IV. ACTUARIAL ESTIMATES
This chapter presents actuarial estimates of the future financial condition of the Social Security program. The income, cost, and assets (or shortfall) of the OASI and DI Trust Funds are projected in dollars for 10 years and as a percentage of taxable payroll, as a percentage of gross domestic product, and in present-value dollars over the 75‑year period. In addition, a variety of measures of the adequacy of current program financing are discussed. This report carefully distinguishes between (1) the cost (obligations) of the program, which includes all future benefits scheduled under current law, and (2) expenditures (disbursements), which include actual payments for the past plus only the portion of program cost 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 is 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 the 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 (2010‑19) are presented first, followed by estimates and
measures of actuarial status for the long range (2010‑84) and over the infinite horizon. As an additional illustration of uncertainty, estimated probability distributions of certain measures are presented in Appendix
E.
Financial adequacy, or solvency, of the trust funds reflects the ability to pay scheduled benefits in full on a timely basis and is generally assessed using the “
trust fund ratio,” which is defined as the
assets at the beginning of a year (which do not include advance tax transfers) expressed as a percentage of the cost during the year. Thus, the trust fund ratio represents the proportion of a year’s cost which could be paid solely with the assets at the beginning of a year. A trust fund ratio of 100 percent of annual program cost is generally assumed to provide a reasonable “contingency reserve.” During periods when trust fund income exceeds disbursements, the excess is held in the trust funds. To the extent that trust fund assets exceed 100 percent of annual cost, the excess is dedicated 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 short-range test of financial adequacy applies to the OASI and DI Trust Funds individually and combined. If the estimated trust fund ratio is at least 100 percent at the beginning of the projection period, the test requires that it be projected to remain at or above 100 percent throughout the 10-year period. Alternatively, if the ratio is initially less than 100 percent, then it must be projected to reach at least 100 percent within 5 years (and not be depleted at any time during this period) and then remain at or above 100 percent throughout the remainder of the 10-year period. This test is applied on the basis of the intermediate estimates. The failure of either trust fund to meet this test indicates that program solvency in the next 10 years is in question and that legislative action is needed to improve short-range financial adequacy.
This subsection presents estimates of the operations and financial status of the OASI Trust Fund for the period 2010-19, 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 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 large amount through the end of 2019. 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).
After an estimated decline in trust fund income from 2009 to 2010 due to the economic recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the Trust Funds in earlier years, the estimated income shown in table
IV.A1 increases annually under each set of assumptions throughout the remainder of the short-range projection period. The estimated increases in income reflect increases in estimated OASDI
taxable earnings and growth in
interest earnings on the invested assets of the trust fund. For each alternative, employment is assumed to decrease in 2010 and is assumed to increase in every year thereafter through 2019. The number of persons with taxable earnings would increase on the basis of alternatives I, II, and III from 156 million during calendar year 2009 to about 179 million, 175 million, and 171 million, respectively, in 2019. The total annual amount of taxable earnings is projected to increase in every year through 2019 for each alternative. Total earnings increase from $5,288 billion in 2009 to $8,787 billion, $8,869 billion, and $9,133 billion in 2019, 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
population increases, (2) increases in average earnings in
covered employment (reflecting both real growth and price inflation), (3) increases in the
contribution and benefit base during the period 2010-19 under the automatic-adjustment provisions, and (4) recovery from the economic recession.
Growth in interest earnings represents a significant component of the overall increase in trust fund income during this period. Although the effective
interest rates payable on trust fund investments are projected to temporarily decline from current levels through 2011, the continuing rapid increase in OASI assets will result in a corresponding net increase in interest income. By 2019, interest income to the OASI Trust Fund is projected to be about 17 percent of total trust fund income on the basis of the intermediate assumptions, as compared to 15 percent in 2009.
Rising expenditures during 2010-19 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 that 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. While trust fund assets are estimated to increase substantially, they will increase at a slowing rate of growth near the end of the short-range period.
The portion of OASI income 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. Interest on these securities is credited to the trust fund and, when the securities mature, they are reinvested in new securities if not immediately needed to pay program costs. When securities are redeemed prior to maturity in order to pay program costs, general fund revenue flows to the trust fund.
The estimated operations and financial status of the DI Trust Fund during calendar years 2010-19 under the three sets of assumptions are shown in table
IV.A2, together with values for actual experience during 2005-09. Income is projected to increase steadily after 2010 under each alternative, reflecting most of the same factors described previously in connection with the OASI Trust Fund. DI Trust Fund assets are projected to continue to decrease in 2010 under each alternative. Under the low-cost assumptions, assets would begin to increase again after reaching a low point in 2015. Under the
intermediate assumptions, assets would continue to decline until their projected exhaustion in 2018. Under the high-cost assumptions, DI assets would decline steadily until exhaustion in 2015.
