The Trustees use three types of financial measures to assess the actuarial status of the Social Security trust funds under the financing approach specified in current law: (1) annual cash-flow measures, including income rates, cost rates, and balances; (2)
trust fund ratios; and (3) summary measures such as
actuarial balances and unfunded obligations.
The difference between the annual income rate and annual cost rate, both expressed as percentages of taxable payroll, is the annual balance. The level and trend of the annual balances at the end of the 75-year projection period are critical factors that the Trustees use to assess the financial condition of the program.
The trust fund ratio for a year is the proportion of the year’s projected cost that could be paid with funds available at the beginning of the year. Critical factors considered by the Trustees include: (1) the level and year of maximum trust fund ratio; (2) the
year of exhaustion of the funds; and (3) the stability of the trust fund ratio at the end of the long-range period. “Sustainable solvency” occurs when the program has positive trust fund ratios throughout the 75‑year projection period that are either stable or rising at the end of the period.
Summarized measures indicate whether projected income is sufficient, on average, for the whole period. The Trustees summarize the total income and cost over
valuation periods that extend through 75 years and over the infinite horizon. This section presents two summarized measures: (1) the actuarial balance; and (2) the open group unfunded obligation. The actuarial balance indicates the size of any surplus or shortfall as a percentage of the taxable payroll over the period. The open group unfunded obligation indicates the size of any shortfall in present-value dollars.
This section also includes additional information that the Trustees use to assess the financial status of the Social Security program, including: (1) a comparison of the number of beneficiaries to the number of covered workers; (2) the test of long-range close actuarial balance; and (3) the reasons for the change in the actuarial balance from the last report.
The concepts of income rate and cost rate, expressed as a percentage of taxable payroll, are essential to consideration of the long-range actuarial status of the trust funds. The annual income rate is the ratio of all non-interest income to the OASDI taxable payroll for the year. Non-interest income includes payroll taxes, taxes on scheduled benefits, and general fund transfers. The OASDI
taxable payroll consists of the total earnings subject to OASDI taxes with some relatively small adjustments.
1 The annual cost rate is the ratio of the cost of the program to the taxable payroll for the year. The cost includes scheduled benefit payments,
administrative expenses, net interchange with the
Railroad Retirement program, and payments for
vocational rehabilitation services for disabled beneficiaries. For any year, the income rate minus the cost rate is the “balance” for the year.
Table IV.B1 presents a comparison of the estimated annual income rates and cost rates by trust fund and alternative. Table VI.F8 shows detailed long-range projections of trust fund operations in current dollar amounts.
Under the intermediate assumptions, the Trustees project that the OASI income rate will rise from 11.00 percent of taxable payroll in 2013 to 11.47 percent in 2086. Income from taxation of benefits causes this increase for two main reasons: (1) benefits are rising faster than payroll; and (2) the benefit-taxation threshold amounts are not indexed, and therefore an increasing share of benefits will be subject to tax. The pattern of the cost rate is much different. The OASI cost rate increased from 11.03 percent of taxable payroll in 2010 to 11.09 percent in 2011. For 2012 and 2013,
the Trustees project larger increases in the cost rate, reaching levels of 11.35 and 11.48 percent of taxable payroll, respectively. From 2014 to 2017, the growth in the cost rate slows, as the economic recovery through this period roughly offsets the effects of the aging population. From 2017 to 2035, the cost rate rises rapidly because the retirement of the
baby-boom generation will increase the number of beneficiaries much faster than subsequent lower-birth-rate generations increase the number of workers. From 2037 to 2053, the aging of the baby-boom generation causes an increase in the average age of beneficiaries and a decline in the cost rate. After initial benefit eligibility, benefits increase annually with price inflation rather than wage inflation. As beneficiaries age, their benefit amounts drop relative to current average taxable earnings because wages generally rise more rapidly than prices. After 2053, the Trustees project the OASI cost rate to rise, reaching 15.53 percent of taxable payroll for 2086, primarily because of projected reductions in death rates.
