Short-Range Actuarial Projections
of the Old-Age, Survivors, and
Disability Insurance Program, 2005

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ACTUARIAL STUDY NO. 119
by Chris Motsiopoulos
and Richard B. Tucker

C. AVERAGE BENEFIT AT AWARD

Each month, benefits are paid to individuals in current-payment status as of the end of the previous month. Adjustments are then made for benefits awarded and terminated during the current month. Finally, adjustments may be made for items such as benefit recalculations for additional earnings, and annual cost-of-living increases. This section describes the estimation of the average amount of new awards; the other factors involved in estimating benefit payments will be discussed in later sections.

1. Sample Data

Projecting the average amount of a new award involves an actual sample of awards to retired or disabled workers, or survivors of deceased workers, and the actual earnings histories of the workers. A 1-percent sample of such awards is drawn from administrative data on awards in calendar year 2001. The sample is then linked to the Master Beneficiary Record (MBR) in order to collect information on the beneficiary's and/or the worker's gender, date of birth, date of death, date of eligibility, periods of disability, Primary Insurance Amount (PIA), type of PIA calculation, delayed retirement and military service credits, and benefit amount in the month of award.

Starting in 1986, some benefit calculations may be affected by the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) provision. The WEP considers the noncovered pension of the worker; the GPO considers the noncovered pension of the spouse beneficiary. For this reason, the sample is linked to WEP administrative data, in order to collect information on the offset amount, as well as the beginning and ending dates of the offset. We do not consider the effects of the GPO.

The Social Security Act allows the President to enter into international agreements to coordinate the U.S. social security programs with the social security programs of other countries. These agreements are known as "totalization agreements." The more accurate determination of the insured status and the PIA of a worker in the sample requires information on totalization. This information is obtained by linking the sample to totalization administrative data.

Finally, the sample is linked to the 2001 Continuous Work History Sample (CWHS) in order to collect the workers' earnings histories. The CWHS is a 1-percent sample of all people with earnings covered by Social Security.

The 2001 CWHS includes Social Security earnings as a lump-sum for years prior to 1951, and year-by-year earnings for the 1951-2001 period. Quarters of coverage for years prior to 1951 are also reported as lump-sum. Social Security earnings are truncated from above by the contribution and benefit base. Also reported in the 2001 CWHS are year-by-year Medicare taxable wages for years 1983-2001. Prior to 1991, the wage base for Medicare wages was the same as for Social Security. For the 1991-93 years, the Medicare wage base was $125,000, $130,200, and $135,000 respectively. As of 1994, Medicare taxable wages have no maximum.

In the construction of the earnings histories for the awards included in the sample, we used Social Security earnings for years 1951-90. We also used Social Security earnings after 1990, if less than the contribution and benefit base. If at the base, then Medicare taxable wages for years 1994 and later were used. For 1991-93, we back estimated the unbounded Medicare taxable wages by discounting the 1994 Medicare taxable wages by the average wage index (1992—5.2 percent, 1993—0.9 percent, and 1994—2.7 percent). Pre-1951 earnings under age 14 (i.e., year of birth less than 1937) were excluded, while earnings for age 14 or older were evenly distributed in the appropriate number of years.

2. Sample Composition

The sample includes awards to young, aged, or disabled survivors of deceased workers. Only one survivor award of each type is included per deceased worker. Additional survivors for the same type receive the same benefit amount. Dependents of retired and disabled workers are not included in the sample; the model assumes these types of benefits are proportional to the primary benefit. The sample includes records on 31,863 beneficiaries, distributed as shown in the "sample awards" column of the following table:

Type of beneficiary
Actual awards
Sample awards
     
Male retired worker
982,144
9,991
Female retired worker
795,667
7,958
Young survivor
340,868
2,217
Aged survivor
466,214
4,638
Disabled survivor
28,152
252
Male disabled worker
374,355
3,708
Female disabled worker
316,148
3,099

3. Simulated Samples

The next step in projecting the average award amount is to construct a simulated sample of awards for the year prior to the projection period—2004 for this study—and for each year in the projection period—2005-14.

The benefit type, age and gender composition of the original sample is maintained in all simulated samples. Therefore, future changes within each benefit type are not captured by the simulated samples.

4. Simulated Earnings

Earnings histories of future awards will differ from those included in the 2001 awards sample. To account for future employment, the model updates the earnings record of each worker in each sample to create representative earnings records that would underlie an award in a particular year. The steps involved in creating simulated sample earnings are described below.

The benefit computation procedures that generally apply consider earnings after 1950, up to the year of award. So as the year of award shifts from 2001 through 2014, the length of the earnings record for each worker increases. For example, a 65-year-old retiring in 2001 had annual earnings from 1951 to 2001 in the original sample—this represents earnings for ages 15 to 65. The "parallel" 65-year-old retiring in 2010 is assigned annual earnings from 1951 to 2010 in the simulated sample for 2010—this represents earnings for ages 5 to 65; however, earnings for ages under 14 are set to zero.

The level of annual earnings in each simulated sample is based on the original 2001 sample, adjusted to reflect annual wage increases, as well as differences in earnings by age and sex. While the adjustment for annual wage increases is a simple application of the assumed changes in the Social Security average wage index, the adjustment for differences in earnings by age and sex is accomplished with the estimation and forecast of a set of annual earnings factors.

