1998


From: Society of Actuaries

SOA Study Says Social Security Financing Would Be Relatively Unaffected By Largest Expected Mortality Improvements, But Uncertainty Persists SCHAUMBURG, Ill. -- Social security financing in the United States and Canada is relatively immune from even the largest increase in human life span predicted by experts, a recent study concluded. However, while experts believe life span will continue to lengthen and there will be larger populations of the elderly, there is much discrepancy about the predicted rate of mortality improvement. This wide discrepancy creates an uncertainty that can and should be accounted for in mortality projections on which social security financing is based, study organizers said.

"Developments in genetic technology and other areas could ease the impact of many diseases and extend human life," said Anna Rappaport, 1997-98 president of the Society of Actuaries, which conducted the study. "In addition, we know from our research that more attention must be directed to the support of larger populations of the elderly."

Results of the project were announced at the Society of Actuaries' (SOA) session, 8-11 a.m. Feb. 17, during the 1998 Annual Meeting of the American Association for the Advancement of Science, Feb. 12-17, Philadelphia. The session, entitled "Social Security in NAFTA Countries: What if People Stop Dying?", presented the results and an overview of the SOA project "Impact of Mortality Improvement on Social Security: Canada, Mexico and the United States." The NAFTA countries' social security administrations cosponsored the project.

Phase 1 of the three-phase project was a literature review of existing knowledge of mortality forecasting. Phase 2 was the convening of an invitation-only seminar of experts and a survey of those attending. The survey included questions about expected mortality improvements, and the results served as a basis for Phase 3, a test of the impact of these mortality improvement rates on social security financing by each NAFTA country's social security administration. (Mexico's projections were not completed by press time.)

The experts surveyed stated a wide range of possible ultimate average annual mortality improvement rates, from 0% to 2%. "This indicated a great degree of uncertainty on this topic," said Michael Sze, Fellow of the Society of Actuaries (F.S.A.), organizer of the project.

Canadian officials created new mortality projections based on the experts' 95th percentile of highest and lowest projections and starting from the mortality figures for 1997. The new projected financial picture of the Canada Pension Plan (CPP) was very similar to that of existing projections. Officials then looked at the impact on the CPP tax rate of four scenarios: current assumptions about the rate of mortality and the experts' median, highest and lowest suggested rates. Less than 1% difference in the tax rate was projected.

The results were:

  • current assumptions, a stable CPP tax rate of 9.9%;
  • experts' median, 10.1%
  • experts' highest rate (experts' median plus 2 standard deviations, corresponding to the experts' 95th percentile), 10.6%;
  • experts' lowest rate (zero improvement), 9.7%.

Officials of the U.S. Social Security Administration (SSA) also presented mortality projections for four scenarios. The necessary tax rate for the next 75 years under each scenario was:

  • mortality rate under the SSA's current intermediate (rather than highest or lowest) assumption: 14.6%
  • experts' median, 14.7%
  • experts' median plus 2 standard deviations, 15.3%
  • experts' lowest rate (zero improvement), 14.2%.

"These results support the current range of mortality assumptions used by the Social Security Administration," said Steve Goss, SSA deputy chief actuary.

"This offers strong evidence that both the U.S. and Canadian social security plans are relatively immune to mortality fluctuations," noted Sze.

However, he said, results of the Phase 2 survey of experts indicated a high degree of uncertainty about the rate of mortality improvement.

"The experts definitely agreed that mortality improvement would continue. However, there are great discrepancies among their predictions for the magnitude of improvement," Sze said. "Also, we need to consider the inflow to the population base of each NAFTA country caused by immigration and the fertility rate. All of this could add up to much larger populations of the elderly. In addition, there are speculations that recent genetic breakthroughs could lead to dramatic extentions of human life. If such speculations were to materialize, they would add to the uncertainties that seem to grow every day.

"So it is increasingly important for retirement planners to face these uncertainties. Fortunately, mathematical processes exist that actuaries can use to identify, quantify and manage risks and uncertainties."

Project sponsors, in addition to the Society and the three social security administrations, were The Actuarial Foundation, the Retirement Research Foundation, the American Society of Pension Actuaries Education and Research Foundation and the Pension Research Council.

More information on the project is available from Judy Yore at the Society offices, 847/706-3572, e-mail [email protected]. Materials from the Phase 2 seminar are available in two packages -- costs are $25 and $75 -- through the Society's Books Department (phone: 847/706-3566; fax: 847/706-3599; e-mail: [email protected]), which can provide details on the packages.

EDITOR'S NOTE: All materials are free of charge to journalists.




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