The Trustees use three types of financial measures to assess the actuarial status of the Social Security trust funds under the financing approach specified in current law: (1) annual cash-flow measures, including income rates, cost rates, and balances; (2)
trust fund ratios; and (3) summary measures such as
actuarial balances and unfunded obligations.
The difference between the annual income rate and annual cost rate, both expressed as percentages of taxable payroll, is the annual balance. The level and trend of the annual balances at the end of the 75-year projection period are critical factors that the Trustees use to assess the financial condition of the program.
The trust fund ratio for a year is the proportion of the year’s projected cost that could be paid with funds available at the beginning of the year. Critical factors considered by the Trustees include: (1) the level and year of maximum trust fund ratio; (2) the
year of exhaustion of the funds; and (3) the stability of the trust fund ratio at the end of the long-range period. “Sustainable solvency” occurs when the program has positive trust fund ratios throughout the 75‑year projection period that are either stable or rising at the end of the period.
Summarized measures indicate whether projected income is sufficient, on average, for the whole period. The Trustees summarize the total income and cost over
valuation periods that extend through 75 years and over the infinite horizon. This section presents two summarized measures: (1) the actuarial balance; and (2) the open group unfunded obligation. The actuarial balance indicates the size of any surplus or shortfall as a percentage of the taxable payroll over the period. The open group unfunded obligation indicates the size of any shortfall in present-value dollars.
This section also includes additional information that the Trustees use to assess the financial status of the Social Security program, including: (1) a comparison of the number of beneficiaries to the number of covered workers; (2) the test of long-range close actuarial balance; and (3) the reasons for the change in the actuarial balance from the last report.
The concepts of income rate and cost rate, expressed as a percentage of taxable payroll, are essential to consideration of the long-range actuarial status of the trust funds. The annual income rate is the ratio of all non-interest income to the OASDI taxable payroll for the year. Non-interest income includes payroll taxes, taxes on scheduled benefits, and general fund transfers. 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 includes 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 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. Table VI.F8 shows detailed long-range projections of trust fund operations in current dollar amounts.
Under the intermediate assumptions, the Trustees project that the OASI income rate will rise from 11.00 percent of taxable payroll in 2013 to 11.47 percent in 2086. Income from taxation of benefits causes this increase for two main reasons: (1) benefits are rising faster than payroll; and (2) the benefit-taxation threshold amounts are not indexed, and therefore an increasing share of benefits will be subject to tax. The pattern of the cost rate is much different. The OASI cost rate increased from 11.03 percent of taxable payroll in 2010 to 11.09 percent in 2011. For 2012 and 2013,
the Trustees project larger increases in the cost rate, reaching levels of 11.35 and 11.48 percent of taxable payroll, respectively. From 2014 to 2017, the growth in the cost rate slows, as the economic recovery through this period roughly offsets the effects of the aging population. From 2017 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 increase the number of workers. From 2037 to 2053, the aging of the baby-boom generation causes an increase in the average age of beneficiaries and a decline in the cost rate. After initial benefit eligibility, benefits increase annually with price inflation rather than wage inflation. As beneficiaries age, their benefit amounts drop relative to current average taxable earnings because wages generally rise more rapidly than prices. After 2053, the Trustees project the OASI cost rate to rise, reaching 15.53 percent of taxable payroll for 2086, primarily because of projected reductions in death rates.
The Trustees’ projections of income rates under the low-cost and high-cost sets of assumptions are very similar to those projected for the intermediate assumptions, because income rates are largely a reflection of the payroll tax rates specified in the law (including reimbursements from the General Fund of the Treasury to compensate fully for the reduction in payroll tax revenue), with the gradual change from taxation of benefits noted above. In contrast, OASI cost rates for the low-cost and high-cost assumptions are significantly different than those projected for the intermediate assumptions. For the low-cost assumptions, the OASI cost rate decreases from 2012 through 2017, and then rises until it peaks in 2034 at 13.29 percent of payroll. Thereafter, the cost rate generally declines gradually until it reaches 11.38 percent of payroll for 2086, at which point the income rate reaches 11.23 percent. For the high-cost assumptions, the OASI cost rate rises throughout the 75-year period. It rises relatively rapidly through 2035 because of the aging of the baby-boom generation. Subsequently, the cost rate continues to rise and reaches 21.93 percent of payroll for 2086, at which point the income rate reaches 11.84 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 throughout the projection period. This annual deficit rises rapidly, reaching a peak of 3.84 percent of taxable payroll for 2037, then declines to 3.41 percent of taxable payroll for 2053, and rises thereafter until it reaches 4.06 percent of taxable payroll for 2086.
