2002 OASDI Trustees Report 

Three financial measures are useful in assessing the actuarial status of the Social Security trust funds under the financing approach specified in current law: (1) annual income and cost rates, and balances, (2) trust fund ratios, and (3) actuarial balance. The first longrange estimates presented are the series of projected annual balances, which are the differences between the projected annual income rates and annual cost rates. In assessing the financial condition of the program, particular attention should be paid to the level of the annual balances at the end of the longrange period and the time at which the annual balances may change from positive to negative values. The next measure to be discussed is the pattern of projected trust fund ratios. The trust fund ratio represents the proportion of a year's projected outgo that can be paid with the funds available at the beginning of the year. Particular attention should be paid to the amount and year of maximum trust fund ratio, to the year of exhaustion of the funds, and to stability of the trust fund ratio in cases where the ratio remains positive at the end of the longrange period. The final measure discussed in this section is the actuarial balance, which summarizes the total income and expenditures over the valuation period and indicates whether projected income will be adequate. This section also includes a comparison of workers to beneficiaries, the longrange test of close actuarial balance, and the reasons for change in the actuarial balance from the last report.
If the 75year actuarial balance is zero (or positive) then the trust fund ratio at the end of the period, by definition, will be at 100 percent (or greater) and financing for the program is considered to be adequate for the 75year period. Whether or not financial adequacy is stable in the sense that it is likely to continue for subsequent 75year periods in succeeding reports is also important when considering the actuarial status of the program. One indication of this stability is the behavior of the trust fund ratio at the end of the projection period. If projected trust fund ratios for the last several years of the longrange period are constant or rising, then it is likely that subsequent Trustees' Reports will also show projections of financial adequacy (assuming no changes in demographic and economic assumptions).
Basic to the consideration of the longrange actuarial status of the trust funds are the concepts of income rate and cost rate, each of which is expressed as a percentage of taxable payroll. The annual income rate is the ratio of income from revenues (payroll tax contributions and income from the taxation of benefits) to the OASDI taxable payroll for the year. The OASDI taxable payroll consists of the total earnings which are subject to OASDI taxes, with some relatively small adjustments.^{1} Because the taxable payroll reflects these adjustments, the annual income rate can be defined to be the sum of the OASDI combined employeeemployer contribution rate (or the payrolltax rate) scheduled in the law and the rate of income from taxation of benefits (which is, in turn, expressed as a percentage of taxable payroll). As such, it excludes reimbursements from the General Fund of the Treasury for the costs associated with special monthly payments to certain uninsured persons who attained age 72 before 1968 and who have fewer than 3 quarters of coverage, and net investment income.
The annual cost rate is the ratio of the cost (or outgo, expenditures, or disbursements) of the program to the taxable payroll for the year. In this context, the outgo is defined to include benefit payments, special monthly payments to certain uninsured persons who have 3 or more quarters of coverage (and whose payments are therefore not reimbursable from the General Fund of the Treasury), administrative expenses, net transfers from the trust funds to the Railroad Retirement program under the financialinterchange provisions, and payments for vocational rehabilitation services for disabled beneficiaries. For any year, the income rate minus the cost rate is referred to as the balance for the year. (In this context, the term balance does not represent the assets of the trust funds, which are sometimes referred to as the balance in the trust funds.)
Table IV.B1 presents a comparison of the estimated annual income rates and cost rates by trust fund and alternative. Detailed longrange projections of trust fund operations, in nominal dollar amounts, are shown in table VI.E9.
The projections for OASI under the intermediate assumptions show the income rate increasing slowly and steadily due to the combination of the flat payroll tax rate and the gradually increasing effect of the taxation of benefits. The pattern of the cost rate is much different. It is projected to remain fairly stable for the next several years. However, from about 2010 to 2030 the cost rate increases rapidly as the babyboom generation reaches retirement age. After 2030 the cost rate rises less rapidly through 2037 and then declines slightly for the next 9 years as the babyboom generation ages and begins to diminish and the relatively small birth cohorts of the late 1970s reach retirement age. Thereafter, the cost rate rises steadily, but slowly, reflecting projected reductions in death rates and continued relatively low birth rates, reaching 17.18 percent of taxable payroll for 2076. The income rate under the intermediate assumptions also rises, reaching 11.54 percent of taxable payroll for 2076.
Projected income rates under the low cost and high cost sets of assumptions are very similar to those projected for the intermediate assumptions as they are largely a reflection of the tax rates specified in the law. OASI cost rates for the low cost and high cost assumptions differ significantly from those projected for the intermediate assumptions, but follow generally similar patterns. For the low cost assumptions, the cost rate declines somewhat for the first 5 years, and then rises, reaching the current level around 2013 and a peak of 13.35 percent of payroll for 2034. The cost rate then declines gradually, reaching a level of 12.42 percent of payroll for 2076. For the high cost assumptions, the cost rate rises generally throughout the 75year period. It rises at a relatively fast pace between 2010 and 2030 because of the aging of the babyboom generation. During the third 25year subperiod, the projected cost rate continues rising and reaches 24.76 percent of payroll for 2076.
The projected pattern of the OASI annual balance is important in the analysis of the financial condition of the program. Under the intermediate assumptions the annual balance is positive for 16 years (through 2017) and is negative thereafter. This annual deficit rises rapidly, reaching over 2 percent of taxable payroll by 2024, and continues rising thereafter, to a level of 5.64 percent of taxable payroll for 2076.
Under the low cost assumptions the projected OASI annual balance is positive for 19 years (through 2020) and thereafter is negative. The deficit under the low cost assumptions rises to a peak of 2.08 percent of taxable payroll for 2034, but declines over the next 15 to 20 years, as the effect of the babyboom generation diminishes and the assumed higher fertility rates increase the size of the work force. The deficit under the low cost assumptions remains fairly stable over the period 2051 through 2076. Under the high cost assumptions, however, the OASI balance is projected to be positive for only 13 years (through 2014) and to be negative thereafter, with a deficit of 2.12 percent for 2020, 7.78 percent for 2050, and 12.81 percent of payroll for 2076.
^{1} Income rates for DI in 2000 and for OASI in 2002 are modified to include adjustments to the lumpsum payments received in 1983 from the General Fund of the Treasury for the cost of noncontributory wage credits for military service in 194056. 
Notes:
1. The income rate excludes interest income and certain transfers from the General Fund of the Treasury.
2. Totals do not necessarily equal the sums of rounded components.
Under the intermediate assumptions, the cost rate for DI generally increases over the longrange period from 1.67 percent of taxable payroll for 2002, reaching 2.65 for 2076. The income rate increases only very slightly from 1.82 percent of taxable payroll for 2002 to 1.87 percent for 2076. The annual balance turns negative in 2009, and the annual deficit reaches 0.78 percent for 2076.
Under the low cost assumptions, the DI cost rate increases much less, reaching 1.82 percent for 2076, with a positive annual balance throughout the period. For the high cost assumptions, DI cost rises much more, reaching 3.75 percent for 2076, with an annual deficit beginning in 2005 and reaching 1.85 percent for 2076.
Also of interest are the annual income rate, cost rate, and balance for the OASDI program. These rates are shown in table IV.B1 and are discussed in section II.D.
Figure IV.B1 shows in graphical form the patterns of the OASI and DI annual income rates and cost rates. (The combined OASI and DI rates are shown in figure II.D2 on page 13.) The income rates shown here are only for alternative II in order to simplify the graphical presentation and because, as shown in table IV.B1, the variation in the income rates by alternative is very small. Income rates increase generally, but at a slow rate for each of the alternatives over the longrange period. Both increases in the income rate and variation among the alternatives result from the relatively small component of income from taxation of benefits. Increases in income from taxation of benefits reflect increases in the total amount of benefits paid and the fact that an increasing share of individual benefits will be subject to taxation, because benefit taxation threshold amounts are not indexed.
The patterns of the annual balances for OASI and DI are indicated in figure IV.B1. For each alternative, the magnitude of each of the positive balances in the early years, as a percent of taxable payroll, is represented by the distance between the appropriate costrate curve and the incomerate curve above it. The magnitude of each of the deficits in subsequent years is represented by the distance between the appropriate costrate curve and the incomerate curve below it.
In the future, the cost of OASI, DI and the combined OASDI program as a percent of taxable payroll will not necessarily be within the range encompassed by alternatives I and III. Nonetheless, because alternatives I and III define a reasonably wide range of demographic and economic conditions, the resulting estimates delineate a reasonable range for consideration of potential future program costs.

