Short-Range Actuarial Projections of the Old-Age, Survivors, and Disability Insurance Program, 2005
ACTUARIAL STUDY NO. 119 by Chris Motsiopoulos and Richard B. Tucker

E. OLD-AGE AND SURVIVORS INSURANCE BENEFIT PAYMENTS

1. Average Benefit

The average benefit in force for retired workers at the end of each year is projected on a year-to-year basis, starting with the corresponding average benefit in force at the end of the previous year. That starting average is adjusted for changes during the year, mainly due to Automatic Cost-of-Living Adjustment (COLA) and benefit recomputations, and then further adjusted by adding in the effects on benefits of new awards during the year (which were described in section III.C.). In making these adjustments, the beneficiary population and their respective average benefits are split by gender and duration since entitlement. For this purpose, single year of duration is used for durations 1-7, and durations of 8 years or longer are grouped into one category. Table III.E1 summarizes the effects of these detailed calculations for the total retired worker population split only by gender. In that simplified presentation, in the columns displaying the average benefits for retired workers terminated during the year, the ratio of that average to the average benefit in force at the beginning of the year represents in effect the net residual of changes in average benefits in force during the year after the effects of the COLA.

The average benefit in force for each sex of retired workers increases each year by the amount of the automatic benefit increase, plus an additional amount representing the net effect of new awards, terminations, and increases due to benefit recomputations and other factors.

The average benefit in current-payment status for male and female retired workers is equal to the average benefit in force times a factor derived from the historical relationship between the two averages. Table III.E1 shows the projections of the average benefit in current-payment status for retired workers.

The average benefit in current-payment status for each member of a retired worker's family is projected based on the historical relationship of the family member's average benefit to the average retired worker benefit. Tables III.E2 and III.E3 show the annual projection of average benefits in current-payment status for young and aged wives and husbands (table III.E2) and minor, disabled, and student children (table III.E3).

The factors relating the average benefit for young and aged wives to the average benefit for male retired workers, and the average for young and aged husbands to the average for female retired workers, are projected by a regression equation, based on the time trend of each factor. In addition, the factors are adjusted by judgment to prevent them from increasing (or decreasing) to unreasonable levels.

The factors relating the average benefit for minor, disabled, and student children of retired workers to the average benefit for male retired workers, are projected by a regression equation, based on the average number of dependent beneficiaries entitled on each retired worker account. These factors are also constrained to prevent them from reaching unreasonable levels.

The average benefit in force for each category of survivor beneficiary is projected in a manner similar to that for retired workers. The average benefit in current-payment status is projected, in turn, by multiplying the average benefit in force by a factor derived from the historical relationship between the two average benefits. Tables III.E4-III.E10 show the annual projection of average benefits in force and in current-payment status for minor child survivors (table III.E4), disabled child survivors (table III.E5), student child survivors (table III.E6), aged widows and widowers (table III.E7), mothers and fathers of child survivors (table III.E8), parents of deceased workers (table III.E9), and disabled widows and widowers (table III.E10).

The historical average benefit in current-payment status for special age-72 beneficiaries is shown in table III.E11. There are no corresponding projected numbers, since we expect the number of special age-72 beneficiaries in current-payment status to be zero by the end of 2005.

2. Benefits In Current-Payment Status

Benefits in current-payment status for each type of retired worker and survivor beneficiary are projected quarterly as the product of:

This procedure follows the method used in the projection of current-payment benefits for disability beneficiaries. Tables III.E12-III.E23 show the quarterly projections of current-payment benefits by sex (except for children), for retired workers (table III.E12), young spouses (table III.E13), aged spouses (table III.E14), total spouses (table III.E15), minor, disabled, and student children of retired workers (table III.E16), minor, disabled, and student children of deceased workers (table III.E17), all OASI children by type (table III.E18), aged widow(er)s (table III.E19), mothers and fathers of children of deceased workers (table III.E20), parents of deceased workers (table III.E21), disabled widow(er)s (table III.E22), and special age-72 beneficiaries (table III.E23).

