Three types of financial measures are useful in assessing the actuarial status of the Social Security trust funds under the financing approach specified in current law: (1) annual cash-flow measures, including income and cost rates, and balances; (2)
trust fund ratios; and (3) summary measures such as
actuarial balances and unfunded obligations. The first long-range estimates presented are the series of projected
annual balances (or net cash flow), which are the differences between the projected annual income rates and annual cost rates (expressed as percentages of the taxable payroll). In assessing the financial condition of the program, critical factors include the level and trend of the annual balances at the end of the long-range period.
The next measure is the pattern of projected trust fund ratios. The trust fund ratio represents the proportion of a year’s projected cost that could be paid with the funds available at the beginning of the year. Critical factors include the level and year of maximum trust fund ratio, the
year of exhaustion of the funds, and the stability of the trust fund ratio in cases where the ratio remains positive through the end of the long-range period. When a program has positive trust fund ratios throughout the 75-year projection period and these ratios are stable or rising at the end of the period, the program financing is said to achieve “sustainable
solvency.”
The final measures in this section summarize the total income and cost over valuation periods that extend through 75 years and over the infinite horizon. These measures indicate whether projected income will be sufficient for the period as a whole. The first such measure, actuarial balance, indicates the size of any surplus or shortfall as a percentage of the taxable payroll over the period. The second, open group unfunded obligation, indicates the size of any shortfall in present-value dollars.
This section also includes additional estimates that are useful in assessing the financial status of the Social Security program. These estimates include a comparison of the number of beneficiaries to the number of covered workers. In addition, this section provides the test of long-range close actuarial balance and the reasons for the change in the actuarial balance from the last report.
If the 75-year actuarial balance is zero (or positive), then the trust fund ratio at the end of the period will be at 100 percent (or greater), and financing for the program would be sufficient for the 75-year period as a whole. Financial adequacy, or solvency, for each year is determined by whether the trust fund asset level is positive throughout the year. Whether or not financial adequacy is stable in the sense that it is likely to continue for subsequent 75-year periods is also important to the actuarial status of the program. One measure of this stability is sustainable solvency, which requires that trust fund ratios be positive throughout the period and be at a constant or rising level for the last several years of the long-range period. When sustainable solvency is achieved, it is likely that subsequent Trustees Reports will also show projections of financial adequacy (assuming no changes in demographic and economic assumptions or the law). The actuarial balance and the open group unfunded obligation over the infinite horizon provide additional measures of the financial status of the program for the very long range.
Basic to the consideration of the long-range actuarial status of the trust funds are the concepts of income rate and cost rate, each of which is expressed as a percentage of taxable payroll. Other measures of the cash flow of the program are shown in appendix
F. The annual income rate is the ratio of all non-interest income reflecting scheduled tax rates to the OASDI taxable payroll for the year. The OASDI
taxable payroll consists of the total earnings subject to OASDI taxes, with some relatively small adjustments.
1
The annual cost rate is the ratio of the cost of the program to the taxable payroll for the year. The cost is defined to include scheduled benefit payments,
administrative expenses, net interchange with the
Railroad Retirement program, and payments for
vocational rehabilitation services for disabled beneficiaries. For any year, the income rate minus the cost rate is referred to as the “balance” for the year.
Table IV.B1 presents a comparison of the estimated annual income rates and cost rates by trust fund and alternative. Detailed long-range projections of trust fund operations, in current dollar amounts, are shown in table
VI.F8.
The projections for OASI under the intermediate assumptions show the income rate generally rising from 11.03 percent of taxable payroll in 2012 to 11.45 percent for 2085, mainly due to the gradually increasing effect of the
taxation of benefits. The projected income from the taxation of benefits, expressed as a percentage of taxable payroll, is expected to increase for two reasons. First, benefits are rising faster than payroll. Second, the benefit-taxation threshold amounts are not indexed, so that an increasing share of benefits will be subject to tax. The pattern of the cost rate is much different. The cost rate, which increased substantially in 2009 and 2010 due to the effects of the recent economic
recession, remains fairly stable through 2014 as the economic recovery through this period roughly offsets the effects of the aging population. From 2014 to 2035, the cost rate rises rapidly because the retirement of the
baby-boom generation will increase the number of beneficiaries much faster than subsequent lower-birth-rate generations will increase the labor force. From 2037 to 2052, the cost rate declines as the baby-boom generation ages, causing an increase in the average age of beneficiaries. After initial benefit eligibility, benefits increase annually with price inflation rather than wage inflation, so as beneficiaries increase in age, their benefit amounts drop relative to current average taxable earnings. Thereafter, the OASI cost rate rises because of the projected reductions in death rates, reaching 15.33 percent of taxable payroll for 2085.
Projected income rates under the low-cost and high-cost sets of assumptions are very similar to those projected for the intermediate assumptions because they are largely a reflection of the payroll tax rates specified in the law, with the gradual change from taxation of benefits noted above. In contrast, OASI cost rates for the low-cost and high-cost assumptions differ significantly from those projected for the intermediate assumptions. For the low-cost assumptions, the OASI cost rate decreases from 2011 through 2014, then rises until it peaks in 2034 at 13.04 percent of payroll. The cost rate then generally declines gradually, until it reaches 11.04 percent of payroll for 2085, at which point the income rate reaches 11.20 percent. For the high-cost assumptions, the OASI cost rate rises from 2012 through the end of the 75-year period. It rises at a relatively fast pace between 2012 and 2035 because of the aging of the baby-boom generation. Subsequently, the projected cost rate continues rising and reaches 22.20 percent of payroll for 2085, at which point the income rate reaches 11.85 percent.
The pattern of the projected OASI annual balance is important in the analysis of the financial condition of the program. Under the intermediate assumptions, the annual balance is negative in 2011, positive for 2012 through 2016, and then negative thereafter. This annual deficit rises rapidly, reaching 3.49 percent of taxable payroll for 2035, and generally rises thereafter (except for the period 2038-52), until it reaches 3.87 percent of taxable payroll for 2085.
Under the low-cost assumptions, the projected OASI annual balance is negative in 2011, positive for 2012 through 2019, and then becomes negative, with the annual deficit peaking at 1.76 percent of taxable payroll for 2034. The annual deficit then declines until 2073, when the OASI annual balance becomes positive and reaches a surplus of 0.16 percent of payroll for 2085. Under the high-cost assumptions, in contrast, the OASI balance is projected to be negative throughout the projection period, with deficits of 1.71 percent for 2020, 6.35 percent for 2050, and 10.35 percent of payroll for 2085.
Notes:1. The income rate excludes interest income.
2. Some historical values are subject to change due to revisions of taxable payroll.
3. Totals do not necessarily equal the sums of rounded components.
Under the intermediate assumptions, the cost rate for DI, which rose substantially from 2.01 percent of taxable payroll in 2008 to 2.40 percent for 2010 due to the economic recession, generally declines to 2.09 percent for 2039, and generally increases gradually thereafter to 2.23 percent for 2085. The income rate increases only very slightly from 1.84 percent of taxable payroll for 2012 to 1.86 percent for 2085. The annual deficit is 0.54 percent in 2012 and reaches 0.37 percent for 2085.
Under the low-cost assumptions, the DI cost rate declines from 2.35 percent of payroll for 2011 to 1.53 percent for 2041, and reaches 1.52 percent for 2085. The annual balance is negative for the first 8 years and is positive throughout the remainder of the long-range period. For the high-cost assumptions, the DI cost rate rises much more and reaches 3.10 percent for 2085. The annual deficit is 0.66 percent in 2011 and reaches 1.21 percent for 2085.
Figure IV.B1 shows the patterns of the OASI and DI annual income rates and cost rates. The income rates shown here are only for alternative II in order to simplify the graphical presentation because, as shown in table
IV.B1, the variation in the income rates by alternative is very small. Income rates increase generally, but at a slow rate for each of the alternatives over the long-range period. Both increases in the income rate and variation among the alternatives result primarily from the relatively small component of income from taxation of benefits. Increases in income from taxation of benefits reflect increases in the total amount of benefits paid and the increasing share of individual benefits that will be subject to taxation because benefit taxation threshold amounts are not indexed.
The patterns of the annual balances for OASI and DI can be inferred from figure
IV.B1. For each alternative, the magnitude of each of the positive balances, as a percentage of taxable payroll, is represented by the distance between the appropriate cost-rate curve and the income-rate curve above it. The magnitude of each of the deficits is represented by the distance between the appropriate cost-rate curve and the income-rate curve below it.
In the future, the cost of OASI, DI, and the combined OASDI programs as a percentage of taxable payroll will not necessarily be within the range encompassed by alternatives I and III. Nonetheless, the resulting estimates delineate a reasonable range for consideration of potential future program costs, because alternatives I and III define a reasonably wide range of demographic and economic conditions.
Long-range OASDI cost and income are generally expressed as percentages of taxable payroll. Also of interest are estimates of income and cost expressed as shares of
gross domestic product (GDP), the value of goods and services produced during the year in the United States. Under alternative II, OASDI cost rises from 4.84 percent of GDP for 2012 to a peak of 6.22 percent for 2036. Then OASDI cost as a percentage of GDP is projected to decline to a low of 5.91 percent for 2067 and increase slowly thereafter, until it reaches a level of 6.01 percent by 2085. Full estimates of income and cost are presented on this basis in appendix
VI.
F.
2 beginning on page 185.
The estimated OASDI cost rate is projected to decrease through 2014 as the economy recovers. The cost rate is expected to rise rapidly between 2014 and 2035 primarily because the number of beneficiaries is expected to rise substantially more rapidly than the number of covered workers as the baby-boom generation retires. The baby-boom generation had low fertility rates relative to their parents, and those lower fertility rates are expected to persist; therefore, the ratio of beneficiaries to workers is expected to rise rapidly and to reach a permanently higher level after the baby-boom generation retires. After 2035, the ratio of beneficiaries to workers generally rises slowly due to increasing longevity. A comparison of the numbers of covered workers and beneficiaries is shown in table
IV.B2.
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Coveredworkers per OASDI beneficiary
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OASDI beneficiaries per 100 covered workers
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Notes: 1. The number of beneficiaries does not include uninsured individuals who receive benefits under Section 228 of the Social Security Act. Costs are reimbursed from the General Fund of the Treasury for most of these individuals.
2. Historical covered worker and beneficiary data are subject to revision.
3. Totals do not necessarily equal the sums of rounded components.
The impact of the demographic shifts under the three alternatives on the OASDI cost rates is clear if one considers the projected number of OASDI beneficiaries per 100
covered workers. As compared to the 2010 level of 34 beneficiaries per 100 covered workers, this ratio is estimated to rise to 48 by 2035 under the intermediate assumptions as the growth in beneficiaries greatly exceeds the growth in workers. By 2085, this ratio rises further under the intermediate and high-cost assumptions, until it reaches 52 under the intermediate assumptions and 68 under the high-cost assumptions. Under the low-cost assumptions, this ratio rises to 44 by 2035 and then declines to 40 by 2085. The significance of these numbers is clear when one compares figure
IV.B1 to figure
IV.B2.
For each alternative, the shape of the curve in figure IV.B2, which shows beneficiaries per 100 covered workers, is strikingly similar to that of the corresponding cost-rate curve in figure
IV.B1, thereby emphasizing the extent to which the cost of the OASDI program as a percentage of taxable payroll is determined by the age distribution of the
population. The cost rate is basically the product of the number of beneficiaries and their average benefit, divided by the product of the number of covered workers and their average taxable earnings. Therefore, the pattern of the annual cost rates is similar to that of the annual ratios of beneficiaries to workers.
Table IV.B2 also shows the number of covered workers per OASDI beneficiary, which was about 2.9 for 2010. Under the low-cost assumptions, this ratio declines to 2.3 by 2035, and then generally rises throughout the remainder of the period, reaching 2.5 for 2085. Under the intermediate assumptions, this ratio declines generally throughout the long-range period, reaching 2.1 for 2035 and 1.9 for 2085, while under the high-cost assumptions, this ratio decreases steadily to 1.5 for 2085.
Trust fund ratios are useful indicators of the adequacy of the financial resources of the Social Security program. The trust fund ratio for a year 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. When the trust fund ratio is positive for a year, but is not positive for the following year, the trust fund becomes exhausted during that year. Under present law, the OASI and DI Trust Funds do not have the authority to borrow other than in the form of advance tax transfers (which are limited to expected taxes for the current calendar month). Exhaustion of the assets in either fund during a year would mean there are no longer sufficient assets in the fund to pay on a timely basis the full amount of benefits scheduled for the year under present law.
The trust fund ratio serves an additional important purpose in assessing the actuarial status of the program. When the financing is adequate for the timely payment of full benefits throughout the long-range period, the stability of the trust fund ratio toward the end of the period reflects the likelihood that this projected adequacy will continue for subsequent Trustees Reports. If the trust fund ratio is positive throughout the period and is level (or increasing) at the end of the period, then projected adequacy for the long-range period is likely to continue for subsequent reports. Under these conditions, the program financing is said to achieve sustainable solvency.
Table IV.B3 shows, by alternative, the estimated trust fund ratios (without regard to advance tax transfers that would be effected) for the separate and combined OASI and DI Trust Funds. Also shown in this table is the year in which a fund is estimated to become exhausted.
Based on the intermediate assumptions, the OASI Trust Fund ratio declines from 401 percent at the beginning of the period, at first slowly, and then more rapidly, before becoming exhausted in 2038. The DI trust fund ratio has been declining steadily since 2003, and is estimated to continue to decline from 136 percent at the beginning of 2011 until the trust fund becomes exhausted in 2018.
The trust fund ratio for the combined OASI and DI Trust Funds under the intermediate assumptions declines from 353 percent at the beginning of 2011, with the combined funds becoming exhausted in 2036, one year earlier than in last year’s report.
Under the intermediate assumptions, OASDI cost is projected to exceed non-interest income for the entire projection period. However, for the period 2011 through 2022, trust fund income, including interest income, is projected to be more than needed to cover costs, so combined trust fund assets will continue to grow. Beginning in 2023, combined trust fund assets will diminish until assets are exhausted in 2036.
Under the low-cost assumptions, the trust fund ratio for the DI program increases from 2018 through the end of the long-range projection period, and reaches the extremely high level of 1,717 percent for 2086. The DI trust fund ratio in 2086 rises by 36 percentage points from the level in 2085. For the OASI program, the trust fund ratio generally declines to a low of 123 percent for 2067, and rises thereafter to a level of 163 percent for 2086. At the end of the period, the OASI trust fund ratio is rising by 3 percentage points per year. For the OASDI program, the trust fund ratio generally declines to 205 percent for 2052, and increases thereafter, until it reaches 350 percent for 2086. Subsequent Trustees Reports are likely to contain projections of adequate long-range financing of the OASI, the DI, and the combined OASDI programs under the low-cost assumptions, because the trust fund ratios are large and increasing at the end of the long-range period. Thus, under the low-cost assumptions, each program achieves sustainable solvency.
In contrast, under the high-cost assumptions, the OASI trust fund ratio is estimated to decline continually to fund exhaustion in 2031. The DI trust fund ratio is estimated to decline from 133 percent for 2011 to fund exhaustion in 2016. The combined OASI and DI trust fund ratio is estimated to decline from 352 percent for 2011 to fund exhaustion in 2029.