The cost of the OASDI program has been discussed in this section in relation to taxable payroll, which is a programrelated concept that is very useful in analyzing the financial status of the OASDI program. The cost can also be discussed in relation to broader economic concepts, such as the gross domestic product (GDP). OASDI outlays generally rise from about 4.5 percent of GDP currently to about 7.0 percent of GDP by the end of the 75year projection period under alternative II. Discussion of both the cost and the taxable payroll of the OASDI program in relation to GDP is presented in appendix VI.E.2 beginning on page 162.
The primary reason that the estimated OASDI cost rate increases rapidly after 2010 is that the number of beneficiaries is projected to increase more rapidly than the number of covered workers. This occurs because the relatively large number of persons born during the babyboom generation will reach retirement age, and begin to receive benefits, while the relatively small number of persons born during the subsequent period of low fertility rates will comprise the labor force. A comparison of the numbers of covered workers and beneficiaries is shown in table IV.B2.
Calendar year 
Beneficiaries ^{2} (in thousands) 


46,390 
1,106 
— 
1,106 
41.9 
2 

48,280 
2,930 
— 
2,930 
16.5 
6 

65,200 
7,563 
— 
7,563 
8.6 
12 

72,530 
13,740 
522 
14,262 
5.1 
20 

80,680 
18,509 
1,648 
20,157 
4.0 
25 

93,090 
22,618 
2,568 
25,186 
3.7 
27 

100,200 
26,998 
4,125 
31,123 
3.2 
31 

113,649 
30,384 
4,734 
35,118 
3.2 
31 

120,565 
32,776 
3,874 
36,650 
3.3 
30 








133,672 
35,266 
4,204 
39,470 
3.4 
30 

132,969 
35,785 
4,388 
40,172 
3.3 
30 

133,890 
36,314 
4,716 
41,029 
3.3 
31 

136,117 
36,758 
5,083 
41,840 
3.3 
31 

138,192 
37,082 
5,435 
42,516 
3.3 
31 

141,017 
37,376 
5,731 
43,108 
3.3 
31 

143,405 
37,521 
5,977 
43,498 
3.3 
30 

146,125 
37,705 
6,087 
43,793 
3.3 
30 

148,936 
37,826 
6,250 
44,076 
3.4 
30 

151,403 
37,934 
6,433 
44,367 
3.4 
29 

153,682 
38,560 
6,606 
45,166 
3.4 
29 

153,477 
38,888 
6,780 
45,668 
3.4 
30 

157,530 
40,091 
8,008 
48,099 
3.3 
31 

165,443 
43,483 
9,382 
52,865 
3.1 
32 

169,688 
49,767 
10,253 
60,020 
2.8 
35 

172,848 
57,627 
11,071 
68,699 
2.5 
40 

175,421 
65,270 
12,095 
77,365 
2.3 
44 

178,131 
71,638 
12,432 
84,070 
2.1 
47 

181,247 
75,603 
12,579 
88,183 
2.1 
49 

184,433 
77,135 
12,933 
90,068 
2.0 
49 

187,274 
78,284 
13,647 
91,931 
2.0 
49 

189,845 
79,934 
14,175 
94,109 
2.0 
50 

192,259 
82,469 
14,603 
97,072 
2.0 
50 

194,568 
85,372 
14,804 
100,177 
1.9 
51 

196,739 
88,352 
15,067 
103,419 
1.9 
53 

198,687 
91,377 
15,346 
106,723 
1.9 
54 

200,496 
94,275 
15,621 
109,896 
1.8 
55 

202,238 
97,031 
15,864 
112,895 
1.8 
56 

159,607 
40,061 
7,666 
47,728 
3.3 
30 

168,537 
43,327 
8,476 
51,803 
3.3 
31 

173,879 
49,227 
8,772 
57,999 
3.0 
33 

178,067 
56,616 
9,146 
65,761 
2.7 
37 

181,816 
63,721 
9,793 
73,515 
2.5 
40 

186,123 
69,384 
9,980 
79,364 
2.3 
43 

191,449 
72,516 
10,084 
82,600 
2.3 
43 

197,455 
73,258 
10,395 
83,653 
2.4 
42 

203,738 
73,825 
11,002 
84,827 
2.4 
42 

210,106 
75,121 
11,487 
86,608 
2.4 
41 

216,708 
77,431 
11,928 
89,359 
2.4 
41 

223,660 
80,096 
12,247 
92,343 
2.4 
41 

230,978 
82,743 
12,673 
95,416 
2.4 
41 

238,407 
85,505 
13,183 
98,688 
2.4 
41 

245,909 
88,462 
13,729 
102,191 
2.4 
42 

253,476 
91,724 
14,265 
105,989 
2.4 
42 

156,053 
40,120 
8,602 
48,723 
3.2 
31 

162,486 
43,643 
10,604 
54,247 
3.0 
33 

166,055 
50,322 
11,900 
62,222 
2.7 
37 

168,462 
58,744 
13,086 
71,830 
2.3 
43 

170,164 
67,075 
14,475 
81,550 
2.1 
48 

171,607 
74,378 
14,958 
89,336 
1.9 
52 

172,913 
79,463 
15,146 
94,609 
1.8 
55 

173,756 
82,102 
15,542 
97,644 
1.8 
56 

173,698 
84,204 
16,367 
100,571 
1.7 
58 

173,069 
86,603 
16,938 
103,541 
1.7 
60 

172,007 
89,735 
17,334 
107,069 
1.6 
62 

170,564 
93,210 
17,365 
110,575 
1.5 
65 

168,667 
96,803 
17,387 
114,189 
1.5 
68 

166,391 
100,331 
17,313 
117,644 
1.4 
71 

163,912 
103,438 
17,183 
120,622 
1.4 
74 

161,387 
105,956 
17,006 
122,961 
1.3 
76 
^{1} Workers who are paid at some time during the year for employment on which OASDI taxes are due. ^{2} Beneficiaries with monthly benefits in currentpayment status as of June 30. 
Notes:
1. The number of beneficiaries does not include certain uninsured persons, most of whom both attained age 72 before 1968 and have fewer than 3 quarters of coverage, in which cases the costs are reimbursed by the General Fund of the Treasury. Totals do not necessarily equal the sums of rounded components.
2. Historical covered worker data are subject to revision.
Table IV.B2 shows that the number of covered workers per beneficiary, which was about 3.4 in 2001, is estimated to decline in the future. Based on the low cost assumptions, for which high fertility rates and small reductions in death rates are assumed, the ratio declines to 2.3 by 2030, and then rises back to a level of 2.4 by 2040. Based on the high cost assumptions, for which low fertility rates and large reductions in death rates are assumed, the decline is much greater, reaching 1.8 by 2034, and 1.4 workers per beneficiary by 2068. Based on the intermediate assumptions, the ratio declines to 2.1 by 2029, and 1.9 workers per beneficiary by 2059.
The impact of the demographic shifts under the three alternatives on the OASDI cost rates is better understood by considering the projected number of beneficiaries per 100 workers. As compared to the 2001 level of 30 beneficiaries per 100 covered workers, this ratio is estimated to rise significantly by 2080 to 42 under the low cost assumptions, 56 under the intermediate assumptions, and 76 under the high cost assumptions. The significance of these numbers can be seen by comparing figure IV.B1 to figure IV.B2.

