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Office of the Chief Actuary

The 1997 OASDI Trustees Report Updated September 9, 1997     Historical document

The Board of Trustees is established under the Social Security Act to oversee the financial operations of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund. The Board is composed of six members, four of whom serve automatically by virtue of their positions in the Federal Government: the Secretary of the Treasury, who is the Managing Trustee, the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security. The other two members are appointed by the President and confirmed by the Senate to serve as public representatives: Stephen G. Kellison and Marilyn Moon are currently serving 4-year terms that began on July 20, 1995.

The Social Security Act requires that the Board, among other duties, report annually to the Congress on the financial and actuarial status of the OASI and DI Trust Funds. This annual report, for 1997, is the 57th such report.

The Council was composed of a Chair and 12 members representing employers and employees, self-employed persons, and the public. The Council's charge was focused on the OASDI program. Among the areas the Secretary specifically asked the Council to examine was Social Security financing. The Advisory Council submitted its report to the Secretary of Health and Human Services and the Commissioner of Social Security on January 6, 1997.

The Council's report presents three alternative sets of recommendations for restoring the long-range actuarial balance of the OASDI program. The first approach would maintain the Social Security benefit and tax structure essentially as it is in the current program, with the possibility that a portion of trust-fund assets be invested in private equities and managed by the Federal Government. Another approach would privatize a significant portion of the current program by directing 5 percentage points of each worker's contributions (from the current 12.4-percent contribution rate for employees and employers, combined) to a "Personal Security Account". Transition costs under this plan would require additional financing equivalent to 1.52 percent of taxable earnings over the first 72 years. A third approach would scale back benefits to levels that could be financed by the current 12.4-percent contribution rate and establish a defined contribution benefit plan, an Individual Account for each worker, through an additional 1.6-percent mandatory contribution payable by the worker to an investment account managed by the Federal Government.

The Council also convened a Technical Panel on Assumptions and Methods to review the assumptions and methodology used to project the future financial status of the OASDI program. In addition, a Technical Panel on Trends and Issues in Retirement Savings was convened by the Council to help analyze the relative roles of the public and private sectors in providing retirement income.

The Technical Panel on Assumptions and Methods found the intermediate estimates in the 1995 annual report of the Board of Trustees to be reasonable. Although the Panel did suggest that modifications be considered in various specific assumptions, the Panel also recognized that the overall effect of those suggestions would not significantly change the estimates of the financial status of the Social Security program. The Technical Panel on Trends and Issues in Retirement Savings recognized the present deficit in the long-range actuarial status of the Social Security program and developed criteria for evaluating a range of policy options to reduce the deficit. Reports of the findings of both Technical Panels were submitted to the Advisory Council in 1995 and are included in Volume II of the Council's report.

• During calendar year 1996, OASDI benefits amounting to $347.1 billion were paid to retired and disabled workers and their families, and to survivors of deceased workers.

• The number of persons receiving monthly OASDI benefits at the end of December 1996 was 43.7 million.

• In 1996, an estimated 144 million people worked in jobs covered by the OASDI program and paid OASDI contributions on their earnings.

• Income to the combined OASI and DI Trust Funds amounted to $424.5 billion in calendar year 1996, and expenditures were $353.6 billion. The assets of the combined funds, therefore, increased by $70.9 billion, from $496.1 billion at the end of December 1995 to $567.0 billion at the end of December 1996.

• Assets at the beginning of the year, as a percentage of expenditures during the year, increased from 140 percent at the beginning of 1996 to an estimated 153 percent at the beginning of 1997, for the combined OASI and DI Trust Funds.

• Interest earnings on the invested assets of the combined OASI and DI Trust Funds were $38.7 billion in calendar year 1996. This represented an effective annual interest rate of 7.6 percent, earned by the combined assets during calendar year 1996. During the same period, the average interest rate on new securities purchased by the trust funds was 6.6 percent.

• Administrative expenses for the OASDI program were $3.0 billion in calendar year 1996, or about 0.9 percent of benefit payments in the year.

• An automatic benefit increase of 2.9 percent became effective for December 1996. The OASDI contribution and benefit base was increased from $62,700 for 1996, to $65,400 for 1997.

Short-Range Results

• In the short range (i.e., the next 10 years) the combined assets of the OASI and DI Trust Funds are expected to increase from the current level of $567.0 billion at the end of calendar year 1996, or 153 percent of estimated expenditures in 1997, to $1,459 billion, or 244 percent of annual expenditures, at the beginning of the year 2006, based on the intermediate assumptions.

• The assets of the OASI Trust Fund are expected to increase rapidly during the next 10 years, from 160 percent of annual expenditures at the beginning of 1997 to about 264 percent of annual expenditures at the beginning of the year 2006, based on the intermediate assumptions.

• The assets of the DI Trust Fund are expected to increase rapidly for most of the next 10 years, rising from 108 percent of annual expenditures at the beginning of 1997 to 152 percent of annual expenditures at the beginning of 2003, based on the intermediate assumptions. While the assets of the fund, in nominal dollars, continue to grow during the entire short-range period consisting of the next 10 years, assets relative to annual expenditures begin to decline in 2003, becoming 140 percent at the beginning of 2006.

• The combined OASI and DI Trust Funds, as well as each fund separately, are adequately financed and meet the short-range test for financial adequacy.

• The assets of the combined OASI and DI Trust Funds are expected to continue growing over most of the next 25 years, based on the intermediate assumptions. By the end of 2018, the assets are estimated to reach $2.89 trillion, in nominal dollars. The assets are then estimated to decline to $2.74 trillion 3 years later, at the end of the 25-year period.

• In the long range (i.e., the next 75 years) the difference between the summarized income and cost rates for the OASDI program is a deficit of 2.23 percent of taxable payroll based on the intermediate assumptions, slightly larger than the difference of 2.19 percent in last year's report. The assets of the combined OASI and DI Trust Funds are estimated to be depleted under present law in 2029 based on the intermediate assumptions. At that time, the estimates indicate that annual tax revenues would be sufficient to cover about 3/4 of annual expenditures.

• On a combined basis, the OASDI program is not in "close actuarial balance" over the next 75 years. In addition, the individual OASI and DI Trust Funds are not in close actuarial balance. These results are the same as those shown in the 1996 Annual Report.

• With the retirement of the "baby-boom" generation starting in about 2010, OASDI costs will increase rapidly relative to the taxable earnings of workers. By the end of the 75-year projection period, the OASDI cost rate is estimated to reach 19.2 percent under the intermediate assumptions, resulting in an annual deficit of about 5.9 percent. Annual tax revenue would be sufficient to cover only about 2/3 of annual expenditures at the end of the 75-year period.

• The cost of the OASDI program is estimated to rise from its current level of 4.7 percent of gross domestic product (GDP) to 6.7 percent of GDP by the end of the 75-year projection period, and the annual deficit is estimated to be 2.1 percent of GDP at the end of the 75-year projection period.

• Under the intermediate assumptions, the excess of OASDI tax revenues over expenditures until 2012, together with interest earnings on the trust funds, will result in a rapid accumulation of assets for the combined OASI and DI Trust Funds during this period. However, total income is estimated to fall short of expenditures beginning in 2019 and in each year thereafter. In this circumstance, trust fund assets would be redeemed to cover the difference until the assets are exhausted in 2029.

• The DI Trust Fund is expected to increase until 2007, and then to decline steadily until its assets are exhausted in 2015. Because DI program growth has fluctuated widely in the past, it is essential that the program's future experience be monitored closely and that action be taken to address the DI Trust Fund's actuarial imbalance.

• The assets of the OASI Trust Fund are expected to increase until 2021, and then to decline until they are exhausted in 2031. Because the OASI program is not in close actuarial balance, the long-range deficit of the OASI Trust Fund should be addressed. It is important to address this problem soon to allow time for phasing in any necessary changes and for workers to adjust their retirement plans to take account of those changes. There is ample time to discuss and examine alternative solutions with deliberation and care. The size of the long-range deficit is such that long-range balance could be restored within the framework of the present Social Security structure. The magnitude of the changes in the current program will be minimized if they are enacted soon.

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  D. TRUST FUND FINANCIAL OPERATIONS

  The various sources of income to the OASDI program, and categories of expenditures, can be illustrated by reference to the actual transactions during calendar year 1996. Table I.D1 summarizes these transactions.
  

  
  

  Table I.D1.­ Summary of OASDI Trust Fund Operations

  		Amount in calendar year 1996 (in billions)
  Type of income or expenditure		OASI		DI		OASDI
  Total income		$363.7		$60.7		$424.5
  	Payroll taxes	321.6		57.3		378.9
  	Taxation of benefits	6.5		.4		6.8
  	Interest	35.7		3.0		38.7
  Total expenditures		308.2		45.4		353.6
  	Benefit payments	302.9		44.2		347.0
  	Railroad Retirement financial interchange	3.6		(1/)		3.6
  	Administrative expenses	1.8		1.2		3.0
  1 Less than $50 million. Note: Totals do not necessarily equal the sums of rounded components.

  
  

  
  

  1. Income

  Most OASDI income consists of the taxes paid by employees, employers, and the self-employed on earnings covered by the OASDI program. These taxes (also called contributions) represent a portion of the payroll taxes collected under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA). The balance of the FICA and SECA contributions are used to finance the Hospital Insurance (HI) program, commonly referred to as "Part A" of Medicare. The taxes for the OASDI program are paid on earnings up to a specified maximum annual amount (the "contribution and benefit base"), $65,400 for 1997. Prior to 1994, HI taxes were also paid on earnings up to a maximum amount each year but are now paid on total covered earnings, without limitation. Table I.D2 shows the allocation of the FICA and SECA tax rates by program for 1997.
  

  
  

  Table I.D2.­ Tax Rates for 1997

  	OASI	DI	OASDI	HI	Total for OASDI and HI
  Tax rate for employees and employers, each (in percent)	5.35	0.85	6.20	1.45	7.65
  Tax rate for self-employed persons (in percent)	10.70	1.70	12.40	2.90	15.30

  
  

  
  The tax rates for OASDI and for HI are not scheduled to change from their current values under present law. The maximum amount of earnings subject to OASDI taxes increases automatically each year, based on the increase in the average wage for all workers. In calendar year 1996, OASDI payroll tax income amounted to $378.9 billion, representing 89 percent of the total income received under the OASDI program during the year.

  Beneficiaries whose "adjusted gross income" exceeds certain threshold amounts must pay income taxes on up to 85 percent of their annual OASDI benefits. The income tax revenue that results from taxing up to 50 percent of those benefits, together with taxes withheld from the benefits paid to nonresident aliens, is credited to the OASI and DI Trust Funds and totaled $6.8 billion in 1996. (The additional tax revenue that results from taxing up to 85 percent of benefits is credited to the HI Trust Fund.)

  The final source of income to the trust funds is from interest on the invested assets of the funds. By law, these investments must be in interest-bearing securities of the U.S. Government or in securities guaranteed by the United States. Interest from investments in 1996 amounted to $38.7 billion. This represented an effective annual interest rate of 7.6 percent, earned by the assets of the trust funds during calendar year 1996. During the same period, the average interest rate on new securities purchased by the trust funds was 6.6 percent.

  2. Expenditures

  In 1996, benefit payments totaling $347.0 billion were made to retired and disabled workers and their families, and to survivors of deceased workers. Such payments represent 98 percent of all expenditures by the OASDI program. An additional $3.6 billion was transferred from the OASI and DI Trust Funds to the Railroad Retirement program in 1996, under provisions of the law requiring a financial interchange between the two programs. The cost of administering the OASDI program in 1996 was $3.0 billion, or about 0.9 percent of total benefits paid during the year.

  3. Trust Fund Assets

  In 1996, total income was $424.5 billion and total expenditures were $353.6 billion. The assets of the OASI and DI Trust Funds therefore increased by a net total of $70.9 billion during the year, from $496.1 billion to $567.0 billion. The invested assets of the trust funds are backed by the full faith and credit of the U.S. Government, in the same way as other public-debt obligations of the United States.

  When program income exceeds expenditures, the trust fund serves as a vehicle to help fund a portion of the program's accruing financial obligations in advance. In particular, as invested assets continue to increase over the next 20 to 30 years, interest earnings will become a larger share of total trust fund income. In 1996, interest income to the combined OASI and DI Trust Funds represented 9.1 percent of total OASDI income. On a combined basis, interest income in 2006 would represent an estimated 13.6 percent of total income.

  Conversely, if income to a trust fund is inadequate to defray expenditures, the fund's assets serve as a contingency reserve to cover the shortfall temporarily. For example, the expenditures of the DI Trust Fund exceeded income to the fund for most of 1994 (prior to enactment of the OASDI tax rate reallocation), necessitating a redemption of assets to cover the difference. In the event of recurring shortfalls, the availability of trust fund assets allows time for the enactment and implementation of legislation to restore financial stability to the program.

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  E. INTRODUCTION TO ACTUARIAL ESTIMATES

  The financial and actuarial status of the OASDI program is traditionally evaluated for both short-range (the next 10 years) and long-range (the next 75 years) periods. The various income and expenditure items described in the previous section are estimated separately, and then combined to form estimates of the future level of trust fund assets.

  A period of 75 years is used to evaluate the long-range actuarial status of the program in order to obtain the full range of financial commitments that will be incurred on behalf of all current program participants. For example, a group of workers now entering the labor force at age 22 will work and pay OASDI taxes for the next 45 years before reaching age 67. At age 67, those surviving may retire and begin to receive full benefits (i.e., not reduced for early retirement). Some of them may live and receive benefits for more than 30 years. Thus, a 75-year projection period will include the entire working and retired life span of the great majority of workers now contributing to the program, as well as those now receiving benefits.

  Because of the inherent uncertainty in estimates for as long as 75 years into the future, projections are shown in this report under three alternative sets of assumptions regarding future economic and demographic trends. Designated as alternatives I, II, and III, these sets range from low cost (alternative I) to high cost (alternative III), with alternative II representing the set of intermediate cost assumptions. The low cost set is more optimistic from the standpoint of OASDI financing and the high cost set is more pessimistic. In the tables in this report, the intermediate estimates, which the Board of Trustees regard as their "best estimates," will be shown first followed by the low cost and high cost estimates.

  From the estimated income, expenditure, and asset amounts, a number of different measures are calculated for use in evaluating the financial status of the program. Because of the difficulty in comparing dollar values for different periods, these measures are generally based on relative scales (although financial operations in nominal and inflation-adjusted dollar amounts are also available). These relative measures include (1) the annual amounts of future income and outgo as a percentage of the amount of earnings subject to the OASDI payroll tax, (2) the annual differences between these income and outgo figures, and (3) summarized values representing these figures over various periods. The level of trust fund assets relative to annual expenditures and the year in which the trust fund is projected to be exhausted are also presented as additional measures for evaluating the financial status of the program. Careful review of these measures provides a reasonably complete picture of the financial outlook for the OASDI program.

  The program is also subject to two explicit tests of financial status (see section II.F) -- a short-range test and a long-range test. The purpose of these tests is to provide objective criteria for determining whether or not the projected financial status of the OASDI program is considered satisfactory in each time period. The tests help highlight the need for corrective action when they are not met.

  As usually required in the analysis of any complex subject, these summary tests should be considered in conjunction with a full understanding of the year-by-year patterns, trends, and other financial characteristics revealed by the underlying actuarial projections.

