the difference between income and expenses within a specific period.
Actuarial Balance Details
Actuarial balance is crucial in social security circles because it reflects the financial health of the social security funds. The SSA manages Americans' social security operations. It collects, controls, and disburses the funds. The Social Security Administration manages two funds:
- Old Age Security Insurance and the Disability Insurance (OASI)
- Old Age and Disability Insurance
Taxes from employees and their employers fund the Old Age and Disability Insurance. Every month, the government takes a portion from your salary to ensure the social security fund is up and running. The SSA is in charge of paying the beneficiaries and investing the remaining funds.
If you are an employee, the government takes 6.2% of your salary with your employer matches this figure. In total, you and your employer have contributed 12.4%. If you happen to be a self-employed person, this figure doubles, you have to pay 12.4% on your own. The SSA has also set a tax cap on the amount it can collect from employees. This cap ensures they do not tax you more than the cost of your benefits.
Actuarial Balance Example
Let's say that the SSA is in an actuarial deficit, and there is a need to restore it to an actuarial balance. Here are some of the actions that the SSA and Congress can take to ensure actuarial balance:
- It can invest its trust fund money into the stock market where there are huge risks and the potential of a high ROI, and the SSA can also morph into a sort of VC and invest in high-growth tech startups.
- Congress can raise the tax cap rate so that SSA collects more money from the high earners. If the cap is $100,000, Congress can even increase it to $180,000. The cap increase ends up collecting more money from top earners.
- The other idea is to have reduced benefit payouts from the SSA; this will reduce the pressure on the funds. Reduced benefits ensure the payouts match with the income or are slightly less than the SSA income.
- Congress can raise the full retirement age by two or three years to ensure the SSA can stretch its resources before a large group of retirees starts joining its benefits list.
- Increasing the social security tax from the current rate to one that ensures there is an actuarial balance.
Significance of Actuarial Balance
SSA accounts must be in good shape because millions of Americans rely on their social security checks to cover their needs. For instance, in 2020 alone, the SSA disbursed one trillion dollars to 65 million Americans. This figure will increase as more people retire, especially among Baby Boomers (born between 1946 to 1964) approaching retirement age.
The massive increase of those receiving social security will lead to a stretch on its resources and a need for radical changes to ensure the SSA fund is still running. An actuarial balance ensures the SSA runs smoothly and can disburse benefits to those who qualify—retirees and those with disabilities.