Social Security:

Actuarial Projections of the Trust Funds

AIMD-00-53R: Published: Jan 14, 2000. Publicly Released: Jan 14, 2000.

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Pursuant to a congressional request, GAO reviewed the Pricewaterhouse Coopers (PwC) report on the actuarial projections for the trust funds of the Old Age, Survivors, and Disability Insurance programs, focusing on whether the Social Security Administration's (SSA) Board of Trustees': (1) 1999 long-range intermediate actuarial projections--their best estimates--as presented in the Trustees' 1999 report are based on generally accepted actuarial methods and techniques and include economic and demographic assumptions that contain no material defects because of errors or omissions and are individually reasonable; and (2) sensitivity tests include all assumptions that could have a significant effect on the projections and are reasonable.

GAO noted that: (1) PwC found that the actuarial methods and techniques used in preparing the long-range intermediate projections of the Social Security trust funds were sound; (2) it also found that the assumptions used in preparing the projections in the Trustees' report were individually reasonable at the time of the projections; (3) 7 months after the Trustees' 1999 report, on October 28, 1999, the Department of Commerce's Bureau of Economic Analysis released revised estimates of gross domestic product and other economic indicators for the period from 1959 through the second quarter of 1999; (4) PwC noted that these revisions may affect some economic assumptions and as a result, some assumptions may no longer be reasonable for future reports; (5) according to SSA officials, SSA actuaries have already begun reviewing the impact of these revisions for the Trustees' 2000 projections; (6) with regard to one of the demographic assumptions--mortality--the recent Technical Panel report concluded that the long-range cost of the Social Security system as currently designed is likely to be higher than previously projected; (7) the panel based its conclusions largely on indications that life expectancy will increase faster in the next century than currently assumed by the Trustees; (8) in contrast, PwC concluded that in the aggregate, the mortality assumptions used by the Trustees were reasonable; and (9) in addition, the sensitivity tests shown in the Trustees' report were reasonable.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The OCACT incorporated changes in productivity in the 2000 Trustees Report as a result of the revised BEA estimates. The OCACT continually monitors revisions in measures of economic performance by the BEA.

    Recommendation: SSA should conduct research as to the effect of the recently announced BEA revisions to historical measures of economic performance on long-term projections of the OASDI Trust Funds.

    Agency Affected: Social Security Administration

  2. Status: Closed - Implemented

    Comments: Beginning with the 2003 Trustees Report, SSA provides an estimate and measure of the actuarial status for both the long-range (75-year measurement period) and for the infinite future (a 100 year measurement period). Though the infinite period actuarial balance deficit is substantially greater than for the 75-year measurement period, it provides a fuller description of the long-run unfunded obligations of the OASDI programs. This presentation not only avoids the annual negative incremental change in actuarial balance from one year to the next, but extends the measurement period past the point where the annual change becomes an increase in the actuarial balance.

    Recommendation: SSA should consider reflecting estimated costs after the end of the measurement period in a way to reduce the impact of the annual change in actuarial balance in the years covered in the measurement period.

    Agency Affected: Social Security Administration

  3. Status: Closed - Implemented

    Comments: OCACT's FTE allocation increased gradually from 49 at the end of fiscal year 1999, to 54 scheduled for fiscal year 2005. Documentation efforts have increased with the addition of this staff. OCACT has developed several policies and procedures regarding documentation, including detailed instructions for producing the long-range Trustees Report. In addition, OCACT has established a standard "work flow process" form, which describes the work flow for each computer program and has developed written instructions for employees to use when completing work flow forms. Procedures to generate projections are documented in the work flow process instructions. Also, each change in method proposed internally by OCACT staff is written up and submitted for approval. In addition, OCACT has made improvements to enhance documentation of the projection model, including documentation of the inputs and outputs used for the economic projections.

    Recommendation: SSA should develop enhanced documentation and enhancements to projection methodology, it would be appropriate to expand the resources available to the OCACT to perform such necessary additional functions and analyses.

    Agency Affected: Social Security Administration

  4. Status: Closed - Implemented

    Comments: Each year, the National Center for Health Statistics provides SSA with data for the fertility projection. At that time, racial differences and other factors such as age, education, and income are examined.

    Recommendation: The Trustees and the OCACT of SSA should test assumptions regarding reasonable convergence of racial differentials outside the general fertility model for the long-range projection

    Agency Affected: Social Security Administration

  5. Status: Closed - Implemented

    Comments: Beginning with the 2002 Trustees Report, OCACT has used seven major causes of death instead of 10. OCACT also continues to consider recent trends in the cause of death mortality rates as it develops its assumptions. OCACT has reviewed alternative projection hypotheses. For example, OCACT has projected mortality using alternative methods, such as the Potts-Schwartz method and Lee-Carter method.

    Recommendation: The Trustees and the OCACT of SSA should consider in their future development of assumptions used in the long-range actuarial projections: (1) trends of cause of death probabilities within the initial base period that should be conducted in projecting future trends; and (2) significant alternative projection hypotheses that exist regarding long-term mortality trends. This area should be continually reviewed to update the methodology of mortality projections, particularly trends by age and sex regarding fundamental drivers of mortality, including smoking, cancer and obesity trends.

    Agency Affected: Social Security Administration

  6. Status: Closed - Implemented

    Comments: OCACT has updated the baseline disability incidence and termination rates. The baseline incidence rates were updated from 1984-86 to 1994-96. The baseline termination rates (death and recovery rates) were updated from 1977-80 to 1991-95. These updates were first introduced in the 2001 Trustees' Report.

