1 Recommendations of the Social Security 2015 Technical Panel on Assumptions and Methods Joe Silvestri Government Accountability Office Karen Glenn Social Security Administration Middle Atlantic Actuarial Club November 6, 2015

2 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

3 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

4 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

5 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

6 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

7 … 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

8 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

9 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

10 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

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

12 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

13 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

14 Effects of TPAM Recommendations on Actuarial Measures

15 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

16 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

17 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

18 Mortality Assumptions: OCACT/Trustees A small selection from our analysis: Average Annual Rates of Reduction in Central Death Rates by Age Group, Sex, and Cause

19 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!

20 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? 21 Mortality Assumptions: Comparisons with JHU Researchers

22 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 23

24 Mortality Assumptions

25 Mortality Assumptions

26 Mortality Assumptions: Discussion

27 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

28 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

29 Real Interest Rate Assumption: OCACT/Trustees

30 Real Interest Rate Assumption: OCACT/Trustees Over the last 5 complete business cycles ( ), the average annual real interest rate was 3.17 percent However, recent interest rates have been extremely low: just 1.07 percent for 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

31 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

32 Real Interest Rate Assumption: Discussion

Other TPAM Recommendations to Highlight Fertility assumption General concurrence on (lack of) growth in disability program Labor force participation 33

34 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

35 Q & A

36 Further Information 2015 Social Security Trustees Report and more details on OCACT assumptions and methods: TPAM report: PAM_Final_Report.pdf?ver= PAM_Final_Report.pdf?ver= Social Security Advisory Board: