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Office of the Chief Actuary

The 1997 OASDI Trustees Report Updated September 9, 1997     Historical document

Additionally, the Social Security Administration's (SSA) regulations have been amended to alter the specific date on which monthly Social Security benefits will be paid. In general, under previous regulations, OASDI benefits were paid on the third of the month following the month for which benefits are payable. Under the amended regulations, most new beneficiaries who file for benefits after April, 1997, will be paid on the second, third, or fourth Wednesday of the month. Beneficiaries living in a foreign country and beneficiaries already entitled to a benefit on the effective date (which is consequently paid on the third of the month) who become entitled to a different benefit after the effective date, will continue to be paid on the third instead of on one of the new payment dates. Persons concurrently entitled under both the OASDI and Supplemental Security Income (SSI) programs will continue to receive OASDI benefits on the third of the month.

Since premium payments for persons enrolled in the Supplementary Medical Insurance (SMI) program are deducted from their Social Security checks at the time their monthly checks are paid, there was a concern that the SMI Trust Fund would suffer loss of interest income under the payment cycling regulation. The Social Security Administration and the Health Care Financing Administration (HCFA) have agreed on a process under which SSA will continue to make available on the third of the month the anticipated SMI premium payments to be paid during the entire month, irrespective of a beneficiary's actual payment date. Thus, there will be no loss of interest income to the SMI Trust Fund.

The actuarial estimates shown in this report reflect the anticipated effects of these changes.

The primary receipts of these two funds are amounts appropriated to each of them under permanent authority on the basis of contributions payable by workers, their employers, and individuals with self-employment income, in work covered by the OASDI program. All employees, and their employers, in covered employment are required to pay contributions with respect to their wages. Employees, and their employers, are also required to pay contributions with respect to cash tips, if the individual's monthly cash tips amount to at least $20. All self-employed persons are required to pay contributions with respect to their covered net earnings from self-employment. In addition to paying the required employer contributions on the wages of covered Federal employees, the Federal Government also pays amounts equivalent to the combined employer and employee contributions that would be paid on deemed wage credits attributable to military service performed after 1956 if such wage credits were covered wages.

In general, an individual's contributions, or taxes, are computed on wages or net earnings from self-employment, or both wages and net self-employment earnings combined, up to a specified maximum annual amount. The contributions are determined first on the wages and then on any net self-employment earnings, such that the total does not exceed the annual maximum amount. An employee who pays contributions on wages in excess of the annual maximum amount (because of employment with two or more employers) is eligible for a refund of the excess employee contributions.

The monthly benefit amount to which an individual (or his or her spouse and children) may become entitled under the OASDI program is based on the individual's taxable earnings during his or her lifetime. For almost all persons who first become eligible to receive benefits in 1979 or later, the earnings used in the computation of benefits are indexed to reflect increases in average wage levels.

The contribution, or tax, rates applicable in each calendar year and the allocation of these rates between the OASI and DI Trust Funds are shown in table II.B1.

For 1998 and later, the rates shown in table II.B1 are those scheduled in present law. (The total contribution rates for the OASDI and Hospital Insurance (HI) programs combined, and for each program separately, are shown in appendix A, table III.A1.) The maximum amount of earnings on which OASDI contributions are payable in a year, which is also the maximum amount of earnings creditable in that year for benefit-computation purposes, is called the contribution and benefit base. The contribution and benefit base for each year through 1997 is also shown in table II.B1.

All contributions are collected by the Internal Revenue Service and deposited in the general fund of the Treasury. The contributions are immediately and automatically appropriated to the trust funds on an estimated basis. The exact amount of contributions received is not known initially because the OASDI and HI contributions and individual income taxes are not separately identified in collection reports received by the Internal Revenue Service. Periodic adjustments are subsequently made to the extent that the estimates are found to differ from the amounts of contributions actually payable as determined from reported earnings. Adjustments are also made to account for any refunds to employees (with more than one employer) who paid contributions on wages in excess of the contribution and benefit base.

From May 1983 through November 1990, amounts representing the estimated total collections of OASDI contributions for each month were credited to the trust funds on the first day of the month. The "Omnibus Budget Reconciliation Act of 1990" amended the law in effect since 1983 to provide that such advance transfers would be used only if the trust funds drop to such a low level that advance transfers are needed in order to pay benefits.

Beginning in 1984, up to one-half of an individual's or couple's OASDI benefits was subject to Federal income taxation under certain circumstances. Effective for taxable years beginning after 1993, the maximum percentage of benefits subject to taxation was increased from 50 percent to 85 percent. The proceeds from taxation of up to 50 percent of benefits are credited to the OASI and DI Trust Funds in advance, on an estimated basis, at the beginning of each calendar quarter, with no reimbursement to the general fund for interest costs attributable to the advance transfers. (The additional tax revenues resulting from the increase to 85 percent are transferred to the HI Trust Fund.) Subsequent adjustments are made based on the actual amounts as shown on annual income tax records. The amounts appropriated from the general fund of the Treasury are allocated to the OASI and DI Trust Funds on the basis of the income taxes paid on the benefits from each fund. (A special provision applies to benefits paid to nonresident aliens. Under Public Law 103-465, effective for taxable years beginning after 1994, a flat-rate tax, usually 25.5 percent, is withheld from the benefits before they are paid and, therefore, remains in the trust funds. From 1984 to 1994 the flat-rate tax that was withheld was usually 15 percent.)

Another source of income to the trust funds is interest received on investments held by the trust funds. That portion of each trust fund which, in the judgment of the Managing Trustee, is not required to meet current expenditures for benefits and administration is invested, on a daily basis, primarily in interest-bearing obligations of the U.S. Government (including special public-debt obligations described below). Investments may also be made in obligations guaranteed as to both principal and interest by the United States, including certain Federally sponsored agency obligations that are designated in the laws authorizing their issuance as lawful investments for fiduciary and trust funds under the control and authority of the United States or any officer of the United States. These obligations may be acquired on original issue at the issue price or by purchase of outstanding obligations at their market price. Thus, all of the investments held by the trust funds are backed by the full faith and credit of the U.S. Government.

The Social Security Act authorizes the issuance of special public-debt obligations for purchase exclusively by the trust funds. The Act provides that these obligations shall bear interest at a rate equal to the average market yield (computed on the basis of market quotations as of the end of the calendar month next preceding the date of such issue) on all marketable interest-bearing obligations of the United States then forming a part of the public debt which are not due or callable until after the expiration of 4 years from the end of such calendar month. These special issues are redeemable at all times at par value and thus bear no risk with respect to changes in interest rates (i.e., principal price fluctuations).

Income is also affected by provisions of the Social Security Act for (1) transfers between the general fund of the Treasury and the OASI and DI Trust Funds for any adjustments to prior payments for the cost arising from the granting of noncontributory wage credits for military service prior to 1957, according to periodic determinations made by the Secretary of Health and Human Services; (2) annual reimbursements from the general fund of the Treasury to the OASI Trust Fund for any costs arising from the special monthly cash payments to certain uninsured persons -- i.e., those who attained age 72 before 1968 and who generally are not eligible for cash benefits under other provisions of the OASDI program; and (3) the receipt of unconditional money gifts or bequests made for the benefit of the trust funds or any activity financed through the funds.

