SOCIAL SECURITY: HOW BIG IS THE FINANCING PROBLEM, AND HOW CAN WE - PowerPoint PPT Presentation

SOCIAL SECURITY: HOW BIG IS THE FINANCING PROBLEM, AND HOW CAN WE PAY FOR WHAT WE WANT? NASI Academy for Interns, July 22, 2010 Presented by Stephen C. Goss, Chief Actuary Social Security Administration

What We Need to Know  (1) System – What it is, what it does, how it works  (2) Solvency – Benefits payable in full on a timely basis  (3) Sustainability – What Americans want---cost versus benefits  (4) Solutions – Options to balance income and outgo 2

(1) System: What it is  Retirement and survivor benefits start 1940  Eligible age lowered 65 to 62 in 1957F/1962M – Full retirement age rises 65 to 67 by 2022  Disability benefits started in 1957  Benefits rise with average wage across generations --- but with CPI after eligible  Payroll taxes roughly pay-as-you go – Rose from 2% to 12.4% as system matured 3

(1) System: What it is Basic level of monthly benefits for aged, disabled, survivors Scheduled Monthly Benefit Levels as Percent of Career- Average Earnings by Year of Retirement at age 65 70 60 Low Earner ($19,553 in 2010; 25th percentile) 50 40 Medium Earner ($43,451 in 2010; 56th percentile) High Earner ($69,522 in 2010; 81st percentile) 30 Max Earner ($106,800 in 2010; 100th 20 10 Source: 2009 OASDI Trustees Report 0 1940 1960 1980 2000 2020 2040 2060 2080 4

(1) System: Trust Fund Financing  OASI, DI and HI cannot borrow Trust Funds enforce long-term budget neutrality Total spending to date cannot exceed income to date  Current OASDI Assets (excess income) $2.5 trillion Available to augment tax income when needed Treasury swaps trust-fund debt for publicly-held debt Total debt subject to limit not affected  If Trust Funds Exhaust in 2037 under current law? – Spending is limited----NO annual budget deficit 5

(1) System: Trust Fund Financing Social Security Cost and Expenditures as Percent of Payroll 25% Cost: Scheduled but Cost: Scheduled and not payable benefits 20% payable benefits 15% Income 10% Expenditures: Income = payable Payable benefits as percent benefits starting in the year the of scheduled benefits: trust funds are exhausted (2037) 2009-36: 100% 5% 2037: 76% 2083: 74% 0% 2005 2015 2025 2035 2045 2055 2065 2075 2085 Calendar year 6

(2) Solvency: Ability to Pay Benefits Solvent as long as Trust Funds have assets Trust Fund Ratios under Intermediate Assumptions 450 400 350 2008 TR 300 2009 TR 250 OASDI Combined 200 2008 TR 150 2009 TR 100 DI 50 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 7

(2) Solvency: Ability to Pay Benefits  If Assets exhaust in 2037, then by Law--- – only 75% of scheduled benefits are payable  Has this ever happened????? – NO. Trust Fund exhaustion forces action » 1977 and 1983 Social Security Amendments  Does “negative cash flow” force action? – Consider History 8

(2) Solvency: OASDI Net Cash Flow Past Social Security Net Cash Flow 1957-2009 1.0 0.8 Payroll Tax Rate rises from 6% in 1961 0.6 to 9% in 1971 1983 as Program Matures Percent of GDP 1977 Amend 0.4 Amend ments ments 0.2 0.0 1972 -0.2 Amend ments -0.4 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 9

(2) Solvency: OASDI Net Cash Flow Future Social Security Net Cash Flow 1957-2085 1.0 0.5 Percent of GDP 0.0 Trust Funds Redeemed to Pay Benefits: Replaced by Benefits Not -0.5 Publicly Held Payable under Debt Current Law -1.0 -1.5 1957 1967 1977 1987 1997 2007 2017 2027 2037 2047 2057 2067 2077 10

(3) Sustainability: Two Meanings  First: – Clearly scheduled benefits NOT sustainable with scheduled income  Second: – Current program structure IS sustainable with adjustments – Or structure can be modified – Sustainable is what Americans want and are willing to pay for 11

(3) Sustainability: Cost for Scheduled Benefits Social Security Scheduled Cost as Percent of GDP 12

(3) Sustainability: Why has cost gone up 3.3 workers per beneficiary since 1975; just 2 after 2030 Covered Workers Per OASDI Beneficiary 10 9 8 7 Demographic Change 6 5 4 Low Cost 3 Program Matures 2 1 High Cost 0 1940 1960 1980 2000 2020 2040 2060 2080 13

(3) Sustainability: Effect of fewer workers per beneficiary  An Example – Average Retiree benefit is about $1,000/month – 3.3 workers sharing pay $300 each – But if 2 workers share they pay $500 each – Or if 2 workers pay $300 each » Then average retiree gets $600 per month 14

(3) Why the Shift?: We are an “Aging” society; Not from living longer, but fewer Births Total and Aged Dependancy Ratios, 2009 Social  s Security Trustees Report Intermediate projection compared to no mortality improvement after 2008 1.00 0.90 Intermediate Projection 0.80 TOTAL dependency ratio No increase in 0.70 Life expectancy Dependancy Ratio after 2008 0.60 0.50 0.40 Intermediate Projection 0.30 No increase in AGED dependency ratio 0.20 Life expectancy after 2008 0.10 0.00 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Year 15

(3) Sustainability: Permanently fewer Births, shift age distribution for the future U.S. Total Fertility Rate: With and Without Adjustment for Survival to Age 10 5 4 TFR 3 AdjTFR 2 Ave TFR Ave AdjTFR 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 16

(3) Sustainability: We are an “Aging” society; Longer life---gradual effect after 2030 Total and Aged Dependancy Ratios, 2009 Social Security Trustees Report Intermediate projection compared to no mortality improvement after 2008 1.00 0.90 Intermediate Projection 0.80 No increase in Life expectancy after 2008 0.70 Dependancy Ratio TOTAL dependency ratio 0.60 0.50 Intermediate Projection 0.40 0.30 No increase in Life expectancy after 2008 0.20 AGED dependency ratio 0.10 0.00 1975 1985 1995 2005 2015 2025 2035 2045 2055 2065 2075 2085 Year 17

(4) Solutions: Get Sustainable Solvency, or at least make progress  Eliminate 2.00% Actuarial Deficit (0.7% GDP)  Sustainable Solvency– Stable Trust Fund Ratio – Largely reduce the 2083 annual deficit » 4.34% of payroll, 1.45% of GDP  BUT, Sustainability is about timing and trend – Meet or reduce obligations when shortfalls occur  Enact soon with changes implemented later – Gradual changes with time for planning 18

(4) Solutions: No Need to “Bend” the Cost Curve (% of GDP) for Social Security 12% HI + SMI (including Part D) 10% Historical Estimated 8% 6% OASI + DI 4% 2% 0% 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 Calendar year 19