2002 OASDI Trustees Report

C. ASSUMPTIONS ABOUT THE FUTURE

The actual future income and expenditures of the OASI and DI Trust Funds will depend on many factors, including future demographic and economic conditions. These factors include the size and characteristics of the population receiving benefits, the level of monthly benefit amounts, the size and characteristics of the work force, and the level of workers' earnings. These factors will depend in turn upon future birth rates, death rates, immigration, marriage and divorce rates, retirement-age patterns, disability incidence and termination rates, productivity gains, wage increases, inflation, and many other demographic, economic, and program-specific factors.

Assumptions regarding each of these variables must be made in order to project trust fund financing in the future. The assumptions selected vary, in most cases, from year to year during the first decade or more before reaching ultimate assumed values for the remainder of the 75-year projection period. This phasing-in process is particularly important if the projection period begins when a variable that has experienced distinct cycles in the past is at, or near, a cyclic extreme. An ultimate value for each variable is assumed for the long-range projection because any cycles in factors are assumed to average out at that ultimate value over the long range.

Any projection of the future is, of course, uncertain. The degree of uncertainty involved can be illustrated by imagining how difficult it would have been in 1925 to project the world of 1930, much less that of 2000. Three alternative sets of assumptions are used in this report to recognize this uncertainty and provide a range of possible future experience. The intermediate set of assumptions, designated as alternative II, reflects the Trustees' best estimates of future experience; the low cost alternative I is more optimistic and the high cost alternative III more pessimistic for the trust funds' future financial outlook.

While no assurance can be given that actual future experience will fall within the range provided by these sets of assumptions, there are factors that reduce the inherent uncertainty. For example, the number of beneficiaries over age 65 is subject to less uncertainty for the next several decades because all of these individuals are already born. In addition, the wage-indexing of many program provisions has reduced the sensitivity of projections to some economic factors, even in the long term. Thus, projections presented in this report can provide early notice of significant changes in future income and expenditures, as, for example, when the baby-boom generation retires during the period from 2010 to 2030. Also, the assumptions are reexamined each year in light of recent experience and new information that may influence future trends, and are revised when warranted. This careful review and updating of the assumptions on an annual basis helps ensure that they provide a reasonable range of future possibilities.

Table II.C1 summarizes the ultimate values assumed for the key demographic and economic elements underlying the projections shown in this report. These ultimate values generally apply after the first 10 years. Two exceptions are the ultimate fertility rate and the ultimate mortality annual rate of reduction, which are reached in 2026.

The ultimate productivity growth assumption was increased by 0.1 percentage point in this year's report (from 1.5 to 1.6 percent for the intermediate assumptions). This increase is based on the growing body of evidence suggesting that the climate for productivity growth has improved in recent years. A number of prominent economists have argued that the higher productivity growth experienced during the last 5 to 7 years (annual average of 2.0 percent from 1995 to 2000) may signal a return to a higher productivity trend compared to the relatively slow growth experienced between 1973 and the early 1990s. This recent period of faster growth is generally ascribed to the development of an information technology driven "new economy". The key question is the degree to which this increased growth rate will be sustained into the long-term future. The Trustees will continue to closely monitor information concerning the future trend growth in productivity.

Modifications in mortality projections resulted in more rapid reductions in death rates (0.70 percent per year in this report versus 0.65 percent per year in last year's report for ages 65 and over, under the intermediate assumptions). A number of prominent demographers have argued that future mortality decline may be closer to that of the last century (0.75 percent per year for ages 65 and over) than to the experience of the last two decades (0.50 percent per year). As with other assumptions, the Trustees will continue to examine information related to future mortality improvement.

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