Short-Range Actuarial Projections |
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ACTUARIAL STUDY NO. 119
by Chris Motsiopoulos and Richard B. Tucker | |||||
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 Assumptions
Table V.A1 shows the principal low cost economic assumptions. The level of economic activity is assumed to be higher than the intermediate projection. Specifically, the annual percentage change in the total U.S. economy productivity declines at a slower pace than under the intermediate assumptions, reaching 1.9 percent in 2014. The annual percent increase in covered wages is lower than the intermediate set beginning in 2006, reaching a level of 3.4 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 1.6 percent by the end of the period.
Table V.A2 presents the low cost additional economic factors, which show a better employment picture than the intermediate assumptions. Specifically, the average annual change in real GDP declines from an estimated 4.4 percent in 2004 to 2.7 percent in 2014, while under the intermediate assumptions, it declines to 2.1 percent in the same period. The ultimate unemployment rate is a full percentage point lower.
Tables V.A3 shows the nominal interest rates for invested assets of the trust funds, which are expected to be slightly lower than those under the intermediate assumptions.
Automatically Adjusted Program Amounts
Tables V.A4 and V.A5 show the automatically adjusted program amounts. Compared to the intermediate projection, benefit increases are lower throughout the short-range period (by a full percentage point from 2008 and on), due to lower rates of inflation. Increases in the average wages used for Social Security indexing purposes are lower throughout the short-range period. 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 2006 is roughly the same as the increase in the average wage index for 2004—3.2 percent.
Demographic Assumptions
Table V.A6 shows low cost demographic assumptions. By 2014, the fertility rate of 2.10 is higher than the rate of 1.99 for the intermediate set. Mortality rates are higher under low cost assumptions, resulting in lower program costs. Life expectancy at age 65 is about 5 months shorter for males and 6 months shorter for females by 2014. Immigration is estimated to be higher by 400,000 annually under low cost assumptions.
Programmatic Assumptions
Table V.A7 shows low cost programmatic assumptions. Coverage rates are higher under low cost assumptions because of the lower unemployment rates. About 0.7 percent more of the population is working in covered employment by 2014. Insured rates are about the same as under 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.A8 and V.A9 summarize the number of beneficiaries and benefit payments based on low cost assumptions.
The total number of OASDI beneficiaries is nearly 1.2 million lower by the end of 2014, 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 $798 billion in 2014 for the combined OASI and DI Trust Funds, compared to $875 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.A10-V.A12 show the progress of the OASI, DI, and combined funds. Assets are projected to increase more rapidly under the low cost assumptions—roughly $4.2 trillion combined by the end of 2014, compared to $4.0 trillion based on intermediate assumptions.
Table V.A13 shows the status of the trust funds as measured by trust fund ratios. OASI and DI trust fund ratios reach 523 and 267 percent, respectively, by the beginning of 2014, compared to 468 and 162 percent under intermediate projections.
Table V.A14 shows annual income rates and cost rates for the trust funds. As expected, higher balances result under the low cost alternative—1.65 percent of taxable payroll by 2014 for the OASDI program, compared to 0.71 percent under intermediate projections.