NASI Fumbles Facts Regarding Primary Cause of Social Security’s Funded Status Deterioration

This month, the National Academy of Social Insurance (NASI) released “Social Security at 90: Policy Options for Strengthening the Program’s Finances and Avoiding Automatic Benefit Cuts.”
In their report, NASI examines “lessons from Social Security’s history
that can help inform a potential path forward.” With respect to the
causes of system’s current long-term financing problem, the report
concludes:“Much of the program’s long-term shortfall stems from
the legacy costs of paying benefits to early generations of recipients
after the program’s inception. More recently, the further deterioration
in Social Security’s financial outlook since 1983 is largely due to the
rise in earnings inequality that has eroded the program’s tax base,
along with a failure to adjust tax rates in recent decades.”In
this post, we will disagree with NASI’s conclusions with respect to the
primary cause(s) of the system’s long-range funded status deterioration
and several other suggestions they make. This is a subject that we have
written about extensively in the past, and one which we feel compelled
respond to by “substituting facts for appearances” (part of the
actuarial profession’s motto). Readers may wish to visit the following
prior posts and article for additional discussion of this subject:July 27, 2024–Actuaries Double Down on Questionable Primary Cause of Social Security’s Financial DeteriorationJanuary 20, 2024—Actuaries Confuse the Primary Causes of Social Security’s Funding ShortfallSeptember 23, 2023—Actuaries Continue to Ignore the “Valuation Date Creep” Elephant in the Social Security Financing RoomMay 21, 2023—Unfortunately, Congress Did Not Adopt a Better Financing Approach for Social Security in 1983February 26, 2024 Advisor Perspectives—Social Security’s Deterioration and Implications for Future ReformReaders can refer to our previous post for a brief description of the system’s current long-range funded status.SSA Actuarial Note 2025.8As
part of its annual actuarial valuation process, SSA actuaries release
several actuarial notes to supplement the results summarized in the
annual OASDI Trustees Report. Actuarial Note Year.8
(2025.8 this year) is a marvelous document that tracks the year-by-year
causes for changes in the system’s long-range actuarial balance from
1983 to the current valuation year. It is what pension actuaries refer
to as a gain and loss analysis by source. It should be the go-to source
document for anyone looking to quantify the specific causes of the
changes in the system’s long-range (or long-term) funded status since
1983.The key take-aways from Actuarial Note 2025.8 include:The
system’s long-range actuarial deficit in 1982 was -1.80% of taxable
payroll, or about 2% of payroll smaller than the 2025 measure of the
long-range deficit. Before enactment of the 1983 Amendments, Social
Security Actuaries changed the 1982 long-range deficit to -2.09% of
payroll to reflect passage of the Tax Equity and Fiscal Responsibility
Act (which angered congressmen who were working hard to try to bring
this measure down to zero percent to achieve actuarial balance of system
income and outgo for the long-term). Enactment of the 1983
Amendments “solved” the long-range problem, and in the 1983 Trustees
Report, the long-range actuarial balance was a positive .02% of payrollThe
system’s long-term actuarial balance funded status has declined fairly
continuously over the past 42 years from a positive 0.02% of taxable
payroll in 1983 to -3.82% of payroll in 2025.Of this decline,64% is attributable to annual changes in the valuation period (which I refer to as “the Valuation Date Creep”,26% of the decline is attributable to economic data and assumptions,about 9% of the decline is attributable to disability data and assumptions, andabout 1% is due to other causes.In terms of the 3.44% of payroll decline in the long-range actuarial balance since 1983,44% of payroll is due to the Valuation Date Creep,1% of payroll is due to economic data and assumptions,33% of payroll is due to disability data and assumptions, and07% of payroll is due to other causes.Even
