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

IV. TRUST FUND INCOME AND OUTGO

Trust fund assets are projected at the end of each month by adding total income and subtracting total outgo from assets at the end of the previous month. The majority of total outgo is projected benefit payments, shown in the previous chapters. This section describes the projection methodology and results of OASI and DI Trust Funds income, and additional items of outgo, as well as the resulting progress of funds.

A. TRUST FUND INCOME

Income to the OASI and DI Trust Funds can be grouped into four main categories:

Payroll tax collections for 2004 amounted to $552.3 billion (84.0 percent of total OASDI income); revenue from taxation of benefits was $15.7 billion (2.4 percent); general fund revenue was $1.3 million (0.0002 percent); and interest income was $89.0 billion (13.5 percent). Figure 5 presents income of the combined OASI and DI Trust Funds for calendar year 2004.

1. FICA and SECA

Contributions are appropriated to the trust funds monthly, based on the estimated portion of payments made to the general fund of the Treasury under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA). Table IV.1 shows the tax rates specified by law. The employee and employer rates are applied to taxable wages, while the self-employed rates are applied to taxable self-employment earnings.

The employer deducts the employee tax at the time wages are paid, then remits the combined employee-employer taxes periodically to the IRS—reporting frequency depends on the size and type of employer. The self-employed must pay the estimated self-employment tax quarterly to the IRS. Any balance due is remitted with the Federal income tax return.

In 1984, a credit of 0.3 percent was allowed against employee FICA taxes, reducing the net OASDI employee tax rate to 5.4 percent. Similarly, various credits were allowed against SECA taxes during the period 1984-89. After 1989, the credit was replaced with special deduction provisions designed to treat the self-employed in much the same way as employees and employers for Social Security tax purposes.

The model estimates future monthly appropriations by applying present law tax rates to projected taxable earnings covered under FICA and SECA, subject to the contributions and benefit base. Such projected taxable earnings are provided by the Revenue Estimates and Economic Analysis Group, Office of the Chief Actuary.

2. State Deposits

The tax rates also apply under State agreements for coverage of State and local government employees. Prior to 1987, amounts received under State agreements had been counted as a separate category. In 1987 and later, these amounts are included with FICA receipts. "State deposits" received after 1987 are actually adjustments to amounts for prior years, and as such their future expected value is zero. Therefore, no state deposit amounts are projected.

3. Adjustments

In addition to current monthly appropriations, the model projects adjustments to prior monthly appropriations based on actual data received by the Department of the Treasury. For example, estimates of quarterly adjustments are made to account for reporting lags encountered in the communication of self-employment earnings and resulting SECA cash flows. Adjustments may be positive or negative, depending on how actual experience compares to the initial estimate.

4. Refunds

Wages are taxable only up to the contribution and benefit base for a particular year. Since each employer must withhold employee tax up to the wage base, an employee who works for two or more employers may not be liable for all the taxes withheld. Such an employee can claim the excess withholdings as a tax credit on the Federal tax return. Amounts are transferred annually from the trust funds to the general fund of the Treasury. Refunds are projected as a fraction of wages which are taxable under FICA and paid in excess of the wage base.

Tables IV.2 and IV.3 show historical and projected FICA and SECA appropriations, State deposits, adjustments, and refunds for OASI and DI Trust Funds, respectively.

5. Taxation of Benefits

During the period 1984-93, up to 50 percent of an OASI or DI benefit may have been subject to Federal income tax, with the proceeds credited to the appropriate fund. Beginning in 1994, up to 85 percent of OASDI benefits may be taxed if total income exceeds certain levels. Tax on the first 50 percent of benefits is allocated to the appropriate OASI or DI Trust Fund; tax on the fraction of benefits over 50 percent and up to 85 percent is transferred to the Medicare Hospital Insurance (HI) Trust Fund.

Estimated income taxes from the general fund of the Treasury are credited to the trust funds at various times throughout the year. The OASI and DI Trust Funds receive appropriations in advance, at the beginning of each calendar quarter. The HI Trust Fund receives appropriations on the 15th of each month of January, April, June, and September. No provision is made for reimbursement to the general fund for interest costs associated with the transfers. Subsequent adjustments are made based on the actual amounts as shown on annual tax records.

Table IV.4 shows the income from taxation of benefits that is credited to the OASI and DI Trust Funds. Amounts credited to the HI Trust Fund are not shown. The income from taxation of benefits is projected quarterly by applying estimated fractions of taxable benefits and average marginal tax rates to the already projected quarterly benefit payments. Estimates for the fraction of OASDI benefits taxable and the average marginal tax rates are prepared by the Office of Tax Analysis (OTA), and are based on personal income for a sample of recent tax returns. The fraction of OASDI benefits that are taxable is projected to increase steadily as an increasing percentage of taxpayers exceed the stipulated income levels. On the other hand, the average tax rate that may apply to OASDI benefits has been declining—the significant reduction in 1987 was a result of the Tax Reform Act of 1986 (Public Law 99-514).

Nonresident Aliens

A provision of the 1983 amendments called for a tax withholding on 50 percent of monthly OASDI benefits paid to nonresident aliens after December 31, 1983. In 1994, the amount of the benefits subject to this withholding was changed to 85 percent, effective with benefits paid after December 31, 1994. U.S. citizens and residents of the following countries are exempt—or partially exempt—from this tax: Canada, Egypt, Germany, India, Ireland, Israel, Italy, Japan, Romania, Switzerland, United Kingdom, and the United States. The proceeds of this taxation accrue only to the OASI and DI Trust Funds.

For purposes of actual monthly withholding, 85 percent of the monthly benefit is taxed at a rate of 30 percent. This means 25.5 percent of monthly nonresident alien OASDI benefits is withheld. The original 1983 amendments required that 50 percent of the monthly benefit be taxed at a rate of 30 percent, resulting in 15 percent withholding for 1994 and earlier.

Table IV.5 shows the amounts withheld from nonresident aliens, which declined slightly through 1987 as the effect of the provision was clarified and additional countries won full or partial exemption from the provision. The amount withheld increased in 1995 due to the increase in the portion of OASDI benefits subject to taxation; and again in 1996 due to a change in the totalization agreement with Canada. In 1998, the amount withheld dropped significantly due to the effectuation of various agreements with the countries listed above.

Projected amounts withheld from nonresident aliens are calculated quarterly by applying an estimated fraction of benefits payable to nonresident aliens to total quarterly benefits, and then applying 25.5 percent withholding rate to the resulting benefits. The fraction of benefits payable to nonresident aliens is assumed to remain the same as in the last historical year throughout the projection period.

6. Military Service Payments

Work as a member of the U.S. Armed Forces has been covered by Social Security since January 1, 1957. Under certain conditions, the worker may receive "wage credits" in addition to basic pay, for active duty or training, for years prior to 2002. These credits are subject to the contribution and benefit base, and are granted in recognition that compensation in the armed forces consists of basic pay augmented by various allowances. The deemed amounts are noncontributory and may be granted as follows:

The Department of Defense Appropriations Act, FY 2002, Public Law 107-117, enacted on January 10, 2002, contains a provision to eliminate deemed wage credits for members of the uniformed armed services for all years after calendar year 2001. Social Security benefit computations will continue to include deemed wage credits earned prior to 2002.

Under certain conditions, noncontributory wage credits of $160 may also be granted for each month in which a veteran had active service during the World War II period (September 16, 1940-July 24, 1947), or post-World War II period (July 25, 1947-December 31, 1956).

Annual payments are made from the general fund of the Treasury to the OASI and DI Trust Funds representing employer and employee contributions that would have been paid on deemed wage credits if such credits were counted as covered wages. In 1983, a change in the financing basis for pre-1957 service resulted in a one-time transfer for past credits. These additional amounts represent the then present value of additional past and future benefit payments and administrative costs, less the accumulated value of past reimbursements for the costs associated with such credits. Adjustments to the initial 1983 transfer were made in 1985, 1990, 1995, and 2000 to account for actual experience and revised assumptions related to future experience. The 2000 adjustment for pre-1957 service was $414 million payable to the OASI Trust Fund; and $836 million payable from the DI Trust Fund to the general fund. Due to budgetary complications, the OASI adjustment was paid in 2002. Additional adjustments are expected to be made in the fourth quarter of 2005, and every fifth year thereafter.

Public Law 108-203 provided that the trust funds be compensated for taxes that should have been received in 2000 and 2001, based on estimated deemed wage credits for military service prior to 2002, plus an adjustment for interest lost due to the delay in remitting the taxes. The total amount of the compensation was specified in the legislation to be $625.0 million to the OASI Trust Fund and $105.4 to the DI Trust Fund. The said compensation was paid in 2004.

Table IV.6 shows the payments due to credits for post-1956 and pre-1957 military service, for both trust funds. Since the adjustments paid account for both past and future benefit payments and administrative costs, future adjustments are expected to be zero.

7. Benefits to Uninsured Persons

Some older persons had little or no chance to become fully insured for Social Security benefits during their working lifetime. Special payments from the OASI Trust Fund may be granted to uninsured persons who either: (i) attained age 72 before 1968, or (ii) attained age 72 in 1968 or later and had three quarters of coverage for each year after 1966 and before the year of attainment of age 72. Costs associated with providing such benefits to persons having fewer than three quarters of coverage (QCs) are reimbursable from the general fund of the Treasury—as provided by section 228 of the Social Security Act. So payments to those satisfying the first condition are recoverable, provided they have fewer than three QCs; payments to those satisfying the second condition are not recoverable, as they will necessarily have three or more QCs.

Reimbursements are made on a fiscal year basis, accumulated with interest to the time of reimbursement—about 15 months after the end of the fiscal year. Table IV.7 shows the reimbursements to the OASI Trust Fund for payments to uninsured persons, all of whom attained age 72 before 1968 and have fewer than three QCs. Future reimbursements are estimated by applying factors to projected benefit payments and are expected to be less than $50,000 per year.

8. Interest

Net investment income as a percent of total income to the OASI and DI Trust Funds has risen from less than 2.0 percent in 1980, to 13.5 percent in 2004. Interest paid to the trust funds is made up of:

Investment policy for the assets of the OASI and DI Trust Funds is set by law, with the Secretary of the Treasury acting as Managing Trustee. Income to the trust funds from payroll taxes or other sources is invested when received—essentially on a daily basis. Any income not immediately needed to pay benefits or administrative expenses may be invested in any interest-bearing security issued or guaranteed by the Federal Government. Marketable securities include Treasury bonds, notes, and bills; non-marketable securities called special issues include short-term certificates of indebtedness (CIs) and longer-term bonds issuable only to the trust funds¹. As of the end of 2004, all but $30.25 million in OASDI assets are invested in special issues.

Special Issues

Interest rates on special issues are determined each month by the Department of the Treasury as the average yield on all marketable government obligations not due or callable until after 4 years from the date of determination. All new special issue investments for a particular month receive the market yield as calculated at the end of the previous month. Note that beginning with new issues for January 1999, the Treasury determination for monthly rates changed; namely, callable securities trading above par are valued on a yield-to-call basis. Prior to this time, Treasury procedure was to use the yield-to-maturity on all securities, regardless of call features.

Most of the interest income from investments is received semiannually on June 30 and December 31. Interest is also received whenever investments are redeemed prior to maturity to pay regular monthly benefits or other expenses. At these times, interest is credited from the time the issue is purchased—or the last interest payment date, if later—to the time of redemption.

Special issues have specific maturity dates, but are redeemable at any time at par—their purchase price. Since both principal and interest are guaranteed, trust fund assets bear no risk with respect to changes in interest rates. The daily receipts of the trust funds are invested immediately in CIs which mature the following June 30, and so carry a term-to-maturity of less than one year. Each June 30, any outstanding CIs are rolled over into the longer-term bonds with maturity dates of June 30, ranging from 1 to 15 years in the future.

Marketable Securities

The trust funds are also permitted to invest in marketable securities such as publicly traded Treasury bonds, or obligations of Federally sponsored organizations such as the Government National Mortgage Association ("Ginnie Mae") and the Federal National Mortgage Association ("Fannie Mae"). These issues are bought and sold on the open market, so it is possible for the trust funds to realize a capital gain or loss upon the sale of such securities prior to maturity. Marketable securities are normally held to maturity, and have not been purchased since 1980.

Special accounting rules apply to securities bought at a premium—at a price greater than par value; or at a discount—at a price less than par value. A bond purchased at a premium would produce a capital loss at maturity since only the par amount is returned to the bondholder. This loss is reflected in the security's yield. After each coupon payment, the bond's price will be gradually adjusted downward as the premium is returned to the bondholder over time. As a result, the coupon is not pure interest, but a combination of interest and return of principal. This is called amortization of premium.

Similarly, a bond purchased at a discount would produce a capital gain at maturity. In this case, the bond's price is gradually adjusted upward and the periodic interest payment consists of the coupon plus a portion of the discount as the gain is accumulated over time. This is called accumulation of discount. Amortization of premium or discount appears as a separate item on the trust funds' balance sheet.

As of December 2004, the DI Trust Fund has $30.25 million in assets invested in marketable securities, while no marketables are held by the OASI Trust Fund. The model assumes that the above marketable security will be called in February 2005, and no future purchases of such securities will occur; therefore, the amount of future premium or discount is negligible given the trust funds current holdings.

Interfund Borrowing

Section 201(l) of the Social Security Act authorized borrowing among the OASI, DI, and HI Trust Funds "when necessary" for financing the benefit payments. The timing and amount of any loans are left to the discretion of the Managing Trustee, although authority to make new loans expired at the end of 1987. Loans were not allowed to be made from a trust fund if its current assets represented less than 10 percent of the current annual rate of expenditures. The law also specified that interest on borrowed amounts would be paid monthly at a rate equivalent to what the loaned assets would have earned as trust fund investments. A criteria for repaying outstanding amounts was also provided.

Late in 1982, $17.5 billion was lent to the OASI Trust Fund under these provisions—$12.4 billion came from the HI Trust Fund, and $5.1 billion came from the DI Trust Fund. Under the automatic-repayment provisions of the law, all amounts were repaid by the end of April 1986. The following table summarizes the various interfund borrowing transactions (in millions of dollars):

There are currently no outstanding loan amounts, and the model predicts no future interfund borrowing activity.

Advance Tax Transfers

The funding crisis in the early 1980s resulted in a provision of the 1983 Amendments that changed the mechanism of transferring estimated monthly tax receipts to the trust funds by having the entire amount deposited on the first day of the month. Such advance tax transfers ensured that more funds would be available to pay benefits early in the month, thus minimizing the redemption of bonds. The legislation also provided that the trust funds would pay interest semiannually to the general fund of the Treasury on what amounted to monthly short-term loans. Congress amended the advance tax transfer provisions in November 1990 so that transfers would only be made to a fund if its assets were otherwise insufficient to pay benefits.

Advance tax transfers were made from May 1983 through November 1990. Based on the 2005 Trustees Report, such transfers are not needed within the short-range projection period for either of the OASI or DI Trust Funds, under the low cost and the intermediate assumptions, but they may be needed at the end of 2014 under the high cost assumptions.

Miscellaneous

Miscellaneous interest items include administrative expenses relating to interfund transfers, and interest relating to military service adjustments or trust fund activity precipitated by legislative changes.

Table IV.8 shows the various components of net investment income to the OASI and DI Trust Funds. Investment interest is projected by simulating the activity of the trust funds over time. Bond holdings are simulated as portfolios of bonds grouped by interest rate and maturity date. As of December 2004, there were 112 such bonds for the OASI Trust Fund, totaling $1,420 billion, and 98 for the DI Trust Fund, totaling $178 billion. For simplicity, the model assumes investment transactions occur on the 1st, 3rd, 15th, and the last day of each month². Bonds may be sold, and CIs may be bought or sold on these dates as income is received and benefit payments are made, depending on the needs of the trust funds. Interest accrues from the time of purchase, and is credited on June 30th and December 31st. Interest credited in December is reinvested in CIs at the December rate.