Female retired workers receive 42 percent of the total current-payment benefits paid to retired workers. This percentage is projected to increase very slowly, to 43 percent by 2014.

Current-payment benefits to young husbands of retired workers are projected to remain at relatively low levels, never more than $120 thousand per quarter through 2014 (ranging from $64 thousand to $120 thousand).

Current-payment benefits to children of retired workers are projected to increase in all three categories, though the proportion for student children is far smaller than that for minor or disabled children, forming less than 4 percent of the total. Percentage increases projected over the next 10 years are: 59 percent for minor children, 53 percent for disabled children, and 44 percent for students.

Current-payment benefits to all three categories of children of deceased workers are much larger than the corresponding benefits for children of retired workers, and are projected to remain so. Here again, the proportion for students is far smaller, forming less than 4 percent of the total. Percentage increases projected over the next 10 years are: 55 percent for disabled children, 30 percent for minor children, and 40 percent for students.

Current-payment benefits to aged widows make up the largest category of survivor benefits, or about 73 percent of the total in 2004 (surviving children form the next largest, or about 22 percent). Aged widow benefits are projected to increase 32 percent over the next 10 years, from about $47.3 billion in 2004 to about $62.7 billion in 2014. Current-payment benefits to disabled widows show a projected 42 percent increase over the same period; those to mothers (young widows) show a 25 percent increase. Among aged widow(er)s, disabled widow(er)s, and mothers/fathers, the male proportion of the current-payment benefits are all quite small, specifically (in 2004) about 1 percent for aged widowers, 5 to 6 percent for disabled widowers, and 2 to 3 percent for fathers. Nevertheless, benefits in these male categories show sharp increases over the projection period, projected to double in 10 years for aged and disabled widowers, and grow about 47 percent for fathers.

Benefits to parents of deceased workers are projected to decrease only slightly, as the increase in average benefits partially offsets the decrease in the number of parent beneficiaries. Quarterly current-payment benefits to special age-72 beneficiaries have been less than $50 thousand since the second quarter of 2001, and they are expected to stop by the end of 2005.

3. Benefits In Non-Current-Payment Status

One component of benefits in non-current-payment status to OASI beneficiaries consists of the retroactive benefits that are paid as a result of benefit recomputations accounting for additional earnings after initial retirement. This component will be called AERO (Automatic Earnings Reappraisal Operation), after the name of the operation that performs most of the recomputations. This operation is normally performed twice a year. All other non-current-payment benefits to OASI beneficiaries are collectively termed "non-AERO" retroactive benefits; AERO and non-AERO retroactive benefits are analyzed and projected separately. Non-AERO retroactive benefits are projected for retired workers and family members as the product of:

The benefit increase factor allows for the fact that retroactive benefits for some months are at a lower rate than the rate at time of first receipt, due to intervening benefit increases. Table III.E24 shows the annual projection of non-current-payment benefits other than AERO to retired workers and family members.

The factor for all other components ranged between 0.1 and 0.9 from 1984 through 1996. In 1997 and 1998, the factor exceeded 1.0 due to a special effort that was made to find aged widows who were due higher benefits. Some of these widows were fully insured and therefore were able to receive a retired worker benefit. In 1999, the factor for all other components came back down to 1.0. The elimination of the retirement earnings test for those over NRA caused this factor to increase sharply to 1.9 in 2000, but for the next 4 years it dropped back to a level between 0.7 and 0.8. It is projected to return to a value close to 1.0 early in the projection period.

Non-current-payment benefits other than AERO are projected for survivors of deceased workers in a manner parallel to that for retired workers and dependents. Table III.E26 shows the annual projection of these non-AERO benefits for survivors. Note that the "factor for all other components" for survivors has been more stable, over the period 1997-2004, than the factor for retirees and dependents, remaining in the range from 2.0 to 2.4. It is projected to remain in this range over the projection years.

AERO benefits are projected as a total for all OASI beneficiaries and then, based on historical trends, are split into amounts for:

AERO and non-AERO benefits are then added for each of the two groups to produce total non-current-payment benefits. Table III.E25 shows AERO, non-AERO, and total non-current-payment benefits for retired workers and dependents; table III.E27 shows a similar breakdown of benefits for survivors.

