VE: Stochastic Model of OASDI program

The difference between the summarized income rate and the summarized cost rate over a given time period.

Expenses incurred by the Social Security Administration and the Department of the Treasury in administering the OASDI program and the provisions of the Internal Revenue Code relating to the collection of contributions. Such administrative expenses are paid from the OASI and DI Trust Funds.

The crude rate that would occur in the standard population if it were to experience the same rates by age as in the selected year.

Treasury notes and bonds, other securities guaranteed by the Federal Government, certain Federally sponsored agency obligations, and cash, held by the trust funds for investment purposes.

Values relating to future trends in certain key factors which affect the balance in the trust funds. Demographic assumptions include fertility, mortality, net immigration, marriage, and divorce. Economic assumptions include unemployment rates, average earnings, inflation, interest rates, and productivity. Program-specific assumptions include retirement patterns, and disability incidence and termination rates. Three sets of demographic, economic, and program-specific assumptions are presented in the 2004 Trustees Report:

Alternative II (intermediate assumptions): represents the Trustees' best estimates of likely future demographic, economic, and program-specific conditions.

Alternative I (low cost assumptions): assumes relatively rapid economic growth, low inflation, and favorable (from the standpoint of program financing) demographic conditions.

Alternative III (high cost assumptions): assumes relatively slow economic growth, high inflation, and unfavorable (from the standpoint of program financing) demographic conditions.

The annual increase in benefits, effective for December, reflecting the increase in the cost of living. The benefit increase equals the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) measured from the average over July, August, and September of the preceding year to the average for the same 3 months in the current year. If the increase is less than one-tenth of 1 percent, when rounded, there is no automatic increase for the current year; the increase for the next year would reflect the net increase in the CPI over a 2-year period.

The amount of earnings used in determining the primary insurance amount (PIA) for most workers who attain age 62, become disabled, or die after 1978. A worker's actual past earnings are adjusted by changes in the average wage index, in order to bring them up to their approximately equivalent value at the time of retirement or other eligibility for benefits.

The average amount of total wages for each year after 1950, including wages in noncovered employment and wages in covered employment in excess of the OASDI contribution and benefit base. (See Title 20, chapter III, section 404.211(c) of the Code of Federal Regulations for a more precise definition.) These average wage amounts are used to index the taxable earnings of most workers first becoming eligible for benefits in 1979 or later, and for automatic adjustments in the contribution and benefit base, bend points, earnings test exempt amounts, and other wage-indexed amounts.

An administrative determination that an individual is entitled to receive a specified type of OASDI benefit. Awards can represent not only new entrants to the benefit rolls but also persons already on the rolls who become entitled to a different type of benefit. Awards usually result in the immediate payment of benefits, although payments may be deferred or withheld depending on the individual's particular circumstances.

The dollar amounts defining the AIME or PIA brackets in the benefit formulas. Each bracket is an AIME or PIA interval throughout which each dollar generates a uniform benefit increment.

The annual number of deaths for a particular group divided by the estimated population of that group at midyear.

An official measure of inflation in consumer prices. In this study, all references to the CPI relate to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Annual dollar amount above which earnings in employment covered under the OASDI program are neither taxable nor creditable for benefit computation purposes. (Also referred to as maximum contribution and benefit base, annual creditable maximum, taxable maximum, and maximum taxable.)

The amount based on a percentage of earnings, up to an annual maximum, that must be paid by:

employers and employees on wages from employment under the Federal Insurance Contributions Act,

the self-employed on net earnings from self-employment under the Self-Employment Contributions Act, and

States on the wages of State and local government employees covered under the Social Security Act through voluntary agreements under section 218 of the Act.

Generally, employers withhold contributions from wages, add an equal amount of contributions, and pay both on a current basis. Also referred to as taxes, and as tax contributions.

The cost rate for a year is the ratio of the cost of the program to the taxable payroll for the year. In this context, the cost is defined to include scheduled benefit payments, special monthly payments to certain uninsured persons who have three 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; it excludes special monthly payments to certain uninsured persons whose payments are reimbursable from the General Fund of the Treasury (as described above), and transfers under the interfund borrowing provisions.

All employment for which earnings are creditable for Social Security purposes. Almost all employment is covered under the program. Some exceptions are:

State and local government employees whose employer has not elected to be covered under Social Security and who are participating in an employer-provided pension plan.

Current Federal civilian workers hired before 1984 who have not elected to be covered.

Self-employed workers earning less than $400 in a calendar year.

A person who has earnings creditable for Social Security purposes on the basis of services for wages in covered employment and/or on the basis of income from covered self-employment.

