2013 OASDI Trustees Report

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V. ASSUMPTIONS AND METHODS UNDERLYING
ACTUARIAL ESTIMATES
The future income and cost of the OASDI program will depend on many demographic, economic, and program-specific factors. Trust fund income will depend on how these factors affect the size and composition of the working population as well as the level and distribution of earnings. Similarly, program cost will depend on how these factors affect the size and composition of the beneficiary population as well as the general level of benefits.
The Trustees make basic assumptions for several of these factors based on analysis of historical trends, historical conditions, and expected future conditions. These factors include fertility, mortality, immigration, marriage, divorce, productivity, inflation, average earnings, unemployment, real interest rate, and disability incidence and termination. Other factors depend on these basic assumptions. These other, often interdependent, factors include total population, life expectancy, labor force participation, gross domestic product, and program-specific factors. Each year the Trustees reexamine these assumptions and methods in light of new information and make appropriate revisions. The Trustees selected the assumptions for this report by the end of December 2012.
Future levels of these factors and their interrelationships are inherently uncertain. To address these uncertainties, this report uses three sets of assumptions, designated as intermediate (alternative II), low-cost (alternative I), and high-cost (alternative III). The intermediate set represents the Trustees’ best estimate of the future course of the population and the economy. With regard to the net effect on the actuarial status of the OASDI program, the low-cost set is more optimistic and the high-cost set is more pessimistic. The low-cost and high-cost sets of assumptions reflect significant potential changes in the interrelationships among factors, as well as changes in the values for individual factors.
While it is unlikely that all of the factors and interactions will differ in the same direction from those expected, many combinations of individual differences in the factors could have a similar overall effect. Outcomes with overall long-range cost as low as the low-cost scenario or as high as the high-cost scenario are very unlikely. This report also includes sensitivity analysis, where factors are changed one at a time (see appendix D), and a stochastic projection, which provides a probability distribution of possible future outcomes that is centered around the intermediate assumptions (see appendix E).
Readers should interpret with care the estimates based on the three sets of alternative assumptions. These estimates are not specific predictions of the future financial status of the OASDI program, but rather a reasonable range of future income and cost under a variety of plausible demographic and economic conditions.
The Trustees assume that values for each of the demographic, economic, and program-specific factors change toward long-range ultimate values from recent levels or trends within the next 25 years. For extrapolations beyond the 75‑year long-range period, the ultimate levels or trends reached by the end of the 75‑year period remain unchanged. The assumed ultimate values represent average annual experience or growth rates. Actual future values will exhibit fluctuations or cyclical patterns, as in the past.
The following sections briefly discuss the various assumptions and methods required to make the estimates of trust fund financial status, which are the heart of this report.1 There are, of course, many interrelationships among these factors that make a sequential presentation potentially misleading.
A. DEMOGRAPHIC ASSUMPTIONS AND METHODS
Table V.A1 displays the principal demographic assumptions relating to fertility, mortality, and net immigration for the three alternatives.
1. Fertility Assumptions
Birth rates by single year of age, for women aged 14 to 49, are the basis for the fertility assumptions. These rates apply to the total number of women, across all marital statuses, in the midyear population at each age.
Historically, birth rates in the United States have fluctuated widely. The total fertility rate2 decreased from 3.31 children per woman at the end of World War I (1918) to 2.15 during the Great Depression (1936). After 1936, the total fertility rate rose to 3.68 in 1957 and then fell to 1.74 by 1976. After 1976, the total fertility rate began to rise again until it reached a level of 2.07 for 1990. From 1991 to 2006, the total fertility rate averaged 2.03 children per woman. Then, the total fertility rate dropped from 2.12 in 2007 to 1.93 in 2010 and, based on preliminary data, decreased further to a level of 1.89 in 2011. The recession and high unemployment are likely reasons for this drop. The estimated total fertility rate for 2012 is 1.90.
