2006 Trustees Report: Section II.D, Projections

For the short range (2006-2015), the Trustees measure trust fund adequacy by comparing assets at the beginning of each year to projected program cost for that year under the intermediate set of assumptions. Having a trust fund ratio of 100 percent or more-that is, assets at the beginning of each year at least equal to projected outgo during the year-is considered a good indication of a trust fund's ability to cover most short-term contingencies. Both the OASI and the DI trust fund ratios under the intermediate assumptions exceed 100 percent throughout the short-range period and therefore satisfy the Trustees' short-term test for financial adequacy. Figure II.D1 below shows the trust fund ratios for the combined OASI and DI Trust Funds for the next 10 years.

The financial status of the trust funds over the next 75 years is measured in terms of cost and income as a percentage of taxable payroll, trust fund ratios, the actuarial balance (also as a percentage of taxable payroll), and the open group unfunded obligation (expressed in present-value dollars). Considering Social Security's cost as a percentage of the total U.S. economic output (gross domestic product or GDP) provides an additional perspective.

The year-by-year relationship between income and cost rates shown in figure II.D2 illustrates the expected pattern of cash flow for the OASDI program over the full 75-year period. Under the intermediate assumptions, the OASDI cost rate is projected to decline slightly during 2006 through 2008 and then increase up to the current level within the next 2 years. It then begins to increase rapidly and first exceeds the income rate in 2017, producing cash-flow deficits thereafter. Despite these cash-flow deficits, beginning in 2017, redemption of trust fund assets will allow continuation of full benefit payments on a timely basis until 2040, when the trust funds will become exhausted. This redemption process will require a flow of cash from the General Fund of the Treasury. Pressures on the Federal Budget will thus emerge well before 2040. Even if a trust fund's assets are exhausted, however, tax income will continue to flow into the fund. Present tax rates would be sufficient to pay 74 percent of scheduled benefits after trust fund exhaustion in 2040 and 70 percent of scheduled benefits in 2080.

Social Security's cost rate generally will continue rising rapidly through about 2030 as the baby-boom generation reaches retirement age. Thereafter, the cost rate is estimated to rise at a slower rate for about 20 years as the baby boom ages and decreases in size. Continued reductions in death rates and relatively low birth rates will cause a significant upward shift in the average age of the population and will push the cost rate from 17.6 percent of taxable payroll in 2050 to 18.7 percent by 2080 under the intermediate assumptions. In a pay-as-you-go system (with no trust fund assets or borrowing authority), this 18.7-percent cost rate means the combination of the payroll tax (scheduled to total 12.4 percent) and proceeds from income taxes on benefits (expected to be 1.0 percent of taxable payroll in 2080) would have to equal 18.7 percent of taxable payroll to pay all currently scheduled benefits. After 2080, the upward shift in the average age of the population is likely to continue and to increase the gap between OASDI costs and income.

The primary reason that the OASDI cost rate will increase rapidly between 2010 and 2030 is that, as the large baby-boom generation born in the years 1946 through 1965 retires, the number of beneficiaries will increase much more rapidly than the number of workers. The estimated number of workers per beneficiary is shown in figure II.D3. In 2005, there were about 3.3 workers for every OASDI beneficiary. The baby-boom generation will have largely retired by 2030, and the projected ratio of workers to beneficiaries will be only 2.2 at that time. Thereafter, the number of workers per beneficiary will slowly decline, and the OASDI cost rate will continue to increase largely due to projected reductions in mortality.

The maximum projected trust fund ratios for the OASI, DI, and combined funds appear in table II.D1. The year in which the maximum projected trust fund ratio is attained and the year in which the assets are projected to be exhausted are shown as well.

