Actuarial Status and Future Prospects for Social Security

Discussion with Drake University and Iowa Actuaries Club

Stephen C. Goss, Chief Actuary Social Security Administration March 26, 2012

Social Security Financial Situation and Options

1) Social Security’s Role in Retirement Income 2) The Financial Outlook for Social Security 3) Why the Rise in Cost over the Next 20 Years?

4) Options for Getting OASDI in Long-Range Balance 5) Doing It Better This Time 2

1) Social Security’s Role in Retirement Income

 Only one of the three legs of the stool  But is the only leg for about one third of retirees  And is more than half for about two thirds  Defined Benefit, Life annuity, CPI indexed  Efficiency??? Over 99 percent “loss ratio”  What level of retirement income does it provide?

3

1) Social Security’s Role in Retirement Income

70 60 50 40 30 20 10 0 1940

Scheduled Monthly Benefit Levels as Percent of Career-Average Earnings by Year of Retirement at age 65

1960 1980 2000 2020 Low Earner ($19,583 in 2011; 25th percentile) Medium Earner ($43,518 in 2011; 56th percentile) High Earner ($69,629 in 2011; 81st percentile) Max Earner ($106,800 in 2011; 100th percentile) Source: 2011 OASDI Trustees Report 2040 2060 2080 4

60 50 40 30 20 70

1) Social Security’s Role in Retirement Income

Scheduled Monthly Benefit Levels as Percent of Career-Average Earnings by Year of Retirement at age 62

Low Earner ($19,583 in 2011; 25th percentile) Medium Earner ($43,518 in 2011; 56th percentile) High Earner ($69,629 in 2011; 81st percentile) Max Earner ($106,800 in 2011; 100th percentile) 10 0 1960 1980 2000 2020 Source: 2011 OASDI Trustees Report 2040 2060 5 2080

1) Social Security’s Role in Retirement Income

PAYABLE

Monthly Benefit Levels as Percent of Career Average Earnings by Year of Retirement at age 62

70 60 50 40 30 20 10 0 1960 1980 2000 2020 Low Earner ($19,583 in 2011; 25th percentile) Medium Earner ($43,518 in 2011; 56th percentile) High Earner ($69,629 in 2011; 81st percentile) Max Earner ($106,800 in 2011; 100th percentile) Source: 2011 OASDI Trustees Report 2040 2060 6 2080

2) The Financial Outlook for Social Security

150 OASDI Annual Balances 2011TR Intermediate Assumptions: Trust Fund (Off-Budget) Perspective: Total Income minus Total Cost Unified Budget Perspective: Dedicated Tax Income minus Cost Total Income minus Cost Non-interest Income minus Cost Dedicated Tax Income minus Cost 100 50 0 -50 -100 2011 Tax Holiday Effect -150 2010 2011 2012 2012 Tax Holiday Effect 2013 2014 2015 2016 2017 2018 2019 7 2020

2) The Financial Outlook for Social Security

Combined OASDI Reserves Exhaust by 2036; DI Sooner

450% 400% 350% 300% 250% 200% 150% 100% 50% 0% 1990

Social Security Trust Fund Ratios Assets as Percent of Annual Cost Trustees Report Intermediate Projections

Historical OASDI 2011TR OASI 2011TR DI 2011TR OASDI 2010TR OASI 2010TR DI 2010TR 1995 Tax Rate Reallocation 2000 2005 2010

DI

2015 2020

OASDI

2025

OASI

2030 2035 8 2040

2) The Financial Outlook for Social Security

Projected Cost, Income, and Expenditures as Percent of Taxable Earnings

25%

Cost

: Scheduled and payable benefits

Cost

: Scheduled but not fully payable benefits 20% 15% 10% 5% 0% 2005

Income

Payable benefits as percent of scheduled benefits: 2011-35: 100% 2036: 77% 2085: 74%

Expenditures

: Payable benefits = income after trust fund exhaustion in 2036 2015 2025 2035 2045 Calendar year 2055 2065 2075 2085 9

3) Why the Rise in Cost Over the Next 20 Years?

OASDI Cost as Percent of GDP 1975-2085 2011 Trustees Report Intermediate Assumptions

7 OASDI 6 5 OASI 4 3 Baby Boomers reach ages 45-64 in 2010 2 1 DI 0 5 7 9 1 0 8 9 1 5 8 9 1 0 9 9 1 5 9 9 1 0 0 0 2 5 0 0 2 0 1 0 2 5 1 0 2 0 2 0 2 5 2 0 2 0 3 0 2 5 3 0 2 0 4 0 2 5 4 0 2 0 5 0 2 5 5 0 2 0 6 0 2 5 6 0 2 0 7 0 2 5 7 0 2 10 0 8 0 2 5 8 0 2

3) Why the Rise in Cost Over the Next 20 Years?

3.3 workers per beneficiary since 1975; only 2 by 2035----WHY?

