2007 OASDI Trustees Report

Contents Previous Next List of Tables List of Figures Index

IV. ACTUARIAL ESTIMATES

B. LONG-RANGE ESTIMATES

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 constant or rising, 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.

1. Annual Income Rates, Cost Rates, and Balances

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 which are subject to OASDI taxes, with some relatively small adjustments.1 As such, it excludes net investment income and reimbursements from the General Fund of the Treasury for the costs associated with special monthly payments to certain uninsured persons who attained age 72 before 1968 and who have fewer than 3 quarters of coverage.

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, special monthly payments to certain uninsured persons who have 3 or more quarters of coverage (and whose payments are therefore not reimbursable from the General Fund of the Treasury), 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. (In this context, the term balance does not represent the assets of the trust funds, which are sometimes referred to as the balance in the trust funds.)

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 pattern of the cost rate is much different. It is projected to remain fairly stable for the next several years. However, from about 2010 to 2030 the cost rate increases rapidly as the baby-boom generation reaches retirement eligibility age. Thereafter, the cost rate rises steadily, but slowly, reflecting projected reductions in death rates and continued relatively low birth rates, reaching 16.19 percent of taxable payroll for 2081. By comparison, the income rate reaches 11.49 percent of taxable payroll for 2081.

Projected income rates under the low cost and high cost sets of assumptions are very similar to those projected for the intermediate assumptions as 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, but follow generally similar patterns. For the low cost assumptions, the cost rate increases in 2007, decreases for the next 2 years, then rises, reaching the current level around 2012, and peaks in 2035 at a level of 13.18 percent of payroll. The cost rate then declines gradually, reaching a level of 11.75 percent of payroll for 2081 (at which point the income rate reaches 11.24 percent). For the high cost assumptions, the cost rate generally rises throughout the 75-year period. It rises at a relatively fast pace between 2010 and 2030 because of the aging of the baby-boom generation. Subsequently, the projected cost rate continues rising and reaches 23.11 percent of payroll for 2081 (at which point the income rate reaches 11.87 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 11 years (through 2017) and is negative thereafter. This annual deficit rises rapidly, reaching over 2 percent of taxable payroll by 2026, and continues rising thereafter, to a level of 4.71 percent of taxable payroll for 2081.

Under the low cost assumptions, the projected OASI annual balance is positive for 14 years (through 2020) and thereafter is negative. The annual deficit under the low cost assumptions rises to a peak of 1.90 percent of taxable payroll for 2035, but declines over the next 15 years, as the effect of the baby-boom generation diminishes and the assumed higher fertility rates increase the size of the workforce. The deficit under the low cost assumptions continues to decline, but at a relatively slow pace over the period 2051 through 2081. Under the high cost assumptions, however, the OASI balance is projected to be positive for only 8 years (through 2014) and to be negative thereafter, with a deficit of 1.75 percent for 2020, 6.69 percent for 2050, and 11.24 percent of payroll for 2081.

Table IV.B1.-Estimated Annual Income Rates, Cost Rates, and Balances,
Calendar Years 1990-2085 

[As a percentage of taxable payroll]

Calendar
year
OASI
 
DI
 
OASDI
Income
rate 1
Cost
rate
Balance 
Income
rate 1
Cost
rate
Balance 
Income
rate 1
Cost
rate
Balance 
Historical data:
 
1990
11.32
9.66
1.66
1.17
1.09
0.09
12.49
10.74
1.75
 
1991
11.44
10.15
1.29
1.21
1.18
.03
12.65
11.33
1.32
 
1992
11.43
10.27
1.16
1.21
1.27
-.06
12.64
11.54
1.10
 
1993
11.40
10.37
1.03
1.21
1.35
-.14
12.61
11.73
.88
 
1994
10.70
10.22
.48
1.89
1.40
.49
12.59
11.62
.97
 
1995
10.70
10.22
.48
1.88
1.44
.44
12.59
11.67
.92
 
1996
10.73
10.06
.68
1.89
1.48
.41
12.62
11.53
1.09
 
1997
10.93
9.83
1.09
1.71
1.44
.28
12.64
11.27
1.37
 
1998
10.96
9.45
1.51
1.72
1.42
.30
12.68
10.87
1.81
 
1999
10.99
9.09
1.90
1.72
1.42
.30
12.71
10.51
2.20
 
2000
10.89
8.98
1.91
1.80
1.42
.37
12.69
10.40
2.29
 
2001
10.89
9.08
1.80
1.82
1.48
.34
12.71
10.56
2.15
 
2002
10.91
9.29
1.62
1.82
1.60
.22
12.74
10.90
1.84
 
2003
10.89
9.35
1.54
1.82
1.68
.14
12.71
11.03
1.68
 
2004
10.92
9.26
1.66
1.82
1.77
.05
12.75
11.03
1.72
 
2005
10.88
9.30
1.58
1.82
1.85
-.03
12.71
11.16
1.55
 
2006
10.91
9.15
1.76
1.82
1.87
-.05
12.73
11.02
1.71
Intermediate:
 
