2002 OASDI Trustees Report

IV. ACTUARIAL ESTIMATES

This chapter presents actuarial estimates of the future financial condition of the Social Security program. These estimates include projected income and expenditures of the OASI and DI Trust Funds, in dollars over the next 10 years and as a percentage of taxable payroll over the full 75-year period, along with a discussion of a variety of measures of the adequacy of current program financing. As described in the Overview section of this report, these estimates depend upon a broad set of demographic and economic assumptions. Since these assumptions are subject to uncertainty, the estimates presented in this section are prepared under three sets of assumptions, to show a range of possible outcomes. 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. The intermediate estimates are shown first in the tables in this report, followed by the low cost and high cost estimates. These sets of assumptions, along with actuarial methods used to produce the estimates, are described in chapter V. In this chapter, the estimates and measures of trust fund financial adequacy for the short range (2002-11) are presented first, followed by estimates and measures of actuarial status for the long range (2002-76).

A. SHORT-RANGE ESTIMATES

In the short range, the adequacy of the trust fund level is generally measured by the "trust fund ratio," which is defined to be the assets at the beginning of the year expressed as a percentage of the projected outgo during the year. Thus, the trust fund ratio represents the proportion of a year's outgo which can be paid with the funds available at the beginning of the year. During periods when trust fund income exceeds disbursements, the trust funds serve to help fund a portion of the Social Security program's future financial obligations in advance. During periods when trust fund disbursements exceed income, as might happen during an economic recession, trust fund assets are used to meet the shortfall. In the event of recurring shortfalls for an extended period, the trust funds can allow time for the development, enactment, and implementation of legislation to restore financial stability to the program.

The test of financial adequacy over the short-range projection period is applicable to the OASI and DI Trust Funds individually and on a combined basis. The requirements of this test are as follows: If the estimated trust fund ratio is at least 100 percent at the beginning of the projection period, then it must be projected to remain at or above 100 percent throughout the 10-year projection period. Alternatively, if the ratio is initially less than 100 percent, then it must be projected to reach a level of at least 100 percent by the beginning of the sixth year and to remain at or above 100 percent throughout the remainder of the 10-year period. In addition, the fund's estimated assets at the beginning of each month of the 10-year period must be sufficient to cover that month's disbursements. This test is applied on the basis of the intermediate estimates. Failure to meet this test by either trust fund is an indication that solvency of the program over the next 10 years is in question and that legislative action is needed to improve the short-range financial adequacy of the program.

1. Operations of the OASI Trust Fund

This subsection presents estimates of the operations and financial status of the OASI Trust Fund for the period 2002-11, based on the assumptions described in chapter V. No changes are assumed to occur in the present statutory provisions and regulations under which the OASDI program operates.¹

These estimates are shown in table IV.A1 and indicate that the assets of the OASI Trust Fund would continue to increase rapidly throughout the next 10 years under all three sets of assumptions. Also, based on the intermediate assumptions, the assets of the OASI Trust Fund would continue to exceed 100 percent of annual expenditures by a steadily increasing amount through the end of 2011. Consequently, the OASI Trust Fund satisfies the test of short-range financial adequacy by a wide margin. The estimates in table IV.A1 also indicate that the short-range test would be satisfied even under the high cost assumptions (see figure IV.A1 for graphical illustration of these results).

The increases in estimated income shown in table IV.A1 under each set of assumptions reflect increases in estimated OASDI taxable earnings and growth in interest earnings on the invested assets of the trust fund. For each alternative, employment and earnings are assumed to increase in every year through 2011 (with the exception that employment is estimated to decline in 2002 as a result of the recession late in 2001, and in 2006 for the high cost assumptions due to a recession in 2005; these recessions are described in section V.B on page 85). The number of persons with taxable earnings would increase on the basis of alternatives I, II, and III from 153 million during calendar year 2001 to about 170 million, 167 million, and 164 million, respectively, in 2011. The total annual amount of taxable earnings is projected to increase from $4,198 billion in 2001 to $6,658 billion, $6,752 billion, and $7,017 billion, in 2011, on the basis of alternatives I, II, and III, respectively. (In constant 2001 dollars-taking account of assumed increases in the CPI from 2001 to 2011 under each alternative-the estimated amounts of taxable earnings in 2011 are $5,506 billion, $5,150 billion, and $4,660 billion, respectively.) These increases in taxable earnings are due primarily to (1) projected increases in employment levels as the working age (20-64) population increases and in average earnings in covered employment, (2) increases in the contribution and benefit base in 2002-11 under the automatic-adjustment provisions, and (3) various provisions enacted in 1983 and later, including extensions of coverage to additional categories of workers.