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  F. ECONOMIC AND DEMOGRAPHIC ASSUMPTIONS

  Actual future income from OASDI payroll taxes and other sources, and actual future expenditures for benefits and administrative expenses, will depend upon a large number of factors: the size and composition of the population that is receiving benefits, the level of benefit amounts, the size and characteristics of the work force covered under OASDI, and the level of workers' earnings. These factors will depend in turn upon future marriage and divorce rates, birth rates, death rates, migration rates, labor force participation and unemployment rates, disability incidence and termination rates, retirement age patterns, productivity gains, wage increases, cost-of-living increases, and many other economic and demographic circumstances affecting the OASDI program.

  While it is reasonable to assume that actual trust fund experience will fall within the range defined by the three alternative sets of assumptions used in this report, no definite assurance can be given that this will occur because of the uncertainty inherent in projections of this type and length. In general, a greater degree of confidence can be placed in the assumptions and estimates for the earlier years than for the later years. Nonetheless, even for the earlier years, the estimates are only an indication of the expected trend and general range of future program experience.

  The assumptions vary, in most cases, from year to year during the first 5 to 25 years before reaching their ultimate values for the remainder of the 75-year projection period. The following table summarizes the ultimate values assumed for the key economic and demographic factors underlying the actuarial estimates shown in this report. These ultimate values apply for years after 2020, with the exception of life expectancy, which is assumed to continue improving throughout the projection period.
  

  
  

  Table I.F1.­ Ultimate Economic and Demographic Assumptions
  Ultimate assumptions	Intermediate		Low Cost		High Cost
  Annual percentage change in:
  Average wage in covered employment	4.4		3.9		4.9
  Consumer Price Index (CPI)	3.5		2.5		4.5
  Real-wage differential (percent)	0.9		1.4		0.4
  Unemployment rate (percent)	6.0		5.0		7.0
  Annual interest rate (percent)	6.2		5.9		6.4
  Total fertility rate (children per woman)	1.9		2.2		1.6
  Life expectancy at birth in 2075 (combined average for men and women, in years)	81.5		78.5		85.5
  Annual net immigration (in thousands)	900.0		1,150.0		750.0

  
  

  
  The long-range economic assumptions in last year's report were not changed from those used in the 1995 report. Although improvements had recently been made in the determination of inflation rates, as measured by the CPI and the GDP price deflator, there was not enough time to sufficiently analyze the effects of these improvements. However, the economic assumptions in this report do reflect the effects of these improvements.

  The effects of these improvements, along with other changes reflecting the judgment of the Trustees, include lowering assumed increases in the CPI by 0.5 percentage point for all three sets of assumptions, reducing the real-wage differential and the rate of growth in productivity by 0.1 percentage point each for all three sets, and raising the real interest rate by 0.4 percentage point for all three sets of assumptions.

  The ultimate demographic assumptions for this report are essentially unchanged from those used in the 1996 report. Only the values for life expectancy are slightly different because they reflect the accumulated difference in annual mortality rate assumptions for all years through the year 2075.

  Revisions of other economic and demographic assumptions for the early years of the projection period, based on data collected since the 1996 report, had little effect in the long range, with the exception of changes in the mortality rates and labor force participation rates. Based on additional data for the years 1992-95, mortality rates for the starting year are slightly lower than those estimated for 1996 in last year's report. This results in the rates of reduction in mortality during the first 25 years of the projection period being increased slightly over those used in the 1996 report. Based on recent data the estimated civilian labor force for 1997 is about 0.8 million higher than was estimated for the 1996 report. The effect of this higher starting value is to increase projected labor force slightly throughout the long-range projection period for this report.

  These assumptions reflect a careful assessment of past data and future prospects. Other changes in assumptions and methods reflected in the estimates in this report are discussed in section II.F.

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  G. SHORT-RANGE ACTUARIAL ESTIMATES

  The financial status of the OASDI program during the next 10 years (1997-2006) is measured by the estimated level of trust fund assets. Because of inflation, economic growth, and growth in the OASDI program, asset levels expressed in nominal dollar amounts are not comparable over long periods of time. For this reason, it is more informative to consider a relative measure of the program's financial condition.

  For example, OASDI assets at the beginning of calendar year 1997 amounted to $567 billion, while assets at the beginning of 1960 were $22 billion. The asset level in 1997 would be sufficient to cover roughly 18 months of expenditures in the absence of other income. Assets in 1960, although much smaller in nominal dollars, could have covered about 22 months of expenditures and thus represented a somewhat stronger contingency reserve.

  The ratio of trust fund assets at the beginning of a year to expenditures during the year is termed the "trust fund ratio." This ratio serves as the primary measure of the fund's financial adequacy in the short range. It is also used when applying an explicit test of short-range financial adequacy.

  1. OASI Trust Fund

  Figure I.G1 presents historical trust fund ratios for the OASI Trust Fund in 1986-96 and estimated ratios for 1997-2006 based on the alternative sets of assumptions.

  As shown in figure I.G1, the OASI trust fund ratio is estimated to increase from 160 percent at the beginning of 1997 to 264 percent by 2006, based on the intermediate (alternative II) assumptions. The ratio is also estimated to increase during the next 10 years under the low cost (alternative I) assumptions. However, under the high cost (alternative III) assumptions the ratio is estimated to level off by 2006. Because OASI assets are estimated to exceed 100 percent of annual expenditures throughout the next 10 years, the OASI Trust Fund meets the requirements of the Trustees' formal test of short-range financial adequacy. (This test is described in detail in the section entitled "Actuarial Estimates" later in this report.) Thus, the financing scheduled under present law for the OASI Trust Fund is considered fully adequate to meet future expenditures over this period and to provide for an adequate contingency reserve.

