THE ACADEMY RELEASED A POSITION STATE- MENT on behalf of the U. S. actuarial profession in August 2008 calling on public policymakers to
address Social Security’s long-term financial issues by increasing the retirement age to reflect increased longevity.
In its statement, the Academy said that while increasing the retirement age may be only part of the solution,
by acting now, policymakers would have a broader range
of policy options from which to choose and be able to apply those options to more of the population.
At a July 8, 2011, hearing on Social Security’s current and future benefit expenditures convened by the
U.S. House Committee on Ways and Means Subcommittee on Social Security, Tom Terry, chairperson of the
Academy’s Public Interest Committee, reiterated the
Terry testified that some of the assumptions underlying the system, including life expectancy, no longer may
be appropriate for today’s working population and beneficiaries. He said that the program’s retirement age hasn’t
kept pace with longevity improvements, noting that life
expectancy for a 65-year-old today is approximately 50
percent higher than it was in 1937 when Social Security
was first implemented.
“Every actuarial forecast or projection that has been
done since then has, in fact, updated and anticipated improved longevity,” Terry said in his testimony. “To restore
balance to the system, and to maintain that balance between the working years and the retirement years, the
Academy believes that it’s paramount that at the top of
any list of reform items, increasing the retirement age
has to appear.”
In a list of ways that policymakers could lessen the
impact on segments of the workforce that could be inequitably affected by any increase in the Social Security
retirement age, Terry said that “disparate distribution
of longevity gains across the population—with wealthier socioeconomic groups recently showing more
longevity improvements than poorer socioeconomic
groups—could be addressed by modifying the progressivity of the benefit formula in conjunction with retirement
To read Terry’s formal written remarks, which expand on his hearing testimony, go to www.actuary.org/
To read the Academy’s 2008 statement, go to http://
48 CONTINGENCIES SEP | OCT.11
to 14.2 percent, 14.3 percent, and 13.7 percent for the next three
scenarios. The differences were, accordingly, 190, 170, 180, and
120 basis points. Similar results obtained for women, in which
the differences were 160, 140, 140, and 100 basis points.
This can be interpreted to signal that individuals whose
higher mortality is associated with a lower socioeconomic status will, in fact, lose more in relative terms if the age of pension
eligibility is raised. The loss may not be as much in absolute
terms, since the pension levels of the higher socioeconomic
group—to the extent that the age when receiving a pension relates to earnings—are likely to be greater. Nonetheless, it can
create what could be considered an unfair situation.
It’s important to note that my results showed that the disparity persists even when both groups had the same levels of
relative improvement in mortality rates—or even if the mortality rates of the lower socioeconomic group improved enough
to hold the difference in life expectancy constant. Even a doubling of relative improvement in longevity didn’t remove this
unfairness—although it ameliorated it (and over time it could be
expected that the disparity would diminish completely).
The second exercise looked at indicators from the perspective of current 20-year-olds. It compared the benefit multiple for
a pension at the age of 65 derived from assuming contributions
of 10 percent of salary. It then looked at the proportional change
in the multiple if the retirement age was moved up to age 67.
As one would expect, the differences in mortality rates had
a significant impact on benefit multiples. Under the first scenario, for example, men in the higher socioeconomic group
could get 1.20 percent per year for that contribution rate, while
those from the lower socioeconomic group could expect 1.57
percent—quite a difference. Allowing for improvements in mortality brought the benefit multiples down—0.97 percent per
annum for the higher status group, and from 1.19 percent to
1.01 percent per annum for the lower status group. The results
for women were similar.
There are two points to note from this. One is that there
seems to be a good argument for some progressivity by income level in the benefit accrual rates (a reduction in accrual
as income increases, for instance). It would be an interesting
exercise to see how the U. S. Social Security benefit accrual formula stands up in this regard.
The other point is that any potential for unfairness doesn’t
change much if the level of mortality improvement for the
lower socioeconomic group only matches that of the higher
group in relative terms, or is such that the absolute difference
in life expectancy holds constant. But doubling of the rate of
improvement until convergence is reached—however unlikely
that may seem in the light of current evidence—does have a
marked effect. It’s more pronounced in this exercise than the
first, of course, because the starting age is now 20, not 65, and
convergence occurs much earlier.
When the age at which the pension commences moves out