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Social Security: Actuarial Status and Assumptions Webinar November 27, 2012
Copyright ÂŠ 2012 by the American Academy of Actuaries Social Security Webinar, Nov. 27, 2012 All Rights Reserved.
PANELISTS: Moderator: Mark Shemtob, MAAA, ASA, EA; Member, Social Security Committee Eric Klieber, MAAA, FSA, EA; Vice-chairperson, Social Security Committee Timothy Marnell, MAAA, ASA, EA; Member, Social Security Committee
DISCUSSANT: Steve Goss, Chief Actuary, Social Security Administration Copyright ÂŠ 2012 by the American Academy of Actuaries Social Security Webinar, Nov. 27, 2012 All Rights Reserved.
Agenda Part 1: Understanding the Assumptions Used to Evaluate Social Security’s Financial Condition Eric Klieber, MAAA, FSA, EA; Vice-chairperson, Social Security Committee Part 2: Actuarial Status of Social Security in the 2012 Trustees Report Tim Marnell, MAAA, ASA, EA; Member, Social Security Committee
Copyright © 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Part 1 Understanding the Assumptions Used to Evaluate Social Security’s Financial Condition
Copyright © 2012 by the American Academy of Actuaries Social Security Webinar, Nov. 27, 2012 All Rights Reserved.
Who is Evaluating Social Security’s Financial Condition? 
Social Security’s Board of Trustees issues an Annual Report   
Congressional Budget Office and Office of Management and Budget   
Required by law 75-year valuation period Three projections: best estimate, high cost and low cost
Provide annual cost estimates to Congress and Executive, respectively Both use Trustees’ best estimate demographics projections But use own economic assumptions
Outside experts from think tanks and academia 
May choose their own methods and assumptions Copyright © 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Who is Evaluating Social Security’s Financial Condition?, cont. 
All of these projections rely on assumptions about future demographic and economic trends
Because the future remains uncertain
The selection of assumptions affects the results of any projection
The results in turn affect the policy prescriptions of anyone relying on the projection
Two Categories of Assumptions 
Demographic assumptions: used to project future populations of –   
Workers paying into the system Retired and disabled worker beneficiaries Family members and survivors receiving benefits
Economic assumptions: used to project –   
Earnings and the resulting taxes paid into the program Amount of benefit payments Investment income on trust fund assets
Sources of Assumptions 
Past experience: the normal valuation process includes  
Comparing actual experience and past projections Fine tuning assumptions based on this analysis
Judgment about future changes in experience    
Will mortality continue improving at historical rates? Will people work to older ages as longevity improves? Will an aging population slow economic growth? How will emerging economies affect the US economy?
Fertility 
Average number of children born to a woman during her lifetime
Primary determinant of rate new workers enter system
Adjusted fertility rate    
Excludes children who do not survive to age 10* Nearly constant at 3.0 from early 20th century to 1960s Declined to about 2.0 in 1960s and 1970s Nearly constant since then
Decline in adjusted fertility rate contributes highly to the projected increase in benefit payments as a percentage of GDP [*They never participate in Social Security] Copyright © 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Immigration 
Secondary determinant of rate new workers enter system   
Most immigrants spend all or most of their working lifetimes in US Emigrants more likely to be older and are often already retired Important to treat immigrants and emigrants separately
Legal immigration has increased since WWII due to increases in statutory quotas
Other than legal immigration hard to quantify Copyright © 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Mortality 
Decreased greatly during 1970s, more slowly since 1982
Result: longer benefit payout periods, fewer preretirement deaths
The former has a far greater impact on cost projections
Future rate of mortality improvement highly uncertain
Mortality, cont. 
