Effect of Aging Population with Declining Mortality on Social Security of Nafta Countries

Abstract

This paper summarizes the results of Phase 3 of a three-phase study by the Society of Actuaries on the impact of mortality decline on social security systems in Canada, Mexico, and the U.S. (the NAFTA countries). Responding to an aging population, each NAFTA country has proposed solutions to its social security problem. It is important to analyze whether the proposed solutions would work under changing demography. It is equally important to ensure that social security financing would not be jeopardized by a greater-than-expected mortality decline. We attempt to analyze these critical issues in this phase of the study. Using assumptions obtained from responses to a questionnaire distributed to experts on mortality in Phase 2 of the study, we tested the impact of mortality decline on social security in each of the NAFTA countries. To ensure that we covered a wide range of possible mortality decline rates, we performed the test under four scenarios based on: current social ecurity assumptions, a measure of the best guess of expert opinion, a measure of the high end of expert opinion, and a measure of the low end of expert opinion. Under each scenario and for each country, the study examined the mortality rate at each age and sex, the projected population, the cash flow, and the financed status for each future year. Based on these analyses, we derived the constant contribution rate required to maintain the sustainability of the system for each country. Results of the study show that social security financing is adequate for Mexico and Canada under their respective social security reforms, and the systems are less volatile with respect to mortality fluctuation than expected. Even though social security financing is heavily affected by demographic changes, the rapid increase in the dependency ratios (defined as the ratio of the size of the population over age 65 to the population at working ages) in Canada and Mexico is mainly due to aging of the current population. Graphically, this is demonstrated by an upward shift in the shape of the current population. We show that the additional impact of mortality decline on the dependency ratio and the shape of the population graph is not as significant as is generally believed. Consequently, the difference between government actuaries’ and experts’ views on social security has less effect on social security financing than many experts expect. Although no definite formula for social security reform has yet been adopted in the U.S., our study shows that the impact of mortality decline on social security funding there is also relatively small. However, the study also points out other important elements to consider, including demographic factors such as retirement, disability rates, fertility, and immigration rates, and economic factors such as inflation, investment return, and real wage increases. These are subjects for future research.