2006 OASDI Trustees Report

Contents Previous Next List of Tables List of Figures Index

IV. ACTUARIAL ESTIMATES

B. LONG-RANGE ESTIMATES

Three types of 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 cash-flow measures, including income and cost rates, and balances, (2) trust fund ratios, and (3) summary measures like actuarial balances and unfunded obligations. The first long-range estimates presented are the series of projected annual balances (or net cash flow), which are 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 discussed is the pattern of projected trust fund ratios. The trust fund ratio represents the proportion of a year's projected cost that can be paid with the funds available at the beginning of the year. Particular attention should be paid to the level 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. When a program has positive trust fund ratios throughout the 75-year projection period and these ratios are stable or rising at the end of the period, the program financing is said to achieve sustainable solvency.

The final measures discussed in this section summarize the total income and cost over valuation periods that extend through 75 years, and to the infinite horizon. These measures indicate whether projected income will be adequate for the period as a whole. The first such measure, actuarial balance, indicates the size of any surplus or shortfall as a percentage of the taxable payroll over the period. The second, open group unfunded obligation, indicates the size of any shortfall in present-value dollars. This section also includes a comparison of covered workers to beneficiaries, a generational decomposition of the infinite future unfunded obligation, the test of long-range 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, will be at 100 percent (or greater) and financing for the program is considered to be adequate for the 75-year period as a whole. (Financial adequacy, or solvency, for each year is determined by whether the trust fund is zero or positive throughout the year.) Whether or not financial adequacy is stable in the sense that it is likely to continue for subsequent 75-year periods in succeeding reports is also important when considering the actuarial status of the program. One indication of this stability, or sustainable solvency, is the behavior of the trust fund ratio at the end of the projection period. If trust fund ratios for the last several years of the long-range period are positive and constant or rising, then it is likely that subsequent Trustees Reports will also show projections of financial adequacy (assuming no changes in demographic and economic assumptions, or the law). The actuarial balance and the open group unfunded obligation for the infinite future provide additional measures of the financial status of the program for the very long range.

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. Other measures of the cash flow of the program are shown in appendix F. The annual income rate is the sum of the tax contribution rate and the ratio of income from 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 As such, it excludes net investment income and 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.

The annual cost rate is the ratio of the cost of the program to the taxable payroll for the year. The cost is defined to include scheduled 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 current dollar amounts, are shown in table VI.F8.

The projections for OASI under the intermediate assumptions show the income rate generally rising due to the gradually increasing effect of the taxation of benefits. The pattern of 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. Thereafter, the cost rate rises steadily, but slowly, reflecting projected reductions in death rates and continued relatively low birth rates, reaching 16.27 percent of taxable payroll for 2080. By comparison, the income rate reaches 11.49 percent of taxable payroll for 2080.

Projected income rates under the low cost and high cost sets of assumptions are very similar to those projected for the intermediate assumptions as they are largely a reflection of the tax rates specified in the law. OASI cost rates for the low cost and high cost assumptions differ significantly from those projected for the intermediate assumptions, but follow generally similar patterns. For the low cost assumptions, the cost rate declines somewhat for the first 4 years, and then rises, reaching the current level around 2013 and a peak of 13.16 percent of payroll for 2035. The cost rate then declines gradually, reaching a level of 11.74 percent of payroll for 2080 (at which point the income rate reaches 11.24 percent). For the high cost assumptions, the cost rate rises generally throughout the 75-year period. It rises at a relatively fast pace between 2010 and 2030 because of the aging of the baby-boom generation. Subsequently, the projected cost rate continues rising and reaches 23.35 percent of payroll for 2080 (at which point the income rate reaches 11.88 percent).

The pattern of the projected OASI annual balance is important in the analysis of the financial condition of the program. Under the intermediate assumptions, the annual balance is positive for 12 years (through 2017) and is negative thereafter. This annual deficit rises rapidly, reaching over 2 percent of taxable payroll by 2026, and continues rising thereafter, to a level of 4.78 percent of taxable payroll for 2080.

Under the low cost assumptions, the projected OASI annual balance is positive for 16 years (through 2021) and thereafter is negative. The annual deficit under the low cost assumptions rises to a peak of 1.88 percent of taxable payroll for 2035, but declines over the next 15 years, 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 the low cost assumptions continues to decline, but at a relatively slow pace over the period 2051 through 2080. Under the high cost assumptions, however, the OASI balance is projected to be positive for only 9 years (through 2014) and to be negative thereafter, with a deficit of 1.74 percent for 2020, 7.08 percent for 2050, and 11.47 percent of payroll for 2080.

Table IV.B1.-Estimated Annual Income Rates, Cost Rates, and Balances
Calendar Years 1990-2080 

[As a percentage of taxable payroll]

Calendar
year
OASI
 
DI
 
OASDI
Income
rate 1
Cost
rate
Balance 
Income
rate 1
Cost
rate
Balance 
Income
rate 1
Cost
rate
Balance 
Historical data:
 
1990
11.32
9.66
1.66
1.17
1.09
0.09
12.49
10.74
1.75
 
1991
11.44
10.15
1.29
1.21
1.18
.03
12.65
11.33
1.32
 
1992
11.43
10.27
1.16
1.21
1.27
-.06
12.64
11.54
1.10
 
1993
11.40
10.37
1.03
1.21
1.35
-.14
12.61
11.73
.88
 
1994
10.70
10.22
.48
1.89
1.40
.49
12.59
11.62
.97
 
1995
10.70
10.22
.48
1.88
1.44
.44
12.59
11.67
.92
 
1996
10.73
10.06
.68
1.89
1.48
.41
12.62
11.53
1.09
 
1997
10.93
9.83
1.09
1.71
1.44
.28
12.64
11.27
1.37
 
1998
10.96
9.45
1.51
1.72
1.42
.30
12.68
10.87
1.81
 
1999
10.99
9.09
1.90
1.72
1.42
.30
12.71
10.51
2.20
 
2000
10.89
8.97
1.92
1.80
1.42
.38
12.69
10.40
2.29
 
2001
10.89
9.08
1.80
1.82
1.48
.34
12.71
10.56
2.14
 
2002
10.91
9.30
1.62
1.82
1.60
.22
12.74
10.90
1.84
 
2003
10.89
9.33
1.56
1.82
1.68
.14
12.71
11.01
1.70
 
2004
10.92
9.30
1.63
1.82
1.78
.05
12.75
11.08
1.67
 
2005
10.88
9.30
1.59
1.82
1.85
-.03
12.71
11.15
1.56
Intermediate:
 
2006
10.91
9.31
1.60
 
1.83
1.91
-.09
 
12.74
11.22
1.52
 
2007
10.93
9.23
1.70
1.83
1.92
-.09
12.75
11.15
1.61
 
2008
10.96
9.18
1.78
1.83
1.92
-.09
12.80
11.10
1.69
 
2009
10.94
9.23
1.71
1.83
1.93
-.10
12.77
11.16
1.61
 
2010
10.96
9.33
1.64
1.83
1.96
-.13
12.79
11.29
1.50
 
2011
11.00
9.45
1.56
1.84
1.95
-.12
12.84
11.40
1.44
 
2012
11.03
9.64
1.39
1.84
1.99
-.16
12.87
11.63
1.23
 
2013
11.05
9.89
1.16
1.84
2.02
-.17
12.90
11.91
.99
 
2014
11.07
10.15
.92
1.84
2.04
-.19
12.91
12.19
.72
 
2015
11.08
10.41
.67
1.84
2.06
-.22
12.93
12.48
.45
 
2020
11.18
11.87
-.70
1.85
2.11
-.27
13.02
13.99
-.97
 
2025
11.26
13.26
-2.00
1.85
2.24
-.39
13.11
15.50
-2.38
 
2030
11.34
14.44
-3.10
1.86
2.28
-.42
13.19
16.71
-3.52
 
2035
11.38
15.09
-3.71
1.86
2.27
-.42
13.24
17.36
-4.12
 
2040
11.40
15.22
-3.82
1.86
2.29
-.44
13.26
17.51
-4.25
 
2045
11.40
15.14
-3.74
1.86
2.37
-.51
13.26
17.51
-4.25
 
2050
11.41
15.15
-3.74
1.86
2.40
-.54
13.27
17.55
-4.28
 
2055
11.42
15.25
-3.83
1.86
2.43
-.57
13.28
17.68
-4.40
 
2060
11.43
15.44
-4.00
1.86
2.43
-.56
13.30
17.87
-4.57
 
2065
11.45
15.65
-4.20
1.87
2.44
-.58
13.31
18.09
-4.78
 
2070
11.47
15.90
-4.44
1.87
2.44
-.58
13.33
18.35
-5.01
 
2075
11.48
16.09
-4.61
1.87
2.46
-.59
13.34
18.54
-5.20
 
2080
11.49
16.27
-4.78
1.87
2.47
-.60
13.36
18.74
-5.38
First year balance becomes
negative and remains negative
through 2080
2018
2005
2017
Low Cost:
 
2006
10.91
9.28
1.63
 
1.83
1.88
-.05
 
12.74
11.15
1.58
 
2007
10.92
9.18
1.75
1.83
1.85
-.03
12.75
11.03
1.72
 
2008
10.96
9.11
1.85
1.83
1.82
.01
12.79
10.93
1.86
 
2009
10.94
9.09
1.85
1.83
1.79
.03
12.77
10.89
1.88
 
2010
10.95
9.10
1.85
1.83
1.78
.05
12.78
10.89
1.90
 
2011
10.99
9.13
1.86
1.83
1.74
.09
12.82
10.87
1.95
 
2012
11.01
9.22
1.79
1.83
1.73
.10
12.84
10.96
1.89
 
2013
11.03
9.36
1.67
1.84
1.71
.12
12.87
11.08
1.79
 
2014
11.04
9.52
1.52
1.84
1.70
.14
12.88
11.22
1.65
 
2015
11.05
9.70
1.35
1.84
1.69
.15
12.89
11.39
1.50
Low Cost (cont.):
 
2020
11.13
10.90
0.23
 
1.84
1.67
0.17
 
12.96
12.57
0.39
 
2025
11.20
12.03
-.83
1.84
1.73
.11
13.04
13.76
-.72
 
2030
11.25
12.85
-1.60
1.84
1.73
.12
13.09
14.58
-1.49
 
2035
11.28
13.16
-1.88
1.84
1.70
.14
13.12
14.86
-1.74
 
2040
11.28
12.98
-1.70
1.84
1.70
.15
13.12
14.67
-1.55
 
2045
11.27
12.64
-1.38
1.84
1.73
.12
13.11
14.37
-1.26
 
2050
11.26
12.40
-1.14
1.84
1.72
.12
13.10
14.13
-1.02
 
2055
11.26
12.24
-.99
1.84
1.72
.12
13.10
13.97
-.86
 
2060
11.25
12.14
-.89
1.84
1.70
.14
13.10
13.84
-.74
 
2065
11.25
12.02
-.77
1.85
1.70
.15
13.09
13.72
-.62
 
2070
11.25
11.90
-.66
1.85
1.70
.15
13.09
13.60
-.51
 
2075
11.24
11.78
-.54
1.85
1.71
.14
13.09
13.49
-.41
 
2080
11.24
11.74
-.50
1.85
1.72
.12
13.09
13.47
-.38
First year balance becomes
negative and remains negative
through 2080
2022
2/
2022
High Cost:
 
2006
10.92
9.53
1.38
 
1.83
2.02
-.19
 
12.75
11.56
1.19
 
2007
10.94
9.55
1.39
1.83
2.09
-.26
12.77
11.64
1.13
 
2008
10.98
9.57
1.41
1.83
2.14
-.31
12.81
11.71
1.11
 
2009
10.96
9.72
1.24
1.83
2.20
-.37
12.80
11.92
.87
 
2010
10.98
9.87
1.11
1.84
2.28
-.44
12.82
12.15
.67
 
2011
11.03
10.03
.99
1.84
2.30
-.46
12.87
12.34
.53
 
2012
11.06
10.32
.74
1.85
2.39
-.54
12.91
12.71
.20
 
2013
11.09
10.66
.43
1.85
2.45
-.60
12.94
13.11
-.17
 
2014
11.11
10.98
.13
1.85
2.50
-.65
12.96
13.48
-.52
 
2015
11.13
11.31
-.19
1.86
2.56
-.70
12.98
13.87
-.89
 
2020
11.23
12.98
-1.74
1.86
2.67
-.81
13.09
15.64
-2.55
 
2025
11.33
14.58
-3.25
1.87
2.82
-.95
13.20
17.40
-4.20
 
2030
11.43
16.13
-4.70
1.87
2.89
-1.02
13.30
19.02
-5.72
 
2035
11.50
17.23
-5.73
1.87
2.92
-1.04
13.37
20.14
-6.77
 
2040
11.54
17.82
-6.28
1.88
2.98
-1.10
13.42
20.80
-7.38
 
2045
11.57
18.20
-6.63
1.88
3.12
-1.24
13.45
21.32
-7.87
 
2050
11.60
18.68
-7.08
1.88
3.21
-1.33
13.49
21.89
-8.40
 
2055
11.64
19.25
-7.61
1.89
3.31
-1.42
13.53
22.56
-9.03
 
2060
11.68
19.98
-8.30
1.89
3.34
-1.45
13.57
23.33
-9.75
 
2065
11.73
20.82
-9.09
1.89
3.40
-1.51
13.62
24.22
-10.59
 
2070
11.79
21.76
-9.97
1.89
3.40
-1.51
13.68
25.16
-11.48
 
2075
11.84
22.60
-10.77
1.89
3.41
-1.52
13.73
26.01
-12.28
 
2080
11.88
23.35
-11.47
1.89
3.42
-1.52
13.77
26.76
-12.99
First year balance becomes
negative and remains negative
through 2080
2015
2005
2013

1Historical income rates are modified to include adjustments to the lump-sum payments received in 1983 from the General Fund of the Treasury for the cost of noncontributory wage credits for military service in 1940-56.

2After 2007, the annual balance is projected to remain positive throughout the remainder of the projection period.

Notes:
1. The income rate excludes interest income and certain transfers from the General Fund of the Treasury.
2. Some historical values are subject to change due to revisions of taxable payroll.
3. Totals do not necessarily equal the sums of rounded components.

Under the intermediate assumptions, the cost rate for DI generally increases over the long-range period from 1.91 percent of taxable payroll for 2006, reaching 2.47 for 2080. The income rate increases only very slightly from 1.83 percent of taxable payroll for 2006 to 1.87 percent for 2080. The annual deficit is about 0.09 percent in 2006 and reaches 0.60 percent for 2080.

Under the low cost assumptions, the DI cost rate is fairly stable over the long-range period, reaching 1.72 percent for 2080. The annual balance is negative for the first 2 years and is positive throughout the remainder of the long-range period. For the high cost assumptions, DI cost rises much more, reaching 3.42 percent for 2080. Annual deficits began in 2005 and reach 1.52 percent for 2080.

Figure IV.B1 shows in graphical form the patterns of the OASI and DI annual income rates and cost rates. The income rates shown here are only for alternative II in order to simplify the graphical presentation 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 suggested by figure IV.B1. For each alternative, the magnitude of each of the positive balances, as a percentage 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 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 programs as a percentage 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 demographic and economic 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]

[D]

The cost of the OASDI program has been discussed in this section in relation to taxable payroll, which is a program-related concept that is very useful in analyzing the financial status of the OASDI program. The cost can also be discussed in relation to broader economic concepts, such as the gross domestic product (GDP), which is the total value of goods and services produced during the year in the United States. OASDI cost generally rises from about 4.3 percent of GDP currently to about 6.3 percent of GDP by the end of the 75-year projection period under alternative II. Discussion of both the cost and the taxable payroll of the OASDI program in relation to GDP is presented in appendix VI.F.2.

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 baby-boom 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.

Table IV.B2.-Covered Workers and Beneficiaries, Calendar Years 1945-2080 
Calendar year
Covered
workers 1
(in thousands)
Beneficiaries 2 (in thousands)
Covered
workers per
OASDI
beneficiary
OASDI beneficiaries
per 100
covered
workers
OASI
DI
OASDI
Historical data:
 
1945
46,390
1,106
-
1,106
41.9
2
 
1950
48,280
2,930
-
2,930
16.5
6
 
1955
65,200
7,563
-
7,563
8.6
12
 
1960
72,530
13,740
522
14,262
5.1
20
 
1965
80,680
18,509
1,648
20,157
4.0
25
 
1970
93,090
22,618
2,568
25,186
3.7
27
 
1975
100,200
26,998
4,125
31,123
3.2
31
 
1980
113,649
30,384
4,734
35,117
3.2
31
 
1985
120,575
32,776
3,874
36,650
3.3
30
 
1990
133,692
35,266
4,204
39,471
3.4
30
 
1991
132,989
35,786
4,388
40,174
3.3
30
 
1992
133,920
36,313
4,716
41,029
3.3
31
 
1993
136,137
36,757
5,083
41,840
3.3
31
 
1994
138,804
37,082
5,435
42,517
3.3
31
 
1995
141,107
37,376
5,731
43,107
3.3
31
 
1996
143,576
37,521
5,977
43,498
3.3
30
 
1997
146,445
37,705
6,087
43,792
3.3
30
 
1998
149,421
37,825
6,250
44,075
3.4
29
 
1999
152,152
37,934
6,433
44,366
3.4
29
 
2000
155,046
38,560
6,606
45,166
3.4
29
 
2001
155,416
38,888
6,780
45,668
3.4
29
 
2002
154,818
39,116
7,060
46,176
3.4
30
 
2003
154,946
39,314
7,438
46,752
3.3
30
 
2004
156,986
39,557
7,810
47,367
3.3
30
 
2005
159,147
39,961
8,172
48,133
3.3
30
Intermediate:
 
2010
167,774
43,329
9,596
52,925
3.2
32
 
2015
171,938
49,488
10,406
59,894
2.9
35
 
2020
176,415
57,219
11,132
68,350
2.6
39
 
2025
179,417
64,619
12,021
76,640
2.3
43
 
2030
182,093
71,300
12,410
83,710
2.2
46
 
2035
185,004
75,906
12,670
88,576
2.1
48
 
2040
188,119
78,249
13,022
91,271
2.1
49
 
2045
191,409
79,861
13,618
93,479
2.0
49
 
2050
194,424
81,568
13,950
95,518
2.0
49
 
2055
197,329
83,546
14,323
97,869
2.0
50
 
2060
200,201
85,851
14,509
100,361
2.0
50
 
2065
203,122
88,302
14,815
103,117
2.0
51
 
2070
205,908
90,927
15,035
105,963
1.9
51
 
2075
208,816
93,256
15,334
108,591
1.9
52
 
2080
211,631
95,581
15,644
111,225
1.9
53
Low Cost:
 
2010
168,984
43,310
9,036
52,346
3.2
31
 
2015
175,593
49,368
9,176
58,544
3.0
33
 
2020
181,170
56,728
9,424
66,152
2.7
37
 
2025
185,428
63,707
9,956
73,663
2.5
40
 
2030
189,840
69,797
10,148
79,945
2.4
42
 
2035
195,069
73,730
10,334
84,064
2.3
43
 
2040
201,229
75,422
10,655
86,077
2.3
43
 
2045
208,157
76,572
11,201
87,773
2.4
42
 
2050
215,474
77,989
11,559
89,548
2.4
42
 
2055
223,126
79,863
11,984
91,847
2.4
41
 
2060
231,201
82,089
12,316
94,406
2.4
41
 
2065
239,925
84,363
12,805
97,169
2.5
40
 
2070
249,130
86,779
13,305
100,085
2.5
40
 
2075
258,778
89,232
13,932
103,164
2.5
40
 
2080
268,666
92,257
14,578
106,835
2.5
40
High Cost:
 
2010
163,064
43,366
10,379
53,745
3.0
33
 
2015
168,855
49,674
11,916
61,589
2.7
36
 
2020
172,764
57,861
13,014
70,876
2.4
41
 
2025
175,173
65,775
14,236
80,011
2.2
46
 
2030
176,892
73,225
14,771
87,996
2.0
50
 
2035
178,166
78,797
15,094
93,892
1.9
53
 
2040
179,018
82,174
15,486
97,660
1.8
55
 
2045
179,523
84,721
16,152
100,873
1.8
56
 
2050
179,132
87,197
16,465
103,662
1.7
58
 
2055
178,477
89,776
16,778
106,554
1.7
60
 
2060
177,391
92,636
16,786
109,422
1.6
62
 
2065
175,919
95,645
16,858
112,502
1.6
64
 
2070
174,173
98,816
16,700
115,516
1.5
66
 
2075
172,279
101,376
16,543
117,919
1.5
68
 
2080
170,212
103,391
16,398
119,789
1.4
70

1Workers who are paid at some time during the year for employment on which OASDI taxes are due.

2Beneficiaries with monthly benefits in current-payment status as of June 30.

Notes:
1. The number of beneficiaries does not include uninsured individuals who receive benefits under Section 228 of the Social Security Act. Costs are reimbursed from the General Fund of the Treasury for most of these individuals.
2. Historical covered worker data are subject to revision.
3. Totals do not necessarily equal the sums of rounded components.

The impact of the demographic shifts under the three alternatives on the OASDI cost rates is readily seen by considering the projected number of OASDI beneficiaries per 100 covered workers. As compared to the 2005 level of 30 beneficiaries per 100 covered workers, this ratio is estimated to rise significantly by 2080 to 40 under the low cost assumptions, 53 under the intermediate assumptions, and 70 under the high cost assumptions. The significance of these numbers can be seen by comparing figure IV.B1 to figure IV.B2.

For each alternative, the shape of the curve in figure IV.B2, which shows beneficiaries per 100 covered workers, is strikingly similar to that of the corresponding cost-rate curve in figure IV.B1, thereby emphasizing the extent to which the cost of the OASDI program as a percentage of taxable payroll is determined by the age distribution of the population. Because the cost rate is basically the product of the number of beneficiaries and their average benefit, divided by the product of the number of covered workers and their average taxable earnings (and because average benefits rise at about the same rate as average earnings), it is to be expected that the pattern of the annual cost rates is similar to that of the annual ratios of beneficiaries to workers.

Figure IV.B2.-Number of OASDI Beneficiaries Per 100 Covered Workers
[D]

Table IV.B2 also shows that the number of covered workers per OASDI beneficiary, which was about 3.3 in 2005, is estimated to decline in the future. Based on the intermediate assumptions, the ratio declines to 2.1 by 2032, and 1.9 workers per beneficiary by 2069. Based on the low cost assumptions, for which high fertility rates and small reductions in death rates are assumed, the ratio declines to 2.3 by 2032, and then rises back to a level of 2.5 by 2061. Based on the high cost assumptions, for which low fertility rates and large reductions in death rates are assumed, the decline is much greater, reaching 1.8 by 2039, and 1.4 workers per beneficiary by 2077.

3. Trust Fund Ratios

Trust fund ratios are useful indicators of the adequacy of the financial resources of the Social Security program at any point in time. For any year in which the projected trust fund ratio is positive (i.e., the trust fund holds assets at the beginning of the year), but is not positive for the following year the trust fund is projected to become exhausted during the year. Under present law, the OASI and DI Trust Funds do not currently have the authority to borrow. Therefore, exhaustion of the assets in either fund during a year would mean there are no longer sufficient assets in the fund to cover the full amount of benefits scheduled for the year under present law.

The trust fund ratio also serves an additional important purpose in assessing the actuarial status of the program. When the financing is adequate for the timely payment of full benefits throughout the long-range period, the stability of the trust fund ratio toward the end of the period indicates the likelihood that this projected adequacy will continue for subsequent Trustees Reports. If the trust fund ratio toward the end of the period is level (or increasing), then projected adequacy for the long-range period is likely to continue for subsequent reports.

Table IV.B3 shows, by alternative, the estimated trust fund ratios (without regard to advance tax transfers that would be effected after the end of the 10-year, short-range period) for the separate and combined OASI and DI Trust Funds. Also shown in this table is the year in which a fund is estimated to become exhausted, reflecting the effect of the provision for advance tax transfers.

Based on the intermediate assumptions, the OASI trust fund ratio rises steadily from 355 percent at the beginning of 2006, reaching a peak of 462 percent at the beginning of 2015. This increase in the OASI trust fund ratio results from the fact that the annual income rate (which excludes interest) exceeds annual outgo for several years (see table IV.B1). Thereafter, the OASI trust fund ratio declines steadily, with the OASI Trust Fund becoming exhausted in 2042. The DI trust fund ratio has followed a pattern that is similar but unfolded more rapidly. The DI trust fund ratio is estimated to decline steadily from 203 percent at the beginning of 2006 until becoming exhausted in 2025.

The trust fund ratio for the combined OASI and DI Trust Funds rises from 329 percent for 2006 to a peak of 409 percent at the beginning of 2015. Thereafter, the ratio declines, with the combined funds becoming exhausted in 2040. Based on the intermediate estimates in last year's report, the peak fund ratio for the combined funds was estimated to be 418 percent for 2015 and the year of exhaustion was estimated to be 2041.

The trust fund ratio for the OASDI program first declines in 2016, about 1 year before annual expenditures begin to exceed noninterest income. This occurs because the increase in trust fund assets during 2015, which reflects interest income and a small excess of noninterest income over cost, occurs at a slower rate than does the increase in the annual cost of the program between 2015 and 2016.

After 2015 the dollar amount of assets is projected to continue to rise through the beginning of 2027 because interest income more than offsets the shortfall in noninterest income. Beginning in 2017, the OASDI program is projected to experience increasingly large cash-flow shortfalls that will require the trust funds to redeem special public-debt obligations of the General Fund of the Treasury. This will differ from the experience of recent years when the trust funds have been net lenders to the General Fund of the Treasury. The change in the cash flow between the trust funds and the general fund is expected to have important public policy and economic implications that go well beyond the operation of the OASDI program itself.

Based on the low cost assumptions, the trust fund ratio for the DI program increases throughout the long-range projection period, reaching the extremely high level of 1,374 percent for 2080. At the end of the long-range period, the DI trust fund ratio is rising by 21 percentage points per year. Thus, subsequent reports are likely to contain projections of adequate long-range financing of the DI program under a similar optimistic set of assumptions. For the OASI program, the trust fund ratio rises to a peak of 535 percent for 2019, dropping thereafter to a level of 276 percent by 2080. At the end of the period the OASI trust fund ratio is declining by 1 percentage point per year. The long-term outlook for the DI program is improved more than for the OASI program largely because lower assumed disability incidence rates have a substantial effect on the DI program but little net effect on the OASI program. For the OASDI program, the trust fund ratio peaks at 508 percent for 2021, falls to 387 percent for 2060, and increases thereafter, reaching 416 percent for 2080. Thus, due to the size of the trust fund ratios and their near stability, subsequent Trustees Reports are likely to contain projections of adequate long-range financing of the OASI and combined OASI and DI program under the low cost assumptions. A stable trust fund ratio at the end of the valuation period indicates that the actuarial balance for Trustees Reports in subsequent years can be expected to remain about the same as long as assumptions are realized.

In contrast, under the high cost assumptions, the OASI trust fund ratio is estimated to peak at 395 percent for 2010, thereafter declining to fund exhaustion by the end of 2033. The DI trust fund ratio is estimated to decline from 197 percent for 2006 to fund exhaustion by the end of 2015. The combined OASDI trust fund ratio is estimated to rise to a peak of 348 percent for 2009, declining thereafter to fund exhaustion by the end of 2030.

Thus, because large ultimate cost rates are projected under all but the low cost assumptions, it is likely that income will eventually need to be increased, and/or program costs will need to be reduced in order to prevent the trust funds from becoming exhausted.

Even under the high cost assumptions, however, the combined OASI and DI funds on hand plus their estimated future income would be able to cover their combined cost for 24 years into the future (until 2030). Under the intermediate assumptions the combined starting funds plus estimated future income would be able to cover cost for about 34 years into the future (until 2040). The program would be able to cover cost for the foreseeable future under the more optimistic low cost assumptions. In the 2005 report, the combined trust funds were projected to become exhausted in 2030 under the high cost assumptions and in 2041 under the intermediate assumptions.

.

Table IV.B3.-Estimated Trust Fund Ratios, Calendar Years 2006-80

[In percent]

Calendar
year
Intermediate
 
Low Cost
 
High Cost
OASI
DI
OASDI
OASI
DI
OASDI
OASI
DI
OASDI
2006
355
203
329
 
355
207
330
 
355
197
328
2007
375
198
344
 
376
206
348
 
370
183
337
2008
394
192
359
 
397
208
365
 
382
166
343
2009
410
187
372
 
418
212
384
 
393
148
348
2010
425
179
382
 
438
215
401
 
395
126
345
2011
438
174
393
 
458
224
420
 
392
103
338
2012
449
166
400
 
476
231
437
 
390
80
332
2013
456
158
405
 
492
242
453
 
389
56
326
2014
460
149
408
 
505
253
467
 
386
31
320
2015
462
139
409
 
517
265
480
 
381
6
312
2020
436
86
383
 
534
332
507
 
324
1/
246
2025
373
17
321
 
513
389
497
 
224
1/
141
2030
282
1/
233
 
471
451
469
 
95
1/
9
2035
176
1/
130
 
426
530
438
 
1/
1/
1/
2040
60
1/
16
 
390
612
415
 
1/
1/
1/
2045
1/
1/
1/
 
363
679
401
 
1/
1/
1/
2050
1/
1/
1/
 
342
760
393
 
1/
1/
1/
2055
1/
1/
1/
 
325
845
389
 
1/
1/
1/
2060
1/
1/
1/
 
309
949
387
 
1/
1/
1/
2065
1/
1/
1/
 
296
1,054
390
 
1/
1/
1/
2070
1/
1/
1/
 
286
1,164
396
 
1/
1/
1/
2075
1/
1/
1/
 
280
1,269
405
 
1/
1/
1/
2080
1/
1/
1/
 
276
1,374
416
 
1/
1/
1/
Trust fund is esti-
mated to become
exhausted in
2042
2025
2040
 
2/
2/
2/
 
2033
2015
2030

1The trust fund is estimated to be exhausted by the beginning of this year. The last line of the table shows the specific year of trust fund exhaustion.

2The fund is not estimated to be exhausted within the projection period.

Note: See definition of trust fund ratio. The combined ratios shown for years after the DI fund is estimated to be exhausted are theoretical and are shown for informational purposes only.

A graphical illustration of the trust fund ratios for the separate OASI and DI Trust Funds is shown in figure IV.B3 for each of the alternative sets of assumptions. A graphical illustration of the trust fund ratios for the combined trust funds is shown in figure II.D7.

Figure IV.B3.-Long-Range OASI and DI Trust Fund Ratios

[Assets as a percentage of annual expenditures]

[D]

4. Summarized Income Rates, Cost Rates, and Balances

Summarized income and cost rates, along with their components, are presented in table IV.B4 for 25-year, 50-year, and 75-year valuation periods. Income rates reflect the scheduled payroll tax rates and the projected income from the taxation of scheduled benefits expressed as a percentage of taxable payroll. The current combined payroll tax rate of 12.4 is scheduled to remain unchanged in the future. In contrast, the projected income from taxation of benefits, expressed as a percentage of taxable payroll, is expected to generally increase throughout the long-range period. This is because increasing income from taxation of benefits reflects not only rising benefit and income levels, but also the fact that benefit-taxation threshold amounts are not indexed. Summarized income rates also include the starting trust fund balance. Summarized cost rates include the cost of reaching a target trust fund of 100 percent of annual cost at the end of the period in addition to the cost included in the annual cost rates.

It may be noted that the payroll tax income expressed as a percentage of taxable payroll, as shown in table IV.B4, is slightly smaller than the actual tax rates in effect for each period. This results from the fact that all OASDI income and cost dollar amounts presented in this report are computed on a cash basis, i.e., amounts are attributed to the year in which they are intended to be received by, or expended from, the fund, while taxable payroll is attributed to the year in which earnings are paid. Because earnings are paid to workers before the corresponding payroll taxes are credited to the funds, payroll tax income for a particular year reflects a combination of the taxable payrolls from that year and from prior years, when payroll was smaller. Dividing payroll tax income by taxable payroll for a particular year, or period of years, will thus generally result in an income rate that is slightly less than the applicable tax rate for the period.

Summarized values for the full 75-year period are useful in analyzing the long-range adequacy of financing for the program over the period as a whole under present law and under proposed modifications to the law.

Table IV.B4 shows summarized rates for valuation periods of the first 25, the first 50, and the entire 75 years of the long-range projection period, including the funds on hand at the start of the period and the cost of accumulating a target trust fund balance equal to 100 percent of the following year's annual cost by the end of the period. The actuarial balance for each of these three valuation periods is equal to the difference between the summarized income rate and the summarized cost rate for the corresponding period. An actuarial balance of zero for any period would indicate that estimated cost for the period could be met, on average, with a remaining trust fund balance at the end of the period equal to 100 percent of the following year's cost. A negative actuarial balance indicates that, over the period, the present value of income to the program plus the existing trust fund falls short of the present value of the cost of the program plus the cost of reaching a target trust fund balance of 1 year's cost by the end of the period. Combined with a falling trust fund ratio, this signals the possibility of continuing cash-flow deficits, implying that the current-law level of financing is not sustainable.

The values in table IV.B4 show that the combined OASDI program is expected to operate with a positive actuarial balance over the 25-year valuation period under the low cost and intermediate assumptions. For the 25-year valuation period the summarized values indicate actuarial balances of 1.82 percent of taxable payroll under the low cost assumptions, 0.66 percent under the intermediate assumptions, and -0.82 percent under the high cost assumptions. Thus, the program is more than adequately financed for the 25-year valuation period under all but the high cost projections. For the 50-year valuation period the OASDI program would have a positive actuarial balance of 0.58 percent under the low cost assumptions, but would have deficits of 1.26 percent under the intermediate assumptions and 3.60 percent under the high cost assumptions. Thus, the program is more than adequately financed for the 50-year valuation period under only the low cost set of assumptions.

For the entire 75-year valuation period, the combined OASDI program would again have actuarial deficits except under the low cost set of assumptions. The actuarial balance for this long-range valuation period is projected to be 0.35 percent of taxable payroll under the low cost assumptions, -2.02 percent under the intermediate assumptions, and -5.17 percent under the high cost assumptions.

Assuming the Trustees' intermediate assumptions are realized, the deficit of 2.02 percent of payroll indicates that financial adequacy of the program for the next 75 years could be restored if the Social Security payroll tax rate were increased for current and future earnings from 12.4 percent (combined employee-employer shares) to 14.42 percent. Alternatively, all current and future benefits could be reduced by 13.3 percent (or there could be some combination of tax increases and benefit reductions). Changes of this magnitude would be sufficient to eliminate the actuarial deficit over the 75-year projection period.

However, large annual deficits projected under current law for the end of the long-range period, which exceed 5 percent of payroll under the intermediate assumptions, indicate that the annual cost will very likely continue to exceed tax revenues after 2080. As a result, ensuring continued adequate financing would eventually require larger changes than those needed to restore actuarial balance for the 75-year period. For the infinite future, the actuarial deficit is estimated to be 3.7 percent of taxable payroll under the intermediate assumptions. This means that the projected infinite horizon shortfall could be eliminated with an immediate increase in the combined payroll tax rate from 12.4 percent to about 16.1 percent. This shortfall could also be eliminated if all current and future benefits were immediately reduced by 22 percent.

As may be concluded from table IV.B4, the financial condition of the DI program is substantially weaker than that of the OASI program for the first 25 years. Summarized over the full 75-year period, however, long-range deficits for the OASI and DI programs under intermediate assumptions are more similar, relative to the level of program costs.

.

Table IV.B4.-Components of Summarized Income Rates and Cost Rates,
Calendar Years 2006-80

[As a percentage of taxable payroll]

Valuation period
Income rate
 
Cost rate
 
Actuarial
balance
Payroll
tax
Taxation
of
benefits
Beginning
fund
balance
Total
Disburse-
ments
Ending
fund
balance
Total
OASI:
   
 
Intermediate:
   
   
2006-30
10.59
0.52
1.49
12.60
 
11.28
0.50
11.79
 
0.81
   
2006-55
10.59
.64
.87
12.10
 
12.87
.21
13.08
 
-.99
   
2006-80
10.59
.68
.68
11.95
 
13.51
.12
13.63
 
-1.68
 
Low Cost:
   
   
2006-30
10.59
.48
1.49
12.56
 
10.51
.44
10.95
 
1.61
   
2006-55
10.59
.56
.87
12.02
 
11.45
.18
11.63
 
.39
   
2006-80
10.59
.58
.67
11.83
 
11.57
.10
11.67
 
.17
 
High Cost:
   
   
2006-30
10.58
.57
1.50
12.65
 
12.26
.58
12.84
 
-.19
   
2006-55
10.58
.73
.86
12.18
 
14.65
.28
14.93
 
-2.75
   
2006-80
10.59
.83
.67
12.08
 
16.11
.17
16.28
 
-4.19
DI:
   
 
Intermediate:
   
   
2006-30
1.80
.04
.18
2.02
 
2.09
.08
2.17
 
-.15
   
2006-55
1.80
.05
.10
1.95
 
2.19
.03
2.23
 
-.27
   
2006-80
1.80
.05
.08
1.93
 
2.25
.02
2.27
 
-.33
 
Low Cost:
   
   
2006-30
1.80
.04
.17
2.01
 
1.73
.06
1.79
 
.22
   
2006-55
1.80
.04
.10
1.94
 
1.73
.02
1.75
 
.19
   
2006-80
1.80
.04
.08
1.92
 
1.72
.01
1.73
 
.18
 
High Cost:
   
   
2006-30
1.80
.05
.18
2.03
 
2.56
.10
2.66
 
-.63
   
2006-55
1.80
.06
.10
1.96
 
2.77
.05
2.81
 
-.85
   
2006-80
1.80
.07
.08
1.95
 
2.90
.02
2.93
 
-.98
OASDI:
   
 
Intermediate:
   
   
2006-30
12.38
.57
1.67
14.62
 
13.37
.58
13.96
 
.66
   
2006-55
12.38
.69
.98
14.05
 
15.06
.25
15.31
 
-1.26
   
2006-80
12.38
.74
.76
13.88
 
15.76
.14
15.90
 
-2.02
 
Low Cost:
   
   
2006-30
12.38
.52
1.66
14.57
 
12.24
.50
12.74
 
1.82
   
2006-55
12.39
.60
.97
13.95
 
13.18
.20
13.38
 
.58
   
2006-80
12.39
.62
.75
13.75
 
13.29
.11
13.40
 
.35
 
High Cost:
   
   
2006-30
12.38
.63
1.67
14.68
 
14.82
.68
15.50
 
-.82
   
2006-55
12.38
.80
.97
14.14
 
17.42
.32
17.74
 
-3.60
   
2006-80
12.38
.90
.75
14.03
 
19.01
.19
19.21
 
-5.17

Note: Totals do not necessarily equal the sums of rounded components.

Table IV.B5 presents the components and the calculation of the long-range (75-year) actuarial balance under the intermediate assumptions. The present value of future cost less future tax income over the long-range period, minus the amount of trust fund assets at the beginning of the projection period, amounts to $4.6 trillion for the OASDI program. This amount is referred to as the 75-year "open group unfunded obligation." The actuarial deficit (i.e., the negative of the actuarial balance) combines this unfunded obligation with the present value of the "ending target trust fund," and expresses the total as a percentage of the present value of the taxable payroll for the period. The present value of future tax income minus cost, plus starting trust fund assets, minus the present value of the ending target trust fund amounts to -$4.9 trillion for the OASDI program. Expressed as a percentage of taxable payroll for the period, this is the actuarial balance of -2.02 percent.

