I. OVERVIEW

I. CONCLUSION

As we have reported for the last several years, the combined OASI and DI Trust Funds are adequately financed over the next 10 years, and for many years thereafter, but the program is not in close actuarial balance over the next 75 years. Thus, the combined funds meet the short-term solvency test under all three sets of assumptions, but not the long-term test.

1. Short-term Status

At the beginning of 1996, the combined assets of the trust funds represented 140 percent of estimated expenditures in 1996. The combined funds are projected to grow during the next 10 years, and for many years thereafter, under both the intermediate and low cost assumptions. However, under the high cost assumptions, while the assets of the combined funds continue to grow through 2007, the trust fund ratio of assets to annual expenditures begins to decline in 2000. Both the OASI and DI Trust Funds separately meet the short-term solvency test.

2. Long-term Status

Although the combined trust funds are well financed over the next 10 years, the OASDI program is not in close actuarial balance over the full 75-year projection period and therefore does not meet the long-term solvency test. The estimated actuarial balance is a deficit of 2.19 percent of taxable payroll over the next 75 years, based on the intermediate assumptions. The combined OASI and DI Trust Funds would become exhausted in 2029 without corrective legislation. At that time, annual tax revenues of the combined trust funds would be less than expenditures by 3.87 percent of taxable earnings and would be sufficient to cover only 77 percent of annual expenditures.

The intermediate estimates indicate that the combined trust funds would be sufficient to enable the timely payment of benefits for the next 33 years. Relative to annual expenditures, the combined trust funds would continue to grow during the next 15 years, reaching a peak of about 2.4 times annual expenditures. Considering each fund separately, the OASI Trust Fund would have sufficient funds for the next 35 years, and the DI Trust Fund for the next 19 years, to enable timely payment of benefits. Based on the high cost assumptions, the combined funds would be sufficient to enable the timely payment of benefits only for the next 20 years.

For each of the next 16 years, OASDI income from contributions on earnings and income taxes on benefits is expected to exceed total expenditures. Starting in about 2010, however, OASDI costs, relative to taxable earnings, are expected to begin increasing rapidly as the baby-boom generation reaches retirement age. In contrast, the program's income from contributions on taxable earnings and income taxes on benefits will remain a relatively constant percentage of taxable payroll.

Therefore, the OASDI cost rate is estimated to exceed the income rate from 2012 through the end of the projection period, with the shortfall reaching 5.51 percent of taxable earnings by 2070, the last year of the 75-year period. Based on the less favorable conditions assumed for the high cost estimates, the crossover point would be reached in 2000, and the shortfall would grow eventually to be 14.24 percent of taxable earnings by 2070.

Although OASDI annual balances become negative in 2012 in the intermediate case, the availability of interest earnings results in continued trust fund growth until 2019. Because expenditures are estimated to increase faster than assets, however, OASDI assets would decline relative to annual expenditures, from about 2.4 to about 1.9 times annual expenditures, during the same period.

3. Recommendations

In view of the lack of close actuarial balance in the OASDI program over the next 75 years, we again urge that the long-range deficits of both the OASI and DI Trust Funds be addressed in a timely way. Because the DI Trust Fund is expected to be depleted several years earlier than the OASI Trust Fund, and because DI program growth has fluctuated widely in the past, it is essential that the DI program's future experience be monitored closely. It is important to address both the OASI and DI problems soon to allow time for phasing in any necessary changes and for workers to adjust their retirement plans to take account of those changes. We believe there is ample time to discuss and evaluate alternative solutions with deliberation and care. The size of the long-range deficit is such that long-range balance could be restored within the framework of the present program. Nonetheless, the magnitude of any required changes will be smaller the sooner they are enacted.

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Last Modified: 09:56am, June 11, 1996