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<h2>Social Security Testimony Before Congress</h2></div>
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<p><strong>Testimony of Stephen C. Goss, Chief Actuary, </strong><strong><br>
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Social Security Administration<br>
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“The Foreseen Trend in the Cost of Disability Insurance Benefits”<br>
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Before The Senate Finance Committee<br>
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</strong></p>
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<p><strong>July 24, 2014</strong></p>
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</div>
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<p>Chairman Wyden, Ranking Member Hatch, and members of the committee, thank you very
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much for the invitation to speak to you today on this very important subject. We are all focused
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on the actuarial status of the Social Security Disability Insurance program, because the reserves
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are projected to become depleted late in 2016. Without legislative action, benefits scheduled in
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the law will not be payable in full on a timely basis once these reserves are depleted. Therefore,
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I will present to you today the reasons, which we have long anticipated and understood, for the
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recent rise in DI cost and the shortfall we face. </p>
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<p><strong><u>Background</u></strong></p>
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<p> Many analysts have raised questions about the “sustainability” of the recent period of rapid
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growth in the numbers of DI beneficiaries and the cost of their benefits. I am glad to report that
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this period of rapid growth: (1) was foreseen, (2) can be explained, and (3) is now at its predicted
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end.</p>
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<p> The figure below shows that the cost of DI benefits declined from just under 0.6 percent of GDP
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in 1980 to just over 0.4 percent of GDP in 1990, and then increased to nearly 0.9 percent of GDP
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by 2010. These changes are almost entirely explained by changes in the population and the
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economy.</p>
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<p align="center"><img src="testimony_072414a.jpg" width="715" height="445" alt="DI Cost and Income as Percent of GDP 1975-2090 Chart"></p>
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<p>Between 1970 and 1990, there was a dramatic change in the age distribution of the working-age
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population, as the baby boomers (born 1946-1965) entered young adulthood. This caused
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employment and GDP to rise much more than DI cost, as the baby boomers were still under age
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45 by 1990. However, from 1990 to 2010 the baby boomers moved from young adults under age
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45 to older working ages 45-64. Because they were replaced at younger adult ages by low-birthrate
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generations born after 1965, the share of working-age adults who were in disability-prone
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ages (45-64) grew rapidly from 1990 to 2010. The great recession of 2008 resulted in lower
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GDP, making DI cost relative to GDP rise even more by 2010. After our economy fully recovers,
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we project DI cost will stabilize at just under 0.8 percent of GDP.</p>
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<p align="center"><img src="testimony_072414aa.jpg" width="689" height="415" alt="Age Distribution of the Population Age 25+, 1940 to 2100 (2012TR) Chart"></p>
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<p>Over the next 20 years, through about 2035, the share of the working age population that is aged
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45-64 (disability-prone ages) will shrink rapidly, putting a halt to the rise in DI cost. This
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population shift has also been foreseen for decades. </p>
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<p>The rise in DI cost as percent of GDP between 1990 and 2010, due to the aging of the baby
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boomers and the lower birth rates following them, is a prelude to the increase in retirement cost
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our society faces over the next 20 years. The drop in birth rates after 1965 makes the rising