2007
10.93
9.29
1.64
 
1.83
1.93
-.10
 
12.75
11.21
1.54
 
2008
10.94
9.13
1.81
 
1.83
1.90
-.07
 
12.76
11.03
1.74
 
2009
10.95
9.15
1.80
 
1.83
1.92
-.09
 
12.78
11.07
1.72
 
2010
10.97
9.25
1.72
 
1.83
1.95
-.11
 
12.80
11.20
1.60
 
2011
11.00
9.38
1.61
 
1.84
1.95
-.11
 
12.83
11.33
1.50
 
2012
11.02
9.57
1.45
 
1.84
1.99
-.15
 
12.86
11.56
1.30
 
2013
11.05
9.82
1.23
 
1.84
2.02
-.17
 
12.89
11.84
1.05
 
2014
11.06
10.09
.97
 
1.84
2.04
-.20
 
12.91
12.13
.78
 
2015
11.08
10.37
.72
 
1.84
2.06
-.22
 
12.93
12.43
.50
 
2016
11.11
10.65
.45
 
1.85
2.09
-.24
 
12.95
12.74
.21
 
2020
11.18
11.89
-.71
 
1.85
2.11
-.26
 
13.03
14.00
-.97
 
2025
11.27
13.26
-1.99
 
1.85
2.19
-.33
 
13.12
15.44
-2.33
 
2030
11.34
14.42
-3.08
 
1.85
2.18
-.32
 
13.19
16.59
-3.40
 
2035
11.38
15.02
-3.63
 
1.85
2.16
-.30
 
13.24
17.17
-3.94
 
2040
11.40
15.11
-3.71
 
1.86
2.17
-.31
 
13.25
17.27
-4.02
 
2045
11.40
14.98
-3.59
 
1.86
2.24
-.38
 
13.25
17.22
-3.97
 
2050
11.40
14.98
-3.58
 
1.86
2.27
-.42
 
13.26
17.26
-3.99
 
2055
11.41
15.12
-3.71
 
1.86
2.31
-.45
 
13.28
17.43
-4.16
 
2060
11.43
15.37
-3.94
 
1.86
2.30
-.44
 
13.29
17.67
-4.38
 
2065
11.45
15.59
-4.14
 
1.86
2.30
-.44
 
13.31
17.89
-4.59
 
2070
11.46
15.78
-4.32
 
1.86
2.32
-.45
 
13.32
18.10
-4.78
 
2075
11.47
15.96
-4.49
 
1.86
2.34
-.47
 
13.33
18.29
-4.96
 
2080
11.48
16.15
-4.67
 
1.86
2.35
-.49
 
13.35
18.50
-5.16
 
2085
11.50
16.35
-4.86
 
1.86
2.36
-.49
 
13.36
18.71
-5.35
First year balance becomes negative
and remains negative through 2085
2018
 
2005
 
2017
Low Cost:
 
2007
10.92
9.22
1.70
 
1.83
1.89
-.06
 
12.75
11.11
1.64
 
2008
10.93
9.03
1.90
 
1.83
1.83
-.01
 
12.76
10.87
1.89
 
2009
10.95
9.01
1.94
 
1.83
1.82
.01
 
12.78
10.83
1.94
 
2010
10.96
9.04
1.92
 
1.83
1.82
.01
 
12.79
10.86
1.93
 
2011
10.98
9.09
1.89
 
1.83
1.80
.04
 
12.82
10.89
1.93
 
2012
11.00
9.18
1.82
 
1.84
1.80
.03
 
12.84
10.99
1.85
 
2013
11.02
9.34
1.69
 
1.84
1.80
.04
 
12.86
11.14
1.73
 
2014
11.04
9.50
1.53
 
1.84
1.80
.04
 
12.87
11.30
1.57
 
2015
11.05
9.69
1.36
 
1.84
1.79
.04
 
12.89
11.49
1.41
 
2016
11.07
9.89
1.18
 
1.84
1.80
.04
 
12.91
11.69
1.22
Low Cost (cont.):
 
2020
11.13
10.92
0.21
 
1.84
1.75
0.09
 
12.97
12.67
0.30
 
2025
11.20
12.03
-.83
 
1.84
1.75
.09
 
13.04
13.78
-.74
 
2030
11.26
12.89
-1.63
 
1.84
1.67
.17
 
13.10
14.56
-1.46
 
2035
11.28
13.18
-1.90
 
1.84
1.62
.22
 
13.12
14.80
-1.68
 
2040
11.28
12.98
-1.70
 
1.84
1.60
.24
 
13.12
14.58
-1.46
 
2045
11.27
12.62
-1.36
 
1.84
1.63
.22
 
13.11
14.25
-1.14
 
2050
11.26
12.39
-1.13
 
1.84
1.63
.21
 
13.10
14.02
-.91
 
2055
11.26
12.27
-1.02
 
1.84
1.63
.21
 
13.10
13.90
-.80
 
2060
11.26
12.23
-.98
 
1.84
1.60
.24
 
13.10
13.84
-.74
 
2065
11.26
12.12
-.87
 
1.84
1.59
.25
 
13.10
13.72
-.62
 
2070
11.25
11.96
-.71
 
1.84
1.59
.25
 
13.09
13.56
-.46
 
2075
11.24
11.81
-.56
 
1.84
1.61
.23
 
13.09
13.42
-.33
 
2080
11.24
11.75
-.51
 
1.84
1.63
.22
 
13.09
13.38
-.29
 
2085
11.24
11.78
-.54
 
1.84
1.64
.21
 
13.09
13.42
-.33
First year balance becomes negative
and remains negative through 2085
2021
 
2/
 
2022
High Cost:
 
2007
10.93
9.48
1.46
 
1.83
2.03
-.20
 
12.76
11.50
1.26
 
2008
10.95
9.42
1.53
 
1.83
2.05
-.22
 
12.78
11.47
1.31
 
2009
10.97
9.50
1.47
 
1.83
2.12
-.28
 
12.80
11.61
1.19
 
2010
10.99
9.70
1.28
 
1.84
2.21
-.37
 
12.82
11.91
.91
 
2011
11.02
9.90
1.12
 
1.84
2.25
-.41
 
12.86
12.15
.71
 
2012
11.04
10.13
.91
 
1.85
2.33
-.48
 
12.89
12.46
.43
 
2013
11.08
10.50
.58
 
1.85
2.40
-.55
 
12.93
12.90
.03
 
2014
11.10
10.88
.22
 
1.85
2.46
-.60
 
12.95
13.33
-.38
 
2015
11.12
11.21
-.09
 
1.85
2.51
-.66
 
12.98
13.72
-.75
 
2016
11.15
11.58
-.43
 
1.86
2.57
-.71
 
13.01
14.15
-1.15
 
2020
11.24
12.99
-1.75
 
1.86
2.66
-.80
 
13.10
15.65
-2.55
 
2025
11.33
14.55
-3.22
 
1.87
2.78
-.92
 
13.20
17.34
-4.14
 
2030
11.43
16.04
-4.61
 
1.87
2.79
-.92
 
13.30
18.83
-5.53
 
2035
11.49
17.04
-5.54
 
1.87
2.79
-.92
 
13.36
19.82
-6.46
 
2040
11.53
17.54
-6.02
 
1.87
2.83
-.95
 
13.40
20.37
-6.97
 
2045
11.55
17.83
-6.28
 
1.88
2.96
-1.08
 
13.43
20.79
-7.36
 
2050
11.58
18.27
-6.69
 
1.88
3.05
-1.17
 
13.46
21.32
-7.86
 
2055
11.62
18.86
-7.24
 
1.88
3.15
-1.26
 
13.50
22.00
-8.50
 
2060
11.67
19.62
-7.96
 
1.88
3.18
-1.29
 
13.55
22.80
-9.25
 
2065
11.71
20.42
-8.71
 
1.89
3.21
-1.33
 
13.60
23.64
-10.04
 
2070
11.76
21.29
-9.53
 
1.89
3.25
-1.36
 
13.65
24.54
-10.89
 
2075
11.81
22.15
-10.34
 
1.89
3.26
-1.38
 
13.70
25.41
-11.71
 
2080
11.86
22.96
-11.10
 
1.89
3.27
-1.39
 
13.75
26.23
-12.49
 
2085
11.90
23.64
-11.75
 
1.89
3.26
-1.38
 
13.78
26.91
-13.12
First year balance becomes negative
and remains negative through 2085
2015
 
