Summer Summit 07142014 GossWade

The Aging of America:
Implications for Social
Security, etc.
American Academy of Actuaries Summer Summit
Presented by Steve Goss, Chief Actuary &
Alice Wade, Deputy Chief Actuary
Social Security Administration
July 14, 2014


Developed nations are “aging”
◆

“Macro Aging”
Shift to older age distribution, because
Lower birth rates
Fewer working age per elder

◆

“Micro Aging”
People are living longer
Lower death rates
Higher life expectancy

◆ Different

Challenges—Different
Solutions---Consider the U.S.
2

Macro Aging results from the drop in Birth Rates
after 1964—Had Birth rates stayed at 3.0 or 3.3---

3


Macro Aging has already affected disability
ages, and is poised to affect retirement ages

4


Implications of “Macro Aging”
◆

It is a Pay-As-You-Go World
– In the aggregate; consumption = production

◆

Consider drop in birth rate from 3 to 2
– The older age distribution requires:

◆

» Elders consume less--2/3 as much,
» Working age share more---3/2 as much,
» Get elders to work a lot longer---5 years,
» Or some combination

The old promise of capital deepening
– We are NOT closed economies

5


Cause of “Micro Aging”
Declining death rates

6


Implications of “Micro Aging”
Rising Life Expectancy

7


Implications of “Micro Aging”
◆

Most people are not saving enough
– Desire/need to “consume now”

◆

Those who are saving do NOT annuitize
– We have succeeded too well on accumulation?

» Once accumulated, people won’t give it up

– Annuities are not valued or understood

» Fear of getting run over by a truck
» Commercial annuities are expensive
» Ford and GM now offering lump sum options
» Even Social Security delayed retirement does not attract
8


Implications for Social Security


Micro aging”- increased longevity
 Gradual and manageable effects



“Macro aging”- changing age distribution due to drop in birth
rates
 Major abrupt shift with no obvious solution



Different challenges: different solutions

9


Potential for 23% Benefit Reduction Will Force Action
Need to reduce cost 25% or increase revenue 33%

OASDI Annual Cost and Non-Interest Income as Percent of Taxable Payroll

10


“Micro Aging” Solution
◆

For the “micro aging” challenge, increase the Social
Security normal retirement age to maintain the ratio
of expected retirement duration to potential work
years:
LE(NRA) / (NRA – 20) = constant





For pay-as-you-go system, this makes financial status
neutral under increasing life expectancy
We estimate this index results in increasing the NRA
one month every two years after 2022
Saves18 percent of our long-term financing shortfall
Can hold low earners harmless—Simpson/Bowles
11


“Macro Aging” Solutions: Many Choices
◆

◆

◆

Raise Scheduled Revenue
•
Increase payroll tax rate
•
Increase taxable maximum
•
Increase revenue from taxation of benefits
•
Find other sources of revenue, expand coverage
Lower Scheduled Benefits
•
Change benefit formula
•
Reduce benefits for dependents
•
Reduce cost of living adjustments
Benefit Adequacy
•
Increase benefits for lower income by establishing a minimum benefit
•
Increase benefits for widows and widowers, childcare credits, student
benefits, increase benefits for oldest

12

Solutions: Raise taxable maximum for 90%
intended of the early 1980’s. Or Higher like HI


Solutions Adjust the Benefit Formula:
formula shown for those newly eligible in 2014

Can
change
bend
points or
formula
factors

14


Call for Action
◆

Decide what the American public wants

◆

No action – automatic benefit cuts

◆

Enacting Change Relatively Soon





More advance notice
Gradual change
More options

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Learn more about the current program & the future
financial challenges at: