Short-Range Actuarial Estimates
For the short-range period (2012 through 2021), the Trustees measure financial adequacy by comparing projected assets at the beginning of each year to projected program cost for that year under the intermediate set of assumptions. A trust fund ratio of 100 percent or more — that is, assets at the beginning of each year at least equal to projected cost for the year — is a good indication that the trust fund can cover most short-term contingencies. The projected trust fund ratios under the intermediate assumptions for OASI alone, and for OASI and DI combined, exceed 100 percent throughout the short-range period. Therefore, OASI and OASDI satisfy the Trustees’ short-term test of financial adequacy. However, the DI Trust Fund fails the Trustees’ short-term test of financial adequacy. The Trustees project that the DI trust fund ratio will fall below 100 percent by the beginning of 2013. After 2013, the projected DI trust fund ratio continues to decline until the trust fund is exhausted in 2016. Figure
II.D1 shows that the trust fund ratios for the combined OASI and DI Trust Funds decline consistently after 2010.
Long-Range Actuarial Estimates
The Trustees use three types of measures to assess the actuarial status of the program over the next 75 years: (1) annual cash-flow measures, including income rates, cost rates, and balances; (2) trust fund ratios; and (3) summary measures such as actuarial balances and open group unfunded obligations. The Trustees most often express these measures as percentages of taxable payroll, but may also express the measures as percentages of gross domestic product (GDP) or in dollars. The Trustees also present summary measures over the
infinite horizon.
1 The infinite horizon values provide an additional indication of Social Security’s very-long-run financial condition, but are subject to much greater uncertainty.
Figure II.D2 illustrates the year-by-year relationship among OASDI income (excluding interest), cost (including scheduled benefits), and expenditures (including payable benefits) for the full 75-year period. The figure shows all values as percentages of taxable payroll. Under the intermediate assumptions, demographic factors would by themselves cause the projected cost rate to rise rapidly for the next two decades before leveling off in about 2035. However, the recent recession led to a reduction in the tax base and a surge in beneficiaries, which in turn sharply increased the cost rate. This recession effect obscures the underlying rising trend in the cost rate for the next 5 years. The projected income rate is stable at about 13 percent throughout the 75-year period.
Annual OASDI cost exceeded non-interest income in 2010 for the first time since 1983. The Trustees project that cost will continue to exceed non-interest income throughout the 75-year valuation period. Nevertheless, total trust fund income, including interest income, is more than is necessary to cover costs through 2020, so trust fund assets continue to grow. Beginning in 2021, cost exceeds total income and combined OASI and DI Trust Fund assets diminish until they become exhausted in 2033. After trust fund exhaustion, continuing income is sufficient to support expenditures at a level of 75 percent of program cost for the rest of 2033, declining to 73 percent for 2086.
Figure II.D3 shows the estimated number of workers per beneficiary. Figures II.D2 and II.D3 illustrate the inverse relationship between cost rates and the number of workers per beneficiary. In particular, the projected future increase in the cost rate reflects a projected decline in the number of covered workers per beneficiary. There were about 2.9 workers for every OASDI beneficiary in 2011. This ratio had been extremely stable, remaining between 3.2 and 3.4 from 1974 through 2008, and has declined since then due to the economic recession and the beginning of the demographic shift that will drive this ratio over the next 20 years. The Trustees project that the ratio of workers to beneficiaries will continue to decline, even as the economy recovers, due to this demographic shift — as workers of lower-birth-rate generations replace workers of the baby-boom generation. The ratio of workers to beneficiaries reaches 2.0 by 2035 when the baby-boom generation will have largely retired, with a further gradual decline thereafter due to increasing longevity.
