Three types of financial measures are useful in assessing the actuarial status of the Social Security trust funds under the financing approach specified in current law: (1) annual cash-flow measures, including income and cost rates, and balances; (2)
trust fund ratios; and (3) summary measures like
actuarial balances and unfunded obligations. The first long-range estimates presented are the series of projected
annual balances (or net cash flow), which are the differences between the projected annual income rates and annual cost rates (expressed as percentages of the taxable payroll). In assessing the financial condition of the program, particular attention should be paid to the level and trend of the annual balances at the end of the long-range period.
The next measure discussed is the pattern of projected trust fund ratios. The trust fund ratio represents the proportion of a year’s projected cost that could be paid with the funds available at the beginning of the year. Particular attention should be paid to the level and year of maximum trust fund ratio, to the
year of exhaustion of the funds, and to the stability of the trust fund ratio in cases where the ratio remains positive at the end of the long-range period. When a program has positive trust fund ratios throughout the 75-year projection period and these ratios are stable or rising at the end of the period, the program financing is said to achieve sustainable
solvency.
The final measures discussed in this section summarize the total income and cost over
valuation periods that extend through 75 years and to the infinite horizon. These measures indicate whether projected income will be sufficient for the period as a whole. The first such measure, actuarial balance, indicates the size of any surplus or shortfall as a percentage of the taxable payroll over the period. The second, open group unfunded obligation, indicates the size of any shortfall in present-value dollars. This section also includes a comparison of covered workers to beneficiaries, a generational decomposition of the infinite horizon unfunded obligation, the test of long-range close actuarial balance, and the reasons for change in the actuarial balance from the last report.
If the 75-year actuarial balance is zero (or positive), then the trust fund ratio at the end of the period will be at 100 percent (or greater), and financing for the program is considered to be sufficient for the 75-year period as a whole. Financial adequacy, or solvency, for each year is determined by whether the trust fund asset level is positive throughout the year. Whether or not financial adequacy is stable in the sense that it is likely to continue for subsequent 75-year periods is also important to the actuarial status of the program. One indication of this stability is achieving sustainable solvency, which requires that trust fund ratios be positive throughout the period and be at a constant or rising level for the last several years of the long-range period. When sustainable solvency is achieved, it is likely that subsequent Trustees Reports will also show projections of financial adequacy (assuming no changes in demographic and economic assumptions or the law). The actuarial balance and the open group unfunded obligation over the infinite horizon provide additional measures of the financial status of the program for the very long range.
Basic to the consideration of the long-range actuarial status of the trust funds are the concepts of income rate and cost rate, each of which is expressed as a percentage of taxable payroll. Other measures of the cash flow of the program are shown in Appendix
F. The annual income rate is the sum of the income from payroll taxes and the income from
taxation of benefits, expressed as a percentage of OASDI taxable payroll for the year. The OASDI
taxable payroll consists of the total earnings that are subject to OASDI taxes, with some relatively small adjustments.
1
The annual cost rate is the ratio of the cost of the program to the taxable payroll for the year. The cost is defined to include scheduled benefit payments,
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. For any year, the income rate minus the cost rate is referred to as the balance for the year.
2
Table IV.B1 presents a comparison of the estimated annual income rates and cost rates by trust fund and alternative. Detailed long-range projections of trust fund operations, in current dollar amounts, are shown in table
VI.F8.
The projections for OASI under the intermediate assumptions show the income rate generally rising from about 11 percent of taxable payroll in recent years to 11.45 percent for 2084, due to the gradually increasing effect of the taxation of benefits. The projected income from the taxation of benefits, expressed as a percentage of taxable payroll, is expected to increase for two reasons. First, benefits are rising faster than payroll. Second, the benefit-taxation threshold amounts are not indexed, so that an increasing share of benefits will be subject to tax. The pattern of the cost rate is much different. The cost rate, which increased substantially in 2009 due to the effects of the recent economic
recession, remains fairly stable through 2015 as the economic recovery through this period roughly offsets the effects of the aging population. From about 2015 to 2035, the cost rate rises rapidly because the retirement of the
baby-boom generation will increase the number of beneficiaries much faster than subsequent relatively low-birth-rate generations will increase the labor force. From 2035 to 2050, the cost rate declines somewhat as the baby-boom generation ages, causing an increase in the average age of beneficiaries. Benefits increase annually with price inflation rather than wage inflation, so as beneficiaries increase in age, their benefit amounts drop relative to current average taxable earnings. Thereafter, the cost rate rises slowly because of the projected reductions in death rates, reaching 15.17 percent of taxable payroll for 2084.
Projected income rates under the low-cost and high-cost sets of assumptions are very similar to those projected for the intermediate assumptions because they are largely a reflection of the payroll tax rates specified in the law, with the gradual change from taxation of benefits noted above. In contrast, OASI cost rates for the low-cost and high-cost assumptions differ significantly from those projected for the intermediate assumptions. For the low-cost assumptions, the OASI cost rate decreases from 2010 through 2013, then rises until it peaks in 2033 at 12.73 percent of payroll. The cost rate then generally declines gradually, reaching 10.79 percent of payroll for 2084, at which point the income rate reaches 11.19 percent. For the high-cost assumptions, the OASI cost rate rises from 2012 through the end of the 75-year period. It rises at a relatively fast pace between 2012 and 2035 because of the aging of the baby-boom generation. Subsequently, the projected cost rate continues rising and reaches 22.18 percent of payroll for 2084, at which point the income rate reaches 11.85 percent.
The pattern of the projected OASI annual balance is important in the analysis of the financial condition of the program. Under the intermediate assumptions, the annual balance is negative in 2010, positive from 2011 through 2017, and then negative thereafter. This annual deficit rises rapidly, reaching 3.23 percent of taxable payroll by 2035, and generally rises thereafter (except for the period 2038-52), reaching 3.72 percent of taxable payroll for 2084.
Under the low-cost assumptions, the projected OASI annual balance is negative in 2010, positive from 2011 through 2020, and then becomes negative, with the annual deficit peaking at 1.46 percent of taxable payroll for 2033. Then the annual deficit declines until 2063, when the OASI annual balance becomes positive, reaching a surplus of 0.40 percent of payroll in 2084. Under the high-cost assumptions, in contrast, the OASI balance is projected to be negative in 2010, positive for only 3 years (through 2013), and to be negative thereafter, with a deficit of 1.69 percent for 2020, 6.06 percent for 2050, and 10.33 percent of payroll for 2084.
Notes:1. The income rate excludes interest income.
2. Some historical values are subject to change due to revisions of taxable payroll.
3. Totals do not necessarily equal the sums of rounded components.
Under the intermediate assumptions, the cost rate for DI, which rose substantially from 2.01 percent of taxable payroll in 2008 to 2.35 percent for 2010 due to the economic recession, generally declines to 2.10 percent for 2039, and increases gradually thereafter to 2.26 percent for 2084. The income rate increases only very slightly from 1.84 percent of taxable payroll for 2011 to 1.86 percent for 2084. The annual deficit is 0.52 percent in 2011 and reaches 0.40 percent for 2084.
Under the low-cost assumptions, the DI cost rate generally declines from 2.30 percent of payroll for 2010 to 1.52 percent for 2084. The annual balance is negative for the first 8 years and is positive throughout the remainder of the long-range period. For the high-cost assumptions, the DI cost rate rises much more, reaching 3.18 percent for 2084. The annual deficit is 0.65 percent in 2010 and reaches 1.29 percent for 2084.
Figure IV.B1 shows the patterns of the OASI and DI annual income rates and cost rates. The income rates shown here are only for alternative II in order to simplify the graphical presentation because, as shown in table
IV.B1, the variation in the income rates by alternative is very small. Income rates increase generally, but at a slow rate for each of the alternatives over the long-range period. Both increases in the income rate and variation among the alternatives result primarily from the relatively small component of income from taxation of benefits. Increases in income from taxation of benefits reflect increases in the total amount of benefits paid and the increasing share of individual benefits that will be subject to taxation because benefit taxation threshold amounts are not indexed.
The patterns of the annual balances for OASI and DI can be inferred from figure
IV.B1. For each alternative, the magnitude of each of the positive balances, as a percentage of taxable payroll, is represented by the distance between the appropriate cost-rate curve and the income-rate curve above it. The magnitude of each of the deficits is represented by the distance between the appropriate cost-rate curve and the income-rate curve below it.
In the future, the cost of OASI, DI, and the combined OASDI programs as a percentage of taxable payroll will not necessarily be within the range encompassed by alternatives I and III. Nonetheless, because alternatives I and III define a reasonably wide range of demographic and economic conditions, the resulting estimates delineate a reasonable range for consideration of potential future program costs.
Long-range OASDI cost and income are generally expressed as percentages of taxable payroll. Also of interest are estimates of income and cost expressed as shares of
gross domestic product (GDP), the value of goods and services produced during the year in the United States. Under alternative II, OASDI cost generally rises from about 4.8 percent of GDP currently to a peak of 6.1 percent in 2035. Then OASDI cost as a percent of GDP is projected to decline to a low of 5.9 percent in 2055 and increase slowly thereafter, reaching a level around 6.0 percent by 2084. Full estimates of income and cost are presented on this basis in Appendix
VI.
F.
2 beginning on page 185.
The estimated OASDI cost rate is expected to remain relatively stable for the next 5 years, as the economy recovers. Between 2015 and 2035, the cost rate is expected to rise rapidly primarily because the number of beneficiaries is expected to rise substantially more rapidly than the number of covered workers as the baby-boom generation retires. Because the baby-boom generation had low fertility rates relative to their parents, and those low fertility rates are expected to persist, the ratio of beneficiaries to workers is expected to rise rapidly and reach a permanently higher level after the baby-boom generation retires. After 2035, the ratio of beneficiaries to workers rises slowly due to increasing longevity. A comparison of the numbers of covered workers and beneficiaries is shown in table
IV.B2.
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Coveredworkers per OASDI beneficiary
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OASDI beneficiaries per 100 covered workers
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Notes: 1. The number of beneficiaries does not include uninsured individuals who receive benefits under Section 228 of the Social Security Act. Costs are reimbursed from the General Fund of the Treasury for most of these individuals.
2. Historical covered worker and beneficiary data are subject to revision.
3. Totals do not necessarily equal the sums of rounded components.
The impact of the demographic shifts under the three alternatives on the OASDI cost rates is clear if one considers the projected number of OASDI beneficiaries per 100
covered workers. As compared to the 2009 level of 33 beneficiaries per 100 covered workers, this ratio is estimated to rise to 46 by 2030 and 48 by 2035 under intermediate assumptions, as the growth in beneficiaries greatly exceeds the growth in workers. By 2085, this ratio rises further under the intermediate and high-cost assumptions, reaching 51 under the intermediate assumptions, and 69 under the high-cost assumptions. Under the low-cost assumptions, this ratio rises to 43 by 2035 and then declines to 38 by 2085. The significance of these numbers can be seen by comparing figure
IV.B1 to figure
IV.B2.
For each alternative, the shape of the curve in figure IV.B2, which shows beneficiaries per 100 covered workers, is strikingly similar to that of the corresponding cost-rate curve in figure
IV.B1, thereby emphasizing the extent to which the cost of the OASDI program as a percentage of taxable payroll is determined by the age distribution of the
population. Because the cost rate is basically the product of the number of beneficiaries and their average benefit, divided by the product of the number of covered workers and their average taxable earnings (and because average benefits rise at about the same rate as average earnings), it is to be expected that the pattern of the annual cost rates is similar to that of the annual ratios of beneficiaries to workers.
Table IV.B2 also shows the number of covered workers per OASDI beneficiary, which was about 3.0 in 2009. Under the low-cost assumptions, this ratio declines to 2.3 by 2035, and then generally rises throughout the remainder of the period, reaching 2.6 in 2085. Under the intermediate assumptions, this ratio declines generally throughout the long range period, reaching 2.1 in 2035 and 1.9 in 2085, while under the high-cost assumptions, this ratio decreases steadily to 1.4 in 2085.
Trust fund ratios are useful indicators of the adequacy of the financial resources of the Social Security program at any point in time. The trust fund ratio for a year is defined as the assets at the beginning of a year, which do not include advance tax transfers, expressed as a percentage of the cost during the year. When the trust fund ratio is positive for a year, but is not positive for the following year, the trust fund becomes exhausted during that year. Under present law, the OASI and DI Trust Funds do not have the authority to borrow other than in the form of advance tax transfers. Therefore, exhaustion of the assets in either fund during a year would mean there are no longer sufficient assets in the fund to pay the full amount of benefits scheduled for the year under present law.
The trust fund ratio serves an additional important purpose in assessing the actuarial status of the program. When the financing is adequate for the timely payment of full benefits throughout the long-range period, the stability of the trust fund ratio toward the end of the period indicates the likelihood that this projected adequacy will continue for subsequent Trustees Reports. If the trust fund ratio is positive throughout the period and is level (or increasing) at the end of the period, then projected adequacy for the long-range period is likely to continue for subsequent reports. Under these conditions, the program financing achieves sustainable solvency.
Table IV.B3 shows, by alternative, the estimated trust fund ratios (without regard to advance tax transfers that would be effected) for the separate and combined OASI and DI Trust Funds. Also shown in this table is the year in which a fund is estimated to become exhausted.
Based on the intermediate assumptions, the OASI trust fund ratio rises slightly from 399 percent at the beginning of 2010, reaching a peak of 403 percent at the beginning of 2012. Thereafter, the OASI trust fund ratio declines steadily, with the OASI Trust Fund becoming exhausted in 2040. The DI trust fund ratio has been declining steadily since 2003, and is estimated to continue to decline from 158 percent at the beginning of 2010 until the trust fund becomes exhausted in 2018.
The trust fund ratio for the combined OASI and DI Trust Funds under the intermediate assumptions declines from 355 percent for 2010, with the combined funds becoming exhausted in 2037. In last year’s report, the peak trust fund ratio for the combined funds was estimated to be 369 percent for 2012 and the year of exhaustion was estimated to be 2037.
Under the intermediate assumptions, OASDI cost is projected to exceed non-interest income in 2010 and 2011 due to increased benefits and reduced tax revenue as a result of the economic recession, and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the Trust Funds in earlier years. For 2012‑14, however, non-interest income will exceed cost as the economy recovers. OASDI cash flow, excluding interest, will then become negative in 2015 due to demographic trends. Throughout the period 2010 through 2024, trust fund income, including interest income, is more than is needed to cover costs, so combined trust fund assets will continue to grow. Beginning in 2025, combined trust fund assets will diminish until assets are exhausted in 2037.
Based on the low-cost assumptions, the trust fund ratio for the DI program increases from 2017 through the end of the long-range projection period, and reaches the extremely high level of 1,799 percent for 2085. At the end of the long-range period, the DI trust fund ratio is rising by 36 percentage points per year. For the OASI program, the trust fund ratio rises to a peak of 422 percent for 2018, drops to a low of 282 percent for 2048, and rises thereafter to a level of 457 percent for 2085. At the end of the period, the OASI trust fund ratio is rising by 8 percentage points per year. For the OASDI program, the trust fund ratio peaks at 376 percent for 2019, falls to 306 percent for 2041, and increases thereafter, reaching 622 percent for 2085. Because the trust fund ratios are large and increasing at the end of the long-range period, subsequent Trustees Reports are likely to contain projections of adequate long-range financing of the OASI, the DI, and the combined OASDI programs under the low-cost assumptions. Thus, under the low-cost assumptions, each program would achieve sustainable solvency.
In contrast, under the high-cost assumptions, the OASI trust fund ratio is estimated to peak at 400 percent for 2011, thereafter declining to fund exhaustion by the end of 2032. The DI trust fund ratio is estimated to decline from 156 percent for 2010 to fund exhaustion by the end of 2015. The combined OASI and DI trust fund ratio is estimated to decline from 354 percent for 2010 to fund exhaustion by the end of 2029.
Thus, because large, persistent annual deficits are projected under all but the low-cost assumptions, it is likely that income will eventually need to be increased, program costs will need to be reduced, or both, in order to prevent exhaustion of the trust funds.
Even under the high-cost assumptions, however, the combined OASI and DI funds on hand plus their estimated future income would be able to cover their combined cost for 19 years (until 2029). Under the intermediate assumptions, the combined starting funds plus estimated future income would be able to cover cost for 27 years (until 2037). The program would be able to cover cost for the foreseeable future under the more optimistic low-cost assumptions. In the 2009 report, the combined trust funds were projected to become exhausted in 2029 under the high-cost assumptions and in 2037 under the intermediate assumptions.
An illustration of the trust fund ratios for the separate OASI and DI Trust Funds is shown in figure
IV.B3 for each of the alternative sets of assumptions. A graph of the trust fund ratios for the combined trust funds is shown in figure
II.D6 on page 16.
Summarized income and cost rates, along with their components, are presented in table
IV.B4 for 25-year, 50-year, and 75-year valuation periods. Income rates reflect the scheduled payroll tax rates and the projected income from the taxation of scheduled benefits expressed as a percentage of taxable payroll. The current combined payroll tax rate of 12.4 percent is scheduled to remain unchanged in the future. In contrast, the projected income from taxation of benefits, expressed as a percentage of taxable payroll, is expected to generally increase throughout the long-range period for two reasons. First, benefits are rising faster than payroll. Second, the benefit-taxation threshold amounts are not indexed, so that an increasing share of beneficiaries will be paying tax on their benefits. Summarized income rates also include the starting trust fund balance. Summarized cost rates include the cost of reaching a target trust fund of 100 percent of annual cost at the end of the period in addition to the cost included in the annual cost rates.
It may be noted that the payroll tax income expressed as a percentage of taxable payroll, as shown in table
IV.B4, is slightly smaller than the actual tax rates in effect for each period. This is because all OASDI income and cost amounts are computed on a cash basis and are thus attributed to the year in which they are intended to be received by or expended from the fund, while taxable payroll is attributed to the year in which earnings are paid. Because earnings are paid to workers before the corresponding payroll taxes are credited to the funds, payroll tax income for a given year reflects taxes paid from a combination of the taxable payrolls for that year and prior years, when payroll was smaller. Dividing payroll tax income by taxable payroll for a particular year, or period of years, will thus generally result in an income rate slightly lower than the applicable tax rate for the period.
Summarized values for the full 75-year period are useful in analyzing the long-range adequacy of financing for the program over the period as a whole, both under present law and under proposed modifications to the law.
Table IV.B4 shows summarized rates for valuation periods of the first 25, the first 50, and the entire 75 years of the long-range projection period, including the funds on hand at the start of the period and the cost of accumulating a target trust fund balance equal to 100 percent of the following year’s annual cost by the end of the period. The actuarial balance for each of these three valuation periods is equal to the difference between the
summarized income rate and the
summarized cost rate for the corresponding period. An actuarial balance of zero for any period would indicate that estimated cost for the period could be met, on average, with a remaining trust fund balance at the end of the period equal to 100 percent of the following year’s cost. A negative actuarial balance indicates that, over the period, the present value of income to the program plus the existing trust fund falls short of the present value of the cost of the program plus the cost of reaching a target trust fund balance of 1 year’s cost by the end of the period. This negative balance, combined with a falling trust fund ratio, signals the likelihood of continuing cash-flow deficits, and implies that the current-law level of financing is not sustainable.
The values in table IV.B4 show that the combined OASDI program is expected to operate with a positive actuarial balance over the 25-year valuation period under only the low-cost assumptions. For the 25-year valuation period, the summarized values indicate actuarial balances of 1.12 percent of taxable payroll under the low-cost assumptions, ‑0.25 percent under the intermediate assumptions, and -1.86 percent under the high-cost assumptions. Thus, the program is more than adequately financed for the 25‑year valuation period under only the low-cost projections. For the 50‑year valuation period, the OASDI program would have a positive actuarial balance of 0.55 percent under the low-cost assumptions, but would have deficits of 1.45 percent under the intermediate assumptions and 4.00 percent under the high-cost assumptions. Thus, the program is more than adequately financed for the 50‑year valuation period under only the low-cost set of assumptions.
For the entire 75-year valuation period, the combined OASDI program would once again have
actuarial deficits except under the low-cost set of assumptions. The actuarial balance for this long-range valuation period is projected to be 0.59 percent of taxable payroll under the low-cost assumptions, ‑1.92 percent under the intermediate assumptions, and ‑5.26 percent under the high-cost assumptions.
Assuming the Trustees’ intermediate assumptions are realized, solvency for the program over the next 75 years (timely payment of scheduled benefits throughout this period) could be restored if the Social Security payroll tax rate were increased for earnings during this period from 12.40 percent (combined employee-employer rates) to 14.24 percent. Solvency for this period could also be restored if scheduled benefits for this period were reduced by 12.0 percent. Alternatively, a combination of these approaches could be used.
However, eliminating the actuarial deficit over the next 75 years would require raising payroll taxes or lowering benefits by more than is required just to achieve solvency, because the actuarial deficit includes the cost of attaining a target trust fund ratio equal to 100 percent of annual program cost by the end of the period. Eliminating the actuarial deficit could be achieved for the 75-year period with an increase in the combined payroll tax to 14.38 percent for all earnings during this period or a decrease in scheduled benefits of 12.8 percent for benefits paid during this period. Alternatively, a combination of these approaches could be used. These changes would be sufficient to eliminate the actuarial deficit and leave a projected actuarial balance of zero for the OASDI program. It may be noted that the indicated increase in the payroll tax rate is somewhat larger than the actuarial deficit of 1.92 percent of payroll due to a reduction in the tax base, reflecting the assumed response of employers and employees to an increase in taxes.
Large annual deficits projected under current law for the end of the long-range period, which exceed 4 percent of payroll under the intermediate assumptions (see table
IV.B1), indicate that the annual cost will very likely continue to exceed tax revenue after 2084. As a result, ensuring continued adequate financing would eventually require larger changes than those needed to maintain solvency for the 75-year period. Over the infinite horizon, the actuarial deficit is estimated to be 3.3 percent of taxable payroll under the intermediate assumptions. This estimate indicates that the projected infinite horizon shortfall could be eliminated with an immediate increase in the combined payroll tax rate from 12.4 percent to about 15.9 percent. This shortfall could also be eliminated if all current and future benefits were immediately reduced by 20.7 percent. It may be noted that the indicated increase in the payroll tax rate is larger than the infinite horizon actuarial deficit of 3.3 percent of payroll due to the assumed response of employers and employees to an increase in taxes.
As may be concluded from table IV.B4, the financial condition of the DI program is substantially weaker than that of the OASI program for the first 25 years. Summarized over the full 75-year period, however, long-range deficits for the OASI and DI programs under intermediate assumptions are more similar when measured relative to the level of program costs. The relative weakness of the OASI program in the long-term occurs because increases in longevity have a greater impact on retirement and survivor benefits than on disability benefits.
Table IV.B5 presents the components and the calculation of the long-range (75-year) actuarial balance under the intermediate assumptions. The present value of future cost less future tax income over the long-range period, minus the amount of trust fund assets at the beginning of the projection period, amounts to $5.4 trillion for the OASDI program. This amount is referred to as the 75-year “open group unfunded obligation” (see row G). The actuarial deficit (i.e., the negative of the actuarial balance) combines this unfunded obligation with the present value of the “ending target trust fund” and expresses the total as a percentage of the present value of the taxable payroll for the period. The present value of future tax income minus cost, plus starting trust fund assets, minus the present value of the ending target trust fund, amounts to ‑$5.8 trillion for the OASDI program. The actuarial balance — this amount expressed as a percentage of taxable payroll for the period — is therefore ‑1.92 percent.
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B. Taxation of benefits revenue
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E. Cost minus tax income (D - C)
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F. Trust fund assets at start of period
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G. Open group unfunded obligation (E - F)
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H. Ending target trust fund a
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I. Income minus cost, plus assets at start of period, minus ending target trust fund (C - D + F - H = - G - H)
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As shown in the previous section, a negative actuarial balance (or an actuarial deficit) provides one measure of the unfunded obligation of the program over a period of time. Two additional measures of OASDI unfunded obligations under the intermediate assumptions are presented below.
Consistent with practice since 1965, this report focuses on the 75-year period (from 2010 to 2084 for this report) for the evaluation of the long-run financial status of the OASDI program on an open group basis (i.e., including taxes and cost for past, current, and future participants through the year 2084). Table
IV.B6, in its second line, shows that the present value of the open group unfunded obligation for the program over that period is $5.4 trillion. The open group measure indicates the adequacy of financing over the period as a whole for a program financed on a pay-as-you-go basis. On this basis, payroll taxes and scheduled benefits for all participants are included through 2084.
Table IV.B6 also presents the 75-year unfunded obligation as percentages of future OASDI taxable payroll and GDP through 2084. The 75-year unfunded obligation as a percentage of taxable payroll is less than the actuarial deficit, because it excludes the ending target trust fund value (see table
IV.B5).
However, there are limitations on what can be conveyed using summarized measures alone. For example, overemphasis on summary measures (such as the actuarial balance and open group unfunded obligation) for the 75-year period can lead to incorrect perceptions and policies that fail to address financial sustainability for the more distant future. These concerns can be addressed by considering the trend in trust fund ratios toward the end of the period (see “sustainable solvency” at the beginning of section
IV.B on page 46).
Another measure that reflects the continued, and possibly increasing, annual shortfalls after 75 years is the unfunded obligation extended to the infinite horizon. The extension assumes that the current-law OASDI program and the demographic and economic trends used for the 75‑year projection continue indefinitely.
Over the infinite horizon, table IV.B6 reports that the projected OASDI open group unfunded obligation is $16.1 trillion, which is $10.7 trillion larger than for the 75‑year period. The $10.7 trillion increment reflects a significant financing gap projected for OASDI for years after 2084. Of course, the degree of uncertainty associated with estimates beyond 2084 is substantial.
The $16.1 trillion infinite horizon open group unfunded obligation amounts to 3.3 percent of taxable payroll or 1.2 percent of GDP. These relative measures of the unfunded obligation over the infinite horizon express its magnitude in relation to the resources that are potentially available to finance the shortfall.
Notes:1. The present values of future taxable payroll for 2010-84 and for 2010 through the infinite horizon are $304.5 trillion and $482.6 trillion, respectively.
2. The present values of GDP for 2010-84 and for 2010 through the infinite horizon are $838.2 trillion and $1,395.4 trillion, respectively. Present values of GDP shown in the Medicare Trustees Report differ slightly due to the use of interest discount rates that are specific to each program’s trust fund holdings.
Last year’s report projected the infinite horizon unfunded obligation at $15.1 trillion in present value. If the assumptions, methods, starting values, and the law had all remained unchanged, the change in the valuation date to one year later would have increased the unfunded obligation by about $0.7 trillion to $15.9 trillion. The net effects of changes in law, data, methods, and other assumptions increased the infinite horizon unfunded obligation by about $0.3 trillion in present value.
The infinite horizon unfunded obligation is 0.1 percentage point lower than last year’s report when expressed as a share of taxable payroll, and is unchanged when expressed as a share of GDP. The main changes affecting the infinite horizon unfunded obligation for this report are an increase in the assumed average real wage growth through 2084 reflecting health care legislation, near-term economic and disability assumptions reflecting the recent economic recession, lower mortality rates, and revisions in labor force projections. See section
IV.B7 for details regarding changes in law, data, methods, and assumptions.
Table IV.B7 disaggregates the infinite horizon unfunded obligation of $16.1 trillion into components for past, current, and future participants. The present value of future cost less future taxes over the next 100 years for all current participants (individuals who attain age 15 or older in 2010) equals $20.0 trillion. Subtracting the current value of the trust fund gives a closed group unfunded obligation of $17.4 trillion, which represents the shortfall of lifetime contributions for all past and current participants relative to the cost of benefits for them. Future participants, on the other hand, are scheduled to pay $1.3 trillion more into the system than the cost of benefits for them. The total unfunded obligation, $16.1 trillion, is the sum of the unfunded obligation for current and past participants ($17.4 trillion) and the present value of cost less taxes for future participants (‑$1.3 trillion).
This accounting makes clear that if some generations receive benefits with a present value exceeding the present value of their contributions, other generations must receive benefits with a present value less than the present value of their contributions. Making Social Security solvent over the infinite horizon requires some combination of increased revenue or reduced benefits for current and future participants that amounts to $16.1 trillion in present value, 3.3 percent of future taxable payroll, or 1.2 percent of future GDP.
Notes:1. The present value of future taxable payroll for 2010 through the infinite horizon is $482.6 trillion.
2. The present value of GDP for 2010 through the infinite horizon is $1,395.4 trillion.
3. Totals do not necessarily equal the sums of rounded components.
The test of long-range close actuarial balance applies to a set of 66 separate valuation periods beginning with the first 10‑year period, and including the periods of the first 11 years, the first 12 years, etc., up through the full 75‑year projection period. Under the long-range test, the summarized income rate and cost rate are calculated for each of these valuation periods. The long-range test is met if, for each of the 66 valuation periods, the actuarial balance is not less than zero or is negative by, at most, a specified percentage of the summarized cost rate for the same time period. The percentage allowed for a negative actuarial balance is 5 percent for the full 75-year period. For shorter periods, the allowable percentage begins with zero for the first 10 years and increases uniformly for longer periods, until it reaches the maximum percentage of 5 percent allowed for the 75-year period. The criterion for meeting the test is less stringent for the longer periods in recognition of the greater uncertainty associated with estimates for more distant years.
When a negative actuarial balance in excess of the allowable percentage of the summarized cost rate is projected for one or more of the 66 separate valuation periods, the program fails the test of long-range close actuarial balance. Being out of close actuarial balance indicates that the program is expected to experience financial problems in the future and that ways of improving the financial status of the program should be considered. The sooner the actuarial balance is less than the minimum allowable balance, expressed as a percentage of the summarized cost rate, the more urgent is the need for corrective action. Necessary changes in program financing or benefit provisions should not be put off until the last possible moment if future beneficiaries and workers are to effectively plan for their retirement.
