2001 OASDI Trustees Report

B. LONG-RANGE ESTIMATES

Three financial measures are useful in assessing the actuarial status of the Social Security trust funds under the financing approach specified in current law: (1) annual income and cost rates, and balances, (2) trust fund ratios, and (3) actuarial balance. The first long-range estimates presented are the series of projected annual balances (that is, the differences between the projected annual income rates and annual cost rates). In assessing the financial condition of the program, particular attention should be paid to the level of the annual balances at the end of the long-range period and the time at which the annual balances may change from positive to negative values. The next measure to be discussed is the pattern of projected trust fund ratios. The trust fund ratio represents the proportion of a year's projected outgo that can be paid with the funds available at the beginning of the year. Particular attention should be paid to the amount and year of maximum trust fund ratio, to the year of exhaustion of the funds, and to stability of the trust fund ratio in cases where the ratio remains positive at the end of the long-range period. The final measure discussed in this section is the actuarial balance, which summarizes the total income and expenditures over the valuation period and indicates whether projected income will be adequate. This section also includes a comparison of workers to beneficiaries, the long-range test of close actuarial balance and the reasons for change in the actuarial balance from the last report.

If the 75-year actuarial balance is zero (or positive) then the trust fund ratio at the end of the period, by definition, will be at 100 percent (or greater) and financing for the program is considered to be adequate for the 75-year period. Whether or not financial adequacy is stable in the sense that it is likely to continue for subsequent 75-year periods in succeeding Trustees Reports is also important when considering the actuarial status of the program. One indication of this stability is the behavior of the trust fund ratio at the end of the projection period. If projected trust fund ratios for the last several years of the long-range period are constant or rising, then it is likely that subsequent Trustees Reports will also show projections of financial adequacy (assuming no changes in economic and demographic assumptions).

1. Annual Income Rates, Cost Rates, and Balances

Basic to the consideration of the long-range actuarial status of the trust funds are the concepts of income rate and cost rate, each of which is expressed as a percentage of taxable payroll. The annual income rate is the ratio of income from revenues (payroll tax contributions and income from the taxation of benefits) to the OASDI taxable payroll for the year. The OASDI taxable payroll consists of the total earnings which are subject to OASDI taxes, with some relatively small adjustments.¹ Because the taxable payroll reflects these adjustments, the annual income rate can be defined to be the sum of the OASDI combined employee-employer contribution rate (or the payroll-tax rate) scheduled in the law and the rate of income from taxation of benefits (which is, in turn, expressed as a percentage of taxable payroll). As such, it excludes reimbursements from the general fund of the Treasury for the costs associated with special monthly payments to certain uninsured persons who attained age 72 before 1968 and who have fewer than 3 quarters of coverage, and net investment income.

The annual cost rate is the ratio of the cost (or outgo, expenditures, or disbursements) of the program to the taxable payroll for the year. In this context, the outgo is defined to include benefit payments, special monthly payments to certain uninsured persons who have 3 or more quarters of coverage (and whose payments are therefore not reimbursable from the general fund of the Treasury), administrative expenses, net transfers from the trust funds to the Railroad Retirement program under the financial-interchange provisions, and payments for vocational rehabilitation services for disabled beneficiaries. For any year, the income rate minus the cost rate is referred to as the balance for the year. (In this context, the term balance does not represent the assets of the trust funds, which are sometimes referred to as the balance in the trust funds.)

Table IV.B1 presents a comparison of the estimated annual income rates and cost rates by trust fund and alternative. Detailed long-range projections of trust fund operations, in nominal dollar amounts, are shown in appendix VI.E.3.

The projections for OASI under the intermediate assumptions show the income rate increasing slowly and steadily due to the combination of the flat payroll tax rate and the gradually increasing effect of the taxation of benefits. The pattern followed by the cost rate is much different. It is projected to remain fairly stable for the next several years. However, from about 2010 to 2030 the cost rate increases rapidly as the baby-boom generation reaches retirement age. After 2030 the cost rate rises less rapidly through 2037 and then declines slightly for the next 9 years as the baby-boom generation ages and begins to diminish and the relatively small birth cohorts of the late 1970s reach retirement age. Thereafter, the cost rate rises steadily, but slowly, reflecting projected reductions in death rates and continued relatively low birth rates. The cost rate during the third 25-year subperiod (2051-2075) rises to almost 17 percent of taxable payroll under the intermediate assumptions. The income rate under these assumptions during the third 25-year subperiod rises to about 11.5 percent of taxable payroll.

