Social Security Actuarial StatusThe 2014 Annual Report of the Board of Trustees of the

OASI and DI Trust Funds

Key Results under Intermediate Assumptions

Prepared by the Office of the Chief Actuary, SSA

July 28, 2014

2

What is the Legislative Mandate for the Annual Report?

1) Trust Fund operations of the past year and the next five years

2) Actuarial status of the trust funds– This means the ability to meet the cost of

scheduled benefits with scheduled revenue and trust fund reserves

– And the extent to which scheduled revenue will fall short, forcing cuts or delays in benefits in the absence of legislative change

33

Results for the 2014 OASDI Trustees Report• Actuarial deficit up from 2.72 to 2.88 percent of payroll

– Adding 2088 increases deficit by 0.06 percent of payroll – All other changes and updates increase deficit by 0.10 percent

• Combined OASI-DI Trust Fund reserves depleted in 2033– Same as last year’s projection– With 77 percent still payable after depletion, 72 percent for 2088

• DI Trust Fund reserves alone become depleted in 2016– Same as last year’s projection– With 81 percent still payable after depletion, 80 percent for 2088

• Cost exceeded non-interest income starting in 2010• Cost exceeds total income, including interest, starting in

2020 -- TF reserves grow until then• Unfunded obligation increased from 0.9 to 1.0 percent of

GDP (from $9.6 to $10.6 trillion in present value)

4

SOLVENCY: OASDI Trust Fund Reserve Depletion 2033 — Same as last yearo Reserve depletion date varied from 2029 to 2042 in last 20 reports (1995-2014) o DI Trust Fund — reserve depletion in 2016, same as last year

o 2016 was projected in the 1995 Trustees Report after the 1994 tax-rate reallocation

4

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 20400%

50%

100%

150%

200%

250%

300%

350%

400%

450%

Social Security Trust Fund RatiosAssets as Percent of Annual Cost

Trustees Report Intermediate ProjectionsOASDI 2014TROASI 2014TRDI 2014TROASDI 2013TROASI 2013TRDI 2013TR

Historical

Tax Rate Reallocation

DI

OASDI

OASI

55

OASDI Annual Cost and Non-Interest Income as Percent of Taxable Payroll Persistent Negative Annual Cash-Flow Balance Starting in 2010 77% of scheduled benefits still payable at trust fund reserve depletion

Annual deficit in 2087: 4.85 percent of payroll — 0.08 percent higher than last year

2005 2015 2025 2035 2045 2055 2065 2075 20850%

5%

10%

15%

20%

25%

Calendar year

Cost: Scheduled and payable benefits

Income

Payable benefits as percentof scheduled benefits:2014-32: 100%2033: 77%2088: 72%

Cost: Scheduled but not fully payable benefits

Expenditures: Payable benefits = income after trust fund exhaustion in 2033

66

SUSTAINABILITY: Cost as Percent of GDP Rises from a 4.2-percent average in 1990-2008, to a peak of 6.2%

in 2037, then drops to 6.0% for 2050, back to 6.1% by 2087

1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 20900%

2%

4%

6%

8%

10%

Calendar year

Non-interest Income

Historical Estimated

Cost

77

Following the Ratio of Beneficiaries per 100 Workers

1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 20900

10

20

30

40

50

60

70

80

90

100

Calendar year

Historical Estimated

III

II

I

Projected OASDI Total Income Exceeds Annual Cost until 2020 For a Unified Budget perspective (where trust fund interest is scored to cancel):

non-interest income is less than cost starting in 2010

-200

-150

-100

-50

0

50

100

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Bill

ion

s o

f C

urr

en

t D

olla

rs

OASDI Annual Balances 2014TR 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

8

99

Valuation Period—Changes the actuarial balance by -0.06 percent of payroll

Legislation etc.—Changes actuarial balance by -0.01 percent of payroll

• Expansion of benefits to same-sex married couples (-0.01 percent)

Demographic Data/Assumptions—Changes actuarial balance by +0.04 percent of payroll

• Fertility data lower than expected in 2013 (-0.01 percent)

• New historical divorce data, shift in ages at divorce (+0.02 percent)