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retirement cost as a percent of GDP just as predictable as the rise in disability cost. What is most
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important to note about these changes in the population is that they are permanent shifts in the
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age distribution that are now complete for DI and will be complete in 20 years for OASI.</p>
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<p> In the 1995 Trustees Report, we projected that the cost of DI benefits would rise from 0.6
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percent of GDP in 1995 to 0.9 percent by 2025. Since 1995, historical GDP has been revised
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upward (by 5 percent for 1994 for example). Adjusting for this change in estimated GDP since
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1995 through the levels estimated for 2013, we see the 1995 Trustees Report projected DI cost
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represents 0.85 percent of GDP by 2025. Except for the effects of the unanticipated recession that started in 2008 (with full recovery expected by about 2020), actual DI cost as a percent of GDP has been and is now projected to be lower than expected in 1995.</p>
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<p align="center"><img src="testimony_072414ab.jpg" width="651" height="415" alt="Actual and Projected Cost of DI as Percent of GDP Chart"></p>
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<p>The implications of past economic cycles and various changes in the law on DI cost can be seen
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by their effects on disabled worker “incidence rates,” which are the percent of insured workers
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who become newly disabled in a year. The figure below compares the incidence rate (adjusted
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for changes in the age distribution of the population) to the civilian unemployment rate.</p>
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<p> </p>
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<p align="center"><img src="testimony_072414ac.jpg" width="610" height="415" alt="Economic cycles and policy changes fluctuate Chart"></p>
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<p>During recessions, applications for DI benefits rise, but the percent of applications that are
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approved for benefits generally declines because the standard for qualifying for DI benefits is
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based on the ability to do work that exists in the economy, whether or not job openings are
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plentiful at the time. The figure below shows how initial allowance rates by the state Disability
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Determination Services (DDS), and total allowance rates, including those allowed at appeal,
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respond to increases and decreases in disability applications (claims) as unemployment rises and
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falls. Allowance rates change counter to the civilian unemployment rate with about a 2-year lag,
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as many applicants do not apply immediately following job loss while they are seeking
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employment or receiving unemployment compensation.</p>
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<p align="center"><img src="testimony_072414ad.jpg" width="730" height="495" alt="Ultimate Allowance Rate for Disabled-Worker DDS Claims Chart"></p>
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<p>The effect of the recent recession is particularly noteworthy because it illustrates that the change
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in DI cost as percent of GDP in an economic downturn is affected far more by a drop in GDP
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than by a rise in DI cost. Compared to our projections in the 2008 Trustees Report where no
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recession was anticipated, DI cost turned out to be less than 3 percent above the level expected,
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but GDP turned out to be more than 10 percent lower than expected.</p>
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<p align="center"><img src="testimony_072414ae.jpg" width="692" height="425" alt="Change in DI Benefit Cost and in GDP Chart"></p>
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<p>The difference between the unanticipated reduction in employment and the increase in DI
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beneficiaries is even more dramatic. For 2010, the number of workers with earnings in covered
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employment was more than 10 million lower than projected in the 2008 Trustees Report. On the
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other hand, the increase in the number of disabled worker beneficiaries was only about 0.3