Table IV.B8 presents a comparison of the estimated actuarial balances with the minimum allowable balance (or maximum allowable deficit) under the long-range test, each expressed as a percentage of the summarized cost rate, based on the intermediate estimates. Values are shown for only 14 of the valuation periods: those of length 10 years, 15 years, and continuing in 5-year increments through 75 years. However, each of the 66 periods — those of 10 years, 11 years, and continuing in 1-year increments through 75 years — is considered for the test. These minimum allowable balances are calculated to show the limit for each valuation period resulting from the graduated tolerance scale. The patterns in the estimated balances as a percentage of the summarized cost rates, as well as that for the minimum allowable balance, are presented graphically in figure
IV.B4 for the OASI, DI, and combined OASDI programs. Values shown for the 25-year, 50-year, and 75‑year valuation periods correspond to those presented in table
IV.B4.
For the OASI program, the estimated actuarial balance as a percentage of the summarized cost rate exceeds the minimum allowable for valuation periods of 10 through 27 years under the intermediate estimates. For valuation periods of greater than 27 years, the estimated actuarial balance is less than the minimum allowable. For the full 75-year long-range period, the estimated actuarial balance reaches ‑11.84 percent of the summarized cost rate, for a shortfall of 6.84 percent from the minimum allowable balance of ‑5.0 percent of the summarized cost rate. Thus, although the OASI program satisfies the
test of short-range financial adequacy (as discussed earlier
on page 36), it is not in long-range close actuarial balance.
For the DI program, under the intermediate assumptions, the estimated actuarial balance as a percentage of the summarized cost rate is less than the minimum allowable balance for all 66 valuation periods. For the full 75-year long-range period, the estimated actuarial balance reaches ‑13.40 percent of the summarized cost rate, for a shortfall of 8.40 percent from the minimum allowable balance of ‑5.0 percent of the summarized cost rate. Thus, the DI program fails to meet the short-range test of financial adequacy (as discussed
on page 42), and is also not in long-range close actuarial balance.
Financing for the DI program is much less adequate than for the OASI program in satisfying the test for long-range actuarial balance, even though long-range actuarial deficits are more comparable over the entire 75-year period. This difference occurs primarily because much more of the increase in the long-range cost due to the aging of the baby-boom generation occurs earlier for the DI program than for the OASI program. As a result, tax rates that are relatively more adequate for the OASI program during the first 25 years become relatively less adequate later in the long-range period.
For the OASDI program, the estimated actuarial balance as a percentage of the summarized cost rate exceeds the minimum allowable balance for valuation periods of 10 through 24 years under the intermediate estimates. For valuation periods of greater than 24 years, the estimated actuarial balance is below the minimum allowable balance. The size of the shortfall from the minimum allowable balance rises gradually, reaching 7.05 percent of the summarized cost rate for the full 75-year long-range valuation period. Thus, although the OASDI program satisfies the short-range test of financial adequacy, it is out of long-range close actuarial balance.
The OASI and DI programs, both separate and combined, were also found to be out of close actuarial balance in last year’s report. The estimated deficits for the OASI, DI, and combined OASDI programs in this report are smaller when compared to those shown in last year’s report for the longer valuation periods.
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Rates(percentage of taxable payroll)
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The estimated effects of various changes from last year’s report to this report on the long-range actuarial balance under the intermediate assumptions are listed (by category) in table
IV.B9.
Since the last report, five laws have been enacted that are expected to have financial effects on the OASDI program (see section
III.
B). Two of these laws, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, are together estimated to increase the long-range OASDI actuarial balance by 0.14 percent of taxable payroll. These two laws affect the Social Security program by increasing the share of employee compensation that will be paid in wages covered by Social Security, resulting in increases in the rate of growth in average real covered earnings. The other three laws, the Hiring Incentives to Restore Employment Act, the No Social Security Benefits for Prisoners Act of 2009, and the Social Security Disability Applicants’ Access to Professional Representation Act of 2010, are each estimated to change the long-range actuarial balance by a negligible amount (less than 0.005 percent of taxable payroll).
In changing from the valuation period of last year's report, which was 2009‑83, to the valuation period of this report, 2010‑84, the relatively large negative annual balance for 2084 is included. This change results in a decrease in the long-range OASDI actuarial balance of 0.06 percent of taxable payroll. (Note that the trust fund assets at the end of 2009, i.e., at the beginning of the projection period, are included in the 75-year actuarial balance. These assets reflect the net financial flows for the program for all past years. In effect, therefore, the valuation for these reports reflects financial activity from 1937 through the end of the long-range period.)
The ultimate demographic assumptions are unchanged from those in last year’s report. However, changes in the demographic starting values and the transition to ultimate assumptions combine to reduce the long-range OASDI actuarial balance by 0.05 percent of taxable payroll. The source contributing most to this reduction is the inclusion of final mortality data for 2006, which results in slightly lower starting death rates and faster near-term declines in death rates than in last year’s report. These lower death rates result in a decrease in the long-range OASDI actuarial balance of 0.05 percent of taxable payroll. Final data on legal immigration for 2008 are also included in this year’s report. These data show a lower percentage of immigrants being female, which results in slightly fewer births in the projection period. The effect of including these immigration data for 2008 is a decrease in the long-range OASDI actuarial balance of 0.01 percent of taxable payroll. Offsetting the effect of the immigration change are assumed higher birth rates during the first 24 years of the projection period. Birth rates for this period are projected to be higher than in last year’s report, based on preliminary birth data for 2007 and 2008. These changes in birth rates result in an increase in the long-range OASDI actuarial balance of 0.01 percent of taxable payroll.