Another important way to look at Social Security’s future is to view its annual cost and non-interest income as a share of U.S. economic output. As shown in figure
II.D4, the Trustees project that Social Security’s cost as a percent of GDP will grow from 4.4 percent in 2008 to about 6.4 percent by 2035, then decline to 6.1 percent by 2055, and remain between 6.0 and 6.1 percent through 2086. As the economy recovers, Social Security’s non-interest income, which reflects scheduled tax rates, increases from its current level of about 4.7 percent of GDP to about 4.9 percent of GDP for 2021. Thereafter, non-interest income as a percent of GDP declines gradually, to about 4.6 percent by 2086, because the Trustees expect the share of employee compensation provided in noncovered fringe benefits to increase gradually.
The trust fund ratio is defined as the assets at the beginning of a year expressed as a percentage of the cost during the year. The trust fund ratio thus represents the proportion of a year’s cost which could be paid solely with the assets at the beginning of the year. Table II.D1 displays the projected maximum trust fund ratios during the long-range period for the OASI, DI, and combined funds. The table also shows the year of maximum projected trust fund ratio during the long-range projection period (2012‑86) and the year of trust fund exhaustion. While the trust fund ratio for 2012 is the highest for this period, the trust fund ratio was higher for some earlier years.
The actuarial balance is a summary measure of the program’s financial status through the end of the 75-year valuation period. The actuarial balance measure includes the trust fund assets at the beginning of the period, so it is essentially the difference between the income and cost from 1937 through the end of the valuation period. The Trustees express actuarial balance as a percentage of the taxable payroll for the valuation period, and refer to a negative actuarial balance as an actuarial deficit. In other words, the actuarial deficit is the percentage that could be added to the current-law income rate for each of the next 75 years, or subtracted from the cost rate for each year, to make the trust fund assets at the end of the period equal to the following year’s projected cost. More generally, the actuarial deficit is the average amount of change in income or cost that is needed throughout the valuation period in order to achieve actuarial balance. In this report, the actuarial deficit for the combined OASI and DI Trust Funds under the intermediate assumptions is 2.67 percent of taxable payroll. The actuarial deficit was 2.22 percent in the 2011 report. If the assumptions, methods, starting values, and the law had all remained unchanged from last year, the actuarial deficit would have increased to 2.28 percent of payroll solely due to advancing the valuation period by 1 year.
Another way to illustrate the projected financial shortfall of the OASDI program is to examine the cumulative present value of scheduled income less cost. Figure
II.D5 shows the present value of cumulative OASDI income less cost from the inception of the program through years 2011‑86. A positive cumulative value represents the level of trust fund assets at the end of the selected year. A negative value is the unfunded obligation through the selected year. The balance of the combined trust funds was $2.7 trillion at the end of 2011. The trust fund assets decline on a present value basis after 2011, but remain positive through 2032. However, after 2032 this cumulative amount becomes negative, which means that the combined OASI and DI Trust Funds have a net unfunded obligation through each year after 2032. Through the end of 2086, the combined funds have a present-value unfunded obligation of $8.6 trillion. This unfunded obligation represents 2.52 percent of taxable payroll and 0.9 percent of GDP for the 75-year valuation period. The unfunded obligation as a share of taxable payroll (2.52 percent) and the actuarial deficit (2.67 percent) are similar measures, but differ because the actuarial deficit incorporates the cost of having an ending trust fund balance equal to 1 year’s cost.
Figures II.D2, II.D4, and
II.D5 show that the program’s financial condition is worsening at the end of the projection period. Trends in annual balances and cumulative values toward the end of the 75-year period provide an indication of the program’s ability to maintain solvency beyond 75 years. Consideration of summary measures alone for a 75‑year period can lead to incorrect perceptions and to policy prescriptions that do not achieve sustainable solvency.
2
Extending the horizon beyond 75 years increases the measured unfunded obligation. Through the infinite horizon, the unfunded obligation, or shortfall, equals $20.5 trillion in present value, which represents 3.9 percent of future taxable payroll or 1.3 percent of future GDP. The summarized shortfalls for the 75-year period and through the infinite horizon both reflect annual cash-flow shortfalls for all years after trust fund exhaustion. The annual shortfalls after trust fund exhaustion rise slowly and reflect increases in life expectancy after 2033. The summarized shortfalls for the 75-year period, as percentages of taxable payroll and GDP, are lower than those for the infinite horizon principally because only about three-quarters of the years in the 75-year period have unfunded annual shortfalls.