With large, persistent annual deficits projected under all but the low-cost assumptions, it is highly likely that income will need to be increased, program costs will need to be reduced, or both, in order to prevent exhaustion of the trust funds. The stochastic projections discussed in appendix
E suggest that trust fund exhaustion is highly probable by mid-century.
Even under the high-cost assumptions, however, the combined OASI and DI Trust Fund assets on hand plus their estimated future income would be able to cover their combined cost for 18 years (until 2029). Under the intermediate assumptions, the combined starting funds plus estimated future income would be able to cover cost for 25 years (until 2036). The program would be able to cover cost for the foreseeable future under the more optimistic low-cost assumptions. In the 2010 report, the combined trust funds were projected to become exhausted in 2029 under the high-cost assumptions and in 2037 under the intermediate assumptions.
Note: See definition of trust fund ratio on page 222.The combined ratios shown for years after the DI Trust Fund is estimated to be exhausted are theoretical and are shown for informational purposes only.
An illustration of the trust fund ratios for the separate OASI and DI Trust Funds is shown in figure
IV.B3 for each of the alternative sets of assumptions. A graph of the trust fund ratios for the combined trust funds is shown in figure
II.D6 on page 16.
Summarized income and cost rates, along with their components, are presented in table
IV.B4 for 25-year, 50-year, and 75-year valuation periods. Income rates reflect the scheduled payroll tax rates, the projected income from the taxation of scheduled benefits, and reimbursements from the General Fund of the Treasury, if any, expressed as a percentage of taxable payroll. Under current law, the combined payroll tax rate of 12.4 percent will remain unchanged in the future. In contrast, the projected income from taxation of benefits, expressed as a percentage of taxable payroll, is expected to generally increase throughout the long-range period for two reasons. First, total benefit payments are rising faster than payroll. Second, the benefit-taxation threshold amounts are not indexed, so that an increasing share of beneficiaries will be paying tax on a larger portion of their benefits. Summarized income rates also include the starting trust fund balance. Summarized cost rates include the cost of reaching a target trust fund of 100 percent of annual cost at the end of the period in addition to the cost included in the annual cost rates.
The payroll tax income expressed as a percentage of taxable payroll, as shown in table
IV.B4, is generally slightly smaller than the actual tax rates in effect for each period. The reason for this difference is that all OASDI income and cost amounts are attributed to the year in which they are expected to be received or expended, while taxable payroll is attributed to the year in which earnings are paid. Earnings are paid to workers before the corresponding payroll taxes are credited to the funds; therefore, payroll tax income received in a given year reflects taxes paid from a combination of the taxable payrolls for that year and prior years. Dividing payroll tax income by taxable payroll for a particular year, or period of years, will thus generally result in an income rate slightly lower than the applicable tax rate for the period.
Summarized values for the full 75-year period are useful in analyzing the long-range adequacy of financing for the program over the period as a whole, both under present law and under proposed modifications to the law. Table
IV.B4 shows summarized rates for valuation periods of the first 25, the first 50, and the entire 75 years of the long-range projection period, including the funds on hand at the start of the period and the cost of accumulating a target trust fund balance equal to 100 percent of the following year’s annual cost by the end of the period. The actuarial balance for each of these three valuation periods is equal to the difference between the
summarized income rate and the
summarized cost rate for the corresponding period. An actuarial balance of zero for any period indicates that estimated cost for the period could be met for the period as a whole (but not necessarily at all points within the period), with a remaining trust fund balance at the end of the period equal to 100 percent of the following year’s cost. A negative actuarial balance indicates that, over the period, the present value of income to the program plus the existing trust fund falls short of the present value of the cost of the program plus the cost of reaching a target trust fund balance of 1 year’s cost by the end of the period. This negative balance, combined with a falling trust fund ratio, implies that the current-law level of financing is not sustainable.
The values in table IV.B4 show summarized rates for the intermediate assumptions, as well as for the low-cost and high-cost assumptions. The low-cost and high-cost assumptions define a wide range of possibilities, but are each unlikely to occur. The combined OASDI program is expected to operate with a positive actuarial balance over the 25-year valuation period under only the low-cost assumptions. For the 25-year valuation period, the summarized values indicate actuarial balances of 0.78 percent of taxable payroll under the low-cost assumptions, ‑0.60 percent under the intermediate assumptions, and -2.26 percent under the high-cost assumptions.
2 These balances indicate that the program is more than adequately financed for the 25‑year valuation period under only the low-cost projections. For the 50‑year valuation period, the OASDI program would have a positive actuarial balance of 0.23 percent under the low-cost assumptions, but would have deficits of 1.78 percent under the intermediate assumptions and 4.37 percent under the high-cost assumptions. These deficits mean that the program is more than adequately financed for the 50‑year valuation period under only the low-cost set of assumptions.
For the entire 75-year valuation period, the combined OASDI program would once again have
actuarial deficits except under the low-cost set of assumptions. The actuarial balance for this long-range valuation period is projected to be 0.29 percent of taxable payroll under the low-cost assumptions, ‑2.22 percent under the intermediate assumptions, and ‑5.59 percent under the high-cost assumptions.
