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 Macro Aging results from the drop in Birth Rates after 1964—Had Birth rates stayed at 3.0 or 3.3 - Macro Aging has already affected disability ages, and is poised to affect retirement ages Implications of “Macro Aging” ◆ It is a Pay-As-You-Go World – In the aggregate; consumption = production ◆ Consider drop in birth rate from to – 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 Cause of “Micro Aging” Declining death rates Implications of “Micro Aging” Rising Life Expectancy Implications of “Micro Aging” ◆ Most people are not saving enough – Desire/need to “consume now” ◆ Those who are saving 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 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 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 15 Learn more about the current program & the future financial challenges at: