Social Security

An Actuarial Perspective on the 2018 Social Security Trustees Report

Providing a basis for discussions of Social Security’s financial problems and its solutions

New research from the American Academy of Actuaries. Read the entire report here.

The American Academy of Actuaries’ has published its latest issue brief, An Actuarial Perspective on the 2018 Social Security Trustees Report, providing useful, accessible explanations of the takeaways and key technical definitions and conclusions in the 2018 Social Security Trustees Report. The Social Security Trustees Report is a detailed annual assessment that serves as a basis for discussions of Social Security’s financial problems and their solutions. Social
Security’s chief actuary prepares and certifies the financial projections for the Old-Age, Survivors, and Disability
Insurance program, under the direction of the Social Security Board of TrusteesBecause future events are inherently uncertain, the report contains three 75-year financial projections to illustrate a broad range of possible outcomes.

These projections, each based on a different set of assumptions, are referred to as intermediate, low-cost, and high-cost. The report also provides a sensitivity analysis for key assumptions and a projection based on a probability model (i.e., a stochastic forecast). The trustees consider the intermediate projection to be their best estimate. All information in this issue brief is based on the intermediate projection, unless otherwise noted.

When trust fund reserves are depleted, tax income will be sufficient to provide about 75% to 80% of the scheduled benefits. The Social Security Trustees Report quantifies the value of the benefit and/or tax changes required to restore actuarial balance. Any changes would require congressional action. Failure to act would likely cause a delay in some benefit payouts, which, if not corrected by subsequent congressional action, could result in benefit reductions. However, it should be noted that there is no precedent and no legislative guidance for what would happen if reserves are fully depleted.

Overview of Financial Status

The report provides separate measures and tests for solvency in the short range and in the long range. Our discussion of the short-range estimate includes details about the progression of the financial status from last year to this year. Our discussion of the long-range estimate includes an analysis detailing the conclusion that income will not be sufficient to pay for scheduled benefits in the long run. The two periods (short-range and long-range) are discussed separately below. The test of short-range financial adequacy for a trust fund is met if, based on the intermediate assumptions, (1) the estimated trust fund ratio is at least 100 percent at the beginning of the period and remains at or above 100 percent throughout the 10-year short-range period or (2) the ratio is initially less than 100 percent, reaches at least 100 percent within five years (without reserve depletion at any time during this period) and remains at or above 100 percent throughout the remainder of the 10-year short-range period.

Short-Range Estimates, 2018–2027
Short-range financial adequacy is measured separately for the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) programs, as well as for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) trust funds. The trustees have adopted a test for short-range financial adequacy1 based on projected trust fund ratios. (A
trust fund ratio is the ratio of the trust fund assets at the beginning of the year to the benefits payable during the year.) The OASI fund and the combined OASDI fund meet the short-range financial adequacy test while the DI fund fails the test.
Social Security’s short-range OASDI financial projection is worse than the projection made a year ago. The OASDI trust fund ratio is expected to drop from 288 percent at the beginning of the projection period to 137 percent in the 10th year of
the projection period. Last year, the projected OASDI fund ratio in the 10th year was 165 percent. The total change in the projected 10th-year trust fund ratio is a decline of 28 percentage points (165 percent declining to 137 percent). Moving the short-range estimate period one year forward alone caused a decline of 18 percentage points. A reconciliation of the changes in the projected 10th-year trust fund ratio from last year to this year is shown on the next page.

The combined Social Security trust fund reserves are projected to become depleted during 2034, the same year as projected in last year’s report. If changes to the program are not implemented by that date, only 79 percent of scheduled benefits would be payable after 2034, declining to 74 percent by 2092

  • Moving the short-range estimate period forward one year reduced the fund ratio by 18 percentage points
  • Changes in economic data and assumptions reduced the fund ratio by 16 percentage points.
  • Effect of Tax Cuts and Jobs Act of 2017 and assumed discontinuance of the Deferred Action for Childhood Arrivals (DACA) policy reduced the fund ratio by 5 percentage points
  • Changes in demographic data and assumptions increased the fund ratio by 2 percentage points
  • Changes in programmatic data and assumptions increased the fund ratio by 9 percentage points

Trust Fund Asset Reserves

Any excess of tax income over outgo is recorded as an asset reserve of the Social Security trust funds. These trust fund asset reserves are held in special U.S. Treasury securities that totaled $2.9 trillion at the end of 2017 and represent the government’s commitment to repay the borrowed funds whenever Social Security needs the money. For the first time since 1982, trust fund asset reserves are expected to decrease during the next year. Trust assets are projected to decrease by $1.7 billion during 2018 (total income including earnings on trust fund assets is projected to be less than benefit payments during 2018) and then are projected to continue to decline throughout the remainder of the short-range estimate period and beyond. Income and Cost Figure 1 above shows the excess/(deficit) of income over cost since 1975.

The excess of income over cost has created the current $2.9 trillion in trust fund asset reserves. Starting in 2018, the OASDI trust fund is projected to begin a decline until exhaustion. The current Social Security Trustees Report projects the OASDI trust fund to be depleted in 2034 under the intermediate assumptions. Long-Range Estimates, 2018–2092 Long-range estimates are based on a 75-year projection that covers the future lifetimes of nearly all current participants (those paying payroll taxes and those already retired) along with future expected participants in the program. The estimates show that, beginning in 2034, trust fund asset reserves are projected to be depleted and the system is expected to revert to a fully pay-as-you-go (PAYGO) system. This date is the same as shown in last year’s report. After reserves are depleted in 2034, Social Security income will be sufficient to pay 79 percent of scheduled benefits initially. This ratio decreases to 74 percent by 2092.

Report Shows OASDI Trust Fund Depleted in 16 Years and Social Security’s Financial Soundness Should Be Addressed Now

The 2018 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance (OASI) and Federal Disability Insurance (DI) Trust Funds highlights that:

  • The combined Social Security trust fund reserves are projected to become depleted during 2034, the same year as projected in last year’s report. If changes to the program are not implemented by that date, only 79 percent of scheduled benefits would be payable after 2034, declining to 74 percent by 2092.
  • In 2018, OASDI trust expenditures are expected to exceed income for the first time since 1982 and the combined OASDI trust fund balance is projected to decrease each year until depletion in 2034. In last year’s report, the first year where expenditures were projected to exceed income was 2022.
  • To keep Social Security fully solvent for the next 75 years (using the intermediate assumptions), an immediate increase of 2.78 percentage points in the payroll tax rate or an immediate decrease of about 17 percent of benefits for all current and future beneficiaries, or some equivalent change, is required. The analogous numbers from last year’s report were a 2.76 percentage-point increase in the payroll tax rate and a 17 percent decrease in all benefits. (These payroll tax rates differ slightly from the actuarial deficits shown in the table to the right because they assume a trust fund balance of zero at the end of the period, while the amounts in the table include a reserve equal to one year of benefit payments.)
  • In 2018 there are 2.8 workers supporting each beneficiary. By 2035, the trustees project there will be 2.2 workers supporting each beneficiary. The aging of the Baby Boom generation followed by lower birthrate generations will continue to strain the OASDI system in the foreseeable future.
  • Due to the Tax Cuts and Jobs Act and the rescission of the Deferred Action for Childhood Arrivals (DACA) policy, both in 2017, there is a net negative effect on the OASDI program over the short-range projection period and a negligible effect over the long range projection period.

Read the entire report here.