Projected income rates under the low cost and high cost sets of assumptions are very similar to those projected for alternative II as they are largely a reflection of the tax rates specified in the law. OASI cost rates for alternatives I and III differ significantly from those projected for alternative II, but follow generally similar patterns. For the low cost alternative I, the cost rate declines somewhat for the first 7 years, and then rises, reaching the current level around 2012 and a peak of 13.26 percent of payroll for 2033. The cost rate then declines gradually, reaching a level of 12.08 percent of payroll for 2075. For the high cost alternative III, the cost rate rises generally throughout the 75-year period. It rises at a relatively fast pace over the next 5 years due to the two assumed economic recessions, and between 2010 and 2030 because of the aging of the baby-boom generation. During the third 25-year subperiod, the projected cost rate continues rising and reaches 24.33 percent of payroll for 2075.

The projected pattern of the OASI annual balance is important in the analysis of the financial condition of the program. Under the alternative II assumptions the annual balance is positive for 16 years (through 2016) and is negative thereafter. This annual deficit rises rapidly, reaching over 2 percent of taxable payroll by 2023, and continues rising thereafter, to a level of 5.33 percent of taxable payroll for 2075.

Under the low cost assumptions the projected OASI annual balance is positive for 19 years (through 2019) and thereafter is negative. The deficit under alternative I rises to a peak of 2.09 percent of taxable payroll for 2033, but declines thereafter, as the effect of the baby-boom generation diminishes and the assumed higher fertility rates increase the size of the work force. The deficit under alternative I declines to 0.86 percent of payroll for 2075. Under the high cost assumptions, however, the OASI balance is projected to be positive for only 13 years (through 2013) and to be negative thereafter, with a deficit of 2.47 percent for 2020, 7.83 percent for 2050, and 12.43 percent of payroll for 2075.

Notes:
1. The income rate excludes interest income and certain transfers from the general fund of the Treasury.

2. Totals do not necessarily equal the sums of rounded components.

Under the intermediate alternative II assumptions, the cost rate for DI increases slowly over the long-range period from 1.45 percent of taxable payroll in 2001 to 2.57 in 2075. The income rate increases only very slightly from 1.82 percent of taxable payroll in 2001 to 1.85 in 2075. The annual balance turns negative in 2009, and the annual deficit reaches 0.72 in 2075.

Under the low cost alternative I assumptions, the DI cost rate increases much less, reaching 1.77 in 2075, with a positive annual balance throughout the period. For the high cost alternative III assumptions, DI cost rises much more, reaching 3.60 for 2075, with an annual deficit beginning in 2005 and reaching 1.73 percent for 2075.

Also of interest are the annual income rate, cost rate, and balance for the combined OASDI program. These rates are shown in table IV.B1 and are discussed in section II.D.

Figure IV.B1 shows in graphical form the patterns of the OASI and DI annual income rates and cost rates. (The combined OASI and DI rates are shown in figure II.D2.) The income rates shown here are only for alternative II in order to simplify the graphical presentation and because, as shown in table IV.B1, the variation in the income rates by alternative is very small. Income rates increase generally, but at a slow rate for each of the alternatives over the long-range period. Both increases in the income rate and variation among the alternatives result from the relatively small component of income from taxation of benefits. Increases in income from taxation of benefits reflect increases in the total amount of benefits paid and the fact that an increasing share of individual benefits will be subject to taxation, because benefit taxation threshold amounts are not indexed.

The patterns of the annual balances for OASI and DI are indicated in figure IV.B1. For each alternative, the magnitude of each of the positive balances in the early years, as a percent of taxable payroll, is represented by the distance between the appropriate cost-rate curve and the income-rate curve above it. The magnitude of each of the deficits in subsequent years is represented by the distance between the appropriate cost-rate curve and the income-rate curve below it.

In the future, the cost of OASI, DI and the combined OASDI program as a percent of taxable payroll will not necessarily be within the range encompassed by alternatives I and III. Nonetheless, because alternatives I and III define a reasonably wide range of economic and demographic conditions, the resulting estimates delineate a reasonable range for consideration of potential future program costs.

Figure IV.B1.- Long-Range OASI and DI Annual Income Rates and Cost Rates

[As a percentage of taxable payroll]

2. Comparison of Workers to Beneficiaries

The primary reason that the estimated OASDI cost rate increases rapidly after 2010 is that the number of beneficiaries is projected to increase more rapidly than the number of covered workers. This occurs because the relatively large number of persons born during the period of high fertility rates from the end of World War II through the mid-1960s will reach retirement age, and begin to receive benefits, while the relatively small number of persons born during the subsequent period of low fertility rates will comprise the labor force. A comparison of the numbers of covered workers and beneficiaries is shown in table IV.B2.