2005
 
2014

1Historical income rates are modified to include adjustments to the lump-sum payments received in 1983 from the General Fund of the Treasury for the cost of noncontributory wage credits for military service in 1940-56.

2After 2008, the annual balance is projected to remain positive throughout the remainder of the projection period.

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 generally increases over the long-range period from 1.93 percent of taxable payroll for 2007, reaching 2.35 for 2081. The income rate increases only very slightly from 1.83 percent of taxable payroll for 2007 to 1.86 percent for 2081. The annual deficit is about 0.10 percent in 2007 and reaches 0.49 percent for 2081.

Under the low cost assumptions, the DI cost rate is fairly stable over the long-range period, reaching 1.63 percent for 2081. The annual balance is negative for the first 2 years and is positive throughout the remainder of the long-range period. For the high cost assumptions, DI cost rises much more, reaching 3.27 percent for 2081. Annual deficits began in 2005 and reach 1.38 percent for 2081.

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 are suggested by 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.

Figure IV.B1.-Long-Range OASI and DI Annual Income Rates and Cost Rates

[As a percentage of taxable payroll]

[D]

The cost of the OASDI program has been discussed in this section in relation to taxable payroll, which is a program-related concept that is very useful in analyzing the financial status of the OASDI program. The cost can also be discussed in relation to broader economic concepts, such as the gross domestic product (GDP), which is the total value of goods and services produced during the year in the United States. OASDI cost generally rises from about 4.3 percent of GDP currently to about 6.3 percent of GDP by the end of the 75-year projection period under alternative II. Discussion of both the cost and the taxable payroll of the OASDI program in relation to GDP is presented in appendix VI.F.2.

2. Comparison of Workers to Beneficiaries

The primary reason that the estimated OASDI cost rate increases rapidly after 2010 is that the number of beneficiaries is projected to increase more rapidly than the number of covered workers. This occurs because the relatively large number of persons born during the baby-boom will reach retirement eligibility age, and begin to receive benefits, while the relatively small number of persons born during the subsequent period of low fertility rates will comprise the labor force. A comparison of the numbers of covered workers and beneficiaries is shown in table IV.B2.

Table IV.B2.-Covered Workers and Beneficiaries, Calendar Years 1945-2085 
Calendar year
Covered
workers 1
(in thousands)
Beneficiaries 2 (in thousands)
Covered
workers per
OASDI
beneficiary
OASDI beneficiaries
per 100
covered
workers
OASI
DI
OASDI
Historical data:
 
1945
46,390
1,106
-
1,106
41.9
2
 
1950
48,280
2,930
-
2,930
16.5
6
 
1955
65,200
7,563
-
7,563
8.6
12
 
1960
72,530
13,740
522
14,262
5.1
20
 
1965
80,680
18,509
1,648
20,157
4.0
25
 
1970
93,090
22,618
2,568
25,186
3.7
27
 
1975
100,200
26,998
4,125
31,123
3.2
31
 
1980
113,649
30,384
4,734
35,117
3.2
31
 
1985
120,575
32,776
3,874
36,650
3.3
30
 
1990
133,559
35,266
4,204
39,471
3.4
30
 
1995
141,446
37,376
5,731
43,107
3.3
30
 
1996
143,909
37,521
5,977
43,498
3.3
30
 
1997
146,736
37,705
6,087
43,792
3.4
30
 
1998
149,692
37,825
6,250
44,075
3.4
29
 
1999
152,453
37,934
6,433
44,366
3.4
29
 
2000
155,295
38,560
6,606
45,166
3.4
29
 
2001
155,546
38,888
6,780
45,668
3.4
29
 
2002
154,894
39,116
7,060
46,176
3.4
30
 
2003
154,954
39,314
7,438
46,752
3.3
30
 
2004
156,900
39,557
7,810
47,367
3.3
30
 
2005
159,081
39,961
8,172
48,133
3.3
30
 
2006
161,852
40,435
8,428
48,863
3.3
30
Intermediate:
 
2010
167,664
43,380
9,563
52,942
3.2
32
 
2015
172,465
49,838
10,524
60,362
2.9
35
 
2020
176,602
57,595
11,128
68,723
2.6
39
 
2025
179,816
65,043
11,926
76,969
2.3
43
 
2030
182,708
71,782
12,200
83,982
2.2
46
 
2035
185,889
76,370
12,436
88,806
2.1
48
 
2040
189,189
78,712
12,772
91,483
2.1
48
 
2045
192,566
80,177
13,339
93,516
2.1
49
 
2050
195,597
81,884
13,723
95,607
2.0
49
 
2055
198,487
84,090
14,099
98,188
2.0
49
 
2060
201,387
86,747
14,252
100,999
2.0
50
 
2065
204,340
89,249
14,502
103,751
2.0
51
 
2070
207,208
91,631
14,789
106,420
1.9
51
 
2075
210,101
93,935
15,106
109,042
1.9
52
 
2080
212,880
96,307
15,409
111,716
1.9
52
 
2085
215,638
98,812
15,661
114,473
1.9
53
Low Cost:
 