Under the low-cost assumptions, the Trustees project the OASI annual balance to be negative in 2012-2013, positive for 2014 through 2019, and negative thereafter. The annual deficit peaks at 1.97 percent of taxable payroll for 2034 and then declines through 2084, reaching a deficit of 0.15 percent of payroll for 2086. Under the high-cost assumptions, the OASI balance is negative throughout the projection period, with deficits of 2.06 percent for 2020, 6.48 percent for 2050, and 10.09 percent of payroll for 2086.
Notes:1. The income rate excludes interest income.
2. Revisions of taxable payroll may change some historical values.
3. Totals do not necessarily equal the sums of rounded components.
The DI cost rate rose substantially from 1.88 percent of taxable payroll in 2007 to 2.43 percent for 2011 due to the recent economic recession. Under the intermediate assumptions, the Trustees project that the DI cost rate will increase to 2.48 percent for 2012 and then decline to 2.18 percent for 2020. From 2020 to 2045, the DI cost rate stays relatively stable and then generally increases thereafter, reaching 2.30 percent for 2086. The income rate increases only very slightly from 1.82 percent of taxable payroll for 2012 to 1.86 percent for 2086. The projected annual deficit is 0.66 percent in 2012 and reaches 0.44 percent for 2086.
Under the low-cost assumptions, the Trustees project the DI cost rate will decline from 2.43 percent of payroll for 2011 to 1.58 percent for 2040, and will remain relatively stable thereafter, reaching 1.57 percent for 2086. 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 Trustees project the DI cost rate to generally rise over the projection period, reaching 3.23 percent for 2086. The annual deficit is 0.73 percent in 2012 and rises to 1.34 percent for 2086.
Figure IV.B1 shows the patterns of the OASI and DI annual income rates and cost rates. The variation in income rates by alternative is very small, and, to simplify the presentation, figure
IV.B1 shows only the income rates for alternative II. Income rates generally increase slowly for each of the alternatives over the long-range period. Taxation of benefits, which is a relatively small portion of income, is the main source of both the increases in the income rate and the variation among the alternatives. Increases in income from taxation of benefits reflect: (1) increases in the total amount of benefits paid; and (2) the increasing share of individual benefits that will be subject to taxation because benefit taxation threshold amounts are not indexed.
Figure IV.B1 shows the patterns of the annual balances for OASI and DI. For each alternative and for historical data, the magnitude of each of the positive balances, as a percentage of taxable payroll, is the distance between the appropriate cost-rate curve and the income-rate curve above it. The magnitude of each of the deficits is the distance between the appropriate cost-rate curve and the income-rate curve below it. The pattern of the projected OASDI annual balances is important to the analysis of the financial condition of the Social Security program as a whole.
In the future, the costs of OASI, DI, and the combined OASDI programs as a percentage of taxable payroll are unlikely to fall outside the range encompassed by alternatives I and III because alternatives I and III define a wide range of demographic and economic conditions.
Long-range OASDI cost and income are generally expressed as percentages of taxable payroll. However, the Trustees also present cost and income as shares of
gross domestic product (GDP), the value of goods and services produced during the year in the United States. Under alternative II, the Trustees project the OASDI cost to rise from 5.01 percent of GDP for 2012 to a peak of 6.36 percent for 2035. Thereafter, OASDI cost as a percentage of GDP declines to a low of 6.03 percent for 2067 and then increases slowly thereafter, reaching a level of 6.10 percent by 2086. Appendix
F presents full estimates of income and cost relative to GDP.
The Trustees project the OASDI cost rate to increase through 2014 and then decrease slightly through 2017 as the economy recovers. The cost rate then rises rapidly between 2017 and 2035, primarily because the number of beneficiaries rises much more rapidly than the number of covered workers as the baby-boom generation retires. The baby-boom generation had lower fertility rates than their parents, and the Trustees expect those lower fertility rates to persist; therefore, the ratio of beneficiaries to workers will rise rapidly and reach a permanently higher level after the baby-boom generation retires. To account for increasing longevity, the Trustees project that the ratio of beneficiaries to workers will generally rise slowly thereafter. Table IV.B2 provides a comparison of the numbers of covered workers and beneficiaries.
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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. The General Fund of the Treasury reimburses the trust funds for the costs of 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 effect of the demographic shift under the three alternatives on the OASDI cost rates is clear when one considers the projected number of OASDI beneficiaries per 100
covered workers. Compared to the 2011 level of 35 beneficiaries per 100 covered workers, the Trustees project that this ratio will rise to 49 by 2035 under the intermediate assumptions because the growth in beneficiaries greatly exceeds the growth in workers. By 2090, this projected ratio rises further under the intermediate and high-cost assumptions, reaching 52 under the intermediate assumptions and 68 under the high-cost assumptions. Under the low-cost assumptions, this ratio rises to 45 by 2035 and then declines, reaching a stable level of about 40 after 2070. Figure
IV.B2 shows beneficiaries per 100 covered workers.
For each alternative, the curve in figure IV.B2 is strikingly similar to the corresponding cost-rate curve in figure
IV.B1. This similarity emphasizes the extent to which the cost rate is determined by the age distribution of the
population. The cost rate is essentially 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. For this reason, 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 2011. Under the low-cost assumptions, the Trustees project that this ratio will decline to 2.2 by 2035, and then generally rise throughout the remainder of the period, reaching 2.5 by 2090. Under the intermediate assumptions, this ratio declines generally throughout the long-range period, reaching 2.0 for 2035 and 1.9 by 2090. Under the high-cost assumptions, this ratio decreases steadily to 1.5 by 2090.
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 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. 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. If either trust fund becomes exhausted during a year, then there would not be sufficient assets in the fund to pay the full amount of benefits scheduled for the year on a timely basis.
The trust fund ratio serves an additional important purpose in assessing the actuarial status of the program. If the trust fund ratio is positive throughout the period and is either 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 has achieved sustainable solvency.
Table IV.B3 shows the Trustees’ projections of trust fund ratios by alternative, without regard to advance tax transfers that would be effected, for the separate and combined OASI and DI Trust Funds. The table also shows the years of trust fund exhaustion by alternative.
Under the intermediate assumptions, the Trustees project that the OASI Trust Fund ratio will decline from 390 percent at the beginning of the period, at first slowly, and then more rapidly, until the trust fund becomes exhausted in 2035. The DI trust fund ratio has been declining steadily since 2003, and continues to decline from 109 percent at the beginning of 2012 until the trust fund becomes exhausted in 2016.
The Trustees estimate that, under the intermediate assumptions, the trust fund ratio for the combined OASI and DI Trust Funds will decline from 340 percent at the beginning of 2012 until the combined funds become exhausted in 2033. This is three years earlier than the Trustees projected in last year’s report.
Under the intermediate assumptions, the Trustees project that OASDI cost will exceed non-interest income for the entire projection period. However, for the period 2012 through 2020, trust fund income, including interest income, is more than is needed to cover costs, so combined trust fund assets continue to grow. Beginning in 2021, combined trust fund assets diminish until assets are exhausted in 2033.
Under the low-cost assumptions, the trust fund ratio for the DI program increases from 2020 through the end of the long-range projection period, reaching the extremely high level of 1,289 percent for 2087. For the OASI program, the trust fund ratio declines slowly at first, and then more rapidly, until the trust fund becomes exhausted in 2054. For the combined OASDI program, the trust fund ratio declines to a low of 7 percent for 2076, and increases slightly thereafter, reaching 16 percent for 2087. Thus, under the low-cost assumptions, the DI program and the combined OASDI program achieve sustainable solvency. However, the trust fund ratio for each program falls below 25 percent for some years during the 75-year projection period.
In contrast, under the high-cost assumptions, the Trustees estimate that the OASI trust fund ratio will decline continually to fund exhaustion in 2029. The DI trust fund ratio declines from 107 percent for 2012 to fund exhaustion in 2015. The combined OASI and DI trust fund ratio declines from 338 percent for 2012 to fund exhaustion in 2027.
The Trustees project large, persistent annual deficits under all but the low-cost assumptions. It is highly likely that lawmakers will need to increase income, reduce program costs, 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 are sufficient to cover their combined cost until 2027. Under the intermediate assumptions, the combined starting funds plus estimated future income are sufficient to cover cost until 2033. The combined program is able to cover cost for the foreseeable future under the more optimistic low-cost assumptions. In the 2011 report, the Trustees projected that the combined trust funds would become exhausted in 2029 under the high-cost assumptions and in 2036 under the intermediate assumptions.
Note: The definition of trust fund ratio appears in the Glossary.The combined ratios shown for years after exhaustion of the DI Trust Fund are theoretical.
Figure IV.B3 illustrates the trust fund ratios for the separate OASI and DI Trust Funds for each of the alternative sets of assumptions. DI Trust Fund status is more uncertain than OASI Trust Fund status because there is a high degree of uncertainty associated with future disability prevalence. A graph of the trust fund ratios for the combined trust funds appears in figure
II.D6.
Summarized values for the full 75-year period are useful in analyzing the program’s long-range financial adequacy over the period as a whole, both under present law and under proposed modifications to the law. Table
IV.B4 presents summarized income rates, summarized cost rates, and actuarial balances for 25-year, 50-year, and 75-year valuation periods. Summarized income rates are the sum of non-interest income (which includes scheduled payroll taxes, the projected income from the taxation of scheduled benefits, and reimbursements from the General Fund of the Treasury) and the starting trust fund balance, expressed as a percentage of taxable payroll. Under current law, the total OASDI payroll tax rate, which includes payroll taxes and reimbursements from the General Fund of the Treasury to make up for the reduction in payroll tax revenue, will remain at 12.4 percent in the future. In contrast, the Trustees expect income from taxation of benefits, expressed as a percentage of taxable payroll, to increase in most years of 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 an increasing share of beneficiaries will pay tax on a larger portion of their benefits. Summarized cost rates are the sum of cost (which includes scheduled benefit payments, administrative expenses, net interchange with the
Railroad Retirement program, and payments for vocational rehabilitation services for disabled beneficiaries) and the cost of reaching a target trust fund of 100 percent of annual cost at the end of the period, expressed as a percentage of taxable payroll.
The actuarial balance for a valuation period is equal to the difference between the
summarized income rate and the
summarized cost rate for the period. An actuarial balance of zero for any period indicates that 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 for a period indicates that the present value of income to the program plus the existing trust fund is less than 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, indicates that the current-law level of financing is not sustainable.
Payroll tax income, expressed as a percentage of taxable payroll, is generally slightly smaller than the actual tax rates in effect for each period. The reason for this difference is that workers receive earnings before the trust funds receive the corresponding payroll taxes. As a result of this timing difference, payroll tax income received in a given year includes taxes paid from a combination of the taxable payrolls for that year and prior years. When payroll tax income is divided by taxable payroll for a particular year (or period of years), the resulting income rate is slightly lower than the applicable tax rate for the period.
Table IV.B4 contains summarized rates for the intermediate, low-cost, and high-cost assumptions. The low-cost and high-cost assumptions define a wide range of possibilities. Financial outcomes as good as the low-cost scenario or as bad as the high-cost scenario are unlikely to occur.
For the 25-year valuation period, the OASDI program has an actuarial balance of 0.38 percent of taxable payroll under the low-cost assumptions, ‑1.21 percent under the intermediate assumptions, and -3.13 percent under the high-cost assumptions. 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 has actuarial balances of ‑0.16 percent under the low-cost assumptions, ‑2.28 percent under the intermediate assumptions, and ‑4.91 percent under the high-cost assumptions. These actuarial deficits mean that the program is not adequately financed for the 50‑year valuation period under the intermediate and high-cost sets of assumptions. Under the low-cost projections, in which the combined OASI and DI Trust Fund does not exhaust, the small actuarial deficit means that the reserves of the trust fund fall below 1 year’s projected program cost by the end of 2061.
For the entire 75-year valuation period, the combined OASDI program again has
actuarial deficits under all three sets of assumptions. The actuarial balance for this long-range valuation period is ‑0.11 percent of taxable payroll under the low-cost assumptions, ‑2.67 percent under the intermediate assumptions, and ‑5.89 percent under the high-cost assumptions.
Assuming the Trustees’ intermediate assumptions accurately capture future demographic and economic trends, lawmakers could restore solvency for the program over the next 75 years using a variety of approaches. For example, they could immediately increase the combined Social Security payroll tax rate from 12.40 percent to 15.01 percent, immediately reduce scheduled benefits by 16.2 percent, or use some combination of approaches.
However, eliminating the actuarial deficit over the next 75 years requires 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. Lawmakers could eliminate the actuarial deficit for the 75-year period by immediately increasing the combined payroll tax from 12.40 percent to 15.16 percent,
2 immediately decreasing scheduled benefits by 17.0 percent, or using a combination of these approaches. The Trustees project that these changes would be sufficient to eliminate the actuarial deficit and leave an actuarial balance of zero for the OASDI program.
Under the intermediate assumptions, the Trustees project large annual deficits toward the end of the long-range period that reach 4.50 percent of payroll for 2086 (see table
IV.B1). These large deficits indicate that annual cost continues to exceed non-interest income after 2086, so continued adequate financing would require larger changes than those needed to maintain solvency for the 75-year period. Over the period extending through the infinite horizon, the Trustees estimate the actuarial deficit to be 3.9 percent of taxable payroll under the intermediate assumptions. This deficit indicates that lawmakers could eliminate the projected infinite horizon shortfall with an immediate increase in the combined payroll tax rate from 12.4 percent to about 16.5 percent.
3 They could also eliminate this shortfall by reducing all current and future benefits immediately by 23.3 percent.
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. Increases in longevity after 2027, when the disability conversion age remains fixed, have a greater effect on OASI cost than on DI cost. As a result of this greater effect on OASI cost, the financial status of the OASI program in the later portion of the 75‑year projection period is worse than the financial status of the DI program.
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 $8.6 trillion for the OASDI program. This amount is the 75-year “open group unfunded obligation” (see row
H). The actuarial deficit (which is 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, is ‑$9.1 trillion for the OASDI program. The actuarial balance , expressed as a percentage of taxable payroll for the period, is ‑2.67 percent.
A negative actuarial balance (i.e., an actuarial deficit) is one measure of the unfunded obligation of the program. This subsection presents two additional measures of OASDI unfunded obligations under the intermediate assumptions.
Consistent with practice since 1965, this report focuses on a 75-year open group valuation to evaluate the long-run financial status of the OASDI program. The open group valuation includes non-interest income and cost for past, current, and future participants through the year 2086. The second line of table IV.B6 shows that the present value of the open group unfunded obligation for the program is $8.6 trillion over 2012-86. 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 2086.
Table IV.B6 also presents the 75-year unfunded obligation as percentages of future OASDI taxable payroll and GDP through 2086. 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 the discussion of “sustainable solvency” beginning
on page 46.
Another measure that reflects the continued, and probably increasing, annual shortfalls after 75 years is the unfunded obligation extended over the infinite horizon. The extension of the time period past 75 years assumes that the current-law OASDI program and the demographic and economic trends used for the 75‑year projection continue indefinitely.
Table IV.B6 reports that the OASDI open group unfunded obligation over the infinite horizon is $20.5 trillion, which is $11.9 trillion larger than for the 75‑year period. The $11.9 trillion increment reflects a significant financing gap projected for OASDI for years after 2086. Of course, the degree of uncertainty associated with estimates beyond 2086 is substantial.
The $20.5 trillion infinite horizon open group unfunded obligation is 3.9 percent of taxable payroll or 1.3 percent of GDP. These relative measures of the unfunded obligation over the infinite horizon express its magnitude in relation to the resources potentially available to finance the shortfall.
Notes:1. The present values of future taxable payroll for 2012-86 and for 2012 through the infinite horizon are $341.5 trillion and $530.2 trillion, respectively.
2. The present values of GDP for 2012-86 and for 2012 through the infinite horizon are $947.8 trillion and $1,569.1 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, the Trustees projected that the infinite horizon unfunded obligation was $17.9 trillion in present value. If the assumptions, methods, and starting values had not changed, moving the valuation date forward by 1 year would have increased the unfunded obligation by about $0.8 trillion, to $18.7 trillion. The net effects of changes in assumptions, methods, and starting values increased the infinite horizon unfunded obligation by an additional $1.8 trillion, to $20.5 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 0.1 percentage point higher than last year when expressed as a share of GDP. The main changes affecting the infinite horizon unfunded obligation for this report are revised starting values, changes in interest rates, changes in near-term economic assumptions, revisions to ultimate real-wage differential and disability incidence rates, and other method changes. See section
IV.