For each particular age and sex combination, a historical earnings factor was calculated as the ratio of the average annual change in earnings for this age and sex, over the 1991-2000 decade, to the average annual change in Social Security average wages, over the same period. These historical factors were then adjusted to produce a smooth series by age and sex. Earnings factors for future years were calculated by accumulating the historical earnings factors for the number of years between 2001 and the future year, and by further adjusting the factors to limit the divergence between males and females. Annual earnings in the simulated sample for each future year were multiplied by the appropriate earnings factor.

5. Earnings Prior to 1951

Finally, adjustments are made to account for the fact that year-by-year earnings are not available prior to 1951.

Workers retiring at ages 62-65 in 2001, were age 12-15 in 1951, and therefore there is no need to consider pre-1951 earnings (since they are set to zero). However, for awards to workers retiring in 2001 at ages after 65, and especially for some survivors awards, the worker's pre-1951 earnings may have been significant. For example, consider a survivor who is awarded benefits in 2001, based on the record of a worker who died in 1995 at age 70. Such worker was 26 in 1951, so any pre-1951 earnings present are distributed evenly in as many pre-1951 years as indicated by the pre-1951 quarters of coverage.

Pre-1951 earnings continue to be applied in the future—up to a point—and must be projected for the simulated samples. The number of samples for which pre-1951 earnings are needed is based on the age and earnings pattern of the worker as of 2001. For workers age 62 or older in 2001, pre-1951 earnings are projected for each corresponding simulated sample. For workers younger than age 62 in 2001, pre-1951 earnings are projected only for a fraction of the corresponding simulated samples—zero is assumed for all subsequent samples.

6. Benefit Calculations

Once the simulated samples are constructed, benefits can be calculated for each beneficiary in each sample. First, the model examines annual earnings and the corresponding quarters of coverage to determine if the insured status requirement is met for the particular benefit type.

If the insured status test is met, the benefit is computed for that record. Under the usual benefit calculation procedure, the Average Indexed Monthly Earnings (AIME) amount is found based on a specified number of highest years of indexed earnings—the number of "high-n" years of earnings depends on the year of eligibility of the worker. The eligibility year may precede the year of award, depending on either the year of attainment of age 62; the year of disability onset; or the year of death (survivor case). In the simulated samples, the relationship between the year of eligibility and the year of award is the same as the corresponding record in the 2001 sample.

Once the AIME for each record is computed, all relevant PIA formulas are applied and the highest applicable PIA becomes the PIA at award. Calculations that may apply include the following:

After the PIA is determined for each record in each simulated sample, the model computes the corresponding Monthly Benefit Amount (MBA). For retired workers, the MBA is either: (i) less than the PIA if retirement occurs before normal retirement age; (ii) equal to the PIA if retirement occurs at normal retirement age; or (iii) more than the PIA if retirement occurs after the normal retirement age. The reduction factors and delayed retirement credits will vary, depending on the worker's year of birth. Similar to the retired worker benefit, the MBA for an aged widow(er) is less than the PIA when benefit begins prior to the normal retirement age for the widow(er). For disabled workers, the MBA is assumed to be 100 percent of the PIA. For young survivor beneficiaries, the MBA is assumed to be 75 percent of the PIA.

Next, the average MBA for each type of beneficiary is calculated from the simulated samples for 2005-14. The average MBAs are converted to an index series, representing the year-over-year growth in benefits, having a value of 1.000 in 2004. The index for each projected year is then applied to the actual average benefit awarded in 2004—as determined from actual Social Security data—to obtain the final projection of award amounts.

7. Results

Table III.C1 indicates the award amount for female disabled workers will be roughly 25 percent less than male disabled workers throughout the next 10 years. Female benefits were as much as 33 percent less in the early 1980s. The gradual increase is primarily due to the increase in lifetime earnings of females, relative to those of males.

Table III.C2 shows award amounts for young and aged wives and husbands of disabled workers. The model assumes the amount of a spouse benefit is proportional to that of the worker. Future proportions are expected to be about the same as that for 2004. Note that the full benefit rate for a spouse is 50 percent of PIA, but the actual proportion over all beneficiaries is much less—roughly 17 percent for young spouses. This is mainly due to the Maximum Family Benefit (MFB) provision. The adjustment for the family maximum is made by proportionately reducing all auxiliary benefits until the total monthly benefits payable are within the maximum limit. Another example of reduced benefits to a spouse of a disabled worker is when the spouse is also entitled to a retired worker benefit. If the retirement benefit is smaller than the spouse benefit, only the difference is paid as a spouse benefit.

Table III.C3 shows award amounts for minor, disabled, and student children of disabled workers. The model assumes the amount of a child benefit is proportional to that of the worker. Future proportions are expected to be about the same as that for 2004. The full benefit rate for a child is 50 percent of PIA, but the MFB reduces the actual proportion as discussed above.

Table III.C4 shows award amounts for retired workers. The model projects retirement amounts based on the index of benefit growth from the simulated samples of awards. During the 1980s and early 1990s, award amounts to female retired workers decreased as a proportion of male award amounts. This is partly due to the lengthening computation period. Now that the computation period is at its maximum 35 years, women with longer and more complete earnings records result in more stable, albeit lower, benefits relative to men. Female retired worker benefits are projected to be roughly 68 percent of that for males throughout the short-range period.

Table III.C5 shows award amounts for survivors of deceased workers. The model projects these amounts based on the index of benefit growth from the simulated samples of awards for each of the following groups—11 types of beneficiaries in all:

Award amounts to aged widows are projected to remain the largest of any survivor award. Amounts for other types of survivors are lower because:

Award amounts to dependents of retired workers are not projected. See section E for a description of benefit projections for spouses and children of retired workers.


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