The Trustees’ projections of income rates under the low-cost and high-cost sets of assumptions are very similar to those projected for the intermediate assumptions, because income rates are largely a reflection of the payroll tax rates specified in the law (including reimbursements from the General Fund of the Treasury to compensate fully for the reduction in payroll tax revenue), with the gradual change from taxation of benefits noted above. In contrast, OASI cost rates for the low-cost and high-cost assumptions are significantly different than those projected for the intermediate assumptions. For the low-cost assumptions, the OASI cost rate decreases from 2012 through 2017, and then rises until it peaks in 2034 at 13.29 percent of payroll. Thereafter, the cost rate generally declines gradually until it reaches 11.38 percent of payroll for 2086, at which point the income rate reaches 11.23 percent. For the high-cost assumptions, the OASI cost rate rises throughout the 75-year period. It rises relatively rapidly through 2035 because of the aging of the baby-boom generation. Subsequently, the cost rate continues to rise and reaches 21.93 percent of payroll for 2086, at which point the income rate reaches 11.84 percent.
The pattern of the projected OASI annual balance is important in the analysis of the financial condition of the program. Under the intermediate assumptions, the annual balance is negative throughout the projection period. This annual deficit rises rapidly, reaching a peak of 3.84 percent of taxable payroll for 2037, then declines to 3.41 percent of taxable payroll for 2053, and rises thereafter until it reaches 4.06 percent of taxable payroll for 2086.
Under the low-cost assumptions, the Trustees project the OASI annual balance to be negative in 2012-2013, positive for 2014 through 2019, and negative thereafter. The annual deficit peaks at 1.97 percent of taxable payroll for 2034 and then declines through 2084, reaching a deficit of 0.15 percent of payroll for 2086. Under the high-cost assumptions, the OASI balance is negative throughout the projection period, with deficits of 2.06 percent for 2020, 6.48 percent for 2050, and 10.09 percent of payroll for 2086.
Notes:1. The income rate excludes interest income.
2. Revisions of taxable payroll may change some historical values.
3. Totals do not necessarily equal the sums of rounded components.
The DI cost rate rose substantially from 1.88 percent of taxable payroll in 2007 to 2.43 percent for 2011 due to the recent economic recession. Under the intermediate assumptions, the Trustees project that the DI cost rate will increase to 2.48 percent for 2012 and then decline to 2.18 percent for 2020. From 2020 to 2045, the DI cost rate stays relatively stable and then generally increases thereafter, reaching 2.30 percent for 2086. The income rate increases only very slightly from 1.82 percent of taxable payroll for 2012 to 1.86 percent for 2086. The projected annual deficit is 0.66 percent in 2012 and reaches 0.44 percent for 2086.
Under the low-cost assumptions, the Trustees project the DI cost rate will decline from 2.43 percent of payroll for 2011 to 1.58 percent for 2040, and will remain relatively stable thereafter, reaching 1.57 percent for 2086. The annual balance is negative for the first 8 years and is positive throughout the remainder of the long-range period. For the high-cost assumptions, the Trustees project the DI cost rate to generally rise over the projection period, reaching 3.23 percent for 2086. The annual deficit is 0.73 percent in 2012 and rises to 1.34 percent for 2086.
Figure IV.B1 shows the patterns of the OASI and DI annual income rates and cost rates. The variation in income rates by alternative is very small, and, to simplify the presentation, figure
IV.B1 shows only the income rates for alternative II. Income rates generally increase slowly for each of the alternatives over the long-range period. Taxation of benefits, which is a relatively small portion of income, is the main source of both the increases in the income rate and the variation among the alternatives. Increases in income from taxation of benefits reflect: (1) increases in the total amount of benefits paid; and (2) the increasing share of individual benefits that will be subject to taxation because benefit taxation threshold amounts are not indexed.
