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Recommendations of the Social Security 2015 Technical Panel on Assumptions and Methods

Joe SilvestriGovernment Accountability Office

Karen GlennSocial Security Administration

Middle Atlantic Actuarial ClubNovember 6, 2015

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Outline

Social Security projections, assumptions, and methods

Social Security Advisory Board and Technical Panel on Assumptions and Methods (TPAM)

2015 TPAM recommendations Focus on: mortality Focus on: real interest rate Q & A / Wrap up

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Social Security projections, assumptions, and methods

Social Security Advisory Board and Technical Panel on Assumptions and Methods (TPAM)

2015 TPAM recommendations Focus on: mortality Focus on: real interest rate Q & A / Wrap up

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Social Security Projections: Background

Social Security consists of two separate programs (and two separate trust funds): Old Age and Survivors Insurance (OASI) Disability Insurance (DI) The combined programs are referred to as OASDI

The programs are essentially pay as you go, with relatively small trust fund reserves

The Social Security Board of Trustees must report annually on the actuarial status of the programs

SSA’s Office of the Chief Actuary (OCACT) makes 75-year open group projections

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Assumptions Used in Social Security Projections

Demographic Mortality Fertility Immigration

Economic Productivity (total economy) Price inflation Real wage differential Unemployment rate Trust fund real interest rate

Disability Incidence Recovery Mortality

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How Assumptions Are Developed (in Brief)

The OCACT demographic, economics, and disability teams analyze available data and research

OCACT makes recommendations to the Trustees’ Working Group on each of the “basic” assumptions

Focus is on the ultimate assumptions—in general, the last 50 years of the 75-year projection period

The Working Group meets several times each year to discuss and vet the assumptions Experts are often asked to present and participate The Trustees themselves are consulted as necessary

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… and Methods

OCACT also consults with the Trustees’ Working Group on projection methods

Our intermediate, or “best guess,” deterministic projections are the primary focus

We also produce: Two alternative scenarios, reflecting low-cost and high-cost sets of

assumptions Sensitivity analysis on many of the basic assumptions A stochastic projection, which provides a probability distribution of

possible future outcomes centered around the intermediate assumptions

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Social Security projections, assumptions, and methods

Social Security Advisory Board and Technical Panel on Assumptions and Methods (TPAM)

2015 TPAM recommendations Focus on: mortality Focus on: real interest rate Q & A / Wrap up

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Social Security Advisory Board (SSAB)

7-member bipartisan board Advises the President, the Congress, and the

Commissioner of Social Security Every 4 years, the SSAB appoints a technical

panel to review the assumptions and methods used by the Social Security Board of Trustees and OCACT

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Technical Panel on Assumptions and Methods (TPAM)

Composed of expert actuaries, economists, and demographers

The 2015 TPAM was convened in November 2014 Its final report was released in September 2015

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2015 Technical Panel

Alicia Munnell, Director of Center for Retirement Research - Chair Katherine Abraham, Director of MD Center for Economics and Policy David Autor, Associate Department Head, MIT Economics Jeffrey Brown, Dean, University of Illinois College of Business Peter Diamond, Professor Emeritus, MIT Economics Claudia Goldin, Director, Development of the American Economy

Program Sam Gutterman, Consulting Actuary Michael Teitelbaum, Senior Research Associate, Labor and Worklife

Program at Harvard Law School Ronald Rindfuss, Fellow, Carolina Population Center Joseph Silvestri, Senior Actuary, GAO

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Social Security projections, assumptions, and methods

Social Security Advisory Board and Technical Panel on Assumptions and Methods (TPAM)

2015 TPAM recommendations Focus on: mortality Focus on: real interest rate Q & A / wrap up

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TPAM Recommended Assumptions

“The recommendations…should not overshadow the Panel’s primary response to its charge. The Panel concluded unequivocally that the methods and assumptions used by the Social Security actuaries and Trustees are reasonable.” Alicia Munnell, Sep. 30, 2015 blog post

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Effects of TPAM Recommendations on Actuarial Measures

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Other TPAM Recommendations

Presentation of Uncertainty Basis for alternative scenarios Less data, more information Experience analysis Naming conventions

Illustrating Benefits Relative to Earnings Effect of program changes Effect of improving longevity on benefit cost Financial planning insights

Measures of Long-Run Financial Sustainability

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Social Security projections, assumptions, and methods

Social Security Advisory Board and Technical Panel on Assumptions and Methods (TPAM)

2015 TPAM recommendations Focus on: mortality Focus on: real interest rate Q & A / wrap up

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Mortality Assumptions: OCACT/Trustees

