2005 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 cost of the OASI and DI Trust Funds, in dollars over the next 10 years and as a percentage of taxable payroll or in present-value dollars over the full 75-year period, along with a discussion of a variety of measures of the adequacy of current program financing. In this report we carefully distinguish between (1) the cost (or obligations) of the program, which includes, for the future, all benefits scheduled under current law, and (2) expenditures (disbursements or outgo), which include actual payments for the past and only the portion of the cost of the program that is projected to be payable with the financing provisions in current law.

As described in the Overview section of this report, these estimates depend upon a broad set of demographic, economic, and programmatic factors. Since assumptions related to these factors 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 estimate 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 (2005-14) are presented first, followed by estimates and measures of actuarial status for the long range (2005-79) and for the infinite future. As an additional illustration of uncertainty, estimated probability distributions of certain measures are presented in appendix E.

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 cost for the year. Thus, the trust fund ratio represents the proportion of a year's cost which can be paid with the funds available at the beginning of the year. During periods when trust fund income exceeds disbursements, the excess is held in the trust funds which serve to advance fund a portion of the Social Security program's future financial obligations. 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 within 5 years 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 2005-14, 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 2014. 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 2014. The number of persons with taxable earnings would increase on the basis of alternatives I, II, and III from 157 million during calendar year 2004 to about 174 million, 171 million, and 168 million, respectively, in 2014. The total annual amount of taxable earnings is projected to increase from $4,515 billion in 2004 to $7,231 billion, $7,284 billion, and $7,553 billion, in 2014, on the basis of alternatives I, II, and III, respectively.2 These increases in taxable earnings are due primarily to (1) projected increases in employment levels as the working age (20-64) population increases, (2) increases in average earnings in covered employment (reflecting both real growth and price inflation), and (3) increases in the contribution and benefit base in 2005-14  under the automatic-adjustment provisions.

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 2014, interest income to the OASI Trust Fund is projected to be about 19.6 percent of total trust fund income on the basis of the intermediate assumptions, as compared to 13.9 percent in 2004.

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

[Assets as a percentage of annual cost]

[D]

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

Rising expenditures during 2005-14 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.

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 financial securities, generally special public-debt obligations of the U.S. Government. The cash used to make these purchases flows to the General Fund of the Treasury and is used to meet various Federal outlays or to reduce the amount of publicly-held Federal debt. Interest on these securities is paid to the trust fund and, when the securities mature or are redeemed prior to maturity, general fund revenues flow 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, this cash flow will reverse sometime in the next 10-20 years. Thereafter, increasingly larger amounts will be needed from trust fund assets 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.

2. Operations of the DI Trust Fund

The estimated operations and financial status of the DI Trust Fund during calendar years 2005-14 under the three sets of assumptions are shown in table IV.A2, together with figures on actual experience in 2000-04. 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 lower rate than for the OASI Trust Fund. Under the high cost assumptions, DI assets would increase through 2006 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. Over the period 2004-14, the projected annual average growth rate in the number of DI worker beneficiaries is roughly 1.8, 2.9, and 4.4 percent under alternatives I, II, and III, respectively. Growth is largely attributable to the gradual progression of the baby-boom generation through ages 50-65, at which higher rates of disability incidence are experienced.

Recent annual increases in incidence rates over the period 2001-03 represented a notable departure from the experience of the preceding decade, which generally showed modest annual declines in the age-sex-adjusted disability incidence rate.3 These increases were likely due in large part to the slowdown in economic growth experienced during that period. However, a special administrative activity undertaken by SSA beginning in 2001 has also contributed slightly to the upsurge in disabled worker awards. This special workload was the result of discovering a substantial number of current or former recipients of Supplemental Security Income (SSI) benefits whose disability-insured status under the DI program was not previously recognized. As this special disability workload is processed over the next several years, the resulting disability awards will contribute to temporarily higher incidence rates than would have been expected as part of longer term underlying trends.

Estimates of the total size of this special workload, and the time required to process these claims, remain roughly the same as assumed for the 2004 report. After the last of the special workload cases is processed, the incidence rates projected in this report are estimated to drop back somewhat from recent levels, consistent with an assumed return to faster economic growth. Incidence rates are then expected to return to levels roughly in line with those assumed in last year's report under the three alternative sets of assumptions.

