Short-Range Actuarial Projections of the Old-Age, Survivors, and Disability Insurance Program, 2001 Actuarial Study No. 115 Chris Motsiopoulos and Tim Zayatz, A.S.A.

V. ESTIMATES BASED ON ALTERNATIVE ASSUMPTIONS

The Office of the Chief Actuary prepares cost estimates for the Trustees Report based on three alternative sets of assumptions. Prior tables show data based on the intermediate (alternative II) set. This section shows results from the low-cost (alternative I) and high-cost (alternative III) sets. These alternatives illustrate variations in the projected financial status of the OASDI program resulting from economic and demographic assumptions that differ substantially from what is considered to be most likely.

In general, low-cost assumptions assume relatively rapid economic growth, low inflation, and demographic conditions that are favorable from the standpoint of program financing. High-cost assumptions assume slow economic growth, more rapid inflation, and financially disadvantageous demographic conditions.

A. LOW-COST ASSUMPTIONS

Economic and Demographic Assumptions

Table V.A1 shows the various low-cost economic assumptions. The level of economic activity is assumed to be higher than the intermediate projection. Specifically, real GDP declines from an estimated 5.1 percent in 2000, to 2.5 percent by 2010. Under the intermediate set, GDP declines to 2.0 percent. The annual percent increase in covered wages is lower than the intermediate set beginning in 2003, reaching a level of 3.8 percent by the end of the short-range period. The ultimate level of CPI is a full percentage point lower under low-cost resulting in a real-wage differential of 1.5 percent by the end of the period. Nominal interest rates for invested assets of the trust funds are expected to be slightly lower; annual unemployment rates are one percentage point lower.

Table V.A2 shows average annual wages are slightly higher than the intermediate projection through 2003, then slightly lower from 2004 through 2010.

Tables V.A3 and V.A4 show the program amounts. Compared to the intermediate projection, benefit increases are the same for 2001, but lower thereafter due to lower rates of inflation. Annual increases in amounts that are based on automatic-adjustment provisions follow the same pattern of increase in the average wage index, lagged by 2 years. For example, the increase in the PIA bend points for 2002 is roughly the same as the increase in the average wage index for 2000-5.7 percent.

Tables V.A5 and V.A6 show low-cost demographic and programmatic assumptions. By 2010, the fertility rate of 2.12 is slightly higher than the rate of 2.02 for the intermediate set. Mortality rates are higher under low-cost assumptions, resulting in lower program costs. Life expectancy at age 65 is 6 months lower for both males and females by 2010. Immigration is estimated to be higher by 310,000 annually under low-cost assumptions.

Coverage rates are higher under low-cost assumptions because of the lower unemployment rates. About 0.9 percent more of the population is working in covered employment by 2010. Insured rates are about the same as in the intermediate set. Disability incidence rates are lower and termination rates are higher.

Benefit Payments

The numbers of OASI and DI beneficiaries and benefit payments are projected by methods identical to those described in section III. Tables V.A7 and V.A8 summarize the number of beneficiaries and benefit payments based on low-cost assumptions.

The total number of OASDI beneficiaries is nearly 1.3 million lower by the end of 2010, compared to the intermediate projection. The estimated number of retired workers is less because of higher assumed mortality rates. The number of disabled workers is less because of lower incidence rates and higher termination rates under low-cost assumptions.

Lower benefit amounts are also predicted under low-cost assumptions, due to lower inflation and wage growth. Fewer beneficiaries combined with lower benefits result in lower total benefit payments-roughly $667 billion in 2010 for the combined OASI and DI Trust Funds, compared to $728 billion based on intermediate assumptions.

Trust Fund Status

The progress of the OASI and DI Trust Funds is projected by methods identical to those described in section IV. Tables V.A9, V.A10 and V.A11 show the progress of the OASI, DI, and combined funds. Assets are projected to increase more rapidly under the low-cost assumptions-roughly $3.7 trillion combined by the end of 2010, compared to $3.4 trillion based on intermediate assumptions.

Table V.A12 shows the status of the trust funds as measured by trust fund ratios. OASI and DI trust fund ratios reach 513 and 369 percent, respectively, by the beginning of 2010, compared to 453 and 249 percent under intermediate projections.

Table V.A13 shows annual income rates and cost rates for the trust funds. As expected, higher balances result under the low-cost alternative-2.35 percent of taxable payroll by 2010 for the OASDI program, compared to 1.46 percent under intermediate projections.

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December 26, 2001