OCACT projects mortality improvement by: 5 broad age groups

Under age 15, ages 15-49, ages 50-64, ages 65-84, age 85 and older

Gender 5 cause of death groups:

Cardiovascular disease Cancer Violence Respiratory disease Other

Historical data from the National Center for Health Statistics and Medicare

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Mortality Assumptions: OCACT/Trustees

A small selection from our analysis:

2015 TR 2015 TR 1979 to 2011 2001 to 2011 2039 to 2089 1979 to 2011 2001 to 2011 2039 to 2089

Ages 65 - 84Cardiovascular Disease 3.21 4.51 2.2 2.83 4.47 2.2Cancer 0.78 1.91 0.9 -0.13 1.18 0.9Violence 0.67 0.27 0.5 -0.02 -0.07 0.5Respiratory Disease 0.56 1.80 0.3 -2.17 0.66 0.3Other -0.79 -0.34 0.3 -1.55 -0.58 0.3Resulting Total ** 1.56 2.32 0.76 0.72 1.78 0.71

Male Female

Historical HistoricalAlternative II Alternative II

Average Annual Rates of Reduction in Central Death Rates by Age Group, Sex, and Cause

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Mortality Assumptions: OCACT/Trustees

OCACT projections assume a slowdown in future mortality improvement

Periods of extraordinary improvement in the last century will likely not be replicated: Access to primary medical care for the general population Antibiotics and immunizations Clean water supply and waste removal Rapid growth in the general standard of living

Effects of smoking, obesity, slowdown in health spending, income dispersion?

Remember these are 75-year projections!

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Mortality Assumptions: Some International Comparisons

Focus groups with clinical experts to develop mortality forecasts by cause, age, and sex

What diseases have been responsible for the increases in life expectancy in the past?

What improvements in public health and medicine are likely to increase in life expectancy in the future?

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Mortality Assumptions: Comparisons with JHU Researchers

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Mortality Assumptions: 2015 TPAM

Increase ultimate rate of improvement Retain the age gradient and the “by-cause”

projection model Investigate alternative projection methodologies

and compare to the current Investigate alternative methods for transitioning

from historical to ultimate rates of longevity improvement

Mortality Assumptions: 2015 TPAM

Rationale for higher rate of improvement Align with historical trends Converge toward international experience Reflect expert opinion on long-term improvement

Put greater weight on historical and international trends than ideas about future scenarios

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Mortality Assumptions

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Mortality Assumptions

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Mortality Assumptions: Discussion

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Social Security projections, assumptions, and methods

Social Security Advisory Board and Technical Panel on Assumptions and Methods (TPAM)

2015 TPAM recommendations Focus on: mortality Focus on: real interest rate Q & A / wrap up

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Real Interest Rate Assumption: OCACT/Trustees

By law, the OASI and DI Trust Funds invest in special-issue securities of the US Treasury

These securities earn interest at the average market yield on all marketable fixed-rate Federal obligations that are not callable and do not mature within the next 4 years

In other words, they earn a fair market return for longer-term, highly liquid, default-risk-free obligations

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Real Interest Rate Assumption: OCACT/Trustees

-10

-5

0

5

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1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Real Interest Rate

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Real Interest Rate Assumption: OCACT/Trustees

Over the last 5 complete business cycles (1966-2007), the average annual real interest rate was 3.17 percent

However, recent interest rates have been extremely low: just 1.07 percent for 2003-2013

Comparisons to other forecasters—but their time horizon is not as long

We assumed a 2.9 percent real interest rate for the 2015 Trustees Report

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Real Interest Rate Assumption: 2015 TPAM

Consider inflation and real rates in combination as well as separately

Give greater weight to consideration of: Surveys of forecasters Market information

Additional indicators were lower In general, other experts project lower Market rates indicate lower, even after adjusting for term premia

and potential biases in TIPS

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Real Interest Rate Assumption: Discussion

Other TPAM Recommendations to Highlight

Fertility assumption General concurrence on (lack of) growth in

disability program Labor force participation

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Social Security projections, assumptions, and methods

Social Security Advisory Board and Technical Panel on Assumptions and Methods (TPAM)

2015 TPAM recommendations Focus on: mortality Focus on: real interest rate Q & A / wrap up

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Q & A

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Further Information

2015 Social Security Trustees Report and more details on OCACT assumptions and methods: https://www.socialsecurity.gov/oact/TR/2015/index.html

2015 TPAM report: http://www.ssab.gov/Portals/0/Technical%20Panel/2015_TPAM_Final_Report.pdf?ver=2015-09-24-113145-693

Social Security Advisory Board: http://www.ssab.gov/