Summarized measures for any period indicate whether projected income is sufficient, on average, for the whole period. The Trustees summarize the total income and cost over valuation periods that extend through 75 years and over the infinite horizon. This section presents two summarized measures: (1) the actuarial balance; and (2) the open group unfunded obligation. The actuarial balance indicates the size of any surplus or shortfall as a percentage of the taxable payroll over the period. The open group unfunded obligation indicates the size of any shortfall in present-value dollars.
Table IV.B1 presents a comparison of the estimated annual income rates and cost rates by trust fund and alternative. Table VI.F8 shows detailed long-range projections of trust fund operations in current dollar amounts.
Under the intermediate assumptions, the Trustees project that the OASI income rate will rise from 10.89 percent of taxable payroll for 2013 to 11.39 percent for 2087. Income from taxation of benefits causes this increase for two main reasons: (1) benefits are rising faster than payroll; and (2) the benefit-taxation threshold amounts are fixed (not indexed), and therefore an increasing share of benefits will be subject to tax as incomes and benefits rise. The pattern of the cost rate is much different. The OASI cost rate increased from 11.04 percent of taxable payroll for 2011 to 11.33 percent for 2012. For 2013 and 2014, the Trustees project smaller increases in the cost rate, reaching levels of 11.51 and 11.63 percent of taxable payroll, respectively. From 2014 to 2016, the cost rate stabilizes, as the economic recovery through this period offsets the effects of the aging population. From 2016 to 2035, the cost rate rises rapidly because the retirement of the
baby-boom generation will increase the number of beneficiaries much faster than the number of workers increases, as subsequent lower-birth-rate generations replace the baby-boom generation at working ages. From 2038 to 2050, the cost rate declines because the aging baby-boom generation is gradually replaced at retirement ages by historically low-birth-rate generations, causing the beneficiary-to-worker ratio to decline. After 2050, the Trustees project the OASI cost rate will generally rise, reaching 15.73 percent of taxable payroll for 2087, primarily because of projected reductions in death rates.
Figure IV.B1 shows the patterns of the OASI and DI annual cost rates. Annual DI cost rates rose substantially between 1990 and 2010 in large part due to: (1) aging of the working population as the baby-boom generation moved from ages 25-44 in 1990, where disability prevalence is low, to ages 45-64 in 2010, where disability prevalence is much higher; (2) a substantial increase in the percentage of women insured for DI benefits as a result of increased and more consistent rates of employment; and (3) increased disability incidence rates for women to a level similar to those for men by 2010. After 2010, all of these factors stabilize, and therefore the DI cost rate stabilizes also. Annual OASI cost rates follow a similar pattern to that for DI, but displaced 20 to 25 years later, because the baby-boom generation enters retirement ages 20 to 25 years after entering prime disability ages. Figure
IV.B1 shows only the income rates for alternative II because the variation in income rates by alternative is very small. Income rates generally increase slowly for each of the alternatives over the long-range period. Taxation of benefits, which is a relatively small portion of income, is the main source of both the increases in the income rate and the variation among the alternatives. Increases in income from taxation of benefits reflect: (1) increases in the total amount of benefits paid; and (2) the increasing share of individual benefits that will be subject to taxation because benefit taxation threshold amounts are not indexed.
Figure IV.B1 shows the patterns of the annual balances for OASI and DI. For each alternative and for historical data, the magnitude of each of the positive balances, as a percentage of taxable payroll, is the distance between the appropriate cost-rate curve and the income-rate curve above it. The magnitude of each of the deficits is the distance between the appropriate cost-rate curve and the income-rate curve below it. Annual balances follow closely the pattern of annual cost rates after 1990 because the payroll tax rate does not change for the OASDI program, with only small variations in the allocation between DI and OASI. The pattern of the projected OASDI annual balances is important to the analysis of the financial condition of the Social Security program as a whole.
Long-range OASDI cost and income are most often expressed as percentages of taxable payroll. However, the Trustees also present cost and income as shares of gross domestic product (GDP), the value of goods and services produced during the year in the United States. Under alternative II, the Trustees project the OASDI cost to rise from 5.06 percent of GDP for 2013 to a peak of 6.23 percent for 2036. Thereafter, OASDI cost as a percentage of GDP declines to a low of 6.04 percent for 2052 and then generally increases slowly thereafter, reaching 6.20 percent by 2087. Appendix
F presents full estimates of income and cost relative to GDP.
The effect of the demographic shift under the three alternatives on the OASDI cost rates is clear when one considers the projected number of OASDI beneficiaries per 100 covered workers. Compared to the 2012 level of 35 beneficiaries per 100 covered workers, the Trustees project that this ratio will rise to 48 by 2035 under the intermediate assumptions because the growth in beneficiaries greatly exceeds the growth in workers. By 2090, this projected ratio rises further under the intermediate and high-cost assumptions, reaching 52 under the intermediate assumptions and 67 under the high-cost assumptions. Under the low-cost assumptions, this ratio rises to 45 by 2035 and then declines, reaching a stable level of about 40 after 2077. Figure
IV.B2 shows beneficiaries per 100 covered workers.
For each alternative, the curve in figure IV.B2 is strikingly similar to the corresponding cost-rate curve in figure
IV.B1. This similarity emphasizes the extent to which the cost rate is determined by the age distribution of the
population. The cost rate is essentially 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. For this reason, the pattern of the annual cost rates is similar to that of the annual ratios of beneficiaries to workers.
Table IV.B2 also shows the number of covered workers per OASDI beneficiary, which was about 2.9 for 2012. Under the low-cost assumptions, this ratio declines to 2.2 by 2035, and then generally rises throughout the remainder of the period, reaching 2.5 by 2090. Under the intermediate assumptions, this ratio declines generally throughout the long-range period, reaching 2.1 for 2035 and 1.9 by 2090. Under the high-cost assumptions, this ratio decreases steadily to 1.5 by 2090.
Table IV.B3 shows the Trustees’ projections of trust fund ratios by alternative, without regard to advance tax transfers that would be effected, for the separate and combined OASI and DI Trust Funds. The table also shows the years of trust fund reserve depletion and the percentage of scheduled benefits that would be payable thereafter, by alternative.
Figure IV.B3 illustrates the trust fund ratios for the separate OASI and DI Trust Funds for each of the alternative sets of assumptions. DI Trust Fund status is more uncertain than OASI Trust Fund status because there is a high degree of uncertainty associated with future disability prevalence. A graph of the trust fund ratios for the combined trust funds appears in figure
II.D6.
Table IV.B4 presents summarized income rates, summarized cost rates, and actuarial balances for 25-year, 50-year, and 75-year valuation periods. Summarized income rates are the sum of the present value of non-interest income for a period (which includes scheduled payroll taxes, the projected income from the taxation of scheduled benefits, and reimbursements from the General Fund of the Treasury) and the starting trust fund asset reserves, expressed as a percentage of the present value of taxable payroll over the period. Under current law, the total OASDI payroll tax rate will remain at 12.4 percent in the future. In contrast, the Trustees expect income from taxation of benefits, expressed as a percentage of taxable payroll, to increase in most years of the long-range period for two reasons. First, total scheduled benefits are rising faster than payroll. Second, the benefit-taxation threshold amounts are fixed (not indexed), so an increasing share of benefits will be subject to tax as incomes and benefits rise. Summarized cost rates are the sum of the present value of cost for a period (which includes scheduled benefits, administrative expenses, net interchange with the
Railroad Retirement program, and payments for vocational rehabilitation services for disabled beneficiaries) and the present value of the cost of reaching a target trust fund of 100 percent of annual cost at the end of the period, expressed as a percentage of the present value of taxable payroll over the period.
The actuarial balance for a valuation period is equal to the difference between the summarized income rate and the
summarized cost rate for the period. An actuarial balance of zero for any period indicates that cost for the period could be met for the period as a whole (but not necessarily at all points within the period), with a remaining trust fund reserve at the end of the period equal to 100 percent of the following year’s cost. A negative actuarial balance for a period indicates that the present value of income to the program plus the existing trust fund is less than the present value of the cost of the program plus the cost of reaching a target trust fund reserve of 1 year’s cost by the end of the period.
