Three types of financial measures are useful in assessing the actuarial status of the Social Security trust funds under the financing approach specified in current law: (1) annual cash-flow measures, including income and cost rates, and balances; (2)
trust fund ratios; and (3) summary measures like
actuarial balances and unfunded obligations. The first long-range estimates presented are the series of projected
annual balances (or net cash flow), which are the differences between the projected annual income rates and annual cost rates (expressed as percentages of the taxable payroll). In assessing the financial condition of the program, particular attention should be paid to the level of the annual balances at the end of the long-range period and the time at which the annual balances may change from positive to negative values.
The next measure discussed is the pattern of projected trust fund ratios. The trust fund ratio represents the proportion of a year’s projected cost that could be paid with the funds available at the beginning of the year. Particular attention should be paid to the level and year of maximum trust fund ratio, to the
year of exhaustion of the funds, and to the stability of the trust fund ratio in cases where the ratio remains positive at the end of the long-range period. When a program has positive trust fund ratios throughout the 75-year projection period and these ratios are stable or rising at the end of the period, the program financing is said to achieve sustainable solvency.
The final measures discussed in this section summarize the total income and cost over
valuation periods that extend through 75 years, and to the infinite horizon. These measures indicate whether projected income will be adequate for the period as a whole. The first such measure, actuarial balance, indicates the size of any surplus or shortfall as a percentage of the taxable payroll over the period. The second, open group unfunded obligation, indicates the size of any shortfall in present-value dollars. This section also includes a comparison of covered workers to beneficiaries, a generational decomposition of the infinite future unfunded obligation, the test of long-range close actuarial balance, and the reasons for change in the actuarial balance from the last report.
If the 75-year actuarial balance is zero (or positive), then the trust fund ratio at the end of the period will be at 100 percent (or greater), and financing for the program is considered to be adequate for the 75-year period as a whole. Financial adequacy, or solvency, for each year is determined by whether the trust fund asset level is positive throughout the year. Whether or not financial adequacy is stable in the sense that it is likely to continue for subsequent 75-year periods in succeeding reports is also important when considering the actuarial status of the program. One indication of this stability, or sustainable solvency, is the behavior of the trust fund ratio at the end of the projection period. If trust fund ratios for the last several years of the long-range period are positive and are at a constant or rising level, then it is likely that subsequent Trustees Reports will also show projections of financial adequacy (assuming no changes in demographic and economic assumptions, or the law). The actuarial balance and the open group unfunded obligation for the infinite future provide additional measures of the financial status of the program for the very long range.
Basic to the consideration of the long-range actuarial status of the trust funds are the concepts of income rate and cost rate, each of which is expressed as a percentage of taxable payroll. Other measures of the cash flow of the program are shown in Appendix
F. The annual income rate is the sum of the tax contribution rate and the ratio of income from
taxation of benefits to the OASDI taxable payroll for the year. The OASDI
taxable payroll consists of the total earnings that are subject to OASDI taxes, with some relatively small adjustments.
1
The annual cost rate is the ratio of the cost of the program to the taxable payroll for the year. The cost is defined to include scheduled benefit payments,
administrative expenses, net transfers from the trust funds to the
Railroad Retirement program under the
financial-interchange provisions, and payments for
vocational rehabilitation services for disabled beneficiaries. For any year, the income rate minus the cost rate is referred to as the balance for the year.
2
Table IV.B1 presents a comparison of the estimated annual income rates and cost rates by trust fund and alternative. Detailed long-range projections of trust fund operations, in current dollar amounts, are shown in table
VI.F8.
The projections for OASI under the intermediate assumptions show the income rate rising due to the gradually increasing effect of the taxation of benefits. The projected income from the taxation of benefits, expressed as a percentage of taxable payroll, is expected to increase for two reasons. First, benefits are rising faster than payroll. Second, the benefit-taxation threshold amounts are not indexed, so that an increasing share of beneficiaries will be paying tax on their benefits. The pattern of the cost rate is much different. The cost rate rises in 2009 and 2010 due to the projected economic recession, and then comes back down through 2012 due to the recovery. From about 2012 to 2030, the cost rate rises rapidly because the retirement of the
baby-boom generation will cause the number of beneficiaries to rise much faster than the labor force. After 2030, the cost rate remains fairly stable for about 30 years because the number of workers and beneficiaries are projected to rise at the same rate. Thereafter, the cost rate rises slowly, reflecting projected reductions in death rates and continued relatively low birth rates. The cost rate reaches 15.35 percent of taxable payroll for 2083. By comparison, the income rate reaches 11.48 percent of taxable payroll for 2083.
Projected income rates under the low-cost and high-cost sets of assumptions are very similar to those projected for the intermediate assumptions because they are largely a reflection of the tax rates specified in the law. OASI cost rates for the low-cost and high-cost assumptions differ significantly from those projected for the intermediate assumptions. For the low-cost assumptions, the cost rate decreases from 2010 through 2013, then rises, until it peaks in 2033 at a level of 13.01 percent of payroll. The cost rate then generally declines gradually, reaching a level of 10.92 percent of payroll for 2083 (at which point the income rate reaches 11.22 percent). For the high-cost assumptions, the cost rate rises from 2011 through the end of the 75-year period. It rises at a relatively fast pace between 2011 and 2030 because of the aging of the baby-boom generation. Subsequently, the projected cost rate continues rising and reaches 22.41 percent of payroll for 2083 (at which point the income rate reaches 11.88 percent).
