V. ASSUMPTIONS AND METHODS UNDERLYINGACTUARIAL ESTIMATES
The future income and cost of the OASDI program will depend on many demographic, economic, and program-specific factors. Trust fund income will depend on how these factors affect the size and composition of the working population as well as the level and distribution of earnings. Similarly, program cost will depend on how these factors affect the size and composition of the
beneficiary population as well as the general level of benefits.
Basic assumptions are developed for several of these factors based on analysis of historical trends and conditions, as well as expected future conditions. These factors include fertility, mortality, immigration, marriage, divorce, productivity,
inflation, average earnings, unemployment, real interest rate, retirement, and disability
incidence and
termination. Other factors are developed utilizing these basic assumptions. The other factors include total population, life expectancy, labor force participation,
gross domestic product, and program-specific factors. All factors included in any consistent set of assumptions are interrelated directly or indirectly.
The assumptions and methods used in this report are reexamined each year in light of new information that may influence future conditions and are revised, if warranted.
Projections of these factors and their interrelationships are inherently uncertain. Therefore, this report uses three sets of assumptions, designated as
intermediate (alternative II),
low-cost (alternative I), and
high-cost (alternative III). The intermediate set represents the Board’s best estimate of the future course of the population and the economy. With regard to the net effect on the status of the OASDI program, the low-cost is more optimistic, and the high-cost is more pessimistic. The low- and high-cost sets of assumptions reflect significant potential changes in the interrelationship among factors, as well as changes in the values for individual factors.
While it is unlikely that all of the factors and interactions would differ in the same direction from those expected, many combinations of individual differences in the factors could have a similar overall effect. Outcomes with overall long-range cost as low as (or lower than) the low-cost scenario or as high as (or higher than) the high-cost scenario are very unlikely. This report also includes sensitivity analysis, where factors are changed one at a time (see appendix D), and a stochastic projection, which provides a probability distribution of possible future outcomes that is centered around the intermediate assumptions (see appendix
E).
The estimates developed using the three sets of alternative assumptions should be interpreted with care. These estimates are not intended to be specific predictions of the future financial status of the OASDI program, but rather a reasonable range of future income and cost under a variety of plausible demographic and economic conditions.
The values for each of the demographic, economic, and program-specific factors are assumed to change toward long-range ultimate values from recently experienced levels or trends, generally over the next 25 years. For extrapolations beyond the 75‑year long-range period, the ultimate levels or trends reached by the end of the 75‑year period are generally maintained.
The assumed ultimate values, which are generally reached within the first 25 years for both the demographic and the economic factors (and apply thereafter through the end of the 75-year long-range period), are intended to represent average annual experience or growth rates. Actual future values will exhibit fluctuations or cyclical patterns, as in the past.
The following sections discuss, in abbreviated form, the various assumptions and methods required to make the estimates of trust fund financial status, which are the heart of this report.
1 There are, of course, many interrelationships among these factors that make a sequential presentation potentially misleading. Nevertheless, the following sections roughly follow the order used in building the trust fund estimates presented in chapter
IV.
Fertility assumptions are developed for women in the form of birth rates by single year of age, from 14 to 49. These rates apply to the total number of women, for all marital statuses, in the midyear population at each age.
Historically, birth rates in the United States have fluctuated widely. The total fertility rate
2 decreased from 3.31 children per woman at the end of World War I (1918) to 2.15 during the Great Depression (1936). After 1936, the total fertility rate rose to 3.68 in 1957 and then fell to 1.74 by 1976. After 1976, the total fertility rate began to rise again until it reached a level of 2.07 for 1990. In the 1990s, the total fertility rate was fairly stable, around 2.00 children per woman. Since 2000, the total fertility rate has been consistently above 2.00, and was 2.13 in 2007.
These variations in the total fertility rate resulted from changes in many factors, including social attitudes, economic conditions, birth-control practices, and the racial/ethnic composition of the population. Future total fertility rates are expected to remain close to recent levels. Certain population characteristics, such as the higher percentages of women who have never married, of women who are divorced, and of young women who are in the labor force, are consistent with continued lower total fertility rates than experienced during the baby-boom era (1946-65). Based on consideration of these factors, ultimate total fertility rates of 2.30, 2.00, and 1.70 children per woman are assumed for the low-cost, intermediate, and high-cost assumptions, respectively. These assumptions are unchanged from those used in last year’s report.
Based on preliminary data, the total fertility rate is assumed to have decreased to a level of 2.09 children per woman in 2008, and decreased further to 2.03 in 2009. The total fertility rate for 2010 is assumed to be 2.08. These levels are slightly lower than those estimated in last year’s report for the intermediate assumptions. For each of the three alternatives, the total fertility rate is then assumed to follow a gradual trend toward the selected ultimate level, which is reached in 2035.
For the projections in this year’s report, assumed average percentage reductions in future mortality rates were developed by age group, sex, and cause of death. These assumptions were then used to estimate future central death rates by age group, sex, and cause of death. From these estimated central death rates, probabilities of death by single year of age and sex were calculated.
Historical death rates (for years 1900-2007) were calculated for ages below 65 (and for all ages for years prior to 1968) using data from the National Center for Health Statistics (NCHS).
3 For ages 65 and over, final
Medicare data on deaths and enrollments were used for years 1968 through 2007. Death rates by cause of death at all ages for years 1979-2007 were produced using data from the NCHS.
The total age-sex-adjusted death rate4 declined at an average rate5 of 1.10 percent per year between 1900 and 2007. Between 1979 and 2007, the period for which death rates were analyzed by cause, the total age-sex-adjusted death rate (for all causes combined) declined at an average rate of 0.93 percent per year.
Death rates have declined substantially in the U.S. since 1900, with rapid declines over some periods and slow or no improvement over the other periods. Historical death rates generally declined more slowly for older ages than for the rest of the population. The age-sex-adjusted death rate for ages 65 and over declined at an average rate of 0.79 percent per year between 1900 and 2007.
Reductions in death rates resulted from many factors, including increased medical knowledge, increased availability of health-care services, and improvements in sanitation and nutrition. Based on consideration of the expected rate of future progress in these and other areas, three alternative sets of ultimate annual percentage reductions in central death rates by age group, sex, and cause of death are assumed for 2035 and later. The intermediate set, which is used for alternative II, is considered to be the most likely to occur. The average annual percentage reductions used for alternative I are generally smaller than those for alternative II, while those used for alternative III are generally larger. These ultimate annual percentage reductions are the same as those in last year’s report.
For the years 2008 through 2010, the reductions in central death rates are assumed to be the same as the average annual reductions by age group, sex, and cause of death observed between 1997 and 2007. After 2010, the reductions in central death rates for alternative II are assumed to change rapidly from the average annual reductions by age group, sex, and cause of death observed between 1997 and 2007 until they reach the ultimate annual percentage reductions by age group, sex, and cause of death assumed for 2035 and later. The reductions in death rates under alternatives I and III are also assumed to change rapidly to their ultimate levels, but start from levels which are, respectively, 50 or 150 percent of the average annual reductions observed between 1997 and 2007.
Projections of age-sex-adjusted death rates are presented in table V.A1 for the total population (all ages), for under age 65, and for ages 65 and over. Under the intermediate assumptions, projected age-sex-adjusted death rates for the total population are lower than the death rates in last year’s report. However, for the age group under age 65, projected age-sex-adjusted death rates are higher than in last year’s report. For the age group 65 and over, projected age-sex-adjusted death rates are lower than in last year’s report. These changes primarily result from incorporating new final mortality data for 2007 and a methodological change to use a more recent 10‑year period (1997-2007), rather than a 20‑year period (1987-2007), to set the starting rates of annual reduction in death rates.
After adjustment for changes in the age-sex distribution of the population, the resulting total death rates are projected to decline at average annual rates of about 0.32 percent, 0.78 percent, and 1.31 percent between 2010 and 2085 for alternatives I, II, and III, respectively. In keeping with the patterns observed in the historical data, future rates of decline are assumed to be greater for younger ages than for older ages, but to a substantially lesser degree than in the past. Accordingly, age-sex-adjusted death rates for ages 65 and over are projected to decline at average annual rates of about 0.29 percent, 0.72 percent, and 1.26 percent between 2010 and 2085 for alternatives I, II, and III, respectively.
Experts express a wide range of views on the likely rate of future decline in death rates. For example, the 2007 Technical Panel on Assumptions and Methods, appointed by the Social Security Advisory Board, believed that ultimate rates of decline in mortality will be higher than the rates of decline assumed for the intermediate projections in this report. Others believe that biological and social factors may slow future rates of decline in mortality. Evolving mortality trends in health care and lifestyle will be closely monitored to determine what further modifications to the assumed ultimate rates of decline in mortality will be warranted for future reports.
