The Social Security Act requires that certain parameters affecting the determination of OASDI benefits and taxes be adjusted annually to reflect changes in particular economic measures. Formulas prescribed in the law, applied to reported statistics, change these program parameters annually. The law bases these automatic adjustments on measured changes in the
national average wage index (AWI) and the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI).
1 This section shows values for program parameters adjusted using these indices from the time that these adjustments became effective through 2022. Projected values for future years depend on the economic assumptions described in the preceding section of this report.
Tables V.C1 and
V.C2 present the historical and projected values of the CPI-based benefit increases, the
AWI series, and the values of many of the wage-indexed program parameters. Each table shows projections under the three alternative sets of economic assumptions. Table
V.C1 includes:
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The annual levels of and percentage increases in the AWI. Under section 215(b)(3) of the Social Security Act, Social Security benefit computations index taxable earnings (for most workers first becoming eligible for benefits in 1979 or later) using the AWI for each year after 1950. This procedure converts a worker’s past earnings to approximately average-wage-indexed equivalent values near the time of his or her benefit eligibility. Other program parameters presented in this section that are subject to the automatic-adjustment provisions also rely on the AWI.
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The wage-indexed contribution and benefit base. For any year, the contribution and benefit base is the maximum amount of earnings subject to the OASDI payroll tax and creditable toward benefit computation. The Social Security Act defers any increase in the contribution and benefit base if there is no cost-of-living adjustment effective for December of the preceding year. There was no increase in the contribution and benefit base in 2010 and 2011. Increases resumed in 2012.
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The wage-indexed retirement earnings test exempt amounts. The exempt amounts are the annual amount of earnings below which beneficiaries do not have benefits withheld. A lower exempt amount applies in years before normal retirement age. A higher amount applies for the year in which a beneficiary attains normal retirement age. Starting in 2000, the retirement earnings test no longer applies beginning with the month of normal retirement age attainment. The Social Security Act defers any increase in these exempt amounts if there is no cost-of-living adjustment effective for December of the preceding year. There was no increase in these exempt amounts in 2010 and 2011. Increases resumed in 2012.
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Cost-of-living benefit increase a (percent)
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Average wage index (AWI) b
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Contribution and benefit base c
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Table V.C2 shows values for other wage-indexed parameters. The table provides historical values from 1978, when indexing of the amount of earnings required for a quarter of coverage first began, through 2013, and also shows projected values through 2022. These other wage-indexed program parameters are:
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The bend points in the formula for computing the primary insurance amount (PIA) for workers who reach age 62, become disabled, or die in a given year. As figure V.C1 illustrates, these two bend points define three ranges in a worker’s average indexed monthly earnings (AIME). The formula for the worker’s PIA multiplies a 90, 32, or 15 percent factor by the portion of the worker’s AIME that falls within the three respective ranges, and then adds the resulting products together.
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AIME bend points in PIA formula a
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PIA bend points in maximum- family-benefit formula b
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Old-law contribution and benefit base c
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Projections of the total U.S. labor force and unemployment rate (see table V.B2) are based on Bureau of Labor Statistics definitions from the Current Population Survey (CPS). These projections represent the average weekly number of employed and unemployed persons, age 16 and over, in the U.S. in a calendar year. The Office of the Chief Actuary defines the total
covered workers in a year as the persons who have any OASDI covered earnings (that is, earnings subject to the OASDI payroll tax) at any time during the year. For those age 16 and over, projected covered employment is the sum of age-sex components, each reflecting the growth projected for the component’s total U.S employment and average weeks worked per year.
2For the short-range period, the average weeks worked for each component is assumed to increase during the economic recovery. After 2022, the average weeks worked for each component is assumed to remain constant. The projection method also accounts for changes in non-OASDI-covered employment, the increase in coverage of Federal civilian employment as a result of the 1983 Social Security Amendments, and changes in the number and employment status of other immigrants residing within the Social Security coverage area.
The covered-worker rate is the ratio of OASDI covered workers to the Social Security area population. For men age 16 and over, the projected age-adjusted covered-worker rates
3 for 2087 are 71.2, 70.5, and 69.8 percent for the low-cost, intermediate, and high-cost assumptions, respectively. For women age 16 and over, the projected covered-worker rates for 2087 are 65.2, 64.5, and 63.7 percent for the low-cost, intermediate, and high-cost assumptions, respectively. These rates are higher than the 2011 levels of 66.8 percent for males and 59.9 percent for women, due to the assumed decreases in unemployment rates and assumed increase in labor force participation rates.
Eligibility for worker benefits under the OASDI program requires some threshold level of work in covered employment. A worker satisfies this requirement by his or her accumulation of quarters of coverage (QCs). Prior to 1978, a worker earned one QC for each calendar quarter in which he or she earned at least $50. In 1978, when annual earnings reporting replaced quarterly reporting, the amount required to earn a QC (up to a maximum of four per year) was set at $250. As specified in the law, the Social Security Administration has adjusted this amount each year since then according to changes in the
AWI. Its value in 2013 is $1,160.
Using these insured models, the percentage of the Social Security area population aged 62 and over that is fully insured will increase from its estimated level of 82.9 for December 31, 2010, to 88.9, 89.5, and 90.3 for December 31, 2090, under the low-cost, intermediate, and high-cost alternatives, respectively. Over the projection period, the percentage for females increases significantly, reflecting the past substantial growth in the employment of younger cohorts of women. The percentage for males declines to a small degree, reflecting, in part, increases in the percent of the population that is classified as other immigrants and is thus less likely to have earnings reported and credited to them. Under the intermediate assumptions, for example, the percentage for males decreases slightly from 92.2 to 90.3, and the percentage for females increases from 75.5 to 88.7.
The short-range model develops the number of retired-worker beneficiaries by applying
award rates to the aged fully insured population, excluding those already receiving retired-worker, disabled-worker, aged-widow(er)’s, or aged-spouse’s benefits, and by applying termination rates to the number of
retired-worker beneficiaries.
The long-range model projects the number of retired-worker beneficiaries who were not previously converted from disabled-worker beneficiary status as a percentage of the exposed population.
4 For age 62, the model projects this percentage by using a linear regression based on the historical relationship between this percentage, the labor force participation rate at age 62, and the number of months from age 62 to normal retirement age. The percentage for ages 70 and over is nearly 100 because delayed retirement credits cannot be earned after age 70. The long-range model projects the percentage for each age 63 through 69 based on historical experience with an adjustment for changes in the portion of the primary insurance amount that is payable at each age of entitlement. The model adjusts these percentages for ages 62 through 69 to reflect changes in the normal retirement age.
Table V.C4 shows the projected number of beneficiaries under the OASI program by type of benefit. The retired worker beneficiary counts include those persons who receive a residual auxiliary benefit in addition to their retired-worker benefit. The office makes estimates of the number and amount of residual payments separately for spouses and widow(er)s.
The DI Trust Fund pays for benefits to disabled workers who: (1) satisfy the disability insured requirements; (2) are unable to engage in any
substantial gainful activity due to a medically determinable physical or mental impairment severe enough to satisfy the requirements of the program; and (3) have not yet attained
normal retirement age . Spouses and children of such disabled workers may also receive DI benefits provided they satisfy certain criteria, primarily age and earnings requirements.
The disability incidence rate is the ratio of the number of new beneficiaries awarded benefits each year to the number of individuals who meet insured requirements but are not yet receiving benefits (the disability-exposed population
5)
. The Office of the Chief Actuary projects the number of newly awarded beneficiaries for each future year by multiplying assumed age-sex-specific
disability incidence rates and the projected disability-exposed population by age and sex.
Figure V.C3 illustrates the historical and estimated incidence rates under the three alternatives. Incidence rates have varied substantially during the historical period since 1970 due to a variety of demographic and economic factors, along with changes in legislation and program administration. The solid lines in figure
V.C3 show the incidence rate adjusted to the age-sex distribution of the disability-exposed population for 2000. This adjustment allows a comparison of incidence rates over time by focusing on the likelihood of becoming disabled, and by excluding the effects of a changing distribution of the population toward ages where disability is more or less likely.
