1. BackgroundOther sections of this report provide estimates of the financial status of the combined OASI and DI Trust Funds using a scenario-based model. For the scenario-based model, the Trustees use three alternative scenarios (low-cost, intermediate, and high-cost) that make assumptions about levels of fertility, changes in mortality, legal and other immigration levels, legal and other emigration levels, changes in the Consumer Price Index, changes in average real wages, unemployment rates, trust fund real yield rates, and disability incidence and recovery rates. In general, the Trustees assume that each of these variables will reach an ultimate value at a specific point during the long-range period, and will maintain that value throughout the remainder of the period. The three alternative scenarios assume separate, specified values for each of these variables. Chapter V contains more details about each of these assumptions.This appendix presents estimates of the probability that key measures of OASDI solvency will fall in certain ranges, based on 5,000 independent stochastic simulations. Each simulation allows the above variables to vary throughout the long-range period. The fluctuation of each variable over time is simulated using historical data and standard time-series techniques. Generally, each variable is modeled using an equation that: (a) captures a relationship between current and prior years’ values of the variable; and (b) introduces year-by-year random variation as observed in the historical period. For some variables, the equations also reflect relationships with other variables. The equations contain parameters that are estimated using historical data for periods between 25 years and 110 years, depending on the nature and quality of the available data. Each time-series equation is designed so that, in the absence of random variation over time, the value of the variable for each year equals its value under the intermediate assumptions.^{1}Figure VI.E1 displays the probability distribution of the year-by-year OASDI cost rates (that is, cost as a percentage of taxable payroll). The range of the cost rates widens as the projections move further into the future, which reflects increasing uncertainty. Because there is relatively little variation in income rates across the 5,000 stochastic simulations, the figure includes the income rate only under the intermediate assumptions to indicate the patterns of cash flow for the OASDI program. The two extreme lines in this figure illustrate the range within which future annual cost rates are projected to occur 95 percent of the time (i.e., a 95-percent confidence interval). In other words, the model indicates that there is a 2.5 percent probability that the cost rate in a given year will exceed the upper bound and a 2.5 percent probability that it will fall below the lower bound. Other lines in the figure delineate additional confidence intervals (80‑percent, 60‑percent, 40‑percent, and 20‑percent) around future annual cost rates. The median cost rate for each year is the rate that falls exactly in the middle of possible outcomes for that year. These lines do not represent the results of individual stochastic simulations. Instead, for each given year, they represent the percentile distribution of cost rates based on all stochastic simulations for that year.

Figure VI.E1.—Long-Range OASDI Cost Rates From Stochastic Modeling Figure VI.E2 presents the simulated probability distribution of the annual trust fund ratios for the combined OASI and DI Trust Funds. The lines in this figure display the median set (50th percentile) of estimated annual trust fund ratios and delineate the 95‑percent, 80‑percent, 60‑percent, 40‑percent, and 20‑percent confidence intervals expected for future annual trust fund ratios. These lines are not the results of individual stochastic simulations. For each given year, they represent the percentile distribution of trust fund ratios based on all stochastic simulations for that year.Figure VI.E2 shows that the 95‑percent confidence interval for the trust fund depletion year ranges from 2028 to 2044, and there is a 50‑percent probability of trust fund depletion by the end of 2033 (the median depletion year). The median depletion year is the same as the Trustees project under the intermediate assumptions. The figure also shows confidence intervals for the trust fund ratio in each year. For example, the 95‑percent confidence interval for the trust fund ratio in 2025 ranges from 255 to 78 percent of annual cost.

Figure VI.E4.—OASDI Trust Fund (Unfunded Obligation) Ratios: Comparison of Stochastic to Low-Cost, Intermediate, and High-Cost Alternativesa

Table VI.E1 displays long-range actuarial estimates for the combined OASDI program using the two methods of illustrating uncertainty: (1) alternative scenarios and (2) stochastic simulations. The table shows stochastic estimates for the median (50th percentile) and for the 95‑percent and 80‑percent confidence intervals. For comparison, the table shows scenario-based estimates for the intermediate, low-cost, and high-cost assumptions. Each individual stochastic estimate in the table is the level at that percentile from the distribution of the 5,000 simulations. For each given percentile, the values in the table for each long-range actuarial measure are generally from different stochastic simulations.The median stochastic estimates displayed in table VI.E1 are, in general, slightly more optimistic than the intermediate-alternative scenario-based estimates. The median estimate of the long-range actuarial balance is ‑2.63 percent of taxable payroll, about 0.09 percentage point higher than projected under the intermediate assumptions. The median projected year that cost first exceeds non-interest income (as it did in 2010, 2011, and 2012), and remains in excess of non-interest income throughout the remainder of the long-range period, is 2013. This is the same year as projected under the intermediate assumptions. The median year that asset reserves first become depleted is 2033, also the same as projected under the intermediate assumptions. The median estimates of the annual cost rate for the 75th year of the projection period are 17.54 percent of taxable payroll and 5.80 percent of gross domestic product (GDP). The comparable estimates under the intermediate assumptions are 18.01 percent of payroll and 6.20 percent of GDP.A comparison of the 95‑percent confidence interval to the range of variation defined by the traditional low-cost and high-cost alternatives follows. For three measures in table VI.E1 (the actuarial balance, the open group unfunded obligation, and the first year asset reserves become depleted), the 95‑percent stochastic confidence interval is narrower than the range defined by the low-cost and high-cost alternatives. In other words, for these measures, the range defined by the low-cost and high-cost alternatives contains the 95‑percent confidence interval of the stochastic modeling projections. For the remaining three measures (the first year cost exceeds non-interest income and remains in excess through 2087, the annual cost in the 75th year as a percent of taxable payroll, and the annual cost in the 75th year as a percent of GDP), one or both of the bounds of the 95‑percent stochastic confidence interval fall outside the range defined by the low-cost and high-cost alternatives.

More detail on this model, and stochastic modeling in general, is available at

www.socialsecurity.gov/OACT/stochastic/index.html.

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