T R A N S A C T I O N S OF SOCIETY OF ACTUARIES

1 9 8 4 VOL. 36

AN ACTUARIAL MODEL FOR ANALYZING THE SOCIAL

SECURITY MONEY'S-WORTH QUESTION

F R A N K G. B U R I A N E K A N D J U D I T H M. R E V E R M A N

ABSTRACT

Over the past few years many state and local governments and nonprofit
organizations have examined the question of whether they should ter-
minate social security coverage for their employees. One of the first steps
in addressing this issue is to answer the social security "money's-worth"
question: Does social security provide a fair return on dollars contributed?
This paper describes an actuarial model that was developed to answer
this question with reference to a two-wage-earner family. Illustrative ex-
amples of the output from the model are presented based upon the '~of-
ficial" set of projections contained in the 1982 OASDI and HI trustees'
reports ([7], [8]).

INTRODUCTION

One of the first steps in analyzing whether an organization should with-

draw from the social security system is to answer the question: On av-
erage, will the employees of the organization receive a fair return on their
dollars contributed to social security? This is the money's-worth question.
If analysis shows that most employees will not receive their money's
worth, then it is appropriate to address the question: How much will it
cost to replace the benefits provided by the social security system?
Most actuarial models designed to answer the money's-worth question
have not considered the situation of two married wage-earners both cov-
ered by social security. Most models have considered only the retirement
benefits provided by the system or, at. most, the "cash benefits" (retire-
ment, disability, and death benefits).
The model described in this paper examines the question from both the
one-wage-earner and the two-wage-earner points of view. In the latter
case, it considers the additio/nal benefits provided by the second worker's
taxes. The model considers not only cash benefits, but also incorporates
a proxy to the benefits provided by the hospital insurance portion of the
medicare program.
143
144 SOCIAL SECURITY MONEY'S-WORTH QUESTION

The results of any actuarial model are sensitive to the methods and
assumptions utilized. Every effort must be made to select assumptions
(particularly economic forecasts) that will not bias the result. In this paper,
the initial assumptions used are the Alternative II-B assumptions con-
tained in the 1982 OASDI trustees' report [7] for cash benefits, and the
Alternative II-B assumptions in the 1982 H1 trustees' report [8] for hospital
insurance benefits. These assumptions have the advantage of being up-
to-date as well as unbiased (i.e., not selected by either the organization
examining the withdrawal issue or the actuary performing the analysis).
Alternative calculations are frequently developed based on assumptions
thought to be more appropriate to the employees of a particular organi-
zation. The Alternative II-B assumptions are described in Appendix III.
An important assumption that underlies any money's-worth projection
is whether or not the system itself will be changed. This is particularly
important here since, under the Alternative II-B assumptions, both OASDI
and HI are out of balance (i.e., future benefits are greater than future tax
receipts). The model presented herein does not anticipate any future ben-
efit or tax changes. If the model shows that the typical employee will not
receive his or her money's worth from social security, then it is more
than likely that any future changes in the system would not reverse this
relationship (benefits will have to be reduced or taxes increased for the
system to become balanced). On the other hand, if the typical employee
will receive his or her money's worth from the system, then the fact that
the system is out of balance clouds the issue. The attitude of the orga-
nization and its employees toward the system will come into play.
TAXES

Appendix II contains the tax rates utilized in the model. No attempt is

made to project larger tax rates than are currently contained in the law.
The wages to which the tax rate applies are limited to the taxable wage
base, which is estimated from the assumption as to future increases in
average wages in covered employment.
Only the employee tax rate is compared with the value of future benefits.
However, the results can be easily adjusted to use the combined employee-
employer taxes by doubling the present value of future taxes.
BENEFITS

The model takes into account the major benefits provided under social
security: retirement, disability, death, and medicare. It does not consider
"special" benefits such as those payable to aged parents, lump-sum death
benefits, or benefit losses due to divorce or remarriage.
 SOCIAL SECURITY MONEY'S-WORTH QUESTION 145

In order to accommodate the use of assumptions that vary by duration,

the model develops "benefit streams," which assign to each future year
a specific benefit weighted by the appropriate probability of receipt. The
benefits are modified to take into account any age-related adjustment
factors contained in the social security system as well as to reflect in-
creases in the Consumer Price Index. The benefits are discounted using
the assumed interest rate. Appendix I contains the formulas used to de-
velop the four types of benefits considered in the model. These formulas
reflect the "carve out" of benefits payable to a worker based upon the
spouse's earnings record, where applicable (this concept is discussed in
more detail later in the paper).
To assign a value to future medicare benefits, the model determines the
present value of future premiums required to purchase such coverage
from the social security system. Although this approach is not feasible
for disabled individuals under age 65, it is appropriate as a proxy to future
hospital insurance benefits.
ACTUARIAL ASSUMPTIONS

The results obtained from this model are highly influenced by the ac-
tuarial assumptions used. Because of the nature of the money's-worth
question, primary.considerations in the selection of assumptions are that
they be objective and relevant.
Objectivity means that the assumptions should stand up to scrutiny by
anyone reviewing the results. They should not be chosen to bias the results
either way.
Relevance means that it is not enough for the assumptions to be ap-
propriate in the "aggregate," as ERISA requires under its pension-funding
rules. Because the results will frequently be distributed to the employees
involved, and because these individuals cannot be expected to understand
the offsetting effects of implicit assumptions, each assumption by itself
must appear reasonable to a layman.
Economic Assumptions
The economic assumptions used are most often subject to scrutiny. In
order to satisfy the conditions of objectivity and relevance, the economic
assumptions first applied are usually those used in the 1982 OASDI trust-
ees' report [7] (Alternative II-B). As the "official" assumptions, and as
those most frequently quoted, they pass the objectivity test. They also
satisfy the relevance criterion since, based on recent levels of inflation
and interest rates, the assumptions over the next decade are quite
believable.
146 SOCIAL SECURITY MONEY'S-WORTH QUESTION
TO be c o m p a t i b l e with this set of a s s u m p t i o n s , the average H I m o n t h l y
p r e m i u m rate i n c r e a s e s were d e v e l o p e d from the i n t e r m e d i a t e set of as-
s u m p t i o n s in the 1982 H I t r u s t e e s ' report [8] ( A l t e r n a t i v e II-B). As a first
step in d e v e l o p i n g the p r o j e c t i o n s , the m o n t h l y health i n s u r a n c e p r e m i u m
rate effective o n July 1 was d e t e r m i n e d for each year from 1981 through
2006. T h e rate a p p l i c a b l e d u r i n g the first six m o n t h s of a c a l e n d a r year
was averaged with the rate a p p l i c a b l e during the last half of the c a l e n d a r
year, a n d the c o r r e s p o n d i n g i n c r e a s e in the average HI m o n t h l y p r e m i u m
rate was d e t e r m i n e d .
This t e c h n i q u e p r o d u c e d a d e c l i n i n g s e q u e n c e of i n c r e a s e s with the rate
in the year 2004 e q u a l to 8.3 p e r c e n t . To e x t e n d the table further, two
choices are available. First, a n u l t i m a t e rate of 8 p e r c e n t can be projected
b e g i n n i n g in the y e a r 2005. While this would p r o d u c e a s m o o t h t r a n s i t i o n
to the u l t i m a t e rate, it w o u l d i m p l y that health care costs will f o r e v e r be
in e x c e s s of the i n c r e a s e in wages. This is not a totally u n r e a s o n a b l e
a s s u m p t i o n , c o n s i d e r i n g that historically hospital costs have risen faster
than either wages or inflation. Table l c o m p a r e s historical i n c r e a s e s in
hospital costs with i n c r e a s e s in average wages a n d inflation. A n o t h e r
m e t h o d , w h i c h m a y s e e m m o r e r e a s o n a b l e , would be to a s s u m e that
hospital cost i n c r e a s e s e v e n t u a l l y will be the same as i n c r e a s e s in average

TABLE 1
HISTORICALINCREASESIN HOSPITALCOSTS

Aggregate
Calendar Average CPI Inpatient
Year Wages Hospital
Costs
1956-65.. 3.7% 1.6% 10.4%
1966 . . . . . 5.7 3.0 11.7
1967 . . . . . 5.5 2.8 18.6
1968 . . . . . 6.4 4.2 16.5
1969 . . . . . 6.7 5.4 18.4
1970 . . . . . 4.9 5.9 16.8
1971 . . . . . 4.9 4.3 13.7
1972 . . . . . 7.3 3.3 13.5
1973 . . . . . 6.9 6.2 10.1
1974 .... 7.4 I 1.0 14.5
1975 .... 6.6 9.1 18.7
1976 .... 8.2 5.8 15.7
1977 .... 8.0 6.5 13.6
1978 .... 8.2 7.6 12.7
1979 .... 8.8 I1.1 12.7
1980 .... 8.6 13.5 16.6
SOURCE.--Table AI in the 1982 HI trustees" report [8].
 SOCIAL SECURITY MONEY'S-WORTH QUESTION 147

wages. This assumption would result in a sharp discontinuity in the year

2005, but would be more reasonable in the eyes of some individuals. The
illustrations contained in this paper were prepared under the assumption
that increases in average hospital insurance premium rates would level
off at 8 percent per year, remaining higher than the increases in both
wages and the Consumer Price Index.
In practice, complete past salary histories are usually secured from the
social security administration for individuals aged 35 and older. Where
possible, records of past quarters of coverage are also obtained. Future
increases in pay are usually assumed to be in line with the increases in
average wages in covered employment, and all individuals are assumed
to have unbroken work records in the future. Note that in the examples
included in this paper, pre-1982 earnings trends were assumed to follow
the past trends in average covered wages.
Noneconomic Assumptions
A standard table is used by the model in forecasting mortality rates for
healthy individuals (the UP-1984 Table [!]). This table is adjusted to be
sex-distinct. For disabled individuals, mortality rates are taken from the
tables used by the PBGC to value benefits for individuals in receipt of
social security disability benefits. This information originally comes from
the Social Security Administration, so its use is appropriate. Zero mor-
tality is assumed for children in the valuation of family benefits.
Disability incidence rates are taken from the most recent actuarial study
on the subject. This study was published in 1980 and deals with experience
of disabled workers during the period 1974-78 [6]. Incidence rates are
based on the 1977 calendar year of entitlement. These disability incidence
rates may be considered high since the experience under the disability
portion of the social security system has been improving over the past
few years. However, the disability incidence rate prior to 1980 was gen-
erally high. The disability incidence rate has been below 4.0 awards per
thousand insured workers in only four years--1964, 1980, 1981, and 1982.
No recoveries from disability are assumed; the only terminations of
disability are due to death.
Expenses of administration are disregarded in the analysis. To simplify
the calculations, workers are assumed to retire at age 65 with spouses
retiring at the first age eligible, but not before the worker.
WORKER CHARACTERISTICS

The actuarial model has been developed to handle three distinct types
of family units in arriving at the present value of future benefits.
148 SOCIAL SECURITY MONEY'S-WORTH QUESTION

Single Worker
The first and simplest case is the analysis for an individual who is
unmarried. An unmarried individual is assumed to have no children. Al-
though this may not be reasonable considering the increase in the divorce
rate over the past few years, it does simplify the calculations. For a single
worker, retirement benefits, disability benefits, and medicare benefits are
valued.

Married Worker with a Nonworking Spouse

The next analysis is for a married worker with a nonworking spouse
and two or fewer children. Retirement benefits, disability benefits, death
benefits, and medicare benefits are all valued.

Married Worker with Working Spouse

This actuarial model, unlike most traditional analyses, considers the
benefits payable to a worker after reflecting the fact that a working spouse
covered by social security will also provide benefits to the worker. The
"marginal" benefits over and above those attributable to an individual
based on the spouse's earnings record are compared to the present value
of the worker's social security taxes. For hospitals considering withdrawal
from the social security system, because of their typical work force (heavy
percentage of females belonging to a two-wage-earner family), this re-
finement is of utmost importance. The statement is frequently made that
a two-wage-earner family will generally receive their money's-worth in re-
lation to the sum of their contributions because each earner will receive at
least the benefits payable to an unmarried worker. However, this view ig-
nores the fact that it is possible to take advantage of the social adequacy
principles of the system in certain situations.
Because of the complexities involved, benefits payable to the worker
based upon the spouse's earnings record are recognized only in the most
valuable areas. The areas not measured do not make up a significant part
of the total present value of future benefits.
In the retirement area, full recognition is made of the benefits payable
to the spouse based on the worker's earnings record, the benefits payable
to the worker based on the spouse's earnings record, and the death benefits
payable to the worker based on the spouse's earnings record. Chart 1
illustrates the mechanism used in the model for assigning retirement ben-
efits to a worker and spouse when both of them qualify for social security
retirement benefits at age 65 on their own earnings records.
 SOCIAL SECURITY MONEY'S-WORTH QUESTION 149
In the first case, the worker's social security taxes will earn an additional
$250 in retirement benefits for the worker, since, even if the worker was
not covered by the system, based on the spouse's earnings record the
worker would have a benefit of $150 per month. Since the benefit the
spouse earns on his or her own earnings record is higher than the spouse's
benefit provided by the worker's earnings record, the spouse's benefit
provided by the worker is of no value. The only benefit that would be
included in the money's-worth analysis would be a $250 retirement benefit
to the worker.
In the second case, the worker's retirement benefit as well as the spouse's
benefit based on the worker's earnings record are both of no value since
the spouse would provide his or her own benefit as well as a spouse's
benefit in excess of anything that would be generated from the worker's
earnings record. There is no future return in retirement benefits on social
security taxes paid by the worker.
In the third case, the worker provides an additional $350 in retirement
benefits based on his or her own earnings record, as well as an additional
$100 of benefits to the spouse. Thus, a total of $450 in monthly retirement
benefits would be valued and compared to the worker's social security
taxes.
The approach illustrated above simply carves out of the total family
benefits the benefits payable based on the spouse's earnings record. The
adjusted benefits then represent the marginal benefits the worker will
receive as a result of his or her social security taxes over and above what
would be provided the family on the basis of the spouse's earnings record.

CHART I

WORKER-
SrOUSE
(SUBJECT OF ANALYSIS)

RBt(~') I RBAw)s~use RBt(s) RBt(s) S~u~

Case I :
Basic benefits .............. $400 $200 $300 $150
Marginal benefits ........... 250 0
C a s e 2:
Basic benefits .............. 200 ~ 100 400 200
Marginal benefits ........... 0 0
C a s e 3:
Basic benefits .............. 400 200 100 50
Marginal benefits ........... 350 100

NOTES - - R B , ( w ) = r e t i r e m e n t b e n e f i t p a y a b l e in y e a r t to w o r k e r b a s e d o n o w n earnings
r e c o r d ; RB,(s) = r e t i r e m e n t benefit p a y a b l e in y e a r t to s p o u s e b a s e d o n o w n earnings
r e c o r d ; RB,(w) ~0°. . . . r e t i r e m e n t b e n e f i t p a y a b l e in y e a r t to s p o u s e f r o m w o r k e r ' s earnings
r e c o r d ; RB,(s) ~oo. . . . r e t i r e m e n t benefit p a y a b l e in y e a r t to w o r k e r f r o m s p o u s e ' s earnings
record.
150 SOCIAL SECURITY MONEY'S-WORTHQUESTION
Since so many hospital employees are female secondary wage earners
with a spouse covered under the social security system, this type of
analysis is quite important.
In addition to the retirement benefit offset, the model also offsets ben-
efits payable to the worker from the death of a spouse.
In the disability area, no benefit offsets are considered. This limits the
analysis, but because of the relative insignificance of disability benefits,
this simplification does not materially distort the results. With respect to
death benefits, the only offset that takes place deals with the retirement
benefit payable to the spouse based on his or her own earnings record.
In the medicare area, full recognition is made of the fact that the worker
can qualify for a benefit based on the spouse's earnings record when the
spouse retires. Again, because of the significant value of medicare ben-
efits, this refinement is essential.

EXAMPLES

In April of 1978, Orio R. Nichols and Richard G. Schreitmueller of the

Office of the Actuary of the Social Security Administration published an
actuarial note entitled "Some Comparisons of the Value of Worker's So-
cial Security Taxes and Benefits" [3]. The paper presented the results of
their money's-worth actuarial model for a large number of hypothetical
workers, both newly covered in 1978 and already covered. For each worker,
a "worker's future value ratio," defined as the present value of OASDI
benefits to be gained divided by the present value of OASDI taxes to be
paid, was calculated. Components of the basic figures were set forth to
illustrate the details of the methodology used, along with the relative
values of the various categories of benefits. These included future benefits
derived from past covered employment and benefits to be gained from
future covered employment.
These results are herein compared with the calculations of the model
described in this paper but based on updated median earnings and max-
imum earnings figures, and with the calculations prepared as of January
1, 1982. Tables 2 and 3 illustrate the comparison. Note that married work-
ers are assumed to have two children (25 and 27 years younger) who will
remain eligible for child's benefits until age 16 in the 1982 calculations
and until age 22 in the 1978 calculations. Even though children may con-
tinue to receive benefits until age 18 (or age 19 if in high school), to simplify
the calculations child's benefits are not considered after the spouse's
benefit ceases.
 SOCIAL SECURITY MONEY'S-WORTH QUESTION 151
There are differences in calculation techniques which should be rec-
ognized when comparing results:

I. The 1978 calculations utilize only the OASDI tax rates, while the 1982 calcu-
lations include the HI tax rates.
2. The 1978 calculations do not include any hospital insurance (medicare) benefits,
while the 1982 calculations do include these benefits.
3. The 1978 calculations include lump-sum death benefits, while the 1982 calcu-
lations do not.
4. The 1978 calculations include the death benefits payable to a surviving spouse
after retirement with the value of old-age benefits, while the 1982 calculations
include the surviving spouse benefits with the other death benefits.

One interesting observation to be drawn from Table 2 is that in all cases

the most valuable benefits are those for hospital insurance. Because the
current tax structure cannot support projected future hospital insurance
benefits under the assumptions utilized in the analysis, all but one of these
workers will receive back not only their own taxes but also those paid
on their behalf by their employer. The lone exception is for an unmarried
male worker with earnings always at the taxable wage base. Similar results
were obtained when the lower 5V2 percent hospital insurance premium
rate increase assumption after 2004 was substituted for the 8.0 percent
rate.
Table 3 indicates the relationship between benefits and social security
taxes for an illustrative worker who already has " e a r n e d " a significant
amount of the eventual social security benefits that he and his family will
receive. In these cases, adding in the medicare benefits again illustrates
their significant value. But upon withdrawal from the system, most of the
medicare benefits would already be " v e s t e d , " and the additional hospital ~
insurance taxes would not purchase much in additional benefits. The
future value ratios are uniformly lower than those developed in 1978.
To illustrate the two-wage-earner family situation, the examples were
modified to replace the nonworking spouse with a spouse earning the
same salary. The results are shown in Tables 4 and 5.
A comparison of the results illustrated on Tables 2 and 4 is striking. In
all cases the worker with a working spous e covered by social security
has a future value ratio less than 2.00, indicating that coverage under the
social security system will not provide a return equal to the combined
e m p l o y e e - e m p l o y e r taxes. The examples in Table 2 show that the married
workers in a one-earner family can expect to receive much more than the
combined e m p l o y e e - e m p l o y e r taxes (the ratios range from 3.34 to 8.39).
 TABLE 2
ONE-WAGE-EARNER SITUATIONS
(Dollar figures are present values at January 1, 1978 and 1982)

WORKER BECOMING WORKER BECOMING

COVERED AT AGE 22 COVERED AT AGE 42

Median Maximum Median Maximum

Earnings Earnings Earnings Earnings
1982 1978 1982 1978 1982 1978 1982 ] 1978
$15.IXX) $9.654 $32.400 $17.700 $15.000 $9.654 $32.400 $17.700
Male Worker
r
Worker's taxes . . . . . . . . . . . . . $ 35,429 $19,557 $ 76,527 $ 49,439 $ 19,040 $10,701 $ 41,127 $26,726
Benefits payable to unmarried i
worker:
Old-age . . . . . . . . . . . . . . . . . . 30.413 20,856 i 43,067 34,635 28,295 19,652 43,962 35,105
Disability . . . . . . . . . . . . . . . . 14,443 6,648 20,482 11,003 7,320 3,076 11,686 5,302
Medicare . . . . . . . . . . . . . . . . . 51.735 ............ 51,735 ............ 36,417 ............ 36,417 ............
I-,,9 I I I I I I I
Total . . . . . . . . . . . . . . $ 96,591 $27,504 i $115,284 $ 45,638 $ 72,032 $22,728 $ 92,065 $40,407
I I I I I I I
Worker's future value ratio 2.73 1.41 1.51 .92 3.78 2.12 2.24 .151
I I
Additional benefits payable to
dependents of married
worker:
Old-age . . . . . . . . . . . . . . . . . . $ 10,507 $25,084 $ 14,878 $ 41,658 $ 10,019 $22,611 $ 15,566 $40,390
Disability . . . . . . . . . . . . . . . . 1,917 1,313 2,722 1,924 1,454 21 2,330 44
Death . . . . . . . . . . . . . . . . . . . . 29,333 8,708 41,587 ' 14,477 21,078 6,145 33,257 10,946
Medicare . . . . . . . . . . . . . . . . . 81,420 81,420 55,105 ............ 55,105
I I I I I
Total . . . . . . . . . . . . . . $123,177 $35.11)5 $140,607 $ 58,059 $ 87,656 $28,777 $106,258 $51,380
Fotal benefits payable to
married work er and
dependents:
Total . . . . . . . . . . . . . . $219,768 $62,609 $255,891 $103,697 $159,688 $51,505 $198,323 $91,787
I I
Worker's future value ratio 6.20 3.20 3.34 2.10 8.39 4.81 4.82 3.43
 TABLE 2-----Continued
ONE-WAGE-EARNER SITUATIONS
(Dollar figures are present values at January 1, 1978 and 1982)
WORKER BECOMING WORKER BECOMING
COVERED ~ T AGE 22
COVERED AT AGE 42
Median Maximum Median Maximum
Earnings Earnings ------------------Earnings Earnings
1982 1978 1982 I 1978 1982 1978 1982 ] 1978
L/I $15.000 $9,654 $32,400 [ $17.700 $15,000 $9,654 $32,400 $17,700
L,O
Female Worker
Worker's taxes . . . . . . . . . . . . . . $ 36,436 i $20,421 $ 78,702 $ 51,654 $ 19,879
Benefits payable to unmarried $11,249 $ 42,939 $28,129
worker:
Old-age . . . . . . . . . . . . . . . . . . . 43,381 32,187 61,430 53,453 39,849
Disability . . . . . . . . . . . . . . . . . 14,939 29,466 61,912 52,636
6,713 21,188 11,138 7,507 3,039 11,980 5,226
Medicare . . . . . . . . . . . . . . . . . . 75,379 ... 75,379 53,056 ............ 53,056
Total . . . . . . . . . . . . . . . $133.699 I I I............
$38,900 ' $157,997 I $ 64,591 I1 $100,412 i $32,505 $126,948 $57,862
I
Worker's future value ratio 3.67 1.91 ,I 2.01 ,I 1.25 ,I 5.05 [i 2.89 I,i 2.96 l, 2.06
 TABLE 3
ONE-WAGE-EARNER SITUATIONS
(Dollar figures are present values at January 1, 1978 and 1982)

t~IAI.E WORKER AGED 42 V~.'ITIt 20 YEARS COVERAGE

Median Maximum
Earnings Earnings

1982 1978 1982 1978

$15,~ $9.654 $32.400 $17,700

Worker's taxes .................. $ 19,040 $10,701 $ 41,127 $26.726

Benefits p a y a b l e to u n m a r r i e d
worker:
If c o v e r a g e c o n t i n u e s :
Old-age . . . . . . . . . . . . . . . . . . . . . 37,252 25,770 50,046 39,580
Disability ................... 13,971 5,609 18,116 8,051
Medicare .................... 37,510 ............ 37,510 ............
Total . . . . . . . . . . . . . . . . . . . $ 88,733 $31,379 $1(15,672 $47,63.1
If c o v e r a g e t e r m i n a t e s :
Old-age . . . . . . . . . . . . . . . . . . . . . $ 26,010 $17,605 $ 31,555 $21,950
Disability ................... 5,614 1,106 6,795 1,440
Medicare .................... 35,122 ............ 35,122 ............
Total . . . . . . . . . . . . . . . . . . . $ 66,746 $18,711 $ 73.472 $23,390
Benefits to be g a i n e d b y future
coverage .................... $ 21,987 $12,668 $ 32,200 $24,241
W o r k e r ' s future value ratio . . . . . . 1.15 1.18 .78 .91
A d d i t i o n a l benefits p a y a b l e to
d e p e n d e n t s of m a r r i e d w o r k e r :
If c o v e r a g e c o n t i n u e s :
Old-age . . . . . . . . . . . . . . . . . . . . . $ 13,190 i $29,65O $ 17,719 $45,538
Disability ................... 2,336 293 3,062 329
Death .......................
Medicare ....................
33,574
58,801
I.... 10:!!! 44,199
58,801
14,959

Total . . . . . . . . . . . . . . . . . . . $107,901 $40,166 $123,781 $60,826

If c o v e r a g e t e r m i n a t e s :
Old-age . . . . . . . . . . . . . . . . . . . . . $ 9,210 $20,256 $ 11,173 $25,255
Disability ................... 1,252 293 1,519 320
Death . . . . . . . . . . . . . . . . . . . . . . . 24,660 8,065 29,942 10,256
Medicare .................... 58,801 ,. . . . . . . . . . . . i 58,8(11 ............
Total . . . . . . . . . . . . . . . . . . $ 93,923 i $28.614 $101,435 ~ $35,831
Benefits to be g a i n e d by
future c o v e r a g e . . . . . . . . . . . . . $ 13,978 $11,552 $ 22,345
I $24,995
Total benefits p a y a b l e to m a r r i e d
w o r k e r and d e p e n d e n t s to be
g a i n e d by future c o v e r a g e :
Total . . . . . . . . . . . . . . . . . . $ 35.965 $24.220 $ 54,545 $49,236
W o r k e r ' s future value r a t i o . . . . . 1.89 2.26 1.33 1.84

154
 SOCIAL SECURITY M O N E Y ' S - W O R T H QUESTION 155

The results from Tables 3 and 5 are more compatible. This is because
after twenty years of coverage under the social security system, the work-
ers in both situations have already earned most of their eventual social
security benefits.
Nichols and Schreitmueller conclude in their paper [3] that with few ex-
ceptions a two-wage-earner family will generally receive their money's-
worth in relation to their contributions, because each earner will receive at
least the benefits payable to an unmarried worker. While this may be true,
the marginal benefits to be gained by coverage for the second earner will
not be worth the combined employee-employer taxes. This has been a pri-
mary motivation behind the significant increase in withdrawal activity over
the past few years.

CONCLUSION

This paper has presented a detailed explanation of the operation of an

actuarial model designed to answer the social security m o n e y ' s - w o r t h
question. The intent was not to answer the question for any particular
TABLE 4
TwO-WAGE-EARNER SITUATIONS
(Dollar figures are present values at January 1, 1982)

~tORKER B I].COMING ~*V¢)RKE R I~ECOM I NG

COVERED A T AGE 22, COVERED AT A G E 4 2 .
W O R K E R / S P o u S E EARNINGS WORKER/SPOUSE EARNINGS

$15.000 [ $32.400 $15.000 ] $32.a00

Male Worker
Worker's taxes $35,429 $76,527 $19,040 $41,127
Marginal benefits payable:
Old-age 10,617 17.327 8,137 15,379
Disability 16,360 23,204 8,774 14,016
Death. 19.564 29,201 11,696 18,681
Medicare . . . . . . . . . . . . . . . . . . . . . 5,670 5.670 2,135 2,135
Total . . . . . . . . . . . . . . . . . . $52,211 $75.402 $30,742 $50,211
Worker's future value ratio . . . . . 1.47 .99 1.61 1.22
~mal Worker
Worker's taxes . . . . . . . . . . . . . . . . . $36,436 $78,702 $19.879 $42,939
Marginal benefits payable:
Old-age . . . . . . . . . . . . . . . . . . . . . . 11,859 20,126 8,973 16,958
Disability . . . . . . . . . . . . . . . . . . . . 16,842 23.889 8.852 14,134
Death . . . . . . . . . . . . . . . . . . . . . . . . 1(I.393 15,571 5,898 9,417
Medicare . . . . . . . . . . . . . . . . . . . . . 5,499 5.499 1,982 1,982
Total . . . . . . . . . . . . . . . . . . $44,593 $65,(185 $25,705 $42,491
I
Worker's future value ratio . . . . . 1.22 •83 1.29 I .99
156 SOCIAL SECURITY MONEY'S-WORTH QUESTION

case, but rather to point out the considerations involved in analyzing the
question. The model expands upon traditional calculations by partially
taking into account benefits payable to a worker based on a spouse's
earnings record in a two-wage-earner family, and by including a proxy
for the hospital insurance benefits payable under the medicare program.