Cost is estimated to increase in part due to increases in average benefit levels resulting from (1) automatic benefit increases and (2) projected increases in the amounts of average monthly earnings on which benefits are based. In addition, the number of DI beneficiaries in
current-payment status is projected to generally increase during the short-range projection period. Over the period 2009-19, the projected annual average growth rate in the number of DI disabled-worker beneficiaries is roughly 0.8, 2.0, and 3.2 percent under alternatives I, II, and III, respectively. Growth is largely attributable to the gradual progression of the baby-boom generation through ages 50 to
normal retirement age (NRA), at which ages higher rates of disability incidence are experienced. The estimates under all three sets of assumptions anticipate additional growth in the numbers of disabled-worker beneficiaries due to a projected sharp, but temporary, increase in incidence rates to levels comparable to some of the highest ever experienced under the DI program. These increases are projected to result from the economic recession. The projected higher levels of disability incidence are expected to subside as the economy recovers, and to return to levels comparable to those projected prior to last year’s report.
3
The proportion of disabled-worker beneficiaries whose benefits terminate in a given year has also fluctuated in the past. Over the last 20 years, the rates of benefit termination due to death and the proportion converting to retirement benefits (at attainment of NRA) have declined very gradually. This trend is attributable, in part, to the lower average age of new beneficiaries. Declines in mortality for the general population have also led to improved mortality experience among the disabled-worker beneficiaries. In addition, conversions to old-age benefits were at a temporarily reduced level for years 2003 through 2008 due to the gradual increase in the NRA. 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 rates of recovery terminations in this year’s report are temporarily elevated in years 2013-18 due to an assumed increase in funding for the purpose of reducing the backlog of continuing disability reviews (CDRs). Following this temporary increase in CDRs, recovery termination rates are projected to return to levels consistent with (1) projected levels of work terminations and (2) the assumption that terminations for medical improvement will be consistent with continued timely completion of CDRs after 2018. The overall proportion of disabled workers leaving the DI rolls (reflecting all causes) is projected to generally increase due to the aging of the beneficiary population.
At the beginning of calendar year 2009, the assets of the DI Trust Fund represented 178 percent of annual expenditures. During 2009, DI expenditures exceeded income, and the trust fund ratio for the beginning of 2010 decreased to about 158 percent. Under the intermediate set of assumptions, expenditures are estimated to exceed total income throughout the short-range projection period. The projected expenditures in excess of income result in the estimated exhaustion of the DI Trust Fund by the end of 2018.
Under the low-cost assumptions, the trust fund ratio would decrease to a low of 94 percent at the beginning of 2017 before increasing to 98 percent at the beginning of 2019. Under the high-cost assumptions, the assets of the DI Trust Fund would decline steadily, dipping below the level of annual expenditures during 2012 and becoming completely depleted in 2015.
Assets of the DI Trust Fund were greater than annual expenditures at the beginning of 2010. Under all three alternatives, however, the DI Trust Fund does not satisfy the Trustees’ short-range test of financial adequacy. The DI Trust Fund is projected to be exhausted by the end of 2018 and 2015 for alternatives II and III, respectively.
The estimated operations and status of the combined OASI and DI Trust Funds during calendar years 2010-19 for the three alternatives are shown in table
IV.A3, together with figures on actual experience in 2005‑09. 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 intermediate scenario, table
IV.A2 shows that the DI Trust Fund becomes exhausted in 2018. The value of the combined OASI and DI Trust Funds in that year shown in table
IV.A3 shows that sufficient OASI assets would be available to pay DI benefits through 2019, but only with legislation to permit this action.
The factors underlying the changes in the intermediate estimates for the OASI, DI, and the combined funds from last year’s report to this report are analyzed in table
IV.A4.
In the 2009 report, the trust fund ratio for OASI was estimated to reach 394 percent at the beginning of 2018 — the tenth projection year from that report. Based on the change in the short-range valuation period alone, from 2009‑18 to 2010‑19, the estimated ratio for the tenth year (now 2019) would be 11 percentage points lower, or 383 percent. Changes to reflect legislation enacted since last year’s report, the latest actual data, adjustments to the assumptions for future years, and changes in projection methods further reduce the ratio for the tenth projection year (2019) to 366 percent.
The enactment of health care reform legislation resulted in a 1 percentage point decrease in the OASI 2019 trust fund ratio. The net effect of changes in demographic assumptions over the short-range period resulted in a reduction in the tenth-year trust fund ratio of 9 percentage points. The cumulative net effects of changes in economic data and assumptions, reflecting revised estimates of the effects of the economic recession that started in December 2007, resulted in a reduction in the trust fund ratio of 2 percentage points by the beginning of 2019. A decrease in the 2019 trust fund ratio of 2 percentage points resulted from the combined effects of incorporating recent programmatic data including the further correction of the trust fund allocation error described in section
III.A. Finally, there were several relatively minor changes in the short-range projection methodology since the 2009 report. The most important of these changes was an improvement in the data and methods used to estimate the growth rates of average benefit amounts awarded over the projection period. The combined effect of the various methodological improvements was to decrease the ending trust fund ratio by about 2 percentage points.
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 ratios at the beginning of 2019 for the DI Trust Fund and the OASI and DI funds combined under the intermediate assumptions are theoretical because the DI Trust Fund is projected to be depleted during 2018. The 43 percentage point decrease in the DI trust fund ratio by the beginning of 2019 (compared with the ratio at the beginning of 2018 in last year’s report) is largely caused by updates to programmatic and economic data and assumptions, most of which are attributable to temporarily higher disability incidence and lower payroll tax receipts due to the recession. The remainder of the change results from the combined effects of enactment of the health reform legislation, the change in the valuation period, and several minor changes in methodology.