2010
169,179
43,365
9,237
52,602
3.2
31
 
2015
176,192
49,713
9,752
59,465
3.0
34
 
2020
181,474
57,091
9,988
67,079
2.7
37
 
2025
185,658
64,137
10,309
74,446
2.5
40
 
2030
189,940
70,350
10,203
80,553
2.4
42
 
2035
195,126
74,320
10,235
84,555
2.3
43
 
2040
201,221
76,049
10,457
86,506
2.3
43
 
2045
208,014
77,075
10,920
87,995
2.4
42
 
2050
215,112
78,510
11,278
89,789
2.4
42
 
2055
222,535
80,602
11,670
92,272
2.4
41
 
2060
230,380
83,151
11,951
95,102
2.4
41
 
2065
238,897
85,473
12,366
97,839
2.4
41
 
2070
248,002
87,597
12,879
100,476
2.5
41
 
2075
257,544
89,806
13,503
103,309
2.5
40
 
2080
267,311
92,663
14,141
106,804
2.5
40
 
2085
277,257
96,266
14,746
111,012
2.5
40
High Cost:
 
2010
164,656
43,403
10,146
53,548
3.1
33
 
2015
169,296
50,001
11,834
61,835
2.7
37
 
2020
172,920
58,163
13,092
71,255
2.4
41
 
2025
175,712
66,087
14,281
80,369
2.2
46
 
2030
177,908
73,583
14,698
88,281
2.0
50
 
2035
179,730
79,128
14,986
94,114
1.9
52
 
2040
181,026
82,481
15,351
97,833
1.9
54
 
2045
181,796
84,855
15,981
100,836
1.8
55
 
2050
181,611
87,335
16,361
103,696
1.8
57
 
2055
181,099
90,159
16,690
106,850
1.7
59
 
2060
180,145
93,339
16,675
110,015
1.6
61
 
2065
178,936
96,428
16,698
113,127
1.6
63
 
2070
177,234
99,465
16,669
116,133
1.5
66
 
2075
175,410
102,281
16,557
118,838
1.5
68
 
2080
173,278
104,625
16,399
121,025
1.4
70
 
2085
171,222
106,473
16,185
122,658
1.4
72

1Workers who are paid at some time during the year for employment on which OASDI taxes are due.

2Beneficiaries with monthly benefits in current-payment status as of June 30.

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 2006 level of 30 beneficiaries per 100 covered workers, this ratio is estimated to rise significantly by 2085 to 40 under the low cost assumptions, 53 under the intermediate assumptions, and 72 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.

Figure IV.B2.-Number of OASDI Beneficiaries Per 100 Covered Workers
[D]

Table IV.B2 also shows that the number of covered workers per OASDI beneficiary, which was about 3.3 in 2006, is estimated to decline in the future. Based on the intermediate assumptions, the ratio declines to 2.1 by 2032, and 1.9 workers per beneficiary by 2070. Based on the low cost assumptions, for which high fertility rates and small reductions in death rates are assumed, the ratio declines to 2.3 by 2031, and then rises back to a level of 2.5 by 2067. Based on the high cost assumptions, for which low fertility rates and large reductions in death rates are assumed, the decline is much greater, reaching 1.8 by 2041, and 1.4 workers per beneficiary by 2078.

3. Trust Fund Ratios

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.

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 steadily from 375 percent at the beginning of 2007, reaching a peak of 463 percent at the beginning of 2015. This increase in the OASI trust fund ratio results from the fact that the annual income rate (which excludes interest) exceeds annual outgo for several years (see table IV.B1). Thereafter, the OASI trust fund ratio declines steadily, with the OASI Trust Fund becoming exhausted in 2042. The DI trust fund ratio follows a pattern that is similar but unfolds more rapidly. The DI trust fund ratio is estimated to decline steadily from 200 percent at the beginning of 2007 until becoming exhausted in 2026.

The trust fund ratio for the combined OASI and DI Trust Funds under the intermediate assumptions rises from 345 percent for 2007 to a peak of 409 percent at the beginning of 2014. Thereafter, the ratio declines, with the combined funds becoming exhausted in 2041. In last year's report, the peak fund ratio for the combined funds was estimated to be 409 percent for 2015 and the year of exhaustion was estimated to be 2040.

The trust fund ratio for the OASDI program under the intermediate assumptions first declines in 2015. This occurs because the increase in trust fund assets during 2014, 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 2014 and 2015. After 2014, the dollar amount of assets is projected to continue to rise through the beginning of 2027 because interest income more than offsets the shortfall in noninterest income.

Beginning in 2017, 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 throughout the long-range projection period, reaching the extremely high level of 1,736 percent for 2082. At the end of the long-range period, the DI trust fund ratio is rising by 32 percentage points per year. Thus, subsequent reports are likely to contain projections of adequate long-range financing of the DI program under a similar optimistic set of assumptions. For the OASI program, the trust fund ratio rises to a peak of 528 percent for 2019, dropping thereafter to a level of 250 percent by 2082. At the end of the period the OASI trust fund ratio is declining by 2 percentage points per year. The long-term outlook for the DI program is improved more than for the OASI program largely because lower assumed disability incidence rates have a substantial effect on the DI program but little net effect on the OASI program. For the OASDI program, the trust fund ratio peaks at 490 percent for 2021, falls to 387 percent for 2060, and increases thereafter, reaching 431 percent for 2082. Thus, due to the size of the trust fund ratios and their near stability, subsequent Trustees Reports are likely to contain projections of adequate long-range financing of the OASI and combined OASI and DI program under the low cost assumptions. A stable trust fund ratio at the end of the valuation period indicates that the actuarial balance for Trustees Reports in subsequent years can be expected to remain about the same as long as assumptions are realized.

In contrast, under the high cost assumptions, the OASI trust fund ratio is estimated to peak at 412 percent for 2011, thereafter declining to fund exhaustion by the end of 2033. The DI trust fund ratio is estimated to decline from 193 percent for 2007 to fund exhaustion by the end of 2016. The combined OASDI trust fund ratio is estimated to rise to a peak of 362 percent for 2010, declining thereafter to fund exhaustion by the end of 2030.

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 23 years into the future (until 2030). Under the intermediate assumptions the combined starting funds plus estimated future income would be able to cover cost for about 34 years into the future (until 2041). The program would be able to cover cost for the foreseeable future under the more optimistic low cost assumptions. In the 2006 report, the combined trust funds were projected to become exhausted in 2030 under the high cost assumptions and in 2040 under the intermediate assumptions.

.

