2018 OASDI Trustees Report

II. OVERVIEW

A. HIGHLIGHTS

This section summarizes the report’s major findings.

In 2017

At the end of 2017, the OASDI program was providing benefit payments¹ to about 62 million people: 45 million retired workers and dependents of retired workers, 6 million survivors of deceased workers, and 10 million disabled workers and dependents of disabled workers. During the year, an estimated 174 million people had earnings covered by Social Security and paid payroll taxes on those earnings. Total expenditures in 2017 were $952 billion. Total income was $997 billion, which consisted of $911 billion in non-interest income and $85 billion in interest earnings. Asset reserves held in special issue U.S. Treasury securities grew from $2,848 billion at the beginning of the year to $2,892 billion at the end of the year.

Short-Range Results

Under the Trustees’ intermediate assumptions, Social Security’s total cost is projected to exceed its total income in 2018 for the first time since 1982, and remain higher throughout the projection period. Social Security’s cost has exceeded its non-interest income since 2010. For 2018, cost for the program is projected to exceed total income by $2 billion and non-interest income by $85 billion. As a result, asset reserves will decline during 2018. Reserves are also projected to decline throughout the remainder of the short-range period.

To illustrate the actuarial status of the Social Security program as a whole, the operations of the OASI and DI funds are often shown on a combined basis as OASDI. However, by law, the two funds are separate entities and therefore the combined fund operations and reserves are hypothetical.

The reserves of the combined OASI and DI Trust Funds along with projected program income are adequate to cover projected program cost over the next 10 years under the intermediate assumptions. The ratio of reserves to annual cost declines from 288 percent at the beginning of 2018 to 137 percent at the beginning of 2027. By remaining at or above 100 percent, the combined OASI and DI Trust Funds therefore satisfy the short-range test of financial adequacy.² Considered separately, the OASI Trust Fund also satisfies the test, but the DI Trust Fund does not. For last year’s report, the Trustees projected that combined reserves would be 287 percent of annual cost at the beginning of 2018 and 148 percent at the beginning of 2027. The combined reserves are projected to decrease from $2,892 billion at the beginning of 2018 to $2,189 billion at the end of 2027.

Long-Range Results

Under the Trustees’ intermediate assumptions, OASDI cost is projected to exceed total income throughout the projection period, and the dollar level of the hypothetical combined trust fund reserves declines until reserves become depleted in 2034.³ Figure  II.D2 shows the implications of reserve depletion for the combined OASI and DI Trust Funds. Considered separately, the DI Trust Fund reserves become depleted in 2032 and the OASI Trust Fund reserves become depleted in 2034. In last year’s report, the projected reserve depletion years were 2034 for OASDI, 2028 for DI, and 2035 for OASI.

The change in the reserve depletion date for DI is largely due to continuing favorable experience for DI applications and benefit awards. Disability applications have been declining steadily since 2010, and the total number of disabled-worker beneficiaries in current payment status has been falling since 2014. For this report, ultimate disability incidence rate assumptions are unchanged from the last report. However, this year’s report has lower incidence rates over the first few years of the projection period, and a gradual rise from recent low levels, reaching the ultimate DI incidence rates by the end of the short-range period. In addition, average benefit levels for disabled-worker beneficiaries were lower than expected in 2017, and are expected to be lower in the future. Disabled-worker average benefit levels were somewhat elevated in 2011 through 2016 due to reduced numbers of hearings decisions (where monthly benefit levels tend to be relatively low), as the number of applicants awaiting a hearing increased. In 2017, hearings decisions increased, thus restoring a more normal, and somewhat lower, average benefit level for disabled workers newly awarded benefits in 2017. See page  38 for more details on these changes in DI projections. These changes, which are partially offset by lower payroll tax revenue in the near term, are primarily responsible for the change in the DI reserve depletion date from early in 2028 in last year’s report to late in 2032 in this year’s report.

Projected OASDI cost increases more rapidly than projected non-interest income through 2039 primarily because the retirement of the baby-boom generation will increase the number of beneficiaries much faster than the number of covered workers increases, as subsequent lower-birth-rate generations replace the baby-boom generation at working ages. From 2040 to 2052, the cost rate (the ratio of program cost to taxable payroll) generally declines because the aging baby-boom generation is gradually replaced at retirement ages by subsequent lower-birth-rate generations. Thereafter, increases in life expectancy cause OASDI cost to increase generally relative to non-interest income, but more slowly than between 2010 and 2039.

The projected OASDI annual cost rate increases from 13.81 percent of taxable payroll for 2018 to 16.83 percent for 2039 and to 17.68 percent for 2092, a level that is 4.32 percent of taxable payroll more than the projected income rate (the ratio of non-interest income to taxable payroll) for 2092. For last year’s report, the Trustees estimated the OASDI cost for 2092 at 17.84 percent, or 4.53 percent of payroll more than the annual income rate for that year. Expressed in relation to the projected gross domestic product (GDP), OASDI cost generally rises from 4.9 percent of GDP for 2018 to about 6.1 percent by 2038, then declines to 5.9 percent by 2052, and then generally increases to 6.1 percent by 2092.