These variations in the total fertility rate resulted from changes in many factors, including social attitudes, economic conditions, birth-control practices, and the racial/ethnic composition of the population. The Trustees expect future total fertility rates to remain close to recent levels. Certain population characteristics, such as the higher percentages of women who have never married, of women who are divorced, and of young women who are in the labor force, are consistent with continued lower total fertility rates than experienced during the baby-boom era (1946-65). Based on consideration of these factors, the Trustees assume ultimate total fertility rates of 2.30, 2.00, and 1.70 children per woman for the low-cost, intermediate, and high-cost assumptions, respectively. These ultimate rates are unchanged from last year’s report.
For the intermediate alternative, the projected total fertility rate rises until 2021 when it reaches 2.07. This reflects the assumption that fertility rates will have a recovery from their current recession-depleted levels. The Trustees then assume the total fertility rate follows a gradual trend toward the ultimate level in 2037. The Trustees assume the low-cost and high-cost total fertility rates gradually trend away from the intermediate path to reach the ultimate values in 2037.
2. Mortality Assumptions
The Office of the Chief Actuary at the Social Security Administration develops average percentage reductions in future mortality rates by age group, sex, and cause of death. The office uses these percentages to estimate future central death rates by age group, sex, and cause of death. From these estimated central death rates, the office calculates probabilities of death by single year of age and sex.
The Office of the Chief Actuary calculated historical death rates for years 1900‑2009 for ages below 65 (and for all ages for years prior to 1968) using data from the National Center for Health Statistics (NCHS).3 For ages 65 and over, the office used final Medicare data on deaths and enrollments for years 1968 through 2009 and preliminary data for 2010. The office produced death rates by cause of death at all ages for years 1979‑2009 using data from the NCHS.
The total age-sex-adjusted death rate4 declined at an average annual rate of 1.11 percent between 1900 and 2009. Between 1979 and 2009, the period for which death rates were analyzed by cause, the total age-sex-adjusted death rate, for all causes combined, declined at an average rate of 0.99 percent per year.
Death rates have declined substantially in the U.S. since 1900, with rapid declines over some periods and slow or no improvement over the other periods. Historical death rates generally declined more slowly for older ages and more rapidly for children than for the rest of the population. Between 1900 and 2009, the age-sex-adjusted death rate for 65 and over declined at an average rate of 0.81 percent per year, while declining at an average rate of 3.10 percent per year for ages under 15.
Many factors are responsible for historical reductions in death rates, including increased medical knowledge, increased availability of health-care services, and improvements in sanitation and nutrition. Considering the expected rate of future progress in these and other areas, the Trustees assume three alternative sets of ultimate annual percentage reductions in central death rates by age group and cause of death, for 2037 and later. The intermediate set, alternative II, represents the Trustees’ best estimate. The average annual percentage reductions for alternative I (low-cost) are smaller than those for alternative II, while those for alternative III (high-cost) are larger. These ultimate annual percentage reductions are the same as those in last year’s report.
For the years 2010 through 2012, the assumed reductions in central death rates are the same as the average annual reductions by age group, sex, and cause of death experienced between 1999 and 2009. After 2012, the assumed reductions in central death rates for alternative II change rapidly from the average annual reductions experienced between 1999 and 2009, until they reach the ultimate annual percentage reductions for 2037 and later. The assumed reductions in death rates under alternatives I and III also rapidly approach their ultimate levels, but start from levels which are, respectively, 50 and 150 percent of the corresponding alternative II level.
Table V.A1 contains projections of age-sex-adjusted death rates for the total population (all ages), for ages under 65, and for ages 65 and over. Under the intermediate assumptions, projected age-sex-adjusted death rates are lower than the death rates in last year’s report. These changes primarily result from incorporating two additional years of historical data.
After adjusting for changes in the age-sex distribution of the population, the projected total death rates decline at average annual rates of about 0.42 percent, 0.80 percent, and 1.21 percent between 2012 and 2087 for alternatives I, II, and III, respectively. In keeping with the patterns observed in the historical data, the assumed future rates of decline are greater for younger ages than for older ages, but to a substantially lesser degree than in the past. Accordingly, the projected age-sex-adjusted death rates for ages 65 and over decline at average annual rates of about 0.39 percent, 0.73 percent, and 1.09 percent between 2012 and 2087 for alternatives I, II, and III, respectively. The projected age-sex-adjusted death rates for ages under 15 decline at average annual rates of about 0.77 percent, 1.55 percent, and 2.54 percent between 2012 and 2087 for alternatives I, II, and III, respectively
