Methodology Changes for Estimates of Provisions that Affect Social Security

The annual Trustees Report provides financial estimates of the Social Security program under current law. Beginning with estimates for provisions and proposals (groups of provisions) that are based on the intermediate assumptions of the 2009 Trustees Report, we made two significant changes to the methodology and presentation of estimates for provisions that would alter current law. These two changes are described below:

1. Provisions intended to change the amount of payroll tax income are estimated with an updated methodology. The methodology improves estimates of employer and employee behavioral responses to any change in the taxable maximum or any change in the payroll tax rate above or below the taxable maximum.
• Behavioral Response by the Employer: We assume all other compensation (other than payroll taxes paid by the employer) would be reduced proportionally to completely offset the increase in payroll taxes paid by the employer. The employer's total compensation, therefore, is assumed to remain the same.
• Behavioral Response by the Employee: We assume that, if the employee's payroll taxes are increased, some employees will shift some amount of earnings to compensation not subject to payroll taxes. The amount of earnings shifted reflects the earnings level of the employee and the increase in the tax rate for the employee. For employees with earnings below 10 percent of the taxable maximum in a year, no shift in earnings is assumed. For employees with earnings above this amount, we assume the proportion shifted increases as the employee's earnings increases.
  
  
2. With the updated presentation, all rates and summary measures (annual income rate, annual cost rate, annual balance, and the long-range actuarial balance and deficit) are expressed in terms of taxable payroll under present law. This presentation reduces the measured amount of interaction among provisions, thus simplifying the consideration of multiple provisions. Previously, the rates and summary measures were expressed in terms of taxable payroll as estimated under the proposal.