The pattern of the projected OASI annual balance is important in the analysis of the financial condition of the program. Under the intermediate assumptions, the annual balance is positive for 8 years (through 2016) and is negative thereafter. This annual deficit rises rapidly, reaching 2 percent of taxable payroll by 2024, and continues rising generally thereafter, to a level of 3.87 percent of taxable payroll for 2083.
Under the low-cost assumptions, the projected OASI annual balance is positive for 11 years (through 2019) and then becomes negative, with the annual deficit peaking at 1.74 percent of taxable payroll for 2033. Then, the annual deficit declines until 2065, when the OASI annual balance becomes positive, reaching a surplus of 0.30 percent of payroll in 2083. Under the high-cost assumptions, in contrast, the OASI balance is projected to be positive for only 5 years (through 2013) and to be negative thereafter, with a deficit of 2.19 percent for 2020, 6.30 percent for 2050, and 10.53 percent of payroll for 2083.
Notes:1. The income rate excludes interest income and certain transfers from the General Fund of the Treasury.
2. Some historical values are subject to change due to revisions of taxable payroll.
3. Totals do not necessarily equal the sums of rounded components.
Under the intermediate assumptions, the cost rate for DI fluctuates between 2.15 and 2.30 percent of taxable payroll from 2009 to 2034, generally increasing thereafter to 2.34 percent for 2083. The income rate increases only very slightly from 1.84 percent of taxable payroll for 2009 to 1.87 percent for 2083. The annual deficit is about 0.34 percent in 2009 and reaches 0.47 percent for 2083.
Under the low-cost assumptions, the DI cost rate peaks at 2.15 percent of payroll for 2010, then generally declines slowly thereafter, reaching 1.57 percent for 2083. The annual balance is negative for the first 7 years and is positive throughout the remainder of the long-range period. For the high-cost assumptions, DI cost rises much more, reaching 3.29 percent for 2083. The annual deficit is about 0.39 percent in 2009 and reaches 1.39 percent for 2083.
Figure IV.B1 shows in graphical form the patterns of the OASI and DI annual income rates and cost rates. The income rates shown here are only for alternative II in order to simplify the graphical presentation because, as shown in table
IV.B1, the variation in the income rates by alternative is very small. Income rates increase generally, but at a slow rate for each of the alternatives over the long-range period. Both increases in the income rate and variation among the alternatives result from the relatively small component of income from taxation of benefits. Increases in income from taxation of benefits reflect increases in the total amount of benefits paid and the fact that an increasing share of individual benefits will be subject to taxation because benefit taxation threshold amounts are not indexed.
The patterns of the annual balances for OASI and DI can be inferred from figure
IV.B1. For each alternative, the magnitude of each of the positive balances, as a percentage of taxable payroll, is represented by the distance between the appropriate cost-rate curve and the income-rate curve above it. The magnitude of each of the deficits is represented by the distance between the appropriate cost-rate curve and the income-rate curve below it.
In the future, the cost of OASI, DI and the combined OASDI programs as a percentage of taxable payroll will not necessarily be within the range encompassed by alternatives I and III. Nonetheless, because alternatives I and III define a reasonably wide range of demographic and economic conditions, the resulting estimates delineate a reasonable range for consideration of potential future program costs.
Thus far in this section, the cost and income of the OASDI program have been discussed with reference to their size relative to taxable payroll, which is the base from which most of the income is derived for the OASDI program. Also of interest are estimates of income and cost expressed as shares of
gross domestic product (GDP), the value of goods and services produced during the year in the United States. Under alternative II, OASDI cost generally rises from about 4.8 percent of GDP currently to 6.1 percent in 2030, and then peaks at almost 6.2 percent in 2034. Thereafter, OASDI cost as a percent of GDP is projected to decline, reaching a level around 5.8 percent for the period 2050 through 2083. Full estimates of income and cost are presented on this basis in Appendix
VI.F.2 beginning on page 182.
The estimated OASDI cost rate is expected to rise rapidly between 2012 and 2030 primarily because the number of beneficiaries is expected to rise substantially more rapidly than the number of covered workers as the baby-boom generation retires. This occurs largely because of the swings in fertility rates over time. Because the baby-boom generation had low fertility rates relative to their parents, and those low fertility rates are expected to persist, the ratio of beneficiaries to workers is expected to rise rapidly, reaching a permanently higher level after the baby-boom generation retires. After 2030, the ratio of beneficiaries to workers rises slowly due to increasing longevity. A comparison of the numbers of covered workers and beneficiaries is shown in table
IV.B2.
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Coveredworkers per OASDI beneficiary
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OASDI beneficiaries per 100 covered workers
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Notes: 1. The number of beneficiaries does not include uninsured individuals who receive benefits under Section 228 of the Social Security Act. Costs are reimbursed from the General Fund of the Treasury for most of these individuals.
2. Historical covered worker data are subject to revision.
3. Totals do not necessarily equal the sums of rounded components.
The impact of the demographic shifts under the three alternatives on the OASDI cost rates is readily seen by considering the projected number of OASDI beneficiaries per 100
covered workers. As compared to the 2008 level of 31 beneficiaries per 100 covered workers, this ratio is estimated to rise to 46 by 2030 and 48 by 2035 under intermediate assumptions, as the growth in beneficiaries greatly exceeds the growth in workers. By 2085, this ratio rises significantly under all three alternatives, reaching 39 under the low-cost assumptions, 52 under the intermediate assumptions, and 69 under the high-cost assumptions. The significance of these numbers can be seen by comparing figure
IV.B1 to figure
IV.B2.
For each alternative, the shape of the curve in figure IV.B2, which shows beneficiaries per 100 covered workers, is strikingly similar to that of the corresponding cost-rate curve in figure
IV.B1, thereby emphasizing the extent to which the cost of the OASDI program as a percentage of taxable payroll is determined by the age distribution of the
population. Because the cost rate is basically the product of the number of beneficiaries and their average benefit, divided by the product of the number of covered workers and their average taxable earnings (and because average benefits rise at about the same rate as average earnings), it is to be expected that the pattern of the annual cost rates is similar to that of the annual ratios of beneficiaries to workers.
Table IV.B2 also shows the number of covered workers per OASDI beneficiary, which was about 3.2 in 2008. This ratio declines under all three alternatives because it is the inverse of the ratio of beneficiaries to workers.
Trust fund ratios are useful indicators of the adequacy of the financial resources of the Social Security program at any point in time. For any year in which the projected trust fund ratio is positive (i.e., the trust fund holds assets at the beginning of the year), but is not positive for the following year, the trust fund is projected to become exhausted during the year. Under present law, the OASI and DI Trust Funds do not have the authority to borrow. Therefore, exhaustion of the assets in either fund during a year would mean there are no longer sufficient assets in the fund to cover the full amount of benefits scheduled for the year under present law.
The trust fund ratio also serves an additional important purpose in assessing the actuarial status of the program. When the financing is adequate for the timely payment of full benefits throughout the long-range period, the stability of the trust fund ratio toward the end of the period indicates the likelihood that this projected adequacy will continue for subsequent Trustees Reports. If the trust fund ratio toward the end of the period is level (or increasing), then projected adequacy for the long-range period is likely to continue for subsequent reports. Under these conditions, the program financing is said to achieve sustainable solvency.
Table IV.B3 shows, by alternative, the estimated trust fund ratios (without regard to advance tax transfers that would be effected after the end of the 10‑year, short-range period) for the separate and combined OASI and DI Trust Funds. Also shown in this table is the year in which a fund is estimated to become exhausted, reflecting the effect of the provision for advance tax transfers.
Based on the intermediate assumptions, the OASI trust fund ratio rises from 392 percent at the beginning of 2009, reaching a peak of 422 percent at the beginning of 2012. This increase in the OASI trust fund ratio results from the fact that the annual income rate exceeds the annual cost rate for several years (see table
IV.B1). Thereafter, the OASI trust fund ratio declines steadily, with the OASI Trust Fund becoming exhausted in 2039. The DI trust fund ratio has been declining steadily since 2003, and is estimated to continue to decline from 179 percent at the beginning of 2009 until the trust fund becomes exhausted in 2020.
The trust fund ratio for the combined OASI and DI Trust Funds under the intermediate assumptions rises from 354 percent for 2009 to a peak of 369 percent at the beginning of 2012. Thereafter, the ratio declines, with the combined funds becoming exhausted in 2037. In last year’s report, the peak trust fund ratio for the combined funds was estimated to be 395 percent for 2014 and the year of exhaustion was estimated to be 2041.
The trust fund ratio for the OASDI program under the intermediate assumptions first declines in 2013. This occurs because the increase in trust fund assets during 2012, which reflects interest income and a small excess of noninterest income over cost, occurs at a slower rate than does the increase in the annual cost of the program between 2012 and 2013. After 2012, the dollar amount of assets is projected to continue to rise through the beginning of 2024 because interest income more than offsets the shortfall in noninterest income.
Beginning in 2016, the OASDI program under the intermediate assumptions is projected to experience increasingly large cash-flow shortfalls that will require the trust funds to redeem special public-debt obligations of the General Fund of the Treasury. This will differ from the experience of recent years when the trust funds have been net lenders to the General Fund of the Treasury. The change in the cash flow between the trust funds and the general fund is expected to have important public policy and economic implications that go well beyond the operation of the OASDI program itself.
Based on the low-cost assumptions, the trust fund ratio for the DI program increases from 2014 through the end of the long-range projection period, reaching the extremely high level of 1,683 percent for 2084. At the end of the long-range period, the DI trust fund ratio is rising by 33 percentage points per year. For the OASI program, the trust fund ratio rises to a peak of 451 percent for 2017, drops to a low of 261 percent for 2052, and rises thereafter to a level of 389 percent for 2084. At the end of the period, the OASI trust fund ratio is rising by 6 percentage points per year. For the OASDI program, the trust fund ratio peaks at 408 percent for 2018, falls to 301 percent for 2044, and increases thereafter, reaching 552 percent for 2084. Because the trust fund ratios are large and increasing at the end of the long-range period, subsequent Trustees Reports are likely to contain projections of adequate long-range financing of the OASI, the DI, and the combined OASI and DI programs under the low-cost assumptions. Thus, under the low-cost assumptions, each program would achieve sustainable solvency.
In contrast, under the high-cost assumptions, the OASI trust fund ratio is estimated to peak at 413 percent for 2012, thereafter declining to fund exhaustion by the end of 2031. The DI trust fund ratio is estimated to decline from 176 percent for 2009 to fund exhaustion by the end of 2016. The combined OASDI trust fund ratio is estimated to rise to a peak of 360 percent for 2011, declining thereafter to fund exhaustion by the end of 2029.
Thus, because large ultimate cost rates are projected under all but the low-cost assumptions, it is likely that income will eventually need to be increased, and/or program costs will need to be reduced in order to prevent the trust funds from becoming exhausted.
Even under the high-cost assumptions, however, the combined OASI and DI funds on hand plus their estimated future income would be able to cover their combined cost for 20 years into the future (until 2029). Under the intermediate assumptions the combined starting funds plus estimated future income would be able to cover cost for about 28 years into the future (until 2037). The program would be able to cover cost for the foreseeable future under the more optimistic low-cost assumptions. In the 2008 report, the combined trust funds were projected to become exhausted in 2031 under the high-cost assumptions and in 2041 under the intermediate assumptions.
Note: See definition of trust fund ratio on page 219. The combined ratios shown for years after the DI fund is estimated to be exhausted are theoretical and are shown for informational purposes only.
An illustration of the trust fund ratios for the separate OASI and DI Trust Funds is shown in figure
IV.B3 for each of the alternative sets of assumptions. A graphical illustration of the trust fund ratios for the combined trust funds is shown in figure
II.D6 on page 15.
Summarized income and cost rates, along with their components, are presented in table
IV.B4 for 25-year, 50-year, and 75-year valuation periods. Income rates reflect the scheduled payroll tax rates and the projected income from the taxation of scheduled benefits expressed as a percentage of taxable payroll. The current combined payroll tax rate of 12.4 percent is scheduled to remain unchanged in the future. In contrast, the projected income from taxation of benefits, expressed as a percentage of taxable payroll, is expected to generally increase throughout the long-range period for two reasons. First, benefits are rising faster than payroll. Second, the benefit-taxation threshold amounts are not indexed, so that an increasing share of beneficiaries will be paying tax on their benefits. Summarized income rates also include the starting trust fund balance. Summarized cost rates include the cost of reaching a target trust fund of 100 percent of annual cost at the end of the period in addition to the cost included in the annual cost rates.
It may be noted that the payroll tax income expressed as a percentage of taxable payroll, as shown in table
IV.B4, is slightly smaller than the actual tax rates in effect for each period. This difference results from the fact that all OASDI income and cost dollar amounts presented in this report are computed on a cash basis, i.e., amounts are attributed to the year in which they are intended to be received by, or expended from, the fund, while taxable payroll is attributed to the year in which earnings are paid. Because earnings are paid to workers before the corresponding
payroll taxes are credited to the funds, payroll tax income for a particular year reflects a combination of the taxable payrolls from that year and from prior years, when payroll was smaller. Dividing payroll tax income by taxable payroll for a particular year, or period of years, will thus generally result in an income rate that is slightly less than the applicable tax rate for the period.
Summarized values for the full 75-year period are useful in analyzing the long-range adequacy of financing for the program over the period as a whole under present law and under proposed modifications to the law.
Table IV.B4 shows summarized rates for valuation periods of the first 25, the first 50, and the entire 75 years of the long-range projection period, including the funds on hand at the start of the period and the cost of accumulating a target trust fund balance equal to 100 percent of the following year’s annual cost by the end of the period. The actuarial balance for each of these three valuation periods is equal to the difference between the
summarized income rate and the
summarized cost rate for the corresponding period. An actuarial balance of zero for any period would indicate that estimated cost for the period could be met, on average, with a remaining trust fund balance at the end of the period equal to 100 percent of the following year’s cost. A negative actuarial balance indicates that, over the period, the present value of income to the program plus the existing trust fund falls short of the present value of the cost of the program plus the cost of reaching a target trust fund balance of 1 year’s cost by the end of the period. This negative balance, combined with a falling trust fund ratio, signals the likelihood of continuing cash-flow deficits, implying that the current-law level of financing is not sustainable.
The values in table IV.B4 show that the combined OASDI program is expected to operate with a positive actuarial balance over the 25-year valuation period under only the low-cost assumptions. For the 25-year valuation period the summarized values indicate actuarial balances of 1.18 percent of taxable payroll under the low-cost assumptions, ‑0.17 percent under the intermediate assumptions, and -1.81 percent under the high-cost assumptions. Thus, the program is more than adequately financed for the 25‑year valuation period under only the low-cost projections. For the 50‑year valuation period the OASDI program would have a positive actuarial balance of 0.48 percent under the low-cost assumptions, but would have deficits of 1.51 percent under the intermediate assumptions and 4.05 percent under the high-cost assumptions. Thus, the program is more than adequately financed for the 50‑year valuation period under only the low-cost set of assumptions.
For the entire 75-year valuation period, the combined OASDI program would once again have
actuarial deficits except under the low-cost set of assumptions. The actuarial balance for this long-range valuation period is projected to be 0.50 percent of taxable payroll under the low-cost assumptions, ‑2.00 percent under the intermediate assumptions, and ‑5.32 percent under the high-cost assumptions.
Assuming the Trustees’ intermediate assumptions are realized, the deficit of 2.00 percent of payroll indicates that financial adequacy of the program for the next 75 years could be restored if the Social Security payroll tax rate were increased for current and future earnings from 12.40 percent (combined employee-employer shares) to 14.41 percent. Alternatively, all current and future benefits could be reduced by 13.3 percent (or there could be some combination of tax increases and benefit reductions). Changes of this magnitude would be sufficient to maintain trust fund solvency over the 75-year projection period under the intermediate assumptions.
However, large annual deficits projected under current law for the end of the long-range period, which exceed 4 percent of payroll under the intermediate assumptions (see table
IV.B1), indicate that the annual cost will very likely continue to exceed tax revenues after 2083. As a result, ensuring continued adequate financing would eventually require larger changes than those needed to maintain solvency for the 75-year period. For the infinite future, the actuarial deficit is estimated to be 3.4 percent of taxable payroll under the intermediate assumptions. This means that the projected infinite horizon shortfall could be eliminated with an immediate increase in the combined payroll tax rate from 12.4 percent to about 15.8 percent. This shortfall could also be eliminated if all current and future benefits were immediately reduced by 21.1 percent.
As may be concluded from table IV.B4, the financial condition of the DI program is substantially weaker than that of the OASI program for the first 25 years. Summarized over the full 75-year period, however, long-range deficits for the OASI and DI programs under intermediate assumptions are more similar when measured relative to the level of program costs.
Table IV.B5 presents the components and the calculation of the long-range (75-year) actuarial balance under the intermediate assumptions. The present value of future cost less future tax income over the long-range period, minus the amount of trust fund assets at the beginning of the projection period, amounts to $5.3 trillion for the OASDI program. This amount is referred to as the 75-year “open group unfunded obligation.” The actuarial deficit (i.e., the negative of the actuarial balance) combines this unfunded obligation with the present value of the “ending target trust fund,” and expresses the total as a percentage of the present value of the taxable payroll for the period. The present value of future tax income minus cost, plus starting trust fund assets, minus the present value of the ending target trust fund amounts to ‑$5.7 trillion for the OASDI program. The actuarial balance—this amount expressed as a percentage of taxable payroll for the period—is therefore ‑2.00 percent.
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B. Taxation of benefits revenue
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E. Cost minus tax income (D - C)
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F. Trust fund assets at start of period
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G. Open group unfunded obligation (E - F)
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H. Ending target trust fund a
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I. Income minus cost, plus assets at start of period, minus ending target trust fund (C - D + F - H = - G - H)
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As shown in the previous section, a negative actuarial balance (or an actuarial deficit) provides one measure of the unfunded obligation of the program over a period of time. Two additional measures of OASDI unfunded obligations under the intermediate assumptions are presented below.
Consistent with practice since 1965, this report focuses on the 75-year period (from 2009 to 2083 for this report) for the evaluation of the long-run financial status of the OASDI program on an open group basis (i.e., including taxes and cost for past, current and future participants through the year 2083). Table
IV.B6, in its second line, shows that the present value of the open group unfunded obligation for the program over that period is $5.3 trillion. The open group measure indicates the adequacy of financing over the period as a whole for a program financed on a pay-as-you-go basis. On this basis, payroll taxes and scheduled benefits of all participants are included through 2083.
Table IV.B6 also presents the 75-year unfunded obligation as percentages of future OASDI taxable payroll and gross domestic product (GDP) through 2083. The 75-year unfunded obligation as a percentage of taxable payroll is less than the actuarial deficit, because it excludes the ending target trust fund value (see table
IV.B5).
However, there are limitations on what can be conveyed using summarized measures alone. For example, overemphasis on summary measures (such as the actuarial balance and open group unfunded obligation) for the 75-year period can lead to incorrect perceptions and policies that fail to address financial sustainability for the more distant future. This can be addressed by considering the trend in trust fund ratios toward the end of the period (see “sustainable solvency” at the beginning of section IV.B).
Another limitation of the 75‑year summary measure is that continued, and possibly increasing, annual shortfalls after 75 years are not taken into account. In order to address this limitation, this section presents estimates of unfunded obligations that extend to the infinite horizon. The extension assumes that the current-law OASDI program and the demographic and most economic trends used for the 75‑year projection continue indefinitely. The one exception is that the ultimate assumed real-wage differential for the long-range period of 1.1 percent is increased to 1.2 percent, phased in over the 10-year period 2084 to 2093. This change essentially maintains consistency with the assumed reduction in the growth of health care expenditures after 2083. (See the Medicare Trustees Report.) The values in table
IV.B6 indicate that extending the calculations beyond 2083 adds $9.9 ($15.1 - $5.3) trillion in present value to the amount of the unfunded obligation estimated through 2083. That is, over the infinite horizon, the OASDI open group unfunded obligation is projected to be $15.1 trillion. The $9.9 trillion increment reflects a significant financing gap projected for OASDI for years after 2083. Of course, the degree of uncertainty associated with estimates beyond 2083 is substantial.
In last year’s report the unfunded obligation over the infinite horizon was reported as $13.6 trillion in present value as of January 1, 2008. The change to the later valuation date (January 1, 2009), taken alone, would increase the measured deficit by about $0.7 trillion. In addition, the net effects of changes in data, methods, and other assumptions increased the infinite horizon unfunded obligation by approximately $0.8 trillion. The main changes affecting the infinite horizon unfunded obligation for this report are near-term economic and disability assumptions reflecting the current economic recession, updated starting economic values, and lower ultimate mortality rates for ages 65-84. See section IV.B.7 for details regarding changes in data, methods, and assumptions.
As noted in the previous section, the $15.1 trillion infinite future open group unfunded obligation may also be expressed as a percentage of the taxable payroll over that period. This actuarial deficit for the infinite future is 3.4 percent of taxable payroll under the intermediate assumptions, about 0.2 percentage point higher than in last year’s report. This unfunded obligation can also be expressed as a percentage of GDP over the infinite future and is 1.2 percent on that basis, about 0.1 percentage point higher than in last year’s report. These relative measures of the unfunded obligation over the infinite future express its magnitude in relation to the resources that are potentially available to finance the shortfall.
Notes:1. The present values of future taxable payroll for 2009-83 and for 2009 through the infinite horizon are $282.8 trillion and $442.3 trillion, respectively.
2. The present values of GDP for 2009-83 and for 2009 through the infinite horizon are $788.4 trillion and $1,309.0 trillion, respectively. Present values of GDP shown in the Medicare Trustees Report differ slightly due to the use of interest discount rates that are specific to each program’s trust fund holdings.
The future unfunded obligation of the OASDI program may also be viewed from a generational perspective. This perspective is generally associated with assessment of the financial condition of a program that is intended or required to be financed on a fully‑advance‑funded basis. However, analysis from this perspective can also provide insights into the implications of pay-as-you‑go financing, the basis that has been used for the OASDI program.
The first line of table IV.B7 shows that the present value of future cost less future taxes over the next 100 years for all current participants equals $18.7 trillion. For this purpose, current participants are defined as individuals who attain age 15 or older in 2009. Subtracting the current value of the trust fund (the accumulated value of past OASDI taxes less cost) gives a closed group (excluding all future participants) unfunded obligation of $16.3 trillion. This value represents the shortfall of lifetime contributions for all past and current participants relative to the lifetime costs associated with their generations. For a fully‑advance‑funded program this value would be equal to zero.
For Social Security benefits to be adequately financed for the infinite future, the scheduled taxes or benefits of current and future participants in the system must be adjusted to fully offset the shortfall due to past and current participants. Future participants, as a whole, are projected to pay taxes that are approximately $1.2 trillion more in present value than the cost of providing benefits they are scheduled to receive over the infinite future.
The remaining long run financing gap that program reforms must ultimately close for the infinite future is estimated to be $15.1 trillion in present value. Closing this gap can be achieved by raising additional revenue or reducing benefits (or some combination) for current and future participants so that the present value of the additional revenue or reduced benefits for the infinite future is equivalent to about 3.4 percent of taxable payroll or 1.2 percent of GDP.
Notes:1. The present value of future taxable payroll for 2009 through the infinite horizon is $442.3 trillion.
2. The present value of GDP for 2009 through the infinite horizon is $1,309.0 trillion.
3. Totals do not necessarily equal the sums of rounded components.
The test of long-range close actuarial balance applies to a set of 66 separate valuation periods beginning with the first 10‑year period, and including the periods of the first 11 years, the first 12 years, etc., up through the full 75‑year projection period. Under the long-range test, the summarized income rate and cost rate are calculated for each of these valuation periods. The long-range test is met if, for each of the 66 valuation periods, the actuarial balance is not less than zero or is negative by, at most, a specified percentage of the summarized cost rate for the same time period. The percentage allowed for a negative actuarial balance is 5 percent for the full 75-year period. For shorter periods, the allowable percentage begins with zero for the first 10 years and increases uniformly for longer periods, until it reaches the maximum percentage of 5 percent allowed for the 75-year period. The criterion for meeting the test is less stringent for the longer periods in recognition of the greater uncertainty associated with estimates for more distant years.
When a negative actuarial balance in excess of the allowable percentage of the summarized cost rate is projected for one or more of the 66 separate valuation periods, the program fails the test of long-range close actuarial balance. Being out of close actuarial balance indicates that the program is expected to experience financial problems in the future and that ways of improving the financial status of the program should be considered. The sooner the actuarial balance is less than the minimum allowable balance, expressed as a percentage of the summarized cost rate, the more urgent is the need for corrective action. Necessary changes in program financing or benefit provisions should not be put off until the last possible moment if future beneficiaries and workers are to effectively plan for their retirement.
Table IV.B8 presents a comparison of the estimated actuarial balances with the minimum allowable balance (or maximum allowable deficit) under the long-range test, each expressed as a percentage of the summarized cost rate, based on the intermediate estimates. Values are shown for only 14 of the valuation periods: those of length 10 years, 15 years, and continuing in 5-year increments through 75 years. However, each of the 66 periods—those of length 10 years, 11 years, and continuing in 1-year increments through 75 years—is considered for the test. These minimum allowable balances are calculated to show the limit for each valuation period resulting from the graduated tolerance scale. The patterns in the estimated balances as a percentage of the summarized cost rates, as well as that for the minimum allowable balance, are presented graphically in figure
IV.B4 for the OASI, DI and combined OASDI programs. Values shown for the 25-year, 50-year, and 75‑year valuation periods correspond to those presented in table
IV.B4.
For the OASI program, the estimated actuarial balance as a percentage of the summarized cost rate exceeds the minimum allowable for valuation periods of length 10 through 27 years under the intermediate estimates. For valuation periods of length greater than 27 years, the estimated actuarial balance is less than the minimum allowable. For the full 75-year long-range period the estimated actuarial balance reaches ‑12.23 percent of the summarized cost rate, for a shortfall of 7.23 percent from the minimum allowable balance of ‑5.0 percent of the summarized cost rate. Thus, although the OASI program satisfies the
test of short-range financial adequacy (
as discussed earlier on page 34), it is not in long-range close actuarial balance.
For the DI program, under the intermediate assumptions, the estimated actuarial balance as a percentage of the summarized cost rate is less than the minimum allowable balance for all 66 valuation periods. For the full 75-year long-range period the estimated actuarial balance reaches ‑14.14 percent of the summarized cost rate, for a shortfall of 9.14 percent from the minimum allowable balance of ‑5.0 percent of the summarized cost rate. Thus, the DI program fails to meet the short-range test of financial adequacy (
as discussed on page 40), and is also not in long-range close actuarial balance.
Financing for the DI program is much less adequate than for the OASI program in satisfying the test for long-range actuarial balance even though long-range actuarial deficits are more comparable over the entire 75-year period. This difference occurs because much more of the increase in the long-range cost due to the aging of the baby-boom generation occurs earlier for the DI program than for the OASI program. As a result, tax rates that are relatively more adequate for the OASI program during the first 25 years become relatively less adequate later in the long-range period.
For the OASDI program, the estimated actuarial balance as a percentage of the summarized cost rate exceeds the minimum allowable balance for valuation periods of length 10 through 25 years under the intermediate estimates. For valuation periods of length greater than 25 years, the estimated actuarial balance is below the minimum allowable balance. The size of the shortfall from the minimum allowable balance rises gradually, reaching 7.50 percent of the summarized cost rate for the full 75-year long-range valuation period. Thus, although the OASDI program satisfies the short-range test of financial adequacy, it is out of long-range close actuarial balance.
The OASI and DI programs, both separate and combined, were also found to be out of close actuarial balance in last year’s report. The estimated deficits for the OASI, DI, and combined OASDI programs in this report are worse when compared to those shown in last year’s report for the longer valuation periods.
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Rates(percentage of taxable payroll)
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The estimated effects of various changes from last year’s report to this report on the long-range actuarial balance under the intermediate assumptions are listed (by category) in table
IV.B9.
Since the last report, one law that affects the financing of the OASDI program, the Food, Conservation, and Energy Act of 2008, was enacted (see section
III.B). The effect of this law is estimated to increase the long-range OASDI actuarial balance by a negligible amount (less than 0.005 percent of taxable payroll). In addition, the Congress has enacted legislation to stabilize the banking system and to stimulate the economy. The Emergency Economic Stabilization Act of 2008 allows the government to purchase troubled assets and stocks to strengthen financial institutions. The American Recovery and Reinvestment Act of 2009 includes some reductions in personal income taxes and increases in government expenditures. These policies are expected to affect the speed and timing of the economic recovery from the current recession. The short-range economic assumptions used for this report reflect these effects.
In changing from the valuation period of last year’s report, which was 2008-82, to the valuation period of this report, 2009-83, the relatively large negative annual balance for 2083 is included. This results in a decrease (worsening) in the long-range OASDI actuarial balance of 0.05 percent of taxable payroll. (Note that the trust fund assets at the end of 2008, i.e., at the beginning of the projection period, are included in the 75-year actuarial balance. These assets reflect the net financial flows for the program for all past years. Hence the valuation periods for the 2008 and 2009 Trustees Reports could be referred to as 1937-2082 and 1937-2083, respectively.)
Changes in the demographic starting values and assumptions reduce the long-range OASDI actuarial balance by 0.11 percent of taxable payroll. First, the source of change contributing most to this reduction is the revision of ultimate rates of decline in mortality. The most significant of these revisions are faster ultimate rates of decline in death rates for heart disease and cancer for ages 65-84. In addition, final mortality data for 2005 result in slightly lower starting death rates and faster near-term declines in death rates than in last year’s report. All of the mortality changes result in a decrease in the long-range OASDI actuarial balance of about 0.12 percent of taxable payroll. Second, immigration levels for the first several years of the projection period are assumed to be slightly lower than the levels in last year’s report, reflecting both a lower starting level of immigration and the weaker economy during the recession and recovery period. These lower levels result in a decrease in the long-range OASDI actuarial balance of about 0.01 percent of taxable payroll. Third, partially offsetting the effect of the mortality and immigration changes are higher assumed birth rates during the first 24 years of the projection period. This revision stems from preliminary birth data for 2006 that indicate higher than expected numbers of births, and results in an increase in the long-range OASDI actuarial balance of about 0.02 percent of taxable payroll.
Ultimate economic assumptions are unchanged from those in last year’s report. However, changes in starting values and in the near-term economic growth assumptions significantly reduce the long-range OASDI actuarial balance by about 0.15 percent of taxable payroll. The projections begin with an economic recession where negative real GDP growth that started in the third calendar quarter of 2008 is assumed to continue though the second quarter of 2009. The recovery from the recession is projected to extend through 2015. During the period of negative real GDP growth and the period of recovery, unemployment rates are higher than the assumed ultimate level and higher than projected in last year’s report. Reduced employment during these periods leads to significantly less payroll taxes, resulting in smaller trust fund accumulations. For 2017 and later, real GDP is projected to be about 1.4 percent lower than in the 2008 report, based on recent data and the effects of the recession. Reduced average benefit levels resulting from the recession only partly offset the effects on revenue. Based on recent experience, interest rates for new special-issue Treasury bonds are assumed to be lower through 2012 than in last year’s report.
Several changes in disability assumptions and data are included in this report and combine to decrease the long-range OASDI actuarial balance by 0.01 percent of taxable payroll. First, disability incidence rates are substantially higher in the first few years of the projection period as more individuals are assumed to apply for disability benefits due to the economic recession. These increased incidence rates reduce the long-range OASDI actuarial balance by 0.02 percent of taxable payroll. Second, the disability incidence rate assumptions are slightly increased to reflect the agency’s decision that certain policies currently applying only in the Boston region (in particular, the policy to close a disability claimant’s record to new evidence after a determination for an initial appeal to an administrative law judge) would not be extended to other regions. This decision reduces the long-range OASDI actuarial balance by 0.01 percent of taxable payroll. Third, the ultimate disability incidence rates and the disability-insured population are updated to reflect more recent historical data and trends (other than the recession), resulting in an improvement in the actuarial balance of 0.02 percent of taxable payroll.
Several methodological improvements and updates of program-specific data are included in this report. These changes to programmatic data and methods have largely offsetting effects and combine to increase the long-range OASDI actuarial balance by 0.03 percent of taxable payroll.
Three significant changes were made in the methods for determining average benefit amounts for retired-worker and disabled-worker beneficiaries for projection years 11 through 75. First, the factors used to project growth in benefit levels after initial entitlement in excess of the COLA (due to additional earnings and lower mortality for higher earners) were updated, reflecting recent data. Second, post-entitlement factors were newly developed and applied for the following additional beneficiary categories: (1) retired-worker beneficiaries after conversion from disabled-worker status at normal retirement age; (2) retired-worker beneficiaries over age 95; and (3) disabled-worker beneficiaries. Third, the transitioning of projected average benefit levels, from the end of the 10-year short-range period to the remainder of the long-range period, was improved. These three changes combined to increase the projected average benefit level for disabled-worker beneficiaries and decrease the projected average benefit level for retired-worker beneficiaries over the long-range projection period. As a result, the long-range OASI actuarial balance decreased by 0.05 percent of taxable payroll, and the long-range DI actuarial balance increased by a similar amount. In total, the combined effects increased the long-range OASDI actuarial balance by 0.01 percent of taxable payroll.
Three additional significant changes were made in the area of methodological improvements and updates of program-specific data. First, the ultimate projected relationship between benefits and personal income taxes on OASDI benefits was updated based on new estimates provided by the Office of Tax Analysis at the Department of the Treasury. The revisions in the estimates of tax revenue increase the long-range OASDI actuarial balance by 0.02 percent of taxable payroll. Second, the methodology for projecting the financial interchange between the Social Security Administration and the Railroad Retirement Board (RRB) was improved by using data and projections provided directly from the RRB. The improvement in the methodology of RRB estimates decreases the long-range OASDI actuarial balance by 0.01 percent of taxable payroll. Third, starting level data and estimates were revised for retroactive payments to beneficiaries for periods of benefit entitlement prior to award; plus estimates of the effect of the windfall elimination provision for individuals with pensions based on non-OASDI-covered employment were revised. These final updates, and other improvements based on more recent historical information, result in an increase in the long-range OASDI actuarial balance of about 0.01 percent of taxable payroll.
If no changes in assumptions or methods were made for this report and actual experience had met expectations since the last report, the OASDI long-range actuarial deficit would have increased by 0.05 percent of taxable payroll due to the change in the valuation period. However, the combined changes made in data, assumptions, and methods for this report increase the actuarial deficit by an additional 0.25 percent of taxable payroll. Thus the actuarial deficit increases from 1.70 percent in last year’s report to 2.00 percent of taxable payroll in this report.
The effects of changes made in this report can also be illustrated by comparing the annual (cash-flow) balances for this and the prior year’s report. Figure
IV.B5 provides this comparison for the combined OASDI program over the long-range (75-year) projection period.
During the first 10 years of the projection period, the annual balances in this report are lower than those in last year’s report by about 0.52 percent of taxable payroll, on average. This is mainly due to (1) a lower starting level of real GDP than was assumed last year for 2008, and (2) the economic recession which is projected to cause a decline in income from payroll taxes and an increase in the number of disabled-worker beneficiaries. After 2018, the difference in projected annual balances between the two reports increases through about 2025 due to the improved method for transitioning projected average benefit levels from the short-range period to the long-range period. The effect of generally lower post-entitlement factors then causes the difference to decline, reaching similar annual balances around 2063. Thereafter, the projected annual balances in this year’s report gradually become lower than in last year’s report due primarily to the increase in assumed rates of decline in mortality. By the end of last year’s 75-year projection period (2082), the difference in the annual balances is 0.09 percent of payroll. The annual deficit for 2082 is 4.29 percent of taxable payroll in this report compared to 4.20 percent for 2082 in last year’s report.
