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Trustees Report- 1996

 

C. LONG-RANGE ESTIMATES OF SOCIAL SECURITY TRUST FUND OPERATIONS AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT

This appendix presents long-range projections of the operations of the combined Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) Trust Funds and of the Hospital Insurance (HI) Trust Fund expressed as a percentage of gross domestic product (GDP). While expressing these fund operations as a percentage of taxable payroll is the most useful approach for assessing the financial status of the programs, (see table II.F13 and appendix A), analyzing them as a percentage of GDP provides an additional perspective on these fund operations in relation to the total value of goods and services produced in the United States.

Table III.C1 shows estimated income excluding interest, total outgo, and the resulting balance of the combined OASI and DI Trust Funds, of the HI Trust Fund, and of the combined OASI, DI, and HI Trust Funds, expressed as percentages of GDP on the basis of each of the three alternative sets of assumptions. The estimated GDP on which these percentages are based is also shown in table III.C1. For OASDI, income excluding interest consists of payroll-tax contributions, proceeds from taxation of benefits, and various reimbursements from the general fund of the Treasury. Total outgo consists of benefit payments, administrative expenses, net transfers from the trust funds to the Railroad Retirement program, and payments for vocational rehabilitation services for disabled beneficiaries. For HI, income excluding interest consists of contributions (including contributions from railroad employment) and payments from the general fund of the Treasury for contributions on deemed wage credits for military service. Total outgo consists of outlays (benefits and administrative expenses) for insured beneficiaries. Both the HI income and outgo are on an incurred basis.

The OASDI balance (income excluding interest, less outgo) as a percentage of GDP is projected to be positive on the basis of the low cost alternative I through 2020, but with decreasing deficits after 2030. The OASDI balance is projected to be positive through 2010 on the basis of the intermediate alternative II and through 1999 on the basis of the high cost alternative III, before becoming permanently negative, with increasing deficits. The projected HI balance as a percentage of GDP, however, is negative, with increasing deficits, throughout the long-range period under all three alternatives. The combined OASDI and HI balance as a percentage of GDP is projected to be positive through 2010 under the low cost alternative I, through 1997 under the intermediate alternative II, and through only 1996 under the high cost alternative III. Between 2010 and about 2030, under all three alternatives, both the OASDI and HI balances as percentages of GDP are projected to decline substantially because the baby-boom generation reaches retirement age during these years. After balances cease to be positive under the intermediate and high cost alternatives, the size of annual deficits increases fairly steadily for the OASDI and HI programs, both separately and combined.

By the year 2070, the combined OASDI and HI balances as percentages of GDP, based on the three alternatives, are projected to differ by a relatively large amount: from a deficit of 1.44 percent for the low cost alternative I to a deficit of 12.04 percent for the high cost alternative III. Projected balances differ by a much smaller amount by the year 2005: from a positive balance of 0.37 percent for the low cost alternative I to a deficit of 1.48 percent for the high cost alternative III.

The summarized long-range (75-year) balance as a percentage of GDP for the combined OASDI and HI programs varies by a relatively large amount (from a deficit of 0.60 percent, based on the low cost alternative I, to a deficit of 6.29 percent, based on the high cost alternative III). The 25-year summarized balance varies by a smaller amount (from a positive of 0.23 percent to a deficit of 1.98 percent). Summarized rates are calculated on the present-value basis including the trust fund balances on January 1, 1996 and the cost of reaching and maintaining a target trust fund level equal to 100 percent of annual expenditures by the end of the period. (See section II.F for further explanation.)

The difference between trust fund operations expressed as percentages of taxable payroll and those expressed as percentages of GDP can be seen by analyzing the estimated ratios of OASDI taxable payroll to GDP, which are presented in table III.C2. HI taxable payroll is about 20 percent larger than the OASDI taxable payroll throughout the long-range period (see appendix A for a detailed description of the difference). The cost as a percentage of GDP is approximately equal to the cost as a percentage of taxable payroll multiplied by the ratio of taxable payroll to GDP.

Projections of GDP for the first several years were based on assumed quarterly changes in real GDP and the GDP implicit price deflator. Thereafter, projections of GDP were based on the projected increases in U.S. employment, labor productivity, and the GDP implicit price deflator. Productivity projections are consistent with assumed changes in the level of average earnings, the ratio of earnings to worker compensation, the ratio of worker compensation to GDP, and average hours worked per year (see section II.H).

Projections of taxable payroll, which are described in detail in section II.H, were based on the projected increases in covered employment and average taxable earnings. Therefore, the projected increases in taxable payroll differ from projected increases in GDP primarily to the extent that average taxable earnings are assumed to increase more slowly than is productivity and to the extent that OASDI program coverage of employment changes over time.

The long-range trend in the ratio of taxable payroll to GDP reflects the assumed trend in the ratio of wages to total employee compensation - i.e., wages plus fringe benefits. The ratio of wages to total employee compensation declined at average annual rates of 0.37 percent for the 40 years 1955-94 and 0.34, 0.50, 0.51, and 0.12 percent for the 10-year periods 1955-64, 1965-74, 1975-84, and 1985-94, respectively. Ultimate future annual rates of decline in the ratio of wages to employee compensation are assumed to be 0.1, 0.2, and 0.3 percent for alternatives I, II, and III, respectively. An additional factor that has made the overall ratio of taxable payroll to GDP decline in recent years is the decline in the ratio of taxable earnings to covered earnings, as a result the relatively greater increases in earnings for persons with earnings above the benefit and contribution base. This decline in the taxable ratio is assumed to continue at a slower pace through the end of this century.

Between 1983 and 2015, however, the tendency toward decreases in the ratio of taxable payroll to GDP, discussed above, is at least partially offset by the gradually expanding OASDI coverage of Federal civilian employment resulting from the 1983 amendments.

For the low cost alternative I, the ratio of taxable payroll to GDP is projected to be nearly constant through the year 2005, and then to decrease for the remainder of the long-range period. For the intermediate and high cost alternatives, the ratio of taxable payroll to GDP is projected to decrease essentially throughout the long-range period.


 
 
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