Table IV.B5.-Components of 75-Year Actuarial Balance
Under Intermediate Assumptions (2006-80)
Item
OASI
DI
OASDI
Present value as of January 1, 2006 (in billions):
     
 
a. Payroll tax revenue
$25,903
$4,399
$30,301
 
b. Taxation of benefits revenue
1,675
132
1,806
 
c. Tax income (a + b)
27,577
4,530
32,107
 
d. Cost
33,058
5,499
38,557
 
e. Cost minus tax income (d - c)
5,481
969
6,449
 
f. Trust fund assets at start of period
1,663
196
1,859
 
g. Open group unfunded obligation (e - f)
3,818
773
4,591
 
h. Ending target trust fund1
298
45
343
 
i. Income minus cost, plus assets at start of period, minus
ending target trust fund (c - d + f - h = - g - h)
-4,116
-818
-4,934
 
j. Taxable payroll
244,670
244,670
244,670
Percent of taxable payroll:
     
 
Actuarial balance (100 i j)
-1.68
-.33
-2.02

1The calculation of the actuarial balance includes the cost of accumulating a target trust fund balance equal to 100 percent of annual cost by the end of the period.

Note: Totals do not necessarily equal the sums of rounded components.

5. Additional Measures of OASDI Unfunded Obligations

As shown in the previous section, a negative actuarial balance (or an actuarial deficit) provides one measure of the unfunded obligation of the program over a period of time. Two additional measures of OASDI unfunded obligations under the intermediate assumptions are presented below.

a. Open Group Unfunded Obligations

Consistent with practice since 1965, this report focuses on the 75-year period (from 2006 to 2080 for this report) for the evaluation of the long-run financial status of the OASDI program on an open group basis (i.e., including taxes and cost for past, current and future participants through the year 2080). Table IV.B6, in its second line, shows that the present value of the open group unfunded obligation for the program over that period is $4.6 trillion. The open group measure indicates the adequacy of financing over the period as a whole for a program financed on a pay-as-you-go basis. On this basis, payroll taxes of all participants are included, through the year 2080, but some or all of their future scheduled benefits, for years after 2080, are excluded.

Table IV.B6 also presents the 75-year unfunded obligation as percentages of future OASDI taxable payroll and gross domestic product (GDP) through 2080. The 75-year unfunded obligation as a percentage of taxable payroll is less than the actuarial deficit, because it excludes the ending target trust fund value (see table IV.B5).

However, there are limitations on what can be conveyed using summarized measures alone. For example, overemphasis of summary measures (such as the actuarial balance and open group unfunded obligation) for the 75-year period can lead to incorrect perceptions and policy that fail to address financial sustainability for the more distant future. This can be addressed by considering the trend in trust fund ratios toward the end of the period (see "sustainable solvency" at the beginning of section IV.B).

Another limitation is that continued, and possibly increasing, annual shortfalls after the period are not reflected in the 75-year summarized measures. In order to provide a fuller description of long-run unfunded obligations of the OASDI program, this section presents estimates of obligations that extend to the infinite horizon. The extension assumes that the current-law OASDI program and the demographic and most economic trends used for the 75-year projection continue indefinitely. The one exception is that the ultimate assumed real-wage differential for the long-range period of 1.1 percent is increased to 1.2 percent for each year after 2080. This change essentially maintains consistency with the assumed reduction in the growth of health care expenditures after 2080. (See the Medicare Trustees Report.) The values in table IV.B6 indicate that extending the calculations beyond 2080 adds $8.8 trillion in unfunded obligations to the amount estimated through 2080. That is, over the infinite horizon, the OASDI open group unfunded obligations are projected to be $13.4 trillion. The $8.8 trillion increment reflects a significant financing gap projected for OASDI after 2080. Of course, the degree of uncertainty associated with estimates beyond 2080 is substantial.

In last year's report the unfunded obligation over the infinite horizon was reported as $11.1 trillion in present value as of January 1, 2005. The change to the later valuation date for this report, January 1, 2006, tends to increase the measured deficit by about $0.6 trillion. The change in projected trust fund interest rates, primarily the assumption that ultimate trust fund real interest rates would be 2.9 percent, rather than 3.0 percent, increased the measured deficit by about $1.4 trillion. In addition, the net effects of changes in data, methods, and other assumptions increased the infinite horizon unfunded obligation by approximately $0.3 trillion. See section IV.B.7 for details regarding changes in data, methods, and assumptions.

As noted in the previous section, the $13.4 trillion infinite future open group unfunded obligation may also be expressed as a percentage of the taxable payroll over that period. This actuarial deficit for the infinite future is 3.7 percent of taxable payroll under the intermediate assumptions, 0.2 percent higher than in last year's report. This unfunded obligation can also be expressed as a percentage of GDP over the infinite future and is 1.3 percent on that basis. These relative measures of the unfunded obligation over the infinite future express its magnitude in relation to the resources that are potentially available to finance the shortfall.

Table IV.B6.-Unfunded OASDI Obligations for 1935 (Program Inception)
Through the Infinite Horizon

[Present values as of January 1, 2006; dollar amounts in trillions]

 
Present
value
 
Expressed as a percentage
of future payroll and GDP
Taxable
payroll
GDP
Unfunded obligation for 1935 through the infinite horizon 1
$13.4
 
3.7
1.3
Unfunded obligation for 1935 through 2080 2
4.6
 
1.9
.7

1Present value of future cost less future taxes, reduced by the amount of trust fund assets at the beginning of 2006. Expressed as percentage of payroll and GDP for the period 2006 through the infinite horizon.

2Present value of future cost less future taxes through 2080, reduced by the amount of trust fund assets at the beginning of 2006. Expressed as percentage of payroll and GDP for the period 2006 through 2080.

Notes:
1. The present values of future taxable payroll for 2006-80 and for 2006 through the infinite horizon are $244.7 trillion and $366.6 trillion, respectively.
2. The present values of GDP for 2006-80 and for 2006 through the infinite horizon are $670.1 trillion and $1,057.4 trillion, respectively.

b. Unfunded Obligations for Past, Current, and Future Participants

The future unfunded obligation of the OASDI program may also be viewed from a generational perspective. This perspective is generally associated with assessment of the financial condition of a program that is intended or required to be financed on a fully-advance-funded basis. However, analysis from this perspective can also provide insights into the implications of pay-as-you-go financing, the basis that has been used for the OASDI program.

The first line of table IV.B7 shows that the present value of future cost less future taxes over the next 100 years for all current participants equals $15.1 trillion. For this purpose, current participants are defined as individuals who are age 15 or older at the beginning of 2006. Subtracting the current value of the trust fund (the accumulated value of past OASDI taxes less cost) gives a closed group (excluding all future participants) unfunded obligation of $13.3 trillion. This value represents the shortfall of lifetime contributions for all past and current participants relative to the lifetime costs associated with their generations. For a fully-advance-funded program this value would be equal to zero.

For Social Security benefits to be adequately financed for the infinite future, the scheduled taxes or benefits of current and future participants in the system must be adjusted to fully offset the shortfall due to past and current participants. Future participants, as a whole, are projected to pay, in present value, taxes that are approximately $0.1 trillion less than the cost of providing benefits they are scheduled to receive over the infinite future. For the 2005 report, on a present value basis, future participants were projected to pay about $0.9 trillion more, in taxes, than the total cost of benefits they would receive over the infinite future. This amount changed primarily because of the lower ultimate real trust fund interest rate of 2.9 percent, assumed for this report. This lower ultimate interest rate causes the measured values of all future taxes and benefits to increase. Measured values of more distant transactions increase relatively more. For future participants, the measured present value of scheduled benefits increases relatively more than the present value of scheduled taxes.

Thus, the remaining long run financing gap that program reforms must ultimately close for the infinite future is estimated to be $13.4 trillion in present value. This can be achieved by raising additional revenue or reducing benefits (or some combination) for current and future participants so that the present value of the additional revenue or reduced benefits for the infinite future is equivalent to 3.7 percent of taxable payroll or 1.3 percent of GDP.

Table IV.B7.-Present Values of OASDI Cost Less Tax Revenue and Unfunded Obligations for Program Participants

[Present values as of January 1, 2006; dollar amounts in trillions]

 
Present
value
 
Expressed as a percentage of future payroll and GDP
Taxable
payroll
GDP
Present value of future cost less future taxes for current participants 
$15.1
 
4.1
1.4
Less current trust fund
(tax accumulations minus expenditures to date for past and current participants)
1.9
.5
.2
Equals unfunded obligation for past and current participants 1
13.3
3.6
1.3
Plus present value of cost less taxes for future participants
for the infinite future
.1
2/
3/
Equals unfunded obligation for all participants through the infinite
horizon
13.4
3.7
1.3

1This concept is also referred to as the closed group unfunded obligation.