  Figure I.G1.­OASI Trust Fund Ratios [Assets as a percentage of annual expenditures]

  
  

  
  

  2. DI Trust Fund

  As described in the 1995 Annual Report, legislation enacted in 1994 provided additional financing to the DI Trust Fund through a reallocation of a portion of the OASI tax rate. Largely as a result of this additional revenue, the DI Trust Fund is currently adequately financed for the short-range period. As shown in figure I.G2, the DI trust fund ratio is estimated to increase from 108 percent at the beginning of 1997 to 140 percent by 2006, based on the intermediate (alternative II) assumptions. Because DI assets exceeded the level of one year's expenditures at the beginning of 1997 and are estimated to remain above that level in 1998 and later, the DI Trust Fund meets the requirements of the Trustees' formal test of short-range financial adequacy under the intermediate assumptions.

  However, as also shown in figure I.G2, under the high cost assumptions, not only does DI fail to meet the short-range test of financial adequacy, the DI Trust Fund is projected to be exhausted soon after the end of the short-range projection period. This situation is similar to projections made for the 1996 Annual Report.

  Figure I.G2.­DI Trust Fund Ratios [Assets as a percentage of annual expenditures]

  
  

  
  

  3. OASI and DI Trust Funds, Combined

  Figure I.G3 summarizes the trust fund ratio for the OASI and DI Trust Funds, combined, in the recent past and estimates for the next 10 years.

  Figure I.G3.­Trust Fund Ratios for OASI and DI Trust Funds, Combined [Assets as a percentage of annual expenditures]

  
  

  
  As shown, the trust fund ratio for OASI and DI on a combined basis is estimated to increase from 153 percent at the beginning of 1997 to 244 percent by 2006, based on the intermediate assumptions. Based on the low cost assumptions, the ratio would also increase throughout the 10-year period. Under the high cost assumptions, however, the ratio would be lower at the beginning of 2002, and each year thereafter, than it was at the beginning of the previous year (but would remain above 100 percent throughout the short-range period). Because the trust fund ratio for the combined funds is estimated to remain above 100 percent under the intermediate assumptions, the combined funds meet the short-range test of financial adequacy.

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  H. LONG-RANGE ACTUARIAL ESTIMATES

  The long-range financial estimates provided in this section generally relate to the OASI and DI Trust Funds on a combined basis. However, as the OASI and DI programs are legally separate, a final assessment of the financial status of these funds must be provided on a separate basis, as is done later in this section. More detailed estimates for these trust funds, both separately and combined, can be found in section II.F2 of this report.

  Each year estimates of the financial and actuarial status of the OASDI program are prepared for the next 75 years. Although financial estimates for periods as long as 75 years are inherently uncertain, the results can provide valuable information for use by policymakers. In particular, such estimates can indicate whether the program -- as seen from today's vantage point -- is considered to be in satisfactory financial condition.

  As mentioned previously, a number of different measures are useful in evaluating the financial status of the trust funds over the next 75 years. In addition to the actuarial balance and the trust fund ratio, emphasis is placed on the relationship between the levels of future tax income and future expenditures for each year (relative to the amount of earnings subject to the OASDI payroll tax). The year-by-year patterns of this relationship are of particular interest.

  In addition to the presentation of long-range estimates, a specific test of the program's long-range financial status is applied. This test is referred to as the test for long-range "close actuarial balance."

  1. Annual Income Rates, Cost Rates, and Balances

  Figure I.H1 compares past and estimated future OASDI income (from payroll taxes on covered earnings and income taxes on OASDI benefits) with OASDI expenditures (for benefits and administrative expenses). Included are historical data for the past 12 calendar years (1985-96) and estimates for the 75-year long-range projection period (1997-2071) under the three alternative sets of assumptions. These income and expenditure amounts are shown relative to the earnings in covered employment that are taxable under the OASDI program -- referred to as "taxable payroll." The ratio of tax income (including both payroll taxes and income from taxation of benefits) to taxable payroll is called the "income rate" and the ratio of expenditures to taxable payroll is the "cost rate."
  

  
  

  Figure I.H1.­OASDI Income Rates and Cost Rates [As a percentage of taxable payroll]

  
  

  
  For calendar year 1997, the income rate for the OASDI program is estimated to be about 12.63 percent of taxable payroll. This rate is made up of the combined tax rate payable by employees and employers, 12.40 percent, plus the revenue from the income taxation of OASDI benefits, equivalent to 0.23 percent of taxable payroll. Since OASDI payroll tax rates are not scheduled to change in the future under present law, payroll tax income as a percentage of taxable payroll remains constant at about 12.40 percent. Income from the taxation of benefits will gradually increase, primarily because a greater proportion of benefits will become subject to taxation. Thus, the income rate is projected to increase somewhat from its current level, reaching about 13.33 percent of taxable payroll by the year 2071. The income rate projection shown in figure I.H1 is based on the intermediate set of assumptions (alternative II) only; the projections under the low cost and high cost sets of assumptions (alternatives I and III, respectively) are very similar.