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million more than projected.</p>
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<p align="center"><img src="testimony_072414af.jpg" width="707" height="435" alt="Changes in Disabled Worker Beneficiaries Chart"></p>
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|
<p>Over longer periods, however, the unanticipated effects of specific economic cycles tend to
|
|
offset one another. In 1995, the Trustees projected that the DI Trust Fund reserves would deplete
|
|
in 2016. The figure below shows that this projection was quite accurate, even though the
|
|
Trustees anticipated neither the period of extraordinary and unsustainable economic growth and
|
|
the positive trust fund buildup experienced between 1995 and 2005, nor the recession of 2008,
|
|
which essentially offset the positive effects between 1995 and 2005.</p>
|
|
<p align="center"><img src="testimony_072414ag.jpg" width="717" height="437" alt="DI Trust Fund Ratio in 1995, 2008, 2013 Trustees Reports Chart"></p>
|
|
<p><strong><u>Why Did the Number of Disabled Worker Beneficiaries Increase from 1980 to 2010?</u></strong></p>
|
|
<p> The change in DI cost is closely related to changes in the numbers of disabled worker
|
|
beneficiaries. This makes sense because average benefit levels are designed to roughly keep
|
|
pace with the average wage level, but have actually fallen short of that. Between 1980 and 2010,
|
|
the total annual DI benefit cost per disabled worker rose from $5,445 to $15,139, an increase of
|
|
roughly 3.5 percent per year on average. During the same period, the national average wage
|
|
index (AWI) grew substantially faster at an average rate of 4.1 percent per year. </p>
|
|
<p>Between 1980 and 2010, the number of disabled worker beneficiaries nearly tripled from 2.9
|
|
million to 8.2 million worker beneficiaries. This 187 percent increase is explainable largely by
|
|
the overall growth in the working age population (disabled worker benefits are payable only until
|
|
the normal retirement age, now 66), the change in the age distribution of this population, changes
|
|
in employment, insured status and disability incidence rates for women, and the recent severe
|
|
recession.</p>
|
|
<p align="center"><img src="testimony_072414ah.jpg" width="716" height="465" alt="DI Disabled Worker Beneficiaries : from 2010 to 1980 Chart"></p>
|
|
<p>The increase in the percent of working age women who have worked consistently enough to be
|
|
disability insured is remarkable, nearly doubling since 1970.</p>
|
|
<p align="center"><img src="testimony_072414ai.jpg" width="720" height="454" alt="Percent of Population that is Insured for Disability Chart"></p>
|
|
<p>In addition, disability incidence rates increased for women, as their likelihood of being insured
|
|
increased. Incidence rates are now close to the level experienced for men.</p>
|
|
<p align="center"><img src="testimony_072414aj.jpg" width="664" height="350" alt="New Disabled Workers per 1,000 Exposed (Incidence) Chart"></p>
|
|
<p>Considerable attention has been focused on disability adjudication standards. Many have raised
|
|
questions about the distribution of newly entitled disabled workers by impairment diagnosis.
|
|
This is a particularly important question for women who have experienced such large increases
|
|
in the likelihood of being insured and the likelihood of becoming disabled. We have looked at
|
|
the historical trend in this distribution by age group.</p>
|
|
<p align="center"><img src="testimony_072414ak.jpg" width="679" height="409" alt="Distribution of Female New Disabled Worker Entitlements at Ages 30-39 by Impairment Chart"></p>
|
|
<p>For younger women, the distribution has stayed remarkably consistent over the past three
|
|
decades. The distribution is similar for men.</p>
|
|
<p>For older women and men becoming newly entitled for disabled worker benefits, the distribution
|
|
has also remained consistent over time with two exceptions. We show the trend for males below
|
|
because the effects of the exceptions are more apparent than for women. The share of new
|
|
beneficiaries with musculoskeletal impairments has increased substantially, while the share with
|
|
circulatory impairments has declined. However, the combined share for these two diagnosis
|
|
groups has remained about the same.</p>
|
|
<p align="center"><img src="testimony_072414al.jpg" width="679" height="409" alt="Distribution of Male New Disabled Worker Entitlements at Ages 50-59 by Impairment Chart"></p>
|
|
<p><strong><u>Disabled Worker Beneficiary Prevalence Rates</u></strong></p>
|
|
<p> There are many ways of looking at the growth in the number of disabled worker beneficiaries.
|
|
Care should be exercised in selecting which years and which concepts are most helpful in
|
|
explaining change over time. In addition to changes in numbers of beneficiaries, we can look at
|
|
changes in “prevalence rates.” Prevalence rates tell us the percent of the insured population that
|
|
is receiving benefits currently. Care must be taken with prevalence rates as changes in the age
|
|
distribution of the insured population can have a profound effect on the overall “gross”
|
|
prevalence rate. This is particularly the case for gross prevalence rates between 1990 and 2010,
|
|
when the working age population was getting older with the aging of the baby boomers.</p>