Factors favoring rapid decrease in mortality:   
Medical advances Greater emphasis on disease management Lifestyle changes, e.g., more exercise, less smoking
Factors favoring leveling off of mortality improvement:    
Diminishing returns on medical research High cost of medical care Possible emergence of new diseases Obesity Copyright © 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Disability Incidence 
Determines greatly the cost of disability insurance
Tends to be cyclical in response to ups and downs in economy
Long-term age adjusted rates have not changed much recently
Aging population and recent severe recession combined have caused high rates of new disability awards in the last several years, but not outside historical norms
Earnings Increases 
Affects both tax receipts and benefit amounts
Made possible by increases in productivity, i.e., ratio of real GDP to hours worked
Earnings increases do not exactly track productivity increases due to –    
Changes in average hours worked Changes in proportion of total compensation paid as earnings Inflation (as measured by GDP deflator) Other factors with small effects
CPI for urban wage earners and clerical workers 
Beginning with the year of benefit eligibility 
(CPI-W)
(age 62 for retirees)
Intended to maintain purchasing power of benefits
Real Wage Differential 
Wage increase minus increase in CPI-W
A higher real wage differential decreases program cost (and vice versa):  
At any given time, income rises with increases in wages While outgo rises in part with increases in CPI-W
The future real wage differential is a significant factor bearing on Social Security’s financial health
Real Interest Rate 
“Real” means excess over CPI-W
Social Security’s assets invested in special issue Treasury securities
Interest rates approximate rate on medium term public securities
The real interest rate assumption affects projections in two ways:  
Affects return on system’s accumulated assets Affects present value of future system cash flows Copyright © 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Labor Force Participation Rate 
Proportion of working age population employed, self-employed or looking for work
Includes covered and non-covered workers and those unemployed
Assumption affects projection in two ways:  
Affects aggregate earnings and, hence, tax income Affects number of two-earner couples
Future labor force participation rates, particularly among those eligible for old age benefits, remain a great uncertainty in projecting Social Security’s future financial condition Copyright © 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Unemployment Rate 
Proportion of workers in the labor force unable to find work
Affects aggregate earnings and, hence, tax income Affects participant’s benefits at retirement
Former effect much greater
Spike in unemployment rate due to recent recession caused benefit payments to overtake tax income about five years earlier than predicted
But did not have a large effect on the system’s long-term finances Copyright © 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Stock Return Assumption
Not a required assumption for current program
But required for any reform proposal that calls for investment of trust fund assets in stocks, whether or not in individual accounts
Advocates for such investments focus on the higher potential expected return of such investments; opponents note that stock returns are not guaranteed and could be significantly more or less than expected. Copyright © 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Assumptions Over An Infinite Time Horizon 
Since 2003 the Trustees Report has included an infinite time horizon projection
Given the uncertainty of major assumptions over the regular 75-year projection period, it seems unreasonable to expect that results over an infinite period will be sufficiently reliable to use as a basis for policy decisions
For example, merely extending current assumptions for mortality improvement and changes in labor force participation rates leads to the conclusion that some day workers will receive benefits for a longer period than they pay into the system Copyright © 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Conclusions for Part 1 
Even experts can and do disagree about future demographic and economic trends that will affect Social Security’s long-term finances
There are many sets of assumptions that are reasonable
Small changes in assumptions can lead to large changes in results over 75 years
Conclusions for Part 1, cont. 
Do other groups making long-term projections of Social Security’s finances:   
Disclose all assumptions? Use assumptions that are internally consistent? For any assumption subject to substantial uncertainty, provide a sensitivity analysis?
Be aware of how using different assumptions affects the comparison of reform proposals
The Trustees Report and the Social Security actuaries have set “the standard” for providing this information to policymakers
Part 2 2012 Trustee Report Actuarial Status
Results from 2012 Trustees Report 
In general, the Trustees report on:
Short-range results  
Year just ended results (2011) 10-year projection period (2012 to 2021)
Long-range results 
75-year period (2012 to 2086)
2012 Results 
Cost, generally benefit payments plus administrative expenses, continued to exceed non-interest income
Deficit of non-interest income relative to cost was:  
$45 billion for 2011 $53 billion projected for 2012
General revenue reimbursements for 2011 were $103 billion and projected to be $112 for 2012
Short-Range Projections 
Combined OASI and DI trust funds assets:  
Expected to grow from $2,678 billion at beginning of 2012 to $3,061 billion at beginning of 2021 Thereafter, assets expected to decline
Short-Range Projections, cont. 
Ratio of assets to cost continues to decline  
340% for 2012 to 227% for 2021 Prior year’s ratios were 347% and 272% at 2012 and 2021, respectively 4
Short-Range OASDI Trust Fund Ratios
Source: Figure II.D1., 2012 OASDI Trustees Report
DI Trust Fund expected to decline rapidly  
Falls below 100% at beginning of 2013 Exhausted by 2016 Short-Range DI Trust Fund Ratios
DI Intermediate
Source: IV.A1., 2012 OASDI Trustees Report
Change in Short-Range Projections from 2011 Trustees Report 
Change in valuation period reduced the trust fund ratio by 13 percentage points 
Prior period was 2011 to 2020  Current period is 2012 to 2021 
Changes in demographic assumptions reduced the trust fund ratio by only 2 percentage points
Actual economic data and changes in assumptions reduced the trust fund ratio by 53 percentage points 
Actual cost-of-living increase for December 2011  Lower interest rates  Slower growth in average earnings  Higher unemployment rates
Number of OASDI beneficiaries per 100 Covered Workers Number of OASDI Beneficiaries Per 100 Covered Workers 80 70 60 50 Intermediate
Low Cost 30
Source: IV.B2., 2012 OASDI Trustees Report
Long-Range Results, cont. 