Table IV.B3.-Estimated Trust Fund Ratios, Calendar Years 2007-85

[In percent]

Calendar
year
Intermediate
 
Low Cost
 
High Cost
OASI
DI
OASDI
OASI
DI
OASDI
OASI
DI
OASDI
2007
375
200
345
 
375
203
346
 
375
193
343
2008
397
197
362
 
398
204
366
 
392
182
354
2009
414
190
375
 
419
204
383
 
403
165
359
2010
428
183
385
 
439
205
400
 
412
146
362
2011
441
177
396
 
458
209
417
 
412
126
359
2012
451
169
403
 
476
211
433
 
407
102
350
2013
458
160
407
 
491
214
446
 
401
79
341
2014
462
151
409
 
503
218
458
 
395
55
333
2015
463
141
409
 
513
222
468
 
390
30
324
2016
462
130
407
 
521
227
476
 
382
5
314
2020
434
86
381
 
527
256
489
 
331
1/
256
2025
371
21
321
 
506
304
481
 
232
1/
152
2030
281
1/
236
 
464
378
454
 
104
1/
22
2035
176
1/
137
 
418
480
425
 
1/
1/
1/
2040
63
1/
28
 
382
593
405
 
1/
1/
1/
2045
1/
1/
1/
 
356
694
395
 
1/
1/
1/
2050
1/
1/
1/
 
336
805
390
 
1/
1/
1/
2055
1/
1/
1/
 
317
924
388
 
1/
1/
1/
2060
1/
1/
1/
 
297
1,071
387
 
1/
1/
1/
2065
1/
1/
1/
 
279
1,224
389
 
1/
1/
1/
2070
1/
1/
1/
 
266
1,378
397
 
1/
1/
1/
2075
1/
1/
1/
 
258
1,525
410
 
1/
1/
1/
2080
1/
1/
1/
 
252
1,673
425
 
1/
1/
1/
2085
1/
1/
1/
 
245
1,834
439
 
1/
1/
1/
Trust fund is estimated
to become exhausted in
2042
2026
2041
 
2/
2/
2/
 
2033
2016
2030

1The trust fund is estimated to be exhausted by the beginning of this year. The last line of the table shows the specific year of trust fund exhaustion.

2The trust fund is not estimated to be exhausted within the projection period.

Note: See definition of trust fund ratio. The combined ratios shown for years after the DI fund is estimated to be exhausted are theoretical and are shown for informational purposes only.

A graphical 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.D7.

Figure IV.B3.-Long-Range OASI and DI Trust Fund Ratios

[Assets as a percentage of annual expenditures]

[D]

4. Summarized Income Rates, Cost Rates, and Balances

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. This is because increasing income from taxation of benefits reflects not only rising benefit and income levels, but also the fact that benefit-taxation threshold amounts are not indexed. 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 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. Combined with a falling trust fund ratio, this signals the possibility 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 the low cost and intermediate assumptions. For the 25-year valuation period the summarized values indicate actuarial balances of 1.72 percent of taxable payroll under the low cost assumptions, 0.57 percent under the intermediate assumptions, and -0.93 percent under the high cost assumptions. Thus, the program is more than adequately financed for the 25-year valuation period under all but the high cost projections. For the 50-year valuation period the OASDI program would have a positive actuarial balance of 0.57 percent under the low cost assumptions, but would have deficits of 1.23 percent under the intermediate assumptions and 3.53 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 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 0.36 percent of taxable payroll under the low cost assumptions, -1.95 percent under the intermediate assumptions, and -5.05 percent under the high cost assumptions.

Assuming the Trustees' intermediate assumptions are realized, the deficit of 1.95 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 12.4 percent (combined employee-employer shares) to 14.35 percent. Alternatively, all current and future benefits could be reduced by 13.0 percent (or there could be some combination of tax increases and benefit reductions). Changes of this magnitude would be sufficient to eliminate the actuarial deficit over the 75-year projection period.

However, large annual deficits projected under current law for the end of the long-range period, which exceed 5 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 2081. As a result, ensuring continued adequate financing would eventually require larger changes than those needed to restore actuarial balance for the 75-year period. For the infinite future, the actuarial deficit is estimated to be 3.5 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 15.9 percent. This shortfall could also be eliminated if all current and future benefits were immediately reduced by 21.5 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, relative to the level of program costs.

.

Table IV.B4.-Components of Summarized Income Rates and Cost Rates,
Calendar Years 2007-81

[As a percentage of taxable payroll]

Valuation period
Income rate
 
Cost rate
 
Actuarial
balance
Payroll
tax
Taxation
of
benefits
Beginning
fund
balance
Total
Disburse-
ments
Ending
fund
balance
Total
OASI:
   
 
Intermediate:
   
   
2007-31
10.59
0.54
1.56
12.69
 
11.47
0.51
11.98
 
0.71
   
2007-56
10.59
.65
.91
12.15
 
12.94
.21
13.16
 
-1.01
   
2007-81
10.59
.69
.71
11.99
 
13.56
.12
13.68
 
-1.69
 
Low Cost:
   
   
2007-31
10.59
.50
1.55
12.64
 
10.64
.45
11.09
 
1.54
   
2007-56
10.59
.57
.91
12.06
 
11.52
.18
11.70
 
.37
   
2007-81
10.59
.59
.70
11.87
 
11.64
.10
11.73
 
.14
 
High Cost:
   
   
2007-31
10.58
.59
1.56
12.73
 
12.46
.59
13.05
 
-.31
   
2007-56
10.59
.74
.90
12.22
 
14.70
.27
14.97
 
-2.75
   
2007-81
10.59
.83
.70
12.12
 
16.09
.17
16.26
 
-4.15
DI:
   
 
Intermediate:
   
   
2007-31
1.80
.05
.17
2.02
 
2.08
.07
2.15
 
-.14
   
2007-56
1.80
.05
.10
1.95
 
2.14
.03
2.17
 
-.22
   
2007-81
1.80
.05
.08
1.93
 
2.18
.02
2.19
 
-.27
 
Low Cost:
   
   
2007-31
1.80
.04
.17
2.01
 
1.77
.06
1.83
 
.18
   
2007-56
1.80
.04
.10
1.94
 
1.71
.02
1.73
 
.20
   
2007-81
1.80
.04
.08
1.91
 
1.69
.01
1.70
 
.22
 
High Cost:
   
