What Is an Actuarial Deficit?
An actuarial deficit is the difference between future Social Security obligations and the income rate of the Social Security Trust Fund as of present. In simple terms, this is the difference between future obligations for payouts from the Social Security program and the current income rate of the program’s trust funds. The Social Security program is said to be in actuarial deficit if the summarized income rate is less than the summarized cost rate of Social Security for any given valuation period. This situation is commonly referred to as the Social Security System being "insolvent."
- The actuarial deficit is the difference between Social Security obligations and the income rate of the Social Security Trust Fund.
- Social Security is said to be insolvent when in an actuarial deficit, where income is less than the cost rate.
- The opposite of an actuarial deficit is an actuarial balance.
- To correct an actuarial deficit, or get to an actuarial balance, the Social Security program either has to decrease benefit payouts or increase the payroll tax rate.
Understanding Actuarial Deficit
An actuarial deficit is obviously not a desirable situation and is a condition that must be avoided for the Social Security program to remain viable and continue to operate in a fiscally positive manner. To avoid an actuarial deficit, the Social Security program would need to be brought to a state of what is called “actuarial balance.” This would theoretically be achieved quickly by either increasing the payroll tax rate or decreasing benefits payouts.
The term “actuarial deficit” is also sometimes used in a more general manner to refer to the same calculation involving a retirement fund of any type, whether in the U.S. or another part of the world.
The Social Security Board of Trustees prepares an annual report in which the board presents a summary of the actuarial status of the Old-Age and Survivors Insurance and Disability Insurance (OASDI) trust funds. These are the pair of funds that make up the Social Security program and are managed by the Social Security Administration (SSA).
This annual report contains a variety of critical data points. One of the main data points is the projected actuarial deficit for the combined trust funds over the next 75 years. The annual report also identifies a projected depletion date based on the funds’ current status and gives a long-term outlook that specifies the year until which the programs can pay out full benefits at their current rate.
The report from the Board of Trustees also addresses the concept of actuarial balance. In each report, actuarial balance is calculated for 66 different valuation periods, beginning with the upcoming 10-year period and growing with each successive year up to the full 75-year projection. If, at any point, over the 75-year projection, the anticipated costs of Social Security exceed the future value of the trust fund's income, that period would be deemed to be in actuarial deficit.