if all assumptions are realized in the future, the system’s funded
status is expected to keep deteriorating under current law because of
the “Valuation Date Creep.” Unfortunately, the Trustees’ Reports do not
include projections of expected long-term actuarial balances reflecting
expected Valuation Date Creep.Note that while Actuarial Note 2023.8 does support NASI’s conclusion that less favorable than assumed economic experience
contributed to the current funding shortfall, it shows that this source
is only 26% of the total shortfall and less than one-half of the size
of the Valuation Date Creep source, and therefore, the deterioration of
the system’s funded status since 1983 certainly cannot be said to be
“largely due to the rise in earnings inequality that has eroded the
program’s tax base.”As discussed in our post of September 23, 2023,
the Valuation Date Creep results from the implicit assumption adopted
by the Trustees and system’s Chief Actuary that system revenue will
equal system income for years after the 75-year projection period. This
has been an unreasonable implicit assumption since 1983. In our opinion,
this assumption should be fixed, and until it is fixed, its negative
effect on the system’s funding should be highlighted and disclosed, not
hidden.1994-1996 Social Security Advisory Council and Valuation Date CreepWhile
we are on the subject of “lessons to learn from Social Security’s
history that can help form a path forward,” I’d like to direct
interested readers to the 1994-1996 Advisory Council Report. The long-range actuarial balance for 1996 (a
mere 13 years after enactment of the 1983 Amendments) was -2.17% of
taxable payroll (larger than the actuarial balance deficit “solved” by
the 1983 Amendments). This was clearly a source of concern for the
Advisory Council members, But they were also keenly aware of the
Valuation Date Creep problem. They said,“The second major problem
[after the 2.17% of payroll long range deficit] with Social Security
financing is the deterioration in the program’s long-range balance that
occurs solely because of the passage of time. Because of the aging of
the U.S. population, whenever the program is brought into 75-year
balance under a stable tax rate, it can be reasonably forecast that,
without any changes in assumptions or experience, the simple passage of
time will put the system into deficit. The reason is that expensive
years previously beyond the forecasting horizon, with more beneficiaries
getting higher real benefits, are then brought into the forecast
period. There is no simple answer to the question of how much higher the
long-term actuarial deficit is above the 2.17 percent to bring Social
Security into balance beyond the 75-year horizon, but there could be a
significant increase2 . All
members of the Council agree that it is an unsatisfactory situation to
have the passage of time alone put the system into long-run actuarial
deficit [emphasis added], though there are again differences on how the problem should be corrected.”The Valuation Date Creep is still around in 2025, and has only worsened since 1996.Sustainable SolvencyTo
address the Valuation Date Creep problem and to give policymakers the
opportunity to try to avoid imposing higher tax rates on future Social
Security taxpayers, Social Security actuaries developed a stronger
metric for measuring the system’s long-range actuarial funded status,
referring to it as “Sustainable Solvency,” which in addition to
requiring long-range actuarial balance over the 75-year projection
period under the Intermediate Assumption, also required a trend of
positive annual balances at the end of the 75-year projection period.