The ultimate economic assumptions are unchanged from those in last year’s report, except for the assumed share of employee compensation that is paid in wages covered under Social Security. For last year’s report, the share of employee compensation paid in wages was assumed to decline at a constant rate of 0.2 percent per year throughout the 75-year projection period, which reflected the average projected growth rate in pension and health insurance costs that are not subject to the Social Security payroll tax. This assumption was consistent with the constant real wage differential of 1.1 percentage point shown in last year’s report. For this year’s report, this assumption was changed in two steps: first, the projected growth rates of various components of compensation were refined so that they are allowed to change over time, rather than being held constant at a summarized average rate; second, those growth rates were updated to reflect the estimated effects of legislation enacted since last year’s report. The first step of this change results in a small reduction in the long-range OASDI actuarial balance of 0.01 percent of taxable payroll. The second step increases the long-range OASDI actuarial balance by an estimated 0.14 percent of taxable payroll, as described in the preceding paragraph discussing the effects of laws enacted since the prior year’s report. For additional details of this change, see sections V.B3 and V.B4 of this report.
Updating starting values, changes in near-term economic growth rate assumptions, and the first step of the change in the projected share of employee compensation that is paid in the form of wages subject to OASDI payroll tax have a combined negligible effect on the long-range OASDI actuarial balance. In last year’s report, the recession was projected to reach a bottom in the first half of 2009 and to return to full-employment levels in 2015. For this year’s report, we now know that the recession actually did reach bottom in the second quarter of 2009, but with higher unemployment and lower wages and OASDI taxable earnings than were projected last year. Furthermore, the recovery to a stable full-employment path for the economy is now projected to be completed in 2018 rather than 2015. The deeper and longer-lasting trough in economic activity results in lower employment and taxable earnings over the short-range period and lower cost beginning in the latter half of the short-range period.
This report includes new starting data and changes in near-term disability assumptions that combine to reduce the long-range OASDI actuarial balance by 0.02 percent of taxable payroll. In the early portion of the projection period, higher disability incidence rates and lower termination rates are assumed, reflecting the deeper recession and slower recovery than was assumed in last year’s report. As a result, the number of disabled-worker beneficiaries is now projected to be about 100,000 higher at the end of 2010 and about 300,000 higher at the end of 2015 than in last year’s report.
Several methodological improvements and updates of program-specific data are included in this report. These changes to programmatic data and methods have partially offsetting effects and combine to increase the long-range OASDI actuarial balance by 0.07 percent of taxable payroll. One significant change was made to the method for calculating death rates for 2007‑09, years following the year of final data. Death rates at very old ages for these years were lowered to make the trend in population more consistent with the trend indicated by Social Security administrative records for this time period. These reductions result in slightly lower death rates at older ages throughout the projection period. This mortality change results in a decrease in the long-range OASDI actuarial balance of about 0.08 percent of taxable payroll. Another significant change is related to the projection of average benefit levels for workers who will become eligible for benefits in the future. The historical sample of new beneficiaries, which serves as the basis for the projection of average benefit levels, was updated from a 2004 sample to a 2006 sample. The update of this sample results in an increase in the long-range OASDI actuarial balance of about 0.10 percent of taxable payroll. A third significant change is an update to the labor force participation model to account for more recent data and more significant factors affecting participation. This methodological improvement changes the composition of the projected labor force, with fewer teenage and more female and older workers. This improvement results in an increase in the long-range OASDI actuarial balance of about 0.05 percent of taxable payroll.
If the assumptions, methods, starting values, and the law had all remained unchanged from last year, the OASDI long-range actuarial balance would have diminished (become more negative) by 0.06 percent of taxable payroll due to the change in the valuation period. However, the combined changes in law, data, assumptions, and methods reflected in this report increase the actuarial balance by 0.14 percent of payroll. Thus, the actuarial balance changes from -2.00 percent of taxable payroll in last year's report to -1.92 percent in this report.
The effects of changes made in this report can also be illustrated by comparing the annual (cash-flow) balances for this and the prior year’s report. Figure
IV.B5 provides this comparison for the combined OASDI program over the long-range (75-year) projection period.
The annual balance for 2010 in this report is 1.13 percent of payroll lower than was projected in last year's report due to a deeper recession and slower recovery than had been expected, and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the Trust Funds in earlier years. However, over the next 5 years, the difference between the annual balances in the two reports declines rapidly as the economy recovers and the share of employee compensation that is paid in taxable wages declines more slowly due to the recent health care legislation. For the period 2016 through 2083, the annual balances in this report are higher than those in last year’s report by an average amount of about 0.27 percent of taxable payroll. This increase is mainly due to the health care legislation enacted in March 2010, the updated sample used for the projection of average benefit levels for workers who will become eligible in the future, and the updated modeling of labor force participation. By the end of last year’s 75-year projection period (2083), the difference in the annual balances is 0.26 percent of payroll. The annual deficit for 2083 is 4.08 percent of taxable payroll in this report compared to 4.34 percent for 2083 in last year's report.
