2002 OASDI Trustees Report

C. PROGRAM-SPECIFIC ASSUMPTIONS AND METHODS

The demographic and economic assumptions and methods described in the previous sections are used in a set of models to project future income and outgo under the OASDI program. In some cases, the economic assumptions result in the direct calculation of program parameters as described in the following subsection. These parameters affect the level of payroll taxes collected and the level of benefits paid and are calculated using formulas described explicitly in the Social Security Act. In other cases, the combination of demographic and economic assumptions are used indirectly to drive more complicated models that project the numbers of future workers covered under OASDI and the levels of their covered earnings, and the numbers of future beneficiaries and the expected levels of their benefits. The following subsections provide brief descriptions of the derivations of these program-specific factors.

1. Automatically Adjusted Program Amounts

The Social Security Act specifies that certain program amounts affecting the determination of OASDI benefits are to be adjusted annually, in general, to reflect changes in the economy. The law prescribes specific formulas that, when applied to reported statistics, produce automatic revisions in these program amounts and hence in the benefitcomputation procedures. These automatic adjustments are based upon measured changes in the national average wage index and the CPI.¹ In this section, values are shown for program amounts that are subject to automatic adjustment, from the time that such adjustments became effective through 2011. Projected values for future years are based on the economic assumptions described in the preceding section of this report.

The following two tables present the historical and projected values of the CPI-based benefit increases, as well as the average wage index series and the values of many of the wage-indexed program amounts. In each table, the projections are shown under the three alternative sets of economic assumptions described in the previous section. Table V.C1 includes:

• The annual percentage increases which have been applied to OASDI benefits under automatic cost-of-living adjustment provisions in the Social Security Act, based on increases in the CPI.

• The annual levels of and percentage increases in the national average wage index. Under section 215(b)(3) of the Social Security Act, the national average wage index for each year after 1950 is used to index the taxable earnings of most workers first becoming eligible for benefits in 1979 or later. This procedure converts a worker's past earnings to approximately their equivalent values near the time of the worker's retirement or other eligibility, and these indexed values are used to calculate the worker's benefit. The average wage index is also used to adjust most of the other program amounts that are subject to the automatic-adjustment provisions.

• The OASDI contribution and benefit base—the maximum amount of earnings subject to the OASDI payroll tax in the specified year.

• The retirement earnings test exempt amounts—the annual amount of earnings below which beneficiaries are not subject to benefit withholding. A lower exempt amount applies in years before a beneficiary attains normal retirement age (NRA). A higher amount applies for the year in which the beneficiary attains normal retirement age. The retirement test does not apply beginning with the attainment of normal retirement age.

Other wage-indexed amounts are shown in table V.C2. The table provides historical values from 1978, when the amount of earnings required for a quarter of coverage was first indexed, through 2002, and also shows projected amounts through 2011. These other wage-indexed program amounts are:

• 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. These bend points indicate three ranges in a worker's average indexed monthly earnings (AIME) over which a certain percent factor, 90, 32, or 15 percent respectively, is applied to determine the worker's PIA. Figure V.C1 presents the PIA formula for 2002.

Figure V.C1.—Primary-Insurance-Amount Formula for the 2002 Cohort

• Bend points in the formula used to compute the maximum total amount of monthly benefits payable on the basis of the earnings of a retired or deceased worker. This formula is a function of the worker's PIA, and relies on four intervals and percentages. Figure V.C2 presents the maximum-family-benefit formula for 2002.

Figure V.C2.—Maximum-Family-Benefit Formula for the 2002 Cohort

• The amount of earnings required in a year to be credited with a quarter of coverage (QC). The number and timing of QCs earned is used to determine an individual's insured status-the basic requirement for benefit eligibility under OASDI.

• The old-law contribution and benefit base-the OASDI contribution and benefit base that would have been in effect in each year after 1978 under the automatic-adjustment provisions as in effect before the enactment of the 1977 amendments. This old-law base is used in determining special-minimum benefits for certain workers who have many years of low earnings in covered employment. Beginning in 1986, the old-law base is also used in the calculation of OASDI benefits for certain workers who are eligible to receive pensions based on noncovered employment. In addition, it is used for certain purposes under the Railroad Retirement program and the Employee Retirement Income Security Act of 1974.

In addition to the program amounts affecting the determination of OASDI benefits that reflect changes in the economy, there are certain legislated changes that have affected, and will affect, benefits. Two such changes are the scheduled increases in the normal retirement age and in the delayed retirement credits. Table V.C3 shows the scheduled changes in these two important items and their effect on benefits expressed as a percentage of PIA.

2. Covered Employment

Projections of the total labor force and unemployment rate are based on Bureau of Labor Statistics definitions from the Current Population Survey (CPS), and thus represent the average weekly number of employed and unemployed persons, aged 16 and over, in the U.S. in a calendar year. Total covered workers in a year are the number of persons who have any OASDI covered earnings at any time during the year. For those aged 16 and over, projected covered employment is the sum of age-sex components, each of which is projected as a ratio to the CPS concept of employment. For those under age 16, projected covered employment is the sum of age-sex components, each of which is projected as a ratio to the Social Security area population. The projection methodology accounts for changes in the business cycle, the quarterly pattern of growth in employment within each year, 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 of other-than-legal aliens estimated to be residing within the Social Security coverage area.

Covered worker rates are defined as the ratio of OASDI covered workers to the Social Security area population. The projected age-adjusted coverage rate for men, aged 16 and over, changes from its 2000 level of 75.1 percent to 73.0, 72.4, and 71.9 percent for 2080 for alternatives I, II, and III, respectively. (Age-adjusted covered worker rates are adjusted to the 2000 age distribution of the Social Security area population.) For women, it changes from its 2000 level of 63.8 percent to 63.4, 62.8, and 62.3 percent for 2080 for alternatives I, II, and III, respectively.

3. Taxable Payroll and Payroll Tax Revenue

The OASDI taxable payroll is the amount of earnings in a year which, when multiplied by the combined employee-employer tax rate, yields the total amount of taxes due from wages and self-employed income in the year. Taxable payroll is used in estimating OASDI income and in determining income and cost rates and actuarial balances. (See section