1994-96 Advisory Council

1994-1996 Advisory Council on Social Security


The last major tax and benefit changes in the Social Security Act occurred in 1983. These amendments followed the recommendations of the National Commission on Social Security Reform (the Greenspan Commission), except that about one-third of the long-range deficit was met by a proposal added on the floor of the House of Representatives to gradually extend the age of eligibility for full retirement benefits from age65 to 67 beginning in the year 2000 and concluding in 2022.

The 1983 report of the Board of Trustees, following these amendments, found the system to be in balance for both the short and the long run, with a long-run balance over 75years showing a slight surplus of 0.02 percent of taxable payroll. Actual short-term experience has generally been more favorable than estimated at the time of the 1983 amendments, with income exceeding outgo by more than had been projected.

Nevertheless, looking ahead 75 years, the Trustees have found reasons to be concerned. The 1995 Trustees Reports show a continued surplus of Social Security taxes over outgo until 2013, and counting income from interest on the funds, the surplus continues to 2020. But beginning then it will be necessary to start cashing in bonds in order to meet full benefit payments on time. Unless changes are made, after 2030, annual income would meet only about 75 percent of annual costs. The Trustees in 1995 reported that the average short fall over the 75years would be 2.17percent of taxable payroll.

What Has Happened Since 1983 to Produce the Long-Range Deficit?

Beneficiary/Worker Ratio Much the Same The usual popular explanation of the present deficit has been to repeat the underlying reason why the Social Security system will be more expensive in the future than it is today. It is pointed out correctly that while today there are 3.3 active workers paying into the system for every beneficiary now drawing benefits, over time this ratio will change to two workers per beneficiary and in the long run to perhaps 1.9 or 1.8. This is the main reason why Social Security will be more expensive in the future than it is today.

However, this has almost nothing to do with why there is a 2.17percent of taxable payroll deficit. The estimate of the future relationship between beneficiaries and workers was just about the same in 1983 when the program was last in balance. In other words, the fundamental ratio of beneficiaries to workers was fully taken into account in the 1983 financing provisions and, as a matter of fact, was known and taken into account well before that. The current deficit has a different explanation, resulting from an accumulation of relatively small annual changes in the actuarial assumptions and in the method of making the estimates.

Shifting Estimating Period Of the 2.17percent of taxable payroll deficit, 0.55 percentage points (one quarter of the deficit) are the result of the fact that as each new 75-year estimate is made, it includes a more expensive out-year because higher benefits will later on be paid to more beneficiaries. All three of the proposals made by the Advisory Council try to correct this situation by having a stable trust fund ratio at the end of the 75-year forecast horizon.

Of course, correction of this problem will not guarantee that there will not be deficits, or surpluses for that matter, arising because of changes in future assumptions. Any 75-year estimate will be subject to change. But when the problem arising from the moving 75-year period is dealt with, there will be no factor now on the horizon that will cause the deficit to worsen over time.

Disability Assumptions One of the significant causes of the current deficit is the change in the assumptions as to future disability allowance and termination rates. Looked at separately, the experience in this part of the program over the last 12 years has differed significantly from what was expected. Changes in the assumptions to bring the long-range projections in line with that experience accounts for 0.70percentage points of the 2.17percent of taxable payroll deficit.

The Council urges the new SSA Advisory Board to work with SSA and the Congress to monitor developments in the Disability Insurance program. This Council had neither the special experience and skills nor the time needed to make an important contribution to understanding the causes of and possible remedies for the increase in the estimated cost of the disability insurance part of the program.

Economic Assumptions Changes in the economic assumptions underlying the 75-year projections are also a significant cause of the deficit. They account for some 0.79percentage points in the 2.17 percent of taxable payroll deficit. The change in the real wage growth assumption, which gradually came down over the 12years since 1983 from 1.5percent per year to 1.0percent per year accounted for 0.50 percent of taxable payroll. Another important factor was the decline in the portion of total compensation which is now assumed to be taxable in the years ahead. The Council's Technical Panel on Assumptions and Methods has studied both matters and finds the new estimates to be reasonable.

Methods Improved methods of estimating costs have also played an important role in producing the 2.17percent of taxable payroll deficit, causing an addition to the deficit of 0.93 percentage points. These changes involved revisions in the age distribution of immigrants, improvements in consistency between short- and long-range estimates, and higher projections of future benefit levels based on new data on benefit awards. Also, beginning with 1991, the cost of providing for a trust fund equal to 1year's outgo at the end of the estimating period is taken into account in calculating the long-range balance.

Demographic Assumptions Curiously, changes in demographic assumptions over the last 12years have had the effect of reducing, not increasing, the deficit by 0.83 percent of taxable payroll. Increased immigration assumptions and higher near-term fertility rates more than offset the higher costs attributable to a reduction in the ultimate fertility rate and mortality. Whereas the Council's Technical Panel on Assumptions and Methods was not quite so sanguine on these demographic assumptions, in the end it did not propose changing them either.

These changes in the OASDI actuarial balance, 1983-1995, are summarized in the following table:

(Percent of taxable payroll)*

Balance in the 1983 Report   +0.02
Balance in the 1995 Report   -2.17
  Change in balance -2.19
Reason for change:    
  Legislation +0.10
  Valuation period -0.55
  Economic assumptions -0.79
  Demographic assumptions +0.83
  Disability assumptions -0.70
  Methods -0.93
  All other -0.15

Source: Office of the Actuary, Social Security Administration

*NOTE: Additional detail regarding year-by-year changes is available in the annual reports of the Board of Trustees of the OASDI Trust Funds.