Combined trust funds decline beginning in 2021 until exhausted in 2033 
Separately, DI exhausted in 2016  OASI exhausted in 2035  Two to three years earlier than prior projection
Projected OASDI annual cost rate increases from    
13.83% of taxable payroll for 2012 to 17.41% for 2035 to 17.83% for 2086 4.50% of taxable payroll more than the projected 2086 income rate OASDI Income, Cost and Expenditures as Percentages of Taxable Payroll 0.2 0.18 0.16 0.14 0.12
0.06 Expenditures
0.04 0.02 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090
Source: Figure II.D2., 2012 OASDI Trustees Report
Expenditures are benefits payable after trust fund exhaustion in 2033 Copyright © 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Projected OASDI cost relative to GDP increases from: 
5.0% of GDP currently to  6.4% in 2035 and then declines to  6.1% in 2055 and after
OASDI Cost and Non-interest Income as Percentage of GDP 0.07 0.06 0.05 0.04 0.03
Source: Figure II.D4., 2012 OASDI Trustees Report
Summarized Income Rates are the sum of: 
Scheduled payroll taxes;  Income from taxation of scheduled benefits;  Reimbursements from the General Fund; and  The starting trust fund value. 
Expressed as a percentage of taxable payroll
Summarized Cost Rates are the sum of: 
Scheduled benefit payments;  Administrative expenses;  Certain other costs; and  The cost of reaching a target trust fund of 100% of end of period annual cost. 
Actuarial deficit, the difference between the Summarized Income Rate and the Summarized Cost Rate, for the 75-year period is 2.67% of taxable payroll 
Based on Intermediate Assumptions Copyright © 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Change in Long-Range Projections from 2011 Trustees Report 
No changes to ultimate demographic assumptions 
One ultimate economic assumption changed 
Annual rate of change in average hours worked now assumed to decline slightly
Updated starting values and changes in near-term economic growth rate assumptions 
Updated starting values and transition to ultimate assumptions decreased actuarial balance by 0.05% of taxable payroll
0.14% of taxable payroll decrease in long-range actuarial balance
Long-range actuarial balance (the negative of actuarial deficit) expected to: 
Decline by 0.05% of taxable payroll due to change in valuation period  All other changes reduced actuarial balance by another 0.39% of taxable payroll
Additional Resources American Academy of Actuaries Issue Briefs An
Actuarial Perspective on the 2012 Social Security Trustees’ Report
Understanding the Assumptions Used
to Evaluate Social Security’s Financial
Condition Social Security Administration Social Security Office
of the Chief Actuary
2012 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds
Appendix 2012 Trustee Report Assumptions
Demographic Assumptions Fertility Rate Intermediate 2
Low-Cost 2.3
High-Cost 1.7
Source: Table II.C1, 2012 OASDI Trustees Report
Copyright ÂŠ 2012 by the American Academy of Actuaries Social Security Committee Webinar, Nov. 22, 2012 All Rights Reserved.
Demographic Assumptions, cont. Mortality Average annual decrease in mortality Life expectancy in 2090
Source: Table II.C1, 2012 OASDI Trustees Report, Life Expectancy in 2090 - Table V.A3, 2012 OASDI Trustees Report, assuming 50% male, 50% female
Disability Incidence (per 1,000) Intermediate 5.4
Low-Cost 4.4
High-Cost 6.5
Source: Figure V.C3- DI Disability Incidence Rates, 2012 OASDI Trustees Report
Economic Assumptions Real Wage Differential = Wage Growth minus Consumer Price Index Wage Growth Consumer Price Index Real Wage Differential
3.90% 2.80% 1.10%
3.50% 1.80% 1.70%
HighCost 4.30% 3.80% 0.50%
Source: Table II.C1 and Table V.B1, 2012 OASDI Trustees Report
Economic Assumptions, cont. Interest Rate Intermediate 2.90%
Low-Cost 3.40%
High-Cost 2.40%
Labor Force Participation Intermediate 66.80%
Low-Cost 67.10%
High-Cost 66.60%
Source: Section V.B5, 2012 OASDI Trustees Report, assuming 50% male, 50% female
Economic Assumptions, cont. Unemployment Rate Intermediate 5.50%
Low-Cost 4.50%
High-Cost 6.50%
Growth Domestic Product Growth Intermediate 2.40%
Low-Cost 1.50%
High-Cost 3.30%
Source: Table V.B1, 2012 OASDI Trustees Report
Staff Contact David Goldfarb Pension Policy Analyst goldfarb@actuary.org or 202-785-7868
Actuarial_Status_Webinar_Nov-27_2012