Summer Summit 07142014 GossWade

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

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

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

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 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

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 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

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

“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

“Macro Aging” Solutions: Many Choices

• Increase payroll tax rate

• Increase taxable maximum

• Increase revenue from taxation of benefits

• Find other sources of revenue, expand coverage

• Change benefit formula

• Reduce benefits for dependents

• Reduce cost of living adjustments

• Increase benefits for lower income by establishing a minimum benefit

• Increase benefits for widows and widowers, childcare credits, student

benefits, increase benefits for oldest

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

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

Learn more about the current program & the future

financial challenges at: