Trustees Report- 1996

C. SUMMARY OF THE OPERATIONS OF THE OLD-AGE AND SURVIVORS INSURANCE AND DISABILITY INSURANCE TRUST FUNDS, FISCAL YEAR 1995

1. Old-Age and Survivors Insurance Trust Fund

A statement of the income and disbursements of the Federal Old-Age and Survivors Insurance Trust Fund in fiscal year 1995, and of the assets of the fund at the beginning and end of the fiscal year, is presented in table II.C1.

During fiscal year 1995, total receipts amounted to $326.1 billion, and total disbursements were $294.5 billion. The assets of the OASI Trust Fund thus increased by $31.6 billion during the year, to a total of $447.9 billion on September 30, 1995.

Included in total receipts during fiscal year 1995 were $289.3 billion in payroll tax contributions appropriated to the fund. Another $0.2 billion was received from the general fund of the Treasury representing payment for the taxes that would have been paid on estimated deemed wage credits for military service in 1995 if such credits had been considered to be covered wages. (Included in this payment are adjustments for revised estimates of deemed wage credits in prior years.) Normally, these tax receipts are offset by a transfer to the general fund of the Treasury for the estimated amount of refunds to employees who worked for more than one employer during a year and paid contributions in excess of the contribution and benefit base. The transfer was delayed to October 11, 1995, after the close of fiscal year 1995.

Payroll tax contributions thus amounted to $289.5 billion. While taxable earnings increased, contributions to the OASI Trust Fund in fiscal year 1995 were 6.1 percent less than in the previous year because of the reallocation of the OASDI tax rate under Public Law 103-387. The rate allocated to the DI Trust Fund for 1994 through 1996 was increased from 0.60 percent to 0.94 percent for employees and employers, each. The tax rate allocated to DI in later years was also increased. The tax rate allocated to the OASI Trust Fund was reduced by an equal amount, so that the total OASDI tax rate remained unchanged. Because the new law was passed in October 1994 (after the start of fiscal year 1995) and required that the reallocation be effective retroactive to January 1, 1994, the differences in taxes resulting from the reallocation for the first 9 months of calendar year 1994 were transferred to the DI Trust Fund in fiscal year 1995. This resulted in the large increase in payroll tax contributions to the DI Trust Fund discussed in the next section. The combined payroll tax contributions to OASDI actually increased by 4.7 percent in fiscal year 1995 due to increased earnings and the increases in the contribution and benefit base that became effective on January 1 of each year 1994 and 1995. (Table II.B1 in the preceding section shows the tax rates and contribution and benefit bases now in effect.)

Income from taxation of benefits amounted to $5.1 billion, of which nearly 98 percent represented amounts credited to the trust funds in advance, on an estimated basis, together with adjustments to 1992 transfers to account for actual experience. The remaining 2 percent of the total income from taxation of benefits represented amounts withheld from the benefits paid to nonresident aliens.

Special payments are made to uninsured persons who either attained age 72 before 1968, or who attained age 72 after 1967 and had 3 quarters of coverage for each year after 1966 and before the year of attainment of age 72. The costs associated with providing such payments to persons having fewer than 3 quarters of coverage are reimbursable from the general fund of the Treasury. Accordingly, a reimbursement of $6,994,000 was transferred to the OASI Trust Fund in fiscal year 1995, as required by section 228 of the Social Security Act. The reimbursement reflected the costs of payments made in fiscal year 1993.

The OASI Trust Fund was credited with interest totaling $31.4 billion which consisted of (1) interest earned on the investments of the trust fund, plus (2) interest on transfers between the trust fund and the general fund account for the Supplemental Security Income program due to adjustments in the allocation of administrative expenses, and (3) interest arising from the revised allocation of administrative expenses among the trust funds, less (4) interest paid to the DI Trust Fund on the transfer of taxes required by the reallocation of the OASDI tax rate retroactive to January 1, 1994.

The remaining $54,108 of receipts consisted of gifts received under the provisions authorizing the deposit of money gifts or bequests in the trust funds.

Of the $294.5 billion in total disbursements, $288.6 billion was for net benefit payments. The amount of net benefit payments in fiscal year 1995 represents an increase of 4.5 percent over the corresponding amount in fiscal year 1994. This increase was due primarily to (1) the automatic cost-of-living benefit increases of 2.6 percent and 2.8 percent which became effective for December 1993 and December 1994 respectively, under the automatic-adjustment provisions in section 215(i) of the Social Security Act, (2) an increase in the total number of beneficiaries, and (3) an increase in the average benefit amount resulting from the rising level of earnings.

As described in the preceding section, certain provisions of the Railroad Retirement Act coordinate the Railroad Retirement and OASDI programs and govern the financial interchanges arising from the allocation of costs between the two programs. Under those provisions, the Railroad Retirement Board and the Commissioner of Social Security determined that a transfer of $4.1 billion to the Social Security Equivalent Benefit Account from the OASI Trust Fund was required in June 1995.

The remaining $1.8 billion of disbursements from the OASI Trust Fund represented net administrative expenses. The expenses of administering the OASDI and Medicare programs are allocated and charged directly to each of the various trust funds, through which those programs are financed, on the basis of provisional estimates. Similarly, the expenses of administering the Supplemental Security Income program are also allocated and charged directly to the general fund of the Treasury on a provisional basis. Periodically, as actual experience develops and is analyzed, adjustments to the allocations of administrative expenses for prior periods are effected by interfund transfers and transfers between the OASI Trust Fund and the general fund account for the Supplemental Security Income program, with appropriate interest adjustments.

Section 1131 of the Social Security Act authorizes annual reimbursements from the general fund of the Treasury to the OASI Trust Fund for additional administrative expenses incurred as a result of furnishing information on deferred vested benefits to pension plan participants, as required by the Employee Retirement Income Security Act of 1974 (Public Law 93-406). The reimbursement in fiscal year 1995 amounted to $1,359,789.

The assets of the OASI Trust Fund at the end of fiscal year 1995 totaled $447.9 billion, consisting of $447.9 billion in U.S. Government obligations and, as an offset, an extension of credit amounting to $0.8 million. Table II.C2 shows the total assets of the fund and their distribution at the end of each fiscal year 1994 and 1995.

All securities held by the trust funds are backed by the full faith and credit of the United States Government. Those currently held by the OASI Trust Fund are special issues (i.e., securities sold only to the trust funds). These are of two types: short-term certificates of indebtedness and long-term bonds. The certificates of indebtedness are issued through the investment of receipts not required to meet current expenditures, and they mature on the next June 30 following the date of issue. Special-issue bonds, on the other hand, are normally acquired only when special issues of either type mature on June 30. The amount of bonds acquired on June 30 is equal to the amount of special issues maturing, less amounts required to meet expenditures on that day.

The effective annual rate of interest earned by the assets of the OASI Trust Fund during calendar year 1995 was 7.9 percent, as compared to 8.0 percent earned during calendar year 1994. The interest rate on special issues purchased by the trust fund in June 1995 was 6.5 percent, payable semiannually. Special-issue bonds with a total par value of $64.0 billion were purchased in June 1995.

Section 201(d) of the Social Security Act provides that the public-debt obligations issued for purchase by the OASI and DI Trust Funds shall have maturities fixed with due regard for the needs of the funds. The usual practice has been to spread the holdings of special issues, as of each June 30, so that the amounts maturing in each of the next 15 years are approximately equal. Accordingly, the amounts and maturity dates of the OASI special-issue bonds purchased on June 30, 1995, were selected in such a way that the maturity dates of the total portfolio of special issues were spread evenly over the 15-year period 1996-2010.

2. Disability Insurance Trust Fund

A statement of the income and disbursements of the Federal Disability Insurance Trust Fund during fiscal year 1995, and of the assets of the fund at the beginning and end of the fiscal year, is presented in table II.C3.

During fiscal year 1995, total receipts amounted to $70.2 billion, and total disbursements were $41.4 billion. The assets of the trust fund thus increased by $28.8 billion during the year, to a total of $35.2 billion on September 30, 1995.

Included in total receipts were $67.9 billion representing payroll tax contributions appropriated to the fund and $67,222,000 in payments from the general fund of the Treasury representing taxes that would have been paid on estimated deemed wage credits for military service in 1995 if such credits had been considered to be covered wages.

Total contributions amounted to $68.0 billion, an increase of 105.8 percent from the amount in the preceding fiscal year. This increase is primarily attributable to the reallocation of the OASDI tax rate that accounted for the reduction in contributions to the OASI Trust Fund in fiscal year 1995. Income from the taxation of benefit payments amounted to $0.3 billion in fiscal year 1995.

Interest totaling $1.9 billion consisted of interest on the investments of the fund and interest on amounts of interfund transfers.

Of the $41.4 billion in total disbursements, $40.2 billion was for net benefit payments. This represents an increase of 9.2 percent over the corresponding amount of benefit payments in fiscal year 1994. This increase is due in part to the same factors that resulted in the net increase in benefit payments from the OASI Trust Fund. In the case of DI, however, the number of persons receiving disabled worker benefits continued to increase rapidly in 1995. Section II.F1. presents a more detailed discussion of this rapid growth.

Provisions governing the financial interchanges between the Railroad Retirement and OASDI programs are described in the preceding section. Under those provisions, $67,786,000 was transferred to the Social Security Equivalent Benefit Account from the DI Trust Fund in June 1995.

The remaining disbursements amounted to $1.1 billion for net administrative expenses (including $2,418,404 for demonstration projects and experiments to test the effect of alternative methods for assisting disabled beneficiaries' attempts to work), and $38,794,496 for the costs of vocational rehabilitation services furnished to disabled-worker beneficiaries and to those children of disabled workers who were receiving benefits on the basis of disabilities that began before age 22. Reimbursement from the trust funds for the costs of such services is made only in those cases where the services contributed to the successful rehabilitation of the beneficiaries.

The assets of the DI Trust Fund at the end of fiscal year 1995 totaled $35.2 billion, consisting of $35.2 billion in U.S. Government obligations and, as an offset, an extension of credit amounting to $19,146,366. Table II.C4 shows the total assets of the fund and their distribution at the end of each fiscal year 1994 and 1995.

The effective annual rate of interest earned by the assets of the DI Trust Fund during calendar year 1995 was 7.4 percent, as compared to 8.2 percent earned during calendar year 1994. The interest rate on public-debt obligations issued for purchase by the trust fund in June 1995 was 6.5 percent, payable semiannually. Special-issue bonds with a total par value of $28.8 billion were purchased in June 1995. The usual practice of spreading the holdings of special issues, as described earlier, was not followed. The amounts and maturity dates of the DI special-issue bonds purchased on June 30, 1995, were selected in such a way that the maturity dates of the total portfolio of special issues were spread over the 13-year period 1996-2008.

The investment policies and practices described for the OASI Trust Fund apply as well to the investment of the assets of the DI Trust Fund.

3. Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Combined

A statement of the operations of the income and disbursements of the OASI and DI Trust Funds, on a combined basis, is presented in table II.C5. The entries in this table represent the sums of the corresponding values from tables II.C1 and II.C3. For a discussion of the nature of these income and expenditure transactions, reference should be made to the preceding two subsections covering OASI and DI separately.

Table II.C6 compares past estimates of contributions and benefit payments for fiscal year 1995, as shown in the 1991-95 Annual Reports, with the corresponding actual amounts in 1995. The estimates shown are the ones based on the alternative II assumptions.

A number of factors can contribute to differences between estimates and subsequent actual amounts, including actual values for key economic, demographic, and other variables that differ from assumed levels. In addition, amendments to the Social Security Act can cause actual taxes or benefits to vary from earlier estimates. For example, the reallocation of the OASDI tax rate, enacted in October 1994, makes comparison of tax estimates in the 1991-94 Annual Reports with actual taxes in fiscal year 1995 meaningless for OASI and DI taken separately. The comparisons in table II.C6 indicate that combined actual OASI and DI tax contributions in fiscal year 1995 were significantly lower, generally, than estimates in the 1991 report (due primarily to lower than expected inflation). Estimates of OASI benefit payments were generally close to actual payments in 1995. The actual amount of DI benefit payments in 1995, however, was significantly above estimates in the 1991-92 reports, due to faster-than-expected growth in the number of disabled workers.

At the end of fiscal year 1995, about 43.3 million persons were receiving monthly benefits under the OASDI program. Of these persons, about 37.5 million and 5.8 million were receiving monthly benefits from the OASI Trust Fund and the DI Trust Fund, respectively. The number of persons receiving benefits from the OASI and DI Trust Funds grew by 0.8 percent and 5.2 percent, respectively, during the fiscal year. The estimated distribution of benefit payments in fiscal years 1994 and 1995, by type of beneficiary, is shown in table II.C7 for each trust fund separately.

Net administrative expenses charged to the OASI and DI Trust Funds in fiscal year 1995 totaled $2.9 billion. This amount represented 0.8 percent of contribution income and 0.9 percent of expenditures for benefit payments. Corresponding percentages for each trust fund separately and for the OASDI program as a whole are shown in table II.C8 for each of the last 5 years.

Tables II.C2 and II.C4, presented in the two preceding subsections, showed the assets of the OASI and DI Trust Funds at the end of fiscal years 1994 and 1995. The changes in the invested assets of the funds between those two dates are a result of the acquisition and disposition of securities during fiscal year 1995. Table II.C9 presents these investment transactions for each trust fund separately and combined. All amounts shown in the table are at par value.