Demographers express a wide range of views on the likely rate of future decline in death rates. For example, the 2011 Technical Panel on Assumptions and Methods, appointed by the Social Security Advisory Board, believed that ultimate rates of decline in mortality would be higher than the rates of decline assumed for the intermediate projections in this report. Others believe that biological factors, social factors, and limitations on health care spending may slow future rates of decline in mortality. Evolving trends in health care and lifestyle will determine what further modifications to the assumed ultimate rates of decline in mortality will be warranted for future reports.
3. Immigration Assumptions
In order to develop projections of the total Social Security area population, the Trustees make assumptions for annual legal immigration, legal emigration, “other immigration,” and “other emigration.” Legal immigration consists of persons who are granted legal permanent resident status. Legal emigration consists of legal permanent residents and citizens who leave the Social Security area population. Net legal immigration is the difference between legal immigration and legal emigration. “Other immigration” consists of immigrants who enter the Social Security area in a given year and stay to the end of that year without having legal permanent resident status, such as undocumented immigrants and temporary foreign workers and students. “Other emigration” consists of other immigrants who leave the Social Security area population or who adjust their status to become legal permanent residents. Net other immigration is the difference between other immigration and other emigration. Net immigration refers to the sum of net legal immigration and net other immigration.
The Trustees make separate assumptions for the low-cost, intermediate, and high-cost scenarios. The low-cost scenario includes higher annual net immigration and the high-cost scenario includes lower annual net immigration.
Legal immigration increased after World War II to around 300,000 persons per year and remained around that level until shortly after 1960. With the Immigration Act of 1965 and other related changes, annual legal immigration increased to about 400,000 and remained fairly stable until 1977. Between 1977 and 1990, legal immigration once again increased, averaging about 580,0005 per year.
The Immigration Act of 1990, which took effect in fiscal year 1992, restructured the immigration categories and increased significantly the number of immigrants who may legally enter the United States. Legal immigration averaged about 780,0001 persons per year during the period 1992 through 1999. Legal immigration increased to about 900,000 in 2000 and about 1,060,000 in 2001, primarily due to an increase in the number of persons granted legal permanent resident status as immediate relatives of U.S. citizens, the only category of legal immigration that is not numerically limited. However, legal immigration declined to less than 800,000 by 2003 as processing slowed and the number of pending applications increased. From 2003 to 2006, processing accelerated and legal immigration increased until it reached about 1,200,000 in 2006. For 2007 through 2009, legal immigration decreased to about 1,100,000 and declined further to about 1,050,000 in 2010 and 1,060,000 in 2011. The estimated level of legal immigration in 2012 is 1,075,000.
The intermediate alternative assumes that annual legal immigration will be 1,050,000 persons for 2013 and later. Alternatives I and III assume that ultimate annual legal immigration will be 1,250,000 persons and 850,000 persons, respectively, for 2014 and later. The ultimate assumption for each alternative is 50,000 per year higher than in last year’s report.
The assumed ratios of annual legal emigration to legal immigration are 20, 25, and 30 percent for alternatives I, II, and III, respectively. This range is consistent with the limited historical data for legal emigration from the Social Security area. These ratios are unchanged from last year’s report. Under the intermediate alternative, by combining the ultimate annual legal immigration and emigration assumptions, ultimate annual net legal immigration is about 790,000 persons. For the low-cost and high-cost scenarios, ultimate annual net legal immigration is 1,000,000 persons and 595,000 persons, respectively.
The estimated number of other immigrants residing in the Social Security area increased from 9.3 million persons for January 1, 2000, to 14.1 million persons for January 1, 2008. The estimated other-immigrant population is 13.3 million persons for January 1, 2009, and 13.4 million persons for January 1, 2010 and January 1, 2011. The estimates for these 3 years are significantly lower than estimates for prior years’ levels, and this is likely due to the recession.