Growth in interest earnings represents a significant component of the overall increase in trust fund income during this period. Although interest rates payable on trust fund investments are not assumed to change substantially from current levels, the continuing rapid increase in OASI assets will result in a corresponding increase in interest income. By 2011, interest income to the OASI Trust Fund is projected to be about 21 percent of total trust fund income on the basis of the intermediate assumptions, as compared to 12.5 percent in 2001.

Figure IV.A1.—Short-Range OASI and DI Trust Fund Ratios

[Assets as a percentage of annual expenditures]

Note: Totals do not necessarily equal the sums of rounded components.

Rising expenditures during 2002-11 reflect automatic benefit increases as well as the upward trend in the number of beneficiaries and in the average monthly earnings underlying benefits payable by the program. The growth in the number of beneficiaries in the past and the expected growth in the future result both from the increase in the aged population and from the increase in the proportion of the population which is eligible for benefits.

Growth has also occurred, and will continue to occur, in the proportion of eligible persons who receive benefits. This growth is due to several factors, including (1) the amendments enacted since 1950 which affect the conditions governing the receipt of benefits and (2) the increasing percentage of eligible persons who have attained normal retirement age and who therefore may receive benefits regardless of earnings.

The estimates under all three sets of assumptions shown in table IV.A1 indicate that income to the OASI Trust Fund would substantially exceed expenditures in every year of the short-range projection period, and assets are therefore estimated to increase substantially.

The portion of the OASI Trust Fund that is not needed to meet day-to-day expenditures is used to purchase investments, generally in special public-debt obligations of the U.S. Government. The cash used to make these purchases becomes part of the General Fund of the Treasury and can be used to meet various Federal outlays or to reduce the amount of publicly-held Federal debt. Interest is paid to the trust fund on these securities and, when the securities mature or are redeemed prior to maturity, general fund revenues are used to repay the principal to the trust fund. Thus, the investment operations of the trust fund result in various cash flows between the trust fund and the General Fund of the Treasury.

Currently, the excess of tax income to the OASI Trust Fund over the fund's expenditures is borrowed by the general fund, resulting in a substantial net cash flow to the general fund. As discussed in the following section on page 56, this cash flow will reverse sometime in the next 10-20 years; as increasingly larger amounts of annual interest income are used in that period to meet benefit payments and other expenditures, revenue from the General Fund of the Treasury will be drawn upon to provide the necessary cash. The accumulation and subsequent redemption of substantial trust fund assets has important public policy and economic implications that extend well beyond the operation of the OASDI program itself. Discussion of these broader issues is not within the scope of this report.

In interpreting the trust fund ratios in table IV.A1, it should be noted that at the beginning of any month there must be sufficient assets on hand to meet the benefit payments that are payable at the beginning of that month. The specific minimum amount of assets required for this purpose depends on a number of factors and varies somewhat from month to month. Currently, assets of roughly 6 to 7 percent of annual expenditures are sufficient for this purpose, although this minimum requirement will decline very gradually in the future as cycling of payments throughout the month phases in and replaces payment of most benefits on the third of the month. If the assets of either the OASI or DI Trust Fund at the end of a month fall below the minimum amount needed to meet the benefits payable at the beginning of the next month, section 201(a) of the Social Security Act provides for an advance transfer to the trust fund of all the taxes that are expected to be received by the fund in the next month. Thus, the difference between (1) the sum of the estimated trust fund ratios shown in table IV.A1 and the advance tax transfers for January expressed as a percentage of total expenditures in the year and (2) the minimum level required to pay benefits on time, represents the reserve available to handle adverse contingencies.

2. Operations of the DI Trust Fund

The estimated operations and financial status of the DI Trust Fund during calendar years 2002-11 under the three sets of assumptions are shown in table IV.A2, together with figures on actual experience in 1997-2001. Income is generally projected to increase steadily under each alternative, reflecting most of the same factors described previously in connection with the OASI Trust Fund. The estimates indicate that the assets of the DI Trust Fund would also continue to increase throughout the next 10 years under the intermediate and low cost assumptions, but at a slightly lower rate than for the OASI Trust Fund. Under the high cost assumptions, DI assets would increase through 2007 and decline steadily thereafter.

