Social Security Reform - actuaries' views
In the November issue of the Actuarial Update, Steve Goss (Social Security Actuary) responded (http://www.actuary.org/update/pdf/1106.pdf) to a note published in the August issue of the Update by Mark Shemtob http://www.actuary.org/update/pdf/0806.pdf. Mark argued that the Social Security System requires modification, and that the Academy should work on a reform plan. It seems reasonable to me that actuaries, given our training, may have something to contribute to this discussion, so I was disappointed to read Steve’s response, which can be summarized as:
- The government financing problem (which will begin to appear in 2017) can be addressed by government issuing more bonds to cover deficits no longer financed by surplus social security contributions;
- Some combination of tax increases and benefit reductions is needed to address the financing gap that will be apparent after 2040.
These responses may seem attractive to politicians, but what of taxpayers? As an employer, the largest check I pay each month is to Social Security and Medicare (a combination of company and employee contributions). Unlike the check that I write for the company pension plan, which funds individual employee accounts, and whose benefits are directly visible, Social Security contributions simply disappear; I have to take “on trust” that politicians will one day honor their implied (but not contractual) obligation to pay my and my employees’ benefits. And judging by the comments of their chief actuary, we should count on neither the current amount of benefits, nor on the current level of cost being assured in the future.
Steve questions what role actuaries (and the Academy) should have in this debate, arguing (essentially) for neutrality. I would argue that our actuarial training leads to a couple of positions that may seem non-neutral in this debate. The first of these is that a funded system is superior to a non-funded one. From day one of my actuarial training I learned that there are two ways to establish liabilities: one is to reserve excess premiums, and the other is to discount the future value of promised benefits. I understand that the Social Security system is a pay-as-you-go system, and that in some circumstances this may be considered actuarially sound. But in the current environment of declining contributors relative to beneficiaries, can we stand back and assume a neutral position, or should we be advocating for a sounder (actuarially) principle?
The second area in which we may be non-neutral is in understanding the value of the market. Mark Shemtob’s proposal includes consideration of personal accounts. Unfortunately personal accounts, which are the link to the market, have been demonized by the politicians. One way that the system can be made more financially secure would be to raise the rate of return on investments. Investment in higher-yielding assets will occur if the market is allowed to operate. Most actuaries operate in the market and are comfortable with its mechanisms and instruments. We understand that the market delivers choice and efficiency. While the political decision may ultimately be made to leave the provision of retirement income security to a social program, we owe it to the public to explain the benefits that the market could deliver.
Finally, actuaries have some idea of benefit structure and costs. Some components of the program can and should be examined from the perspective of how best to deliver them: an example is the Social Security death benefits. Given the widespread access of the public to death benefits, why should these be provided by a social program? The bundling of benefits makes it more difficult to deconstruct the program and answer the question: what is the return on my contributions to the system? This is a question that I have asked Social Security actuaries in the past, without obtaining an answer. But I think I am entitled to an answer, if only because, if Steve’s proposal (raise taxes and cut benefits) is followed, whatever my current rate of return on my contributions, it will be lower in the future. At the least, when I sign my checks over to Social Security and the company pension plan each month, I can make a rational decision about which program provides me greater value.
- The government financing problem (which will begin to appear in 2017) can be addressed by government issuing more bonds to cover deficits no longer financed by surplus social security contributions;
- Some combination of tax increases and benefit reductions is needed to address the financing gap that will be apparent after 2040.
These responses may seem attractive to politicians, but what of taxpayers? As an employer, the largest check I pay each month is to Social Security and Medicare (a combination of company and employee contributions). Unlike the check that I write for the company pension plan, which funds individual employee accounts, and whose benefits are directly visible, Social Security contributions simply disappear; I have to take “on trust” that politicians will one day honor their implied (but not contractual) obligation to pay my and my employees’ benefits. And judging by the comments of their chief actuary, we should count on neither the current amount of benefits, nor on the current level of cost being assured in the future.
Steve questions what role actuaries (and the Academy) should have in this debate, arguing (essentially) for neutrality. I would argue that our actuarial training leads to a couple of positions that may seem non-neutral in this debate. The first of these is that a funded system is superior to a non-funded one. From day one of my actuarial training I learned that there are two ways to establish liabilities: one is to reserve excess premiums, and the other is to discount the future value of promised benefits. I understand that the Social Security system is a pay-as-you-go system, and that in some circumstances this may be considered actuarially sound. But in the current environment of declining contributors relative to beneficiaries, can we stand back and assume a neutral position, or should we be advocating for a sounder (actuarially) principle?
The second area in which we may be non-neutral is in understanding the value of the market. Mark Shemtob’s proposal includes consideration of personal accounts. Unfortunately personal accounts, which are the link to the market, have been demonized by the politicians. One way that the system can be made more financially secure would be to raise the rate of return on investments. Investment in higher-yielding assets will occur if the market is allowed to operate. Most actuaries operate in the market and are comfortable with its mechanisms and instruments. We understand that the market delivers choice and efficiency. While the political decision may ultimately be made to leave the provision of retirement income security to a social program, we owe it to the public to explain the benefits that the market could deliver.
Finally, actuaries have some idea of benefit structure and costs. Some components of the program can and should be examined from the perspective of how best to deliver them: an example is the Social Security death benefits. Given the widespread access of the public to death benefits, why should these be provided by a social program? The bundling of benefits makes it more difficult to deconstruct the program and answer the question: what is the return on my contributions to the system? This is a question that I have asked Social Security actuaries in the past, without obtaining an answer. But I think I am entitled to an answer, if only because, if Steve’s proposal (raise taxes and cut benefits) is followed, whatever my current rate of return on my contributions, it will be lower in the future. At the least, when I sign my checks over to Social Security and the company pension plan each month, I can make a rational decision about which program provides me greater value.
posted by Solucia, Inc. at 9:06 PM
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