SSI Reform: Ticking Clock or Ticking Bomb?

Actuaries warn time is the enemy of fixing Social Security’s financial challenges

by Donald Fuerst, MAAA, EA, FSA, FCA, MSPA

In testimony I gave before a congressional subcommittee last year, I said that Social Security is a major component of the financial security for the elderly. When I made that statement before the Social Security Subcommittee of the U.S. House Ways and Means Committee, one could say, in a sense, that I advised members of Congress as a “client” that this “product” is suitable to help meet the financial needs of beneficiaries in old age, and particularly as an anti-poverty measure (which was the central purpose of the program as conceived at its inception).

The promise of Social Security’s suitability for this purpose is one that I or any “advisor” aiming to help current or future elderly beneficiaries could make and stand by today. Yet for each year that passes without addressing the old-age program’s long-term financial challenges, such as this past year, that promise becomes less tenable. Absent reform, two facts are slowly converging over time to present a real threat to the solemn promises that the program represents.

The first fact is demographic

According to Social Security’s actuaries, several changes in the population will drive the program in its present form toward a future imbalance that makes it impossible to pay retired-worker benefits as they are promised today. Benefit payments are increasing as more workers retire and live longer than previous generations. But Social Security’s revenue, our tax payments, grows less rapidly as fertility rates have dropped and slowed the growth of income to the system. According to current projections, in 2033 the program will no longer generate enough revenue to pay full retirement benefits in a timely fashion.

The second fact is political

he more time that passes without reform, the more difficult it will become to solve the program’s financial challenges incrementally, i.e., in a way that prevents “shocks” like hefty benefit cuts or tax increases, or changes in benefit eligibility for those who are close to the age they expected to be able to claim full retirement benefits. Delaying reform has the unfortunate effect of making it increasingly more difficult for elected officials to responsibly address these challenges.

These demographic and political realities are a slowly closing pincer, imperceptibly driving the old-age benefit program toward a reckoning that is becoming ever harder to prevent. The good news is that there’s time to escape from the pincer, if Congress acts now. Gradual, more politically palatable reforms could be enacted now and save the program from the pincer for several generations.

The fact that Social Security is not at imminent risk of insolvency is assuring for the present, but also can mask an unsettling truth about the future. Actuarial tests clearly show that changes are necessary to preserve the long-term financing of the program. In my testimony last year, I explained to members of Congress that the path to assuring retired workers of meaningful, predictable old-age benefits involves taking action to establish “sustainable solvency” – i.e., a solvent program with stable trust fund reserves — beyond 2033 and through the next 75 years.
The American Academy of Actuaries’ Social Security Committee recently provided an update on the financial condition of Social Security based on the 2013 trustees report, and possible changes that could help put the program on a path toward sustainable solvency.

The committee’s 2014 monograph, Social Security Reform Options, available at www.actuary.org, offers Congress a comprehensive menu of options and an essential discussion of the implications of each option. The options include:

• Raising the full retirement age to reflect increased longevity since the Social Security program was enacted;
• Making changes within the current structure to increase the revenue of the system, such as increasing the payroll tax or the limit on taxable earnings or investing in securities markets;
• Making changes within the current structure to slow the growth of benefit payments, such as modifying the cost of living increases or means testing of eligible beneficiaries; and
• Establishing mandatory or voluntary individual investment accounts, and options for annuitization.

Each of these options, plus the many others that the monograph explores, contains upsides and downsides, but the American Academy of Actuaries sees one option as a critical element in any reform package that could reasonably be expected to achieve sustainable solvency: Raising the full retirement age.

Need for Change

Why is a change in the full retirement age — the earliest age at which an individual can receive unreduced old-age benefits — necessary? When the new Social Security Administration began paying monthly retired-worker benefits in 1940, the full retirement age was 65. At that time, workers who survived to age 65 had a remaining life expectancy of 12.7 years for males and 14.7 years for females. In 2011, life expectancy at age 65 was 18.7 years for males and 20.7 years for females, an increase of six full years for males and females.

It’s easy to see why this creates a financial problem. Any increase in longevity among the elderly population without a corresponding change in the full retirement age actually constitutes an increase in the amount of lifetime benefits paid. The need to address the de facto benefit increases associated with increased longevity was last recognized in the 1983 Social Security reforms, which gradually increased the full retirement age to 67.

The continuation of this longevity trend necessitates further adjustments to the full retirement age (along with other changes!). Under the Social Security actuaries’ intermediate projection, future life expectancy is projected to increase about one year per decade. In 20 years, life expectancy at age 65 for males is expected to be more than 20 years and more than 22 years for females. The lifetime benefit increases that this continuing trend represents are unsustainable.

There are other good reasons to address Social Security’s long-term financial challenges by raising the full retirement age. It encourages workers to remain a productive part of our economy. It also addresses the financial challenges associated with longevity without having to modify the current benefit formula, and does not reduce disabled-workers’ benefits.

Raising the full retirement age is a critical part of ensuring that the promise of Social Security endures. Several possible approaches to raising the full retirement age have been suggested including: fixed-schedule increases; increases indexed based on years in retirement; increases indexed based on ratio of retirement to working years; and increases indexed to maintain actuarial balance.

Actuaries have done a service by pointing out Social Security’s long-term financial challenges before demographic and political realities force drastic, unpalatable reforms. There’s still time before the pincer closes to prevent the promise of retired-worker benefits from being diminished. What remains to be seen is whether we can summon the will to act before it’s too late.