TABLE 5

T w o - W A G E - E A R N E R SITUATIONS
(Dollar figures are present values at January I, 1982)

WORKER AGED 42 WITH 20 YEARS

COVERAGE, WORKER/SPOUSEEARNINGS

s,s, I s32,
Male Worker

Worker's taxes .................................... $19,040 $41,127

Marginal benefits payable:
If c o v e r a g e c o n t i n u e s :
Old-age ...................................... 15,102 20,636
Disability ..................................... 16,307 21,178
Death ........................................ 22,430 29,448
Medicare ..................................... 2,925 2,925
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56,764 $74,187
If c o v e r a g e t e r m i n a t e s :
Old-age ...................................... $ 6,519 $ 6,593
Disability ..................................... 6,866 8,314
Death ........................................ 16,036 19,479
Medicare ..................................... 537 537
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,958 $34,923
Benefits to b e g a i n e d b y f u t u r e c o v e r a g e . . . . . . . . . . . $26,806 $39,264
Worker's future value ratio ....................... 1.41 .95
Female Worker

Worker's taxes .................................... $19,879 $42,939

Marginal benefits payable:
If c o v e r a g e c o n t i n u e s :
Old-age ...................................... 17,298 23,739
Disability ..................................... 16,802 21,791
Death ........................................ 11,542 15,158
Medicare ..................................... 2,807 2,807
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $48,449 $63,495
If c o v e r a g e t e r m i n a t e s :
Old-age ...................................... $ 7,188 $ 7,270
Disability ..................................... 8,055 9,754
Death ........................................ 8,235 10,005
Medicare ..................................... 570 570
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,048 $27,599
B e n e f i t s to b e g a i n e d b y f u t u r e c o v e r a g e . . . . . . . . . . . $24,401 $35,896
Worker's future value ratio ....................... 1.23 .84
 SOCIAL SECURITY MONEY'S-WORTH QUESTION 157
Although the possibility of withdrawing from the social security s y s t e m
will become a moot question if the recommendations of the Report of the
National Commission on Social Security Reform [4] are adopted, the
m o n e y ' s - w o r t h question will always be of interest to individuals c o v e r e d
by the program.

APPENDIX I

BENEFIT FORMULAS

1. Retirement Benefits
x, = Worker's current age;
x2 = Spouse's current age;
t! = Worker's age in year t;
t2 = S p o u s e ' s age in year t;
l. = Entry from active life table;
RB,(w) Retirement benefit payable in year t to worker based on
own earnings record;
RB,(s) = Retirement benefit payable in year t to spouse based on
own earnings record;
RB,(w)spo, sc = Retirement benefit payable in year t to spouse from work-
e r ' s earnings record;
RB,(s)sp ousc = Retirement benefit payable in year t to worker from spouse's
earnings record;
DBI(s) = Death benefit payable in year t to worker from s p o u s e ' s
earnings record if spouse died in year s.
Single worker: benefit valued during year t is

1~, RB,(w).

Married worker: benefit valued during year t is

l,", {[RB,(w) - R B , ( s ) ~ q + [RB,(w) ~ .... RB,(s)]}

1:, \1:2
+ ' ~ ' ~ [RB,(w)-DB:(s)]).

NOTES

1. Worker retires at age 65; spouse retires at first eligible age, but not
before worker.
158 SOCIAL SECURITY MONEY'S-WORTH QUESTION
2. Benefits payable based on the spouse's earnings record as a result
of the spouse becoming disabled are not considered.
3. Benefit adjustments to reflect age when payments began and in-
creases in the C o n s u m e r Price Index are not explicitly shown but are part
of the symbol RB or DB.
4. No w o r k e r ' s benefit is reduced to a negative value after offsetting
by the s p o u s e ' s benefit.

2. Disability Benefits
xt = Worker's current age;
x2 = S p o u s e ' s current age;
y, = Worker's age in year of disability (s) before age 65;
t, = Worker's age in year t;
t2 = S p o u s e ' s age in year t;
lo = Entry from active life table;
Ii = Entry from disabled life table;
lB,(w) = Disability benefit payable in year t based on w o r k e r ' s earn-
ings record if disability occurred in year s.
I f there is at least one child under age 16, benefit valued during year t is

i~l~,+___.2lB~(w){l+O.5[(number°fchildren']+~]}
,'X", ~, L\under age 16 ,/ IX", "

If there are no children under age 16 and t2 >/62, benefit valued during
year t is
• ,
ty~ l,,+___2IBf(w)
[ I + I,=/reduction
./s ouse's ?
j|"
Ix", I~,, lx"2\ f a c t o r /J

NOTES

!. Spouse draws benefit at first eligible age.

2. Benefits payable based on the spouse's earnings record as a result
of the spouse retiring, becoming disabled, or dying are not considered.
3. Benefit adjustments to reflect increases in the Consumer Price Index
are not explicitly shown but are part of the symbol lB.
4. Mortality rates for children are not used, and no benefits after age
16 are considered.
5. No recoveries from disability are assumed.
6. M a x i m u m family benefit limitation is automatically checked, and
appropriate reductions are made.
 SOCIAL SECURITY MONEY'S-WORTH QUESTION 159
3. Death Benefits
X I = Worker's current age;
X 2 Spouse's current age;
Yl = Worker's age in year of death (s);
12 = Spouse's age in year t;
l~= Entry from active life table;
P= Entry from disabled life table;
DB~(w) = Death benefit payable in year t based on worker's earnings
record if death occurred in year s;
RB,(s) = Retirement benefit payable in year t to spouse based on
own earnings record,
If death occurs while active and y, < 65 and ihere is at least one child
under age 16, benefit valued during year t is

d~"'DB;(w){0.75[~
a
number°f ) +/'~:]}
/a
li~, \children under age 16 ~: •

If death occurs while active and y, < 65, there are no children under age
16, and t2 >/60, benefit valued during year t is
o fspouse's'~
d~°' OB;(w) l,~ | r e d u c t i o n S .
;~, 1~2\ f a c t o r /

If death occurs while disabled and there is at least one child under age
16, benefit valued during year t is

{[
d~., DBI(w)
i~,
0.75 ( n u m b e r of
\children under age 16
+-,2]~
l~J J"
),°
If death occurs while disabled, there are no children under age 16, and
t2 ~> 60, benefit valued during year t is

/ s p o u s e ' s '~
d~---a'DB,(w) l'°" | r e d u c t i o n S .
i~, 1~, \ f a c t o r /

If death occurs when y, >I 65, benefit valued during year t is

d;'., l',', [DB,(w)-RB,(s)].