  As figure I.H1 indicates, the pattern followed by the estimated cost rates is much different. Costs as a percentage of taxable payroll are estimated to rise slowly for about 13 years (or to decline slowly, in the case of alternative I) and then to increase rapidly for about the next 20 years. Thereafter, cost rates are estimated to grow less rapidly (or to decline somewhat, in the case of alternative I). By the year 2071 the cost rate is estimated to have reached 13.45 percent, 19.23 percent, and 28.91 percent under alternatives I, II, and III, respectively.

  The primary reason that the estimated OASDI cost rate increases rapidly after about 2010 is that the number of beneficiaries is projected to increase more rapidly than the number of covered workers. Because the cost rate expresses expenditures (primarily payments to beneficiaries) as a percentage of taxable payroll (the taxable earnings of covered workers), there is a close relationship between the demographic characteristics of the population and the OASDI cost rate.

  Figure I.H2 shows the estimated number of covered workers per OASDI beneficiary. In 1996, there were about 3.3 workers for every beneficiary. As indicated, this ratio is expected to decline substantially in the future under all three sets of assumptions. The most rapid decline will occur as the relatively large number of persons born during the "baby boom" (from the end of World War II through the mid-1960s) reaches retirement age and begins to receive benefits. At the same time, the relatively small number of persons born during the subsequent period of low fertility rates will comprise the labor force. Between 2030 and 2050, the number of workers per beneficiary is relatively stable as the "baby-boom" generation diminishes in size. After the year 2050, this ratio will continue to decline at a slower pace for the intermediate and high cost projections, reflecting the increasing numbers of beneficiaries due to assumed increases in life expectancy. Based on the low cost assumptions, a slow increase in this ratio is projected to occur after 2050. By the end of the 75-year projection period, the number of workers per beneficiary is projected to decline to 2.4, 1.8, and 1.3 under the low cost (alternative I), intermediate (alternative II), and high cost (alternative III) assumptions, respectively.
  

  
  

  Figure I.H2.­Number of Workers Per Beneficiary

  
  

  
  The difference between the income rate and the cost rate in a given year is referred to as the "annual balance" for that year. The estimated pattern of the OASDI annual balance depends significantly on the economic and demographic conditions assumed to occur in the future. Income rates are estimated to exceed cost rates until 2019, 2012, and 2001, under alternatives I, II, and III, respectively, resulting in positive annual balances. Thereafter, under the intermediate assumptions, the annual deficit would rise rapidly, reaching 4.38 percent of taxable payroll by 2030 and 5.90 percent in the year 2071. Under alternative I, a temporary period of deficits in excess of 1 percent of taxable payroll (from 2024 through 2043) would be followed by a return to relatively small deficits lasting throughout the remainder of the projection period. Under adverse conditions, as assumed in alternative III, the deficit would grow very rapidly, to over 15 percent of taxable payroll by the year 2071.

  2. Summarized Income Rates, Cost Rates, and Balances

  It is useful to consider the income and cost rates on a summarized basis over the three 25-year subperiods that make up the 75-year projection period. For this purpose, the annual income rates are summarized by calculating the present value of future tax income for the subperiod in question, and expressing it as a percentage of the present value of future taxable payroll for that subperiod. ("Present values" are used in financial analysis to calculate the lump-sum equivalent value, at a particular point in time, of a series of future amounts or transactions. See the Glossary for additional information.) Similarly, a summarized cost rate is calculated, based on the present value of future expenditures as a percentage of the present value of future taxable payroll. The following table shows these summarized amounts for the OASDI program for the three 25-year subperiods.
  

  
  

  Table I.H1.­ OASDI Income and Cost Rates for 25-Year Subperiods
  	Income rate	Cost rate	Balance
  Intermediate:
  1997-2021	12.72	12.76	-0.04
  2022-2046	13.08	17.41	-4.33
  2047-2071	13.24	18.62	-5.38
  Low Cost:
  1997-2021	12.68	11.55	1.13
  2022-2046	12.95	14.42	-1.47
  2047-2071	13.01	13.74	-.73
  High Cost:
  1997-2021	12.77	14.17	-1.41
  2022-2046	13.26	21.20	-7.95
  2047-2071	13.61	26.14	-12.52

  
  

  
  A small deficit is shown under the intermediate alternative II assumptions for the first subperiod; thereafter, the program is projected to experience substantial deficits, for the reasons outlined previously. Under the low cost alternative I assumptions, summarized tax income would exceed summarized costs for the first 25-year subperiod only, with deficits diminishing to relatively low levels in the third subperiod. (The less favorable outlook for the second subperiod occurs under the low cost assumptions because the "baby-boom" generation is retired essentially throughout this period, while the assumed higher ultimate fertility rates have not yet had their full effect on the estimated numbers of workers.) If the high cost conditions of alternative III are experienced, substantial deficits would occur for all three subperiods.

  To assess the overall financial balance for the long range, it is customary to calculate summarized income rates and cost rates for the full 75-year valuation period. For this purpose, summarized income and cost rates are calculated on a present-value basis, as before. In addition, the summarized income rate is augmented by the value of trust fund assets on hand at the beginning of the period. Similarly, the summarized cost rate is adjusted to include the additional cost of accumulating trust fund assets at the end of the period equal to 100 percent of the following year's expenditures. The results of this calculation are shown in the following table.
  

  
  

  Table I.H2.­ OASDI Income and Cost Rates for 75-Year Valuation Period
  	Income rate	Cost rate	Balance
  Intermediate:
  1997-2071	13.37	15.60	-2.23
  Low Cost:
  1997-2071	13.25	13.03	.21
  High Cost:
  1997-2071	13.53	19.07	-5.54

  
  

  
  The difference between the summarized income and cost rates for the 75-year valuation period is called the "actuarial balance" and ranges from a surplus of 0.21 percent of taxable payroll under the low cost assumptions to a deficit of 5.54 percent under the high cost assumptions. Based on the intermediate assumptions, an actuarial deficit of 2.23 percent is projected, representing the difference between the summarized income rate of 13.37 percent and the corresponding cost rate of 15.60 percent.

  The estimated actuarial deficit is slightly larger than the corresponding deficit of 2.19 percent of payroll in last year's report. If the only change for this year's report were to change the long-range valuation period from 1996-2070 to 1997-2071, the deficit for this year's report would have risen to 2.27 percent of payroll. However, there were a number of other changes that, in net, partially offset the effect of the change in valuation period. See section II.F2g for complete details on the change in actuarial balance from last year's report.

  The size of the actuarial balance for any valuation period represents a measure of the program's financial adequacy for that period. The actuarial balance can be interpreted as the amount of change which, if made to the payroll tax rates scheduled under present law for each year in the period, would bring the program into exact actuarial balance. For example, if the 75-year actuarial deficit of 2.23 percent under intermediate assumptions were addressed by raising scheduled tax rates by 1.12 percent for employees and employers, each, and by 2.24 percent for the self-employed, then OASDI assets at the beginning of 1997, together with income from payroll taxes, interest, and other sources, would be just sufficient to meet all expenditures for the period and leave a trust fund level at the end of the period equal to about 100 percent of the following year's expenditures. Of course, there are numerous other changes to tax rates or benefit provisions that could also result in the elimination of the long-range actuarial deficit.

  The 75-year actuarial balance is a convenient and widely used measure of the OASDI program's overall financial status. It is important to remember, however, that this summary measure reflects the combined effects of several very different periods, as previously described. Thus, while the use of summary measures such as the actuarial balance is often convenient, such measures should not be used as a substitute for a more complete understanding of the underlying year-by-year outlook.

  3. Trust Fund Ratios

  As noted previously, the total income of the OASDI program currently exceeds total expenditures by a substantial margin. As a result, the assets of the combined trust funds are increasing rapidly. Under the intermediate alternative II assumptions, tax income is expected to exceed expenditures until 2012, when the cost of the program will have started to increase with the retirement of the "baby-boom" generation. From that point on the tax rates scheduled in present law are expected to be insufficient to cover program expenditures and it will be necessary to use interest earned by the combined OASI and DI Trust Funds to make up the shortfall. Total income, including interest earnings, is expected to exceed expenditures through about 2018. Thereafter, it will be necessary to redeem assets to make up the shortfall. If no corrective action were taken, trust fund assets would be exhausted by the end of 2029, after which full benefits would not be payable on a timely basis. The resulting pattern of combined OASI and DI assets, expressed as a percentage of annual expenditures, is illustrated in figure I.H3 under each of the three alternative sets of assumptions.

  At the beginning of 1997, the combined assets of the OASI and DI Trust Funds represented about 153 percent of combined annual expenditures estimated for the year. Based on the intermediate assumptions, assets would accumulate to a peak of 265 percent of expenditures in 2011, and would then decline steadily until exhaustion in the year 2029. Based on the intermediate estimates in last year's report, the peak fund ratio for the combined funds was estimated to be 245 percent in 2011 and the year of exhaustion was also estimated to be 2029.
  

  
  

  Figure I.H3.­Trust Fund Ratios for OASI and DI Trust Funds, Combined [Assets as a percentage of annual expenditures]

  
  

  
  For OASI and DI, separately, the peak fund ratios based on the intermediate assumptions are 306 and 152 percent, respectively, in this year's report and 284 percent and 136 percent, respectively, in last year's report. The following table summarizes the projections in this year's report for OASI, DI, and the combined trust funds under the three sets of assumptions for the period 1997 through 2071.
  

  
  

  Table I.H3.­ OASDI Trust Fund Ratios
  		OASI	DI	Combined
  Intermediate:
  	Maximum trust fund ratio (percent)	306	152	265
  	Year attained	2013	2003	2011
  	Year of exhaustion	2031	2015	2029
  Low Cost:
  	Maximum trust fund ratio (percent)	469	1,276	457
  	Year attained	2017	2071	2018
  	Year of exhaustion	-	-	-
  High Cost:
  	Maximum trust fund ratio (percent)	195	115	175
  	Year attained	2007	1998	2001
  	Year of exhaustion	2022	2007	2018

  
  

  
  Under the low cost alternative I assumptions, the combined trust fund ratio rises rapidly until the retirement of the "baby-boom" generation, declines during the retirement years of the "baby-boom" generation, but levels off and then resumes increasing after 2060, even though annual balances are negative. This occurs because the assumed trust fund interest rates are high enough to offset the small annual deficits and still keep the trust funds growing faster than annual outgo. For the high cost alternative III, the combined trust fund is permanently exhausted in 2018.