Expenditures are estimated to increase because of automatic benefit increases and projected increases in the amounts of average monthly earnings on which benefits are based. In addition, under all three sets of assumptions, the number of DI beneficiaries in current-payment status is projected to continue increasing throughout the short-range projection period, at somewhat higher levels than anticipated in last year's report. The projected annual average growth rate in the number of DI worker beneficiaries is roughly 3.9 percent over the period 2001-11. Growth is largely attributable to the gradual progression of the baby-boom generation toward ages 50-64 at which higher rates of disability incidence are experienced.

The proportion of insured workers who are awarded disability benefits in a given year is referred to as the disability incidence rate. Due to the substantial variation exhibited by incidence rates in the past and the difficulty in determining reliable explanatory factors for this variation, any projection of future incidence rates necessarily will be uncertain. The 2001 disability incidence rate (calculated on an age-sex-adjusted basis) was 4.94 awards per 1,000 insured workers. This figure was slightly higher than the average incidence rate of 4.91 per thousand that was experienced during the period 1975-2000. The 2001 rate, however, represented an 8 percent increase over the corresponding value for 2000. This sharp one-year increase is a dramatic departure from the experience of the previous 8 years which generally observed modest annual declines in the age-sex adjusted incidence rate for disabled workers.

The increase in the incidence rate in 2001 is likely due in large part to the economic downturn experienced during that year. There was, however, a special administrative activity undertaken by SSA beginning in 2001 that contributed to the upsurge in disabled worker awards. This special workload was the result of discovering roughly 200,000 recipients of Supplemental Security Income (SSI) benefits whose disability-insured status under the DI program was not previously recognized. As the DI benefits for those in this special workload continue to be processed over the next 12-18 months, it is anticipated that a temporary increase in DI incidence rates will be observed. The first part of that temporary increase contributed to the higher than expected incidence rates in 2001. After the special workload cases are processed, the incidence rates projected in this report over the short range are expected to return to levels slightly higher than those assumed in last year's report due in part to the continuing effect of this effort to better identify DI disability insured status for SSI recipients. Under the intermediate assumptions, incidence rates are assumed to increase to 5.53 per thousand in 2002 and then decline to 4.8 per thousand in 2003 and remain at roughly that level for the remainder of the short-range projection period, slightly below the average level for the past 25 years. Under the low and high cost alternatives, incidence rates are assumed to follow a similar pattern of a temporary increase in 2002, followed by a decline in 2003. Under the low cost alternative, incidence rates decline further after 2003 to roughly 4 per thousand by the end of the short-range period. The high cost alternative assumes that incidence rates increase after 2003 to roughly 5.5 per thousand by 2011.

The proportion of DI beneficiaries whose benefits terminate in a given year has also fluctuated significantly in the past. Over the last 20 years, the rates of benefit termination due to death or conversion to retirement benefits (at attainment of normal retirement age) have declined very gradually. This trend is attributable, in part, to the lower average age of new beneficiaries. However, some recent program changes and health trends have also led to improved mortality experience among the DI disabled workers. These changes include legislation to exclude drug addicts and alcoholics from the DI rolls; the diminished impact of AIDS on DI; continued increases in mental-impairment disabilities; and a rising number of awards to older workers, which are based on vocational factors. The termination rate due to recovery has been much more volatile. Currently, the proportion of disabled beneficiaries whose benefits cease because of their recovery from disability is very low in comparison to levels experienced throughout the 1970s and early 1980s.

Note: Totals do not necessarily equal the sums of rounded components.

In this report, termination rates due to attainment of normal retirement age are estimated to remain steady through 2002 at roughly 40 per thousand disabled. This rate then drops in 2003 and remains at a depressed level for 5 more years as a result of the increase in the normal retirement age which begins with individuals attaining age 65 in that year. Age-specific death rates for disabled beneficiaries are assumed to decline gradually from the current experience levels. Projected levels of recovery terminations for this year's report remain consistent with last year's report after adjusting for (1) 2001 actual experience, and (2) the somewhat higher numbers of disabled workers expected to return to work and leave the DI rolls as a result of the provisions in Public Law 106-170 enacted December 17, 1999. The overall termination rate (reflecting all causes) is projected to either remain level (under the low cost alternative) or decline slightly (under the intermediate and high cost alternatives) during 2002. The overall rate then declines in 2003 due largely to the increase in the normal retirement age cited above.

