System and what the options are to fix it if you can find on my person policy. Org. Today were here with steve and carried them so lucky to be joined by them because they are both people who i have long admired it is so secure the policy space. Very few people who know more about the program and the two of david vitter working on it for a number of years. What i love about both of them is that they are walks at heart and actuaries of the mind, and so you can ask of what percent do i need to increase the payroll tax by in order to solve half of the substituted problems . They will give you the answer like that. But if they tried really, really hard they condemn it down enough for the rest of us so we can actually understand whats going on in this policy issue. You can find their full bios in the package that you have but steve is a chief actuary, has been for many years at the Social Security administration. He is responsible for scoring all of the proposals that members of congress, outside groups like this commission, submit and request assistance with sync with the impacts would be on the program as well as for contributing to the annual Trustees Report and many other responsibilities that i wont detail here. And karen is the deputy chief actuary of the Social Security administration. So with that im going to turn it over to them for a brief presentation on the financing and some of the policy options that are on the table for fixing Social Security. If you have a question at the end please retur refrain it andl do some q a. When it is your turn to ask a question please make sure you speak loudly so that everyone in the room can hear you. So with that i think karen will start off. Canada make one little comet on your initial question to the group, shai, just cant resist. Something like 20 years ago or so something but which a lot of people in the room would not have familiarity, there was a survey done at some of us older folks were familiar with that was asked a bunch of young people if youre more likely to Social Security benefits or space aliens. In a lifetime. The answer was almost unanimously space aliens. So i was at a point short after that talkative bunch of people a little bit older than you all as interns that were payroll administrators for various corporations all over the place. They were all people pretty much in the 20s. I raised that question to them and all the hands went up for space aliens, of course. How cool is that quick then i said so you are making a pretty good income here now, and since you no, you are not going to get anything from Social Security you are probably saving a huge portion of your salary. You are probably saving like crazy. There was molding around the group that one guy stood up and negative we didnt really mean nothing. I think really its kind of a cool thing to say, to be cynical and not expect staff but when he came right down to it they were not walking with, there were not voting with their feet. Tells you more about the psychology than there actually believe. Exactly and with that, sorry. Karen will tell you the real story. Thank yothank you so much, sd welcome everyone. We are just going to give you a little bit of background on Social Security financing and some options to change it for the future. So to begin, Social Security is to legally distinct trust funds. Theres the oasi fund in which is old age and survivors insurance. Thats really the retirement and survivors funds. Then theres the Disability Insurance fund, which is for disability benefits. Really those two are separate legally. Oftentimes we will talk about them on a combined basis, but really they are separate and cant borrow from each other. The Financial Operations are overseen by the board of trustees. There are six trustees, typically. There is the secretary of the treasury who is the managing trustee. The secretary of health and human services, secretary of labor, commissioner of Social Security and then there are two Public Trustees dominated by either party. Right now this positions are vacant and they had been for a couple of years, but were hopeful well get some folks on board soon. Folks. As i mentioned the two funds are often looked at on a combined basis. At the end of last year there were about 2. 85 trillion in the trust funds. Those combined funds have run surpluses since the early 80s, and they are expected to do so through about 2021. Beginning in 2022, those reserves will start to go down until we expect them to be depleted in 2034. So thats, what, about 17 years from now. When they are depleted we still expect that about 77 of benefits will be able to be paid, and thats if nothing else is done, if no legislative changes are made, still 77 benefits will be paid. Looking separately, the di fund is in a little bit worse shape. Its expected to be depleted in 2028. So attention needs to be paid to that and little bit sooner. All right. This graph here just shows you as a percent of gdp have much the trust funds hold in reserves. So you can see that back in the 1980s the fund was getting very low. At that Time Congress got together, made a compromise, and passed in 1983 amendments which brought more revenues into the funds and cut benefits for little bit. So at that point, asset start to go way up until about, this is all as a percent of gdp, but until very recently assets are going up as a percent of gdp, and now they are expected to decline until 2034. So how does Social Security get its income works i think most of your scene in your own paychecks, employees and employers each pay 6. 2 of their earnings into the trust funds. Selfemployed pay both of those pieces, so the employer and the employee piece to make it 12. 