1. Social Security:
Part I. The System, Solvency,
I System Solvency
and Sustainability
Presented by Stephen C. Goss, Chief Actuary
Social Security Administration, May 12, 2010

2. What We Need to Know
 (1) System
– What it is, what it does, how it works
 (2) Solvency
– Benefits payable in full on a timely basis
 (3) Sustainability
– What Americans want---cost versus benefits
 (4) S l ti
Solutions
– Options to balance income and outgo
2

3. (1) System: What it is
Basic level of monthly benefits for aged, disabled, survivors
Scheduled Monthly Benefit Levels as Percent of Career-
Average Earnings by Year of Retirement at age 65
70
60
Low Earner ($16,000 in 2005; 26th percentile)
50
40 Medium Earner ($36,000 in 2005; 57th percentile)
High Earner ($57,000 in 2005; 82nd percentile)
30
Max Earner ($77,000 in 2005; 100th percentile)
20
10
0
1940 1960 1980 2000 2020 2040 2060 2080
3

4. (1) System: What it is
 Retirement and survivor benefits start 1940
 Eligible age lowered 65 to 62 in 1957F/1962M
– Full retirement age rises 65 to 67 by 2022
g y
 Disability benefits started in 1957
 Benefits rise with average wage across
generations --- but with CPI after eligible
 Payroll taxes roughly pay-as-you go
– Rose from 2% to 12.4% as system matured
4

5. (1) System: Trust Fund Financing
 OASI
OASI, DI and HI cannot borrow
Trust Funds enforce long-term budget neutrality
Total
T t l spending to date cannot exceed income to date
di t d t t di t d t
 Current OASDI Assets (excess income) $2.5 trillion
Available to augment tax income when needed
Treasury swaps trust-fund debt for publicly-held debt
Total debt subject to limit not affected
 If Trust Funds Exhaust in 2037 under current law?
– Spending is limited----NO annual budget deficit
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6. (1) System: Trust Fund Financing
Social Security Cost and Expenditures as Percent of Payroll
25%
Cost: Scheduled but
Cost: Scheduled and not payable benefits
20% payable benefits
15%
10% Income
Expenditures: Income = payable
Payable benefits as percent benefits starting in the year the
of scheduled benefits:
2009-36: 100%
trust funds are exhausted (2037)
5%
2037: 76%
2083: 74%
0%
2005 2015 2025 2035 2045 2055 2065 2075 2085
Calendar year
6

7. (2) Solvency: Ability to Pay Benefits
Solvent as long as Trust Funds have assets
g
Trust Fund Ratios under Intermediate Assumptions
450
400
350
2008 TR
300
2009 TR
250
200 OASDI Combined
2008 TR
150
2009 TR
100
DI
50
0
2005 2010 2015 2020 2025 2030 2035 2040 2045
7

8. (2) Solvency: Ability to Pay Benefits
 If Assets exhaust in 2037, then by Law---
2037 Law
– only 75% of scheduled benefits are payable
 Has this ever happened?????
hi h d?????
– NO. Trust Fund exhaustion forces action
» 1977 and 1983 Social Security Amendments
 Does “negative cash flow” force action?
– Consider History
8

9. ( )
(2) Solvency: OASDI Net Cash Flow Past
y
Social Security Net Cash Flow 1957-2009
1.0
0.8
Payroll Tax Rate rises
from 6% in 1961
0.6
to 9% in 1971
as Program Matures 1983
Perce nt of GDP
1977 Amend
0.4
Amend ments
ments
0.2
0.0
-0.2 1972
Amend
ments
-0.4
04
1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
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10. (2) Solvency: OASDI Net Cash Flow Future
Social Security Net Cash Flow 1957-2085
1.0
0.5
cent of GD P
0.0
Trust Funds
Redeemed to
Pay Benefits:
Replaced by Benefits N t
B fit Not
Perc
-0.5
Publicly Held
Debt Payable under
Current Law
-1.0
-1.5
15
1957 1967 1977 1987 1997 2007 2017 2027 2037 2047 2057 2067 2077
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11. ( )
(3) Sustainability: Two Meanings
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 First:
– Clearly scheduled benefits NOT sustainable
with scheduled income
 Second:
– Current program structure IS sustainable with
adjustments
– Or structure can be modified
– Sustainable is what Americans want and are
willing to pay for
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12. (3) Sustainability: Cost for Scheduled Benefits
Social Security Scheduled Cost as Percent of GDP
12

13. (3) Sustainability: Why has cost gone up
3.3 workers per beneficiary since 1975; just 2 after 2030
Covered Workers Per OASDI Beneficiary
10
9
8
7
Demographic
6 Change
5
4
Low Cost
3 Program
2 Matures
1
High Cost
0
1940 1960 1980 2000 2020 2040 2060 2080
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14. (3) Sustainability: Effect of fewer workers per beneficiary
 An Example
– Average Retiree benefit is about $1,000/month
– 3 3 workers sharing pay $300 each
3.3 k h i h
– But if 2 workers share they pay $500 each
– Or if 2 workers pay $300 each
» Th average retiree gets $600 per month
Then ti t th
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15. (3) Why the Shift?: We are an “Aging” society;
Not from living longer, but fewer Births
g g ,
Total and Aged Dependancy Ratios, 2009 Social
s Security Trustees Report
S it T t R t
Intermediate projection compared to no mortality improvement after 2008
1.00
0.90
Intermediate Projection
0.80
TOTAL dependency ratio
0.70 No increase in
Life expectancy
D p n a c R tio
after 2008
e e d ny a
0.60
0.50
0.40
Intermediate Projection
0.30
AGED dependency ratio No increase in
N i i
0.20 Life expectancy
after 2008
0.10
0.00
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Year
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16. (3) Sustainability: Permanently fewer Births,
helped
h l d somewhat by Immigration
h b I i i
Historical and Projected Total Fertility Rate and
Augmented Total Fertility Rate to Include Net Immigration: U.S.
US
4.5
4
3.5
35
Augmented
3 TFR with Net
Immigration
2.5
2
Total Fertility Rate
1.5
1
0.5
0
1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080
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17. (3) Sustainability: We are an “Aging” society;
Longer life---gradual effect after 2030
L lif d l ff f
Total and Aged Dependancy Ratios, 2009 Social
Security Trustees Report
Intermediate projection compared to no mortality improvement after 2008
1.00
0.90
Intermediate Projection
0.80
No increase in Life expectancy after 2008
0.70
D en a c R tio
TOTAL dependency ratio
ep d n y a
0.60
0.50
0.40 Intermediate Projection
0.30
No increase in Life expectancy after 2008
0.20
AGED dependency ratio
0.10
0.00
1975 1985 1995 2005 2015 2025 2035 2045 2055 2065 2075 2085
Year
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18. (4) Solutions: Get Sustainable Solvency,
or at l
least make progress
k
 Eliminate 2.00% Actuarial Deficit
2 00%
 Eliminate unfunded obligation
– 0 7% of GDP or $5.3 trillion over next 75 years
0.7% $5 3
 BUT
BUT, S t i bilit is about ti i and t d
Sustainability i b t timing d trend
– Meet or reduce obligations when shortfalls occur
E
Enact soon with changes implemented later
ih h i l dl
– Gradual changes with time for planning
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19. (4) Solutions: No Need to “Bend” the Cost
Curve (% of GDP) for Social Security
12%
HI + SMI
(inc luding Part D)
10%
Historical Estimated
8%
6%
OASI + DI
4%
2%
0%
1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080
Calendar year
19