2013 OASDI Trustees Report

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B. LONG-RANGE ESTIMATES
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 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 in assessing actuarial status include: (1) the level and year of maximum trust fund ratio; (2) the year of depletion of the fund reserves and the percent of scheduled benefits that is still payable after reserves are depleted; and (3) the stability of the trust fund ratio at the end of the long-range period.
Solvency at any point in time requires that sufficient financial resources are available to pay all scheduled benefits at that time. Solvency is generally indicated by a positive trust fund ratio. “Sustainable solvency” for the financing of the program under a specified set of assumptions has been achieved when the program has positive projected trust fund ratios throughout the 75‑year projection period that are either stable or rising at the end of the period.
Summarized measures for any period 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.
1. Annual Income Rates, Cost Rates, and Balances
The concepts of income rate and cost rate, expressed as percentages of taxable payroll, are important in the 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 any general fund transfers or reimbursements. 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 benefits, 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 10.89 percent of taxable payroll for 2013 to 11.39 percent for 2087. 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 fixed (not indexed), and therefore an increasing share of benefits will be subject to tax as incomes and benefits rise. The pattern of the cost rate is much different. The OASI cost rate increased from 11.04 percent of taxable payroll for 2011 to 11.33 percent for 2012. For 2013 and 2014, the Trustees project smaller increases in the cost rate, reaching levels of 11.51 and 11.63 percent of taxable payroll, respectively. From 2014 to 2016, the cost rate stabilizes, as the economic recovery through this period offsets the effects of the aging population. From 2016 to 2035, the cost rate rises rapidly because the retirement of the baby-boom generation will increase the number of beneficiaries much faster than the number of workers increases, as subsequent lower-birth-rate generations replace the baby-boom generation at working ages. From 2038 to 2050, the cost rate declines because the aging baby-boom generation is gradually replaced at retirement ages by historically low-birth-rate generations, causing the beneficiary-to-worker ratio to decline. After 2050, the Trustees project the OASI cost rate will generally rise, reaching 15.73 percent of taxable payroll for 2087, 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 temporary reductions in payroll tax rates in 2010 through 2012), 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 from 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 13.05 percent of payroll. Thereafter, the cost rate generally declines until it reaches 11.59 percent of payroll for 2087, at which point the income rate reaches 11.18 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. Thereafter, the cost rate continues to rise and reaches 22.17 percent of payroll for 2087, at which point the income rate reaches 11.73 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 3.61 percent of taxable payroll for 2038, then declines to 3.29 percent of taxable payroll for 2051, and generally rises thereafter, reaching 4.34 percent of taxable payroll for 2087.
Under the low-cost assumptions, the Trustees project the OASI annual balance to be negative in 2013-2015, positive for 2016 through 2018, and negative thereafter. The annual deficit peaks at 1.82 percent of taxable payroll for 2034 and then declines for most years thereafter, reaching a deficit of 0.41 percent of payroll for 2087. Under the high-cost assumptions, the OASI balance is negative throughout the projection period. Annual deficits rise to 2.03 percent for 2020, 6.21 percent for 2050, and 10.45 percent of payroll for 2087.
 
Income
rate a

a
Income rates include certain reimbursements from the General Fund of the Treasury.

b
The Trustees project the annual balance to be negative for a temporary period and return to positive levels before the end of the projection period.

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 2.46 percent for 2012 due to the recent economic recession. Under the intermediate assumptions, the Trustees project that the DI cost rate will decline from 2.46 percent for 2012 to 2.10 percent for 2020. From 2020 to 2040, the DI cost rate stays relatively stable and then increases to 2.28 percent for 2087. The income rate increases only very slightly from 1.80 percent of taxable payroll for 2013 to 1.85 percent for 2087. The projected annual deficit is 0.64 percent for 2013 and declines to 0.42 percent for 2087.
Under the low-cost assumptions, the DI cost rate declines from 2.46 percent of payroll for 2012 to 1.54 percent for 2040, and remains relatively stable thereafter, reaching 1.56 percent for 2087. The annual balance is negative for the first 7 years and is positive throughout the remainder of the long-range period. Under the high-cost assumptions, the DI cost rate generally rises from 2020 through the end of the projection period, reaching 3.19 percent for 2087. The annual deficit is 0.71 percent for 2013, 0.63 percent for 2020, and rises to 1.31 percent for 2087.
Figure IV.B1 shows the patterns of the OASI and DI annual cost rates. Annual DI cost rates rose substantially between 1990 and 2010 in large part due to: (1) aging of the working population as the baby-boom generation moved from ages 25-44 in 1990, where disability prevalence is low, to ages 45-64 in 2010, where disability prevalence is much higher; (2) a substantial increase in the percentage of women insured for DI benefits as a result of increased and more consistent rates of employment; and (3) increased disability incidence rates for women to a level similar to those for men by 2010. After 2010, all of these factors stabilize, and therefore the DI cost rate stabilizes also. Annual OASI cost rates follow a similar pattern to that for DI, but displaced 20 to 25 years later, because the baby-boom generation enters retirement ages 20 to 25 years after entering prime disability ages. Figure IV.B1 shows only the income rates for alternative II because the variation in income rates by alternative is very small. 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. Annual balances follow closely the pattern of annual cost rates after 1990 because the payroll tax rate does not change for the OASDI program, with only small variations in the allocation between DI and OASI. 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 most often 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 5.06 percent of GDP for 2013 to a peak of 6.23 percent for 2036. Thereafter, OASDI cost as a percentage of GDP declines to a low of 6.04 percent for 2052 and then generally increases slowly thereafter, reaching 6.20 percent by 2087. Appendix F presents full estimates of income and cost relative to GDP.
2. Comparison of Workers to Beneficiaries
Under the intermediate assumptions, the Trustees project the OASDI cost rate will increase through 2014 and then decrease 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 ratio of OASDI beneficiaries to workers is dominated by the OASI program because all workers eventually die or retire, but only a small minority become disabled. The trends described below are primarily due to demographic changes and thus affect the DI program roughly 20 years earlier than the OASI and OASDI programs. 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 OASDI beneficiaries to workers will rise rapidly and reach a permanently higher level after the baby-boom generation retires. Due to increasing longevity, 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.
 
