This chapter presents actuarial estimates of the future financial condition of the Social Security program. These estimates show the income, cost, and assets or unfunded obligation of the OASI and DI Trust Funds: (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, the chapter discusses a variety of measures of the adequacy of current program financing. 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 projected program cost that would be payable with the financing provisions in current law.
This chapter presents the estimates and measures of trust fund financial adequacy for the short range (2012‑21) first, followed by estimates and measures of
actuarial status for the long range (2012‑86) and over the infinite horizon. As described in the Overview chapter of this report, these estimates depend upon a broad set of
demographic, economic, and programmatic factors. This chapter presents estimates 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 tables of this report show the intermediate estimates first, followed by the low-cost and high-cost estimates. Chapter
V describes these three sets of assumptions, along with the actuarial methods used to produce the estimates. Appendix
D and appendix
E present two additional methods to illustrate the uncertainty of the projections. Appendix
D presents sensitivity analyses of the effects of variation in individual factors and appendix
E presents probability distributions generated by a stochastic model.
The Trustees consider the trust funds solvent if the funds can pay scheduled benefits in full on a timely basis. A standard method of assessing solvency is the “
trust fund ratio,” which is the
assets in a fund 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 the assets available at the beginning of that year can cover. The Trustees assume that a trust fund ratio of 100 percent of annual program cost provides a reasonable “contingency reserve.” Maintaining a reasonable contingency reserve is important because the trust funds do not have borrowing authority. After exhaustion, the trust funds would be unable to pay benefits in full on a timely basis 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 lawmakers 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 remain at or above 100 percent throughout the 10-year period. Alternatively, if the ratio is initially less than 100 percent, then it must reach at least 100 percent within 5 years (without depletion at any time during this period) and then remain at or above 100 percent throughout the remainder of the 10-year period. This test uses the estimates based on the intermediate assumptions. If either trust fund fails this test, then program solvency in the next 10 years is in question, and lawmakers will have to take prompt action 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 2012-21. These estimates assume that there are no changes in the statutory provisions and regulations under which the OASDI program currently operates.
1
Table IV.A1 shows these estimates, which indicate that the assets of the OASI Trust Fund continue to increase throughout the next 10 years under the intermediate and low-cost sets of assumptions, but begin to decline in 2018 under the high-cost assumptions. Based on the intermediate assumptions, the assets of the OASI Trust Fund continue to exceed 100 percent of annual expenditures by a large amount through the end of 2021. Consequently, the OASI Trust Fund satisfies the test of short-range financial adequacy by a wide margin. Table
IV.A1 also indicates that the OASI Trust Fund would satisfy the short-range test even under the high-cost assumptions. See figure
IV.A1 for an 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 increases in every year through 2021 for all three alternatives, except for a slight decrease in 2013 under the high-cost set of assumptions due to an assumed second dip of the recession. The number of persons with taxable earnings increases on the basis of alternatives I, II, and III from 158 million during calendar year 2011 to about 179 million, 175 million, and 170 million, respectively, in 2021. The total annual amount of taxable earnings increases in every year through 2021 for each alternative. Total earnings increase from $5,466 billion in 2011 to $9,459 billion, $9,247 billion, and $9,123 billion in 2021, on the basis of alternatives I, II, and III, respectively. 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.
Interest earnings contribute to the overall projected increase in trust fund income during this period. Despite the projected growth in OASI Trust Fund assets, annual interest earnings decline slightly in the early projection years under all three sets of assumptions due to historically low interest rates on newly-issued bonds. Thereafter, interest income generally increases due to the net effects of higher asset levels and the patterns of projected interest rates. Although interest earnings generally increase over the short-range period, interest declines as a share of total OASI Trust Fund income. By 2021, OASI interest income is about 12 percent of total trust fund income under the intermediate assumptions, as compared to 15 percent in 2011.
Rising expenditures during 2012-21 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 the intermediate and low-cost sets of assumptions shown in table
IV.A1 indicate that income to the OASI Trust Fund, including interest earned on trust fund assets, exceeds expenditures in every year of the short-range projection period. While trust fund assets increase substantially, they grow more slowly near the end of the short-range period. Under the high-cost assumptions, assets begin to decline in 2018.
The Treasury invests OASI income in 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. The trust fund earns interest on these securities, and the Treasury invests maturing securities in new securities if not immediately needed to pay program costs. When payment of program costs requires the redemption of securities prior to maturity, general fund revenue flows to the trust fund.
Table IV.A2 shows the estimated operations and financial status of the DI Trust Fund during calendar years 2012-21 under the three sets of assumptions, together with values for actual experience during 2007-11. Non-interest income increases steadily after 2011 under each alternative, due to most of the same factors described previously for the OASI Trust Fund. However, DI costs grow at an even faster pace than income for reasons explained in greater detail below. As a result, after having reached a maximum in 2008, DI Trust Fund assets continue to decrease in 2012 under each alternative. Under the low-cost assumptions, assets begin to increase again after reaching a low point in 2018. Under the
intermediate assumptions, assets continue to decline until their projected exhaustion in 2016. Under the high-cost assumptions, DI assets decline steadily until exhaustion in 2015.