    Recommendation: The Trustees and the OCACT of SSA should consider in their future development of assumptions used in the long-range actuarial projections DI mortality rates used in the long-range projections and the age-sex baseline rates of incidence and termination to reflect more up-to-date experience.

    Agency Affected: Social Security Administration

  7. Status: Closed - Implemented

    Comments: The OCACT prepares and tests the alternative approach to directly model the real wage differential and provides this information to the Trustees for their consideration.

    Recommendation: The Trustees and the OCACT of SSA should consider in their future development of assumptions used in the long-range actuarial projections the alternative approach to directly model real-wage differential, rather than relying solely on a linked-GDP modeling approach.

    Agency Affected: Social Security Administration

  8. Status: Closed - Implemented

    Comments: The Trustees collectively select assumptions for total labor productivity, taking into account their understanding of the historical contribution of capital and possible trends of capital deepening in the future. After considering this recommendation, SSA decided not to explicitly factor this disaggregation into their model.

    Recommendation: The Trustees and the OCACT of SSA should consider in their future development of assumptions used in the long-range actuarial projections in future models the role of capital and the effect of economic sectors in projection of potential GDP. Efforts should be made to reconcile CBO and SSA potential GDP projections. Although the CBO methodology is not designed for a seventy five year forecast, some of the CBO model's strength could be adopted to refine the medium range period of the projection.

    Agency Affected: Social Security Administration

  9. Status: Closed - Implemented

    Comments: The OCACT performed an extensive analysis of historical behavior of average hours worked for the 2001 Trustees Report. In addition, the OCACT performed an extensive analysis of the historical behavior of the ratio of compensation to total GDP, a concept closely related to earning as a percentage of total compensation.

    Recommendation: The Trustees and the OCACT of SSA should consider in their future development of assumptions used in the long-range actuarial projections additional research for both average weekly hours and earning share of total compensation assumptions. Although relatively small in impact, the ultimate values of both of these assumptions appear somewhat lower than our best-estimates based upon future knowledge. Both variables directly influence projected wage growth together with projected program revenues.

    Agency Affected: Social Security Administration

  10. Status: Closed - Implemented

    Comments: After considering this recommendation, SSA concluded that an explicit feedback loop is not necessary because they do not believe the revenue source generated to pay Social Security taxes will be significant to the final projections.

    Recommendation: The Trustees and the OCACT of SSA should consider in their future development of assumptions used in the long-range actuarial projections a feedback loop. OCACT should determine whether the assumptions should be modified if the resulting projected environment would prove that the initial assumptions made are no longer appropriate.

    Agency Affected: Social Security Administration

  11. Status: Closed - Implemented

    Comments: After considering this recommendation, the OCACT came to the conclusion that structural breaks must be analyzed separately for each assumption.

    Recommendation: The Trustees and the OCACT of SSA should consider in their future development of assumptions used in the long-range actuarial projections a consistent approach to identification and reflection of structural breaks in historical experience used as a base for development of assumptions used in long-range projections.

    Agency Affected: Social Security Administration

  12. Status: Closed - Implemented

    Comments: After considering this recommendation, OCACT came to the conclusion that the economies of underdeveloped nations will have little impact on the strong U.S. economy. The OCACT stated that the recent recessions in Europe and Asia had no impact on the U.S. economy. OCACT officials also noted that forecasting global economies would involve too much uncertainty to be of value.

    Recommendation: The Trustees and the OCACT of SSA should consider in their future development of assumptions used in the long-range actuarial projections the impact of global economy. As economies worldwide become increasingly linked, consideration should be given to enhancing SSA's models to reflect expected future developments in foreign countries.

    Agency Affected: Social Security Administration

  13. Status: Closed - Implemented

    Comments: OCACT has begun to develop a process to assist it in preparing this analysis (e.g., stochastic modeling). Stochastic modeling presents the range and probability of possible forecast results obtained by varying a set of interrelated assumptions for possible conditions rather than presenting a range of forecast results based on varying only one assumption at a time. Since 2003, SSA has included stochastic projections as an appendix to the Trustees Report.

    Recommendation: In general, values used in sensitivity tests for specific assumptions need not be the same as the values included in the aggregate sensitivity tests.

    Agency Affected: Social Security Administration

  14. Status: Closed - Implemented

    Comments: The OCACT has conducted additional sensitivity tests, including an analysis of real-wage increase, reflecting greater labor productivity than assumed previously, and an analysis of marriage and divorce sensitivity.

    Recommendation: SSA should perform additional sensitivity tests on labor productivity. Consider the addition of tests on other assumptions, including GDP, martial status, and wage to compensation.

    Agency Affected: Social Security Administration

  15. Status: Closed - Implemented

    Comments: SSA's Office of the Chief Actuary (OCACT) has developed several policies and procedures regarding documentation, including detailed instructions for producing the long-range Trustees report. In addition, OCACT has established a standard "work flow process" form, which describes the work flow for each computer program and has developed written instructions for employees to use when completing work flow forms. Procedures to generate projections are documented in the work flow process instructions. Also, each change in method proposed internally by OCACT staff is written up and submitted for approval. In addition, OCACT has made improvements to enhance documentation of the projection model, including documentation of the inputs and outputs used for the economic projections.

    Recommendation: SSA should enhance current documentation, particularly in the areas of the economic assumptions and the long-range model.

    Agency Affected: Social Security Administration

  16. Status: Closed - Implemented

    Comments: After considering this recommendation, the OCACT did not identify any additional sensitivity tests that should be conducted.

    Recommendation: SSA should identify whether sensitivity tests should be conducted on a combination of related assumptions, particularly economic assumptions.

    Agency Affected: Social Security Administration

 

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