2Less than 0.05 percent of taxable payroll.

3Less than 0.05 percent of GDP.

Notes:
1. The present value of future taxable payroll for 2006 through the infinite horizon is $366.6 trillion.
2. The present value of GDP for 2006 through the infinite horizon is $1,057.4 trillion.
3. Totals do not necessarily equal the sums of rounded components.

6. Test of Long-Range Close Actuarial Balance

The test of long-range close actuarial balance applies to a set of 66 separate valuation periods beginning with the first 10-year period, and including the periods of the first 11 years, the first 12 years, etc., up through the full 75-year projection period. Under the long-range test, the summarized income rate and cost rate are calculated for each of these valuation periods. The long-range test is met if, for each of the 66 valuation periods, the actuarial balance is not less than zero or is negative by, at most, a specified percentage of the summarized cost rate for the same time period. The percentage allowed for a negative actuarial balance is 5 percent for the full 75-year period. For shorter periods, the allowable percentage begins with zero for the first 10 years and increases uniformly for longer periods, until it reaches the maximum percentage of 5 percent allowed for the 75-year period. The criterion for meeting the test is less stringent for the longer periods in recognition of the greater uncertainty associated with estimates for more distant years.

When a negative actuarial balance in excess of the allowable percentage of the summarized cost rate is projected for one or more of the 66 separate valuation periods, the program fails the test of long-range close actuarial balance. Being out of close actuarial balance indicates that the program is expected to experience financial problems in the future and that ways of improving the financial status of the program should be considered. The sooner the actuarial balance is less than the minimum allowable balance, expressed as a percentage of the summarized cost rate, the more urgent is the need for corrective action. It is recognized that necessary changes in program financing or benefit provisions should not be put off until the last possible moment if future beneficiaries and workers are to effectively plan for their retirement.

Table IV.B8 presents a comparison of the estimated actuarial balances with the minimum allowable balance (or maximum allowable deficit) under the long-range test, each expressed as a percentage of the summarized cost rate, based on the intermediate estimates. Values are shown for only 14 of the valuation periods: those of length 10 years, 15 years, and continuing in 5-year increments through 75 years. However, each of the 66 periods-those of length 10 years, 11 years, and continuing in 1-year increments through 75 years-is considered for the test. These minimum allowable balances are calculated to show the limit for each valuation period resulting from the graduated tolerance scale. The patterns in the estimated balances as a percentage of the summarized cost rates, as well as that for the minimum allowable balance, are presented graphically in figure IV.B4 for the OASI, DI and combined OASDI programs. Values shown for the 25-year, 50-year, and 75-year valuation periods correspond to those presented in table IV.B4.

For the OASI program, the estimated actuarial balance as a percentage of the summarized cost rate exceeds the minimum allowable for valuation periods of length 10 through 35 years under the intermediate estimates. For valuation periods of length greater than 35 years, the estimated actuarial balance is less than the minimum allowable. For the full 75-year long-range period the estimated actuarial balance reaches -12.34 percent of the summarized cost rate, for a shortfall of 7.34 percent, from the minimum allowable balance of -5.0 percent of the summarized cost rate. Thus, although the OASI program satisfies the test of short-range financial adequacy (as discussed earlier), it is not in long-range close actuarial balance.

For the DI program, the estimated actuarial balance as a percentage of the summarized cost rate exceeds the minimum allowable balance for valuation periods of length 10 through 13 years under the intermediate estimates. For valuation periods of length greater than 13 years, the estimated actuarial balance is less than the minimum allowable. For the full 75-year long-range period the estimated actuarial balance reaches -14.76 percent of the summarized cost rate, for a shortfall of 9.76 percent, from the minimum allowable balance of -5.0 percent of the summarized cost rate. Thus, the DI program, although meeting the short-range test of financial adequacy, is not in long-range close actuarial balance.

Financing for the DI program is much less adequate than for the OASI program in satisfying the test for long-range actuarial balance even though long-range actuarial deficits are more comparable over the entire 75-year period. This occurs because much more of the increase in the long-range cost due to the aging of the large baby-boom generation occurs earlier for the DI program than for the OASI program. As a result, tax rates that are relatively more adequate for the OASI program during the first 25 years become relatively less adequate later in the long-range period.

For the OASDI program, the estimated actuarial balance as a percentage of the summarized cost rate exceeds the minimum allowable balance for valuation periods of length 10 through 32 years under the intermediate estimates. For valuation periods of length greater than 32 years, the estimated actuarial balance is below the minimum allowable balance. The size of the shortfall from the minimum allowable balance rises gradually, reaching 7.68 percent of the summarized cost rate for the full 75-year long-range valuation period. Thus, although the OASDI program satisfies the short-range test of financial adequacy, it is out of long-range close actuarial balance.

The OASI and DI programs, both separate and combined, were also found to be out of close actuarial balance in last year's report. The estimated deficits for the OASI, DI, and combined OASDI programs in this report are similar to those shown in last year's report.

Table IV.B8.-Comparison of Estimated Long-Range Actuarial Balances With the Minimum Allowable in the Test for Close Actuarial Balance,
Based on Intermediate Assumptions
Valuation period
Rates
(percentage of taxable payroll)
 
Values expressed as a
percentage of cost rate
Summarized
income rate
Summarized
cost rate
Actuarial
balance
Actuarial
balance
Minimum
allowable
actuarial
balance
OASI:
 
10 years: 2006-2015
14.41
10.63
3.79
 
35.62
0.00
 
15 years: 2006-2020
13.37
10.88
2.49
 
22.86
-.38
 
20 years: 2006-2025
12.88
11.32
1.56
 
13.77
-.77
 
25 years: 2006-2030
12.60
11.79
.81
 
6.89
-1.15
 
30 years: 2006-2035
12.43
12.20
.22
 
1.81
-1.54
 
35 years: 2006-2040
12.31
12.53
-.22
 
-1.76
-1.92
 
40 years: 2006-2045
12.22
12.76
-.54
 
-4.25
-2.31
 
45 years: 2006-2050
12.15
12.94
-.79
 
-6.10
-2.69
 
50 years: 2006-2055
12.10
13.08
-.99
 
-7.55
-3.08
 
55 years: 2006-2060
12.05
13.21
-1.16
 
-8.77
-3.46
 
60 years: 2006-2065
12.02
13.33
-1.31
 
-9.83
-3.85
 
65 years: 2006-2070
11.99
13.44
-1.45
 
-10.76
-4.23
 
70 years: 2006-2075
11.97
13.54
-1.57
 
-11.60
-4.62
 
75 years: 2006-2080
11.95
13.63
-1.68
 
-12.34
-5.00
DI:
 
10 years: 2006-2015
2.24
2.17
.06
 
2.85
.00
 
15 years: 2006-2020
2.11
2.14
-.03
 
-1.52
-.38
 
20 years: 2006-2025
2.05
2.15
-.10
 
-4.69
-.77
 
25 years: 2006-2030
2.02
2.17
-.15
 
-7.00
-1.15
 
30 years: 2006-2035
1.99
2.18
-.18
 
-8.45
-1.54
 
35 years: 2006-2040
1.98
2.19
-.21
 
-9.54
-1.92
 
40 years: 2006-2045
1.97
2.20
-.23
 
-10.60
-2.31
 
45 years: 2006-2050
1.96
2.21
-.26
 
-11.53
-2.69
 
50 years: 2006-2055
1.95
2.23
-.27
 
-12.33
-3.08
 
55 years: 2006-2060
1.95
2.24
-.29
 
-12.98
-3.46
 
60 years: 2006-2065
1.94
2.24
-.30
 
-13.53
-3.85
 
65 years: 2006-2070
1.94
2.25
-.32
 
-14.00
-4.23
 
70 years: 2006-2075
1.93
2.26
-.33
 
-14.40
-4.62
 
75 years: 2006-2080
1.93
2.27
-.33
 
-14.76
-5.00
OASDI:
 
10 years: 2006-2015
16.65
12.80
3.85
 
30.05
.00
 
15 years: 2006-2020
15.48
13.03
2.45
 
18.84
-.38
 
20 years: 2006-2025
14.93
13.47
1.46
 
10.82
-.77
 
25 years: 2006-2030
14.62
13.96
.66
 
4.73
-1.15
 
30 years: 2006-2035
14.42
14.38
.04
 
.26
-1.54
 
35 years: 2006-2040
14.28
14.71
-.43
 
-2.92
-1.92
 
40 years: 2006-2045
14.18
14.96
-.78
 
-5.18
-2.31
 
45 years: 2006-2050
14.11
15.15
-1.04
 
-6.89
-2.69
 
50 years: 2006-2055
14.05
15.31
-1.26
 
-8.25
-3.08
 
55 years: 2006-2060
14.00
15.45
-1.45
 
-9.38
-3.46
 
60 years: 2006-2065
13.96
15.57
-1.61
 
-10.36
-3.85
 
65 years: 2006-2070
13.93
15.69
-1.76
 
-11.23
-4.23
 
70 years: 2006-2075
13.90
15.80
-1.90
 
-12.00
-4.62
 
75 years: 2006-2080
13.88
15.90
-2.02
 
-12.68
-5.00

Note: Totals do not necessarily equal the sums of rounded components.