Covered
workers a(in thousands)
Beneficiaries b (in thousands)

a
Workers who are paid at some time during the year for employment on which OASDI taxes are due.

b
Beneficiaries with monthly benefits in current-payment status as of June 30.

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 2012 level of 35 beneficiaries per 100 covered workers, the Trustees project that this ratio will rise to 48 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 67 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 2077. 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 2012. Under the low-cost assumptions, this ratio declines to 2.2 by 2035, and then generally rises 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 2.1 for 2035 and 1.9 by 2090. Under the high-cost assumptions, this ratio decreases steadily to 1.5 by 2090.
3. Trust Fund Ratios and Test of Long-Range Close Actuarial Balance
Trust fund ratios are critical indicators of the adequacy of the financial resources of the Social Security program. The trust fund ratio for a year is the amount of asset reserves in a fund at the beginning of a year expressed as a percentage of the cost for 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 reserves held in either trust fund become depleted during a year, and continuing tax revenues fall short of the cost of scheduled benefits, then full scheduled benefits would not be payable on a timely basis. For this reason, the trust fund ratio is the most critical financial measure.
The trust fund ratio serves an additional important purpose in assessing the actuarial status of the program. If the projected 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 reserve depletion and the percentage of scheduled benefits that would be payable thereafter, by alternative.
Under the intermediate assumptions, the OASI Trust Fund ratio consistently declines from 383 percent at the beginning of the period until the trust fund reserves become depleted in 2035, at which time 75 percent of scheduled benefits would be payable. The DI trust fund ratio has been declining steadily since 2003 (at first slowly and then more rapidly), and continues to decline from 85 percent at the beginning of 2013 until the trust fund reserves become depleted in 2016, at which time 80 percent of scheduled benefits would be payable.
Under the intermediate assumptions, the trust fund ratio for the combined OASI and DI Trust Funds declines from 330 percent at the beginning of 2013 until the combined fund reserves become depleted in 2033, at which time 77 percent of scheduled benefits would be payable. This is the same depletion year that was shown in last year’s report.
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 1,462 percent for 2088. For the OASI program, the trust fund ratio declines steadily, until the trust fund reserves become depleted in 2054, at which time 91 percent of scheduled benefits would still be payable. For the combined OASDI program, the trust fund ratio declines from 331 percent for 2013 until reserves become depleted in 2068, at which time 95 percent of scheduled benefits would still be payable. Thus, under the low-cost assumptions, only the DI program achieves sustainable solvency. However, the DI trust fund ratio falls below 25 percent for some early years of the 75-year projection period.
Under the high-cost assumptions, the OASI trust fund ratio declines continually until reserves become depleted in 2029, at which time 70 percent of scheduled benefits would still be payable. The DI trust fund ratio declines from 83 percent for 2013 until reserves become depleted in 2015, at which time 70 percent of scheduled benefits would still be payable. The combined OASI and DI trust fund ratio declines from 329 percent for 2013 until reserves become depleted in 2027, at which time 72 percent of scheduled benefits would still be payable.
The Trustees project trust fund reserve depletion within the 75-year projection period with the exception of the DI Trust Fund under the low-cost assumptions. It is therefore highly likely that lawmakers will need to increase income, reduce program costs, or both, in order to maintain solvency for the trust funds. The stochastic projections discussed in appendix E suggest that trust fund reserve depletion is highly probable by mid-century.
Even under the high-cost assumptions, however, the combined OASI and DI Trust Fund reserves on hand plus their estimated future income are sufficient to cover their combined cost until 2027. Under the intermediate and low-cost assumptions, the combined starting fund reserves plus estimated future income are sufficient to cover cost until 2033 and 2068, respectively. In the 2012 report, the Trustees projected that the combined trust fund reserves would become depleted in 2027 under the high-cost assumptions and in 2033 under the intermediate assumptions, but also projected that the combined trust fund reserves would remain positive and achieve sustainable solvency under the low-cost assumptions.