For each alternative, the shape of the curve in figure IV.B2, which shows beneficiaries per 100 covered workers, is strikingly similar to that of the corresponding costrate curve in figure IV.B1, thereby emphasizing the extent to which the cost of the OASDI program as a percentage of taxable payroll is determined by the age distribution of the population. Because the cost rate is basically 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 (and because average benefits rise at about the same rate as average earnings), it is to be expected that the pattern of the annual cost rates is similar to that of the annual ratios of beneficiaries to workers. A graphical presentation of covered workers per beneficiary is shown in figure II.D3 on page 14 of the Overview.
Trust fund ratios are useful indicators of the adequacy of the financial resources of the Social Security program at any point in time. For any year in which the projected trust fund ratio is positive (i.e., the trust fund holds assets at the beginning of the year), but is not positive for the following year, the trust fund is projected to become exhausted during the year. Under present law, the OASI and DI Trust Funds do not currently have the authority to borrow. Therefore, exhaustion of the assets in either fund during a year, would mean there are no longer sufficient funds to cover the full amount of benefits payable under present law.
The trust fund ratio also serves an additional important purpose in assessing the actuarial status of the program. When the financing is adequate for the timely payment of full benefits throughout the longrange period, the stability of the trust fund ratio toward the end of the period indicates the likelihood that this projected adequacy will continue for subsequent Trustees' Reports. If the trust fund ratio toward the end of the period is level (or increasing) then projected adequacy for the longrange period is likely to continue for subsequent reports.
Table IV.B3 shows, by alternative, the estimated trust fund ratios (without regard to advance tax transfers that would be effected after the end of the 10year, shortrange period) for the separate and combined OASI and DI Trust Funds. Also shown in this table is the first year in which a fund is estimated to be exhausted, reflecting the effect of the provision for advance tax transfers. The patterns of the OASI and DI trust fund ratios, over the 75year period, are shown graphically in figure IV.B3 for all three sets of assumptions. A graphical presentation of the combined OASDI ratios is shown in figure II.D4 on page 15.
Based on the intermediate assumptions, the OASI trust fund ratio rises steadily from 272 percent at the beginning of 2002, reaching a peak of 522 percent at the beginning of 2015. This increase in the OASI trust fund ratio results from the fact that the annual income rate (which excludes interest) exceeds annual outgo for several years (see table IV.B1). Thereafter, the OASI trust fund ratio declines steadily, with the OASI Trust Fund becoming exhausted in 2043. The DI trust fund ratio follows a pattern that is similar but unfolds more rapidly. The DI trust fund ratio is estimated to rise from 197 percent at the beginning of 2002 to a peak of 246 percent for 2007, and to decline thereafter until becoming exhausted in 2028.
The trust fund ratio for the combined OASI and DI Trust Funds rises from 261 percent for 2002 to a peak of 471 percent at the beginning of 2015. Thereafter, the ratio declines, with the combined funds becoming exhausted in 2041. Based on the intermediate estimates in last year's report, the peak fund ratio for the combined funds was estimated to be 436 percent for 2014 and the year of exhaustion was estimated to be 2038.
The trust fund ratio for the OASDI program first declines in 2016, about 1 year before annual expenditures begin to exceed noninterest income. This occurs because the increase in trust fund assets during 2015, which reflects interest income and a small excess of noninterest income over cost, occurs at a slower rate than does the increase in the annual cost of the program between 2015 and 2016.
After 2015 the dollar amount of assets is projected to continue to rise through the beginning of 2027 because interest income more than offsets the shortfall in noninterest income. Beginning in 2017, the OASDI program is projected to experience increasingly large cashflow shortfalls that will require the trust funds to redeem special publicdebt obligations of the General Fund of the Treasury. This will differ from the experience of recent years when the trust funds have been net lenders to the General Fund of the Treasury. The change in the cash flow between the trust funds and the general fund is expected to have important public policy and economic implications that go well beyond the operation of the OASDI program itself. Discussion of these issues is outside the scope of this report.
Based on the low cost assumptions, the trust fund ratio for the DI program increases throughout the longrange projection period, reaching the extremely high level of 1,459 percent for 2077. At the end of the longrange period, the DI trust fund ratio is rising by 20 percentage points per year. Thus, subsequent reports are likely to contain projections of adequate longrange financing of the DI program under a similar optimistic set of assumptions. For the OASI program, the trust fund ratio rises to a peak of 633 percent for 2018, dropping thereafter to a level of 377 percent by 2077. At the end of the period the OASI trust fund ratio is declining by 4 percentage points per year. The long term outlook for the DI program is improved more than for the OASI program largely because lower assumed disability incidence rates have a substantial effect on the DI program but little net effect on the OASI program. For the OASDI program, the trust fund ratio follows a pattern similar to that for OASI, peaking at 614 percent for 2019, and then falling to 515 percent for 2043. However, after 2043 the combined OASI and DI trust fund ratio stays about level, with a value of 515 percent for 2077, with an annual decline at a rate of 1 percentage point. Thus, due to the size of the trust fund ratios and their near stability, subsequent Trustees' Reports are likely to contain projections of adequate longrange financing of the OASI and combined OASI and DI program under the low cost assumptions. A stable trust fund ratio at the end of the valuation period indicates that the actuarial balance for Trustees' Reports in subsequent years can be expected to remain about the same as long as assumptions are realized.
In contrast, under the high cost assumptions, the OASI trust fund ratio is estimated to peak at 425 percent for 2013, thereafter declining to fund exhaustion by the end of 2032. The DI trust fund ratio is estimated to peak at 205 percent for 2004, thereafter declining to fund exhaustion by the end of 2015. The combined OASDI trust fund ratio is estimated to rise to a peak of 359 percent for 2012, declining thereafter to fund exhaustion by the end of 2029.
Thus, because the high ultimate cost rates are projected under all but the low cost assumptions, it is likely that income will eventually need to be increased and/or program costs will need to be reduced in order to prevent the trust funds from becoming exhausted.
Even under the high cost assumptions, however, the combined OASI and DI funds on hand plus their estimated future income would be able to cover their combined expenditures for 27 years into the future (until 2029). Under the intermediate assumptions the combined starting funds plus estimated future income would be able to cover expenditures for about 39 years into the future (until 2041). The program would be able to cover expenditures for the indefinite future under the more optimistic low cost assumptions. In the 2001 report, the combined trust funds were projected to be exhausted in 2027 under the high cost assumptions and in 2038 under the intermediate assumptions.
^{1} The trust fund is estimated to be exhausted by the beginning of this year. The last line of the table shows the specific year of trust fund exhaustion. ^{2} The fund is not estimated to be exhausted within the projection period. 
Note: See definition of trust fund ratio on page 197. The combined ratios shown for years after the DI fund is estimated to be exhausted are theoretical and are shown for informational purposes only.
A graphic illustration of the trust fund ratios for the separate OASI and DI Trust Funds is shown in figure IV.B3 for each of the alternative sets of assumptions. A graphic illustration of the trust fund ratios for the combined trust funds is shown in figure II.D4.