  Trust fund assets are generally invested in special Treasury securities so that the excess of cash receipts over expenditures are borrowed from the trust funds by the general fund of the Treasury and used to help meet various Federal outlays. These securities are backed by the full faith and credit of the U.S. Government, the same as other public-debt obligations of the U.S. Government. The assets of the trust funds can be redeemed for cash at any time if required to meet program expenditures. The redemption of a Treasury security held by a trust fund requires that the Treasury transfer cash -- obtained from another revenue source, such as income taxes or borrowing from the public -- to the trust fund. Thus, the investment operations of the trust funds result in various cash flows between the trust funds and the general fund of the Treasury.

  Under the intermediate assumptions, the excess of OASDI income over outgo during the next 15 years will result in a substantial net cash flow from the trust funds of amounts borrowed by the general fund. Thereafter, this cash flow is expected to 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 economic and public policy implications that go well beyond the operation of the OASDI program itself. Discussion of these broader issues is not within the scope of this report.

  4. Test of Long-Range Close Actuarial Balance

  Because the OASI and DI programs, both separately and combined, have actuarial deficits that are more than 5 percent of the corresponding summarized cost rates over the next 75 years under the Trustees' intermediate (alternative II) assumptions, they do not meet the requirements of the Trustees' formal test for long-range close actuarial balance. (This test is described in detail in section II.F entitled "Actuarial Estimates" later in this report.)

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  I. CONCLUSION

  As we have reported for the last several years, the combined OASI and DI Trust Funds are adequately financed over the next 10 years, and for many years thereafter, but the program is not in close actuarial balance over the next 75 years. Thus, the combined funds meet the short-term solvency test under all three sets of assumptions, but not the long-term test.

  1. Short-Term Status

  At the beginning of 1997, the combined assets of the trust funds represented 153 percent of estimated expenditures in 1997. Under both the intermediate and low cost assumptions, the combined funds, as well as the ratio of fund assets at the beginning of a year to annual expenditures, are projected to grow during the next 10 years and for several years thereafter. However, under the high cost assumptions, while the assets of the combined funds continue to grow throughout the next 10 years, the trust fund ratio would be lower at the beginning of 2002, and each year thereafter, than it was at the beginning of the previous year. Both the OASI and DI Trust Funds separately meet the short-term solvency test.

  2. Long-Term Status

  Although the combined trust funds are well financed over the next 10 years, the OASDI program is not in close actuarial balance over the full 75-year projection period and therefore does not meet the long-term solvency test. The estimated actuarial balance is a deficit of 2.23 percent of taxable payroll over the next 75 years, based on the intermediate assumptions. The combined OASI and DI Trust Funds would become exhausted in 2029 without corrective legislation. At that time, annual tax revenues of the combined trust funds would be less than expenditures by 4.26 percent of taxable earnings and would be sufficient to cover only about 3/4 of annual expenditures.

  The intermediate estimates indicate that the combined trust funds would be sufficient to enable the timely payment of benefits for the next 32 years. Relative to annual expenditures, the combined trust funds would continue to grow during the next 14 years, reaching a peak of about 2.6 times annual expenditures. Considering each fund separately, the OASI Trust Fund would have sufficient funds for the next 34 years, and the DI Trust Fund for the next 18 years, to enable timely payment of benefits. Based on the high cost assumptions, the combined funds would be sufficient to enable the timely payment of benefits only for the next 21 years.

  For each of the next 15 years, OASDI income from contributions on earnings and income taxes on benefits is expected to exceed total expenditures. Starting in about 2010, however, OASDI costs, relative to taxable earnings, are expected to begin increasing rapidly as the "baby-boom" generation reaches retirement age. In contrast, the program's income from contributions on taxable earnings and income taxes on benefits will remain a relatively constant percentage of taxable payroll.

  Therefore, the OASDI cost rate is estimated to exceed the income rate from 2012 through the end of the projection period, with the shortfall reaching 5.90 percent of taxable earnings by 2071, the last year of the 75-year period. Based on the less favorable conditions assumed for the high cost estimates, the crossover point would be reached in 2001, and the shortfall would grow eventually to be 15.09 percent of taxable earnings by 2071.

  Although OASDI annual balances become negative in 2012 in the intermediate case, the availability of interest earnings results in continued trust fund growth until 2019. Because expenditures are estimated to increase faster than assets, however, OASDI assets would decline relative to annual expenditures, from about 2.6 to about 2.1 times annual expenditures, during the same period.

  3. Recommendations

  In view of the lack of close actuarial balance in the OASDI program over the next 75 years, we again urge that the long-range deficits of both the OASI and DI Trust Funds be addressed in a timely way. Because the DI Trust Fund is expected to be depleted several years earlier than the OASI Trust Fund, and because DI program growth has fluctuated widely in the past, it is essential that the DI program's future experience be monitored closely.

  It is important to address both the OASI and DI problems soon to allow time for phasing in any necessary changes and for workers to adjust their retirement plans to take account of those changes. The proposals in the recent Advisory Council Report and others being advanced by public officials and private organizations should be carefully evaluated by the government and the public. It is essential that the financial status of the Social Security program be strengthened and maintained.

  However, we continue to believe there is ample time to discuss and evaluate alternative solutions with deliberation and care. The size of the long-range deficit is such that long-range balance can be restored within the framework of the present program, or through plans that involve some structural change. Nonetheless, the impact of any required changes will be less disruptive the sooner they are enacted.

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