In order to develop projections of the total Social Security area population, assumptions are made for annual legal immigration, legal emigration, “other immigration,” and “other emigration.” Legal immigration consists of persons who are granted legal permanent resident (LPR) status. Legal emigration consists of those legal immigrants and native-born citizens who leave the Social Security area population. Net legal immigration is then calculated as the difference between legal immigration and legal emigration. “Other immigration” consists of immigrants who enter the Social Security area in a given year and stay to the end of that year without having LPR status, such as undocumented immigrants and temporary foreign workers and students. “Other emigration” consists of other immigrants who leave the Social Security area population or who adjust their status to LPR. Net other immigration is then calculated as the difference between other immigration and other emigration. Net immigration refers to the sum of net legal immigration and net other immigration.
Separate assumptions are developed for the low-cost, intermediate, and high-cost scenarios. The low-cost scenario includes higher annual net immigration and the high-cost scenario includes lower annual net immigration.
Legal immigration increased after World War II to around 300,000 persons per year and remained around that level until shortly after 1960. With the Immigration Act of 1965 and other related changes, annual legal immigration increased to about 400,000 and remained fairly stable until 1977. Between 1977 and 1990, legal immigration once again increased, averaging about 580,000
6 per year. The Immigration Act of 1990, which took effect in fiscal year 1992, restructured the immigration categories and increased significantly the number of immigrants who may legally enter the United States.
Legal immigration averaged about 780,0001 persons per year during the period 1992 through 1999. Legal immigration increased to about 900,000 in 2000 and about 1,060,000 in 2001 reflecting primarily an increase in the number of persons granted LPR status as immediate relatives of U.S. citizens, the only category of legal immigration that is not numerically limited. However, legal immigration declined to less than 800,000 by 2003 as the number of pending applications increased. From 2003 to 2006, legal immigration increased until it reached about 1,200,000 for 2005 and 2006. For 2007 through 2009, legal immigration decreased to about 1,100,000. Legal immigration in excess of 1,000,000 reflects the concerted effort in recent years to reduce the backlog of pending applications for LPR status.
For the intermediate alternative, the Department of Homeland Security is expected to continue to reduce the backlog of pending applications, and legal immigration is assumed to be about 1,100,000 persons in 2010, 1,050,000 in 2011, and 1,000,000 persons per year thereafter. For alternatives I and III, annual legal immigration is ultimately assumed to be 1,200,000 persons and 800,000 persons, respectively. These ultimate assumptions are unchanged from last year’s report.
The ratios of annual legal emigration to legal immigration are assumed to be 20, 25, and 30 percent for alternatives I, II, and III, respectively. This range is consistent with the limited historical data for legal emigration from the Social Security area. These ratios are the same ratios used in last year’s report. Under the intermediate alternative, by combining the ultimate annual legal immigration and emigration assumptions, the ultimate annual net legal immigration is 750,000 persons. For the low-cost and high-cost scenarios, ultimate annual net legal immigration is 960,000 persons and 560,000 persons, respectively.
The number of other immigrants residing in the Social Security area population is estimated to have been about 8.9 million persons as of January 1, 2000, increasing to about 13.5 million persons as of January 1, 2007. During the recession, the other-immigrant population is estimated to have decreased and reached a level of 12.6 million persons as of January 1, 2009.
Annual other immigration for 2009 and 2010 is estimated to have been 1.0 million persons. Due to the recent recession, these levels are significantly lower than those estimated during the period 2000 through 2006. Under the intermediate assumptions, annual other immigration would be 1.1 million in 2011, and would increase until 2015 to the ultimate level of 1.5 million persons. For the low- and high-cost scenarios, the future ultimate annual other immigration is assumed to be 1.8 million persons and 1.2 million persons, respectively.
Emigration from the other-immigrant population includes those who leave the Social Security area and those who adjust their status to become LPRs. This other-immigrant population is highly mobile and far more likely to leave the Social Security area than is the native-born or legal-immigrant population. The annual number of other immigrants who leave the Social Security area is estimated in two groups. The first departing group is set, by age and sex, at a stable proportion of the number of other immigrants who are assumed to have recently entered the Social Security area. The size of the second departing group is calculated by applying a set of annual departure rates, by age and sex, to the other-immigrant population in the Social Security area. The annual number of other emigrants who leave the Social Security area is projected to average 665,000 through the 75-year projection period. In addition, the annual number of other immigrants who adjust status to become LPRs is assumed to ultimately be 500,000 for the intermediate assumptions. This ultimate level is one-third of the annual number of other immigrants assumed to enter the Social Security area. For the low- and high-cost scenarios, ultimate annual numbers adjusting status to LPR are assumed to average 600,000 persons and 400,000 persons, respectively.