Summarized values for the full 75year period are useful in analyzing the longrange adequacy of financing for the program over the period as a whole under present law and under proposed modifications to the law. In order to focus on the full 75year period as well as on broad patterns through the period, tables IV.B4 and IV.B5 summarize, on a presentvalue basis, the projected annual figures shown in table IV.B1 for various periods within the overall 75year projection period.
Table IV.B4 shows rates on a presentvalue basis summarized for each of the 25year subperiods, excluding both the assets of the trust funds on hand at the beginning of the period and the cost of accumulating a target trust fund balance by the end of the period. These rates are useful for comparing the total cash flows of tax income and expenditures, as an indicator of the degree to which tax income during the period is sufficient to meet the outgo estimated for the period.
For the OASDI program, a positive balance is projected for the first 25year subperiod under both the low cost and intermediate assumptions. A deficit is projected for the first 25year subperiod under the high cost assumptions. Deficits are projected for the second and third subperiods under all three alternatives.
Subperiod 
OASI 

DI 

Combined 


11.03 
10.45 
0.58 

1.84 
1.96 
0.13 

12.87 
12.42 
0.45 

11.38 
15.19 
3.81 

1.86 
2.41 
.55 

13.24 
17.60 
4.36 

11.48 
16.24 
4.77 

1.87 
2.61 
.74 

13.34 
18.85 
5.51 

11.00 
9.76 
1.24 

1.83 
1.63 
.20 

12.83 
11.39 
1.44 

11.26 
12.93 
1.67 

1.84 
1.76 
.08 

13.10 
14.69 
1.59 

11.27 
12.40 
1.13 

1.85 
1.80 
.05 

13.11 
14.20 
1.09 

11.07 
11.34 
.27 

1.84 
2.37 
.53 

12.92 
13.71 
.80 

11.53 
18.05 
6.52 

1.88 
3.17 
1.29 

13.41 
21.21 
7.81 

11.78 
21.94 
10.15 

1.90 
3.65 
1.76 

13.68 
25.59 
11.91 
^{1} Income rates do not include beginning trust fund balances and cost rates do not include the cost of accumulating target trust fund balances. 
Note: Totals do not necessarily equal the sums of rounded components.
Table IV.B5 shows summarized rates for valuation periods of the first 25, the first 50, and the entire 75 years of the longrange projection period, including the funds on hand at the start of the period and the cost of accumulating a target trust fund balance equal to 100 percent of annual expenditures by the end of the period. The actuarial balance for each of these three valuation periods is equal to the difference between the summarized income rate and the summarized cost rate for the corresponding period. An actuarial balance of zero for any period would indicate that estimated outgo for the period could be met, on average, with a remaining trust fund balance at the end of the period equal to 100 percent of the following year's outgo. A negative actuarial balance indicates that, over the next 75 years, the present value of income to the program plus the existing trust fund falls short of the present value of expenditures by the program plus the cost of reaching a target trust fund balance of 1 year's expenditures by the end of the period—deficits for some years within the period are not fully offset by surpluses in other years. Combined with a falling trust fund ratio, this signals the possibility of continuing cashflow deficits, implying that the currentlaw level of financing is not sustainable.
Valuation period 
OASI 

