[Letter sent on April 7, 1999 to each member of the Board of Directors of the American Academy of Actuaries]

Dear :

I am writing this letter to you in your capacity as a member of the Board of Directors of the American Academy of Actuaries.

A second apparent violation by the Social Security actuaries of an actuarial standard has come to light having to do with the projections they prepared for the Social Security Advisory Council during the period of its tenure, 1994-1996. The standard in question is Actuarial Standard of Practice No. 27 (Selection of Economic Assumptions for Measuring Pension Obligations), which is also included by reference in ASP No. 32 (Social Insurance).

Briefly, the SSA actuaries compared Social Security with the privatization proposals of Schieber and Gramlich. To project the retirement benefit's the equity accumulations would provide under the latter two proposals, a 7% rate of return was assumed, which requires about a 3.5% to 5% gross domestic product; however, for the purpose of projecting the values for Social Security, and average GDP of only 1.5% was used, or 57% to 70% less. This inconsistency is clearly prohibited by ASP No. 27, section 3.10 as follows:

"With respect to any particular measurement, each economic assumption selected by the actuary should be consistent with every other economic assumption selected by the actuary over the measurement period, unless the assumption, considered individually, is not materialä"

Therefore, it appears that the thirteen Advisory Council members received from SSA's actuaries an apple-to-orange comparison that heavily favored the privatization proposals. Had the proper apple-to-apple comparison been made based on the higher GDP for Social Security as well, no need to "fix" Social Security would have arisen. Conversely, if the lower GDP were used for all, then the privatization proposals would have compared much less favorably with Social Security. This seeming failure to utilize consistent economic assumptions may thus have deprived the Advisory Council of a fair basis for comparison and misled its members, perhaps especially the seven who voted for the two privatization proposals.

We thus now have two instances in which SSA's actuaries may not have observed the Academy's standards of practice. First, their apparent disregard of ASP 32's call for the consideration of long and short term prior history led to a long-range actuarial deficiency of 2.13% of the taxable payroll in 1994, which created public concern for the future financing of Social Security and was the basis for the privatization proposals to "fix" Social Security. Second, their apparently not observing the prohibition against the use of inconsistent economic assumptions in ASP No. 27 may have made the privatization proposals seem more worthy of serious consideration than warranted.

Under the circumstances, it has hardly been possible for anyone -- the President, the Congress, and the public -- to reach a sound conclusion of what, if anything, needs to be done about Social Security. It may well be that there is no financial problem.

Therefore, as a member of the Academy, I respectfully request that you and the other members of the Board of Directors consider that violations of the actuarial standards may have occurred and, if so, to then contemplate appropriate action to remedy any resulting misperceptions that the public may now have. I believe that by doing so the Academy will come to be seen as carrying out its mission with respect to establishing professional standards and assisting in formulating public policy.

This letter is being sent to all members of the Academy's Board of Directors. Because of the general concern for the financial status of Social Security, the text will also be sent to other interested persons. You should already have received the text of my article, "Social Security finances are in fine shape," which examines possible violation of ASP No. 32 and is to appear in the May - June Contingencies. Kindly call me if you have any question. With best regards,

Sincerely yours,

David Langer, M.A.A.A.

© 2001 DAVID LANGER COMPANY, INC.