Interest credited in June along with principal from maturing CIs or other bonds are used to buy new bonds at the June rate. The bonds carry maturities of 1 to 15 years to achieve a uniform distribution over all maturities. For instance, in June 2005, the OASI Trust fund is projected to buy $249 billion in new bonds, with maturities from June 2006 to June 2020.

When required to pay program costs, special issues are redeemed in maturity-date order, beginning with the earliest maturity date. Special issues with the same maturity date are redeemed in interest-rate order, beginning with the lowest rate. Special issues with both the same maturity date and interest rate will be redeemed on a first-in-first-out (FIFO) basis.

B. TRUST FUND OUTGO

Outgo from the OASI and DI Trust Funds can be grouped into three main categories:

Benefit payments for 2004 amounted to $493.3 billion—roughly 98.3 percent of total OASDI outgo; Railroad payments were $3.8 billion—0.8 percent; and administrative expenses were $4.5 billion—0.9 percent. Figure 6 presents outgo of the combined OASI and DI Trust Funds for calendar year 2004.

1. Unnegotiated Checks

The trust funds are debited the amount of a benefit check around the time the check is issued. Before Public Law 100-86, the trust funds were reimbursed the principal amount of the check with interest, if the check had not been cashed within 6 months—as set forth under Section 201 of the Social Security Act. If a check was cashed after 6 months, the trust funds were re-debited.

Public Law 100-86 revised government-wide procedures for handling uncashed checks. Treasury checks issued before October 1989 were negotiable until September 30, 1990; then the checks were cancelled and the trust funds were reimbursed. Treasury checks issued in October 1989 and later are negotiable for 12 months:

Table IV.9 shows reimbursements to the OASI and DI Trust Funds for unnegotiated checks. These amounts reflect checks issued before October 1989 and uncashed after 6 months, or checks issued in October 1989 and later and uncashed after 12 months. The reimbursements for 1983 include estimated amounts for all uncashed checks issued before 1983. The reimbursements for 1985 include an adjustment to the 1983 estimates. Figures for both years also include a substantial amount of interest on the checks issued before 1983—interest in all other years is much less due to the shorter period of time between check issuance and reimbursement. The reimbursement for 1990 is relatively low due to the transition in check-handling procedures.

The percentage of total benefits reimbursed to the trust funds as unnegotiated checks is assumed to remain the same as in the last historical year throughout the projection period.

2. Vocational Rehabilitation

Section 222(d) of the Social Security Act provides for payments from the OASI and DI Trust Funds for the cost of vocational rehabilitation (VR) services provided to disabled beneficiaries. The VR program is a public program administered by a State agency to help persons with physical or mental disabilities to become gainfully employed. Prior to the 1981 Amendments, costs associated with disabled workers and disabled children of disabled workers were paid from the DI Trust Fund; costs for disabled children of retired and deceased workers, and for disabled widow(er)s, were paid from the OASI Trust Fund. From 1984 to 2002, all vocational rehabilitation costs were paid from the DI Trust Fund, regardless of the type of beneficiary.

The 1981 Amendments changed the method of payment to State agencies for rehabilitative services. Public Law 97-35 authorized the reimbursement of funds to agencies only for the "successful rehabilitation" of beneficiaries. It requires a determination of the effectiveness of services toward the individual's performance of substantial gainful activity.

The Ticket to Work and Work Incentives Improvement Act of 1999 (P.L. 106-170) created a program to better help disabled individuals return to work. Under the program, beneficiaries may obtain VR, employment, and other support services from an employment network of their choice. In turn, VR providers receive a percentage of the benefit payment savings to the trust fund for successful rehabilitation. Providers may also be eligible for other incentive payments for achieving work-effort milestones. As a result of these provisions, total VR expenses are projected to increase from $51.7 million in 2004 (0.07 percent of total benefits to disabled beneficiaries) to $565.2 million in 2014 (0.40 percent of total benefits to disabled beneficiaries). Projected VR expenses on a fiscal year basis are provided by the Office of Budget. Table IV.10 shows VR expenses paid from the OASI and DI Trust Funds.