The primary expenditures of the OASI and DI Trust Funds are for (1) OASDI benefit payments, net of any reimbursements from the general fund of the Treasury for unnegotiated benefit checks, and (2) expenses incurred by the Social Security Administration, the Department of Health and Human Services, and the Department of the Treasury in administering the OASDI program and the provisions of the Internal Revenue Code relating to the collection of contributions. Such administrative expenses include expenditures for construction, rental and lease, or purchase of office buildings and related facilities for the Social Security Administration. The Social Security Act does not permit expenditures from the OASI and DI Trust Funds for any purpose not related to the payment of benefits or administrative costs for the OASDI program.

The expenditures of the trust funds are also affected by (1) costs of vocational rehabilitation services furnished as an additional benefit to disabled persons receiving cash benefits because of their disabilities where such services contributed to their successful rehabilitation, and (2) the provisions of the Railroad Retirement Act which provide for a system of coordination and financial interchange between the Railroad Retirement program and the Social Security program. Under the latter provisions, transfers between the Railroad Retirement program's Social Security Equivalent Benefit Account and the trust funds are made on an annual basis in order to place each trust fund in the same position in which it would have been if railroad employment had always been covered under Social Security.

The net worth of facilities and other fixed capital assets is not carried in the statements of the operations of the trust funds presented in this report. This is because the value of fixed capital assets does not represent funds available for the payment of benefits or administrative expenditures, and therefore is not considered in assessing the actuarial status of the trust funds.

1. Old-Age and Survivors Insurance Trust Fund

During fiscal year 1996, total receipts amounted to $356.8 billion, and total disbursements were $305.3 billion. The assets of the OASI Trust Fund thus increased by $51.5 billion during the year, to a total of $499.5 billion on September 30, 1996.

Included in total receipts during fiscal year 1996 were $318.3 billion in payroll tax contributions appropriated to the fund. These contributions were offset by transfers totaling $1.4 billion to the general fund of the Treasury for the estimated amount of refunds to employees who worked for more than one employer during a year and paid contributions in excess of the contribution and benefit base. In addition, $0.3 billion was received from the general fund of the Treasury representing payment for the taxes that would have been paid on estimated deemed wage credits for military service in 1996 if such credits had been considered to be covered wages. (Included in this payment are adjustments for revised estimates of deemed wage credits in prior years.)

Payroll tax contributions thus amounted to $317.2 billion, an increase of 9.5 percent over the amount in the preceding year. As described in last year's report, the reallocation of the OASDI tax rate under Public Law 103-387 resulted in a large, retroactive transfer of taxes from the OASI Trust Fund to the DI Trust Fund in fiscal year 1995. The large increase in OASI tax contributions from fiscal year 1995 to fiscal year 1996 is due primarily to the lower level of fiscal year 1995 taxes that resulted from this retroactive transfer. (The retroactive transfer also resulted in higher taxes reported for the DI Trust Fund in fiscal year 1995 and hence a relative decrease in taxes in fiscal year 1996 for this fund, as discussed in the next section.) The combined payroll tax contributions to OASDI increased by 4.5 percent in fiscal year 1996 due to increased earnings and the increases in the contribution and benefit base that became effective on January 1 of each year 1995 and 1996. (Table II.B1 in the preceding section shows the tax rates and contribution and benefit bases in effect for these years.)

Income from taxation of benefits amounted to $5.8 billion, of which nearly 97 percent represented amounts credited to the trust funds in advance, on an estimated basis, together with adjustments to 1993 transfers to account for actual experience. The remaining 3 percent of the total income from taxation of benefits represented amounts withheld from the benefits paid to nonresident aliens. ^1/

Special payments are made to uninsured persons who either attained age 72 before 1968, or who attained age 72 after 1967 and had 3 quarters of coverage for each year after 1966 and before the year of attainment of age 72. The costs associated with providing such payments to persons having fewer than 3 quarters of coverage are reimbursable from the general fund of the Treasury. Accordingly, a reimbursement of $4,541,000 was transferred to the OASI Trust Fund in fiscal year 1996, as required by section 228 of the Social Security Act. The reimbursement reflected the costs of payments made in fiscal year 1994.

Section 217(g) of the Social Security Act requires transfers between the general fund of the Treasury and the OASI and DI Trust Funds for any adjustments to prior payments for the cost arising from the granting of noncontributory wage credits for military service prior to 1957. Determinations of such transfers are required in 1985 and every fifth year thereafter. As a result of the 1995 determination, $0.1 billion was transferred to the general fund from the OASI Trust Fund in December 1995.

The OASI Trust Fund was credited with interest totaling $34.0 billion which consisted of (1) interest earned on the investments of the trust fund, plus (2) interest on transfers between the trust fund and the general fund account for the Supplemental Security Income program due to adjustments in the allocation of administrative expenses, less (3) interest arising from the revised allocation of administrative expenses among the trust funds, and less (4) interest transferred to the general fund because Supplementary Medical Insurance premiums were deducted from benefit payments at a later than normal date in certain months.

The remaining $57,872 of receipts consisted of gifts received under the provisions authorizing the deposit of money gifts or bequests in the trust funds.

Of the $305.3 billion in total disbursements, $300.0 billion was for net benefit payments. The amount of net benefit payments in fiscal year 1996 represents an increase of 3.9 percent over the corresponding amount in fiscal year 1995. This increase was due primarily to (1) the automatic cost-of-living benefit increases of 2.8 percent and 2.6 percent which became effective for December 1994 and December 1995 respectively, under the automatic-adjustment provisions in section 215(i) of the Social Security Act, (2) an increase in the total number of beneficiaries, and (3) an increase in the average benefit amount resulting from the rising level of earnings.

As described in the preceding section, certain provisions of the Railroad Retirement Act coordinate the Railroad Retirement and OASDI programs and govern the financial interchanges arising from the allocation of costs between the two programs. Under those provisions, the Railroad Retirement Board and the Commissioner of Social Security determined that a transfer of $3.6 billion to the Social Security Equivalent Benefit Account from the OASI Trust Fund was required in June 1996.

The remaining $1.8 billion of disbursements from the OASI Trust Fund represented net administrative expenses. The expenses of administering the OASDI and Medicare programs are allocated and charged directly to each of the various trust funds, through which those programs are financed, on the basis of provisional estimates. Similarly, the expenses of administering the Supplemental Security Income program are also allocated and charged directly to the general fund of the Treasury on a provisional basis. Periodically, as actual experience develops and is analyzed, adjustments to the allocations of administrative expenses for prior periods are effected by interfund transfers and transfers between the OASI Trust Fund and the general fund account for the Supplemental Security Income program, with appropriate interest adjustments.

Section 1131 of the Social Security Act authorizes annual reimbursements from the general fund of the Treasury to the OASI Trust Fund for additional administrative expenses incurred as a result of furnishing information on deferred vested benefits to pension plan participants, as required by the Employee Retirement Income Security Act of 1974 (Public Law 93-406). The reimbursement in fiscal year 1996 amounted to $774,703.

The OASI Trust Fund was reimbursed $1,351,739 for expenses of providing certain information required by the Coal Industry Retiree Health Benefit Act of 1992 (part of the Energy Policy Act of 1992, Public Law 102-486). While such reimbursements have occurred in past fiscal years, they were not separately identified.

The assets of the OASI Trust Fund at the end of fiscal year 1996 totaled $499.5 billion, consisting of $499.4 billion in U.S. Government obligations and an undisbursed balance amounting to $0.1 billion. Table II.C2 shows the total assets of the fund and their distribution at the end of each fiscal year 1995 and 1996.

All securities held by the trust funds are backed by the full faith and credit of the United States Government. Those currently held by the OASI Trust Fund are special issues (i.e., securities sold only to the trust funds). These are of two types: short-term certificates of indebtedness and long-term bonds. The certificates of indebtedness are issued through the investment of receipts not required to meet current expenditures, and they mature on the next June 30 following the date of issue. Special-issue bonds, on the other hand, are normally acquired only when special issues of either type mature on June 30. The amount of bonds acquired on June 30 is equal to the amount of special issues maturing, less amounts required to meet expenditures on that day.

The effective annual rate of interest earned by the assets of the OASI Trust Fund during calendar year 1996 was 7.7 percent, as compared to 7.9 percent earned during calendar year 1995. The interest rate on special issues purchased by the trust fund in June 1996 was 7.0 percent, payable semiannually. Special-issue bonds with a total par value of $80.3 billion were purchased in June 1996.

Section 201(d) of the Social Security Act provides that the public-debt obligations issued for purchase by the OASI and DI Trust Funds shall have maturities fixed with due regard for the needs of the funds. The usual practice has been to spread the holdings of special issues, as of each June 30, so that the amounts maturing in each of the next 15 years are approximately equal. Accordingly, the amounts and maturity dates of the OASI special-issue bonds purchased on June 30, 1996, were selected in such a way that the maturity dates of the total portfolio of special issues were spread evenly over the 15-year period 1997-2011.

2. Disability Insurance Trust Fund

During fiscal year 1996, total receipts amounted to $59.2 billion, and total disbursements were $44.3 billion. The assets of the trust fund thus increased by $14.9 billion during the year, to a total of $50.1 billion on September 30, 1996.

Included in total receipts were $56.8 billion representing payroll tax contributions appropriated to the fund. These contributions were offset by transfers totaling $0.3 billion to the general fund of the Treasury for the estimated amount of refunds to employees who worked for more than one employer during a year and paid contributions in excess of the contribution and benefit base. In addition, $46,541,000 was received from the general fund of the Treasury representing taxes that would have been paid on estimated deemed wage credits for military service in 1996 if such credits had been considered to be covered wages.

Total contributions amounted to $56.6 billion, a decrease of 16.8 percent from the amount in the preceding fiscal year. This decrease is primarily attributable to the reallocation of the OASDI tax rate that accounted for the increase in contributions to the OASI Trust Fund in fiscal year 1996. Income from the taxation of benefit payments amounted to $0.4 billion in fiscal year 1996.

As described in the preceding subsection, a determination was required in 1990 to adjust prior payments from the general fund of the Treasury for the costs arising from the granting of noncontributory wage credits for military service prior to 1957. Accordingly, a transfer of $0.2 billion to the general fund from the DI Trust Fund was made in December 1995.

Interest totaling $2.5 billion consisted of interest on the investments of the fund and interest on amounts of interfund transfers.

Of the $44.3 billion in total disbursements, $43.2 billion was for net benefit payments. This represents an increase of 7.6 percent over the corresponding amount of benefit payments in fiscal year 1995. This increase is due in part to the same factors that resulted in the net increase in benefit payments from the OASI Trust Fund.

Provisions governing the financial interchanges between the Railroad Retirement and OASDI programs are described in the preceding section. Under those provisions, $2,201,000 was transferred to the Social Security Equivalent Benefit Account from the DI Trust Fund in June 1996.

The remaining disbursements amounted to $1.1 billion for net administrative expenses (including $292,903 for demonstration projects and experiments to test the effect of alternative methods for assisting disabled beneficiaries' attempts to work), and $31,944,323 for the costs of vocational rehabilitation services furnished to disabled-worker beneficiaries and to those children of disabled workers who were receiving benefits on the basis of disabilities that began before age 22. Reimbursement from the trust funds for the costs of such services is made only in those cases where the services contributed to the successful rehabilitation of the beneficiaries.

The assets of the DI Trust Fund at the end of fiscal year 1996 totaled $50.1 billion, consisting of $50.1 billion in U.S. Government obligations and, as an offset, an extension of credit amounting to $16,505,921. Table II.C4 shows the total assets of the fund and their distribution at the end of each fiscal year 1995 and 1996.

The effective annual rate of interest earned by the assets of the DI Trust Fund during calendar year 1996 was 6.9 percent, as compared to 7.4 percent earned during calendar year 1995. The interest rate on public-debt obligations issued for purchase by the trust fund in June 1996 was 7.0 percent, payable semiannually. Special-issue bonds with a total par value of $17.6 billion were purchased in June 1996. The usual practice of spreading the holdings of special issues, as described earlier, was not followed. The amounts and maturity dates of the DI special-issue bonds purchased on June 30, 1996, were selected in such a way that the maturity dates of the total portfolio of special issues were spread over the 13-year period 1997-2009.

The investment policies and practices described for the OASI Trust Fund apply as well to the investment of the assets of the DI Trust Fund.

3. Old-Age and Survivors Insurance and Disability
Insurance Trust Funds, Combined

Table II.C6 compares past estimates of contributions and benefit payments for fiscal year 1996, as shown in the 1992-96 Annual Reports, with the corresponding actual amounts in 1996. The estimates shown are the ones based on the alternative II assumptions.

A number of factors can contribute to differences between estimates and subsequent actual amounts, including actual values for key economic, demographic, and other variables that differ from assumed levels. In addition, amendments to the Social Security Act can cause actual taxes or benefits to vary from earlier estimates. For example, the reallocation of the OASDI tax rate, enacted in October 1994, makes comparison of tax estimates in the 1992-94 Annual Reports with actual taxes in fiscal year 1996 meaningless for OASI and DI taken separately. The comparisons in table II.C6 indicate that combined actual OASI and DI tax contributions in fiscal year 1996 were lower than estimates in the 1992 report (due primarily to lower than expected inflation). Estimates of OASI benefit payments were generally close to actual payments in 1996. The actual amount of DI benefit payments in 1996, however, was significantly above estimates in the 1992 report, due to faster-than-expected growth in the number of disabled workers.

At the end of fiscal year 1996, about 43.6 million persons were receiving monthly benefits under the OASDI program. Of these persons, about 37.6 million and 6.0 million were receiving monthly benefits from the OASI Trust Fund and the DI Trust Fund, respectively. The number of persons receiving benefits from the OASI and DI Trust Funds grew by 0.4 percent and 4.0 percent, respectively, during the fiscal year. The estimated distribution of benefit payments in fiscal years 1995 and 1996, by type of beneficiary, is shown in table II.C7 for each trust fund separately.

Tables II.C2 and II.C4, presented in the two preceding subsections, showed the assets of the OASI and DI Trust Funds at the end of fiscal years 1995 and 1996. The changes in the invested assets of the funds between those two dates are a result of the acquisition and disposition of securities during fiscal year 1996. Table II.C9 presents these investment transactions for each trust fund separately and combined. All amounts shown in the table are at par value.

1. Economic Assumptions

Alternatives I, II, and III represent a range of economic assumptions which have been designed to produce variation in Social Security's financial status that should encompass most of the possibilities that might be encountered. The intermediate set of assumptions (alternative II) represents the Trustees' consensus expectation of moderate economic growth throughout the projection period. The low cost assumptions (alternative I) represent a more optimistic outlook, with relatively strong economic growth projected during the short-range period and tapering off a little during the long-range period. The high cost assumptions (alternative III) represent a relatively pessimistic forecast in which the economy experiences generally weak economic growth and business cycles with two recessions in the short-range period. Economic cycles are not included in assumptions beyond the first 5 to 10 years of the projection period because inclusion of such cycles has little effect on the long-range estimates of financial status.

A period of sustained real economic growth began in 1982 and ended with the recession that started with the third quarter of 1990. After a total decline in real GDP of 2.0 percent through the first quarter of 1991, the economy has returned to another sustained period of real economic growth. This period is assumed to continue for alternatives I and II. For the short-range period (1997-2006), average annual real GDP growth is assumed to be about 2.6 percent for alternative I and 2.0 percent for alternative II.

For alternative III, weak growth and an increased rate of price inflation are assumed for the first three quarters of 1997. The first projected recession begins in the fourth quarter of 1997, lasts 3 quarters, and results in a total decline in real GDP of 1.4 percent. After 8 quarters of recovery, a second recession, with a total decline in real GDP of 3.0 percent, is assumed to begin in the third quarter of 2000, lasting 4 quarters. After the second recession, a moderate economic recovery is assumed through the year 2003, with continued modest economic growth thereafter.

After the year 2006, the projected rates of growth in real GDP, for all three alternatives, are determined by the assumed rates of growth in employment, average hours worked, and labor productivity. The trend toward slower growth in real GDP after 2006 results primarily from much slower growth in the working age population, as the "baby-boom" generation approaches retirement and succeeding generations reflecting lower birth rates reach working age. The slowdown in the growth rate in real GDP also reflects the assumed leveling of some labor force participation rates for women, which have risen substantially over the past 25 years, and the continuation of the historical downward trend of labor force participation rates among men in the future. The annual rate of growth in total labor force decreased from over 2 percent in the 1970s to about 1.2 percent for 1990 through 1996. After 1996 the labor force is projected to increase at about 1.0 percent per year, on average, through 2006, and to increase more slowly thereafter, reflecting the projected slowing of growth of the working-age population as compared with the experience of the 1980s and early 1990s.

The age-sex adjusted unemployment rate, for alternatives I and II, is assumed to move gradually toward ultimate average levels of 5.0 and 6.0 percent, respectively, by 2002. For alternative III, the age-sex-adjusted unemployment rate is assumed to reach its ultimate average level of 7.0 percent by 2005, after a recovery that is assumed to follow the second projected recession.

Unemployment rates through 2006 are in the most commonly cited form, the civilian rate, which describes the differences between aggregate civilian labor force and aggregate civilian employment. For years after 2006, however, total age-sex adjusted rates are presented. These include the military (which reduces the rate by about 0.1 percentage point relative to the civilian rate) and are age-sex adjusted to the 1995 labor force. Such total rates better represent the total population covered by the OASDI program and adjust for the changing age-sex distribution of the labor force, which can obscure the comparison of unemployment rates over different time periods.

As indicated in last year's report, the Bureau of Economic Analysis changed from a fixed-weighted to a chain-weighted price measure for the purpose of calculating the real-growth component of GDP. In addition, the historical values of real GDP growth over the period 1959-94 were revised. The effects of these changes were not reflected in the projected growth rates in real GDP for years after 1995 that were shown in last year's report. These changes are now reflected in the assumed real GDP growth rates shown in this report.

For the intermediate projection, each of the other economic parameters is selected reflecting what the Trustees believe to be the most likely future course of the economy at the time of preparation of this report, consistent with the assumed pattern of real GDP growth.

The annual rate of increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was 2.9 percent in 1996. For alternative II, the CPI-W (hereinafter denoted as "CPI") is assumed to increase 3.2 percent in both 1997 and 1998, moving toward the assumed ultimate rate of 3.5 percent by 2001. For alternative I, the CPI is projected to increase 2.9 percent in 1997 and 2.6 percent in 1998, moving toward the assumed ultimate rate of 2.5 percent by 1999. For alternative III, the CPI is projected to increase from a relatively low 2.9 percent in 1996 to a relatively high 5.4 percent in 1999 and 6.0 percent in 2000, eventually stabilizing at the assumed ultimate rate of 4.5 percent in 2002. Recent changes by the Bureau of Labor Statistics have been reflected in assumptions for future price inflation in this report. These improvements are expected to result in measured CPI growth that is about 0.2 percentage point lower per year. In addition, the assumed future rate of growth in the CPI has been reduced by 0.3 percentage point based on historical analysis and expected future trends.

Changes in the assumed actual and measured growth rates in the CPI resulted in a reevaluation of several other assumptions. The GDP (chain-weighted) price index was assumed to grow at the same ultimate rate as the CPI for the 1996 report. The 0.2 percentage point reduction in CPI growth will result in a direct reduction in the measured growth of the GDP price index of about 0.1 percentage point. These changes, alone, tend to have no effect on the ultimate measured growth in nominal GDP, wages, and interest rates. The improvements in CPI measurement, thus, tend to increase expected real growth in average wages and productivity by 0.2 percentage point and 0.1 percentage point, respectively. In addition, the improvements tend to increase the level of the real interest rate by 0.2 percentage point.

However, these changes also produce an assumed ultimate GDP price inflation rate that is higher than that in the CPI. Imposing an assumption that the GDP price inflation rate will be 0.1 percentage point lower than that in the CPI, consistent with recent analysis of the bias in these price measures, requires a further reduction in the assumed GDP price inflation rate of 0.2 percentage point. This lower assumed GDP price inflation rate lowers assumed nominal growth in both GDP and wages, resulting in a 0.2 percentage point reduction in the ultimate real-wage differential. The ultimate assumed rate of decline in average hours worked per week is also changed for this report, from an annual decline of 0.2 percent to 0.1 percent for the intermediate assumptions, based on a reevaluation of historical data. This change in hours tends to increase the assumed real-wage differential by 0.1 percentage point.

The changes described above would raise the productivity and real wage growth assumptions by 0.1 percentage point above last year's assumptions -- from 1.36 to 1.46 percent and from 1.0 to 1.1 percent, respectively. However, we are assuming a productivity growth rate of 1.26 percent and a corresponding real wage growth of 0.9 percent in this year's report. This is the consequence of lowering the productivity growth assumption by 0.2 percentage point based on analysis of historical data after changing to the chain-weighted measure of real growth in the GDP.

The annual rate of change in the average wage in covered employment is assumed to drop, initially, from the estimated 4.2 percent increase for 1996, to a projected rate of 4.0 percent for 1997, and then to rise, generally, averaging about 4.2 percent for the period 1997 through 2006. Growth in the average wage (which is equal to price inflation plus the real-wage differential) through 2006 averages somewhat less than the ultimate assumed rate of 4.4 percent because price inflation and real wage growth rates are assumed to average less than their ultimate levels through this period. Between 2005 and 2015, growth in the average covered wage is slightly higher than the assumed ultimate rate of 4.4 percent, reflecting the gradual movement toward complete inclusion of Federal civilian employees. After 2015, the average covered wage growth rate remains at the ultimate assumed rate of 4.4 percent.

The real-wage differential (i.e., the difference between the annual rates of change in the average wage in covered employment and in the CPI) was 1.4 percent in 1996, based on preliminary data. After 1996, under the intermediate alternative, the real-wage differential is projected to be between 0.0 and 1.0 percent for the years 1997 through the year 2015, thereafter remaining at the ultimate assumed differential of 0.9 percent. For the low cost alternative I, the real-wage differential is assumed to be in the range of 0.2 percent to 1.5 percent between 1997 and 2015, thereafter remaining at the ultimate assumed real-wage differential of 1.4 percent. For the high cost alternative III, a more pessimistic real-wage differential is assumed for the short-range period, averaging 0.2 percent per year. After 2015, the real-wage differential is assumed to be 0.4 percent per year for alternative III.

The average annual nominal interest rate for securities newly issued to the trust funds decreased from 6.9 percent in 1995 to 6.6 percent for 1996, and is projected to move gradually toward the ultimate assumed level through the short-range period. After 2006, the average annual nominal interest rates are assumed to be 5.9, 6.2, and 6.4 percent for alternatives I, II, and III, respectively.

For alternatives I and III, respectively, values for each of the economic parameters are selected to generally reflect a more optimistic and a more pessimistic future financial status of the program. Some of the parameters would normally be expected to deviate in opposite directions from the values assumed for the intermediate alternative. Thus, alternatives I and III also assume structural economic shifts in the relationships among parameters which tend toward low cost and high cost, respectively.

2. Demographic Assumptions

For the intermediate projection, the assumed ultimate total fertility rate of 1.9 children per woman is attained in 2021 after a gradual decline from the preliminary estimate for 1996 of 2.01 children per woman. The age-sex-adjusted death rate is assumed to decrease steadily during the entire projection period, with a total reduction of 35 percent from the 1996 level by 2071. Life expectancies at birth in 2075 are 78.9 years for men and 84.3 years for women, compared to 72.6 and 79.3 years, respectively, in 1996. Life expectancies at age 65 in 2075 are projected to be 18.8 years for men and 22.3 years for women, compared to 15.5 and 19.2 years, respectively, in 1996. Total net immigration is assumed to rise over the next several years reaching an ultimate level of 900,000 persons per year by the year 2000. The ultimate assumed level of net annual immigration is the combination of 600,000 net legal immigrants per year and 300,000 net other-than-legal immigrants per year.

For the low cost alternative I, the total fertility rate is assumed to rise to an ultimate average level of 2.2 children per woman by 2021. The age-sex-adjusted death rate is assumed to decrease more slowly than for the intermediate alternative II, with the total reduction from the 1996 level being 16 percent by 2071. Life expectancies at birth in 2075 are 76.0 years for men and 81.2 years for women, while at age 65 they are 16.5 and 19.7 years, respectively. Total net immigration is ultimately assumed to be 1,150,000 persons per year. The assumed level of net annual immigration is the combination of 700,000 net legal immigrants per year and 450,000 net other-than-legal immigrants per year.

For the high cost alternative III, the total fertility rate is assumed to decrease to an ultimate level of 1.6 by 2021. The age-sex-adjusted death rate is assumed to decrease more rapidly than for alternative II, with the total reduction from the 1996 level being 54 percent by 2071. Life expectancies at birth in 2075 are 82.9 years for men and 88.3 years for women, while at age 65 they are 21.9 and 25.6 years, respectively. Total net immigration is ultimately assumed to be 750,000 persons per year, the combination of 550,000 net legal immigrants per year and 200,000 net other-than-legal immigrants per year.

In this section, values are shown for program amounts that are subject to automatic adjustment, from the time that such adjustments became effective through 2006. Projected values for future years are based on the economic assumptions described in the preceding section of this report. Appendix F, in addition to providing the most recent determinations of program amounts under the automatic adjustment provisions, also provides a more complete description of such amounts.

Under the automatic-adjustment provisions affecting cost-of-living increases, benefits generally are increased once a year. These provisions were originally enacted in 1972 and first became effective with the benefit increase effective for June 1975. The 1983 amendments changed the effective month to December for years after 1982. For persons becoming eligible for benefits in 1979 and later, the increases generally begin with the year in which the worker reaches age 62, or becomes disabled or dies, if earlier. An automatic cost-of-living benefit increase of 2.9 percent, effective for December 1996, was announced in October 1996, as described in appendix F. The automatic cost-of-living benefit increase for any year is normally based on the change in the CPI from the third quarter of the previous year to the third quarter of the current year. ^1/

Under section 215(b)(3) of the Social Security Act, the national average wage index ^2/ for each year after 1950 is used to index the earnings of most workers first becoming eligible for benefits in 1979 or later. This procedure converts a worker's past earnings to approximately their equivalent values near the time of the worker's retirement or other eligibility, and these indexed values are used to calculate the worker's benefit. The average wage index is also used to adjust most of the program amounts that are subject to the automatic-adjustment provisions. Table II.E1 shows the average wage index as determined for each year 1951 through 1995.

The law provides for the determination of the OASDI contribution and benefit bases that would have been in effect in each year after 1978 under the automatic-adjustment provisions as in effect before the enactment of the 1977 amendments. This "old-law base" is used in determining special-minimum benefits for certain workers who have many years of low earnings in covered employment. ^3/ Beginning in 1986, the old-law base is also used in the calculation of OASDI benefits for certain workers who are eligible to receive pensions based on noncovered employment. In addition, it is used for certain purposes under the Railroad Retirement program and the Employee Retirement Income Security Act of 1974.

² The average wage index is defined in the Code of Federal Regulations (Title 20, Chapter III, section 404.211(c)).

³ For special minimum purposes, "low earnings" means earnings of at least 15 percent of the old-law base. Prior to 1991, the definition required earnings of at least 25 percent of the old-law base.

The required information for the fiscal year that ended September 30, 1996, is presented in section II.C of this report. Estimates of the operations and status of the trust funds during fiscal years 1997-2006 are presented in this section. In addition, similar estimates for calendar years 1997-2006 are presented. A description of the actuarial status of the trust funds over the next 75 years, including long-range estimates of program income and program costs over that period, is also included in this section. The methods used to estimate the short-range operations of the trust funds and the long-range actuarial status are described in section II.H.

A number of different measures are useful in evaluating the financial status of the trust funds over the next 75 years. In addition to actuarial balance, and summarized income and cost rates, which are described in detail below, these measures include (1) the levels of future annual income and outgo, both in terms of dollars and relative to annual taxable earnings or payroll, including the pattern and ultimate values of such levels; (2) the annual differences between income and outgo, i.e., the annual balances, in dollars and relative to taxable payroll; (3) the size of future fund accumulations, in dollars and relative to future annual expenditures; and (4) the year in which trust fund exhaustion is estimated to occur. Estimates of all these indicators are presented in this section or in the appendices of this report. However, more attention is focused on certain elements of these measures, as described below.

In the short range, the adequacy of the trust fund level is generally measured by the "trust fund ratio," which is defined to be the assets at the beginning of the year expressed as a percentage of the outgo during the year. (For the years 1984-90, the assets at the beginning of the year also included advance tax transfers for the month of January. Assets at the beginning of subsequent years include advance tax transfers only if such transfers are needed to enable the timely payment of benefits.) The trust fund ratio represents the proportion of a year's outgo which can be paid with the funds available at the beginning of the year. During periods when trust fund disbursements exceed income, as might happen during an economic recession, trust fund assets are used to meet the shortfall. In the event of recurring shortfalls for an extended period, the trust funds can allow sufficient time for the development, enactment, and implementation of legislation to restore financial stability to the program.

The test of financial adequacy over the short-range projection period (the next 10 years), is applicable to each of the OASI and DI Trust Funds, separately, as well as to the combined funds. The requirements of this test are as follows: If the estimated trust fund ratio for a fund is at least 100 percent at the beginning of the projection period, then it must be projected to remain at or above 100 percent throughout the 10-year projection period. Alternatively, if the ratio is initially less than 100 percent, then it must be projected to reach a level of at least 100 percent by the beginning of the sixth year and to remain at or above 100 percent throughout the remainder of the 10-year period. In addition, the fund's estimated assets at the beginning of each month of the 10-year period must be sufficient to cover that month's disbursements. This test is applied on the basis of the intermediate (alternative II) estimates. Failure to meet this test by either trust fund is an indication that solvency of the program over the next 10 years is in question and that Congressional action is needed to improve the short-range financial adequacy of the program.

Basic to the discussion of the long-range actuarial status 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 employee-employer contribution rate (or the payroll-tax 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, transfers under the interfund borrowing provisions, 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 financial-interchange provisions, and payments for vocational rehabilitation services for disabled beneficiaries; it excludes special monthly payments to certain uninsured persons whose payments are reimbursable from the general fund of the Treasury (as described above), and transfers under the interfund borrowing provisions. 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.)

The long-range actuarial status of the trust funds has generally been summarized by the calculation of the "actuarial balance." The actuarial balance for a specified valuation period is defined as the difference between the summarized income rate and the summarized cost rate over that period. The summarized income rate over a period of years is equal to the ratio of (a) the sum of the trust fund balance at the beginning of the period plus the present value of the total income (excluding interest earnings) during the period, to (b) the present value of the taxable payroll for the years in the period. The summarized cost rate is equal to the ratio of (a) the sum of the present value of the outgo during the period plus the present value of a targeted trust fund level at the end of the period equal to the following year's outgo to (b) the present value of the taxable payroll for the years in the period. A targeted ending trust fund level of 1 year's expenditures is considered to be an adequate reserve for unforeseen contingencies; thus, in addition to the total outgo during the projection period, the summarized cost rate includes the cost of reaching and maintaining a target trust fund ratio of 100 percent through the end of the projection period.

The present-value calculations take account of the effect of interest on future income and outgo. In calculating the present value of future income, for example, the income in each year of the projection period is discounted to the beginning of the period using the interest rate assumed for calculating the interest earnings of the trust funds during the period. Thus, the calculations of the summarized income and cost rates are consistent with the estimates of trust fund operations over the projection period.

If the program is in exact actuarial balance for a particular period (that is, if the actuarial balance is zero), then the present value of estimated future income for all years in the period, plus the beginning trust fund balance, is exactly equal to the present value of estimated future expenditures for all years in the period, plus the present value of targeted trust fund assets at the end of the period in the amount of the next year's estimated outgo. A negative actuarial balance indicates that future estimated income and the beginning trust fund balance together are not sufficient to accumulate to the level of the targeted assets while also covering all estimated expenditures in the period. A positive actuarial balance indicates that in addition to covering all estimated expenditures in the period, the estimated ending trust fund assets are more than the targeted level.

The size of the actuarial balance represents a measure of the program's financial adequacy for the period in question. If the actuarial balance is a deficit, the size of the deficit can be interpreted as that amount which, if added to the combined employee-employer contribution rate scheduled under present law for each of the next 75 years, would bring the program into exact actuarial balance. Of course, there are any number of different ways to increase taxes or to reduce expenditures, as well as different combinations of such changes, that would have an equivalent effect on the actuarial balance. Any one of these different sets of changes would, therefore, bring the program into exact actuarial balance.

The long-range 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 75-year projection period. Under the long-range test, summarized income rates and cost rates are calculated for each of the 66 valuation periods in the full 75-year long-range 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 long-range 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 75-year 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 75-year 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 long-range 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 be able to effectively plan for their retirement.

It was noted earlier in this section that in addition to the measures used in the tests of the overall financial condition of the program, other financial measures are also presented in this report. All of these measures are important factors in arriving at a full understanding of the financial position of the OASDI program.

1. Operations and Status of the Trust Funds During
the Period October 1, 1996, to December 31, 2006

These estimates indicate that the assets of the OASI Trust Fund would continue to increase throughout the next 10 years, rapidly under the intermediate and low cost assumptions and moderately under the high cost assumptions. The estimates indicate that the assets of the DI Trust Fund would also continue to increase throughout the next 10 years under the intermediate and low cost assumptions, at a slightly lower rate than for the OASI Trust Fund. Under the high cost assumptions, DI assets would increase for a few years before declining. Although not shown in these estimates, DI assets would become insufficient to permit the timely payment of benefits by the middle of 2007 under the high cost assumptions.

As will be shown later in this subsection, the OASI and DI Trust Funds, both individually and combined, meet the requirements of the Trustees' test of short-range financial adequacy.

a. OASI Trust Fund Operations

Estimates of the operations and status of the OASI Trust Fund during calendar years 1997-2006 are shown in table II.F1 based on each of the three alternative sets of assumptions. Actual operations for calendar year 1996 are also shown in the table.

The increases in estimated income shown in table II.F1 under each set of assumptions reflect increases in estimated taxable earnings and growth in interest earnings on the invested assets of the trust fund. For each alternative, employment and earnings are assumed to increase in every year through the year 2006 (with the exception that employment is estimated to decline temporarily during the economic recessions assumed under alternative III). The number of persons with taxable earnings would increase on the basis of alternatives I, II, and III from 144 million during calendar year 1996 to about 161 million, 157 million, and 152 million, respectively, in 2006. The total annual amount of taxable earnings is projected to increase from $3,083 billion in 1996 to $5,014 billion, $4,988 billion, and $5,099 billion, in 2006, on the basis of alternatives I, II, and III, respectively. (In 1996 dollars -- taking account of assumed increases in the CPI from 1996 to 2006 under each alternative -- the estimated amounts of taxable earnings in 2006 are $3,898 billion, $3,560 billion, and $3,234 billion, respectively.) These increases in taxable earnings are due primarily to (1) projected increases in employment levels and average earnings in covered employment, (2) increases in the contribution and benefit base in 1997-2006 under the automatic adjustment provisions, and (3) various provisions enacted in 1983 and later, including extensions of coverage to additional categories of workers.

Growth in interest earnings represents a significant component of the overall increase in trust fund income during this period. Although interest rates payable on trust fund investments are not assumed to change substantially from current levels, the continuing rapid increase in OASI assets will result in a corresponding increase in interest income. By the year 2006, interest income to the OASI Trust Fund is projected to range from 13 to 15 percent of total trust fund income (depending on alternative), as compared to 10 percent in 1996.

Rising expenditures during 1997-2006 reflect automatic benefit increases as well as the upward trend in the numbers of beneficiaries and in the average monthly earnings underlying benefits payable by the program. The growth in the number of beneficiaries in the past and the expected growth in the future result both from the increase in the aged population and from the increase in the proportion of the population which is eligible for benefits. The latter increase is primarily due to various amendments enacted after 1950 which modified eligibility provisions and extended coverage to additional categories of employment.

Growth has also occurred, and will continue to occur, in the proportion of eligible persons who, in fact, receive benefits. This growth is due to several factors, among which are (1) the amendments enacted since 1950 which affect the conditions governing the receipt of benefits and (2) the increasing percentage of eligible persons who are aged 70 and over and who therefore may receive benefits regardless of earnings.

The estimates shown in table II.F1 indicate that income to the OASI Trust Fund would substantially exceed expenditures in every year of the short-range projection period, under each of the three sets of assumptions used in this report. The assets of the OASI Trust Fund at the beginning of 1996 were equal to 149 percent of the fund's expenditures in 1996. As described in the introduction to this section, this ratio is known as the "trust fund ratio;" it provides a useful measure of the relative level of trust fund assets. During 1996, income exceeded disbursements by $55.5 billion. As a result, the trust fund ratio increased to about 160 percent at the beginning of 1997.

Assets are estimated to increase substantially in each year of the short-range projection period, based on each of the three alternative sets of assumptions. The increase in the trust fund ratio from 160 percent at the beginning of 1997 to the range of 195-329 percent at the beginning of the year 2006 is due, in part, to the increases in the OASI tax rate that became effective in 1988 and 1990 (even though much of the increase was reallocated to the DI Trust Fund in 1994). Asset growth is also assisted by growth in taxable earnings that is projected to exceed the growth in benefit payments throughout the short-range projection period (except for certain years under alternative III).

As noted in section II.B, the portion of the OASI Trust Fund that is not needed to meet day-to-day expenditures is used to purchase investments, generally in special public-debt obligations of the U.S. Government. The cash used to make these purchases becomes part of the general fund of the Treasury and is used to meet various Federal outlays. Interest is paid to the trust fund on these securities and, when the securities mature or are redeemed prior to maturity, general fund revenues are used to repay the principal to the trust fund. Thus, the investment operations of the trust fund result in various cash flows between the trust fund and the general fund of the Treasury.

Currently, the excess of tax income to the OASI Trust Fund over the fund's expenditures results in a substantial net cash flow from the trust fund to the general fund. Sometime after the turn of the century, as shown in the following subsection, this cash flow will reverse; as trust fund securities are redeemed to meet benefit payments and other expenditures, revenue from the general fund of the Treasury will be drawn upon to provide the necessary cash. The accumulation and subsequent redemption of substantial trust fund assets has important public policy and economic implications that extend well beyond the operation of the OASDI program itself. Discussion of these broader issues is not within the scope of this report.

Based on the intermediate (alternative II) assumptions, the assets of the OASI Trust Fund would continue to exceed 100 percent of annual expenditures by a steadily increasing amount through the end of the year 2006. Consequently, the OASI Trust Fund satisfies the test of short-range financial adequacy by a wide margin. The estimates in table II.F1 also indicate that the short-range test would be satisfied even under the high cost assumptions.

In interpreting the trust fund ratios in table II.F1, it should be noted that at the beginning of any month there must be sufficient assets on hand to meet the benefit payments that are payable at the beginning of that month. The specific minimum amount of assets required for this purpose depends on a number of factors and varies somewhat from month to month. Assets of roughly 8 to 9 percent of annual expenditures are normally sufficient for this purpose. If the assets of either the OASI or DI Trust Fund at the end of a month fall below the minimum amount needed to meet the benefits payable at the beginning of the next month, section 201(a) of the Social Security Act provides for an advance transfer to the trust fund of all the taxes that are expected to be received by the fund in the next month. Thus, the difference between (1) the sum of the estimated trust fund ratios shown in table II.F1 and the advance tax transfers for January expressed as a percentage of total expenditures in the year and (2) the minimum required level of about 8-9 percent, represents the reserve available to handle adverse contingencies.

b. DI Trust Fund Operations

The estimated operations and financial status of the DI Trust Fund during calendar years 1997-2006 under the three sets of assumptions are shown in table II.F2, together with figures on actual experience in 1996. Income is generally projected to increase steadily under each alternative, reflecting most of the same factors described previously in connection with the OASI Trust Fund. Interest income was 5 percent of overall income to the DI Trust Fund in 1996; it is projected to increase to roughly 9 percent of annual trust fund income beginning in 2001 on the basis of the intermediate assumptions.

Expenditures are estimated to increase because of automatic benefit increases and projected increases in the amounts of average monthly earnings on which benefits are based. In addition, under all three sets of assumptions, the number of DI beneficiaries in current-payment status is projected to continue increasing throughout the short-range projection period, but at somewhat lower levels than anticipated in last year's report. The projected annual average growth rate in the number of DI worker beneficiaries is roughly 4.5 percent over the period 1996-2006. Growth is attributable to several factors, including (1) a gradually increasing trend in the estimated number of individuals insured for disability benefits, and (2) program dynamics which result in a greater number of insured workers awarded benefits than disabled workers whose benefits terminate as a result of death, recovery, or conversion to old-age benefit payments.

The proportion of insured workers who apply for and are awarded disability benefits in a given year is referred to as the "disability incidence rate." This rate has fluctuated substantially in past years and the causes for the variation have not been precisely determined. Incidence rates increased during 1970-75, declined during 1976-82, increased again during 1983-85, and remained steady in 1986-89. During 1990-92 the incidence rate resumed increasing, with unusually rapid increases (on a relative basis) of 8, 12, and 17 percent in those 3 years. In 1993-96, the observed incidence rate declined slightly from the 1992 level. A 3.3 percent reduction in the number of disabled worker awards from 1995 to 1996 is attributable to several factors, including (1) reductions of 7 percent and 4 percent in applications in 1995 and 1996, respectively, resulting in fewer determinations (and consequently allowances) of disability benefits, (2) low levels of unemployment, and (3) stabilizing female labor participation rates from 1995 to 1996.

The rapid increases in disability benefit applications and awards during 1990-92 appear to be attributable, in part, to the rise in unemployment associated with the 1990-91 economic recession (although the evidence is not conclusive). Other explanatory factors may include changes to the conditions governing receipt of disability benefits, as introduced through recent legislation, regulations, and court decisions, and increased awareness of the DI program by the public.

These and other factors were discussed at some length in a report issued December 1992, entitled "The Social Security Disability Insurance Program: An Analysis" prepared by the Department of Health and Human Services at the request of the Board of Trustees. Subsequent to that report, the Social Security Administration, together with the Office of the Assistant Secretary for Planning and Evaluation in the Department of Health and Human Services, commissioned a series of studies attempting to quantify some of the reasons for the rapid growth in the DI program in the early 1990s. Reference should be made to these studies for further details on the possible factors contributing to the increases in disability incidence rates observed in the period 1990-92, and the subsequent decline observed since 1992.

Due to the substantial variation exhibited by incidence rates in the past and the difficulty in determining reliable explanatory factors for this variation, any projection of future incidence rates necessarily will be uncertain. The 1996 disability incidence rate (calculated on an age-sex-adjusted basis) was 5.03 awards per 1,000 insured workers. This figure was about 8 percent higher than the average incidence rate of 4.65 per thousand that was experienced during 1975 through 1996. Under the intermediate assumptions, incidence rates are assumed to decrease by another 2 percent in 1997-2000 and then to increase gradually for the remainder of the short-range projection period, to about 1 percent above the level experienced in 1996. A small portion of this decline is attributable to the prohibition on future awards of benefits to persons disabled by drug addiction or alcoholism enacted in Public Law 104-121. Under the low cost alternative, incidence rates decline by about 15 percent during 1997-2006, staying under the 1975-96 average for years after 1997. The high cost alternative assumes that incidence rates increase by 19 percent over the next 9 years and then decline slightly in the last year of the short-range period.

The proportion of DI beneficiaries whose benefits terminate in a given year has also fluctuated significantly in the past. Over the last 20 years, the rates of benefit termination due to death or conversion to retirement benefits (at attainment of normal retirement age) have declined very gradually. This trend is attributable, in part, to the lower average age of new beneficiaries. The termination rate due to recovery has been much more volatile. Currently, the proportion of disabled beneficiaries whose benefits cease because of their recovery from disability is very low in comparison to levels experienced throughout the 1970s and early 1980s.

In this report, termination rates due to attainment of normal retirement age are estimated to continue their downward trend through 2002. This rate would drop in 2003 and remain at a depressed level for 5 more years as a result of the increase in the normal retirement age which begins in that year. Age-specific death rates for disabled beneficiaries are assumed to remain at about their current level. Terminations due to recovery are assumed to increase from their current levels in response to the additional funding for continuing disability reviews authorized under Public Law 104-121. In addition, the prohibition placed by Public Law 104-121 on benefits payable to individuals disabled by drug addiction and alcoholism, is expected to result in a one-time increase in terminations during 1997. Ignoring this one-time effect, the overall termination rate (reflecting all causes) is projected under all three alternatives to continue declining gradually during 1997-2002. The overall rate then declines in 2003 due largely to the increase in the normal retirement age cited above.

The continuing spread of Acquired Immunodeficiency Syndrome (AIDS) had contributed somewhat to increases in DI awards in the early 1990s; however, revised downward estimates of both historical and projected awards due to HIV impairments has been the trend over the last several reports. ^3/ In addition, due to the extremely high mortality rates of affected individuals, the total number of disabled workers currently receiving benefits has not increased greatly as a result of AIDS, and has actually decreased in recent years. Although many aspects of the AIDS epidemic are well understood, there remains considerable uncertainty regarding future medical advances and future incidence of HIV infection. To reflect this uncertainty, the projected numbers of benefit awards to AIDS patients are varied by alternative. Under the intermediate assumptions, benefit awards to persons with AIDS are projected to increase slightly through 2000 before beginning to decline. Under the low cost assumptions, the number of new awards declines gradually throughout the projection period, while the number projected under the high cost assumptions increases at a rapid rate through 2001 before beginning to decline.

At the beginning of calendar year 1996, the assets of the DI Trust Fund represented 83 percent of annual expenditures. During 1996, DI income exceeded DI expenditures by $15.4 billion, with the result that the trust fund ratio for the beginning of 1997 increased to about 108 percent. Under the intermediate and low cost sets of assumptions, income is estimated to exceed expenditures in each year of the short-range projection period. The increase in the trust fund ratio from 83 percent at the beginning of 1996 to 108 percent at the beginning of 1997, and the further increase to 152 percent at the beginning of 2003 on the basis of the intermediate assumptions, are largely due to the tax rate reallocation enacted in 1994. The decline in the trust fund ratio to 140 percent at the beginning of 2006 is an early warning of trouble for the DI Trust Fund soon after the short-range period.

Under the low cost assumptions, the trust fund ratio would increase rapidly to 257 percent at the beginning of 2006. Under the high cost assumptions, the assets of the DI Trust Fund would increase through 2000, decline steadily thereafter, and would be exhausted in 2007.

Because DI assets were greater than 1 year's expenditures at the beginning of 1997 and would remain above that level in 1998 and later under the intermediate assumptions, the DI Trust Fund satisfies the Trustees' short-range test of financial adequacy. However, as indicated above, under the high cost assumptions not only does DI fail to meet the short-range test of financial adequacy, but the DI Trust Fund is exhausted soon after the short-range projection period.

c. Combined OASI and DI Trust Fund Operations

The estimated operations and status of the OASI and DI Trust Funds, combined, during calendar years 1997-2006 on the basis of the three alternatives, are shown in table II.F3, together with figures on actual experience in 1996. These amounts are the sums of the corresponding figures shown in tables II.F1 and II.F2.

At the beginning of 1996, the trust fund ratio for the OASI and DI Trust Funds combined was 140 percent, as shown in table II.F3. During 1996, total income to the two trust funds was $70.9 billion higher than total expenditures. As a result of this increase, combined OASDI assets at the beginning of 1997 represented about 153 percent of estimated combined expenditures for the year. Based on the intermediate assumptions, the trust fund ratio for the combined funds is projected to increase substantially, to 244 percent by 2006. The ratio would grow at an even faster rate under the low cost assumptions, reaching 318 percent at the beginning of the year 2006. Under the high cost assumptions, assets would grow more slowly, reach a maximum of 175 percent in 2001, and decline to 165 percent at the beginning of 2006.

Under the intermediate assumptions, the total assets of the OASI and DI Trust Funds would remain above 100 percent of annual OASDI expenditures throughout the short-range projection period. Therefore, the combined trust funds meet the requirements of the short-range test of financial adequacy. Under the high cost assumptions, the fund ratio for OASI and DI combined would still remain above 100 percent through 2006 (although, as indicated in the section on long-range projections, the ratio would fall below this level shortly thereafter). Thus, even under adverse conditions the combined funds would satisfy the short-range test of financial adequacy, although by a narrower margin.

Section 215(i) of the Social Security Act includes a provision to stabilize automatic benefit increases in the event of high inflation at a time when the combined assets of the OASI and DI Trust Funds are at very low levels (see section II.E of this report). Under all three alternatives, the level of OASDI assets during 1997-2006 would substantially exceed the applicable threshold. Thus, the stabilizer provision would not be triggered during the short-range projection period under any of the sets of assumptions used in this report.

Figure II.F1 presents the estimated total assets of the OASI and DI Trust Funds at the end of each year 1997-2006, based on the three sets of assumptions (together with actual assets at the end of each year 1986-96). Figure II.F2 illustrates the pattern of actual past and estimated future OASDI trust fund ratios under the three alternatives. Trust fund ratios for selected years prior to 1997, and estimates for 1997-2006 under the three alternatives, are shown in table II.F4 for OASI, DI, and both funds combined. In evaluating the ratios shown in figure II.F2 and table II.F4, it should be recalled that a minimum of roughly 8 to 9 percent is generally needed to meet monthly cash-flow requirements. The shaded area in figure II.F2 depicts this requirement.

Figure II.F1.­Estimated Assets at End of Year, for OASI and DI Trust Funds Combined, by Alternative, Calendar Years 1986-2006 [In billions]

Figure II.F2.­ Estimated Trust Fund Ratios, for OASI and DI Trust Funds Combined, by Alternative, Calendar Years 1986-2006 [Assets as a percentage of annual expenditures]