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

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 worker beneficiaries. 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. Projected levels of recovery terminations for this year's report remain consistent with last year's report. The overall termination rate (reflecting all causes) is projected to remain near the 2003 level before increasing back to higher levels in 2009 when the gradual increase in the normal retirement age temporarily ceases.

At the beginning of calendar year 2004, the assets of the DI Trust Fund represented 218 percent of annual expenditures. During 2004, DI income exceeded DI expenditures by only $10.8 billion, contributing to a decrease in the trust fund ratio for the beginning of 2005 to about 215 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 to 162 percent by the beginning of 2014 is an early warning of the eventual shortfall in available DI Trust Fund assets needed to cover program cost—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 to 267 percent at the beginning of 2014. Under the high cost assumptions, the assets of the DI Trust Fund would decline steadily, dipping below the level of 1 year's expenditures near the middle of 2010, and is projected to become completely depleted near the end of 2014.

Because DI assets were greater than 1 year's expenditures at the beginning of 2005 and would remain above that level in 2006 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 2005-14 on the basis of the three alternatives, are shown in table IV.A3, together with figures on actual experience in 2000-04. Because income and cost for the OASI Trust Fund represent over 80 percent of the corresponding amounts for the combined OASI and DI Trust Funds, the operations of the OASI Trust Fund tend to dominate the combined operations of the two funds. Consequently, based on the strength of the OASI Trust Fund over the next 10 years, the combined OASI and DI Trust Funds meet the requirements of the short-range test of financial adequacy under all three alternative sets of assumptions.

While combining the operations of the OASI and DI Trust Funds permits an assessment of the short-range test for the two programs on a combined basis, in practice assets from one trust fund cannot be shared with another trust fund without legislative changes to the Social Security Act. For example, under the high cost scenario, table IV.A2 shows that the DI Trust Fund becomes exhausted in 2014. The value of the combined OASI and DI Trust Funds in that year shown in table IV.A3 implies that OASI assets could be made available to pay DI benefits once the DI Trust Fund is exhausted.

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

4. Factors Underlying Changes in 10-Year Trust Fund Ratio Estimates From the 2004 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 2004 Annual Report, the trust fund ratio for OASI was estimated to reach 492 percent at the beginning of 2013—the tenth projection year from that report. If there had been no changes to the projections, the estimated ratio at the beginning of 2014 would be 6 percentage points higher than at the beginning of 2013, or 498 percent. There were changes, however, to reflect the latest actual data, as well as adjustments to the assumptions for future years. The resulting ratio shown in this report for the tenth projection year (2014) is 468 percent. The net effect of changes in demographic assumptions over the short-range period resulted in an estimated small net reduction in the tenth-year trust fund ratio. The cumulative net effects of changes in economic data and assumptions (including re-estimates of future tax revenue consistent with recent revisions to historical data) resulted in a reduction in the trust fund ratio of 26 percentage points by the beginning of 2014. A further reduction was due to the net effect of various factors labeled collectively as "programmatic data and assumptions." Finally, updated estimates of future earnings patterns used to project average amounts paid to newly-awarded beneficiaries resulted in a further reduction in the 2014 trust fund ratio of 1 percentage point.

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. The largest effect on the DI trust fund ratio at the beginning of 2014 was due to revised economic assumptions, although the change in the valuation period and updates for a variety of programmatic assumptions have contributed to the total 32 percentage point reduction.

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

1The estimates shown in this subsection reflect 12 months of benefit payments in each year of the short-range projection period. In practice, the actual payment dates have at times been shifted over calendar year boundaries as a result of the statutory requirement that benefit checks be delivered early when the normal check delivery date is a Saturday, Sunday, or legal public holiday. The annual benefit figures are shown as if those benefit checks were delivered on the usual date.

2Note that the pattern, by alternative, of these nominal amounts of total wages is not what might be expected, but the reverse, because of the varying inflation assumptions embedded in the respective estimates.

3Historical and projected patterns of disability incidence rates are described in greater detail in section V.C.6.

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