The dashed lines in figure V.C3 represent the gross (unadjusted) incidence rates. The changing age‑sex distribution of the exposed population over time influences these unadjusted rates. The gross incidence rate fell substantially below the age‑sex-adjusted rate between 1975 and 1995 as the baby-boom generation swelled the size of the younger working-age population, where disability incidence is lower than in older populations. After 1995, the gross rate rose faster than the age‑sex-adjusted rate as the baby-boom generation moved into an age range where disability incidence peaks. After 2023, the projected gross incidence rate declines relative to the age-sex-adjusted rate as the baby-boom generation moves above the normal retirement age and the lower-birth-rate cohorts of the 1970s enter prime disability ages (50 to normal retirement age). As these smaller cohorts age beyond normal retirement age, by about 2050, the gross incidence rate returns to a higher relative level under the intermediate assumptions. Thereafter, the gross rate remains higher and reflects the persistently higher average age of the working-age population, which is largely due to lower birth rates since 1965.
For the first 10 years of the projection period (through 2022), incidence rates reflect several factors including: (1) aspects of program administration, such as efforts to reduce the disability backlog and recent changes to how claims are adjudicated; (2) assumed future unemployment rates; and (3) underlying trends in incidence. For this year’s report, all three sets of underlying economic assumptions include a gradual economic recovery with unemployment rates gradually declining to their ultimate sustainable levels. During the period of high unemployment, the projected disability incidence rates are above the general trend level. The elevated incidence rates subside as the economy recovers, and then briefly drop below the general trend level since some of the earlier additional awards would have occurred in a later year. After 2022, age-sex-specific incidence rates trend toward the ultimate rates assumed for the long-range projections and reach these ultimate rates in 2032. These ultimate age-sex-specific disability incidence rates were selected based on careful analysis of historical levels and patterns and expected future conditions, including the impact of scheduled increases in the normal retirement age.
6 The ultimate incidence rates represent the expected average rates of incidence for the future.
In the short-range period (through 2022), the projected age-sex-adjusted death rate (adjusted to the 2000 disabled-worker population) under the intermediate assumptions gradually declines from 26.5 deaths per thousand beneficiaries in 2012 to about 22.3 per thousand by 2022.The projected age-sex-adjusted recovery rate (medical improvement and return to work) under the intermediate assumptions rises from a level of 9.7 per thousand beneficiaries in 2012 (reflecting temporarily lower levels of continuing disability reviews) to 11.4 per thousand beneficiaries by 2022. Under the low-cost and high-cost assumptions, total age-sex-adjusted termination rates due to death and recovery are roughly 10-15 percent higher or lower, respectively, than under the intermediate assumptions.
For the long-range period (post-2022), the Office of the Chief Actuary projects death and recovery rates by age, sex, and duration of entitlement relative to the average level of rates experienced over the base period 2001-2005. The assumed ultimate age-sex-adjusted recovery rate for disabled workers is about 10.4 per thousand beneficiaries. The assumed ultimate age-sex-adjusted recovery rates for the low-cost and high-cost alternatives are about 12.5 and 8.3 recoveries per thousand beneficiaries, respectively. Recovery rates by age, sex, and duration of entitlement reach ultimate levels in the twentieth year of the projection period (2032) for all three sets of assumptions. In contrast, death rates by age and sex change throughout the long-range period at the same rate as death rates in the general population. From the age-sex-adjusted death rate of 26.5 per thousand beneficiaries in 2012, this rate decreases to 17.8, 11.0, and 6.4 per thousand disabled-worker beneficiaries for 2090 under the low-cost, intermediate, and high-cost assumptions, respectively.
Figure V.C4 illustrates gross and age-sex-adjusted total termination rates for disabled-worker beneficiaries for the historical period since 1970, and for the projection period through 2090. In the near term, through 2016, recovery terminations are projected to increase, consistent with the assumption that the Social Security Administration will receive sufficient budget appropriations to reduce the pending backlog of continuing disability reviews. As with incidence rates, the age-sex-adjusted termination rate illustrates the real change in the tendency to terminate benefits. Changes in the age-sex distribution of the beneficiary population influence the gross termination rate. A shift in the beneficiary population to older ages, as occurred over the past 20 years when the baby-boom generation moved into pre-retirement ages, increases gross death termination rates relative to the age-sex-adjusted rates.
Figure V.C5 compares the historical and projected (intermediate) levels of incidence, termination, and conversion on both a gross basis and an age-sex-adjusted basis. Incidence rates have varied widely, and, on an age-sex-adjusted basis under the intermediate assumptions, the Trustees expect them to remain near the middle of the high and low extremes experienced since 1970. Termination rates have declined and the Trustees expect them to continue to decline, largely because of declining death rates.
The Office of the Chief Actuary makes detailed projections of disabled-worker awards, terminations, and conversions and combines these to project the number of disabled workers receiving benefits over the next 75 years. Table V.C5 presents the projected numbers of disabled workers in current-payment status. The number of disabled workers in current-payment status grows from 8.8 million at the end of 2012, to 12.7 million, 14.4 million, and 15.2 million at the end of 2090, under the low-cost, intermediate, and high-cost assumptions, respectively. Of course, much of this growth results from the growth and aging of the population described earlier in this chapter. Table
V.C5 also presents projected numbers of auxiliary beneficiaries and disability prevalence rates on both a gross basis and an age-sex-adjusted basis.
The disability prevalence rate is the ratio of the number of disabled-worker beneficiaries in current-payment status to the number of persons insured for disability benefits. Figure V.C6 illustrates the historical and projected disability prevalence rates on both a gross basis and on an age-sex-adjusted basis (adjusted to the age-sex distribution of the insured population for the year 2000).
Changes in prevalence rates are a direct result of changes in incidence rates and termination rates. Figure V.C5 depicts patterns for incidence and termination rates, which are helpful for understanding the trend in prevalence rates. Annual incidence and termination rates are not directly comparable or combinable because their denominators differ.
As mentioned above in the discussion of incidence and termination rates, the age-sex-adjusted prevalence rate isolates the changing trend in the underlying likelihood of receiving benefits for the insured population, without reflecting changes in the age distribution of the population. As with incidence rates, gross disability prevalence rates declined relative to the age-sex-adjusted rate when the baby-boom generation reached working age between 1970 and 1990; this trend reflects the lower
disability prevalence rates associated with younger ages. Conversely, the gross rate of disability prevalence has increased relative to the age-sex-adjusted rate after 1990 due to the aging of the baby-boom generation into ages with higher disability prevalence rates.
Table V.C5 presents projections of the numbers of auxiliary beneficiaries paid from the DI Trust Fund. As indicated at the beginning of this subsection, auxiliary beneficiaries are qualifying spouses and children of disabled workers. A spouse must either be at least age 62 or have an eligible child beneficiary in his or her care who is either under age 16 or disabled prior to age 22. A child must be: (1) under age 18; (2) age 18 or 19 and still a student in high school; or (3) age 18 or older and disabled prior to age 22.
The OASDI taxable payroll (see table VI.F6) for a year is the amount of earnings which, when multiplied by the combined OASDI employee-employer payroll tax rate for that year, yields the total amount of payroll taxes due from wages paid and self-employment net earnings for the year. The Trustees use taxable payroll to determine income rates, cost rates, and actuarial balances. Taxable payroll is derived by adjusting total taxable earnings to account for categories of earnings that are taxed at rates other than the combined employee-employer rate and to take into account amounts credited as wages that were not included in normally reported wages. For 1951 and later, taxable earnings are reduced by one-half of the amount of wages paid to employees with multiple jobs that exceed the contribution and benefit base. For 1983 through 2001, deemed wage credits for military service after 1956 are added to taxable earnings. The self-employment tax rates for 1951 through 1983 were less than the combined employee-employer rates; therefore, the self-employment component of taxable payroll for those years is reduced by multiplying the ratio of the self-employment rate to the combined employee-employer rate times the taxable self-employment net earnings. Finally, for 1966 through 1979, employers were exempt from paying their share of payroll tax on their employees’ tips and, for 1980 through 1987, employers paid tax on only part of their employees’ tips. For those years, the taxable payroll is reduced by half of the amount of tips for which the employer owed no payroll tax.
