2006 OASDI Trustees Report

V. ASSUMPTIONS AND METHODS UNDERLYING
ACTUARIAL 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 and the level and distribution of earnings. Similarly, program cost will depend on how these factors affect the size and composition of the beneficiary population and the general level of benefits.

Basic assumptions are developed for several of these factors based on analysis of historical trends and conditions, and on expected future conditions. These factors include fertility, mortality, immigration, marriage, divorce, productivity, inflation, average earnings, unemployment, retirement, and disability incidence and termination. Other factors are projected using methods that reflect historical and expected future relationships to the basic assumptions. These include total population, life expectancy, labor force, gross domestic product, interest rates, and many program-specific factors. It should be noted that all factors included in any consistent set of assumptions are interrelated directly or indirectly. It is also important to note that these interrelationships can and do change over time.

The assumptions and methods used in this report are reexamined each year in light of recent experience and new information about future conditions, and are revised if warranted.

Because projections of these factors and their interrelationships are inherently uncertain, a range of estimates is shown in this report on the basis of 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. In terms of the net effect on the status of the OASDI program, the low cost is the most optimistic, and the high cost is the most 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. The probability is very low that all the assumptions and interactions would differ in the same direction from those expected. Outcomes with overall cost as low as (or lower than) the low cost scenario or as high as (or higher than) the high cost scenario are also very low probability.

Although these three sets of demographic and economic assumptions have been developed to provide a broad range of possible outcomes, the resulting estimates should be interpreted with care. The estimates are not intended to be specific predictions of the future financial status of the OASDI program, but rather, they are intended to be indicators of the expected trend and 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 move from recently experienced levels or trends, toward long-range ultimate values generally over the next 2 to 25 years. Ultimate values or trends reached by the end of the 75-year long-range period are generally maintained at these levels or trends for extrapolations beyond 75 years. One exception is for real wage growth, as described in section IV.B.5.

The ultimate values assumed after the first 2 to 25 years (and through the end of the 75-year long-range period) for both the demographic and the economic factors 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 somewhat misleading. Nevertheless, the following sections roughly follow the order used in building the trust fund estimates presented in chapter IV.

A. DEMOGRAPHIC ASSUMPTIONS AND METHODS

The principal demographic assumptions relating to fertility, mortality, and net immigration for the three alternatives are shown in table V.A1. The rationales for selecting these assumptions are discussed in the following three sections.

1. Fertility Assumptions

Fertility (birth rate) assumptions are developed for women by single year of age, from 14 to 49. They are applied to the total number of women in the population at each age, for all marital statuses.

Historically, fertility rates in the United States have fluctuated widely. The total fertility rate² decreased from 3.3 children per woman after World War I to 2.1 during the Great Depression, rose to 3.7 in 1957, and then fell to 1.7 in 1976. After 1976, the total fertility rate began to rise again, reaching a level of 2.07 for 1990. Since then, the total fertility rate has remained fairly stable, around 2.0 children per woman.

These variations in fertility rates have resulted from changes in many factors, including social attitudes, economic conditions, and the use of birth-control methods. Future fertility rates may be expected to remain close to recent levels. The recent historical and projected trends in certain population characteristics, such as the rising 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 a continued relatively low fertility rate. Based on consideration of these factors, ultimate total fertility rates of 2.3, 2.0 and 1.7 children per woman were selected for the low cost, intermediate, and high cost assumptions, respectively. For each alternative, the total fertility rate is assumed to gradually trend from the estimated level of 2.05 for 2003, reaching the selected ultimate level for 2030 and later.

The ultimate total fertility rates for the intermediate and low cost assumptions are increased from the rates of 1.95 and 2.2 children per woman, respectively, in last year's report. The ultimate total fertility rate for the high cost assumption is unchanged from last year's report. The increase in the ultimate total fertility rates for the intermediate and low cost assumptions is based primarily on the persistently higher than previously assumed levels of total fertility rates in recent years. Since 1990, the total fertility rate has been at least 2.0 children per woman in all but three years and never below 1.97 children per woman.

In addition, total fertility rates for years prior to 2030 are slightly higher than in last year's report due to incorporating additional birth data for 2003 and revised population data for 2000-03. These recent birth and population data result in slightly higher starting levels that remain at higher levels through 2029.

2. Mortality Assumptions

Mortality (death rate) assumptions are developed by single year of age, sex, and cause of death.

Death rates in the United States since 1900 have declined substantially, but at varying rates. Historical rates (for years 1900-2002) used in preparing this report were calculated for ages below 65 (and for all ages prior to 1968) using data from the National Center for Health Statistics (NCHS).³ For ages 65 and over, Medicare final data were used for years 1968 through 2002. Also used are death rates by cause of death produced by the NCHS for years 1979-2002.

The total age-sex-adjusted death rate⁴ declined at an average rate⁵ of 1.05 percent per year between 1900 and 2002. Between 1979 and 2002, the period for which death rates are analyzed by cause, the total age-sex-adjusted death rate (for all causes combined) declined at an average rate of 0.71 percent per year.

Historical death rates have 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 0.72 percent per year between 1900 and 2002. Between 1979 and 2002 the age-sex-adjusted death rate for these ages declined at an average annual rate of 0.47 percent.

Reductions in death rates have resulted from many factors, including increased medical knowledge and 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, sex, and cause of death were selected for 2030 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 greater. These three sets of ultimate annual percentage reductions are unchanged from those used in last year's report.

After 2002, the reductions in central death rates for alternative II are assumed to change rapidly from the average annual reductions by age, sex, and cause of death observed between 1982 and 2002, to the ultimate annual percentage reductions by age, sex, and cause of death assumed for 2030 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 1982 and 2002.

Projections of age-sex-adjusted death rates are presented in table V.A1 for the total (all ages), for under age 65, and for ages 65 and over. Under the intermediate assumptions, these projected age-sex-adjusted death rates are slightly higher than the death rates in last year's report. New data for 2002 results in age-sex-adjusted death rates throughout the projection period that are slightly higher than those in last year's report.

After adjustment for changes in the age-sex distribution of the population, the resulting total death rates are projected to decline at ultimate average annual rates of about 0.33 percent, 0.70 percent, and 1.22 percent between 2030 and 2080 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, 0.67 percent, and 1.16 percent between 2030 and 2080 for alternatives I, II, and III, respectively.

There is a wide range of opinion among experts on the likely rate of future decline in death rates. For example, the 2003 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 and developments in health care and life style will be closely monitored to determine what further modifications to the assumed ultimate rates of decline in mortality may be warranted for future reports.

3. Immigration Assumptions

Legal immigration⁶ 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 580,000⁷ 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 837,000 ² persons per year during the period 1992 through 2004. The number of legal immigrants in 2004 is estimated to be 946,000 persons.

For 2004, net legal immigration (after considering emigration) is estimated to be about 710,000 persons. Net other immigration is estimated to be 400,000 persons. For 2005, net legal immigration is estimated to be 675,000 for the intermediate, 720,000 for low cost and 630,000 for the high cost assumptions. Net other immigration for 2005 is estimated to be 400,000 persons for all three assumptions.

The ultimate annual net immigration assumptions are unchanged from those in last year's report. After 2005, the annual number of net legal immigrants is projected to reach the ultimate level in 2007. The ultimate level of annual net other immigrants is projected to be reached in 2026 under the intermediate and low cost assumptions and in 2016 under the high cost assumptions.

The total level of net immigration (legal and other, combined) under the intermediate projection is assumed to be 1,075,000 persons in 2006, and 900,000 persons⁸ in 2026 and for each year afterward. For the low cost assumptions, net immigration is assumed to increase slightly from a level of 1,270,000 persons in 2006 to an ultimate level of 1,300,000 persons⁹ for each year 2026 and later. Under the high cost assumptions, net immigration is assumed to be 810,000 persons in 2006, and 672,500 persons¹⁰ for each year after 2015.

There is a very wide range of opinion about the future course of immigration for the United States. Some, like the 2003 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 the U.S. borders could be tightened in the future.

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 2005 through 2080. The starting Social Security area population for January 1, 2004, is based on the Census Bureau's estimate of the residents of the 50 States and D.C., and U.S. Armed Forces overseas. The base estimate is adjusted for net census undercount and increased for other U.S. citizens living abroad (including residents of U.S. territories) and for 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.

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.

5. Life Expectancy Estimates

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. It is thus closely related to the age-sex-adjusted death rate that is 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.

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. Cohort life expectancy is shown in table V.A4 for those born on January 1 of each calendar year, and for those attaining age 65 on January 1 of each calendar year.

Tables V.A3 and V.A4 present historical and projected life expectancy calculated on both period and cohort bases. Cohort life expectancy is somewhat greater than period life expectancy for the same year. This is because death rates for any given age tend to decline as time passes and the cohort grows older.

¹Further details about the assumptions, methods, and actuarial estimates are contained in Actuarial Studies published by the Office of the Chief Actuary, Social Security Administration. A complete list of available studies may be found on the Social Security website at www.socialsecurity.gov/OACT/NOTES/actstud.html. To obtain copies of such Studies, or of this report, submit a request via our Internet request form; or write to: Office of the Chief Actuary, 700 Altmeyer Building, 6401 Security Boulevard, Baltimore, MD 21235; or call (410) 965-3015. This entire report, along with supplemental year-by-year tables, may also be found at www.socialsecurity.gov/OACT/TR/TR06/index.html.

²Defined to be the average number of children that would be born to a woman in her lifetime if she were to experience the birth rates by age observed in, or assumed for, the selected year, and if she were to survive the entire childbearing period. A rate of 2.1 would ultimately result in a nearly constant population if net immigration were zero and if death rates were constant.

³These rates reflect NCHS data on deaths and Census estimates of population.

⁴Calculated here as the crude rate that would occur in the enumerated total population as of April 1, 2000, if that population were to experience the death rates by age and sex for the selected year.

⁵Average rate of decline is calculated as the annual geometric rate of reduction between the first and last years of the period.

⁶Consistent with the U.S. Citizenship and Immigration Services, legal immigrants are individuals admitted to the U.S. for legal permanent residence.

⁷Excludes those persons admitted under the Immigration Reform and Control Act of 1986.

⁸600,000 net legal immigrants plus 300,000 net other immigrants.

⁹850,000 net legal immigrants plus 450,000 net other immigrants.

¹⁰472,500 net legal immigrants plus 200,000 net other immigrants.

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