Assuming the Trustees’ intermediate assumptions accurately reflect future demographic and economic trends, solvency for the program over the next 75 years (timely payment of scheduled benefits throughout this period) could be restored if the Social Security payroll tax rate were increased for earnings during this period from 12.40 percent (combined employee-employer rates) to 14.55 percent. Solvency for this period could also be restored if scheduled benefits for this period were reduced by 13.8 percent. Alternatively, a combination of these approaches could be used.
However, eliminating the actuarial deficit over the next 75 years would require raising payroll taxes or lowering benefits by more than is required just to achieve solvency, because the actuarial deficit includes the cost of attaining a target trust fund ratio equal to 100 percent of annual program cost by the end of the period. Eliminating the actuarial deficit could be achieved for the 75-year period with an increase in the combined payroll tax to 14.71 percent
3 for all earnings during this period or a decrease in scheduled benefits of 14.6 percent for benefits paid during this period. Alternatively, a combination of these approaches could be used. These changes would be sufficient to eliminate the actuarial deficit and leave a projected actuarial balance of zero for the OASDI program.
Large annual deficits projected under current law for the end of the long-range period, which equal 4.24 percent of payroll for 2085, under the intermediate assumptions (see table
IV.B1), indicate that the annual cost will very likely continue to exceed non-interest income after 2085. As a result, ensuring continued adequate financing would eventually require larger changes than those needed to maintain solvency for the 75-year period. Over the period extending through the infinite horizon, the actuarial deficit is estimated to be 3.6 percent of taxable payroll under the intermediate assumptions. This estimate indicates that the projected infinite horizon shortfall could be eliminated with an immediate increase in the combined payroll tax rate from 12.4 percent to about 16.2 percent.
4 This shortfall could also be eliminated if all current and future benefits were immediately reduced by 21.9 percent.
Table IV.B4 indicates that the financial condition of the DI program is substantially worse than that of the OASI program for the first 25 years. Summarized over the full 75-year period, however, long-range deficits for the OASI and DI programs under intermediate assumptions are more similar when measured relative to the level of program costs. The relatively worse financial status of the OASI program in the long-term occurs because increases in longevity have a greater impact on OASI cost than on DI cost largely due to the fixed normal retirement age after 2022.
Table IV.B5 presents the components and the calculation of the long-range (75-year) actuarial balance under the intermediate assumptions. The present value of future cost less future non-interest income over the long-range period, minus the amount of trust fund assets at the beginning of the projection period, amounts to $6.5 trillion for the OASDI program. This amount is referred to as the 75-year “open group unfunded obligation” (see row G). The actuarial deficit (i.e., the negative of the actuarial balance) combines this unfunded obligation with the present value of the “ending target trust fund” and expresses the total as a percentage of the present value of the taxable payroll for the period. The present value of future non-interest income minus cost, plus starting trust fund assets, minus the present value of the ending target trust fund, amounts to ‑$7.0 trillion for the OASDI program. The actuarial balance — this amount expressed as a percentage of taxable payroll for the period — is therefore ‑2.22 percent.
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B. Reimbursements from general revenue
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C. Taxation of benefits revenue
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D. Non-interest income (A + B + C)
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F. Cost minus non-interest income (E - D)
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G. Trust fund assets at start of period
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H. Open group unfunded obligation (F - G)
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I. Ending target trust fund a
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J. Income minus cost, plus assets at start of period, minus ending target trust fund (D - E + G - I = - H - I)
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As shown in the previous section, a negative actuarial balance (or an actuarial deficit) provides one measure of the unfunded obligation of the program over a period of time. Two additional measures of OASDI unfunded obligations under the intermediate assumptions are presented below.
Consistent with practice since 1965, this report focuses on the 75-year period (from 2011 to 2085 for this report) for the evaluation of the long-run financial status of the OASDI program on an open group basis (i.e., including non-interest income and cost for past, current, and future participants through the year 2085). Table
IV.B6, in its second line, shows that the present value of the open group unfunded obligation for the program over that period is $6.5 trillion. The open group unfunded obligation measures the adequacy of financing over the period as a whole for a program financed on a pay-as-you-go basis. On this basis, payroll taxes and scheduled benefits for all participants are included through 2085.
Table IV.B6 also presents the 75-year unfunded obligation as percentages of future OASDI taxable payroll and GDP through 2085. The 75-year unfunded obligation as a percentage of taxable payroll is less than the actuarial deficit, because the unfunded obligation excludes the ending target trust fund value (see table
IV.B5).
Consideration of summary measures alone (such as the actuarial balance and open group unfunded obligation) for a 75-year period can lead to incorrect perceptions and to policy prescriptions that do not achieve sustainable solvency. These concerns can be addressed by considering the trend in trust fund ratios toward the end of the period (see “sustainable solvency” at the beginning of section
IV.
B on page 46).
Another measure that reflects the continued, and possibly increasing, annual shortfalls after 75 years is the unfunded obligation extended over the infinite horizon. The extension assumes that the current-law OASDI program and the demographic and economic trends used for the 75‑year projection continue indefinitely.