At the beginning of calendar year 2001, the assets of the DI Trust Fund represented 193 percent of annual expenditures. During 2001, DI income exceeded DI expenditures by $22.5 billion, contributing to an increase in the trust fund ratio for the beginning of 2002 to about 197 percent. Under the intermediate set of assumptions, total income is estimated to exceed expenditures in each year of the short-range projection period. However, the projected decline in the trust fund ratio from a peak of 246 percent in 2007 to 235 percent by the beginning of 2011 is an early warning of the eventual shortfall in available DI Trust Fund assets needed to cover current expenditures-projected under the intermediate assumptions to occur after the end of the short-range period.

Under the low cost assumptions, the trust fund ratio would increase rapidly to 362 percent at the beginning of 2011. Under the high cost assumptions, the assets of the DI Trust Fund would increase through 2004 and then decline steadily thereafter, dipping below the level of 1 year's expenditures near the middle of 2011.

Because DI assets were greater than 1 year's expenditures at the beginning of 2002 and would remain above that level in 2003 and later the DI Trust Fund satisfies the Trustees' short-range test of financial adequacy under both the intermediate and low cost assumptions. However, under the high cost assumptions the DI Trust Fund fails to meet the short-range test of financial adequacy, because assets fall below 1 year's expenditures by the end of the short-range period, as described above (see also figure IV.A1).

3. Operations of the Combined OASI and DI Trust Funds

The estimated operations and status of the OASI and DI Trust Funds, combined, during calendar years 2002-11 on the basis of the three alternatives, are shown in table IV.A3, together with figures on actual experience in 1997-2001. The dollar amounts are the sums of the corresponding figures shown in tables IV.A1 and IV.A2. Like the individual funds, the combined OASI and DI Trust Funds meet the requirements of the short-range test of financial adequacy (see also figure II.D1).

Note: Totals do not necessarily equal the sums of rounded components.

4. Factors Underlying Changes in 10-Year Trust Fund Ratio Estimates From the 2001 Report

The factors underlying the changes in the intermediate estimates for the OASI, DI and the combined funds from last year's annual report to this report are analyzed in table IV.A4. In the 2001 Annual Report, the trust fund ratio for OASI was estimated to reach 453 percent at the beginning of 2010—the tenth projection year from that report. The corresponding ratio shown in this report for the tenth projection year (2011) is 491 percent. If there had been no changes to the projections, the estimated ratio at the beginning of 2011 would have been 13 percentage points higher than at the beginning of 2010. There were changes, however, to reflect the latest actual data, as well as adjustments to the assumptions for future years. The cumulative net effects of changes in economic assumptions (including re-estimates of future tax revenue consistent with recent revisions to historical data) resulted in an increase in the trust fund ratio of 23 percentage points by the beginning of 2011. Legislation enacted since last year's report eliminating deemed military wage credits, and the indirect effects of Public Law 107-16 on the taxation of benefit payments, as described earlier, resulted in a decrease in the trust fund ratio of 2 percentage points. In addition, the tenth-year trust fund ratio showed a small net change due to the effects of (1) revised population projections and (2) revised assumptions regarding future average benefit levels and projected numbers of old-age and survivor beneficiaries.

Corresponding estimates of the factors underlying the changes in the financial projections for the DI Trust Fund, and for the OASI and DI Trust Funds combined, are also shown in table IV.A4. Other than the effect of the revised economic assumptions, the key factor affecting the new trust fund ratio estimates for the DI Trust Fund was the increase in the projected number of beneficiaries described earlier.

Note: Totals do not necessarily equal the sums of rounded components.

¹ The estimates shown in this subsection reflect 12 months of benefit payments in each year of the short-range projection period. In practice, 13 benefit payments have been made in certain years, with the next year having only 11 payments. This situation resulted from the statutory requirement that benefit checks be delivered early when the normal check delivery date is a Saturday, Sunday, or legal public holiday. For example, the benefit checks for December 1998 would normally have been delivered on January 3, 1999; however, because that day was a Sunday, and the two preceding days a Saturday and a holiday, the checks were actually delivered on December 31, 1998. The annual benefit figures are shown as if those benefit checks were delivered on the usual date. Whenever this situation occurs, only the portion of benefits payable on January 3 would be delivered in December. The benefits payable later in January due to payment cycling, which began in June 1997, would still be paid in January.

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