Its Not Just for Pension Actuaries What Every Actuary Should Know - PowerPoint PPT Presentation

It’s Not Just for Pension Actuaries What Every Actuary Should Know About Social What Every Actuary Should Know About Social Security Funding Session G-3 Tuesday, November 8, 2011 Janet M. Barr, ASA MAAA EA Stephen C Goss ASA MAAA Stephen C. Goss, ASA MAAA Steven G. Lehmann, FCAS MAAA FSA FCIA Thomas S. Terry, FSA MAAA FCA EA 1

• Long-term—Actuarial deficit increased from 1.92 g to 2.22 percent of payroll due primarily to new demographic data and methods • Combined OASI-DI Trust Fund exhausts 2036 (1 yr earlier) • Cost exceeds non-interest income permanently 2010+ • Cost exceeds total income starting 2023 (2 years earlier) • Near-term—Slightly slower economic recovery but longer delay in recovery of earnings levels b l d l i f i l l • DI trust fund exhaustion still projected for 2018 2

Social Security Trust Fund Ratios Assets as Percent of Annual Cost Trustees Report Intermediate Projections 450% Historical 400% OASDI 2011TR OASDI 2011TR OASI 2011TR DI 2011TR 350% OASDI 2010TR OASI 2010TR 300% DI 2010TR 250% OASI 200% OASDI 150% 100% DI 50% 50% Tax Rate Reallocation 0% 3 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 3

25% Cost : Scheduled and Cost : Scheduled but not payable benefits fully payable benefits 20% payroll 15% of taxable Income 10% Expenditures : Payable benefits = income Payable benefits as percent after trust fund exhaustion in 2036 of scheduled benefits: % o 2011-35: 2011-35: 100% 100% 5% 5% 2036: 77% 2085: 74% 0% 2005 2005 2015 2015 2025 2025 2035 2035 2045 2045 2055 2055 2065 2065 2075 2075 2085 2085 Calendar year 4 4

• Reform options to protect the program’s solvency include: include: • Raising the Social Security normal retirement age • Raising the taxable wage base • Changing the benefit formula • Full Unreduced Benefit for those newly eligible in 2011 •90% of first $749 of monthly average earnings (AIME) •32% of AIME in excess of $749 and less than $4 517 32% of AIME in excess of $749 and less than $4,517 •15% of AIME in excess of $4,517 • Changing the cost-of-living adjustments g g g j 5

U.S. Total Fertility Rate: With and Without Adjustment for Survival to Age 10 y j g 5 4 4 TFR 3 AdjTFR AdjTFR 2 Ave TFR Ave AdjTFR 1875 1925 3.67 2.85 1875-1925 3.67 2.85 1926-1965 2.84 2.69 1 1966-1990 1.99 1.95 1991-2003 2.01 1.99 0 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 6 6

3.3 workers per beneficiary since 1975; just 2 after 2030 Covered Workers Per OASDI Beneficiary 10 9 9 8 7 Demographic 6 Change Change 5 4 Low Cost 3 Program 2 2 Matures 1 High Cost 0 1940 1940 1960 1960 1980 1980 2000 2000 2020 2020 2040 2040 2060 2060 2080 2080 7 7

It’s All About Demographics • Average retiree benefit is about $1,000/month • 3.3 workers have been sharing cost of $300 each • But paid 13.6% over cost 1990-2008, $341 each • By 2030 just 2 workers for each beneficiary • Future benefits will already be reduced another 9% • For NRA and COLAs for more years F NRA d COLA f So ultimately-reduce benefits by another 25%, increase income 33%, or some combination! , 8

Period Life Expectancy at 65 p y 24 22 20 Female 18 2011TR2011TR 2011TR 2010TR 16 2009TR 2009TR Male 2008TR 14 12 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 9 9

Aged Dependency Ratios, 2011 Social Security Trustees Report T t R t Intermediate projection compared to no mortality improvement after 2010 0.45 Intermediate Projection 0.40 0.35 ency Ratio No increase in Life expectancy after 2010 0.30 0.25 ged Depende Aged dependency ratio d d d i 0.20 0.15 A 0.10 0.05 0.00 1975 1975 1985 1985 1995 1995 2005 2005 2015 2015 2025 2025 2035 2035 2045 2045 2055 2055 2065 2065 2075 2075 2085 2085 Year 10 10