Over the infinite horizon, table IV.B6 reports that the projected OASDI open group unfunded obligation is $17.9 trillion, which is $11.3 trillion larger than for the 75‑year period. The $11.3 trillion increment reflects a significant financing gap projected for OASDI for years after 2085. Of course, the degree of uncertainty associated with estimates beyond 2085 is substantial.
The $17.9 trillion infinite horizon open group unfunded obligation amounts to 3.6 percent of taxable payroll or 1.2 percent of GDP. These relative measures of the unfunded obligation over the infinite horizon express its magnitude in relation to the resources that are potentially available to finance the shortfall.
Notes:1. The present values of future taxable payroll for 2011-85 and for 2011 through the infinite horizon are $315.2 trillion and $500.5 trillion, respectively.
2. The present values of GDP for 2011-85 and for 2011 through the infinite horizon are $873.7 trillion and $1,460.4 trillion, respectively. Present values of GDP shown in the Medicare Trustees Report differ slightly due to the use of interest discount rates that are specific to each program’s trust fund holdings.
Last year’s report projected the infinite horizon unfunded obligation at $16.1 trillion in present value. If the assumptions, methods, and starting values had all remained unchanged, the change in the valuation date to one year later would have increased the unfunded obligation by about $0.8 trillion to $16.9 trillion. The net effects of changes in assumptions, methods, and starting values increased the infinite horizon unfunded obligation by about $1.0 trillion in present value.
The infinite horizon unfunded obligation is 0.3 percentage point higher than in last year’s report when expressed as a share of taxable payroll, and is unchanged when expressed as a share of GDP. The main changes affecting the infinite horizon unfunded obligation for this report are reductions in mortality rates at the older ages. See section
IV.
B.
7 for details regarding changes in law, data, methods, and assumptions.
Table IV.B7 disaggregates the infinite horizon unfunded obligation of $17.9 trillion into components for past, current, and future participants. The present value of future cost reduced by future non-interest income over the next 100 years for all current participants
5 equals $21.4 trillion. Subtracting the current value of the trust fund gives a closed group unfunded obligation of $18.8 trillion, which represents the shortfall of lifetime contributions for all past and current participants relative to the cost of benefits for them. Future participants, on the other hand, are scheduled to pay $0.9 trillion more into the system than the cost of benefits for them. The total unfunded obligation, $17.9 trillion, is the sum of the unfunded obligation for current and past participants ($18.8 trillion) and the present value of cost less non-interest income for future participants (‑$0.9 trillion).
This accounting makes clear that if some generations receive benefits with a present value exceeding the present value of their payroll tax contributions and other receipts on their behalf, other generations must receive benefits with a present value less than the present value of their payroll tax contributions and other receipts on their behalf. Making Social Security solvent over the infinite horizon requires some combination of increased revenue or reduced benefits for current and future participants that amounts to $17.9 trillion in present value, 3.6 percent of future taxable payroll, or 1.2 percent of future GDP.
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Less current trust fund(accumulation of non-interest income minus expenditures to date for past and current participants)
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Notes:1. It is not clear how to allocate across generations the burden of providing $0.1 trillion of reimbursement from the General Fund of the Treasury in 2010, 2011, and 2012. Any allocation would make at most a rounding difference in some values in this table. Therefore, for the purpose of this table, these reimbursements are allocated as though they represent taxes in the years of reimbursements.
2. The present value of future taxable payroll for 2011 through the infinite horizon is $500.5 trillion.
3. The present value of GDP for 2011 through the infinite horizon is $1,460.4 trillion.
4. Totals do not necessarily equal the sums of rounded components.
The test of long-range close actuarial balance applies to a set of 66 separate valuation periods beginning with the first 10‑year period, and including the periods of the first 11 years, the first 12 years, up through the full 75‑year projection period. Under the long-range test, the summarized income rate and cost rate are calculated for each of these valuation periods. The long-range test is met if, for each of the 66 valuation periods, the actuarial balance is not less than zero or is negative by, at most, a specified percentage of the summarized cost rate for the same time period. The percentage allowed for a negative actuarial balance is 5 percent for the full 75-year period. For shorter periods, the allowable percentage begins with zero for the first 10 years and increases uniformly for longer periods, until it reaches the maximum percentage of 5 percent allowed for the 75-year period. The criterion for meeting the test is less stringent for the longer periods in recognition of the greater uncertainty associated with estimates for more distant years.
When a negative actuarial balance in excess of the allowable percentage of the summarized cost rate is projected for one or more of the 66 separate valuation periods, the program fails the test of long-range close actuarial balance. Being out of close actuarial balance indicates that the program will experience financial problems in the future and that ways of improving the financial status of the program should be considered. The sooner the actuarial balance is less than the minimum allowable balance, expressed as a percentage of the summarized cost rate, the more urgent is the need for corrective action. Necessary changes in program financing or benefit provisions should not be put off until the last possible moment if future beneficiaries and workers are to plan effectively for their retirement.