B.
7 for details regarding changes in law, data, methods, and assumptions.
Table IV.B7 separates the components of the infinite horizon unfunded obligation (with the exception of general fund reimbursements) among past, current, and future participants. The table does not separate the general fund reimbursements among participants because there is no clear basis for attributing the reimbursements across generations.
The excess of the present value of cost for past and current participants
4 over the present value of dedicated tax income for past and current participants produces an unfunded obligation for past and current participants of $22.2 trillion. Table
IV.B7 also shows an unfunded obligation of $21.6 trillion for past and current participants, including past and future general fund reimbursements. Future participants will pay dedicated taxes of $1.1 trillion more into the system than the cost of their benefits ($47.0 trillion of dedicated tax income as compared to $45.9 trillion of cost). The unfunded obligation for all participants through the infinite horizon thus equals $20.5 trillion.
This accounting demonstrates that some generations receive benefits with a present value exceeding the present value of their dedicated tax income, while other generations receive benefits with a present value less than the present value of their dedicated tax income, whether general fund reimbursements are included or not. Making Social Security solvent over the infinite horizon requires some combination of increased revenue or reduced benefits for current and future participants amounting to $20.5 trillion in present value, 3.9 percent of future taxable payroll, or 1.3 percent of future GDP.
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Less present value of past general fund reimbursements a |
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Notes:1. The present value of future taxable payroll for 2012 through the infinite horizon is $530.2 trillion.
2. The present value of GDP for 2012 through the infinite horizon is $1,569.1 trillion.
3. 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
actuarial balance ratio for each of these valuation periods must meet certain criteria. The actuarial balance ratio is defined as the ratio of the actuarial balance to the summarized cost rate. The long-range test is met if, for each of the 66 valuation periods, the actuarial balance ratio is either: (1) not negative; or (2) negative by at most a specified percentage, the “allowable threshold.” The allowable threshold is zero for the first 10-year period and decreases uniformly for longer periods until it reaches ‑5 percent for the 75-year period. To recognize the greater uncertainty associated with estimates for more distant years, the criterion for meeting the test is less stringent for the longer periods.
The program fails the test of long-range close actuarial balance if the actuarial balance ratio falls below the allowable threshold for one or more of the 66 separate valuation periods. When the program is out of close actuarial balance, the program will experience financial problems in the future, and lawmakers should consider ways of improving its financial status. To allow future beneficiaries and workers to plan effectively for their retirement, lawmakers should not delay necessary changes in program financing or benefit provisions.
Table IV.B8 presents a comparison, based on the intermediate assumptions, of the actuarial balance ratios with the allowable thresholds under the long-range test. For display purposes, values are shown only for selected valuation periods. However, each of the 66 periods is considered for the test. Summarized income rates, summarized cost rates, and actuarial balances for the 25‑year, 50-year, and 75‑year valuation periods equal those presented in table
IV.B4. Figure
IV.B4 is a graphical presentation of the estimated balances as a percentage of the summarized cost rates. It includes the allowable thresholds for the OASI, DI, and combined OASDI programs.
For the OASI program, the Trustees estimate that, under the intermediate assumptions, the actuarial balance ratio does not fall below the allowable threshold for valuation periods of 10 through 19 years, but it does fall below for periods of greater than 19 years. For the full 75-year long-range period, the actuarial balance ratio reaches ‑15.94 percent, which is 10.94 percent less than the allowable threshold of ‑5.0 percent. Although the OASI program satisfies the
test of short-range financial adequacy (as discussed in section
IV.
A), it is not in long-range close actuarial balance.
For the DI program, under the intermediate assumptions, the actuarial balance ratio falls below the allowable threshold for all 66 valuation periods. For the full 75-year long-range period, the
actuarial balance ratio reaches ‑16.18 percent, which is 11.18 percent less than the allowable threshold of ‑5.0 percent. Thus, the DI program fails the short-range test of financial adequacy, and is also not in long-range close actuarial balance.
The long-range test indicates that financing for the DI program is less adequate than for the OASI program, even though long-range actuarial deficits for the two programs are comparable over the entire 75-year period. The increase in long-range cost due to the aging of the baby-boom generation occurs much earlier for the DI program than for the OASI program. As a result of this earlier impact on the DI program, payroll tax rates that are relatively more adequate for the OASI program during the first 25 years are relatively less adequate later in the long-range period.
For the OASDI program, the Trustees estimate that, under the intermediate assumptions, the actuarial balance ratio does not fall below the allowable threshold for valuation periods of 10 through 16 years, but it does fall below for periods of greater than 16 years. For the full 75-year long-range period, the actuarial balance ratio reaches ‑15.97 percent, which is 10.97 percent less than the allowable threshold of ‑5.0 percent. Although the OASDI program satisfies the short-range test of financial adequacy, it is out of long-range close actuarial balance.
Last year, the Trustees reported that the OASI and DI programs, both separate and combined, were out of close actuarial balance. This year, the Trustees project that the deficits for the OASI, DI, and combined OASDI programs are larger than in last year’s report for all valuation periods.
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Changing the 75-year valuation period from 2011-85 to 2012-86 decreased the projected long-range OASDI actuarial balance by 0.05 percent of taxable payroll. This decrease occurred because the 75-year actuarial balance now includes the relatively large negative annual balance for 2086. Note that the trust fund assets at the beginning of the projection period are included in the 75-year actuarial balance. Since these assets reflect the program’s net financial flows for all past years, the actuarial balance incorporates financial activity from 1937 through the end of the long-range period.
The Trustees did not change any of the ultimate demographic assumptions this year. However, updated starting demographic values, and the way these values transition to ultimate assumptions, decreased the long-range OASDI actuarial balance by 0.05 percent of taxable payroll. Three changes significantly affect the long-range OASDI actuarial balance. First, preliminary birth rate data for 2009 and 2010 are lower than had been expected in last year’s report. The Trustees also project generally lower birth rates than in last year’s report during the transition years to ultimate rates. These changes in birth rates decreased the long-range OASDI actuarial balance by 0.02 percent of taxable payroll. Second, this year’s estimates incorporate final data on legal immigration for 2010, which are slightly lower than the estimates in last year’s report. Including these new immigration data decreased the long-range OASDI actuarial balance by 0.01 percent of taxable payroll. Third, the updated starting population levels, and the interaction of these levels with the changes in fertility and immigration, decreased the long-range OASDI actuarial balance by 0.02 percent of taxable payroll.
The Trustees changed one of the ultimate economic assumptions this year — the annual rate of change in average hours worked for the future. The Trustees now assume a decline in average hours worked of 0.05 percent per year, rather than no change as they assumed last year. This change decreased the long-range OASDI actuarial balance by 0.07 percent of taxable payroll. Reasons for the change in the ultimate average hours worked include: (1) establishing consistency with the projections of an aging workforce; and (2) the belief that increasing productivity is likely to result in workers’ desire to enjoy some of these productivity gains in the form of more leisure. In addition, historical data and trends support this reduction in the assumed average hours worked. See Section
V.
B.
3 for details. The change in this assumption lowers the ultimate annual real wage differential by 0.05 percentage point from last year’s report, with the level of the differential changing from 1.17 percentage points to 1.12 percentage points.
In addition, updated starting values and changes in near-term economic growth rate assumptions combined to decrease the long-range OASDI actuarial balance by 0.14 percent of taxable payroll. Two specific changes to starting values and growth assumptions account for this decrease in the actuarial balance. First, starting values for 2011 resulted in higher benefit levels and lower payroll taxes for 2012 than those projected in last year’s report. Price inflation in 2011 was higher than expected, with the cost-of-living adjustment to benefits in December 2011 being 2.9 percentage points higher than assumed in last year’s report. Furthermore, the average level of taxable earnings for covered workers in 2011 was about 1.6 percent lower than estimated in last year’s report. The higher-than-expected adjustment to benefits for 2012, combined with a 2.0 percent lower-than-expected level of average taxable earnings for 2012, increased annual cost rates for at least the next 20 years. The second main reason for the decrease in the actuarial balance is the lower projected real interest rates on trust fund investments during the first 10 years in this year’s report. Real interest rates for new investments during 2011 are significantly lower than projected in last year’s report, and these lower real interest rates on new investments continue for several years before reaching their ultimate levels.