The status of beneficiaries presently scheduled to be paid regular monthly benefits; includes those scheduled to be paid less than a full month's benefits, but excludes those who receive retroactive benefits that are not scheduled to be paid regularly.

A model with specified assumptions for and relationships among variables. Under such model, any specified set of assumptions fully determines a single outcome directly reflecting the specifications.

The proportion of the exposed population at the beginning of that year who become newly entitled to disability benefits during the year.

The proportion of disabled-worker beneficiaries whose disability benefits terminate as a result of the individual's recovery from disability during the year.

Unless otherwise qualified, all wages from employment and net earnings from self-employment, whether or not taxable or covered.

The conditions upon which an individual may collect a Social Security cash benefit. There are many definitions, depending on the type of benefit.

Retired-worker benefit—An individual is entitled to a retirement insurance benefit if that individual:

is at least 62 for a full month and is fully insured; and

has filed an application for retirement benefits, or is entitled to disabled-worker benefits in the month before the month of attainment of the normal retirement age.

If the individual meets the requirements in (a) before the month the individual filed the application, that individual may be entitled to retirement insurance benefits back to the first month in which the individual met those requirements, subject to certain limitations.

Disabled-worker benefit—An individual is entitled to a disability insurance benefit if that individual:

is disabled according to Social Security's definition of disability,

has filed an application for disabled-worker's benefits,

has disability insured status,

has completed a five-month waiting period (unless exempt), and

has not attained the normal retirement age.

Provisions of the Railroad Retirement Act providing for transfers between the trust funds and the Social Security Equivalent Benefit Account of the Railroad Retirement program in order to place each trust fund in the same position as it would have been in if railroad employment had always been covered by Social Security.

The total dollar value of all goods and services produced by labor and property located in the United States, regardless of who supplies the labor or property.

Ratio of income from tax revenues on a liability basis (payroll-tax contributions and income from the taxation of scheduled benefits) to the OASDI taxable payroll for the year.

The annual growth rate in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

There are three types of insured status which can be acquired by a worker under the OASDI program. Each of these statuses is determined by the number and recency of quarters of coverage (QCs) earned.

Fully insured status is acquired by any worker whose total number of QCs is greater than or equal to the number of years elapsed after the year of attainment of age 21 (with a minimum of six QCs required). Once a worker has accumulated 40 QCs, the worker remains permanently fully insured.

Disability insured status is acquired by any fully insured worker over age 30 who has accumulated 20 QCs during the 40-quarter period ending with the current quarter, any fully insured worker aged 24-30 who has accumulated QCs during one-half of the quarters elapsed after the quarter of attainment of age 21 up to and including the current quarter, and any fully insured worker under age 24 who has accumulated six QCs during the 12-quarter period ending with the current quarter.

Currently insured status is acquired by any worker who has accumulated six QCs during the 13-quarter period ending with the current quarter.

Periods of disability are excluded from the above described QC requirements for insured status (but do not reduce the minimum of six QCs).

Amount of interest payment per unit of principal. Interest rates on new public-debt obligations issuable to Federal trust funds are determined monthly. (See "Special public-debt obligation.") Such rates are set equal to the average market yield on all outstanding marketable U.S. securities not due or not callable until after four years from the date of the determination. The effective interest rate for a trust fund is the ratio of the interest earned by the fund over a given period of time to the average level of assets held by the fund during the period. The effective rate of interest thus represents a measure of the overall average interest earnings on the fund's portfolio assets.

The number of persons who are employed or actively seeking work as a percent of the civilian noninstitutional population.

The number of persons who lawfully leave the United States, and are no longer considered to be a part of the Social Security program.

The number of persons lawfully admitted for permanent residence into the United States.

The average number of years of life remaining if a group of people at a given age were to experience the mortality rates for that year over the course of their remaining lives. This quantity is computed for each year of each simulation, and is done so

At age 65, and

At birth.

The next 75 years. Long-range actuarial estimates are made for this period because it is approximately the maximum remaining lifetime of current Social Security participants.

A complete record of beneficiaries which contains such items as social security number, beneficiary identification code, date of birth, date of entitlement, etc. The x% MBR represents a sampling of x% of these records from the collection of all records.

In Fortran, a nonexecutable program unit that contains type definitions, object declarations, procedure definitions (module procedures), external procedure interfaces, user-defined generic names, and user-defined operators and assignments. Any such definitions not specified to be private to the module containing them are available to be shared with those programs that use the module. Thus, modules provide a convenient sharing and encapsulation mechanism for data, types, procedures, and procedure interfaces. The OSM contains the following modules:

Assumptions: Projects some of the key demographic and economic assumptions using time-series models.