3. Railroad Retirement Interchange

Section 7(c)(2) of the Railroad Retirement Act of 1974 provides for a financial interchange between the Railroad Retirement and Social Security programs. The interchange is intended to place the OASDI—and HI—Trust Funds in the same condition they would have been had railroad employment been covered by Social Security. Each year estimates are made of the additional benefits and administrative expenses that would have been paid from the trust funds, as well as the additional payroll taxes and income taxes that would have been received, with allowances for interest. Transfers between the OASDI Trust Funds and the Railroad Retirement program's Social Security Equivalent Benefit Account occur every June 1st or soon thereafter, based on experience in the prior fiscal year. The principal amount for a particular year calculated as of September 30 includes:

The principal amount is accumulated with interest and transferred the following June 1. Table IV.11 summarizes the amounts transferred from the OASI and DI Trust Funds. The determination of the OASI principal amount of $3,513.0 million for September 30, 2003 (paid June 2, 2004) is as follows:

Note that the interest amount shown in the table includes interest on the prior year's principal amount. For example, the amount of $229.9 million for 2003 includes $102.4 million for interest on the excess of additional benefits over taxes for the September 30, 2003 determination; and $127.5 million for interest on the principal amount of $3,452.5 million for the June 2, 2003 transfer.

Annual projected railroad interchange amounts are provided by the Railroad Retirement Board. These projections are then adjusted to reflect updated payroll taxes and interest rates. Transfers from the OASI and DI Trust Funds are projected to grow only slightly as a result of growth in Social Security benefit payments to retired railroad workers. Little growth is expected in payroll taxes from railroad workers.

4. Administrative Expenses

Expenses for administering the OASI and DI programs are allocated and charged directly to each trust fund. Table IV.12 shows the ratio of net administrative expenses to benefit payments, as well as nominal dollar amounts.

Estimates for the first several years of the projection period are provided by the Office of Budget. Afterward, nominal amounts are projected by a regression model, taking account of historical experience and the expected growth in average wages. Annual expenses for the combined trust funds are expected to be less than 1 percent of total outgo throughout the projection period.

C. TRUST FUND PROGRESS

Tables IV.13-IV.15 present estimates of the operations of the OASI, DI, and combined Trust Funds, respectively, based on the 2005 Trustees Report intermediate assumptions. Trust fund assets are calculated at the end of each month by adding total income and subtracting total outgo from assets at the end of the previous month. Quarterly projections are shown for the short-range period 2005-14. Note that the assets of the combined OASI and DI Trust Funds exceeded $1 trillion for the first time in the third quarter of 2000, and are projected to grow to roughly $4.0 trillion by the end of the projection period. Figure 7 presents assets of the combined OASI and DI Trust Funds at the end of calendar year 2004.

Measures of the short-range financial status of the trust funds focus on the adequacy of reserves to pay benefits in the near term. The trust fund ratio and short-range test of adequacy are the primary evaluation methods, as described in section I. Table IV.16 shows the OASI, DI, and combined trust fund ratios, with a graphical representation presented in figure 8.

Although income and cost rate analysis is primarily a long-range evaluation method (also described in section I), table IV.17 presents these rates for the short-range period. The income rate is projected to exceed the cost rate in every year of the projection period, for the combined OASI and DI Trust Funds. However, deficits in the latter part of the long-range period totally offset the surpluses in the short-range period. This leads to combined trust fund exhaustion in 2041 under intermediate assumptions, and 2030 under high cost assumptions.

The analysis of trust fund progress is a continuous process. Each year, the short-range staff examines the changes in economic, demographic, and programmatic assumptions, and the corresponding changes in estimates. The following presents a summary of the differences between projections found in the 2005 Trustees Report—on which this study is based—and the 2004 Trustees Report made one year earlier. The comparisons are based on the intermediate set of assumptions, and are presented by trust fund.

