2012 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, retirement, 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 2011.
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 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. Since 1990, the total fertility rate has been fairly stable at around 2.00 children per woman.
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.
Based on preliminary data, the estimated total fertility rate decreased to a level of 2.01 children per woman in 2009, and decreased further to 1.95 in 2010. The recession and high unemployment are likely reasons for these decreases. For 2011, the estimated total fertility rate rises to 2.03, as the economy gradually improves. These levels are lower than those estimated in last year’s report.
For the intermediate alternative, the projected total fertility rate rises slightly until 2015 when it reaches 2.06. The Trustees then assume the total fertility rate follows a gradual trend toward the ultimate level in 2036. 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 2036.
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 1900-2007 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 2007. The office produced death rates by cause of death at all ages for years 1979-2007 using data from the NCHS.
The total age-sex-adjusted death rate4 declined at an average rate5 of 1.10 percent per year between 1900 and 2007. Between 1979 and 2007, 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 0.93 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 than for the rest of the population. The age-sex-adjusted death rate for ages 65 and over declined at an average rate of 0.79 percent per year between 1900 and 2007.
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 2036 and later. The intermediate set, alternative II, represents the Trustees’ best estimate. The average annual percentage reductions for alternative I are generally smaller than those for alternative II, while those for alternative III are generally larger. These ultimate annual percentage reductions are similar to those in last year’s report. However, the same reductions now apply for both males and females, and the number of causes of death decreased from seven to five.
For the years 2008 through 2011, the assumed reductions in central death rates are the same as the average annual reductions by age group, sex, and cause of death observed between 1997 and 2007. After 2011, the assumed reductions in central death rates for alternative II change rapidly from the average annual reductions observed between 1997 and 2007, until they reach the ultimate annual percentage reductions for 2036 and later. The assumed reductions in death rates under alternatives I and III also rapidly reach 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 for the total population are approximately the same as the death rates in last year’s report. For the age group 65 and over, projected age-sex-adjusted death rates start slightly lower than in last year’s report and end about 1 percent higher in 2086. These changes primarily result from revising estimates for 2011 and regrouping the ultimate annual percentage reductions.
After adjusting for changes in the age-sex distribution of the population, the projected total death rates decline at average annual rates of about 0.39 percent, 0.77 percent, and 1.18 percent between 2011 and 2086 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 0.36 percent, 0.70 percent, and 1.06 percent between 2011 and 2086 for alternatives I, II, and III, respectively.
Experts 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 those legal immigrants and native-born 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 legal permanent resident. 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 580,0006 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 the number of pending applications increased. From 2003 to 2006, legal immigration increased until it reached about 1,200,000 for 2005 and 2006. For 2007 through 2009, legal immigration decreased to about 1,100,000 and declined further to about 1,050,000 in 2010.
The intermediate alternative assumes that annual legal immigration will be 1,000,000 persons for 2011 and later. Alternatives I and III assume that ultimate annual legal immigration will be 1,200,000 persons and 800,000 persons, respectively. The ultimate assumptions for all of the alternatives are unchanged from 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 750,000 persons. For the low-cost and high-cost scenarios, ultimate annual net legal immigration is 960,000 persons and 560,000 persons, respectively.
The estimated number of other immigrants in the Social Security area population is about 8.8 million persons as of January 1, 2000, and about 13.5 million persons as of January 1, 2007. The estimated other-immigrant population decreased during the recession to a level of 12.6 million persons as of January 1, 2010.
Estimated annual other immigration for 2010 and 2011 is 1.0 million and 1.1 million persons, respectively. Due to the recent recession, these levels are significantly lower than those estimated during the period 2000 through 2006. Under the intermediate assumptions, annual other immigration is 1.2 million in 2012, and increases until 2015 to the ultimate level of 1.5 million persons. For the low-cost and high-cost scenarios, the future ultimate annual other immigration is 1.8 million persons and 1.2 million persons, respectively.
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 native-born or legal-immigrant 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 derives from 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 665,000 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 500,000 for the intermediate assumptions. This ultimate level is 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 755,000 and 550,000, 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 600,000 persons and 400,000 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 660,000 persons from 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 1,045,000 for 2005, decreasing to 710,000 for 2006 and 10,000 for 2007. For 2008, estimated net other immigration is negative, at -770,000, but returns to a positive level of 40,000 for 2009. Under the intermediate assumptions, projected net other immigration is about 210,000 persons in 2012, and rises to about 500,000 persons in 2015. Net other immigration then decreases to about 325,000 in 2040 and to about 275,000 in 2090. The decline in net other immigration 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 2014, 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 330,000 persons. For the low-cost and high-cost assumptions, projected average net other immigration is about 420,000 persons per year and 230,000 persons per year, respectively.
The projected average total level of net immigration (legal and other combined) is about 1,080,000 persons per year during the 75-year projection period under the intermediate assumptions. For the low-cost and high-cost assumptions, projected average total net immigration is about 1,375,000 persons per year and 790,000 persons per year, 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 attracted to other 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
20087
2011g

a
The total fertility rate for any year is the average number of children who would be born to a woman in her lifetime if she were to experience the birth rates by age observed in, or assumed for, the selected year, and if she were to survive the entire childbearing period. The assumed total fertility rate does not change after 2036.

b
The age-sex-adjusted death rate is the crude rate that would occur in 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 2010.

g
Fertility estimated starting in 2009, mortality estimated starting in 2008, and immigration estimated starting in 2010.

4. Total Population Estimates
The starting Social Security area population for January 1, 2010 derives from, with several adjustments, the Census Bureau’s estimate of the residents of the 50 States and D.C. and U.S. Armed Forces overseas. These adjustments reflect mortality assumptions for the aged population since 2000 that are consistent with Medicare and Social Security data, net immigration assumptions for the aged population since 2000, estimates of the net undercount in the 2000 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 as of January 1 of each year 2011 through 2090 by combining the assumptions for future fertility, mortality, and net immigration with assumptions on 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.
This report contains a July 1 (i.e., midyear) population for each year, which derives from surrounding January populations. Table V.A2 shows the historical and projected population as of July 1 by broad age group, for the three alternatives. Also shown are aged and total dependency ratios (see table footnotes for definitions).
 
65 and
over
2011c

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 one way to summarize the Trustees’ mortality assumptions. This report includes life expectancy in two different forms (period and cohort) for two separate purposes.
Period life expectancy for a given year uses the actual or expected death rates at each age for that year. It is a useful summary statistic for illustrating the overall level of the death rates experienced in a single year. Period life expectancy for a particular year provides an individual’s expected average remaining lifetime at a selected age, assuming no change in death rates after that year. Table V.A3 presents historical and projected life expectancy calculated on a period basis. While life expectancy relates to the age-sex-adjusted death rate discussed in section V.A.2, life expectancy places far greater weight on changes in death rates at lower ages than at higher ages. It is important to keep this concept in mind when considering trends in life expectancy.
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, assuming 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 the same year because death rates for any given age tend to decline as time passes and the cohort grows older.
 
Table V.A3.—Period Life Expectancy
2002
2003
2004
2005
2006
2007
2010  b