Table IV.B8 presents a comparison, based on the intermediate estimates, of the actuarial balances with the minimum allowable balance (or maximum allowable deficit) under the long-range test, each expressed as a percentage of the summarized cost rate. For display purposes, values are shown for 14 selected valuation periods, ranging from 10 years to 75 years in length. However, each of the 66 periods — those of 10 years, 11 years, and continuing in 1-year increments through 75 years — is considered for the test. These minimum allowable balances are calculated to show the limit for each valuation period resulting from the graduated tolerance scale. The patterns in the estimated balances as a percentage of the summarized cost rates, as well as that for the minimum allowable balance, are presented graphically in figure
IV.B4 for the OASI, DI, and combined OASDI programs. Values shown for the 25-year, 50-year, and 75‑year valuation periods correspond to those presented in table
IV.B4.
For the OASI program, the estimated actuarial balance as a percentage of the summarized cost rate exceeds the minimum allowable for valuation periods of 10 through 23 years under the intermediate estimates. For valuation periods of greater than 23 years, the estimated actuarial balance is less than the minimum allowable. For the full 75-year long-range period, the estimated actuarial balance reaches ‑13.71 percent of the summarized cost rate, for a shortfall of 8.71 percent from the minimum allowable balance of ‑5.0 percent of the summarized cost rate. Although the OASI program satisfies the
test of short-range financial adequacy (as discussed earlier
on page 35), it is not in long-range close actuarial balance.
For the DI program, under the intermediate assumptions, the estimated actuarial balance as a percentage of the summarized cost rate is less than the minimum allowable balance for all 66 valuation periods. For the full 75-year long-range period, the estimated actuarial balance reaches ‑13.55 percent of the summarized cost rate, for a shortfall of 8.55 percent from the minimum allowable balance of ‑5.0 percent of the summarized cost rate. Thus, the DI program fails to meet the short-range test of financial adequacy (as discussed
on page 35), and is also not in long-range close actuarial balance.
Financing for the DI program is much less adequate than for the OASI program in satisfying the test for long-range actuarial balance, even though long-range actuarial deficits are more comparable over the entire 75-year period. For the long-range actuarial deficit, much more of the increase in the long-range cost due to the aging of the baby-boom generation occurs earlier for the DI program than for the OASI program. As a result, payroll tax rates that are relatively more adequate for the OASI program during the first 25 years become relatively less adequate later in the long-range period.
For the OASDI program, the estimated actuarial balance as a percentage of the summarized cost rate exceeds the minimum allowable balance for valuation periods of 10 through 21 years under the intermediate estimates. For valuation periods of greater than 21 years, the estimated actuarial balance is below the minimum allowable balance. The size of the shortfall from the minimum allowable balance rises gradually, reaching 8.69 percent of the summarized cost rate for the full 75-year long-range valuation period. Although the OASDI program satisfies the short-range test of financial adequacy, it is out of long-range close actuarial balance.
The OASI and DI programs, both separate and combined, were out of close actuarial balance in last year’s report. The estimated deficits for the OASI, DI, and combined OASDI programs in this report are larger when compared to those shown in last year’s report for all valuation periods.
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Rates(percentage of taxable payroll)
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The estimated effects (by category) of various changes from last year’s report to this report on the long-range actuarial balance under the intermediate assumptions are listed in table
IV.B9.
In changing from the valuation period of last year's report, which was 2010‑84, to the valuation period of this report, 2011‑85, the relatively large negative annual balance for 2085 is included. This change results in a decrease in the long-range OASDI actuarial balance of 0.05 percent of taxable payroll. (Note that the trust fund assets at the end of 2010, i.e., at the beginning of the projection period, are included in the 75-year actuarial balance. These assets reflect the net financial flows for the program for all past years. In effect, therefore, the actuarial balance presented in these reports reflects financial activity from 1937 through the end of the long-range period.)
The ultimate demographic assumptions are unchanged from those in last year’s report. However, changes in the demographic starting values and the transition to ultimate assumptions combine to decrease the long-range OASDI actuarial balance by 0.14 percent of taxable payroll. The demographic change contributing most to this reduction is the inclusion of final mortality data for 2007, which results in lower starting death rates and faster near-term declines in death rates at older ages compared to last year’s report. These lower death rates result in a decrease in the long-range OASDI actuarial balance of 0.10 percent of taxable payroll. Revised historical estimates of net other immigration and final data on legal immigration for 2009 are also included in this year’s report. Based on estimates from the Department of Homeland Security for 2007 and 2008 and due to the weak U.S. economy since 2008, net other immigration levels for years 2007-10 are estimated to be negative. These levels are significantly lower than the positive estimates in last year’s report. For years 2011‑14, the number of other immigrants entering the country is assumed to be lower than in last year’s report, consistent with the expected timing of the economic recovery. The effect of including these new immigration data and assumptions is a decrease in the long-range OASDI actuarial balance of 0.05 percent of taxable payroll. Birth rates projected through 2026 are slightly lower than in last year’s report, a result caused by lower preliminary birth data for 2008 and 2009 than had been expected for last year’s report. These changes in birth rates result in a decrease in the long-range OASDI actuarial balance of 0.01 percent of taxable payroll. Finally, incorporating updated starting population levels and the interaction of these levels with the changes in fertility, mortality, and immigration result in an increase in the long-range OASDI actuarial balance of 0.02 percent of taxable payroll.
