Memo Re: Social Security Actuaries’ Changes in Methods and Assumptions, 1979-98

Cumulative impact of 20 years of changes, by David Langer, Consulting Actuary

The Social Security Administration’s actuaries measure each year the cost impact of their changes in actuarial assumptions and methods. The results are reported in the OASDI Trustees’ Annual Report as a percentage change in the payroll subject to the Social Security tax (“taxable payroll”). The graph, “OASrDI’S long range actuarial balance, 1979-1998,” reveals a sharply LRAB7998descending pattern of the long range actuarial balance (“LRAB”) resulting from those changes that can be considered as discretionary (as opposed to legislative), from a negative 1.21% of taxable payroll in 1979 down to a negative 4.50% in 1998.

In terms of dollars, this 3.29% drop in the LRAB represents an increase in the projected cost of the program of more than $100 billion a year and of over ten trillion dollars over the projected 75 year period.

The enclosed table* contains the 20 years of data underlying the graph. There were, in total, 101 changes in assumptions and methods made over the period. Of these, 68 were negative, raising the projected cost of the program, while 33 were positive, serving to reduce the cost, a two-to-one ratio. While a strict comparison obviously cannot be made here with probabilities arising from 101 tosses of a coin with equal likelihood of a head or tail, there is sufficient discretion in the decision making, so that the choice of 68 negatives out of 101 can be considered significant in the absence of adequate justification. (Sixty-eight tails out of 101 coin tosses have less than a 1% chance of occurrence.)

The 46% cost increase in 1994 Of note is the increase of 0.67% of taxable payroll that occurs in the 1994 Trustees’ Annual Report, which raised the negative actuarial balance for the 75 year projection, with the effect of legislative changes included, from -1.46% to -2.13%. This extraordinary 46% cost increase is what the Social Security Advisory Council, formed later in 1994, was faced with at its first meeting, and which was the basis for seven of the thirteen members of the Council calling for some form of privatization to “protect” Social Security.

The 1994 cost increase of 46% resulted from the following, all of which served to raise program costs: finding more people at high ages, lowering the total fertility rate, lowering mortality rates, reducing legal immigration, reducing the real wage differential, reducing the proportion of covered taxable wages, and increasing the level of projected benefits. No change is noted that would improve Social Security’s financial position, although a case could have been made for doing so, or at least being less negative, in at least some instances.

*For a copy of the table, OASDI’s Long Range Actuarial Balance (LRAB), 1979-1998, send a request with a stamped, self-addressed envelope to the National Jobs for All Coalition, 475 Riverside Dr, Ste. 832, NY, NY 10115.