Trustees Reports- 1995

A. ACTUARIAL ESTIMATES FOR THE OASDI AND HI PROGRAMS, COMBINED

In this appendix, long-range actuarial estimates for the OASDI and Hospital Insurance (HI) programs are combined to facilitate analysis of the adequacy of the combined income and assets of the trust funds relative to their combined expenditures. Combining cost and income rates as percentages of taxable payroll requires a note of caution. The taxable payrolls for the HI program are larger than those estimated for the OASDI program because (1) a larger maximum taxable amount was established for the HI program in 1991, with the maximum being eliminated altogether for the HI program in 1994, (2) a larger proportion of Federal, State, and local government employees have their wages covered under the HI program, and (3) the earnings of railroad workers are included in the HI taxable payroll but not in the OASDI taxable payroll (railroad contributions for the equivalent of OASDI benefits are accounted for on a net interchange that occurs annually between the OASDI and Railroad Retirement programs). As a result, the HI taxable payroll is about 20 percent larger than the OASDI taxable payroll throughout the long-range period. Nonetheless, combined OASDI and HI rates shown in this appendix are computed by adding the separately derived rates for the programs. The resulting combined rates may be interpreted as those applicable to the taxable payroll in the amount of the OASDI payroll, with the separate HI rates being additionally applicable to the excess of the HI payroll over the OASDI payroll.

Long-range estimates are subject to much uncertainty and should not be considered precise forecasts. Instead they should be considered as indicative of the general trend and range of costs that could reason ably be expected to occur. The emphasis in this appendix on combined operations, while significant, should not obscure the analysis of the financial status of the individual trust funds, which are legally separate and cannot be commingled. In addition, the factors which determine the costs of the OASI, DI, and HI programs differ substantially.

As with the OASI and DI Trust Funds, income to the HI Trust Fund comes primarily from contributions paid by employees, employers, and self-employed persons. The combined OASDI and HI contribution rate for employees and their employers is often referred to as the FICA tax, because it is authorized by the Federal Insurance Contributions Act. Contribution rates for the OASDI and HI programs are shown in table III.A1.

Table III.A2 shows estimated annual income rates and cost rates for the OASDI program, the HI program, and the combined OASDI and HI programs, based on the low cost, intermediate, and high cost sets of assumptions (alternatives I, II, and III) described earlier in this report. These annual rates are intended to indicate the cash-flow operation of the programs. Therefore, income rates exclude interest earned on trust fund assets and cost rates exclude the cost of accumulating or maintaining target trust fund balances. Table III.A2 also shows the difference between income rates and cost rates, called balances. Estimates shown for the combined trust funds are theoretical because no authority currently exists for transferring assets from one trust fund to another.

Under all three sets of assumptions, combined OASDI and HI cost rates are projected to rise above current levels, with the sharpest increase occurring during the period 2010-2030. Under the high cost set of assumptions, alternative III, annual deficits are projected to occur within the next 3 years, and to continue for the remainder of the 75-year projection period. Cost rates are projected to rise to over three times their current level by the end of the projection period. Under the intermediate assumptions, alternative II, annual deficits begin in the year 2002, with cost rates almost doubling by the end of the projection period. Under the low cost assumptions, alternative I, cost rates are projected to increase by about 25 percent, with annual deficits beginning by the year 2020.

Tables III.A3 and III.A4 show the estimates of summarized OASDI and HI income rates, cost rates and balances for various time periods, based on all three sets of assumptions. In table III.A3 values are summarized over the three 25-year subperiods (excluding the beginning fund balances and the cost of accumulating ending fund targets). In table III.A4 values are summarized over the 25-year, 50-year, and 75-year valuation periods (for which beginning fund balances are included in the summarized income rates, and the costs of accumulating an ending fund balance equal to 100 percent of annual expenditures by the end of the period are included in the summarized cost rates). Estimates shown for the combined trust funds are theoretical because no authority currently exists for transferring assets from one trust fund to another.

Under the high cost alternative III, the combined OASDI and HI system is projected to experience large deficits during the 25-year, 50-year, and 75-year valuation periods (including beginning trust fund balances and the cost of ending fund targets). Deficits are projected to occur during each 25-year subperiod of the 75-year projection period (excluding beginning trust fund balances and the cost of ending fund targets). Under intermediate alternative II assumptions, deficits of smaller magnitude than those for the high cost alternative III are projected to occur for each of the three 25-year subperiods and for each of the three valuation periods. Under the low cost alternative I, the combined OASDI and HI system is projected to show positive balances for the first 25-year subperiod and the 25-year valuation period, and a small positive balance for the 50-year valuation period. Relatively small deficits are projected for the 75-year valuation period and for the second and third 25-year subperiods.