• Some believe that assumptions used to value Some believe that assumptions used to value Social Security are too conservative • Low cost scenario assumes every assumption is Low cost scenario assumes every assumption is most optimistic in range of realistic • Assumptions are compared against experience • Assumptions are compared against experience every year and revised as appropriate • Panel of demographers statisticians actuaries is • Panel of demographers, statisticians, actuaries, is convened every 4 years to review assumptions and ranges and ranges 11

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OASDI Annual Balances 2011TR Intermediate Assumptions: Trust Fund (Off-Budget) Perspective: Total Income minus Total Cost T t F d (Off B d t) P ti T t l I i T t l C t Unified Budget Perspective: Non-Interest Income minus Cost 150 Total Income minus Cost Non-interest Income minus Cost 100 nt Dollars 50 ns of Curren 0 -50 -50 Billion -100 -150 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 13 13 13

Social Security Effect on Annual Budget Balance Measures 1957-2085 1.0 Unified-Budget Effect Equals OASDI Net Cash Flow 0.5 0.5 On-Budget Effect is Zero under Current Law GDP 0.0 Percent of G -0.5 Under "Budget Scoring Convention Benefits NOT Convention" Benefits NOT Payable under Current Law Are Assumed to Add -1.0 to Unified Budget Deficit -1.5 1957 1967 1977 1987 1997 2007 2017 2027 2037 2047 2057 2067 2077 14 14

SUSTAINABILITY: Cost as Percent of GDP rises from a 4.4 percent average 1990-2008, to a peak of 6.2 percent in 2035, then roughly stabilizes between 5.9 and 6 0 percent after 2050 and 6.0 percent after 2050. 10% Historical Historical Estimated Estimated 8% Cost 6% 6% Non-interest Income 4% 2% 0% 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 15 15 Calendar year 15

Scheduled Benefit Levels as Percent of Career-Average including Annual Scheduled Benefits in 2011 Earnings by Year of Retirement at age 65 70% $10,398 60% Low Earner ($19,583 in 2011; 25th Low Earner ($19 583 in 2011; 25th percentile) 50% $17,134 Medium Earner ($43,518 in 2011; 56th percentile) 40% High Earner ($69,629 in 2011; 81st percentile) 30% $22,717 $27,004 Max Earner ($106,800 in 2011; 100th 20% percentile) til ) 10% Source: 2011 OASDI Trustees Report 0 0 1940 1960 1980 2000 2020 2040 2060 2080 16 16

Trust Fund • Consists mostly of payroll taxes, plus revenue C i t tl f ll t l from taxation of benefits • Accumulates with interest • Accumulates with interest • Legally can only be used to pay Social Security benefits and administrative expenses p • Only source of money available to pay benefits • Invested in U.S. Government Securities • Creditor relationship is no different than other creditor relationships 17 17

• F Formula for a Ponzi Scheme l f P i S h • Pyramid; exponentially increasing number of participants is need to pay beneficiaries • Madoff; false high rates of return promised • Formula for a Pay-as-you-go System • Each generation pays during their work years what is E h i d i h i k h i needed for current beneficiaries • B x number of beneficiaries = C x number of workers • Social Security Equation of Balance • Cannot borrow! So cumulative income is always at least cumulative expenditures least cumulative expenditures 18 18

• “Maximum Transition Cost” for Social Security (like plan termination liability) is $17.4 trillion • (Irrelevant for a PAYGO System!) • Total US stock market is < $13 trillion • Would require government ownership of private industry, and then some! p y, 19 19

Effect of Immigration • Increased Immigration helps Social Security I d I i ti h l S i l S it financing • OACT immigration assumptions and effect on deficit: OACT immigration assumptions and effect on deficit: Scenario Average Annual Deficit Net Immigration Low Cost 1,385,000 -2.01 Intermediate 1,075,000 -2.22 High Cost 785,000 -2.44 • Higher birth rates for recent immigrants • Other than legal pay into Social Security and do • Other-than-legal pay into Social Security and do not receive benefits. 20 20

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22 22 It’s Not Just for Pension Actuaries Questions