DI 

Combined 


12.22 
10.93 
1.29 

1.99 
2.04 
0.05 

14.21 
12.98 
1.24 

11.88 
12.59 
.71 

1.94 
2.18 
.24 

13.82 
14.77 
.95 

11.79 
13.33 
1.54 

1.92 
2.26 
.34 

13.72 
15.59 
1.87 

12.19 
10.18 
2.01 

1.98 
1.69 
.29 

14.17 
11.87 
2.30 

11.81 
11.21 
.60 

1.93 
1.71 
.22 

13.74 
12.92 
.82 

11.69 
11.43 
.26 

1.91 
1.72 
.19 

13.60 
13.16 
.44 

12.28 
11.89 
.39 

2.00 
2.48 
.47 

14.28 
14.36 
.09 

11.97 
14.38 
2.41 

1.95 
2.75 
.80 

13.92 
17.13 
3.21 

11.93 
15.95 
4.02 

1.94 
2.93 
.99 

13.87 
18.87 
5.00 
^{1} Income rates include beginning trust fund balances and cost rates include the cost of reaching a target trust fund level of 1 year's expenditures at the end of the period. 
Note: Totals do not necessarily equal the sums of rounded components.
The values in table IV.B5 show that the combined OASDI program is expected to operate with a positive actuarial balance over the 25year valuation period under the low cost and intermediate assumptions. For the 25year valuation period the summarized values indicate actuarial balances of 2.30 percent of taxable payroll under the low cost assumptions, 1.24 percent under the intermediate assumptions, and 0.09 percent under the high cost assumptions. Thus, the program is more than adequately financed for the 25year valuation period under all but the high cost projections. For the 50year valuation period the OASDI program would have a positive actuarial balance of 0.82 percent under the low cost assumptions, but would have deficits of 0.95 percent under the intermediate assumptions and 3.21 percent under the high cost assumptions. Thus, the program is more than adequately financed for the 50year valuation period under only the low cost set of assumptions.
For the entire 75year valuation period, the combined OASDI program would again have actuarial deficits except under the low cost set of assumptions. The actuarial balance for this longrange valuation period is projected to be 0.44 percent of taxable payroll under the low cost assumptions, 1.87 percent under the intermediate assumptions, and 5.00 percent under the high cost assumptions.
Assuming the Trustees' intermediate assumptions are realized, the deficit of 1.87 percent of payroll indicates that financial adequacy of the program for the next 75 years could be restored if the Social Security payroll tax were immediately and permanently increased from its current level of 12.4 percent (combined employeeemployer shares) to 14.27 percent. Alternatively, all current and future benefits could be reduced by about 13 percent (or there could be some combination of tax increases and benefit reductions). Changes of this magnitude would be sufficient to eliminate the actuarial deficit over the 75year projection period. However, because of the projected increase in the average age of the population, projected annual deficits begin in 2017 and increase to levels in excess of 6 percent of taxable payroll by the end of the 75year period. The large annual deficits at the end of the projection period indicate that the annual cost will very likely continue to exceed tax revenues after 2076. As a result, ensuring the sustainability of the system would eventually require larger changes than those needed to restore actuarial balance for the 75year period.
As may be concluded from tables IV.B4 and IV.B5, the financial condition of the DI program is substantially weaker than that of the OASI program for the first 25 years. Summarized over the full 75year period, however, longrange deficits for the OASI and DI programs under intermediate assumptions are more similar, relative to the level of program costs.
The longrange test of close actuarial balance applies to a set of valuation periods beginning with the first 10 years and continuing through the first 11 years, the first 12 years, etc., up to and including the full 75year projection period. Under the longrange test, the summarized income rate and cost rate are calculated for each of the 66 valuation periods in the full 75year longrange projection period, with the first of these periods consisting of the next 10 years. Each succeeding period becomes longer by 1 year, culminating with the period consisting of the next 75 years. The longrange test is met if, for each of the 66 time periods, the actuarial balance is not less than zero or is negative by, at most, a specified percentage of the summarized cost rate for the same time period. The percentage allowed for a negative actuarial balance is 5 percent for the full 75year period. For shorter periods, the allowable percentage begins with zero for the first 10 years and increases uniformly for longer periods, until it reaches the maximum percentage of 5 percent allowed for the 75year period. The criterion for meeting the test is less stringent for the longer periods in recognition of the greater uncertainty associated with estimates for more distant years.
When a negative actuarial balance in excess of the allowable percentage of the summarized cost rate is projected for one or more of the 66 separate valuation periods, the program fails the longrange test of close actuarial balance. Being out of close actuarial balance indicates that the program is expected to experience financial problems in the future and that ways of improving the financial status of the program should be considered. The sooner the actuarial balance is less than the minimum allowable balance, expressed as a percentage of the summarized cost rate, the more urgent is the need for corrective action. However, it is recognized that necessary changes in program financing or benefit provisions should not be put off until the last possible moment if future beneficiaries and workers are to effectively plan for their retirement.
Table IV.B6 presents a comparison of the estimated actuarial balances with the minimum allowable balance (or maximum allowable deficit) under the longrange test, each expressed as a percentage of the summarized cost rate, based on the intermediate estimates. Values are shown for only 14 of the valuation periods: those of length 10 years, 15 years, and continuing in 5year increments through 75 years. However, each of the 66 periodsthose of length 10 years, 11 years, and continuing in 1year increments through 75 yearsis considered for the test. These minimum allowable balances are calculated to show the limit for each valuation period resulting from the graduated tolerance scale. The patterns in the estimated balances as a percentage of the summarized cost rates, as well as that for the minimum allowable balance, are presented graphically in figure IV.B4 for the OASI, DI and combined OASDI program. Values shown for the 25year, 50year, and 75year valuation periods correspond to those presented in table IV.B5.
For the OASI program, the estimated actuarial balance as a percentage of the summarized cost rate exceeds the minimum allowable for valuation periods of length 10 years through 41 years, under the intermediate estimates. For valuation periods of length greater than 41 years, the estimated actuarial balance is less than the minimum allowable. For the full 75year longrange period the estimated actuarial balance reaches 11.52 percent of the summarized cost rate, for a shortfall of 6.52 percent, from the minimum allowable balance of 5.0 percent of the summarized cost rate. Thus, although the OASI program satisfies the shortrange test of financial adequacy (as discussed earlier on page 33), it is not in longrange close actuarial balance.
For the DI program, the estimated actuarial balance as a percentage of the summarized cost rate exceeds the minimum allowable balance for valuation periods of length 10 through 23 years under the intermediate estimates. For valuation periods of length greater than 23 years, the estimated actuarial balance is less than the minimum allowable. For the full 75year longrange period the estimated actuarial balance reaches 14.95 percent of the summarized cost rate, for a shortfall of 9.95 percent, from the minimum allowable balance of 5.0 percent of the summarized cost rate. Thus, the DI program, although meeting the shortrange test of financial adequacy, is not in longrange close actuarial balance.
Financing for the DI program is much less adequate than for the OASI program during the first 25 years even though longrange actuarial deficits are more comparable over the entire 75year period. This occurs because much more of the increase in the longrange cost due to the aging of the large babyboom generation occurs earlier for the DI program than for the OASI program. As a result, tax rates that are relatively more adequate for the OASI program during the first 25 years become relatively less adequate later in the longrange period.
For the OASDI program, the estimated actuarial balance as a percentage of the summarized cost rate exceeds the minimum allowable balance for valuation periods of length 10 years through 38 years. For valuation periods of length greater than 38 years, the estimated actuarial balance is below the minimum allowable balance. The size of the shortfall from the minimum allowable balance rises gradually, reaching 7.02 percent of the summarized cost rate for the full 75year longrange valuation period. Thus, although the OASDI program satisfies the shortrange test of financial adequacy, it is out of longrange close actuarial balance.
The OASI and DI programs, both separate and combined, were also found to be out of close actuarial balance in last year's report. The estimated deficits for the OASI, DI, and combined OASDI program in this report are similar to those shown in last year's report.
Note: Totals do not necessarily equal the sums of rounded components.