160 SOCIAL SECURITY MONEY'S-WORTH QUESTION

NOTES

I. Spouse draws benefit at first eligible age.

2. Benefits payable based on the s p o u s e ' s earnings record as a result
o f the spouse retiring (if death of the worker occurs before age 65 or while
the worker is disabled), becoming disabled, or dying are not considered.
3. Benefit adjustments to reflect age when payments began and in-
creases in the C o n s u m e r Price Index are not explicitly shown but are part
o f the symbols DB and RB.
4. Mortality rates for children are not used, and no benefits after age
16 are considered.
5. M a x i m u m family benefit limitation is automatically checked, and
appropriate reductions are made.
6. No benefit is reduced to a negative value after offsetting by the
s p o u s e ' s benefit.
7. N o lump-sum death benefits are considered.

4. Medicare Benefits
x, = Worker's current age;
x2 = S p o u s e ' s current age;
y, = Worker's age in year of disability or death (s) before age 65;
t, = Worker's age in year t;
tz= S p o u s e ' s age in year t;
l~= Entry from active life table;.
l' = Entry from disabled life table;
MP, = Medicare premium payable in year t.
Disabled participant when t, t> y, + 2: benefit valued during year t is

(,., 1~, Me,.

1:~,(~.,
Disabled participant's spouse when t2 t> 65: benefit valued during year t
is

i,., 1~, 1,~ MP,.

Deceased participant's spouse when t2 t> 65: benefit valued during year
t is

1" +
dq - - M P , .
 SOCIAL SECURITY MONEY'S-WORTH QUESTION 161
Retired participant with spouse not eligible for a benefit on own earnings
record when t2 1> 65: benefit valued during year is

~:, \t~, t:d

Retired single participant:

lg5 1,~ MP,.

NOTES

1. Premium adjustments to reflect increases in average hospital costs

are not explicitly shown but are part of the symbol MP.
2. No recoveries from disability are considered.
3. Benefits payable based on the spouse's earnings record as a result
of the spouse becoming disabled or dying are not considered.

APPENDIX II

TAXES

EQUAL EMPLOYEE/EMPLOYER TAX RATE

Calendar Year OASDI HI Total

1982 . . . . . . . . . . . . . . . . . . . I 5.4% 1.3 % 6.7 %

1983 . . . . . . . . . . . . . . . . . . . 5.4 .3 6.7
1984 . . . . . . . . . . . . . . . . . . . 5.4 .3 6.7
1985 . . . . . . . . . . . . . . . . . . . 5.7 .35 7.05
1986 . . . . . . . . . . . . . . . . . . . 5.7 .45 7.15
1987 . . . . . . . . . . . . . . . . . . . 5.7 .45 7.15
1988 . . . . . . . . . . . . . . . . . . . 5.7 .45 7.15
1989 . . . . . . . . . . . . . . . . . . . 5.7 1.45 7.15
1990and later . . . . . . . . . . . 6.2 1.45 7.65

APPENDIX III

ACTUARIAL ASSUMPTIONS

1. Economic Assumptions
The annual percentage increase in average wages in covered employ-
ment, the Consumer Price Index, and the annual interest rate are taken
from the 1982 OASDI trustees' report [7] intermediate set of economic
assumptions (Alternative II-B). The average HI monthly premium rates
162 SOCIAL SECURITY MONEY'S-WORTH QUESTION

are based on the 1982 HI trustees' report [8] i n t e r m e d i a t e set of economic

assumptions (Alternative II-B) up to 2005. Beginning in 2006 the rates are
projected at a constant 8 percent.

ANNUAL PERCENTAGE
INCREASE IN
ANNUAL
CALENDAR Average HE INTERESI
YEAR Average Wages Consumer
Monthly RATE
in Covered Price
Premium
Employment Index
Rate

1982 . . . . . . . . . . . . . . . . 6.6% 6.9% 21.3% 13.0%

1983 . . . . . . . . . . . . . . . . 8.1 7.9 14.7 11.4
1984 . . . . . . . . . . . . . . . . 8.1 7.4 14.2 9.3
1985 . . . . . . . . . . . . . . . 6.9 6.6 14.6 8.0
1986 . . . . . . . . . . . . . . . 6.8 5.8 13.3 7.1
1987 . . . . . . . . . . . . . . . . I 6.6 5.5 12.2 6.8
1988 . . . . . . . . . . . . . . . . I 6.6 5.3 11.3 6.6
1989 . . . . . . . . . . . . . . . . ~ 6.4 4.9 11.5 6.5
1990 . . . . . . . . . . . . . . . . 6.0 4.5 11.4 6.4
1991 . . . . . . . . . . . . . . . . 5.7 4.1 10.8 6.2
1992 . . . . . . . . . . . . . . . . 5.5 4.0 10.5 6.1
1993 . . . . . . . . . . . . . . . . 5.5 4.0 10.1 6.1
1994 . . . . . . . . . . . . . . . . 5.5 4.0 10.0 6.1
1995 . . . . . . . . . . . . . . . . 5.5 4.0 9.6 6.1
1996 . . . . . . . . . . . . . . . . 5.5 4.0 9.2 6.1
1997 . . . . . . . . . . . . . . . . 5.5 4.0 9.1 6.1
1998 . . . . . . . . . . . . . . . . 5.5 4.0 9.0 6.1
1999 . . . . . . . . . . . . . . . . 5.5 4.0 9.0 6.1
2000 . . . . . . . . . . . . . . . . 5.5 4.0 8.7 6.1
2001 . . . . . . . . . . . . . . . . 5.5 4.0 8.4 6.1
2002 . . . . . . . . . . . . . . . . 5.5 4.0 8.3 6.1
2003 . . . . . . . . . . . . . . . . 5.5 4.0 8.2 6.1
2004 . . . . . . . . . . . . . . . . 5.5 4.0 8.3 6.1
2005 a n d l a t e r . . . . . . . 5.5 4.0 8.0 6.1

2. Noneconomic Assumptions
Mortality rates for healthy individuals are taken from the UP-1984 Table
[1], unadjusted for males and set back five years for females.
Mortality rates for disabled individuals are taken from tables used by
the Pension Benefit Guaranty Corporation to value benefits for individuals
in receipt of social security disability benefits for plans that terminated
on or after September 2, 1974, and before December 1, 1980.
No mortality is assumed for children.
Disability rates of incidence are taken from Actuarial Study No. 81,
"Experience of Disabled-Worker Benefits under OASDI, 1974-78" [6],
and are based on a 1977 calendar year of entitlement.
No recovery rates are dssumed.
Expenses of administration are disregarded.
 SOCIAL SECURITY MONEY'S-WORTH QUESTION 163

R e t i r e m e n t is a s s u m e d at a g e 65 f o r a w o r k e r . S p o u s e s r e t i r e at t h e f i r s t
eligible age, but not before the worker.