• Revised historical population data, smoothing of married population (+0.03 percent)Economic Data/Assumptions—Changes the actuarial balance by -0.10 percent of

payroll

• Lower ultimate average increase in Consumer Price Index (CPI-W) (-0.02 percent)

• Starting values and lower ultimate level of output and taxable earnings (-0.08 percent)

Disability Assumptions—Changes the actuarial balance by +0.02 percent of payroll

• Slightly lower near term incidence rates and updated starting levels of beneficiaries and benefit levels

Methods and Programmatic Assumptions -0.05 percent of payroll

• Labor force model alignment, and other changes

Reasons for Change in 2014 Trustees Report Actuarial Balance—Net Change of -0.16 percent of payroll

1010

Lower Unemployment Rate 2013-16:Contributed to slightly fewer disabled workers

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 20234

5

6

7

8

9

10Civilian Unemployment Rate

2008 TR (no recession)

2013 TR

2014 TR

Slightly Fewer Disabled Worker Beneficiaries Lower Unemployment, Applications, and Allowance Rates

Disabled Worker Beneficiaries In Current Payment Status at End of Year (in thousands)

6,000

7,000

8,000

9,000

10,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

2014 TR

2013 TR

2008 TR (no recession)

11

12

Higher Average Real U.S. Earnings in 2012-16: Revised data

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 20231,000

1,050

1,100

1,150

1,200

1,250Average Real Earnings per Week in the US Economy-2010$

2010 TR

2011 TR

2012 TR

2013 TR

2014 TR

2% higher for 2013 in the 2014TR

1313

Slightly Lower GDP after 2014: Modest 1-percent permanent reduction in level of output

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 202312,000

13,000

14,000

15,000

16,000

17,000

18,000

19,000 GDP Billions of 2005$

2008TR (no recession)

2013TR

2014TR

1414

Changes the actuarial balance by -0.05 percent of payroll

1) Improve alignment of labor force participation rates with future trends in marital status and longevity (-0.05 percent)

2) Disaggregate “other immigrant” population: implications for immigration flows and earnings and employment levels. (between -0.005 and +0.005 percent)

3) Taxation of benefits: increase the ultimate projected ratio of income from taxation of benefits to total benefits. (+0.02 percent)

4) Update programmatic data, including changes in projected OASI beneficiaries and benefit levels over the first 10 years of the projection period. (-0.02 percent)

Methods Improvements/New Program Data in 2014 Trustees Report

Uncertainty IllustrationsAlternatives expanded by reversing CPI assumption;Stochastic– narrowed by immigration model change

unrealistically narrow due to lack of central tendency variation

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2013 2028 2043 2058 2073 208810%

15%

20%

25%

30%2013TR OASDI Annual Cost Rate

Low-CostIntermediateHigh-CostStochastic 2.5%Stochastic 50%

Projection year2014 2029 2044 2059 2074 2089

10%

15%

20%

25%

30%2014TR OASDI Annual Cost Rate

Low-CostIntermediateHigh-CostStochastic 2.5%Stochastic 50%Stochastic 97.5%

Projection year

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Stochastic simulations unrealistically narrow—Example from Actuarial Study 117. Range of cumulative average values for

real average wage growth compresses to zero for long periods

Figure IV.12—Real Average Covered Wage, Calendar Years 1968-2078

Replacement Rates removed from the 2014TRBut OCACT will continue to provide in annual Actuarial Note

17Source: Annual Recurring Actuarial Note #9 at www.ssa.gov/oact/NOTES/ran9/index.html

1940 1960 1980 2000 2020 2040 2060 20800

10

20

30

40

50

60

70

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

Low Earner ($21,054 for2014; 25th percentile)

Medium Earner ($46,787 for 2014; 56th percentile)

High Earner ($74,859 for 2014; 81st percentile)

Max Earner ($117,000 for 2014; 100th percentile)

How About at Age 62,Where Most Start Benefits?

