IV. ACTUARIAL ESTIMATES
This chapter presents actuarial estimates of the future financial condition of the Social Security program. The income, cost, and assets or unfunded obligation of the OASI and DI Trust Funds are projected: (1) in dollars over the 10‑year short-range period; and (2) as a percentage of taxable payroll, as a percentage of gross domestic product, and in present-value dollars over the 75‑year long-range period. In addition, a variety of measures of the adequacy of current program financing are discussed. This report 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. The estimates presented in this section are prepared under three sets of assumptions to show a wide range of possible outcomes, because assumptions related to these factors are subject to uncertainty. The intermediate set of assumptions, designated as
alternative II, reflects the Trustees’ best estimate of future experience; the low-cost
alternative I is significantly more optimistic and the high-cost
alternative III is significantly more pessimistic for the trust funds’ future financial outlook. The intermediate estimates are shown first in the tables of 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 (2011‑20) are presented first, followed by estimates and
measures of actuarial status for the long range (2011‑85) and over the infinite horizon. As additional illustrations related to uncertainty, sensitivity analyses of the effects of variation in individual factors are presented in appendix
D and 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. A standard method of assessing solvency is 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. The trust fund ratio represents the proportion of a year’s cost which could be paid solely with the assets at the beginning of that year. A trust fund ratio of 100 percent of annual program cost is generally assumed to provide a reasonable “contingency reserve.” Maintaining a reasonable contingency reserve is important because the trust funds do not have borrowing authority. The trust funds would be unable to pay benefits in full on a timely basis if they were to become exhausted and if annual revenue were less than annual cost. Unexpected events, such as severe economic recessions or large changes in other trends, can quickly deplete reserves. In such cases, a reasonable contingency reserve can maintain the ability to pay scheduled benefits while giving Congress time to address possible changes 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, based on the assumptions described in chapter
V, of the operations and financial status of the OASI Trust Fund for the period 2011-20. 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. 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 2020. 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).
The estimated income shown in table IV.A1 increases annually under each set of assumptions throughout 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. After decreasing in the period 2008-10, employment is assumed to increase in every year through 2020 for all three alternatives. The number of persons with taxable earnings would increase on the basis of alternatives I, II, and III from 157 million during calendar year 2010 to about 179 million, 174 million, and 170 million, respectively, in 2020. The total annual amount of taxable earnings is projected to increase in every year through 2020 for each alternative. Total earnings increase from $5,333 billion in 2010 to $8,899 billion, $8,774 billion, and $8,927 billion in 2020, 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) trend increases in average earnings in
covered employment (reflecting both real growth and price inflation); (3) increases in the
contribution and benefit base under the automatic-adjustment provisions; and (4) growth in employment and average earnings, temporarily higher than trend, as the economy recovers from the economic recession.
Growth in interest earnings represents a significant component of the overall increase in trust fund income during this period. The effective
interest rates payable on trust fund investments are projected to temporarily decline from current levels through 2012, resulting in a slight decline in interest income in 2011. Thereafter, the rapid increase in OASI assets results in a corresponding net increase in interest income. By 2020, interest income to the OASI Trust Fund is projected to be about 15 percent of total trust fund income on the basis of the intermediate assumptions, as compared to 16 percent in 2010.
Rising expenditures during 2011-20 reflect automatic benefit increases as well as the upward trend in the number of beneficiaries and in the average monthly earnings underlying benefits. The growth in the number of beneficiaries in the past and the expected future growth 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, including interest earned on trust fund assets, would 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 2011-20 under the three sets of assumptions are shown in table
IV.A2, together with values for actual experience during 2006-10. Income is projected to increase steadily after 2010 under each alternative, due to most of the same factors described previously in connection with the OASI Trust Fund. DI costs are projected to grow at an even faster pace than income for reasons explained in greater detail below. As a result, DI Trust Fund assets are projected to continue to decrease in 2011 under each alternative, after reaching a maximum in 2008. Under the low-cost assumptions, assets would begin to increase again after reaching a low point in 2016. 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 2016.
Future DI 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 2010-20, the projected annual average growth rate in the number of DI disabled-worker beneficiaries is roughly 0.5, 1.6, and 2.7 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 prevalence 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 consistent with longer term trends in incidence rates.