Annual income rates and their components are shown in table IV.B7 for each alternative set of assumptions. The annual income rates reflect the scheduled payroll tax rates and the projected income from the taxation of benefits expressed as a percentage of taxable payroll. (Increasing income from taxation of benefits reflects rising benefit and income levels and the fact that benefittaxation threshold amounts are not indexed.)
Summarized income and cost rates, along with their components, are presented in table IV.B8 for 25year, 50year, and 75year valuation periods. Summarized income rates include the starting trust fund balance in addition to the components included in the annual income rates. The summarized cost rates include the cost of reaching a target trust fund of 100 percent of annual expenditures at the end of the period in addition to the expenditures included in the annual cost rates.
It may be noted that the payroll tax income expressed as a percentage of taxable payroll is slightly smaller than the actual tax rates in effect for each period. This results from the fact that all OASDI income and outgo amounts presented in this report are computed on a cash basis, i.e., amounts are attributed to the year in which they are actually received by, or expended from, the fund, while taxable payroll is allocated to the year in which earnings are paid. Because earnings are paid to workers before the corresponding payroll taxes are credited to the funds, payroll tax income for a particular year reflects a combination of the taxable payrolls from that year and from prior years, when payroll was smaller. Dividing payroll tax income by taxable payroll for a particular year, or period of years, will thus generally result in an income rate that is slightly less than the applicable tax rate for the period.
Values shown in the table below for income from taxation of benefits for years 2015 and later are about 10 percent higher than values estimated for last year's report. See section IV.B.7 for a discussion of the methodological change that resulted in this increase.
Note: Totals do not necessarily equal the sums of rounded components.
Note: Totals do not necessarily equal the sums of rounded components.
Reasons for changes from last year's report to this report in the longrange actuarial balance under the intermediate assumptions are itemized in table IV.B9. Also shown are the estimated effects associated with each reason for change.
Item 