Under the assumptions and methods described above, the size of the other-immigrant population is projected to grow substantially. This growth reflects the excess of annual other immigration over the combined annual numbers of emigrants and deaths that occur within the other-immigrant population.
Net other immigration is estimated to have averaged about 610,000 persons from 2000 through 2004. Estimates of net other immigration are based on data from the Department of Homeland Security for 2005 through 2008. The levels for 2005 and 2006 are estimated to have been 1,015,000 persons and 675,000 persons, respectively. For 2007 through 2010, net other immigration is estimated to have been negative, as compared to high positive levels in last year’s report. Under the intermediate assumptions, net other immigration is projected to return to a positive level of 105,000 persons in 2011, and rise to about 500,000 persons in 2015. Net other immigration is then projected to decrease to about 320,000 in 2040 and to about 275,000 in 2085. The decline in net other immigration is attributable to the increasing number of other immigrants residing in the Social Security area. Based on the rates of departure described above, this effect occurs because an increase in the number of other immigrants residing in the Social Security area results in an increase in the number who emigrate out of the area. All other components of other immigration and emigration are assumed to be stable after 2014, and thus do not contribute toward any change in net other immigration. The average annual level of net other immigration over the 75-year projection period is estimated to be about 325,000 persons. Net other immigration is estimated to average about 425,000 persons per year under the low-cost assumptions and 225,000 persons per year under the high-cost assumptions.
The total level of net immigration (legal and other combined) is estimated to average 1,075,000 persons per year during the 75-year projection period under the intermediate assumptions. For the low-cost assumptions, total net immigration is estimated to average 1,385,000 persons per year. Under the high-cost assumptions, total net immigration is estimated to average 785,000 persons per year.
Demographers express a wide range of views about the future course of immigration for the United States. Some, like the 2007 Technical Panel mentioned in the previous section, believe that immigration will increase substantially in the future. Others believe that potential immigrants may be attracted to other countries or that changes in the law or enforcement of the law could restrict immigration.
4.
Total Population Estimates
Combining the above assumptions for future fertility, mortality, and net immigration with assumptions on marriage and divorce based on data from the NCHS, projections were made of the population in the Social Security area by age, sex, and marital status as of January 1 of each year 2010 through 2085. The starting Social Security area population for January 1, 2009, is based, with several adjustments, on the Census Bureau’s estimate of the residents of the 50 States and D.C., and U.S. Armed Forces overseas. These adjustments reflect mortality assumptions for the aged population since 2000 that are consistent with Medicare and Social Security data, net immigration assumptions for the aged population since 2000, estimates of the net undercount in the 2000 census, inclusion of U.S. citizens living abroad (including residents of U.S. territories), and inclusion of non-citizens living abroad who are insured for Social Security benefits. This starting population was then projected using assumed rates of birth, death, marriage, and divorce; and assumed levels of net immigration.
Using surrounding January 1 populations, a July 1 (i.e., midyear) population was also calculated for each year. Table
V.A2 shows the historical and projected population as of July 1 by broad age group, for the three alternatives. Also shown are aged and total dependency ratios (see table footnotes for definitions).
Notes:1. Historical data are subject to revision.
2. Totals do not necessarily equal the sums of rounded components.
Life expectancy, or average remaining number of years expected prior to death, is a useful analytical concept. Life expectancy is calculated in two different forms for two separate purposes.
Period life expectancy is calculated for a given year using the actual or expected death rates at each age for that year. It is a useful summary statistic for illustrating the overall level of the death rates experienced in a single year, and thus is closely related to the age-sex-adjusted death rate discussed in section
V.
A.
2. Period life expectancy for a particular year may be viewed as the expected remaining life at a selected age only if it is assumed that there is no change in death rates after that year. Table V.A3 presents historical and projected life expectancy calculated on a period basis.
Cohort life expectancy truly answers the question “What is the expected average remaining lifetime for an individual at a selected age in a given year?” Cohort life expectancy is calculated using death rates not from a single year, but from the series of years in which the individual will actually reach each succeeding age if he or she survives. Table V.A4 presents historical and projected life expectancy calculated on a cohort basis. Cohort life expectancy is somewhat greater than period life expectancy for the same year, because death rates for any given age tend to decline as time passes and the cohort grows older.