3
The proportion of disabled-worker beneficiaries whose benefits terminate or convert to retirement benefits in a given year has also fluctuated in the past. Over the last 20 years, the rates of benefit termination due to death have declined very gradually, and generally mirror the improving mortality experience for the overall population. The proportion of disabled worker beneficiaries converting to retirement benefits at attainment of NRA also declined gradually through 2008 due to the relatively low average age of new beneficiaries coming on the rolls during the 1990s, along with the effects over the period 2003-08 of the gradual increase in the NRA to age 66. After 2008, the conversion proportion returned to pre-2003 levels as an 11-year period began where the NRA remains at age 66 before beginning to increase again. Furthermore, starting in 2012, the conversion proportion will increase sharply as the baby boom cohorts begin to reach 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 2013-15 due to an assumed increase in funding for the purpose of reducing the backlog of continuing disability reviews (CDRs), although it is not clear that Congress will provide the level of funding necessary to reduce this backlog. 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 2015. 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 2010, the assets of the DI Trust Fund represented 159 percent of annual expenditures. During 2010, DI expenditures exceeded income, and the trust fund ratio for the beginning of 2011 decreased to about 136 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 67 percent at the beginning of 2018 before increasing to 69 percent at the beginning of 2020. Under the high-cost assumptions, the assets of the DI Trust Fund would decline steadily, and dip below the level of annual expenditures during 2012 before becoming completely depleted in 2016.
Although assets of the DI Trust Fund were greater than annual expenditures at the beginning of 2011, under all three alternatives the DI Trust Fund does not satisfy the Trustees’ short-range test of financial adequacy. Furthermore, the DI Trust Fund is projected to be exhausted by the end of 2018 and 2016 under alternatives II and III, respectively.
The estimated operations and status of the combined OASI and DI Trust Funds during calendar years 2011-20 for the three alternatives are shown in table
IV.A3, together with figures on actual experience in 2006‑10. With income and cost for the OASI Trust Fund representing 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 this analysis permits an assessment of the short-range test for the two programs on a combined basis, in practice one trust fund cannot share assets 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. Nevertheless, considering the OASI and DI Trust Funds together demonstrates that, on a combined basis, a legislative change would allow sufficient assets to be available to pay all benefits through the end of the short-range period.
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 2010 report, the trust fund ratio for OASI was estimated to reach 366 percent at the beginning of 2019 — the tenth projection year from that report. Based on the change in the short-range valuation period alone, from 2010‑19 to 2011‑20, the estimated ratio for the tenth year (now 2020) would be 10 percentage points lower, or 356 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 (2020) to 339 percent.
Public Law 111-312 (The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010) included a temporary two-year extension of lower Federal income tax rates that had been scheduled through tax year 2010. This provision is projected to decrease revenue due to the effect on the taxation of Social Security benefits over the next two years, with a cumulative effect of reducing the OASI trust fund ratio for 2020 by 1 percentage point. This law also reduced the OASDI payroll tax rate for 2011 by 2 percentage points for employees and for self-employed workers, and provided for reimbursements from the General Fund of the Treasury to the OASI and DI Trust Funds to make up for this reduction in payroll tax revenue. This provision has no effect on trust fund assets or the trust fund ratio. A second piece of legislation enacted in 2010, Public Law 111‑240 (The Small Business Jobs Act of 2010), provided for a temporary deduction of family health insurance costs in the computation of self-employment earnings for business owners. The legislation is estimated to decrease OASI SECA tax collections by slightly more than $1 billion in 2011, but this one-time reduction in SECA collections has a negligible effect on the OASI trust fund ratio for 2020.
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 7 percentage points. The cumulative net effects of changes in economic data and assumptions, which reflects revised estimates of the effects of the economic recession that started in December 2007, resulted in a reduction in the trust fund ratio of 13 percentage points by the beginning of 2020. An increase in the 2020 trust fund ratio of 5 percentage points resulted from the combined effects of incorporating recent programmatic data including the numbers of beneficiaries, amount of benefit payments, and administrative expenses. Finally, there were several relatively minor changes in the short-range projection methodology since the 2010 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 on the ending trust fund ratio was negligible.
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 (shown in last year’s report) and 2020 (shown in this report) for the DI Trust Fund and the OASI and DI Trust Funds combined under the intermediate assumptions are theoretical because the DI Trust Fund is projected to be depleted during 2018 in both reports. The 20 percentage point decrease in the DI trust fund ratio by the beginning of 2020 (compared with the ratio at the beginning of 2019 in last year’s report) is largely caused by the change in the valuation period, as well as updates to economic data and assumptions that account for continuing effects of the economic downturn that began in December 2007. The remainder of the change results from the combined effects of enactments of Public Laws 111‑240 and 111-312, demographic changes, and the incorporation of recent programmatic data.
