The Aging of America: Implications for Social

Security, etc.

American Academy of Actuaries Summer SummitPresented by Steve Goss, Chief Actuary &

Alice Wade, Deputy Chief ActuarySocial Security Administration

July 14, 2014

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Developed nations are “aging” “Macro Aging”

Shift to older age distribution, becauseLower birth ratesFewer working age per elder

“Micro Aging”People are living longer

Lower death ratesHigher life expectancy

Different Challenges—Different Solutions---Consider the U.S.

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Macro Aging results from the drop in Birth Rates after 1964—Had Birth rates stayed at 3.0 or 3.3---

Aged Dependency Ratio (Population 65+/20-64) 2012 TR

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Actual and TR Intermediate

TFR remain at 3.0 after 1964

TFR remain at 3.3 after 1964

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Macro Aging has already affected disability ages, and is poised to affect retirement ages

Age Distribution of the Population Age 25+, 1940 to 2100 (2012TR):What If Birth Rate (TFR) Had Stayed at 3.0?

0

10

20

30

40

50

60

70

80

90

100

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Perc

en

t o

f P

op

ula

tio

n a

t A

ges 2

5+

25-44

45-64

65-84

85+

Boomers become 25-44

Boomers become 45-64

Boomers

become 65-84

TFR=Actual &

TR intermediate

TFR remains at 3.0 after 1964

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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

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Cause of “Micro Aging”Declining death rates

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Implications of “Micro Aging”Rising Life Expectancy

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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

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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

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Potential for 23% Benefit Reduction Will Force ActionNeed to reduce cost 25% or increase revenue 33%

OASDI Annual Cost and Non-Interest Income as Percent of Taxable Payroll

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“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

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“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

Solutions: Raise taxable maximum for 90% intended of the early 1980’s. Or Higher like HI

Percent of Covered Earnings that is Taxable: Social Securityand Medicare HI

80

85

90

95

100

1980 1985 1990 1995 2000 2005 2010 2015

Social Security

Medicare HILast time explicitly legislated for

Social Security

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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

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Learn more about the current program & the future financial challenges at: