2014 OASDI Trustees Report

STATEMENT OF ACTUARIAL OPINION

It is my opinion that, with the important caveats noted below: (1) the techniques and methodology used herein to evaluate the financial and actuarial status of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds are based upon sound principles of actuarial practice and are generally accepted within the actuarial profession; and (2) the assumptions used and the resulting actuarial estimates are, individually and in the aggregate, reasonable for the purpose of evaluating the financial and actuarial status of the trust funds, taking into consideration the past experience and future expectations for the population, the economy, and the program. I am a member of the American Academy of Actuaries and I meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein.

Uncertainty Illustrations

Comparisons between projections for the three alternative scenarios (low-cost, intermediate, and high-cost) and the stochastic simulations presented in this report should be made with a full understanding of the limitations on these two approaches for illustrating uncertainty. The stochastic simulations include random annual variations in several key parameters, but these annual variations tend to cancel out over time so the average variation for each parameter diminishes with longer periods, approaching zero variation across the simulations. (See Actuarial Study 117 at www.socialsecurity.gov/OACT/NOTES/s2000s.html for additional details.) For this and other reasons, the variation reflected in the stochastic simulations is unreasonably small. In addition, the variation across the three alternative scenarios was increased this year by reversing the assignment of ultimate price inflation assumptions between the low-cost and high-cost scenarios.

Federal Budget Accounting

This report focuses on the actuarial status of the OASI and DI Trust Funds and includes important information on (1) the years in which trust fund asset reserves are projected to be depleted and (2) the degree to which benefits scheduled in the law would no longer be fully payable on a timely basis after reserve depletion. However, the footnote on page 60 of this report directs the reader to an appendix in the Medicare Trustees Report, which states, “The trust fund perspective does not encompass the relationship between the Medicare and Social Security trust funds and the overall federal budget.” The reader of this report should consider this “overall” federal unified budget perspective with care because the assumptions underlying unified budget accounting are inconsistent with the assumptions of trust fund accounting.

In particular, trust fund accounting accurately reflects the law, under which benefits cannot be paid in full on a timely basis after reserve depletion. In contrast, unified budget accounting assumes that full scheduled benefits will continue to be paid through transfers from the General Fund of the Treasury, thus representing “a draw on other Federal resources for which there is no earmarked source of revenue from the public.” Not only are such “draws” not permissible under the law, no precedent exists for a change in the Social Security Act to finance unfunded trust fund obligations with such draws on other Federal resources. Under this unified budget accounting assumption, $10.6 trillion of OASDI unfunded obligations, which are not payable under the law over the next 75 years, are referred to as “expenditures” requiring a “draw” from the General Fund of the Treasury.

In addition, unified budget accounting treats redemptions of trust fund reserves as an addition to annual federal deficits, referring to these redemptions also as “a draw on other Federal resources.” In fact, redemptions of trust fund reserves represent a deferred use of revenues earmarked for the trust fund program alone, which have been collected in prior years and saved for later use. These redemptions utilize the entire $2.8 trillion accumulation of net past earmarked revenue for OASDI, but are referred to as draws on the General Fund of the Treasury under the unified budget perspective.

Therefore, the actual operations of the trust funds under current law do not draw on other Federal resources. Expenditures can only be paid from current or deferred earmarked resources for the specific program financed from the trust fund. Assertions that trust fund reserve redemption and shortfalls after reserve depletion represent draws on other Federal resources are based on assumptions that are inconsistent with the law and with actual trust fund annual cash-flow operations.

In addition to federal budget annual cash flows, the budget perspective is equally concerned with the build-up of federal debt. The total federal debt subject to limit includes trust fund reserves. Thus, as trust fund reserves are accumulated or redeemed, they are offset in the total federal debt by securities issued to the public, with no net effect on the total federal debt. Moreover, even in considering the federal debt owed to (held by) the public, there is no net direct effect on that debt from accumulating and then redeeming trust fund asset reserves. However, budget analysis frequently refers to both trust fund reserve redemptions and trust fund obligations not payable under the law after reserve depletion as factors that increase the federal debt held by the public in the future. This assertion is not consistent with a full assessment of the investment and redemption flows of the trust funds or with the limitations in the law on paying benefits after trust fund reserves are depleted.

Benefit Replacement Rates

Finally, while the Trustees eliminated benefit replacement rates from the report this year, a full analysis of benefit replacement rates is presented in Actuarial Notes 155 and 2014.9 at www.socialsecurity.gov/OACT/NOTES/actnote.html.

Stephen C. Goss

Associate of the Society of Actuaries
Member of the American Academy of Actuaries
Chief Actuary, Social Security Administration