Estimated annual other immigration for 2011 and 2012 is 1.0 million and 1.2 million persons, respectively. Due to the recent recession, these levels are significantly lower than those estimated for the period 2000 through 2006. Under the intermediate assumptions, annual other immigration is 1.3 million for 2013, and increases to 1.6 million for 2018 and 2019 before decreasing to the ultimate level of 1.4 million persons for 2022. For the low-cost and high-cost scenarios, the future ultimate annual other immigration is 1.7 million persons and 1.1 million persons, respectively, for 2022 and later. The ultimate assumption for each alternative is 0.1 million lower than in last year’s report.
Emigration from the other-immigrant population includes those who leave the Social Security area and those who adjust their status to become legal permanent residents. This other-immigrant population is highly mobile and far more likely to leave the Social Security area than is the citizen or legal permanent resident population. The Office of the Chief Actuary models the annual number of other immigrants who leave the Social Security area in two groups. The first departing group equals a proportion of the number of other immigrants, by age and sex, who have recently entered the Social Security area. The second departing group is derived by applying annual departure rates, by age and sex, to the other-immigrant population in the Social Security area.
Under the intermediate assumptions, the total annual number of other emigrants who leave the Social Security area averages 650,000 through the 75‑year projection period. In addition, the Trustees assume that the ultimate annual number of other immigrants who adjust status to become legal permanent residents is 450,000 for the intermediate assumptions. This ultimate annual number who adjust status is about one-third of the ultimate annual number of other immigrants entering the Social Security area. For the low-cost and high-cost scenarios, the total annual number of other emigrants averages 750,000 and 530,000, respectively, through the 75‑year projection period. The Trustees assume the ultimate annual number of people adjusting status to legal permanent resident status will be 550,000 persons and 350,000 persons, for the low-cost and high-cost scenarios, respectively.
Under the assumptions and methods described above, the projected size of the other-immigrant population grows substantially. This growth reflects the excess of annual other immigration over the combined annual numbers of emigrants and deaths that occur within the other-immigrant population.
Estimated annual net other immigration averaged about 615,000 persons for 2000 through 2004. Estimates of net other immigration for 2005 through 2008 are based on data from the Department of Homeland Security. The estimated level is 1,140,000 for 2005, decreasing to 800,000 for 2006 and 70,000 for 2007. For 2008, estimated net other immigration is negative, at -760,000, but returns to a positive level of 105,000 for 2009. The estimated net other immigration for 2010, 2011, and 2012 is 50,000, 75,000, and 270,000, respectively.
Under the intermediate assumptions, projected net other immigration is about 365,000 persons for 2013, and is about 595,000 persons for 2018. Net other immigration then sharply decreases to about 350,000 for 2022, primarily due to the decline in the number of other immigrants entering the country. This is followed by a more gradual decrease after 2022 to about 290,000 for 2040 and 265,000 for 2090. The decline in net other immigration after 2022 is due to the increasing number of other immigrants residing in the Social Security area. Based on the rates of departure described above, an increase in the number of other immigrants residing in the Social Security area results in an increase in the number who emigrate out of the area. The Trustees assume all other components of other immigration and emigration are stable after 2022, and thus do not contribute toward any change in net other immigration. Under the intermediate assumptions, the projected average annual level of net other immigration over the 75-year projection period is about 310,000 persons. For the low-cost and high-cost assumptions, projected average annual net other immigration is about 400,000 persons and 205,000 persons, respectively.
The projected average total level of net immigration (legal and other, combined) is about 1,095,000 persons per year during the 75-year projection period under the intermediate assumptions. For the low-cost and high-cost assumptions, projected average annual total net immigration is about 1,400,000 persons and 800,000 persons, respectively.
Demographers express a wide range of views about the future course of immigration for the United States. Some, like the 2011 Technical Panel mentioned in the previous section, believe that net immigration will increase substantially in the future. Others believe that potential immigrants may be increasingly attracted to other countries, that potential immigrants may be fewer due to lower birth rates in many countries, or that changes in the law or enforcement of the law could reduce immigration.
 