|
|
<p>Disabled worker prevalence rates can also be considered more narrowly by viewing these rates
|
|
separately by gender and age groups. Of course, this approach omits from consideration the
|
|
effects of increased population size, changes in the age distribution of the population, and
|
|
changes in the percent of the population that is insured. Even in this specific analysis, care is
|
|
required to avoid any misunderstanding of changes over time.</p>
|
|
<p>The figure below shows that male disabled worker prevalence rates at ages 35-39 and 50-54
|
|
increased significantly after 2007 as the recession began to reduce employment and cause some
|
|
additional numbers of individuals to apply for benefits.</p>
|
|
<p align="center"><img src="testimony_072414am.jpg" width="712" height="359" alt="Disabled Worker Beneficiaries as Percent of Insured - MALE Chart"></p>
|
|
<p>However, the prevalence rates increased not only because more workers applied and started to
|
|
receive benefits, but also because the number of individuals who maintained disability-insured
|
|
status was reduced by the recession. As seen below, the reduced employment rates in the recent
|
|
recession reduced the percent of the population that has had sufficient recent earnings to
|
|
maintain insured status for disability. This reduction in the number of insured individuals
|
|
directly increases the prevalence rate. Therefore, increases in prevalence rates in hard economic
|
|
times result not only from more individuals applying for benefits, but also from fewer workers
|
|
maintaining their insured status.</p>
|
|
<p align="center"><img src="testimony_072414an.jpg" width="716" height="369" alt="Disability Insured as Percent of Population - MALE Chart"></p>
|
|
<p><strong><u>Adjustments to Financing or Cost Needed Soon</u></strong></p>
|
|
<p> Because the DI Trust Fund reserves are now projected to become depleted late in 2016, with
|
|
continuing tax income sufficient to cover only 80 percent of the scheduled benefits at that time,
|
|
change is needed soon. Numerous possibilities are available for adjusting revenue or benefit
|
|
levels for the DI program, and for the Social Security OASDI program as a whole.</p>
|
|
<p align="center"><img src="testimony_072414ao.jpg" width="698" height="477" alt="SS Trust Funds Ratio Chart"></p>
|
|
<p>The projected shortfall requires that either scheduled revenues be increased by 25 percent, or
|
|
cost be reduced by 20 percent, or some combination of these approaches. Because the trust finds
|
|
cannot by law borrow, adjustments before reserve depletion are essential if abrupt cuts in
|
|
benefits are to be avoided.</p>
|
|
<p>Given the immediacy of the need, one option to avoid sudden cuts in DI benefits is to enact a
|
|
temporary tax-rate reallocation between the OASI and DI Trust Funds. Such reallocations have
|
|
been enacted numerous times in the past, most recently in 1994 when the DI Trust Fund was just
|
|
8 months away from reserve depletion. The following figure illustrates just one possible tax rate
|
|
reallocation that the Congress may consider. This approach would cause a temporary
|
|
reallocation of a part of the OASI tax rate to the DI program, sufficient to equalize the expected
|
|
reserve depletion dates for the two Trust Funds.</p>
|
|
<p align="center"><img src="testimony_072414ap.jpg" width="728" height="464" alt="Projected DI and OASI Trust Fund Ratios (TFR) Chart"></p>
|
|
<p>Conclusion<br>
|
|
The increased cost of the DI program has been foreseen for decades, as it is largely the product
|
|
of demographic changes that have been well known and understood. The 1995 Trustees Report
|
|
provided ample warning that the tax rate reallocation of 1994 was only a temporary extension of
|
|
the year of reserve depletion for the DI Trust Fund. We are now in need of adjustments once
|
|
again to either permanently increase revenue or decrease cost for the DI program to assure
|
|
scheduled benefits will be fully payable on a timely basis in the future. Due to the relatively
|
|
strong status of the OASI Trust Fund, a tax rate reallocation can be enacted at relatively small
|
|
cost to the OASI reserves and projected date of reserve depletion. However, even with this
|
|
possibility, the overall Social Security program would still face a shortfall with reserve depletion
|
|
for the combined trust funds projected for 2033. Adjustments will be needed before that time to
|
|
avert sudden reductions in the amounts of benefits that are payable under the law.</p>
|
|
<p>The Office of the Chief Actuary at the Social Security Administration stands ready to assist in
|
|
any way in developing the proposal that will eventually be enacted by the Congress to maintain
|
|
the actuarial status of these funds. We have developed estimates for many proposals that would
|
|
improve the actuarial status of the trust funds. Our estimates for both comprehensive proposals
|
|
and individual provisions developed by members of Congress and other policy makers are
|
|
available at <a href="http://www.socialsecurity.gov/OACT/" target="_blank">http://www.socialsecurity.gov/OACT/</a>.</p>
|
|
<p> Again, thank you very much for the opportunity to share this information with you. I am happy
|
|
to answer any questions you may have.</p>
|
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