The ultimate economic assumptions are unchanged from those in last year’s report. However, the combination of updating starting economic values and changing near-term economic growth rate assumptions decreases the long-range OASDI actuarial balance by 0.06 percent of taxable payroll. The economic recovery has been slower than assumed in last year’s report. For this year’s report, OASDI taxable earnings are considerably lower for the starting year, 2010, than were projected in last year’s report. Even with faster real earnings growth after 2010 through 2019, the projected level of earnings is lower through 2018 than in last year’s report. In addition, consistent with the less robust recovery, unemployment rates are slightly higher over the next few years than assumed in last year’s report.
This report includes updated disabled worker mortality and termination rates that reflect a more recent historical period. Combining these updated rates with new starting disability data result in a decrease in the long-range OASDI actuarial balance of 0.01 percent of taxable payroll.
Several methodological improvements and updates of program-specific data are included in this report. These changes to programmatic data and methods have partially offsetting effects and combine to decrease the long-range OASDI actuarial balance by 0.05 percent of taxable payroll. First, the method for determining the initial projected rates of mortality decline was changed to place greater emphasis on recent experience. These initial rates of decline are now determined using the mortality data during the most recent 10 years of historical data, rather than the most recent 20 years. This change increased the rate of decline in death rates at older ages for years following the year of final data (2007) up to the year the ultimate rates of decline are fully in effect (2035). This mortality change results in a decrease in the long-range OASDI actuarial balance of about 0.05 percent of taxable payroll. The second significant change improved the historical estimates of the other immigrant population by age and sex and the consistency between the other immigrant population and the total population. This change to the historical population results in a decrease in the long-range OASDI actuarial balance of about 0.04 percent of taxable payroll. A third significant change in methodology affects labor force participation rates. The assumed effect of gains in life expectancy on labor force participation for persons over 40 was doubled, significantly increasing projected participation rates at higher ages. Partially offsetting this increase in labor force participation, disability prevalence was added as an input variable to the labor force model for persons over normal retirement age. The net of these changes on labor force participation increases the long-range OASDI actuarial balance by about 0.01 percent of taxable payroll. A fourth significant change relates to the projection of average benefit levels for workers who will become eligible for benefits in the future. The historical sample of new beneficiaries, which serves as the basis for the projection of average benefit levels, was updated from a 2006 sample to a 2007 sample. The update of this sample resulted in an increase in the long-range OASDI actuarial balance of about 0.02 percent of taxable payroll. Finally, updating programmatic data and other small methodological improvements resulted in an increase in the long-range OASDI actuarial balance of about 0.01 percent of taxable payroll.
If the assumptions, methods, starting values, and the law had all remained unchanged from last year, the OASDI long-range actuarial balance would have diminished (become more negative) by 0.05 percent of taxable payroll due to the change in the valuation period. However, the combined changes in law, data, assumptions, and methods reflected in this report decrease the actuarial balance by an additional 0.25 percent of payroll. Thus, the actuarial balance changes from -1.92 percent of taxable payroll in last year's report to ‑2.22 percent in this report.
The effects of changes made in this report can also be illustrated by comparing the annual (cash-flow) balances for this and the prior year’s report. Figure
IV.B5 provides this comparison for the combined OASDI program over the long-range (75-year) projection period.
The annual balance (income rate minus cost rate) for each year in the 75-year projection period is lower than projected in last year’s report. For 2011, the annual balance in this report is 0.70 percent of payroll lower than was projected in last year's report. This lower balance is mainly due to an expected $10 billion downward adjustment to 2011 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years, and to a slower than expected recovery from the economic recession. In particular, earnings for 2011 are projected to be significantly lower than in last year’s report. However, over the next 10 years, the difference between the annual balances in the two reports declines rapidly. The economic recovery assumed for this year’s report is complete at about the same time with about the same level of economic output as for last year’s report. By 2020, the difference in the annual balances is only 0.04 percent of payroll. After 2020, the difference between the annual balances in the two reports begins to increase, until it reaches a level of 0.34 percent of payroll shortly after 2050. For the period 2055 through 2084, the difference between the annual balances in the two reports decreases, reaching a level of 0.09 percent of payroll in 2084. This pattern of differences after 2020 (first increasing and then decreasing) is largely due to changes in mortality. Compared to last year’s report, age-sex-adjusted death rates for ages 65 and older become progressively lower through 2034, while age-sex-adjusted death rates for ages under 65 become progressively higher. Lower death rates at older ages result in more beneficiaries, while higher death rates for ages under 65 eventually tend to offset some of the increase in beneficiaries from longer life after age 65. The cumulative effects of these mortality changes result in more beneficiaries throughout the projection period as compared to last year’s report. The differences in the number of retired-worker beneficiaries between the reports generally increase each year until soon after 2055. Thereafter, the increases reverse, which results in decreasing differences between the two reports through 2084. Compared to last year’s report, the number of additional retired-worker beneficiaries increases through about 2053, reaching a level that is 2.2 percent higher than in last year’s report. Thereafter, the number of additional retired-worker beneficiaries decreases until it reaches a level for 2084 that is only 0.7 percent higher than in last year’s report. The annual deficit for 2084 is 4.21 percent of taxable payroll in this report compared to 4.12 percent for 2084 in last year's report.
