can lower needed taxes

31
Many comprehensive proposals scored

Example 1: Representative Sam Johnson (R-TX), December 2016

• Make PIA formula less generous but more “progressive” (shortfall ↓32%)

• Change to mini-PIA approach (↓13%)

• Raise the Normal Retirement Age gradually (↓32%)

• Lower the COLA (↓47%) – Based on chain-weighted CPI for most beneficiaries; 0.3pp lower on average

– No COLA if prior year’s MAGI is above certain thresholds

• Add a new minimum benefit (↑9%)

• Eliminate taxation of OASDI benefits in 2054 and later (↑15%)

• Would produce “sustainable solvency” (shortfall ↓100%)

Go to: https://www.ssa.gov/OACT/solvency/SJohnson_20161208.pdf

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Many comprehensive proposals scored

Example 2: Representative John Larson (D-CT), April 2017

• Make PIA formula slightly more generous, more “progressive” (shortfall ↑9%)

• Increase the COLA (↑15%) – Based on CPI-E for all beneficiaries; 0.2pp higher on average

– Index designed to better reflect the purchases of the elderly

• Improve the minimum benefit (↑5%)

• Lower taxation of OASDI benefits slightly (↑7%)

• Tax earnings above $400K (not indexed) with small benefit credit (↓71%)

• Increase payroll tax rate gradually from 12.4 percent to 14.8 percent (↓67%)

• Would produce “sustainable solvency” (shortfall ↓112%)

Go to: https://www.ssa.gov/OACT/solvency/JLarson_20170405.pdf

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For More Information Go To 

http://www.ssa.gov/oact/

There you will find:

• The 2017 and all prior OASDI Trustees Reports, back to 1941

• Detailed single-year tables for recent reports

• Our estimates for comprehensive proposals

• Our estimates for the individual provisions

• Actuarial notes; including replacement rates

• Actuarial studies

• Extensive databases

• Congressional testimonies

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Questions?