4. That is on earnings up to 1,272,000. Thats often called the taxable maximum, the tax cap peculiar various names for it, but basically earnings above that level are not taxed for Social Security benefits. Another piece of the income is taxes on Social Security benefits. Retirees and disabled folks, beneficiaries with high incomes pay some taxes on their benefits, and that goes into the trust fund as well. And finally theres interest on those trust Fund Reserves here the trust funds are invested in interestbearing securities, and we get interest from treasury on a regular basis. So now where does the money go backs mainly benefit payments. The vast majority about goes our benefit payments. About 61 Million People were getting benefits as of the end of last year. 44 million of those were retired workers and their dependents. 6 million were survivors of deceased workers, and about 11 million disabled workers and their dependents. Administrative expenses are another piece of the outgo, very low,. 7 of the expenditures. This is just a little graphical way to see what i just told you. The stuff on the top is the income. So you see the payroll taxes are the vast majority of the income. Tax on benefits are pretty small. Interest is a little bit bigger. And on the bottom of the graph use the benefits going out, the vast majority of the outgo. Theres a little bit of this little tactical thing but we havhadan exchange with the raild retirement board to sort of true of our benefits with theirs. And then theres the administrative expenses, 6 billion sounds like a lot of dollars but in comparison with the benefits, it is really pretty small. Okay, so why do we have trust fund at all . The trust funds really provide a reserve so benefits can be paid even when there isnt enough income coming in. A lot of people think of it as you need at least one years reserve in a trust fund to make it reasonable. Right now weve got about three years of reserves. We do expect those to go down, and assess it before we expect them to become depleted in about 2034. One important thing to note. The funds cant borrow. They can only spend what has been collected. So when there is not enough money coming into the fund, it wont be able to pay full benefits. One thing youl you often hear , other trust funds real . By the just an irq sitting in a filing cabinet somewhere . What does real mean i guess is a question . Is reserved duty plate, full benefits cant be paid. Some of these funds are real in the sense that they have consequence. The trust fund really do force congress to act in order to keep benefits going as happened in 1983. Trust funds were about to deplete. They didnt just let them deeply. They are real in the sense that congress has to change things in order to keep the program going. Quickly, we want to get to questions eventually, how do we typically expressed the future shortfall . To look at things on a comparable basis we you should look at things as a percent of the taxable payroll of the program. So this is a good way you can look at something in 1940, you can look at something now and put it on a comparable basis. So for example, in 2045 we expect taxable payroll to be about 24. 1 trillion. This is all the earnings that will be taxed by the program. Incomes to the program is expected to be about 3. 2 3. 2 trillion. So if you divide those two, income is 13. 24 of payroll. Similarly, look at the cost of the program which is expected to be about 4 trillion. Thats 16. 72 of payroll. So to get the shortfall in that year you just take the difference between the cost and income and thats really a gap that needs to be filled. And that shows exact same thing graphically. If you focus on the 2045 line that we just talked about, you will see that the cost of the program, dotted blue light at the top, is a good bit above the income we expect to become into the program. So there is a gap. There is a shortfall at that point, and its the job of congress and all of you to figure out the way to fill that gap. And now steve is going to go over a few slides and then i will come back and talk about some of the options that weve got for fixing the program took. [applause] okay, thanks karen, thanks shai and fatal for being here. Remember, and eclipse is not the same as space aliens. Thats just going to be the moon sort of, going to the movie on over it. I want to just add a bit of what karen had put forth about the basic nature of the Social Security program and how it is finance, talk about the size of the shortfall which we will be addressing later, and beyond that even the reason why we are looking at having a shortfall coming. First of all as can indicate where looking at this notion of when the reserves deplete. As karen mentioned, reserve depletion of what actually forces congress into action because cool, if youre a member of congress once you all of a sudden have a 77 payable one 723 reduction in the multibenefits from one month to the next for your constituents who will not be have become your chance to get her elected will probably be affected by that. Congress as i stepped up on a timely fashion. You can see a picture of where we are. Karen showed the same graph as a percent of Gross Domestic Product this expressive level of the reserves we have been building up and are now bringing down as a percent of the annual cost of the program. Its called a trust fund ratio. As karen indicated, historically we have maintained a contingency reserve about one years worth of outgo. Why . Because recessions happen. We discovered that recently at the end of 2007, and they and they can take away some of your reserves, and having a reserve cushion allows Congress Time to Pay Attention to realize whats going on with the help of our Trustees Reports and then take timely action. You can see the interesting want is a light blue line, the Disability Insurance program. Back in 1994 the reserve ratio was dropping down precariously low and we were checking that in 1995 it would hit depletion. So congress of course realizing that, we told them, the acted. In 1994 enacted a little reallocation of putting some of the oasi tax rate over to the di fund. That caused moving up the di fund. We knew that would bring a lot but in 1995 we rejected that would carry the di fund to reserve to depletion not in 955 1995 but were estimating 2016. Flash forward forward to 2015 crystal estimating that the reserve depletion would be in 2016. Pretty lucky guess back in 1995, right . We are in much better financial shape for osi then we are for di and the combined by osi of course so why have things gotten better on this putting . For those of you not real familiar with the terminology, incidence rate is number of people really becoming disabled, filing four and is starting to get insurance benefits. As a percentage of all the people out there that are insured and not receiving a benefit. We call that the exposed population, number of people that potentially can file for benefits and get it and you can see historically its averaged a little over five percent , 5. 