Covered Workers Per OASDI Beneficiary

10 9 8 2 1 0 7 6 5 4 3 1940

Program Matures

1960 1980

Demographic Change

2000 2020

Low Cost

2040

High Cost

2060 2080 11

3) Why the Rise in Cost Over the Next 20 Years?

Not mortality improvement after 2010-----something else

0.45

Aged Dependency Ratios, 2011 Social Security Trustees Report Intermediate projection compared to no mortality improvement after 2010

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0.00

1975 1980

Aged dependency ratio

1985 1990 1995 2000

Year

2005 2010

Intermediate Projection

2015 2020

No increase in Life expectancy after 2010

2025 2030 12

3) Why the Rise in Cost Over the Next 20 Years?

Shift in Birth Rate from almost 3 per Woman to Just 2 Since 1975

U.S. Total Fertility Rate: With and Without Adjustment for Survival to Age 10 5 4 TFR 3 AdjTFR 2 1 Ave TFR Ave AdjTFR 1875-1925 3.67 2.85

1926-1965 2.84 2.69

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 13 2005

4) Options for Getting OASDI in Long-Range Balance Ultimately—reduce benefits 25%, increase income 33%, or some combination!!

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



When 2 workers pay same $341 each, then average retiree apparently gets $682 per month, or 32% less. But shortfall after 2040 is 25%, NOT 32%, because 1) NRA increases again under PL 2) Revenue from tax on benefits is rising 3) Average benefit rises slower than average earnings with increasing longevity---more COLAs put benefits further below the general standard of living of current workers

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4) Options for Getting OASDI in Long-Range Balance Recent Commissions and Congressional Proposals



Raise Payroll tax at the top---increase the $110,100 taxable maximum



Raise Revenue on the middle---make employer-sponsored group health premiums taxable



Reduce benefits for retirees and not disabled---increase normal retirement age



Exceptions for long career low earners?



Reduce benefits for all, or most---reduce the benefit formula factors



Can make reductions only, or mainly for higher average earners



Lower benefits mainly for the oldest old---reduce the COLA



Ultimately our elected representatives will decide



What benefits---at what cost

 for complete list of options and plans:

http://www.ssa.gov/OACT/

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5) Doing It Better This Time Congress has always acted in time---but we can do better Social Security Trust Fund Assets (end of year) 1957-2009

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

1957

Payroll Tax Rate rises from 6% in 1961 to 9% in 1971 as Program Matures 1977 Amendments 1983 Amendments 1972 Amendments

1962 1967 1972 1977 1982 1987 1992

Trust Fund Assets Build, Holding Down Publicly Held Debt

1997 2002 2007 16

5) Doing It Better This Time

The 1983 Amendments extended Trust Fund Solvency But scheduled benefits were not sustainable with the scheduled taxes

Sustainable Solvency---The Solution

Requires solvency through 75 years---AND Reserves stable as percent of Program Cost in 75 th year Developed in 1994-6 in response to 1983 Amendments 1994-6 Advisory Council, and Bob Kerry and Alan Simpson This Challenge has been addressed by virtually every proposal since 1995 17

5) Doing It Better This Time —encourage delayed benefits Social Security Retired Worker Monthly Benefit with PIA of $1,000 Per Month

Age 62 63 64 65 66 67 68 69 70 75 80 85 90 95 100 105 62 $750 $750 $750 $750 $750 $750 $750 $750 $750 $750 $750 $750 $750 $750 $750 $750 63 $800 $800 $800 $800 $800 $800 $800 $800 $800 $800 $800 $800 $800 $800 $800 64 $866 $866 $866 $866 $866 $866 $866 $866 $866 $866 $866 $866 $866 $866 Present Value at Age 62 $153,170 Female born 1950 Real interest 2.9% $153,622 $156,111 Office of the Chief Actuary/SSA February 22, 2012 65 Age When Benefits Start 66 67

CPI-indexed dollars

$933 $933 $933 $933 $933 $933 $933 $933 $933 $933 $933 $933 $933 $157,619 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $158,031 $1,080 $1,080 $1,080 $1,080 $1,080 $1,080 $1,080 $1,080 $1,080 $1,080 $1,080 $159,344 68 $1,160 $1,160 $1,160 $1,160 $1,160 $1,160 $1,160 $1,160 $1,160 $1,160 $159,453 69 $1,240 $1,240 $1,240 $1,240 $1,240 $1,240 $1,240 $1,240 $1,240 $158,450 70 $1,320 $1,320 $1,320 $1,320 $1,320 $1,320 $1,320 $1,320 $156,424 18

Best Use of Personal Savings and DC Accumulation?

Four Options for $500,000 at 65: Annual Income and Remaining Assets at Death

$500,000 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 65 Option 4: Buy 20-Year Deferred Annuity at 65 and Spend to 84; $28,492/year Option 2: Buy Life Annuity at 65; $32,669/year 70 75 80 Option 3: Spend to 84 then Buy Annuity at 85; $26,014/year 85 90

Age at Death

Option 1: No Annuity--Spend to Last to Age 110; $19,447/year 95 100 105 19