1. OASI Trust Fund

It is estimated that the assets of the OASI Trust Fund will increase substantially throughout the projection period. The OASI trust fund ratio increases from 341 percent at the beginning of 2005 to 468 percent by the beginning of 2014. This compares with the 2004 Trustees Report estimate of 498 percent for the same point in time³.

As indicated in the table, income to the OASI Trust Fund over the period 2005-14 is estimated to be $60.9 billion lower under the 2005 report, as compared to the 2004 report. Analyzing the components of income separately, net contributions are expected to be higher by $9.7 billion, as a result of higher projected taxable payrolls for the 2008-14 period. Higher payroll are mainly due to higher projected covered wages. Higher wages also result in larger Social Security wage bases and thus higher contributions.

Income from taxation of benefits is estimated to be lower by $2.2 billion, as a result of slightly lower annual fractions of benefits that are taxable, combined with slightly lower annual marginal tax rates.

Finally, the OASI Trust Fund is expected to earn $68.4 billion less in interest, as compared with the 2004 report. This is due to lower year-over-year balances combined with lower nominal interest rates for the 2005-11 period.

For the 2005 report, it is estimated that outgo from the OASI Trust Fund over the period 2005-14 will be $107.0 billion higher than what was estimated for the 2004 report. Most of the difference is due to a net increase in benefit payments, which are projected to be $103.5 billion higher. Average benefit amounts for all beneficiaries are projected to be higher mainly as the result of much higher cost-of-living adjustments for the 2004-07 period. Higher nominal wage growth also contributes to higher average benefit amounts. In addition, projected total benefit payments are higher due to more retired workers, partially offset by fewer dependent and survivor beneficiaries. Finally, we project slightly higher administrative expenses and Railroad Retirement Board transfers.

As previously stated, the intermediate estimate from the 2005 report for the OASI trust fund ratio at the beginning of 2014 is 30 percentage points lower than the intermediate estimate from the 2004 report. This is due to lower income combined with higher outgo over the period 2005-14, as indicated.

2. DI Trust Fund

Under intermediate assumptions, it is estimated that DI assets will increase throughout the period, but at a noticeably slower rate than OASI. The DI trust fund ratio decreases from 215 percent at the beginning of 2005 to 162 percent by 2014. This compares with estimates from the 2004 Trustees Report of a peak of 226 percent in 2007 declining to 188 percent by 2014.

As indicated in the table, income to the DI Trust Fund over the period 2005-14 is estimated to be $12.2 billion lower under the 2005 report, as compared with the 2004 report. Analyzing the components of income separately, we project net contributions to be $1.6 billion higher for the same reasons given for the OASI Trust Fund. DI income from taxation of benefits is estimated to be slightly lower, while the DI Trust Fund is expected to earn $13.0 billion less in interest. The decrease in interest is due to lower year-over-year balances combined with lower nominal interest rates for the 2005-11 period.

For the 2005 report, it is estimated that outgo from the DI Trust Fund over the period 2005-14 will be $23.1 billion higher than what was estimated for the 2004 report. Benefit payments are projected to be $21.9 billion higher as the result of higher projected awards to workers and their dependents, combined with lower terminations due to death. Higher award estimates follow from disability trends over the last 3-4 years and the continuation of the special administrative action (see Awards and Incidence Rates in section III.A), whereas fewer deaths are consistent with overall mortality improvements among the disabled. Average monthly benefit amounts are also higher for the same reasons given for the OASI Trust Fund. Administrative expenses and Railroad Retirement Board transfers are expected to be only slightly higher.

As previously stated, the intermediate estimate from the 2005 report for the DI trust fund ratio at the beginning of 2014 is 26 percentage points lower than the intermediate estimate from the 2004 report. This is due to the estimated decrease in income combined with higher outgo over the period 2005-14.

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Section footnotes--

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¹For a complete description of investment procedures, refer to Actuarial Note No. 142: Social Security Trust Fund Investment Policies and Practices (Jeff Kunkel, January 1999).

²In practice, trust fund transactions occur whenever funds become available on almost every workday.

³For a detailed summary of these prior estimates, refer to 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (March 23, 2004).

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