The actuarial balance is a measure of the program's financial status for the 75-year valuation period as a whole. It is essentially the difference between income and cost of the program expressed as a percentage of taxable payroll over the valuation period. This single number summarizes the adequacy of program financing for the period. When the actuarial balance is negative, the actuarial deficit can be interpreted as the percentage that would have to be added to the current law income rate in each of the next 75 years, or subtracted from the cost rate in each year, to bring the funds into actuarial balance. In this report, the actuarial balance under the intermediate assumptions is a deficit of 2.02 percent of taxable payroll for the combined OASI and DI Trust Funds. The actuarial deficit was 1.92 percent in the 2005 report and has been in the range of 1.86 percent to 2.23 percent for the last ten reports.

Table II.D1.-Projected Maximum Trust Fund Ratios Attained and
Trust Fund Exhaustion Dates Under the Intermediate Assumptions
	OASI	DI	OASDI
Maximum trust fund ratio (percent)	462	203	409
	Year attained	2015	2006	2015
Year of trust fund exhaustion	2042	2025	2040

Another way to illustrate the financial shortfall of the OASDI system is to examine the cumulative value of taxes less costs, in present value. Figure II.D4 shows the present value of cumulative OASDI taxes less costs over the next 75 years. The balance of the combined trust funds peaks at $2.5 trillion in 2017 (in present value) and then turns downward. This cumulative amount continues to be positive, indicating trust fund assets, or reserves, through 2039. However, after 2039 this cumulative amount becomes negative, indicating a net unfunded obligation. Through the end of 2080, the combined funds have a present-value unfunded obligation of $4.6 trillion. This unfunded obligation represents 1.9 percent of future taxable payroll and 0.7 percent of future GDP, through the end of the 75-year projection period.

Still another important way to look at Social Security's future is to view its cost as a share of U.S. economic output. Figure

5 shows that Social Security's cost as a percentage of GDP will grow from 4.3 percent in 2006 to 6.2 percent in 2030, and then slightly increase to 6.3 percent in 2080. However, Social Security's scheduled tax income is projected to be about 4.9 percent of GDP in both 2006 and 2030, and then to decrease to 4.5 percent in 2080.

Figure II.D5.-OASDI Cost and Scheduled Tax Revenue as a Percentage of GDP
[D]

Even a 75-year period is not long enough to provide a complete picture of Social Security's financial condition. Figures II.D2, II.D4, and II.D5 show that the program's financial condition continues to worsen at the end of the period. Overemphasis on summary measures for a 75-year period can lead to incorrect perceptions and to policy prescriptions that do not achieve sustainable solvency. Thus, careful consideration of the trends in annual deficits and unfunded obligations toward the end of the 75-year period is important. In order to provide a more complete description of Social Security's very long-run financial condition, this report also includes summary measures for a time period that extends to the infinite horizon. These calculations show that extending the horizon beyond 75 years continues to increase the unfunded obligation. Over the infinite horizon, the shortfall (unfunded obligation) is $13.4 trillion in present value, or 3.7 percent of future taxable payroll and 1.3 percent of future GDP. These calculations of the shortfall indicate that much larger changes would be required to achieve solvency over the infinite future as compared to changes needed to balance 75-year period summary measures. The increase in the measured unfunded obligation over the infinite horizon from $11.1 trillion in last year's report to $13.4 trillion in this report is largely due to the reduction in the real interest rate assumption from 3.0 to 2.9 percent.

Changes From Last Year's Report

The long-range OASDI actuarial deficit of 2.02 percent of taxable payroll for this year's report is somewhat larger than the deficit of 1.92 percent of taxable payroll shown in last year's report under intermediate assumptions. Changing the assumed real interest rate and the valuation period are the main reasons for the increase in the deficit. Changes in data, methods, and other assumptions combine to have a small positive offsetting effect on the actuarial deficit. For a detailed description of the specific changes identified in table II.D2 below, see section IV.B.7 on page 64.