Population: Projects the Social Security area population for each year based on levels of fertility, mortality, and immigration generated in the Assumptions Module.

Economics: Projects U.S. economy-wide employment and wages, OASDI covered employment and wages, taxable payroll, the average wage index and the COLA.

Insured: Projects the percentage of the population that will be fully insured and disability insured.

Disability Insurance Beneficiaries (DIB): Projects the annual values for the disabled-worker beneficiaries in current-payment status.

Old-Age and Survivors Insurance Beneficiaries (OASIB): Projects the number of retired-worker beneficiaries and all aggregate dependent beneficiaries.

Awards: Projects levels of benefits, in terms of Average Indexed Monthly Earnings (AIME), for those beneficiaries newly awarded.

Cost: Computes the year-by-year progress of the combined OASDI Trust Funds and produces summary measures used to assess the long-range financial status of the OASDI program.

Summary Results: Computes the estimated probability distributions of annual and summarized data received from the Assumptions, Population, and Cost Modules.

The annual flow of persons into the United States minus the annual flow of persons out of the United States who do not meet the definition of legal immigration or legal emigration. Thus, net other immigration includes unauthorized persons and those not seeking permanent residence.

The effective annual interest rate, based on the semiannual compounding of interest. See "Interest rate."

The age at which a person may first become entitled to unreduced retirement benefits. For persons reaching age 62 before 2000, the normal retirement age is 65. It will increase gradually to 67 for persons reaching that age in 2027 or later, beginning with an increase to 65 years and 2 months for persons reaching age 65 in 2003.

The particular stochastic model developed by the Office of the Chief Actuary. See "Stochastic model."

This measure is determined as of the valuation date over a specified time period (such as over the long-range 75-year period). It is computed as the difference between:

The present value of the future cost of the program between the valuation date and the end of the specified time period, and

The sum of the assets in the trust fund as of the valuation date and the present value of the future scheduled tax income of the program between the valuation date and the end of the specified time period.

Actual expenditures (outgo) made or expected to be made under current law, including benefits paid or payable, special monthly payments to certain uninsured persons who have three 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; it excludes special monthly payments to certain uninsured persons whose payments are reimbursable from the General Fund of the Treasury (as described above), and transfers under the interfund borrowing provisions.

The population comprised of (i) residents of the 50 States and the District of Columbia (adjusted for net census undercount); (ii) civilian residents of Puerto Rico, the Virgin Islands, Guam, American Samoa and the Northern Mariana Islands; (iii) Federal civilian employees and persons in the U.S. Armed Forces abroad and their dependents; (iv) crew members of U.S. merchant vessels; and (v) all other U.S. citizens abroad.

The equivalent value, at a given time, of a future stream of payments (either income or cost). The present value of a future stream of payments may be thought of as the lump-sum amount that, if invested today, together with interest earnings would be just enough to meet each of the payments as they fell due. Present values are widely used in calculations involving financial transactions over long periods of time to account for the time value of money (interest). For the purpose of present-value calculations for this study, values are discounted by the effective yield on trust fund assets.

The monthly amount payable to a retired worker who begins to receive benefits at normal retirement age or (generally) to a disabled worker. This amount, which is related to the worker's average monthly wage or average indexed monthly earnings, is also the amount used as a base for computing all types of benefits payable on the basis of one individual's earnings record.

The mathematical formula relating the PIA to the AIME for workers who attain age 62, become disabled, or die after 1978. The PIA is equal to the sum of 90 percent of AIME up to the first bend point plus 32 percent of AIME up to the second bend point, plus 15 percent of AIME in excess of the second bend point. Automatic benefit increases are applied beginning with the year of eligibility.

Basic unit of measurement for determining insured status. In 2004, a worker receives one quarter of coverage (up to a total of four) for each $900 of annual covered earnings. The amount of earnings required for a quarter of coverage is subject to annual automatic increases in proportion to increases in the Average Wage Index.

A Federal insurance program, somewhat similar to Social Security, designed for workers in the railroad industry. The provisions of the Railroad Retirement Act provide for a system of coordination and financial interchange between the Railroad Retirement program and the Social Security program.

The ratio of the average nominal OASDI covered wage to the adjusted inflation rate.

Operation of a trade or business by an individual or by a partnership in which an individual is a member.