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1960 1980 2000 2020 2040 2060 20800

10

20

30

40

50

60

70

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

Low Earner ($21,054 in 2014; 25th percentile)

Medium Earner ($46,787 in 2014; 56th percentile)

High Earner ($74,859 in 2014; 81st percentile)

Max Earner ($117,000 in 2014; 100th percentile)

Source: Annual Recurring Actuarial Note #9 at www.ssa.gov/oact/NOTES/ran9/index.html

Payable Benefits Under the Law, After Trust Fund Reserves Are Depleted, Are Even Lower

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1960 1980 2000 2020 2040 2060 20800

10

20

30

40

50

60

70

PAYABLE Monthly Benefit Levels as Percent of Ca-reer-Average Earnings by Year of Retirement at age

62

Low Earner ($21,054 in 2014; 25th percentile)

Medium Earner ($46,787 in 2014 56th percentile)

High Earner ($74,859 in 2014; 81st percentile)Max Earner ($117,000 in 2014 100th percentile)

Source: Annual Recurring Actuarial Note #9 at www.ssa.gov/oact/NOTES/ran9/index.html

See also New Actuarial Note #155 Comparing Different Replacement Rate Approaches

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Benefit Replacement Rates for Retired Workers in 2011

0%

20%

40%

60%

80%

100%

120%

12 25 50 56 75 81

Percentile

Last 5 years (with zeros)

5years Non-zero WageIndexed

35years CPI Indexed

35years Wage Indexed

2013 Trustees Report for2013 Entitlement at 63.75

Very Low Low Medium High

infinite 232%

MEDIAN

Source: Actuarial Note #155 at www.ssa.gov/oact/NOTES/pdf_notes/note155.pdf

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Reference in 2014TR to “Budget Perspective” —Reference to Medicare TR

• Caveat and Warning to the Reader---Assumptions inconsistent with trust fund reality, and with the law

1) After reserves deplete, $10.6 trillion unfunded obligation cannot be paid under the law Budget deems these “expenditures” creating public debt

2) Reserve redemptions spend excess “earmarked” revenues invested in an earlier year Budget deems these “a draw on other Federal resources”

3) Trust Fund operations have NO direct effect total Federal debt subject to ceiling in any year—and no net effect on publicly held debt Budget says redemptions increase Federal debt held by the

public and often gives no credit for reserve accumulation

Actual Trust Fund Operations Have No Effect Total Federal Debt,

and No Net Effect on Publicly-Held Debt

Social Security Trust Fund Effect on Federal Debt Measures 1957-2085

-20

-10

0

10

20

30

40

50

60

70

80

1957 1967 1977 1987 1997 2007 2017 2027 2037 2047 2057 2067 2077

Perc

en

t o

f G

DP

Publicly-Held Debt underCurrent Law

Publicly-Held Debt under"Budget Scoring Convention"

Total Federal Debt

Under "Budget Scoring Convention ": Benefits Not Payable under Current Law Are Presumed to Add to

Publicly-Held Debt

Trust Fund Reserves Hold Down Publicly-Held Debt-

All Else Equal Source: Intermediate projections in the 2010 OASDI Trustees Report

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How to Fix Social Security Long-Term

• First: OASI help DI soon---reallocate• Second: make choices for 2033-2088

– Raise scheduled revenue by about 33%: increase revenue from 4.6 to 6.0% of GDP

– Reduce scheduled benefits by about 25%: lower benefits to what 4.6% of GDP will buy

– Or some combination of the two– Invest trust funds for higher return?

• Limited help—it is a PAYGO world• So invest in coming generations of workers

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Ways to Lower Cost • Lower benefits for retirees—not disabled?

– Increase normal retirement age– Can exempt long-career low earners

• Lower benefits mainly for high earners?– Reduce PIA above some level– Like progressive indexing

• Lower benefits mainly for the oldest old?– Reduce the COLA

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Ways to Increase Revenue • Raise tax on highest earners?

– Increase taxable maximum amount– Some tax on all earnings above the maximum

• Tax employer group health insurance premiums?– Affects only middle class if taxable maximum

remains

• Maintain larger trust fund reserves?– Added interest can lower needed taxes

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For More Information Go To----http://www.ssa.gov/oact/pubs.html

• There you will find—– This and all prior OASDI Trustees Reports– Detailed single-year tables for recent reports– Our estimates for comprehensive proposals– Our estimates for the individual provisions– Actuarial notes; including replacement rates– Actuarial Studies; including stochastic– Extensive data bases– Past Congressional testimonies