   
2007-31
1.80
.06
.17
2.03
 
2.54
.10
2.64
 
-.62
   
2007-56
1.80
.06
.10
1.96
 
2.70
.05
2.75
 
-.79
   
2007-81
1.80
.07
.08
1.94
 
2.82
.02
2.84
 
-.90
OASDI:
   
 
Intermediate:
   
   
2007-31
12.38
.59
1.73
14.70
 
13.55
.58
14.13
 
.57
   
2007-56
12.39
.70
1.01
14.10
 
15.08
.25
15.33
 
-1.23
   
2007-81
12.39
.74
.79
13.92
 
15.73
.14
15.87
 
-1.95
 
Low Cost:
   
   
2007-31
12.39
.54
1.72
14.64
 
12.42
.50
12.92
 
1.72
   
2007-56
12.39
.61
1.01
14.00
 
13.23
.20
13.43
 
.57
   
2007-81
12.39
.63
.77
13.79
 
13.32
.11
13.43
 
.36
 
High Cost:
   
   
2007-31
12.38
.65
1.73
14.76
 
15.00
.68
15.69
 
-.93
   
2007-56
12.38
.80
1.00
14.19
 
17.40
.32
17.72
 
-3.53
   
2007-81
12.38
.90
.78
14.06
 
18.91
.19
19.11
 
-5.05

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

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 $4.7 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 -$5.1 trillion for the OASDI program. Expressed as a percentage of taxable payroll for the period, this is the actuarial balance of -1.95 percent.

Table IV.B5.-Components of 75-Year Actuarial Balance
Under Intermediate Assumptions (2007-81)
Item
OASI
DI
OASDI
Present value as of January 1, 2007 (in billions):
     
 
a. Payroll tax revenue
$27,507
$4,671
$32,178
 
b. Taxation of benefits revenue
1,798
137
1,935
 
c. Tax income (a + b)
29,305
4,808
34,113
 
d. Cost
35,220
5,656
40,876
 
e. Cost minus tax income (d - c)
5,915
848
6,763
 
f. Trust fund assets at start of period
1,844
204
2,048
 
g. Open group unfunded obligation (e - f)
4,071
644
4,715
 
h. Ending target trust fund1
315
46
361
 
i. Income minus cost, plus assets at start of period, minus
ending target trust fund (c - d + f - h = - g - h)
-4,386
-690
-5,076
 
j. Taxable payroll
259,783
259,783
259,783
Percent of taxable payroll:
     
 
Actuarial balance (100 i j)
-1.69
-.27
-1.95

1The calculation of the actuarial balance includes the cost of accumulating a target trust fund balance equal to 100 percent of annual cost by the end of the period.

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

5. Additional Measures of OASDI Unfunded Obligations

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.

a. Open Group Unfunded Obligations

Consistent with practice since 1965, this report focuses on the 75-year period (from 2007 to 2081 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 2081). 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 $4.7 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 2081.

Table IV.B6 also presents the 75-year unfunded obligation as percentages of future OASDI taxable payroll and gross domestic product (GDP) through 2081. 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 of 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 is that continued, and possibly increasing, annual shortfalls after the period are not reflected in the 75-year summarized measures. 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 2082 to 2091. This change essentially maintains consistency with the assumed reduction in the growth of health care expenditures after 2081. (See the Medicare Trustees Report.) The values in table IV.B6 indicate that extending the calculations beyond 2081 adds $8.9 ($13.6 - $4.7) trillion in present value to the amount of the unfunded obligation estimated through 2081. That is, over the infinite horizon, the OASDI open group unfunded obligation is projected to be $13.6 trillion. The $8.9 trillion increment reflects a significant financing gap projected for OASDI after 2081. Of course, the degree of uncertainty associated with estimates beyond 2081 is substantial.

In last year's report the unfunded obligation over the infinite horizon was reported as $13.4 trillion in present value as of January 1, 2006. The change to the later valuation date (January 1, 2007), taken alone, would increase the measured deficit by about $0.7 trillion. The net effects of changes in data, methods, and other assumptions decreased the infinite horizon unfunded obligation by approximately $0.5 trillion. See section IV.B.7 for details regarding changes in data, methods, and assumptions.

As noted in the previous section, the $13.6 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 3.5 percent of taxable payroll under the intermediate assumptions, 0.2 percent lower 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. 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.

Table IV.B6.-Unfunded OASDI Obligations for 1935 (Program Inception)
Through the Infinite Horizon

[Present values as of January 1, 2007; dollar amounts in trillions]

 
Present
value
 
Expressed as a percentage
of future payroll and GDP
Taxable
payroll
GDP
Unfunded obligation for 1935 through the infinite horizon 1
$13.6
 
3.5
1.2
Unfunded obligation for 1935 through 2081 2
4.7
 
1.8
.7

1Present value of future cost less future taxes, reduced by the amount of trust fund assets at the beginning of 2007. Expressed as percentage of payroll and GDP for the period 2007 through the infinite horizon.

2Present value of future cost less future taxes through 2081, reduced by the amount of trust fund assets at the beginning of 2007. Expressed as percentage of payroll and GDP for the period 2007 through 2081.

Notes:
1. The present values of future taxable payroll for 2007-81 and for 2007 through the infinite horizon are $259.8 trillion and $388.4 trillion, respectively.
2. The present values of GDP for 2007-81 and for 2007 through the infinite horizon are $708.2 trillion and $1,117.3 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.

b. Unfunded Obligations for Past, Current, and Future Participants

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 $16.5 trillion. For this purpose, current participants are defined as individuals who attain age 15 or older in 2007. 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 $14.4 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, in present value, taxes that are approximately $0.8 trillion more than the cost of providing benefits they are scheduled to receive over the infinite future. For the 2006 report, on a present value basis, future participants were projected to pay about $0.1 trillion less, in taxes, than the total cost of benefits they would receive over the infinite future. This amount changed in part due to relatively lower annual deficits late in the 75-year period that are projected to continue. In addition, improvements in methods changed the allocation of taxable payroll and benefits between current and future participants, resulting in more of the unfunded obligation being attributed to current participants.

Thus, the remaining long run financing gap that program reforms must ultimately close for the infinite future is estimated to be $13.6 trillion in present value. This 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 3.5 percent of taxable payroll or 1.2 percent of GDP.