Future DI cost increases 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 generally increases during the short-range projection period. Over the period 2011-21, the projected annual average growth rate in the number of DI disabled-worker beneficiaries is roughly 0.2, 1.3, and 2.5 percent under alternatives I, II, and III, respectively. This growth in DI beneficiaries is largely due to the gradual progression of the baby-boom generation through ages 50 to
normal retirement age, the ages which have the highest rates of disability prevalence. The estimates under all three sets of assumptions anticipate additional growth in the numbers of disabled-worker beneficiaries due to a projected continuation of incidence rates at historically high levels. These projected higher levels of disability incidence subside as the economy recovers from the recent economic recession and return to levels consistent with longer-term trends in incidence rates.
2
The proportion of disabled-worker beneficiaries whose benefits terminate or convert to retirement benefits in a given year has fluctuated in the past. Over the last 20 years, the rates of benefit termination due to death have declined very gradually, and generally have mirrored the improving mortality experience for the overall population. The proportion of disabled-worker beneficiaries who converted to retirement benefits at attainment of normal retirement age also declined gradually through 2008 due to: (1) the relatively low average age of new beneficiaries coming on the rolls during the 1990s; and (2) the effects over the period 2003-08 of the gradual increase in the normal retirement age to age 66. After 2008, the conversion proportion returned to pre-2003 levels because the normal retirement age remains at age 66 from 2009-20 before beginning to increase again. Furthermore, starting in 2012, the projected conversion proportion increases sharply as the baby boom cohorts begin to reach normal retirement age.
The termination rate due to recovery has been much more volatile. In recent years, the proportion of disabled beneficiaries whose benefits cease because of their recovery from disability has been relatively low in comparison to levels experienced throughout the 1970s and early 1980s. Projected rates of recovery terminations assumed in the report are elevated for several years beginning in 2012 due to an assumed increase in funding for reducing the backlog of continuing disability reviews. Following this temporary increase in continuing disability reviews, projected recovery termination rates 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 continuing disability reviews after 2014. The overall proportion of disabled workers leaving the DI rolls (reflecting all causes) generally increases due to the aging of the beneficiary population.
At the beginning of calendar year 2011, the assets of the DI Trust Fund represented 136 percent of annual expenditures. During 2011, DI expenditures exceeded income, and the trust fund ratio for the beginning of 2012 decreased to about 109 percent. Under the intermediate set of assumptions, expenditures 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 2016.
Under the low-cost assumptions, the trust fund ratio decreases to a low of 22 percent at the beginning of 2020 before increasing to 23 percent at the beginning of 2021. Under the high-cost assumptions, the assets of the DI Trust Fund decline steadily, and dip below the level of annual expenditures during 2012 before complete depletion in 2015.
Although assets of the DI Trust Fund were greater than annual expenditures at the beginning of 2012, the DI Trust Fund fails the Trustees’ short-range test of financial adequacy under all three alternatives. Furthermore, the DI Trust Fund becomes exhausted by the end of 2016 and 2015 under alternatives II and III, respectively.
Table IV.A3 shows the estimated operations and status of the combined OASI and DI Trust Funds during calendar years 2012-21 for the three alternatives, together with figures on actual experience in 2007‑11. Income and cost for the OASI Trust Fund represent over 80 percent of the corresponding amounts for the combined OASI and DI Trust Funds. Therefore, based on the strength of the OASI Trust Fund over the next 10 years, the combined OASI and DI Trust Funds would have sufficient assets to pay all scheduled benefits through the end of the short-range period and would satisfy the short-range test of financial adequacy under all three alternative sets of assumptions. Under current law, one trust fund cannot share assets with another trust fund without changes to the Social Security Act.
Table IV.A4 presents an analysis of 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.
In the 2011 report, the trust fund ratio for OASI reached 339 percent at the beginning of 2020 — the tenth projection year from that report. The change in the short-range valuation period alone, from 2011‑20 to 2012‑21, lowered the estimated ratio for the tenth year by 13 percentage points, to 326 percent. Changes to reflect legislation enacted since last year’s report, the most recent data, adjustments to the assumptions for future years, and changes in projection methods further reduced the ratio for the tenth projection year to 280 percent.
Changes in demographic assumptions over the short-range period reduced the projected tenth-year trust fund ratio by 2 percentage points. Changes in economic data and assumptions, which include the effect of the actual 3.6 percent cost-of-living adjustment for December 2011, as well as slower growth in average earnings, lower interest rates, and higher unemployment rates due to a longer period of recovery from the recent recession, reduced the trust fund ratio by 53 percentage points by the beginning of 2021. Incorporating recent programmatic data, including the numbers of beneficiaries and amount of benefit payments, increased the 2021 trust fund ratio by 8 percentage points. In addition, there were several relatively minor changes in the short-range projection methodology since the 2011 report, none of which had a significant effect on the ending trust fund ratio. Finally, legislation enacted since the 2011 report did not have any significant impact on the projected ending OASI Trust Fund ratio in this report.
Table IV.A4 also shows corresponding estimates of the factors underlying the changes in the financial projections for the DI Trust Fund, and for the combined OASI and DI Trust Funds. The ratios at the beginning of 2020 for the DI Trust Fund and the combined OASI and DI Trust Funds in last year’s report, as well as the corresponding ratios for the beginning of 2021 in this year’s report, are theoretical because the Trustees project that the DI Trust Fund will be depleted prior to the end of the short range projection period. The 51 percentage point decrease in the DI trust fund ratio is largely due to 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 incorporation of recent programmatic data accounts for the remainder of the change.
|
|
|
|
|
Trust fund ratio shown in last year’s report for calendar year 2020 a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
