1997 OASDI Trustees 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.­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

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

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