The measured unfunded obligation over the infinite horizon increased from $17.9 trillion in last year’s report to $20.5 trillion in this year’s report. If the assumptions, methods, starting values, and the law had all remained unchanged, the unfunded obligation over the infinite horizon would have risen to $18.7 trillion solely due to the change in the valuation date. Expressed as a percentage of taxable payroll, the measured unfunded obligation through the infinite horizon increased from 3.6 percent in last year’s report to 3.9 percent in this year’s report. As a percentage of GDP, the measured unfunded obligation through the infinite horizon increased from 1.2 percent in last year’s report to 1.3 percent in this year’s report.
A first approach uses alternative scenarios reflecting low-cost (alternative I) and high-cost (alternative III) sets of assumptions. Figure
II.D6 shows the projected trust fund ratios for the combined OASI and DI Trust Funds under the intermediate, low-cost, and high-cost assumptions. The low-cost alternative includes a higher ultimate total fertility rate, slower improvement in mortality, a higher real-wage differential, a higher ultimate real interest rate, and a lower unemployment rate. The high-cost alternative, in contrast, includes a lower ultimate total fertility rate, more rapid improvement in mortality, a lower real-wage differential, a lower ultimate real interest rate, and a higher unemployment rate. These alternatives are not intended to suggest that all parameters would be likely to differ from the intermediate values in the same direction, but are intended to illustrate the effect of clearly defined scenarios that are, on balance, very favorable or unfavorable for the program’s financial status. Actual future costs are unlikely to be as extreme as those portrayed by the low-cost and high-cost projections. The method for constructing the low-cost and high-cost projections does not lend itself to estimating the probability that actual experience will lie within or outside the range they define.
Appendix D of this report presents long-range sensitivity analysis for the OASDI program. By varying one parameter at a time, sensitivity analysis provides a second approach for illustrating the uncertainty surrounding projections into the future.
A third approach uses stochastic simulations that reflect randomly assigned annual values for each parameter. These simulations produce a distribution of projections and corresponding probabilities that future outcomes will fall within or outside a given range. The results of the stochastic simulations, discussed in more detail in appendix
E, suggest that trust fund exhaustion (i.e. the point at which the trust fund ratio reaches zero) is likely by mid-century. In particular, figure
II.D7 suggests that based on these stochastic simulations, trust fund assets will exhaust between 2029 and 2041 with a 95‑percent probability.
The stochastic results suggest that trust fund ratios as high as the low-cost alternative are unlikely. The difference in the ranges of the projected trust fund ratios between two of the methods for illustrating uncertainty (alternative scenarios and stochastic simulations) is substantially due to the different assignment of real interest rates in these two methods. Appendix E includes an explanation of the different treatments.
The projected long-range OASDI actuarial deficit increased from 2.22 percent of taxable payroll for last year’s report to 2.67 percent of taxable payroll for this year’s report. Changes in economic projections, due to new starting values and revised assumptions, are the most significant of several factors contributing to the increase in the deficit. For a detailed description of the specific changes identified in table
II.D2, see section
IV.
B.
7.
The open group unfunded obligation for the 75-year projection period increased from $6.5 trillion (present discounted value as of January 1, 2011) to $8.6 trillion (present discounted value as of January 1, 2012). The unfunded obligation increased by about $0.5 trillion solely due to advancing the valuation date by 1 year and including the year 2086. The combination of legislative changes, changes in methods, revisions in assumptions, and updated data increased the unfunded obligation by about $1.6 trillion.
This year’s projections of annual balances (non-interest income minus cost) are lower than those in last year’s report throughout the 75-year projection period. See figure
II.D8.