11.68 
1.90 
13.58 

13.21 
2.23 
15.44 

1.53 
.33 
1.86 

.00 
.00 
.00 

Valuation period ^{1} 
.06 
.01 
.07 

.04 
.01 
.05 

+.11 
+.01 
+.12 

.00 
+.03 
+.03 

.01 
.03 
.04 

.00 
.01 
.01 

1.54 
.34 
1.87 

11.79 
1.92 
13.72 

13.33 
2.26 
15.59 
^{1} In changing from the valuation period of last year's report, which was 200175, to the valuation period of this report, 200276, the relatively large negative annual balance for 2076 is included. This results in a larger longrange actuarial deficit. The fund balance at the end of 2001, i.e., at the beginning of the projection period, is included in the 75year actuarial balance. 
Note: Totals do not necessarily equal the sums of rounded components.
Two legislative changes have been enacted since the last report that affect the financing of the Social Security program (see section III.B). The first change eliminates deemed wage credits for members of the uniformed armed services for all years after 2001. The second change is the reduction in marginal rates for Federal personal income taxes over the period 200110. This change will reduce the amount of revenue transferred from the General Fund of the Treasury to the trust funds based on taxation of benefits for these years. The combined effect of these changes is estimated to increase the OASDI actuarial deficit by a negligible amount (less than 0.005 percent of taxable payroll).
In changing from the valuation period of last year's report, which was 200175, to the valuation period of this report, 200276, the relatively large negative annual balance for 2076 is included. This results in a larger longrange actuarial deficit. (Note that the fund balance at the end of 2001, i.e., at the beginning of the projection period, is included in the 75year actuarial balance.)
Ultimate demographic assumptions are unchanged except for the effect of modifications in the projection of death rates. Death rates were modified from last year's report in four ways. The first modification was to update mortality data for 1999, resulting in higher death rates for that year than were estimated in the 2001 report. The second modification was to consolidate several causeofdeath categories that have become increasingly less significant into the other causeofdeath category. This reduces the number of such categories considered from 11 to 7. The third modification was to revise the historical time period used to determine the initial rates of change in death rates, replacing the average experience since 1968 with the average experience of the last 20 years. The fourth modification was to accelerate the transition from the initial rates of change in death rates to the ultimate assumed rates of change. In addition, starting levels of birth rates and the rates for transition years were updated based on preliminary data for 2000, which indicate a higher overall birth rate than was estimated for last year's report. The net effect of these demographic changes is an increase in the actuarial deficit of 0.05 percent of taxable payroll. The modifications in the projection of death rates resulted in a somewhat faster overall projected rate of improvement in death rates, thus increasing the actuarial deficit. However, this increase in the actuarial deficit was partially offset by the effects of updating birth rates.
Ultimate economic assumptions were changed from those used in last year's report to reflect an expectation of somewhat lower price inflation and higher growth rates in productivity and real earnings. The ultimate assumed rate of change in the CPI was reduced from 3.3 to 3.0 percent. The ultimate assumed rate of growth in productivity (for the total U.S. economy) was increased from 1.5 to 1.6 percent per year. The ultimate assumed real wage differential was increased from 1.0 to 1.1 percent. The reduction in the OASDI actuarial deficit as a result of the change in productivity and real wages was partially offset by the effect of lowering the assumed ultimate rate of price inflation. In addition, several changes in starting values for economic assumptions and the transition to ultimate assumptions combined to reduce (improve) the OASDI actuarial deficit. These include a longer transition from the relatively high productivity growth rate experienced between 1995 and 2000 to the ultimate assumed rate, and increased real interest rates over the first 10 years of the projection period based on recent experience. The net effect of these economic changes is a reduction in the actuarial deficit of 0.12 percent of taxable payroll.
Three significant changes affected disability assumptions. First, the ultimate disability incidence rates were lowered somewhat from the levels used in last year's report in order to bring the rates closer to the average experience of the last 30 years. Second, the period of transition from the historical agesexspecific incidence and recovery rates to the ultimate agesexspecific rates was extended from 15 to 20 years. These two changes tended to reduce the longrange actuarial deficit. The third change reflects a recent improvement in administrative procedures. In the past, some individuals receiving disability payments under the Supplemental Security Income program were also (or later became) insured for DI disabled worker benefits, but this insured status was not recognized. With a change in administrative procedures to better identify the attainment of DI insured status of such individuals, the annual number of individuals awarded DI disability benefits will increase slightly, partially offsetting the effects of the first two changes on the actuarial deficit. The net effect of the three changes is a reduction in the actuarial deficit by 0.03 percent of taxable payroll.
Several methodological improvements and updates of programspecific data were made for projections in the 2002 report. First, an updated sample of new beneficiaries was used for projecting longrange average benefit levels. This sample better reflected individuals who continue to work with substantial earnings after becoming eligible for retired worker benefits and thus produced higher average benefit levels than those estimated in the prior report. This improved sample, alone, results in an increase in the longrange actuarial deficit of about 0.14 percent of payroll. Next, changes were made to the longrange projections of income from taxation of benefits. The changes were made to improve consistency with shortrange estimates provided over the past year by the Office of Tax Analysis, Department of the Treasury. This change, alone, results in a decrease in the actuarial deficit of about 0.07 percent of payroll. Finally, a new method was developed for longrange projections of the percent of the population that is fully insured for the receipt of OASDI benefits based on their earnings. This change results in a decrease in the actuarial deficit of about 0.03 percent of payroll. Other changes and updates had small effects. Together these changes result in an increase in the actuarial deficit of 0.04 percent of taxable payroll.
If no changes in assumptions or methods were made for this report and actual experience had met expectations since the last report, the OASDI actuarial deficit would still be increased by 0.07 percent of taxable payroll from the level estimated for last year's report due to the change in the valuation period (see table IV.B9). The fact that the actuarial deficit is only 0.01 percent of payroll larger for this report therefore indicates that, on balance, changes in assumptions, methods, and experience have slightly improved the financial outlook.
The year in which the combined OASI and DI Trust Funds' assets are projected to become exhausted under the intermediate assumptions, 2041, is 3 years later than projected for last year's report. This is a relatively larger improvement than would be expected from the change in actuarial balance. The timing of the effects of changes made for this report creates this difference.
For example, two changes made for this report result in relatively large improvements in financing for years prior to projected trust fund exhaustion. First, improved economic assumptions, including higher shortrange real interest rates and a longer transition period from recent high growth rates in productivity to the ultimate growth rate (which is itself higher for this report), disproportionately improve the financial status over the next two decades. Second, a methodological change was made to improve consistency between longrange estimates of revenue from taxation of OASDI benefits and shortrange estimates made over the past year by the Department of the Treasury. This change results in a substantial increase in projected revenue that is largest in the decades immediately following the shortrange period. These two changes share about equally in improving the financial status of the OASDI program over the next four decades and thus delaying the projected date of trust fund exhaustion.
In addition, two changes for this report result in less favorable financial status primarily in years after the projected date of trust fund exhaustion under the intermediate assumptions. The changes in mortality projections that result in higher ultimate rates of decline in death rates increase the cost of benefits most in the latter years of the projection period. The updated sample of new beneficiaries used for longrange projections of average benefit levels has a similar effect.
For the longrange period as a whole, the effect of all changes in this report that improve the OASDI financial status approximately balances the effect of all changes that worsen the financial status. However, due to the differences in timing of these effects, the net effect is an improvement in OASDI annual balances through 2044 for this report, followed by less favorable annual balances thereafter. As a result, the year of trust fund exhaustion is improved significantly, by 3 years, while the actuarial balance is nearly unchanged.
^{1} Adjustments are made to include deemed wage credits based on military service for 19832001, and to reflect the lower effective tax rates (as compared to the combined employeeemployer rate) which apply to multipleemployer "excess wages," and which did apply, before 1984, to net earnings from selfemployment and, before 1988, to income from tips.
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