The Office of the Chief Actuary projects payroll tax contributions using the patterns of tax collection required by Federal laws and regulations. The office determines payroll tax liabilities by multiplying the scheduled tax rates for each year by the amount of taxable wages and self-employment net earnings for that year. The office then splits these liabilities into amounts by collection period. For wages, Federal law requires that employers withhold OASDI and HI payroll taxes and Federal individual income taxes from employees’ pay. As an employer’s accumulation of such taxes (including the employer share of payroll taxes) meets certain thresholds, which the Department of the Treasury determines, the employer must deposit these taxes with the U.S. Treasury by a specific day, depending on the amount of money involved
7. For projection purposes, the office splits the payroll tax contributions related to wages into amounts paid in the same quarter as incurred and in the following quarter. Self-employed workers must make estimated tax payments on their earnings four times during the year and to make up any underestimate on their individual income tax returns. The projection splits the self-employed tax liabilities by collection quarter to reflect this pattern of receipts.
Table V.C6 shows the payroll tax contribution rates applicable under current law in each calendar year and the allocation of these rates between the OASI and DI Trust Funds.
8 It also shows the contribution and benefit base for each year through 2013.
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Employees and employers, combined a
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Scheduled lump-sum death benefits are estimated as the product of: (1) the number of lump-sum death payments projected on the basis of the assumed death rates, the projected fully insured population, and the estimated percentage of the fully insured population that will qualify for lump-sum death payments; and (2) the amount of the lump-sum death payment, which is $255 (unindexed since 1973).
Table V.C7 shows, under the intermediate assumptions, future benefit amounts payable upon retirement at the normal retirement age and at age 65, for workers attaining age 65 in 2013 and subsequent years. The table shows illustrative benefit amounts for workers with four separate pre-retirement earnings patterns. The benefit amounts in table
V.C7 are presented in CPI-indexed 2013 dollars—that is, adjusted to 2013 levels by the CPI indexing series shown in table
VI.F6. Table
V.C7 also shows each benefit amount as a percentage or “replacement rate” of career-average earnings, indexed by national average wage growth to the year prior to retirement. For these scaled worker profiles, this method of calculation produces percentages that may differ significantly from those that would be produced by comparing benefits to these representative workers’ recent average earnings levels or to other more common measures of pre-retirement income. The Trustees are exploring whether to expand or otherwise modify this presentation in the 2014 Trustees Report.
Table V.C7 shows five different pre-retirement earnings patterns. Four of these patterns assume the earnings history of workers with scaled-earnings patterns
9 and reflect very low, low, medium, and high career-average levels of pre-retirement earnings starting at age 21. The fifth pattern assumes the earnings history of a steady maximum earner. The four scaled-earnings patterns derive from earnings experienced by insured workers during 1991‑2009. These earnings levels differ by age. The career-average level of earnings for each scaled case targets a percent of the national average wage index (AWI). As a result, the benefit amounts shown here are consistent with the levels for “steady-earnings” cases presented in the 2000 and earlier Trustees Reports. Since 2001, the Trustees have used scaled-earnings cases, instead of steady-earnings cases, because they better illustrate the differences in benefit levels under the wide variety of reform proposals considered in recent years.
For the scaled medium earner, the career-average earnings level is about equal to the AWI (or $44,826 for 2013). For the scaled very low, low, and high earners, the career-average earnings level is about 25 percent, 45 percent, and 160 percent of the AWI, respectively (or $11,207, $20,172, and $71,722, respectively, for 2013). The steady maximum earner has earnings at or above the contribution and benefit base for each year starting at age 22 through the year prior to retirement (or $113,700 for 2013).
Table V.C7.—
Annual Scheduled Benefit Amounts
a for Retired Workers
With Various Pre-Retirement Earnings Patterns
Based on Intermediate Assumptions, Calendar Years 2013-90
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Scaled very low earnings:d
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Steady maximum earnings: h
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