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SESSION 1 - A - 1

Inflation & Other Economic Factors –

Impact on Investments and Interest Rates
9

2023 CCA ENROLLED 

ACTUARIES CONFERENCE

May 1, 3 & 5

Impact on The Economy and 

Social Security
10

2023 CCA ENROLLED 

ACTUARIES CONFERENCE

May 1, 3 & 5

Last 2 Recessions: 2009 and 2020; and Recoveries

Average annual OASDI covered 

wage changed with GDP in 2009-12. 

But different in the 2020 pandemic 

recession where average annual 

wage dropped little in 2020, rose 

sharply in 2021, with price inflation 

in 2021 and 2022.

Positive real yield on Treasury bonds 

assumed to return in 2024 with 

reduced price inflation following 

GDP slowdown assumed in 2023.
11

2023 CCA ENROLLED 

ACTUARIES CONFERENCE

May 1, 3 & 5 Drop in expected level of GDP after 2009 recession accelerated expected year of OASI Trust Fund 

reserve depletion from 2042 in 2007 Trustees Report to 2034 in the 2020 report. 

Trustees for 2023 report lowered expected level of GDP an additional 3 percent starting in 2023, 

thus accelerating OASI reserve depletion to 2033. Reductions in GDP are in productivity and average real wage, 

......not employment rate which recovers to same level as in 2007. 
12

2023 CCA ENROLLED 

ACTUARIES CONFERENCE

May 1, 3 & 5

Social Security (National pension) Implications from 

Inflation, and Investment Yields

• Reduction in average wage lowers payroll and tax revenue immediately

• But lowers benefit levels starting 2 years later, only for new eligibility

– After initial eligibility, benefits are indexed by CPI-W (price levels)

– So there is a long lag between effect on overall earnings and benefit levels

– Variations up and down tend to have offsetting effects over time

– But the reduction in GDP and wage level assumed permanently lowers reserves 

• Trust fund reserves invested in Treasury bonds only, by law

– However, investment in private securities has long been considered 
13

2023 CCA ENROLLED 

ACTUARIES CONFERENCE

May 1, 3 & 5

Other DB Pension Obligations also Influenced by Wage Growth

• For private and public pension plans (with pay-related accruals), 

as for Social Security, the level of pension payments will reflect 

wage levels near retirement

– Payment levels affected by individual employee earnings levels

– For Social Security, benefit levels for new retirees reflect also the 

average wage level of all workers in the year new retiree attains age 60

• So, it would be convenient if investment returns correlated with 

average wage gains (and, of course, exceed average wage gain)
14

2023 CCA ENROLLED 

ACTUARIES CONFERENCE

May 1, 3 & 5 10-Year Average Investment Returns 

Not well correlated with increases in average wage levels

Source Invest Returns: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
15

2023 CCA ENROLLED 

ACTUARIES CONFERENCE

May 1, 3 & 5 20-Year Average Investment Returns 

Reduces Variability for Longer Holding

Source Invest Returns: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
16

2023 CCA ENROLLED 

ACTUARIES CONFERENCE

May 1, 3 & 5

How do investment options 

look historically relative to 

10-year Treasury Bonds 

required for Social Security?

For 20-year average returns, 

Corporate Bonds are 

consistently higher, 

Stocks generally superior, 

but volatility risk, and

Real Estate questionable. 
17

2023 CCA ENROLLED 

ACTUARIES CONFERENCE

May 1, 3 & 5

For very long holding 

variability greatly reduced. 

Does active management 

pay off? Or is just 

rebalancing superior?

Appears that our assumption 

of 350 basis points equity 

premium over 10-year 

Treasuries established back in 

the mid 1990’s is still a 

reasonable choice