Securities of the United States Government issued exclusively to the OASI, DI, and other Federal trust funds. Section 201(d) of the Social Security Act provides that the public-debt obligations issued for purchase by the OASI and DI Trust Funds shall have maturities fixed with due regard for the needs of the funds. The usual practice has been to spread the holdings of special issues, as of each June 30, so that the amounts maturing in each of the next 15 years are approximately equal. Special public-debt obligations are redeemable at par value at any time and carry interest rates determined by law. (See "Interest rate.")

A model used for projecting a probability distribution of potential outcomes. Such models allow for random variation in one or more variables through time. The random variation is generally based on fluctuations observed in historical data for a selected period. Distributions of potential outcomes are derived from a large number of simulations, each of which reflects random variation in the variable(s).

The ratio of the present value of cost to the present value of the taxable payroll for the years in a given period, expressed as a percentage. This percentage can be used as a measure of the relative level of cost during the period in question. For purposes of evaluating the financial adequacy of the program, the summarized cost rate is adjusted to include the cost of reaching and maintaining a target trust fund level. Because a trust fund level of about one year's cost is considered to be an adequate reserve for unforeseen contingencies, the targeted trust fund ratio used in determining summarized cost rates is 100 percent of annual cost. Accordingly the adjusted summarized cost rate is equal to the ratio of (a) the sum of the present value of the cost during the period plus the present value of the increase needed to attain the targeted ending trust fund level, to (b) the present value of the taxable payroll during the projection period.

The ratio of the present value of scheduled tax income to the present value of taxable payroll for the years in a given period, expressed as a percentage. This percentage can be used as a measure of the relative level of income during the period in question. For the purposes of evaluating the financial adequacy of the program, the summarized income rate is adjusted to include assets on hand at the beginning of the period. Accordingly, the adjusted summarized income rate equals the ratio of (a) the sum of the trust fund balance at the beginning of the period plus the present value of the total income from taxes during the period, to (b) the present value of the taxable payroll for the years in the period.

Wages and/or self-employment income, in employment covered by the OASDI and/or HI programs, that is under the applicable annual maximum taxable limit. For 1994 and later, no maximum taxable limit applies to the HI program.

A weighted average of taxable wages and taxable self-employment income. When multiplied by the combined employee-employer tax rate, it yields the total amount of taxes incurred by employees, employers, and the self-employed for work during the period.

The maximum amount of net earnings from self-employment by an earner which, when added to any taxable wages, does not exceed the contribution and benefit base.

During 1984-93, up to one-half of an individual's or a couple's OASDI benefits was potentially subject to Federal income taxation under certain circumstances. The revenue derived from this provision was allocated to the OASI and DI Trust Funds on the basis of the income taxes paid on the benefits from each fund. Beginning in 1994, the maximum portion of OASDI benefits potentially subject to taxation was increased to 85 percent. The additional revenue derived from taxation of benefits in excess of one-half, up to 85 percent, is allocated to the HI Trust Fund.

The average number of children who would be born to a hypothetical woman in her lifetime if she were to experience the birth rates by age observed in, or assumed for, a specified calendar year, and if she were to survive the entire childbearing period.

Separate accounts in the United States Treasury into which are deposited the taxes received under the Federal Insurance Contributions Act and the Self-Employment Contributions Act, contributions resulting from coverage of State and local government employees; any sums received under the financial interchange with the railroad retirement account; voluntary hospital and medical insurance premiums; and transfers of Federal general revenues. Funds not withdrawn for current monthly or service benefits, the financial interchange, and administrative expenses are invested in interest-bearing Federal securities, as required by law; the interest earned is also deposited in the trust funds.

Old-Age and Survivors Insurance (OASI). The trust fund used for paying monthly benefits to retired-worker (old-age) beneficiaries and their spouses and children, and to survivors of deceased insured workers.

Disability Insurance (DI). The trust fund used for paying monthly benefits to disabled-worker beneficiaries and their spouses and children and for providing rehabilitation services to the disabled.

A measure of the adequacy of the trust fund level. Defined as the assets at the beginning of the year, including advance tax transfers (if any), expressed as a percentage of the cost during the year. The trust fund ratio represents the proportion of a year's cost which could be paid with the funds available at the beginning of the year.

The number of unemployed persons seeking work as a percentage of the civilian labor force.

The year in which a trust fund would become unable to pay benefits when due because the fund has no assets.

A Stochastic Model
of the Long-Range Financial Status
of the OASDI Program—September 2004

E. GLOSSARY

A Stochastic Model of the Long-Range Financial Status of the OASDI Program—September 2004

E. GLOSSARY

A Stochastic Model
of the Long-Range Financial Status
of the OASDI Program—September 2004