DAVID LANGER COMPANY, INC

ARTICLES BY TOPIC ¦ MEMOS TO CLIENTS

June 16, 2004

MEMORANDIUM TO OFFICIALS OF THE AMERICAN ACADEMY OF ACTUARIES and the SOCIETY OF ACTUARIES

Re: Social Security's Chief Actuary Goes and those weird "unfunded obligations"

Chief Actuary Steve Goss has given the ever-noisy privatization claque another cudgel with which to batter Social Security.

Social Security's trustees inserted a new section in the 2003 Annual Report: "Additional Measures of OASDI Unfunded Obligations." These amount to a $3.5 trillion deficit after 75 years and a $10.5 trillion deficit at infinity. (Imagine that! Infinity.) The section is an embarrassment to the actuarial profession.

Social Security's actuaries made the calculations based on the assumptions selected by the trustees and approved by Goss. These outsized obligations have been gleefully seized upon and widely trumpeted by pro-privatization forces as creating a grave economic danger (e.g., see Fortune, "The $44 Trillion Abyss," 11/24/03) and provide political ammunition to deceive the public into believing that Social Security benefits must be both cut back and privatized.

But the lack of substance underlying the calculations is remarkable for three reasons: the gross domestic product (GDP) assumption disregards past experience and thus ignores the Academy's actuarial standards of practice; recent projections of assets weren't even close, which should have alerted Goss that this needed looking into; and the projections are rendered meaningless by even tiny deviations in the assumptions.

The trustee's choice of assumptions. The trustees used the "intermediate cost" set of assumptions, including the key item in the annual increases in the GDP. The average annual GDP increase since around 1930 has been 3.3%, and the recent 10 year average was 3%. However, the trustees called for a mere 2% average for the 75 year period, 2003-20078, and only 1.8% for the infinity calculation. This disregard of past experience gives the trustees carte blanche to arrive at whatever results they may wish, and they apparently got what they wanted.

Note, on the other hand, the "low cost" set of assumptions, with a more realistic average future GDP increase of 2.6%, produces a $1.1 trillion surplus at the end of 75 years. (This surplus does not appear, as it should, in the trustee's 2003 report.) Goss took it upon himself to do the intermediate cost projection to infinity coming up with a $10.5 trillion deficit, but did not make public the result of using the low cost set, which would appear to be a surplus of perhaps $2 trillion. Gross inaccuracy of recent projections. The trustee's projections of trust fund assets in each of 1992-1996 to the year 2002 understated actual 2002 assets by the sizable average of 20%. This misfiring over only 6 to ten years undoubtedly contributed to the long-term deficit of 1.89%, which is often cited to justify privatization. (See my Letter to the Editor, June's Pension Section News, Society of Actuaries; also on my website: david langer.com, under Social Security articles.)

The great impact of even small deviations. Small deviations in assumptions have a significant effect. For example, an increase of only 0.1% in interest will reduce a 75 year present value of a dollar by 7% and by over 99% for a 4000 year period. As noted, the trustees were off by 20% over less than 10 years.

Since the professional reputation of actuaries is at stake, Steve Goss needs to explain to us how he came to approve the trustee's untenable projections.

The directors of the American Academy of Actuaries, charged with protecting its member's professional reputation, needs to inform the public that the "unfunded obligations" are without value. They should also notify the chief actuary and the trustees that, while the trustees have the final say on actuarial assumptions, this authority does not trump the Academy's actuarial standards of practice that Goss must observe.

Sincerely yours,

David Langer, FCA, EA, ASA, MAAA
Formerly Chairman,
Employee Benefits Committee,
Actuarial Society of Greater New York

212-986-2942
e-mail: dlanger@davidlanger.com
Website: david langer.com

David Langer
100 West 57 Street, Suite 2K
New York, N.Y. 10019

For additional information, contact
David Langer, 212-986-2942
email: dlanger@davidlanger.com

FOR IMMEDIATE RELEASE

LANGER DECLARES SOCIAL SECURITY CHIEF ACTUARY GOSS'S APPROVAL OF $10.5 TRILLION DEFICIT IS BASED ON COOKED VALUES

New York consulting actuary believes opponents have used the $10.5 deficit to "batter Social Security" to justify benefit cuts and privatization

In a letter to officials of the American Academy of Actuaries and the Society of Actuaries, David Langer, a New York consulting actuary declared that Steve Goss, Social Security's Chief Actuary, has "given the ever-noisy privatization claque another cudgel with which to batter Social Security."

He declared Goss's approval of the trustee's calculation of the $10.5 trillion Social Security deficit has been "widely trumpeted by pro-privatization forces as creating a grave economic danger," and this, he continued, "has provided political ammunition to deceive the public into believe Social Security must be both cut back and privatized."

He noted three reasons for the "remarkable lack of any substance" underlying the trustee's calculation: "the gross domestic product (GDP) assumption ignores the American Academy of Actuary's actuarial standards of practice; recent asset projections were 20% off, which should have alerted Goss that this needed looking into; and the projections are rendered meaningless by even tiny deviations in the assumptions."

Langer advised the actuarial leadership that the profession's reputation was at stake, and that "Steve Goss needs to explain to us how he came to approve the trustee's untenable projections."

He further asserted that the American Academy of Actuaries must "notify the Chief Actuary and the trustees that, while the trustees have the final say on actuarial assumptions, this authority does not trump the Academy's actuarial standards of practice that Goss must observe."

(Langer, who has served corporate and union clients in the private pension system for fifty years, has studied Social Security's actuarial basis for the past nine years. He has written and spoken extensively on this and other areas under attack by opponents of the program and was named Featured Social Security Expert by The Century Foundation. See the Social Security section of Langer's website and: davidlanger.com)