Table II.D2.-Reasons for Change in the 75-Year Actuarial Balance
Under Intermediate Assumptions

[As a percentage of taxable payroll]
Item			OASI	DI	OASDI
Shown in last year's report:
	Income rate		11.93	1.94	13.87
	Cost rate		13.53	2.26	15.79
	Actuarial balance		-1.60	-.32	-1.92
Changes in actuarial balance due to changes in:
		Legislation / Regulation	.00	.00	.00
		Valuation period ¹	-.05	-.01	-.06
		Demographic data and assumptions	+.02	.00	+.03
		Economic data and assumptions	-.06	-.01	-.06
		Disability data and assumptions	-.04	+.01	-.04
		Programmatic data and methods	+.04	.00	+.04
	Total change in actuarial balance		-.08	-.01	-.09
Shown in this report:
	Actuarial balance		-1.68	-.33	-2.02
	Income rate		11.95	1.93	13.88
	Cost rate		13.63	2.27	15.90

¹In changing from the valuation period of last year's report, which was 2005-79, to the valuation period of this report, 2006-80, the relatively large negative annual balance for 2080 is included. This results in a larger long-range actuarial deficit. The fund balance at the end of 2005, i.e., at the beginning of the projection period, is included in the 75-year actuarial balance.

Note: Totals do not necessarily equal the sums of rounded components.

The open group unfunded obligation over the 75-year projection period, has increased from $4.0 trillion (present discounted value as of January 1, 2005) to $4.6 trillion (present discounted value as of January 1, 2006). The negative effects of three factors explain most of the measured increase in the unfunded obligation: lowering the ultimate real interest rate, advancing the valuation date by 1 year and including the additional year 2080 in the new valuation period.

Figure II.D6 shows that this year's projections of annual balances start at a slightly lower level than those in last year's report principally because the cost of living adjustment of 4.1 percent for December 2005 was larger than had been expected. Over the period 2010 through 2050, annual balances are similar between the two reports. After 2050, the annual shortfall of program income is somewhat smaller than projected last year. The assumed higher ultimate fertility rate is the main reason for this improvement. Section IV.B.7 provides a detailed presentation of these changes.

II.D6.-OASDI Annual Balances: 2005 and 2006 Trustees Reports

[As a percentage of taxable payroll under the intermediate assumptions]
[D]

Finally, two changes were made too late to be reflected in the estimates in this year's report. First, a new disability adjudication process was promulgated in final regulations on March 31, 2006. This new process will slightly increase program cost in the first 10 years but is expected to have no significant cost effect thereafter. Second, it was recently discovered that total benefit payments were being over reported due to certain transfers that are made from the trust funds to the General Fund of the Treasury. This led to a small overstatement of total benefits estimated for about 10 years into the projection period. Actual payments made to individual beneficiaries have not been affected by this issue. The transfer process is now correct. The effects of these two changes are small and will be fully reflected in next year's report.

Uncertainty of the Projections

Significant uncertainty surrounds the intermediate assumptions. The Trustees have traditionally used low cost (alternative I) and high cost (alternative III) assumptions to indicate this uncertainty. Figure II.D7 shows the projected trust fund ratios for the combined OASI and DI Trust Funds under the intermediate, low cost, and high cost assumptions. The low cost alternative is characterized by assumptions that improve the financial condition of the trust funds, including a higher fertility rate, slower improvement in mortality, a higher real-wage differential, and lower unemployment. The high cost alternative, in contrast, features a lower fertility rate, more rapid declines in mortality, a lower real-wage differential, and higher unemployment.

Figure II.D7.-Long-Range OASDI Trust Fund Ratios Under Alternative Assumptions

[Assets as a percentage of annual cost]
[D]

These three alternatives have traditionally been constructed to provide a reasonable range of possible future experience. However, these alternatives do not address the probability that actual experience will be within or outside the range. As an additional way of illustrating uncertainty, this report includes estimates from a model of the trust funds that provides a probability distribution of possible future outcomes (see appendix E). The results of this model suggest that outcomes better than the traditional low cost alternative and outcomes worse than the high cost alternative have very low probabilities of occurring.


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2006 OASDI Trustees Report

D. PROJECTIONS OF FUTURE FINANCIAL STATUS