SOA Blog

What’s an actuary to do about Social Security?

Warren Luckner discusses potential changes to Social Security.

by Warren Luckner, Director, Actuarial Science Program, University of Nebraska-Lincoln

WarrenLuckner I have been asked to provide a few thoughts on the recent (July 29) New York Times article “Muddying the Budget Waters”.

The broad issue referenced is the question of what government programs will be cut back this fall as part of the debt ceiling agreement. Specifically, the article notes that the Social Security program is being discussed in that context, although the program has not contributed to the deficit. But the article does point out that, as most know, Social Security does have significant long-term financing problems of its own due to demographics, greater life expectancies and the current weak economy. And the sooner the financing problems are addressed, the better.


The article focuses a lot on the proposed change in the measure of inflation used to adjust benefits for changes in the cost of living. Critics claim that the proposed change amounts to a benefit reduction because that measure is projected to rise more slowly than with the current index, and that the proposed index is not appropriate for the elderly. Supporters claim the proposed index is “more accurate”. In response some suggest that if accuracy – rather than cost reduction – is the goal, further analysis of an experimental “elderly” index that accounts for the fact that elderly spend a greater share of their budget on medical care would be more appropriate. This “elderly” index is estimated to increase more rapidly than the broader current index and thus would increase costs.

So what’s an actuary to think about an index change – and about other possible changes to Social Security? Or, more importantly, what’s an actuary to do? As an actuary? As a private citizen?

What do “Facts for appearances” and “Demonstrations for impressions” mean here? Within our profession’s expertise, we can analyze the financial implications of possible changes to Social Security. Fortunately, there are many who are actively involved in doing just that – notably the Social Security actuaries, and the Social Security Committee of American Academy of Actuaries. Individual actuaries not directly involved in such efforts can learn much from material posted at the Academy’s website, including “The Social Security Game”, which allows selection of various cost-reduction options and estimates how much of the financing problem is “solved” with each option . The Academy Social Security Committee has produced a large inventory of Issue Briefs on Social Security, including a just-released (August 4) updated Issue Brief on automatic adjustment mechanisms that could help address the actuarial balance challenges facing Social Security. Issue Briefs can be accessed at http://www.actuary.org/briefs.asp#soc.

The SOA’s Social Insurance and Public Finance Section, whose purpose is to “develop consistent, high quality continuing education opportunities and sponsor fundamental research into evaluating and managing social insurance programs, including public pension plans, government funded health plans, workers compensation insurance, and unemployment insurance,” also provides a vehicle for individual actuaries to actively participate in creating awareness about, and suggesting approaches to addressing, actuarial issues related to programs such as Social Security.

As private citizens, actuaries have a variety of perspectives and opinions on the public policy dimension of issues, such as Social Security financing, that are suitable for actuarial analysis. Those perspectives and opinions are input to be shared with the public policy decision-makers – local, state and federal legislators. It is important, however, when providing such input to make clear what is based on our actuarial expertise and what is based on our personal public policy perspectives and opinions.

Now what about Medicare ….

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One response to "What’s an actuary to do about Social Security?"

  • Steve Mathys says:

    I’ve been following the discussion around Social Security about 12 years now, and have consistently seen options like what Mr. Luckner proposes for “saving” Social Security. There are essentially two options, with variation:

    1) Higher premiums, or
    2) Lower benefits.

    The only way to get higher premiums is to take in more taxes. Many alternatives have been outlined above. Some of the ways to lower benefits have been described, but all of those seem to be “tweaks” rather than new ideas. Therefore, I propose a new idea to lower benefits:

    [b]Allow participants to opt-out of Social Security after a minimum number of quarters of service.[/b]

    This is analogous to allowing lapses from any traditional life-insurance policy. At some point in an individual’s life, the projected future SS benefits are higher than the projected future SS premiums. Why not allow people to “cut their losses”, make a contribution to the general welfare, and collect 12.4% more income directly to their pocketbook? They would take home their own tax as well as the employer’s tax. The employer would feel no difference, the employee has much more money and self-responsibility, and the government gets to reduce a large liability. This additional amount could be used to purchase supplemental health insurance, additional life insurance, consumed, saved, or invested.

    Obviously, if this program is designed as a “safety net” then we might be hesitant to let people make a terribly bad decision. Thus perhaps the Office of the Actuary of the Social Security program would suggest a range of optional periods in which someone could opt out. Say, after having paid in for 40 quarters (10 years), that person could elect annually to opt out. Once the person reaches age 55 (for example) no more opt-out would be available.

    If the opt-out becomes too attractive (too many people wanting to get out, such that it reduces near-term incomes too dramatically), there could be a lottery for a maximum number of opt-out spaces available.

    I am surprised that this kind of thing hasn’t been discussed before. It seems natural to me.

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