Total
fertility
ratea
Age-sex-adjusted death rateb
per 100,000, by age
Net immigrationc d
Legal e
Other f
2012 g

a
The total fertility rate for any year is the average number of children that would be born to a woman in her lifetime if she were to experience, at each age of her life, the birth rate observed in, or assumed for, the selected year, and if she were to survive the entire childbearing period.

b
Based on the enumerated total population as of April 1, 2000, if that population were to experience the death rates by age and sex observed in, or assumed for, the selected year.

c
Net immigration values are rounded to the nearest 5,000.

d
Estimates do not include persons who attained legal permanent resident status under the special one-time provisions of the Immigration Reform and Control Act of 1986.

e
Historical estimates of net legal immigration assume a 25 percent reduction in legal immigration due to legal emigration.

f
Historical net other immigration estimates depend on a residual method, using Department of Homeland Security January 1 stock estimates for 2005 through 2011.

g
Fertility is estimated starting in 2011, mortality starting in 2010, and immigration starting in 2011.

4. Total Population Estimates
The starting Social Security area population for January 1, 2011, is derived from the Census Bureau’s estimate of the residents of the 50 States and D.C. and U.S. Armed Forces overseas. Adjustments are made to reflect mortality assumptions for the aged population since 2010 that are consistent with Medicare and Social Security data, net immigration assumptions for the aged population since 2010, estimates of the net undercount in the 2010 census, inclusion of U.S. citizens living abroad (including residents of U.S. territories), and inclusion of non-citizens living abroad who are insured for Social Security benefits. The Office of the Chief Actuary projects the population in the Social Security area by age, sex, and marital status for January 1 of each year 2012 through 2090 by combining the assumptions for future fertility, mortality, and net immigration with assumptions for marriage and divorce. Previous sections of this chapter present the assumptions for future fertility, mortality, and immigration. Assumptions for future rates of marriage and divorce reflect historical data from the National Center for Health Statistics and the Census Bureau.
This report contains a July 1 (i.e., midyear) population for each year, which is derived from surrounding January populations. Table V.A2 shows the historical and projected population for July 1 by broad age group, for the three alternatives. It also shows the aged and total dependency ratios (see table footnotes for definitions).
 
Aged a
Total b
2012  c

a
Ratio of the population at ages 65 and over to the population at ages 20-64.

b
Ratio of the population at ages 65 and over and the population under age 20 to the population at ages 20‑64.

c
Estimated.

Notes:
1. Historical data are subject to revision.
2. Totals do not necessarily equal the sums of rounded components.
5. Life Expectancy Estimates
Life expectancy, or average remaining number of years expected prior to death, is an additional way to summarize the Trustees’ mortality assumptions. This report includes life expectancy in two different forms (period and cohort) for two separate purposes.
Cohort life expectancy does not use death rates for a single year, but for the series of years in which the individual will actually reach each succeeding age if he or she survives. Cohort life expectancy provides an individual’s expected average remaining lifetime at a selected age in a given year, using actual or expected future changes in death rates. Table V.A4 presents historical and projected life expectancy calculated on a cohort basis. Cohort life expectancy is somewhat greater than period life expectancy for a given year because: (a) death rates at any age tend to decline over time; and (b) cohort life expectancy uses death rates from future years, while period life expectancy uses death rates only from the given year.
Life expectancy at a given age reflects death rates at that and all older ages. Period life expectancy is somewhat related to the age-sex-adjusted death rate discussed in section V.A.2. However, life expectancy places far greater weight on death rates at lower ages than at higher ages. Therefore, changes in death rates at lower ages have far greater effects in changing life expectancy over time. It is important to keep this concept in mind when considering trends in life expectancy.
 
2010  b

a
The period life expectancy at a given age for a given year is the average remaining number of years expected prior to death for a person at that exact age, born on January 1, using the mortality rates for that year over the course of his or her remaining life.

b
Estimated.

 
At birth  b
At age 65  c
At birth  b

a
The cohort life expectancy at a given age for a given year is the average remaining number of years expected prior to death for a person at that exact age, born on January 1, using the mortality rates for the series of years in which the individual will actually reach each succeeding age if he or she survives.

b
Cohort life expectancy at birth for those born in the calendar year is based on a combination of actual and estimated death rates for birth years 1940 through 2009. For birth years after 2009, these values depend on estimated death rates.

c
Age 65 cohort life expectancy for those attaining age 65 in calendar years 1940 though 2009 depends on actual death rates or on a combination of actual and estimated death rates. After 2009, these values depend on estimated death rates.


1
Actuarial Studies published by the Office of the Chief Actuary, Social Security Administration, contain further details about the assumptions, methods, and actuarial estimates. A complete list of available studies may be found at www.socialsecurity.gov/OACT/NOTES/actstud.html. To obtain copies of such studies or of this report, please submit a request at www.socialsecurity.gov/OACT/request.html or write to: Office of the Chief Actuary, 700 Altmeyer Building, 6401 Security Boulevard, Baltimore, MD 21235. This entire report, along with supplemental year-by-year tables, may also be found at
www.socialsecurity.gov/OACT/TR/2013/index.html.

2
Defined to be the average number of children that would be born to a woman in her lifetime if she were to experience, at each age of her life, the birth rate observed in, or assumed for, the selected year, and if she were to survive the entire childbearing period. A rate of about 2.1 would ultimately result in a nearly constant population if immigration and emigration were both zero, and if death rates were to remain at current levels.

3
These rates reflect NCHS data on deaths and Census estimates of population.

4
Based on the enumerated total population as of April 1, 2000, if that population were to experience the death rates by age and sex for the selected year.

5
This average excludes those persons who attained legal permanent resident status under the special, one-time provisions of the Immigration Reform and Control Act of 1986.


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