Table IV.B7.-Present Values of OASDI Cost Less Tax Revenue
and Unfunded Obligations for Program Participants

[Present values as of January 1, 2007; dollar amounts in trillions]

 
Present
value
 
Expressed as a percentage of future payroll and GDP
Taxable
payroll
GDP
Present value of future cost less future taxes for current participants 
$16.5
 
4.2
1.5
Less current trust fund
(tax accumulations minus expenditures to date for past and current participants)
2.0
.5
.2
Equals unfunded obligation for past and current participants 1
14.4
3.7
1.3
Plus present value of cost less taxes for future participants
for the infinite future
-.8
-.2
-.1
Equals unfunded obligation for all participants through the infinite
horizon
13.6
3.5
1.2

1This concept is also referred to as the closed group unfunded obligation.

Notes:
1. The present value of future taxable payroll for 2007 through the infinite horizon is $388.4 trillion.
2. The present value of GDP for 2007 through the infinite horizon is $1,117.3 trillion.
3. Totals do not necessarily equal the sums of rounded components.

6. Test of Long-Range Close Actuarial Balance

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. It is recognized that 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 34 years under the intermediate estimates. For valuation periods of length greater than 34 years, the estimated actuarial balance is less than the minimum allowable. For the full 75-year long-range period the estimated actuarial balance reaches -12.34 percent of the summarized cost rate, for a shortfall of 7.34 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), it is not in long-range close actuarial balance.

For the DI 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 12 years under the intermediate estimates. For valuation periods of length greater than 12 years, the estimated actuarial balance is less than the minimum allowable. For the full 75-year long-range period the estimated actuarial balance reaches -12.10 percent of the summarized cost rate, for a shortfall of 7.10 percent, from the minimum allowable balance of -5.0 percent of the summarized cost rate. Thus, the DI program, although meeting the short-range test of financial adequacy, is 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 occurs because much more of the increase in the long-range cost due to the aging of the large 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 32 years under the intermediate estimates. For valuation periods of length greater than 32 years, the estimated actuarial balance is below the minimum allowable balance. The size of the shortfall from the minimum allowable balance rises gradually, reaching 7.31 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 similar to those shown in last year's report.

Table IV.B8.-Comparison of Estimated Long-Range Actuarial Balances With the
Minimum Allowable in the Test for Close Actuarial Balance,
Based on Intermediate Assumptions
Valuation period
Rates
(percentage of taxable payroll)
 
Values expressed as a
percentage of cost rate
Summarized
income rate
Summarized
cost rate
Actuarial
balance
Actuarial
balance
Minimum
allowable
actuarial
balance
OASI:
 
10 years: 2007-2016
14.59
10.74
3.85
 
35.83
0.00
 
15 years: 2007-2021
13.50
11.05
2.44
 
22.10
-.38
 
20 years: 2007-2026
12.98
11.51
1.47
 
12.76
-.77
 
25 years: 2007-2031
12.69
11.98
.71
 
5.92
-1.15
 
30 years: 2007-2036
12.50
12.37
.13
 
1.06
-1.54
 
35 years: 2007-2041
12.37
12.66
-.29
 
-2.28
-1.92
 
40 years: 2007-2046
12.28
12.87
-.59
 
-4.58
-2.31
 
45 years: 2007-2051
12.20
13.02
-.82
 
-6.29
-2.69
 
50 years: 2007-2056
12.15
13.16
-1.01
 
-7.68
-3.08
 
55 years: 2007-2061
12.10
13.28
-1.18
 
-8.87
-3.46
 
60 years: 2007-2066
12.07
13.39
-1.33
 
-9.91
-3.85
 
65 years: 2007-2071
12.04
13.50
-1.46
 
-10.82
-4.23
 
70 years: 2007-2076
12.01
13.59
-1.58
 
-11.62
-4.62
 
75 years: 2007-2081
11.99
13.68
-1.69
 
-12.34
-5.00
DI:
 
10 years: 2007-2016
2.23
2.19
.04
 
1.90
.00
 
15 years: 2007-2021
2.11
2.16
-.05
 
-2.26
-.38
 
20 years: 2007-2026
2.05
2.16
-.11
 
-4.95
-.77
 
25 years: 2007-2031
2.02
2.15
-.14
 
-6.45
-1.15
 
30 years: 2007-2036
1.99
2.15
-.16
 
-7.33
-1.54
 
35 years: 2007-2041
1.98
2.15
-.17
 
-8.02
-1.92
 
40 years: 2007-2046
1.96
2.15
-.19
 
-8.78
-2.31
 
45 years: 2007-2051
1.96
2.16
-.21
 
-9.50
-2.69
 
50 years: 2007-2056
1.95
2.17
-.22
 
-10.15
-3.08
 
55 years: 2007-2061
1.94
2.18
-.23
 
-10.66
-3.46
 
60 years: 2007-2066
1.94
2.18
-.24
 
-11.07
-3.85
 
65 years: 2007-2071
1.93
2.19
-.25
 
-11.44
-4.23
 
70 years: 2007-2076
1.93
2.19
-.26
 
-11.78
-4.62
 
75 years: 2007-2081
1.93
2.19
-.27
 
-12.10
-5.00
OASDI:
 
10 years: 2007-2016
16.82
12.93
3.89
 
30.09
.00
 
15 years: 2007-2021
15.61
13.21
2.39
 
18.12
-.38
 
20 years: 2007-2026
15.03
13.67
1.36
 
9.97
-.77
 
25 years: 2007-2031
14.70
14.13
.57
 
4.04
-1.15
 
30 years: 2007-2036
14.50
14.52
-.03
 
-.19
-1.54
 
35 years: 2007-2041
14.35
14.81
-.46
 
-3.11
-1.92
 
40 years: 2007-2046
14.24
15.02
-.78
 
-5.18
-2.31
 
45 years: 2007-2051
14.16
15.18
-1.02
 
-6.75
-2.69
 
50 years: 2007-2056
14.10
15.33
-1.23
 
-8.03
-3.08
 
55 years: 2007-2061
14.05
15.46
-1.41
 
-9.12
-3.46
 
60 years: 2007-2066
14.00
15.57
-1.57
 
-10.08
-3.85
 
65 years: 2007-2071
13.97
15.68
-1.71
 
-10.91
-4.23
 
70 years: 2007-2076
13.94
15.78
-1.84
 
-11.65
-4.62
 
75 years: 2007-2081
13.92
15.87
-1.95
 
-12.31
-5.00

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

Figure IV.B4.-Test of Long-Range Close Actuarial Balance

[Comparison of estimated long-range actuarial balances with the minimum
allowable for close actuarial balance under intermediate assumptions]

[D]

7. Reasons for Change in Actuarial Balance From Last Report

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.

