This memorandum provides estimates for a proposal that you have developed. The attached tables 1 and 2 provide estimates of the effects of the six provisions reflecting both the expected future average return on equities (tables 1) and a lowyield assumption for equities (tables 2). The estimates and descriptions below reflect our understanding of your intent for this proposal. All estimates reflect the intermediate assumptions of the 2004 Trustees Report plus additional assumptions described below. These estimates reflect contributions from many individuals in the Office of the Chief Actuary, particularly Alice Wade, Jason Schultz, Bill Piet, and Chris Chaplain.
The combined effect of the six provisions is expected to eliminate the 75year longrange actuarial deficit for the OASDI program and leave a significant positive actuarial balance of about 0.65 percent of taxable payroll using the expected equity yield. The ratio of trust fund assets to annual program cost (TFR) is projected to rise consistently throughout the 75year period. However, the growth in the TFR slows toward the end of the period and annual deficits are gradually increasing, so that some additional "maintenance" of the provisions would eventually be needed after the 75year period to maintain sustainable solvency. The proposal in fact recommends such further changes in the form of the balancing tax rate. Even in the absence of such maintenance, the Social Security program would be expected to be solvent for several decades beyond the end of the 75year period.
With the lowyield assumption for equities, the OASDI program would still be projected to be solvent for the 75year longrange period, but would require larger balancing tax rate increases to achieve sustainable solvency.
Descriptions of Six Provisions
Subtotal for Provisions 1 through 3The combined effect of provisions 1 through 3 would reduce the longrange OASDI actuarial deficit from 1.89 percent of payroll by 1.47 percent to a deficit of 0.41 percent of payroll. The resulting actuarial deficit would be less than 5 percent of the longrange summarized cost rate and so the program would meet the test of longrange close actuarial balance with just these provisions.
Subtotal for Provisions 1 through 5The combined effect of provisions 1 through 5 would improve the longrange OASDI actuarial balance by 1.94 percent of payroll resulting in an estimated positive actuarial balance of 0.05 percent of payroll.
Total for Provisions 1 through 6The combined effect of all 6 provisions would be to improve the longrange actuarial balance of the OASDI program by 2.54 percent of payroll to a positive actuarial balance of about 0.65 percent of taxable payroll with expected returns on equities. With a lowyield assumption for equities, equivalent to a riskadjusted return equal to that assumed for longterm Treasury bonds, the longrange actuarial balance would be expected to be improved by 2.23 percent of payroll to a positive balance of 0.35 percent of payroll.
Assumptions
As stated above, all estimates are based on the intermediate assumptions of the 2004 Trustees Report. However, several additional assumptions were used in these estimates.
Estimates of the effect of the provision to tax estates of individuals dying in 2010 and later were made with the assistance of the Office of Tax Analysis of the Department of the Treasury, which provided guidance on the expected revenue for this provision under current law through 2009. Our estimates are based on the assumption that the combined value of estates for all persons dying in future years will remain at about the same percentage of gross domestic product (GDP) as estimated for 2009. On this basis, and reflecting the fixed exemption and tax rate for this provision, we estimate that revenue to the OASDI program would increase from 0.41 percent of taxable payroll in 2010 to 0.72 percent of payroll by 2078.
The long term average real return on equities of corporations based in the United States is assumed to average about 6.5 percent for investments made in future years, over long periods of time. Historically, total real equity returns have averaged around 7 percent. However, we believe that several factors including a somewhat lower perceived level of risk from equity investment will result in market pricing of equities that is somewhat higher than in the past, on average, and thus in somewhat lower longterm average returns. This lower average real return on equities is also consistent with the somewhat higher future average real interest rate on longterm Treasury bonds (3 percent assumed by the Social Security Trustees) than has been experienced over the longterm past. For trust fund assets invested in equities, an administrative expense of 0.0005 percent (0.5 basis point) is assumed annually.
Results
Trust Fund Operations
Table 1 provides projections of the financial operations of the OASDI program assuming that the proposed six provisions are enacted. With enactment of these six provisions assuming the expected real returns on equities, the year in which the annual cost of the program begins to exceed the annual income would be delayed 9 years, from 2018 under current law, to 2027. The estimated year of combined OASDI Trust Fund exhaustion would be delayed to at least several decades beyond the end of the 75year longrange period. And if the recommendation of the proposal to provide continued adjustments to the balancing tax rate is followed by future Congresses, then sustainable solvency would be maintained for the foreseeable future.
Assets
Table 1a provides estimates of the net annual purchase and sale of equities consistent with the expected return and the specifications for increasing equities to 20 percent of trust fund assets by the end of 2025, and rebalancing assets to maintain that percentage thereafter. Trust fund assets are shown by type: equities, Treasury securities, and total. Projected GDP is also shown. We assume that the total market value of all equities for domestically based corporations will generally be about equal to GDP. Because the trust fund assets held in equities are projected to remain well below 15 percent of GDP throughout the projection period, we assume that the limit on equities at 15 percent of the total market valuation will not be reached. For comparison, the net assets of the theoretical Social Security program where borrowing authority is provided in the law are shown in column 9.
Budget Effects
Table 1b provides projected effects of enactment of the six provisions on the unified budget of the federal government. These projected effects are for the change from the effects that are assumed in standard budget accounting under current law (where scheduled benefits are assumed to be paid in full with revenue from the general fund of the Treasury if needed, even after the trust funds are exhausted.) All estimates reflect the intermediate assumptions of the 2004 Trustees Report, and thus are not directly comparable with budget projections made by OMB and CBO, using different assumptions.
Table 1b provides estimates in present value, with all amounts discounted to January 1, 2004 using the Treasury bond yield on assets held by the trust funds. Table 1b.c provides estimates in constant 2004 dollars.
Purchase of equities for the trust funds is considered to be a budget expenditure. As a result, sale of equities when needed for rebalancing the assets in the trust fund are considered budget receipts. The balancing tax rate represents a budget receipt and thus improves budget cash flow. However, revenue from the estate tax represents an additional budget receipt only for 2010, the only year for which the estate tax would be eliminated under current law.
The change in annual unified budget cash flow is accumulated at the trust fund bond yield to estimate the cumulative effect on federal debt held by the public. The change in the annual unified budget balance reflects both the change in budget cash flow and the interest on the change in the accumulated debt. Purchases of equities are projected to generally result in a reduction (negative effect) on unified budget cash flow through 2013. Thereafter, the effects of the other provisions are projected to dominate, resulting in positive effects. Publicly held debt would be increased through 2020, and reduced substantially thereafter. Annual unified budget balances would be generally worse through 2015, and better thereafter.
Cash Flow from Trust Funds to General Fund
Table 1c provides estimates of the net annual cash flow from the OASDI trust funds to the general fund of the Treasury. A comparison is provided with a theoretical Social Security program where transfers are made from the general fund to the trust funds whenever needed to pay scheduled benefits.
Under current law, cash flow to the general fund changes from positive to negative in 2018, reaching 5.9 percent of payroll by 2078. Under the proposal, cash flow first becomes negative in 2027, and reaches 2.8 percent by 2078. For the 75year period as a whole, the total net negative cash flow is reduced from $5.2 to $0.4 trillion in present value under the proposal. Present value amounts are computed reflecting the trust fund yield on assets held in Treasury securities.
Change in Unfunded Obligations
Table 1d illustrates the change from a $3.7 trillion presentvalue unfunded obligation over the 75year longrange period under current law to a positive balance of $1.5 trillion in present value under the proposal. All values are shown in present value discounted to January 1, 2004 based on the Treasury security yield on trust fund assets. Only in column 7, where equities are assumed to be phased into trust fund asset holdings, does the presentvalue discounting reflect the overall asset yield assumed for the trust funds, including equity holdings. The table shows that the roughly $5 trillion improvement in the unfunded obligation is the result of $1 trillion from estate tax revenue, $1.5 trillion from the balancing tax rate, $2.2 trillion from the other provisions (excluding equity investment), and $0.4 trillion from equity investment (the difference between columns 6 and 7).
Taxable Payroll
Table 1e provides the projected level of OASDI taxable payroll under present law and under the proposal. The provisions for increasing the contribution and benefit base and for covering newly hired State and local government employees would both increase the amount of earnings subject to payroll tax under the OASDI program.
Sensitivity Analysis
Tables 2 are similar to tables 1, except that the realized real return on equities is assumed to be equal to that on longterm Treasury bonds, 3 percent. In this case, the 1.0percent total balancing tax rate increase for 2023 and later is not sufficient to attain a stable or rising trust fund as a percent of annual program cost by the end of the period. Thus, while 75year solvency is expected to be fully restored through 2078, sustainable solvency would require larger balancing tax rate increases. Under this assumption, a balancing tax rate of 1.8 percent total for 2021 and later is expected to meet the proposal goal of a stable or rising TFR at the end of 75 years.
Conclusion
The sixprovision proposal is expected to restore solvency for the Social Security program through the next 75 years and for decades thereafter. With the expected equity yields and the specified balancing tax rate increase, trust fund ratios are projected to rise throughout the 75year period. However, to maintain sustainable solvency, and thus solvency for the foreseeable future, some maintenance of the balancing tax rate is expected to be needed after the end of the 75year projection period, as recommended in the proposal.
Attachments:
List of Attached Tables
Table 1

Table 1a

Table 1b

Table 1b.c

Table 1c

Table 1d

Table 1e

Table 2

Table 2a

Table 2b

Table 2b.c

Table 2c

Table 2d

Table 2e

List of memos 