CALENDAR DISABILITY INCIDENCE RATES

AGE AT
ENTITLEMENT Males Females

Under 25 . . . . . . . . . .0013 .0007

25-29 . . . . . . . . . . . .0016 .0010
30-34 . . . . . . . . . . . .0022 .0018
35-39 . . . . . . . . . . . .0030 .0026
40-44 . . . . . . . . . . . .0043 .0039
45-49 . . . . . . . . . . . .0068 .0056
50-54 . . . . . . . . . . . .0118 .0095
55-59 . . . . . . . . . . . .0208 .0154
60-64 . . . . . . . . . . . .0260 .0164

REFERENCES
I. FELLERS, WILLIAM W., and JACKSON, PAUL H. " N o n - i n s u r e d Pension Mor-
tality: T h e UP-1984 Table," PCAPP, X X V (1975-76), 4 5 6 - 5 0 2 .
2. MYERS, ROBERT J. Social.Security. 2d ed. H o m e w o o d , I11.: Richard D. Irwin,
1981.
3. NICHOLS, ORLO R., and SCHREITMUELLER, RICHARD G. Some Comparisons of the
Value of a Worker's Social Securily Taxes and Benefits. Actuarial Note No. 95. U.S.
Department of Health, Education, and Welfare, Social Security Administration, Of-
rice of the Actuary, April 1978.
4. Report o f the National Commission on Social Security Reform, January, 1983.
Washington, D.C.: N a t i o n a l C o m m i s s i o n on Social Security Reform.
5. ROBERTSON, A. HAEWORTH. The Coming Revolution in Social Security.
M c L e a n , Va.: Security Press, 1981.
6. SCHOBEL, BRUCE D. Experience o f Disabled-Worker Benefits under OASDI,
1974-78. Actuarial Study No. 81. U . S . D e p a r t m e n t o f H e a l t h and H u m a n
Services, Office of the Actuary, April 1980.
7. U.S. H o u s e of R e p r e s e n t a t i v e s . C o m m i t t e e on Ways and M e a n s . 1982 Annual
Report, Federal Old-Age and Survivors Insurance and Disability Insurance
Trust Funds. H o u s e D o c u m e n t No. 97-163, April 1982.
8. U.S. H o u s e of R e p r e s e n t a t i v e s . C o m m i t t e e on Ways and M e a n s . 1982 Annual
Report o f the Board o f Trustees o f the Federal Hospital Insurance Trust Fund.
H o u s e D o c u m e n t No. 97-166, April 1982.
 DISCUSSION OF PRECEDING PAPER

R O B E R T F. L I N K :

There are at least two reasons for interest in the social security money's-
worth question. First, "money's-worth" may be a criterion in the design of
social security (witness a recent Advisory Council proposal to increase ben-
efits to assure that an unmarried, high-income person could expect money's-
worth for his own FICA tax). Second, information on this subject may be
useful to individuals or groups facing choices involving their future social
security coverage.
This paper, which mainly addresses the second reason, is a useful addition
to the literature. The authors define money's-worth as " a fair return for
dollars contributed," using actuarial present values and thus taking appli-
cable interest into account. This seems to be the correct approach.
These authors have used the employee tax as "dollars contributed." They
and others who take this approach go on to say that those who prefer the
total tax may easily multiply the ratios by two. I think that looking at only
the employee tax is an incomplete view. I'd rather see the emphasis go
toward the combined tax.
How about money's-worth for the whole system? Can cohorts of current
contributors expect it? This question could be answered using Social Security
Administration data. Even without doing calculations, there are reasons to
expect a money's-worth shortfall.
This view is suggested by considering a stationary population model.
Elaborate on the model to include stationary assumptions on some additional
factors: age at entry into the labor force, age at retirement, levels of real
income, and the provisions of the system itself. In this model, one sees that
the benefits for a cohort are about equal to the taxes of the cohort. Without
the inclusion of interest, there is a money's-worth shortfall.
What changes in this model might cause the benefits for a cohort to exceed
the taxes of the cohort? The following are some possibilities:
1. System immaturity, such that some getting full benefits will not have a record of full
taxes.
2. Benefit increases (a special form of system immaturity).
3. Sustained population growth.
4. Sustained growth in rates of real compensation.
This list assumes that other factors are of lesser strength and that inflation
165
166 SOCIAL SECURITY MONEY'S-WORTH QUESTION

hits both sides and cancels out. Also, it assumes that we count all sources
of income to the system as contributions, that is, general revenue infusions.
There is little doubt that these factors have tilted the equation toward or
beyond a collective money's-worth for past generations. Can collective mon-
ey's-worth prevail in the future? Probably there is not much scope for future
ad hoc benefit increases. Population and pay levels may have significant
potential for long-term growth. But almost certainly, there will be times
when the necessary conditions do not exist.
If approval of our system depends on the existence of a collective mon-
ey's-worth state, we probably must withdraw our approval. This is a back-
ward way of saying that such a criterion is not appropriate for the system
as a whole (any more than it would be for income or other taxes). If we try
to meet critics of our system on their own money's-worth ground, we deserve
to lose the argument.
Entirely different money's-worth criteria should be applied to our kind of
system. Do most of the funds get used for the stated purposes of the system?
Is it efficient? We must answer yes. We are getting out what we put in. Is
American society generally pleased with the results of this redistribution of
purchasing power, in comparison with the expected -results of any alternative
system or no system? The opinion surveys seem to indicate more satisfaction
than dissatisfaction, but there is no developed and examined alternative for
comparison.
It would be pleasing to see some serious discussion of alternatives. The
thoughts of A. Haeworth Robertson deserve study: "Not in the spirit of,
'This won't work for the following reasons.' Rather, 'How could we fix it
so it would w o r k ? ' " If we could, would it be worth considering?'" Such
study might lead to desirable changes. Or it might give us renewed confi-
dence in what we have. Without such study, we can expect a continuation
of quick fixes. The time for study is before there is an emergency.

HOWARD YOUNG:

I found this paper lacking in a couple of areas. Actuaries should be concerned

more with improving the social security system than attacking it. Further-
more, an analysis should not be performed without concern for the social
consequences.
As the authors anticipated in their final paragraph, the Social Security Act
has been changed to treat employees of nonprofit organizations in the same
manner as all others. Consequently, there seems to be less justification for
the paper's premise now.
 DISCUSSION 167
RICHARD G, SCHREITMUELLER AND ORLO R. NICHOLS:

This excellent paper discusses one of the more complex and interesting
problems of recent years. Mr. Burianek and Ms. Reverman have set a good
example for other consulting actuaries whose best work sometimes goes
unpublished.
Since early 1983, tax-exempt nonprofit organizations and governmental
employers have not been allowed to terminate social security coverage. Thus
the money's-worth question analyzed in the paper is less pressing as the
authors anticipated in their conclusion. There will be some ongoing interest
among these governmental employers who are outside social security and
can opt in.
Money's-worth questions of continuing interest to the general public in-
volve benefit/tax comparison for workers already covered. This-is true for
the young especially but also the old, men and women, married and un-
married, and so forth. Some would say that comparisons of benefits versus
taxes for such groups are totally irrelevant, because social security is a
transfer program in which one's own taxes pay for someone else's current
benefits. Despite this, because payroll taxes finance social security, we agree
with the authors that money's-worth questions will always be of interest to
individuals covered by the program.
Some students of social security argue that the public should not care
about workers' benefits versus taxes. The fact is that many workers perceive
payroll taxes as the price they pay for coverage. By paying taxes during
their working years, they earn the right to get benefits later. No one likes
to pay taxes, so naturally they care about getting benefits with a value at
least equal to their taxes plus interest. Another public concern in whether
any government program might be handled better by the private sector. This
concern was evident long before the current conservative trend.
Benefit/tax comparisons under the present social security law are so com-
plex that one can set up comparisons and assumptions to "prove" that just
about any group either gains or loses. At times our political system seems
to encourage a divide-and-conquer approach to forming public opinion, in
which social security money's-worth comparisons may play a role in uniting
diverse groups to support or oppose program features.
Actuaries have generally behaved responsibly toward money's-worth stud-
ies, avoiding biased and misleading comparisons. Other analysts sometimes
develop money's-worth figures to support ideological arguments. We do not
live in an ideal world where facts sell themselves on their own merits. One
challenge for actuaries regarding money's-worth is to remain objective in
choosing methods and assumptions. Then we avoid bias in our own work
168 SOCIALSECURITYMONEY'S-WORTHQUESTION
and gain the ability to speak fairly about the work of others. In that spirit,
we can all learn from this paper.
An analysis under present law would have to consider two recent provi-
sions: the income tax payable on part of social security cash benefits and
the windfall provisions applicable to workers who receive pensions based
on noncovered employment. The tax on benefits can best be treated as a
benefit reduction for the people affected, provided that any comparison with
an alternative program is done on an after-tax basis. This may complicate
the analysis. The effect of the windfall provision is to scale back the first
step of the benefit formula from the usual 90 percent to 40 percent, thus
reducing the primary insurance amount for a typical noncovered worker by
50 percent of the first bend point. While this is the typical result, special
transitional cases involve workers who (1) have substantial social-security-
covered earnings over more than twenty-five years, (2) get only small pen-
sions from their noncovered employment, or (3) reach the noncovered em-
ployer's retirement age before 1990. This windfall provision makes it less
attractive for a public employer to remain outside social security.
One should be careful in raising the authors' question: "How much will
it cost to replace the benefits provided by the social security system?" No
alternative arrangement will fully replace the OASDI benefits, or the HI
benefits, and to suggest otherwise would seem to raise expectations unduly.
It is gratifying to see the paper call the intermediate assumptions of the
trustees report "up-to-date as well as unbiased (i.e., not selected by either
the organization examining the withdrawal issue or the actuary performing
the analysis)," and "quite believable" as to inflation and interest rates over
the next decade. From our viewpoint as well, these assumptions appear
unbiased for purposes of money's-worth comparisons because they were
chosen by the trustees to analyze a more fundamental issue, the adequacy
of financing. Because money's-worth comparisons are often a takeoff point
for defending or attacking provisions of the existing program, a model de-
vised mainly for the purpose of analyzing the money's-worth issue is suspect
until proven otherwise.
The authors' model did not allow for any future benefit or tax changes.
This although just before the 1983 amendments were enacted, the long-range
income to the OASDI program was projected to cover only about 90 percent
of the long-range benefits. As a practical matter, the authors had little choice
but to assume continuation of the law in effect at the time. Accordingly, as
the paper points out, the issue would be clouded if the typical employee
stood to get his or her money's-worth from the program then in effect.
Something obviously had to be changed, and either higher scheduled taxes
or lower scheduled benefits would make the benefits appear less favorable
relative to the taxes. A general principle can be stated. If under a given set
 DISCUSSION 169
of assumptions the social security program is underfinanced, those assump-
tions will tend to show overly favorable benefit/tax comparisons which imply
that the program will survive long enough to deliver those benefits in ex-
change for those taxes. This principle is recognized in the paper.
To estimate social security benefits to be earned in the future, each em-
ployee in the paper was assumed to have an unbroken work record with
future pay following the projected national wage trend. This is normal prac-
tice for a pension benefit design study where emphasis is on the career
employee and ancillary benefits can be analyzed separately. For social se-
curity comparisons, this assumption seems to assign no value to the disa-
bility-freeze and dropout-year provisions, thus understating the benefit/tax
ratios somewhat. Similarly, nothing is included for administering the alter-
native set of benefits, although the payroll taxes cover social security ad-
ministrative costs. On the other hand, there seems to be no turnover assumption
and introducing one would make terminating social security coverage look
more attractive. These are minor points which illustrate that even a sophis-
ticated model will typically cut some comers compared to the Social Security
Administration methods.
The authors did well to include an analysis of employees with working
spouses and of medicare. This went beyond earlier published actuarial stud-
ies. The Social Security Administration practice has traditionally been to
publish actuarial money's-worth studies quite conservatively, sticking to areas
where the technology is well-developed, and remaining silent at times when
the long-range financing is out of balance.

(AUTHORS' REVIEW OF DISCUSSION)

FRANK G. BURIANEK AND JUDITH M. REVERMAN:

We wish to thank each of the four discussants for their comments on our
paper. They raised issues which should be considered in connection with
any analysis of the social security money's-worth issue.
Mr. Link appropriately points out that there is more than one way to
answer the money's-worth question. Each of these other viewpoints is wor-
thy of study.
We hope that those responsible for the social security system will heed
his advice and recognize that the most appropriate time for study of the
system is when an emergency is not imminent. Perhaps now that the 1983
amendments have been adopted there will be a "window of opportunity"
during which the basic design of the system can be examined and desirable
changes can be enacted without the threat of impending default on benefit
payments.
Mr. Young raises two particular criticisms of the paper. He first questions
170 SOCIAL SECURITY MONEY'S-WORTH QUESTION

whether actuaries should be engaged in this type of analysis. In response,

we point out that if actuaries do not prepare this type of analysis, those less
qualified will step in. The result will be less accurate analyses.
Mr. Young's second point is that the 1983 Social Security amendments
have made this type of analysis irrelevant. While the amendments did remove
the right of most employee groups to withdraw from the system, as long as
we have a social security system based on payroll taxes, the money's-worth
question will be with us. As Mr. Link points out in his discussion, the issue
of money's-worth may be to some a criterion in evaluating the design or
general merits of the social security system. Mr. Schreitmueller and Mr.
Nichols also correctly point out that the money's-worth question will be of
continuing interest to the general public---especially the young--in their own
assessment of the worth of the system. We agree with their view that,
whether or not the public should care about workers' benefits versus taxes,
many workers do view payroll taxes as the price they pay for coverage. As
proof, refer to the furor surrounding a statement made by President Reagan
this past summer. Mr. Reagan said, "There is a possibility--well, proba-
b i l i t y - t h a t many people, young people now paying in, will never be able
to receive- as much as they're paying." One need only note the flurry of
responses generated to appreciate that the money's-worth question is still
with us.
,, Finally, it Was gratifying .that Mr. Schreitmueller and Mr. Nichols took
the time to comment on our paper since so much of our work was based on
their earlier analyses. We agree with their specific comments on the meth-
odology contained in our paper. The principal refinements in our approach
to their earlier analyses described in the paper were to expand the calculations
by including (1) the two-wage earner family, and (2) the benefits and costs
of the medicare system. Subsequent to the time the paper was submitted for
publication the 1983, social security amendments were adopted. We have
redone the benefit illustrations in the paper to reflect the later retirement
ages for younger workers and have updated the assumptions to those in the
1984 trustees' report. If any reader would like to see these results, contact
either of us at our Yearbook addresses for copies.