The Trustees revised one of the ultimate disability assumptions in this year’s report, the assumption of disability incidence. This change in the ultimate disability incidence rates decreased the long-range OASDI actuarial balance by 0.04 percent of taxable payroll. Compared to last year’s report, the ultimate age-adjusted disability incidence rates increased by 2 percent for males and 5 percent for females. The revised ultimate disability incidence rates are now more consistent with the levels and the trends experienced in the most recent 10-year historical period.
This report also includes methodological changes and updates of program-specific data that combined to decrease the long-range OASDI actuarial balance by 0.08 percent of taxable payroll. Two methodological changes related to the projection of average benefit levels for workers who become eligible for benefits in the future together decreased the long-range OASDI actuarial balance by about 0.04 percent of taxable payroll. The first methodological change improves consistency between the projected earnings of new beneficiaries and the projected economy-wide covered worker rates. Compared to last year’s report, this methodological change increases benefit levels for workers who become eligible for benefits in the future. The second methodological change slightly increases average benefit levels for retired-worker beneficiaries and disabled-worker beneficiaries for their first two years of benefit entitlement. The method for estimating these average benefit levels now includes beneficiaries who first start receiving benefits more than two years after their initial entitlement date, who tend to have higher benefits. In addition to these changes in methodology, updating programmatic data and projection factors that determine benefit levels and the interaction of all changes combined to decrease the long-range OASDI actuarial balance by about 0.04 percent of taxable payroll. As an example of updated projection factors, updates to post-entitlement factors (used to project the growth in benefit levels after initial entitlement in excess of the cost-of-living adjustment) decreased the OASDI actuarial balance by about 0.01 percent of taxable payroll.
If the assumptions, methods, and starting values had all remained unchanged from last year, the OASDI long-range actuarial balance would have become more negative by 0.05 percent of taxable payroll solely due to the change in the valuation period. However, the combined changes in data, assumptions, and methods described above made the actuarial balance more negative by an additional 0.39 percent of payroll; after rounding, the actuarial balance changed from ‑2.22 percent of taxable payroll in last year's report to ‑2.67 percent in this report.
Comparing the annual cash-flow balances for this report and the prior year’s report illustrates the effects of the changes made. 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 2012, the annual balance in this report is 0.6 percent of payroll lower than projected in last year's report. This lower balance for 2012 is mainly due to two factors: (1) the cost-of-living adjustment to benefits for December 2011 was 2.9 percentage points higher than assumed in last year’s report; and (2) average taxable earnings were 2.0 percent lower for 2012 than assumed in last year’s report. The difference between the annual balances in the two reports over the next 5 years remains close to the difference for 2012, as the cost-of-living adjustment for December 2011 still significantly affects benefit levels for these years. However, over the following 4 years (2018-21), the difference between the annual balances in the two reports declines rapidly. Compared to last year’s report, recovery from the recent recession takes 1 year longer, with the economy returning to its full employment level in 2019. By 2021, the difference in the annual balances is only 0.1 percent of payroll. After 2021, the difference between the annual balances increases until around 2040, when it reaches almost 0.4 percent of payroll. For the period 2050 through 2085, the difference between the annual balances decreases and reaches 0.2 percent of payroll in 2085. The annual deficit for 2085 is 4.47 percent of taxable payroll in this report, compared to 4.24 percent for 2085 in last year's report.
This pattern of differences between the annual balances in the two reports after 2021 is due to a combination of the changes described earlier in this section. After 2021, the assumed lower ultimate real wage differential in this year’s report causes the difference between the annual balances in the two reports to grow throughout the remainder of the long-range period. This lower real wage differential explains most of the 0.2 percent of payroll difference in 2085 between the annual balances in the two reports. The assumed higher ultimate disability incidence rates have a similar effect, but to a lesser degree; the incidence rates explain about one-fourth of the 0.2 percent of payroll difference in 2085 between the annual balances in the two reports. In addition, the population changes contribute to the increasing and then decreasing pattern of differences between the annual balances after 2021. Compared to last year’s report, revisions to the starting level population result in more people age 20 and older through 2030. In 2021, this increase in the population is slightly greater for the working age population (those ages 20‑64) than for the beneficiary age population (those ages 65 and older). After 2030, the working age population is smaller in this year’s report, reflecting the lower starting fertility levels. However, the beneficiary age population remains greater than in last year’s report until 2065. At the very end of the long-range period, the working age population is 0.4 percent less than in last year’s report and the beneficiary age population is 0.6 percent less than in last year’s report.
