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

B. HIGH COST ASSUMPTIONS

Economic Assumptions

Table V.B1 shows the principal high cost economic assumptions. The level of economic activity is assumed to be higher than the intermediate projection. A recession is assumed to begin in the second quarter of 2005 and continues for three quarters, with recovery in the first quarter of 2006. A second recession is assumed to occur beginning in the first quarter of 2008 and continues for four quarters. This is followed by modest economic growth through the end of the short-range period. The ultimate annual percentage change in the total U.S. economy productivity reaches 1.3 percent in 2014. The annual percent increase in covered wages is higher than the intermediate set, with the exception of the recession years, reaching a level of 4.3 percent by the end of the short-range period. The ultimate level of CPI is a full percentage point higher under high cost resulting in a real-wage differential of 0.5 percent by the end of the period.

Table V.B2 presents the high cost additional economic factors, which show a worse employment picture than the intermediate assumptions. Specifically, the average annual change in real GDP declines from an estimated 4.4 percent in 2004 to 1.6 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 higher.

Tables V.B3 shows the nominal interest rates for invested assets of the trust funds, which are expected to be slightly higher than those under the intermediate assumptions.

Automatically Adjusted Program Amounts

Tables V.B4 and V.B5 show the automatically adjusted program amounts. Compared to the intermediate projection, benefit increases are considerably higher throughout the short-range period, due to higher rates of inflation. Increases in the average wages used for Social Security indexing purposes are higher 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 2014 is roughly the same as the increase in the average wage index for 2012—4.6 percent.

Demographic Assumptions

Table V.B6 shows high cost demographic assumptions. By 2014, the fertility rate of 1.88 is lower than the rate of 1.99 for the intermediate set. Mortality rates are lower under high cost assumptions, resulting in higher program costs. Life expectancy at age 65 is about 6 months longer for males and 5 months longer for females by 2014. Immigration is estimated to be lower by 277,500 annually under high cost assumptions.

Programmatic Assumptions

Table V.B7 shows high cost programmatic assumptions. Coverage rates are lower under high cost assumptions because of the higher unemployment rates. About 0.8 percent less of the population is working in covered employment by 2014. Insured rates are about the same as in the intermediate set. Disability incidence rates are higher and termination rates are lower.

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.B8 and V.B9 summarize the number of beneficiaries and benefit payments based on high cost assumptions.

The total number of OASDI beneficiaries is nearly 1.8 million higher by the end of 2014, compared to the intermediate projection. The estimated number of retired workers is more because of lower assumed mortality rates. The number of disabled workers is more because of higher incidence rates and lower termination rates under high cost assumptions.

Higher benefit amounts are also predicted under high cost assumptions, due to higher inflation and wage growth. More beneficiaries combined with higher benefits result in higher total benefit payments—roughly $1,005 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.B10-V.B12 show the progress of the OASI, DI, and combined funds. Assets are projected to increase less rapidly under the high cost assumptions—roughly $3.5 trillion combined by the end of 2014, compared to $4.0 trillion based on intermediate assumptions.

Table V.B13 shows the status of the trust funds as measured by trust fund ratios. OASI and DI trust fund ratios reach 392 and 22 percent, respectively, by the beginning of 2014, compared to 468 and 162 percent under intermediate projections.

Table V.B14 shows annual income rates and cost rates for the trust funds. As expected, lower balances result under the high cost alternative; -0.55 percent of taxable payroll by 2014 for the OASDI program, compared to 0.71 percent under intermediate projections.

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