Unfortunately, this metric is not quantified in the annual Trustees
Reports, and few in the media or elsewhere (like NASI) even acknowledge
its existence. While adopting changes in the system to achieve
Sustainable Solvency would increase the system’s sustainability, it
would not “fix” the system as both metrics rely on assumptions about the
future that will not necessarily be realized.In 1982 and prior
to enactment of the 1983 Amendments, I wrote a paper published in Volume
XXXV of the Transactions of the Society of Actuaries called, “A Better
Financing Approach for Social Security.” In this paper, I advocated
financing Social Security with a level tax rate as opposed to the
approach adopted subsequently by Congress that anticipated level tax
rate financing from 1990 to 2058 and increased tax rates thereafter. I
estimated that the level tax rate I proposed would be about 1.5% higher
(.75% employer/.75% employee) than the 12.4% level tax rate actually
adopted. Of course, if Congress felt that this tax rate were too high,
it could always make downward adjustments in benefits to balance system
assets and liabilities under this stronger approach. My proposed
approach also included actuarial algorithms to maintain the balance
between system assets and liabilities over time when future experience
deviated from actual experience. I assume that if Sustainable Solvency
had been used as the 1983 actuarial balance target, it would have
involved comparable levels of additional revenue or benefit reductions
to achieve long-term balance as the level tax rate approach I proposed.When
Congress adopted the 1983 Amendments, they understood that the changes
in the Act, including a level combined employer/employee tax rate for
much of the foreseeable future) would bring the system back into
actuarial balance over the “long-term.” It is unreasonable to assume, as
some experts do, that Congress adopted the changes because they
understood that large trust fund assets would accumulate over the next
40 years to be used to fund benefits for the subsequent 35 years leaving
large unaddressed deficits thereafter.Some Other Questionable Statements in NASI ReportI didn’t have a problem with everything in the NASI report. However, here are a few additional comments with which I disagreed:“The Trustees Report projects that Social Security is fully funded until 2034, but faces a long-term shortfall thereafter.”The
system has a long-term funding problem today and has had one for over
30 years, largely due to the Valuation Date Creep problem. It is not
fully funded, but has a long-term deficit of 3.82% of taxable payroll
that is expected to increase in the future even if all assumptions are
realized. Yes, Social Security also has a short-term cash flow problem. “Most of Social Security’s Funding Gap Reflects ‘Legacy Costs’”Legacy
costs have nothing to do with Social Security’s long range actuarial
balance metric or the stronger metric of Sustainable Solvency. These
metrics compare the present value of system assets with the present
value of system liabilities with the distinction between the two being
the long-range actuarial balance metric does not require positive annual
balances near the end of the projection period while the Sustainable
Solvency measure does. To the extent there are “Legacy Costs”, they are
built into the present value of the system benefit liabilities under
these metrics.“In sum, erosion of the payroll tax base
explains most of the deterioration in Social Security’s financial
outlook since 1983. Other factors are secondary.” As
discussed above, this is simply not true. Stunningly, the NASI report
fails to even mention the largest cause, the Valuation Date Creep
problem (or Sustainable Solvency for that matter).“The annual
Trustees Reports project Social Security’s future finances over a
75-year window, intended to cover the remaining lifespan of even the
youngest current workers. As a result, policymakers often aim to design
solutions for 75 years—as they did in 1983, although later developments
accelerated trust fund depletion, as discussed above. However, there is
no requirement that changes address the entire 75-year future of the
program all at once; Congress could consider changes designed to put the
program on sound financial footing for a shorter period, such as 25 or
50 years.”To ensure true long-term sustainability of the
system (with the implication that tax rates (or other sources of
revenue) should not be anticipated to be significantly higher in the
future than today under a sustainable system), it is important to look
at sufficiently long periods of time and to examine the anticipated
trends near the end of selected projection periods. What history and the
Valuation Date Creep tell us is that a pretty substantial mistake was
made by ignoring annual balances near the end of the 75-year projection
period when Congress adopted the 1983 Amendments. We are just asking for
more
“kick-the-financing-can-down-the-road-to-future-generations-of-taxpayer”
problems like the current one we are facing if we limit Social
Security’s projection period to just 25 or 50 years.It should be
noted that while Canada uses a 75-year projection period for the funding
of its Canada Pension Plan (CPP), it anticipates maintaining a level
tax rate in all future years if all assumptions are realized, it has
fixed the 75-year Valuation Date Creep problem and it has also
implemented algorithms for automatically adjusted the tax rate for their
system when it falls out of long-term actuarial balance. So, it can be
done. We just need to look to the North for answers to our current
funding problem.SummaryWe agree with NASI
that lessons from Social Security’s history can help inform future
reform. The lessons we hope get incorporated into future system reform
include:It is important to measure and monitor the system’s long-term funded status on a reasonable basisIt is important to fix the Valuation Date CreepTrue system sustainability will not be achieved by assuming higher levels of revenue will be generated by future taxpayers, andReform
should incorporate automatic algorithms to keep the system in long-term
actuarial balance when future experience inevitably differs from
assumed experience.