Table IV.B9.-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
11.95
1.93
13.88
 
Cost rate
13.63
2.27
15.90
 
Actuarial balance
-1.68
-.33
-2.02
Changes in actuarial balance due to changes in:
   
Legislation / Regulation
.00
.00
.00
   
Valuation period 1
-.05
-.01
-.06
   
Demographic data and assumptions
-.03
.00
-.03
   
Economic data and assumptions
+.01
+.01
+.02
   
Disability data and assumptions
-.02
+.08
+.06
   
Programmatic data and methods
+.09
-.01
+.08
 
Total change in actuarial balance
-.01
+.07
+.06
Shown in this report:
 
Actuarial balance
-1.69
-.27
-1.95
 
Income rate
11.99
1.93
13.92
 
Cost rate
13.68
2.19
15.87

1In changing from the valuation period of last year's report, which was 2006-80, to the valuation period of this report, 2007-81, the relatively large negative annual balance for 2081 is included. This results in a larger long-range actuarial deficit. The fund balance at the end of 2006, 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.

One legislative change that affects the financing of the Social Security program, the Social Security Trust Fund Restoration Act of 2006, Public Law 109-465, is included for the first time in the estimates for this report (see section III.B). This change completed the reimbursement of the trust funds for excess transfers to the Internal Revenue Service in 1999 through 2005 related to voluntary income tax withholding for beneficiaries. The effect of this legislation is estimated to increase (improve) the long-range actuarial balance by a negligible amount (less than 0.005 percent of taxable payroll).

In changing from the valuation period of last year's report, which was 2006-80, to the valuation period of this report, 2007-81, the relatively large negative annual balance for 2081 is included. This results in a larger long-range actuarial deficit. (Note that the fund balance at the end of 2006, i.e., at the beginning of the projection period, is included in the 75-year actuarial balance.)

Ultimate demographic assumptions are unchanged from last year's report. However, final mortality data for 2003 indicate a slightly larger than expected decline in death rates for men at older ages. The updates to the mortality data result in slightly lower starting death rates and faster near-term declines in death rates, and thus a decrease (worsening) in the long-range actuarial balance of about 0.03 percent of taxable payroll.

Ultimate economic assumptions are unchanged from last year's report. However, changes in starting values for the economic assumptions and in the near-term transition to the ultimate economic assumptions have a positive effect on the long-range actuarial balance. One of the major reasons for this positive effect is that the growth in average real covered earnings over the period 2006 to 2016 is projected to be somewhat greater than in last year's report. In addition, the average wage index starts and is assumed to remain at a slightly lower level relative to average taxable earnings than was projected in last year's report. This is because the actual growth in the average wage index for 2005, relative to growth in average taxable earnings, was less than expected in last year's report. Because the average wage index is important in the indexing of benefit levels, this lower relative level means slightly smaller benefit levels. The net effect of these economic changes is an increase (improvement) in the long-range actuarial balance of about 0.02 percent of taxable payroll.

Disability incidence rate assumptions are revised from the levels used in last year's report in order to bring the rates closer to the levels and trends in incidence rates experienced since 1970. Compared to last year's report, the ultimate age-adjusted disability incidence rates are 10 percent lower for males and are less than 1 percent higher for females. The changes in ultimate rates increase (improve) the long-range actuarial balance by about 0.06 percent of taxable payroll.

Several methodological improvements and updates of program-specific data are included for projections in the 2007 report. These changes to programmatic data and methods result in a combined increase in the long-range OASDI actuarial balance of about 0.08 percent of taxable payroll, including interaction among the individual changes. Two significant improvements were made to the methods related to the projection of average benefit levels for workers who will become eligible in the future. The first of these improvements augments the sample of newly entitled disabled worker beneficiaries by including records of beneficiaries who began receiving benefits after the year for which they are first found to be eligible. These additional beneficiaries had, on average, slightly lower benefit levels. The second of these improvements reallocates total taxable earnings among sample records. This reallocation increases the proportion of total taxable earnings assigned to workers with earnings close to, or above, the taxable maximum. Reallocating a higher portion of total taxable earnings to higher earners results in lower average benefits due to the progressivity of the benefit formula. These two changes increase (improve) the OASDI actuarial balance by about 0.07 percent of taxable payroll. In addition, two changes to improve consistency of cohort data were made to the historical population estimates. The first is a new smoothing technique for the historical distribution of marriages by age-of-husband and age-of-wife. The other improvement achieves a more consistent cohort estimate of the total U.S. population for years after the 2000 census, by changing how the 2000 census undercount factors are applied. These two improvements to the historical population estimates result in an increase (improvement) in the long-range actuarial balance of about 0.01 percent of taxable payroll. Several other smaller changes have largely offsetting effects on the long-range actuarial balance.

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, nonetheless, have increased by 0.06 percent of taxable payroll from the level estimated for last year's report due to the change in the valuation period (see table IV.B9). The changes made in data, assumptions, and methods for this report, together, more than offset the increase in the deficit due to the new valuation period. This is indicated by the total 0.06 percent decrease in the actuarial deficit, which, after rounding, decreases the deficit from 2.02 percent in last year's report to 1.95 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.

Figure IV.B5.-OASDI Annual Balances: 2006 and 2007 Reports

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

[D]

The projected annual balances in this report are generally higher (less negative) than those in last year's report largely due to the changes in methods and assumptions. Over the period 2007 through about 2030, annual balances are similar between the two reports. Thereafter, the annual balances in this year's report are higher primarily due to the impact of lower ultimate disability incidence rates and improvements in the long-range methods for projecting average benefit levels. The annual deficit for 2080 is 5.16 percent of taxable payroll in this report compared to 5.38 percent for 2080 in last year's report.


1Adjustments are made to include deemed wage credits based on military service for 1983-2001, and to reflect the lower effective tax rates (as compared to the combined employee-employer rate) which apply to multiple-employer "excess wages," and which did apply, before 1984, to net earnings from self-employment and, before 1988, to income from tips.


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