Table IV.B4 contains summarized rates for the intermediate, low-cost, and high-cost assumptions. The low-cost and high-cost assumptions define a wide range of possibilities. Financial outcomes as good as the low-cost scenario or as bad as the high-cost scenario are unlikely to occur.
For the entire 75-year valuation period, the combined OASDI program again has actuarial deficits under all three sets of assumptions. The actuarial balance for this long-range valuation period is ‑0.19 percent of taxable payroll under the low-cost assumptions, ‑2.72 percent under the intermediate assumptions, and ‑5.93 percent under the high-cost assumptions.
However, eliminating the actuarial deficit over the next 75 years requires raising payroll taxes or lowering benefits by more than is required just to achieve solvency, because the actuarial deficit includes the cost of attaining a target trust fund ratio equal to 100 percent of annual program cost by the end of the period. The actuarial deficit could be eliminated for the 75-year period by increasing revenues in a manner equivalent to an immediate and permanent increase in the combined payroll tax from 12.40 percent to 15.22 percent,
2 reducing cost in a manner equivalent to an immediate reduction in scheduled benefits of 17.3 percent, or some combination of approaches could be used.
Under the intermediate assumptions, the OASDI program has large annual deficits toward the end of the long-range period that are increasing and reach 4.77 percent of payroll for 2087 (see table IV.B1). These large deficits indicate that annual cost continues to exceed non-interest income after 2087, so continued adequate financing would require larger changes than those needed to maintain solvency for the 75-year period. Over the period extending through the infinite horizon, the actuarial deficit is 4.0 percent of taxable payroll under the intermediate assumptions. The projected infinite horizon shortfall could be eliminated with additional revenue equivalent to an immediate increase in the combined payroll tax rate from 12.4 percent to about 16.6 percent.
3 This shortfall could be eliminated by reducing cost in a manner equivalent to an immediate and permanent reduction in benefits for all current and future beneficiaries by 23.9 percent.
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 non-interest income over the long-range period, minus the amount of trust fund asset reserves at the beginning of the projection period, amounts to $9.6 trillion for the OASDI program. This amount is the 75-year “open group unfunded obligation” (see row
H). The actuarial deficit (which is 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 non-interest income minus cost, plus starting trust fund reserves, minus the present value of the ending target trust fund, is ‑$10.1 trillion for the OASDI program. The actuarial balance , expressed as a percentage of taxable payroll for the period, is ‑2.72 percent.
Table IV.B6 also presents the 75-year unfunded obligation as percentages of future OASDI taxable payroll and GDP through 2087. The 75-year unfunded obligation as a percentage of taxable payroll is less than the actuarial deficit, because the unfunded obligation excludes the ending target trust fund value (see table
IV.B5).
Table IV.B6 reports that the OASDI open group unfunded obligation over the infinite horizon is $23.1 trillion, which is $13.5 trillion larger than for the 75‑year period. The $13.5 trillion increment reflects a significant financing gap projected for OASDI for years after 2087. Of course, the degree of uncertainty associated with estimates increases substantially for years further in the future.
Table IV.B7 separates the components of the infinite horizon unfunded obligation (with the exception of general fund reimbursements) among past, current, and future participants. The table does not separate past general fund reimbursements among participants because there is no clear basis for attributing the reimbursements across generations.
The excess of the present value of cost for past and current participants
4 over the present value of dedicated tax income for past and current participants produces an unfunded obligation for past and current participants of $24.3 trillion. Table
IV.B7 also shows an unfunded obligation of $23.7 trillion for past and current participants, including past and future general fund reimbursements. Future participants will pay dedicated taxes of $0.6 trillion more into the system than the cost of their benefits ($51.0 trillion of dedicated tax income as compared to $50.4 trillion of cost). The unfunded obligation for all participants through the infinite horizon thus equals $23.1 trillion.
Figure IV.B4 compares the annual cash-flow balances for this report and the prior year’s report for the combined OASDI program over the long-range (75-year) projection period. The figure illustrates the annual effects of the changes described earlier in this section.