AERO benefits to retired workers and dependents declined from 1983 to 1988, and remained relatively stable over the next 10 years. The decline was caused primarily by:

There was a significant increase in 2000, due to an extra run of AERO, and large increases over the years 2001-04 are attributable to the 2000 repeal of the retirement earnings test for those over normal retirement age. AERO benefits for retirees and dependents are projected to increase from $553 million in 2004 to $1,447 million by 2014.

4. Lump-Sum Death Benefits

The number of lump-sum death benefit payments is estimated by applying mortality rates to the fully insured population (shown earlier), and then applying a factor for the percentage of insured deaths that result in a lump-sum death benefit. The total amount of lump-sum death benefits is estimated by multiplying the number of lump-sum deaths by the average benefit amount. Table III.E28 shows the number and amount of lump-sum death benefits.

The number of lump-sum deaths dropped by about half in 1982, when the law changed to restrict the types of lump-sum beneficiaries who are allowed. The number remained relatively steady at slightly over 800 thousand per year until 1993, when it increased for a few years, though remaining under 880 thousand. In 2004, there were 822 thousand lump-sum deaths. During the projection period, the number of lump-sum deaths is projected to remain very close to the current level, and the average amount likewise is projected to remain very close to its recent value.

5. Dual-Entitlement Benefits

Current-payment benefits to retired workers include reduced secondary benefits, if any, for dually-entitled spouse, widow(er), or parent beneficiaries. Tables III.E29, III.E30, and III.E31 show the number, average amount, and total amount, respectively, of reduced secondary benefits.

Table III.E29 shows that the number of dual entitlements has been increasing steadily for female workers since 1975. The number of dual entitlements for male workers, forming only about 2 percent of the total, has been growing as well, but at an increasingly slower rate, over the same period. Throughout the projection period, nearly 0.8 percent of male retired workers and 41.0 percent of female retired workers are expected to be dually entitled. Most of the dually-entitled beneficiaries have a reduced widow(er) benefit. Widow(er)s currently account for about 58 percent of female dual entitlements and about 79 percent of male dual entitlements. The remainder of the dually-entitled beneficiaries consists almost entirely of aged spouses.

Table III.E30 shows the projection of the average reduced secondary benefit for dually-entitled workers. The average reduced amounts for widow(er)s and parents are greater than those for spouses, in part because the unreduced benefit is a larger percent of the PIA for those categories.

Table III.E31 shows the projection of the total amount of reduced secondary benefits. The percentage of current-payment benefits to retired workers that are actually reduced secondary benefits increased steadily from 3.1 percent in 1975 to 9.0 percent in 1997, and it has remained close to this level over the past 8 years. Over the projection period, it is expected to rise very slowly, reaching 9.7 by 2014.

6. Quarterly Benefit Payments

Projected quarterly non-current-payment benefits are derived from annual totals by applying an interpolation formula. Quarterly historical and projected current-payment benefits are adjusted for amounts paid to dually-entitled beneficiaries by subtracting the total reduced secondary benefit amounts from current-payment benefits to retired workers and adding the spouse, widow(er), and parent reduced secondary benefit amounts to the spouse, widow(er), and parent current-payment amounts. Table III.E32 shows quarterly current-payment benefits which have been adjusted for amounts paid to dually-entitled beneficiaries, non-current-payment benefits, and total benefits for total retired workers, total dependents of retired workers, total survivors, special age-72 beneficiaries, lump-sum death payments, and total OASI beneficiaries.

Total quarterly benefit payments from the OASI Trust Fund are projected to increase from $107.6 billion in the first quarter of 2005 to $186.7 billion in the last quarter of 2014.

Tables III.E33, III.E34 and III.E35 summarize OASDI adjusted current-payment, non-current-payment, and total benefit payments, respectively.

Total OASDI benefit payments are projected to increase from $128.3 billion in the first quarter of 2005 to $222.7 billion in the last quarter of 2014.

Figure 4 on page 230 further illustrates the numbers shown in table III.E35 and the relative proportions of benefit payments by type.

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