For the 75‑year projection period, the actuarial deficit is 2.84 percent of taxable payroll, increased from 2.83 percent of taxable payroll in last year’s report. The closely-related open group unfunded obligation for OASDI over the 75-year period is 2.68 percent of taxable payroll, increased from 2.66 percent of payroll in last year’s report. The open group unfunded obligation for OASDI over the 75‑year period is $13.2 trillion in present value and is $0.7 trillion more than the measured level of $12.5 trillion a year ago. If the assumptions, methods, starting values, and the law had all remained unchanged, the actuarial deficit would have increased to 2.88 percent of taxable payroll, and the unfunded obligation would have risen to about 2.72 percent of taxable payroll and $13.1 trillion in present value due to the change in the valuation date. The remaining changes in the actuarial deficit and the unfunded obligation are due to the combined effects of changes in the law, methods, starting values, and assumptions.

To illustrate the magnitude of the 75-year actuarial deficit, consider that for the combined OASI and DI Trust Funds to remain fully solvent throughout the 75-year projection period: (1) revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.78 percentage points⁴ to 15.18 percent, (2) scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of about 17 percent applied to all current and future beneficiaries, or about 21 percent if the reductions were applied only to those who become initially eligible for benefits in 2018 or later; or (3) some combination of these approaches would have to be adopted.

If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2034. For example, maintaining 75-year solvency with changes that begin in 2034 would require: (1) an increase in revenues by an amount equivalent to a permanent 3.87 percentage point payroll tax rate increase to 16.27 percent starting in 2034, (2) a reduction in scheduled benefits by an amount equivalent to a permanent 23 percent reduction in all benefits starting in 2034, or (3) some combination of these approaches would have to be adopted.

Conclusion

Under the intermediate assumptions, DI Trust Fund asset reserves are projected to become depleted in 2032, at which time continuing income to the DI Trust Fund would be sufficient to pay 96 percent of DI scheduled benefits. The OASI Trust Fund reserves are projected to become depleted in 2034, at which time OASI income would be sufficient to pay 77 percent of OASI scheduled benefits.

The Trustees also project that annual cost for the OASDI program will exceed total income (including interest) throughout the projection period under the intermediate assumptions. The projected hypothetical combined OASI and DI Trust Fund asset reserves become depleted and unable to pay scheduled benefits in full on a timely basis in 2034. At the time of depletion of these combined reserves, continuing income to the combined trust funds would be sufficient to pay 79 percent of scheduled benefits. Lawmakers have a broad continuum of policy options that would close or reduce Social Security's long-term financing shortfall. Cost estimates for many such policy options are available at www.ssa.gov/OACT/solvency/provisions/.

The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them. Implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits and could preserve more trust fund reserves to help finance future benefits. Social Security will play a critical role in the lives of 63 million beneficiaries and 175 million covered workers and their families during 2018. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.

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1

The definitions of “benefit payments” and other terms appear in the Glossary.

2

The test of short-range financial adequacy for a trust fund is met if (1) the estimated trust fund ratio is at least 100 percent at the beginning of the period and remains at or above 100 percent throughout the 10-year short-range period or (2) the ratio is initially less than 100 percent, reaches at least 100 percent within 5 years (without reserve depletion at any time during this period) and remains at or above 100 percent throughout the remainder of the 10-year short-range period.

3

Combined trust fund reserves are clearly hypothetical after one fund becomes depleted, because under current law the funds cannot borrow from each other. For example, if the DI Trust Fund reserves were to become depleted in 2032 as is currently projected, the operations of the OASI and DI Trust Funds, shown in this report on a hypothetical combined basis, would not reflect the aggregated operation of the OASI Trust Fund and the DI Trust Fund because part of the DI benefits could not be paid without a change in the law. Implicitly, the values shown for the hypothetical combined trust funds assume the law will have been changed to permit the transfer of resources between funds as needed.

4

The necessary tax rate of 2.78 percent differs from the 2.84 percent actuarial deficit for two reasons. First, the necessary tax rate is the rate required to maintain solvency throughout the period that does not result in any trust fund reserve at the end of the period, whereas the actuarial deficit incorporates an ending trust fund reserve equal to 1 year’s cost. Second, the necessary tax rate reflects a behavioral response to tax rate changes, whereas the actuarial deficit does not. In particular, the calculation of the necessary tax rate assumes that an increase in payroll taxes results in a small shift of wages and salaries to forms of employee compensation that are not subject to the payroll tax.