Figure IV.B1 shows the patterns of the annual balances for OASI and DI. For each alternative and for historical data, the magnitude of each of the positive balances, as a percentage of taxable payroll, is the distance between the appropriate cost-rate curve and the income-rate curve above it. The magnitude of each of the deficits is the distance between the appropriate cost-rate curve and the income-rate curve below it. The pattern of the projected OASDI annual balances is important to the analysis of the financial condition of the Social Security program as a whole.
In the future, the costs of OASI, DI, and the combined OASDI programs as a percentage of taxable payroll are unlikely to fall outside the range encompassed by alternatives I and III because alternatives I and III define a wide range of demographic and economic conditions.
Long-range OASDI cost and income are generally expressed as percentages of taxable payroll. However, the Trustees also present cost and income as shares of
gross domestic product (GDP), the value of goods and services produced during the year in the United States. Under alternative II, the Trustees project the OASDI cost to rise from 5.01 percent of GDP for 2012 to a peak of 6.36 percent for 2035. Thereafter, OASDI cost as a percentage of GDP declines to a low of 6.03 percent for 2067 and then increases slowly thereafter, reaching a level of 6.10 percent by 2086. Appendix
F presents full estimates of income and cost relative to GDP.
The Trustees project the OASDI cost rate to increase through 2014 and then decrease slightly through 2017 as the economy recovers. The cost rate then rises rapidly between 2017 and 2035, primarily because the number of beneficiaries rises much more rapidly than the number of covered workers as the baby-boom generation retires. The baby-boom generation had lower fertility rates than their parents, and the Trustees expect those lower fertility rates to persist; therefore, the ratio of beneficiaries to workers will rise rapidly and reach a permanently higher level after the baby-boom generation retires. To account for increasing longevity, the Trustees project that the ratio of beneficiaries to workers will generally rise slowly thereafter. Table IV.B2 provides a comparison of the numbers of covered workers and beneficiaries.
|
|
|
|
Coveredworkers per OASDI beneficiary
|
OASDI beneficiaries per 100 covered workers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: 1. The number of beneficiaries does not include uninsured individuals who receive benefits under Section 228 of the Social Security Act. The General Fund of the Treasury reimburses the trust funds for the costs of most of these individuals.
2. Historical covered worker and beneficiary data are subject to revision.
3. Totals do not necessarily equal the sums of rounded components.
The effect of the demographic shift under the three alternatives on the OASDI cost rates is clear when one considers the projected number of OASDI beneficiaries per 100
covered workers. Compared to the 2011 level of 35 beneficiaries per 100 covered workers, the Trustees project that this ratio will rise to 49 by 2035 under the intermediate assumptions because the growth in beneficiaries greatly exceeds the growth in workers. By 2090, this projected ratio rises further under the intermediate and high-cost assumptions, reaching 52 under the intermediate assumptions and 68 under the high-cost assumptions. Under the low-cost assumptions, this ratio rises to 45 by 2035 and then declines, reaching a stable level of about 40 after 2070. Figure
IV.B2 shows beneficiaries per 100 covered workers.
For each alternative, the curve in figure IV.B2 is strikingly similar to the corresponding cost-rate curve in figure
IV.B1. This similarity emphasizes the extent to which the cost rate is determined by the age distribution of the
population. The cost rate is essentially the product of the number of beneficiaries and their average benefit, divided by the product of the number of covered workers and their average taxable earnings. For this reason, the pattern of the annual cost rates is similar to that of the annual ratios of beneficiaries to workers.
Table IV.B2 also shows the number of covered workers per OASDI beneficiary, which was about 2.9 for 2011. Under the low-cost assumptions, the Trustees project that this ratio will decline to 2.2 by 2035, and then generally rise throughout the remainder of the period, reaching 2.5 by 2090. Under the intermediate assumptions, this ratio declines generally throughout the long-range period, reaching 2.0 for 2035 and 1.9 by 2090. Under the high-cost assumptions, this ratio decreases steadily to 1.5 by 2090.
Trust fund ratios are useful indicators of the adequacy of the financial resources of the Social Security program. The trust fund ratio for a year is the assets in a fund at the beginning of a year (which do not include advance tax transfers) expressed as a percentage of the cost during the year. Under present law, the OASI and DI Trust Funds do not have the authority to borrow other than in the form of advance tax transfers, which are limited to expected taxes for the current calendar month. If either trust fund becomes exhausted during a year, then there would not be sufficient assets in the fund to pay the full amount of benefits scheduled for the year on a timely basis.
The trust fund ratio serves an additional important purpose in assessing the actuarial status of the program. If the trust fund ratio is positive throughout the period and is either level or increasing at the end of the period, then projected adequacy for the long-range period is likely to continue for subsequent reports. Under these conditions, the program has achieved sustainable solvency.
Table IV.B3 shows the Trustees’ projections of trust fund ratios by alternative, without regard to advance tax transfers that would be effected, for the separate and combined OASI and DI Trust Funds. The table also shows the years of trust fund exhaustion by alternative.
Under the intermediate assumptions, the Trustees project that the OASI Trust Fund ratio will decline from 390 percent at the beginning of the period, at first slowly, and then more rapidly, until the trust fund becomes exhausted in 2035. The DI trust fund ratio has been declining steadily since 2003, and continues to decline from 109 percent at the beginning of 2012 until the trust fund becomes exhausted in 2016.
The Trustees estimate that, under the intermediate assumptions, the trust fund ratio for the combined OASI and DI Trust Funds will decline from 340 percent at the beginning of 2012 until the combined funds become exhausted in 2033. This is three years earlier than the Trustees projected in last year’s report.
Under the intermediate assumptions, the Trustees project that OASDI cost will exceed non-interest income for the entire projection period. However, for the period 2012 through 2020, trust fund income, including interest income, is more than is needed to cover costs, so combined trust fund assets continue to grow. Beginning in 2021, combined trust fund assets diminish until assets are exhausted in 2033.
Under the low-cost assumptions, the trust fund ratio for the DI program increases from 2020 through the end of the long-range projection period, reaching the extremely high level of 1,289 percent for 2087. For the OASI program, the trust fund ratio declines slowly at first, and then more rapidly, until the trust fund becomes exhausted in 2054. For the combined OASDI program, the trust fund ratio declines to a low of 7 percent for 2076, and increases slightly thereafter, reaching 16 percent for 2087. Thus, under the low-cost assumptions, the DI program and the combined OASDI program achieve sustainable solvency. However, the trust fund ratio for each program falls below 25 percent for some years during the 75-year projection period.
In contrast, under the high-cost assumptions, the Trustees estimate that the OASI trust fund ratio will decline continually to fund exhaustion in 2029. The DI trust fund ratio declines from 107 percent for 2012 to fund exhaustion in 2015. The combined OASI and DI trust fund ratio declines from 338 percent for 2012 to fund exhaustion in 2027.
The Trustees project large, persistent annual deficits under all but the low-cost assumptions. It is highly likely that lawmakers will need to increase income, reduce program costs, or both, in order to prevent exhaustion of the trust funds. The stochastic projections discussed in appendix
E suggest that trust fund exhaustion is highly probable by mid-century.
Even under the high-cost assumptions, however, the combined OASI and DI Trust Fund assets on hand plus their estimated future income are sufficient to cover their combined cost until 2027. Under the intermediate assumptions, the combined starting funds plus estimated future income are sufficient to cover cost until 2033. The combined program is able to cover cost for the foreseeable future under the more optimistic low-cost assumptions. In the 2011 report, the Trustees projected that the combined trust funds would become exhausted in 2029 under the high-cost assumptions and in 2036 under the intermediate assumptions.
