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N
E W S R E L E A S E
INCONSISTENT
ECONOMIC ASSUMPTIONS USED BY SOCIAL SECURITY ACTUARIES FAVORED
PRIVATIZATION PROPOSALS
Academy agrees assumptions were inconsistent
David Langer
Company, Inc. 60 East 42nd Street, New York, NY 10165
For additional information contact: David Langer Tel: 212-986-2942
Fax: 212-573-9743
The American Academy
of Actuaries has acknowledged that inconsistent assumptions about
the economic future have been used by the Social Security Administration's
actuaries and others in making financial projections for proposals
to privatize Social Security. In an issue paper released on August
12, the Academy noted the effect is that "The advantages touted
for a particular reform plan may be the result more of the assumptions
used by its supporters than of the actual provisions of the proposal."
The Academy's paper
is a momentous one, because the factors used by the Social Security
actuaries in their projections to compare the national social
insurance program with the privatization proposals heavily favored
the latter. For example, the average gross domestic product used
for the 75 year financial projections for Social Security was
a mere 1.5%, while the range underlying those for the privatization
proposals was 3.5% to 5%, enabling the use for the latter of an
investment yield on equities of 7%.
The importance of
this inconsistency is that if the same 3.5% to 5% GDP range had
been used by the actuaries for the 75 year cost projections they
prepared for the Social Security trusteesô Annual Reports, then
the more than 2% deficit they calculated would have vanished.
In other words, there would not be the so-called financial problem
that has been used by the privatization groups to blacken the
eye of Social Security. Conversely, if the privatization proposals
were based on the same 1.5% GDP as for Social Security, then the
yield on equities would likely be under 5%, and the projected
privatized benefits would be far less attractive when compared
to those arising from Social Security and thus much less deserving
of attention as viable alternatives.
As a result of the
Academy's issue paper, interesting decisions now confront all
those who have been involved in the process of making financial
projections. For instance, the 13 members of the Social Security
Advisory Council, 1994-1996, could conceivably request a redoing
of its report issued in January 1997, which put forward two privatization
proposals for serious consideration by the public. The decision
to put them forward had been made by the council's Chairman, Edward
Gramlich, over the objections of Howard Young, an actuary and
then chairman of the Advisory Council's Technical Panel on Assumptions
and Methods, who asserted that his panel had not been given the
opportunity to evaluate the privatization proposals.
Moreover, what will
be the reaction of the members of Congress who have submitted
legislative proposals based on the tainted projections of the
Social Security actuaries? They could conceivably ask for a rerun
of the projections, or simply drop their proposals.
Finally, the SSA actuaries
and the trustees now need to resolve the inconsistent use of the
GDP insofar as the Annual Reports prepared by the Social Security
trustees are concerned. The reports do not, of course, make use
of a stock market yield -- the trust fund is legally required
to invest solely in Treasury bonds; however, if the decision is
made by the trustees not to raise the current average GDP up from
the projected 75 year average of 1.5%, then the actuaries will
be constrained under the Academyôs issue paper to lower the yield
used to evaluate future privatization proposals to probably less
than 5%, which, as we have seen, will dampen interest in them.
On the other hand, if the actuaries and trustees go to an average
GDP of around 3%, then the projected 75 year deficit will cease
to exist, and the trustees may then wish to issue an addendum
to their 1999 annual report letting the public know that Social
Security has no financial problem, which will be most welcome
news.
Some observers believe
the issue paper is the Academy's response to my earlier assertions
that there have been three violations of the Academy's professional
standards, of which inconsistent assumptions was one. A second
has now become reasonably certain: the nondisclosure of the
input of the OASDI trustees on actuarial matters. The third,
the failure to take prior actuarial experience into account
in setting assumptions, may be the result of the trustees's
non-actuarial input.
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