Figure IV.B4.-Test of Long-Range Close Actuarial Balance

[Comparison of estimated long-range actuarial balances with the minimum
allowable for close actuarial balance under intermediate assumptions]

[D]

7. Reasons for Change in Actuarial Balance From Last Report

The estimated effects of various changes from last year's report to this report on the long-range actuarial balance under the intermediate assumptions are listed (by category) in table IV.B9.

Table IV.B9.-Reasons for Change in the 75-Year Actuarial Balance
Under Intermediate Assumptions

[As a percentage of taxable payroll]

Item
OASI
DI
OASDI
Shown in last year's report:
 
Income rate
11.93
1.94
13.87
 
Cost rate
13.53
2.26
15.79
 
Actuarial balance
-1.60
-.32
-1.92
Changes in actuarial balance due to changes in:
   
Legislation / Regulation
.00
.00
.00
   
Valuation period 1
-.05
-.01
-.06
   
Demographic data and assumptions
+.02
.00
+.03
   
Economic data and assumptions
-.06
-.01
-.06
   
Disability data and assumptions
-.04
+.01
-.04
   
Programmatic data and methods
+.04
.00
+.04
 
Total change in actuarial balance
-.08
-.01
-.09
Shown in this report:
 
Actuarial balance
-1.68
-.33
-2.02
 
Income rate
11.95
1.93
13.88
 
Cost rate
13.63
2.27
15.90

1In changing from the valuation period of last year's report, which was 2005-79, to the valuation period of this report, 2006-80, the relatively large negative annual balance for 2079 is included. This results in a larger long-range actuarial deficit. The fund balance at the end of 2005, i.e., at the beginning of the projection period, is included in the 75-year actuarial balance.

Note: Totals do not necessarily equal the sums of rounded components.

No legislative changes have been enacted since the past report that directly affect the financing of the OASDI program (see section III.B).

In changing from the valuation period of last year's report, which was 2005-79, to the valuation period of this report, 2006-80, the relatively large negative annual balance for 2080 is included. This results in a larger long-range actuarial deficit. (Note that the fund balance at the end of 2005, which includes the cumulative net effects of program financing for all past years, is included in the 75-year actuarial balance.)

Changes in demographic starting values and in the transition to ultimate assumptions, as well as a change in the ultimate total fertility rate, have the overall effect of increasing (improving) the long-range actuarial balance by 0.03 percent of taxable payroll. The ultimate total fertility rate is changed from 1.95 children per woman in last year's report to 2.0. In addition, fertility rates for the first 25 years of the projection period are higher based on newly available birth data from the NCHS and newly revised population data from the Census Bureau for 2000 through 2003. The changes in fertility result in an increase (improvement) in the long-range actuarial balance of about 0.06 percent of taxable payroll. Ultimate mortality assumptions are unchanged from last year's report. However, final mortality data for 2002 indicated a slightly larger than expected decline in death rates at older ages and a slightly smaller decline at younger ages. The updates to the mortality data result in a decrease (worsening) in the long-range actuarial balance of about 0.03 percent of taxable payroll.

Several changes in the economic assumptions in this year's report (see section IV.B), result in a net reduction (worsening) in the long-range actuarial balance of about 0.06 percent of taxable payroll. First, the ultimate annual real interest rate assumed for long-term U.S. Government securities is decreased from 3.0 percent in last year's report to 2.9 percent in this year's report reflecting lower realized yields on Treasury securities in recent years and the belief that lower yields will persist. This change in the ultimate real interest rate results in a reduction (worsening) in the long-range actuarial balance of about 0.07 percent of taxable payroll. However, the projected annual real interest rates on new trust fund investments during the first 10 years of the projection period are overall slightly higher in this year's report than for the same period in last year's report, offsetting a small portion of the negative effect of the change in the ultimate real interest rate assumption. In addition to changes in the assumed interest rates, the ultimate assumed annual rate of change in labor productivity is increased in this year's report, from 1.6 percent to 1.7 percent. The effect of increased productivity growth, alone, tends to raise the real-wage differential thus increasing (improving) the long-range actuarial balance by about 0.11 percent of taxable payroll. Finally, the ultimate assumed differential between the annual change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI) and the annual change in the gross domestic product (GDP) deflator is increased from 0.3 to 0.4 percentage point. The effect of this change is to lower the real-wage differential, decreasing (worsening) the long-range actuarial balance by about 0.11 percent of taxable payroll, thus offsetting essentially the entire effect of the ultimate assumed rate of increasing change in labor productivity.

New data on disability result in reducing (worsening) the long-range actuarial balance by 0.04 percent of taxable payroll. More recent data on disability mortality and improvements in the calculations of the historical disability mortality rates at the oldest ages result in a lower proportion of old-age beneficiaries with earlier disability entitlement than was estimated in last year's report. Because retired workers who are converted from disabled worker status have lower average benefit levels than those not converted, these revisions increase the overall average benefit for retirees and thus reduce (worsen) the long-range actuarial balance.

One significant methodological improvement and several updates of program-specific data were made for projections in the 2006 report. These changes to programmatic data and methods result in a combined increase (improvement) in the long-range OASDI actuarial balance of about 0.04 percent of payroll including interaction. The major cause of this positive change in the actuarial balance is the inclusion of an additional year of more recent program-specific data. The one significant change in methodology is a revision in the method for projecting the number of minor children of retired workers to reflect the recent trend toward a lower number of child beneficiaries. This reduction of minor child beneficiaries compared to last year's report results in an increase (improvement) in the OASDI actuarial balance by about 0.01 percent of payroll.

If no changes in assumptions or methods were made for this report and actual experience had met expectations since the last report, the OASDI long-range actuarial deficit would, nonetheless, have increased by 0.06 percent of taxable payroll from the level estimated for last year's report due to the change in the valuation period (see table IV.B9). The changes made in data, assumptions, and methods for this report, together, make the increase in the deficit about 50 percent larger than the increase in the deficit due solely to the new valuation period. This is indicated by the total 0.09 percentage point increase in the deficit, which, after rounding, increases the deficit from 1.92 percent to 2.02 percent of taxable payroll.

The effects of changes made in this report can also be illustrated by comparing the annual (cash-flow) balances for this and the prior year's report. Figure IV.B5 provides this comparison for the combined OASDI program over the long range.

Figure IV.B5.-OASDI Annual Balances: 2005 and 2006 Reports

[As a percentage of taxable payroll under the intermediate assumptions]

[D]

The projected annual balances in this report start at a lower level than those in last year's report largely due to worse than expected recent economic experience. Over the period 2010 through 2050, annual balances are similar between the two reports. After 2050, however, the annual balances in this year's report are larger due to the impact of the higher fertility rates. The annual deficit for 2079 is 5.35 percent of taxable payroll in this report compared to 5.70 percent for 2079 in last year's report.

1Adjustments are made to include deemed wage credits based on military service for 1983-2001, and to reflect the lower effective tax rates (as compared to the combined employee-employer rate) which apply to multiple-employer "excess wages," and which did apply, before 1984, to net earnings from self-employment and, before 1988, to income from tips.



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