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1997 OASDI Trustees Report


D. TEN YEAR HISTORY OF ACTUARIAL BALANCE ESTIMATES

 This appendix chronicles the recent history of the primary measure of long-range actuarial status, namely the actuarial balance, as shown in the annual reports for 1987 and later. Actuarial balance is defined in detail in section II.F, Actuarial Estimates. Conceptually, the two basic components of actuarial balance are the summarized income rate and the summarized cost rate. Both rates are expressed as percentages of taxable payroll. For any given period, the actuarial balance is the difference between the present value of tax income for the period, and the present value of the outgo for the period, each divided by the present value of taxable payroll for all years in the period. Also included in the calculation of the actuarial balance are:

It should be noted that the current method of calculating the actuarial balance based on present values, though used prior to the 1973 Annual Report, was not used for the annual reports of 1973-87. Instead, a simpler method that approximates the results of the present-value approach, called the "average-cost" method, was used during that period. Under the average-cost method, the sum of the annual cost rates (which are expressed as percentages of taxable payroll) over the 75-year projection period was divided by the total number of years, 75, to obtain the average cost rate per year. The average income rate was similarly calculated, and the difference between the average income rate and the average cost rate was called the actuarial balance.

In 1973, when the average-cost method was first used, the long-range financing of the program was more nearly on a pay-as-you-go basis. Also, based on the long-range economic and demographic assumptions then being used, the annual rate of growth in taxable payroll was about the same as the annual rate at which the trust funds earned interest. In either situation (i.e., pay-as-you-go financing, where the annual income rate is the same as the annual cost rate, or an annual rate of growth in taxable payroll equal to the annual interest rate), the average-cost method produces the same result as the present-value method. However, by 1988, neither of these situations still existed.

As a result of legislation enacted in 1977 and in 1983, substantial increases in the trust funds were estimated to occur well into the next century, so that the program was partially "advance funded," rather than being funded on a pay-as-you-go basis. Also, because of declines in long-range fertility rates and average real-wage growth that were assumed in the annual reports over the period 1973-87, the annual rate of growth in taxable earnings assumed for the long range became significantly lower than the assumed interest rate. Therefore, during the period 1973-87, the results of the average-cost method and the present-value method began to diverge, and by 1988 they were quite different. While the average-cost method still accounted for most of the effects of the assumed interest rate, it no longer accounted for all of the interest effects. The present-value method, of course, does account for the full effect of the assumed interest rates. So, in 1988, the present-value method of calculating the actuarial balance was resumed.

A positive actuarial balance indicates that estimated income is more than sufficient to meet estimated trust fund obligations for the period as a whole. A negative actuarial balance indicates that estimated income is insufficient to meet estimated trust fund obligations for the entire period. An actuarial balance of zero indicates that the estimated income exactly matches estimated trust fund obligations for the period.

Table III.D1 shows the estimated OASDI actuarial balances, as well as the summarized income and cost rates, for the last 10 annual reports (1987-96), along with the estimates for the current report. The values shown are based on the intermediate alternative II assumptions, or alternative II-B for years prior to 1991.


Table III.D1.­ Long-Range Actuarial Balances for the OASDI Program as Shown for the Intermediate Assumptions 1/ in the Trustees' Reports Issued in Years 1987-97

[As a percentage of taxable payroll]
Year of report Summarized
income rate		 Summarized
cost rate		 Actuarial
balance		 Change from
previous year
         1987 12.89 13.51 -0.62 -0.18
         1988 12.94 13.52 -.58 +.04
         1989 13.02 13.72 -.70 -.13
         1990 13.04 13.95 -.91 -.21
         1991 13.11 14.19 -1.08 -.17
 
         1992 13.16 14.63 -1.46 -.38
         1993 13.21 14.67 -1.46 -.00
         1994 13.24 15.37 -2.13 -.66
         1995 13.27 15.44 -2.17 -.04
         1996 13.33 15.52 -2.19 -.02
 
         1997 13.37 15.60 -2.23 -.03
1 Values shown are based on the intermediate alternative II assumptions for 1991-97, and on the intermediate alternative II-B assumptions for 1987-90.

Note: Totals do not necessarily equal the sums of rounded components.



Rebenchmarking of the National Income and Product Accounts, and changes in demographic assumptions contributed to the change in actuarial balance for 1987. Various changes in assumptions and methods for the 1988 report had roughly offsetting effects on the actuarial balance. In 1989 and 1990, changes in economic assumptions accounted for most of the changes in the estimated actuarial balance. In 1991, the effect of legislation, changes in economic assumptions, and the introduction of the cost of reaching and maintaining an ending trust fund target combined to produce the change in actuarial balance. In 1992, changes in disability assumptions and the method for projecting average benefit levels accounted for most of the change in the actuarial balance. In 1993, numerous small changes in assumptions and methods had offsetting effects on the actuarial balance. In 1994, changes in the real-wage assumption, disability rates, and the earnings sample used for projecting average benefit levels accounted for most of the change in the actuarial balance. In 1995, numerous small changes had largely offsetting effects on the actuarial balance, including a substantial reallocation of the payroll tax rate, which reduced the OASI actuarial balance, but increased the DI actuarial balance. In 1996, a change in the method of projecting dually entitled beneficiaries produced a large increase in the actuarial balance, which almost totally offset decreases produced by changes in the valuation period and in the economic and demographic assumptions. Changes affecting the actuarial balance shown for the 1997 report are described in section II.F2g.


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