4, i believe that is per thousand. Whatever, 5. 4 per thousand, half a percent each year of the exposed population actually becomes disabled and starts getting benefits. You can see it goes up and down. Not really surprising, you see the right real last big peak around 2010 in 2009, 1011 we had a peak with the incidence rate, why . A big recession comes, a lot of people lose work. A lot of people under normal circumstances in a economy who could qualify for benefits and have significant impairments will nonetheless be unable to hold down a job. They will be retained in a job, still productive but when a recession comes along and they lose their work like everybody else, theyre going to try to find a way to feed themselves and their family so if people can file for a benefit whether the and retirement benefit, people will file, our allowance rate for disability goes down a lot in a recession a lot of people file for benefits that are not qualified but a number are. You actually have a boost in incidence rates but look at whats happened to the solid line going on after the peak in 2010. You can see in successor Trustees Reports of 2012, 13, 14, 15 and now even the Trustees Report, weve been projecting this drop ins incidence rates after the from the recession would be coming back up our longterm expected average and it just has not been. The incidence rates have just been dropping, dropping and to the levels that we have not been expecting that are quite frankly surprising and we are doing work trying to understand why this is happening but as a result of that big drop, that we have had this extension you saw in the prior side knowing for the blue line to the solid blue line, we are working in better financial shape than a year ago. After the broader presdi program as a whole carrying the 3010 look at the combined basis, most of the time in part because even though we do have to separate funds, one of them is in trouble and the other isnt. Iris will step in as they did in 1994 and again in 2015 and see round reallocation of tax rates, sort of true up the funds that keep them operating more on the same path. We look at them on a combined basis and as terry indicated we are rejecting but a combined trust funds could deplete our reserves which means that what they are after we would only under the law be able to pay out as much money as we have continuing to come in which is the sort of ratifying here, our income rate, thats all percentage of our tax base, the tax payroll where the money altered only up to the first hundred 27,200 above that we dont count. But looking at across our whole economy. We can see that we would drop down to pay only what we can and then as terry indicated, at the point of reserve depletion in 2034 we dont have . 77 of continuing tax revenue coming in for every dollar of benefit authentication and modifies a little bit over time, not dramatically to . 73 for every dollar by thetime we get way out there. Important for some of you all and maybe me, 2095. Now, why in the world is cost rising so much as you can see on the slide you can see the cost rate, the blue line which continues, thats what the cost of paying the full benefits would be for the next 20 years this is rising, why is the cost rising so much . You really try to emphasize that for policymakers on the hill and policymakers this afternoon, understanding why you have a problem, why you have a challenges important than finding what you are going to do about it. Why we have one, the first part of this is a number of beneficiaries compared to the number of workers is really whats important because we are facing a payasyougo system. Youve all heard this, coming in from todays workers is what finances the benefits paid to todays beneficiaries so the relationship here, the ratio of the beneficiaries to workers is really important. Within the next 20 years, that is rising a lot. Again, the question is that what the cost is going up because beneficiaries is rising faster than workers, why is that . Its just fundamentally at the population, some people are too young to have ever heard this adage about graphics is definitely, its true. If you look at the black line, this gives you another ratio that we look at, its a cure populationbased ratio , the number of people defied anolder , provided by the number of people working, a rough approximation of sort of what the benefit group is, the Beneficiary Group compared to the people contributing or working in our society. You can see that was rising a little bit for a long time up to 2008 and all of a sudden we had this big level shift and occur that is going to happen within the next 20 years and of course the question why is that . Look at the blue and purple lines and you can see they will continue to grow at a rate, those lines are ones that we found a simulation of what if at the end of the baby boom. , during which on average women were having 3. 3 kids over a lifetime, dropped down to do, what if the number of kids per couple in our society had stayed at three or 3. 3 . You see this age of dependency ratio would not have this baby off that weve got, it wouldve stayed at a very little increase, we would be talking about shortfalls of Social Security or medicare. A little bit of the rise we have here would be continued aging. So you see here really big ships has occurred in the age distribution of our population and its really not so much a matter of the living longer, death rates have been