I. OVERVIEW

A. INTRODUCTION

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 1996, is the 56th such report.

B. ADVISORY COUNCIL

C. HIGHLIGHTS

• During calendar year 1995, OASDI benefits amounting to $332.6 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 1995 was 43.4 million.
• In 1995, an estimated 141 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 $399.5 billion in calendar year 1995, and expenditures were $339.8 billion. The assets of the combined funds, therefore, increased by $59.7 billion, from $436.4 billion at the end of December 1994 to $496.1 billion at the end of December 1995.
• Assets at the beginning of the year, as a percentage of expenditures during the year, increased from 128 percent at the beginning of 1995 to an estimated 140 percent at the beginning of 1996, for the combined OASI and DI Trust Funds.
• Interest earnings on the invested assets of the combined OASI and DI Trust Funds were $35.0 billion in calendar year 1995. This represented an effective annual interest rate of 7.8 percent, earned by the combined assets during calendar year 1995. During the same period, the average interest rate on new securities purchased by the trust funds was 6.9 percent.
• Administrative expenses for the OASDI program were $3.1 billion in calendar year 1995, or about 0.9 percent of benefit payments in the year.
• An automatic benefit increase of 2.6 percent became effective for December 1995. The OASDI contribution and benefit base was increased from $61,200 for 1995, to $62,700 for 1996.

• 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 $496.1 billion at the end of calendar year 1995, or 140 percent of estimated expenditures in 1996, to $1,276 billion, or 221 percent of annual expenditures, at the beginning of the year 2005, based on the intermediate assumptions.
• The assets of the OASI Trust Fund are expected to increase rapidly during the next 10 years, from 148 percent of annual expenditures at the beginning of 1996 to about 239 percent of annual expenditures at the beginning of the year 2005, 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 83 percent of annual expenditures at the beginning of 1996 to 136 percent of annual expenditures at the beginning of 2002, 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 2002, becoming 127 percent at the beginning of 2005.
• In the short range, 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 $2.87 trillion, in nominal dollars. The assets are then estimated to decline to $2.83 trillion 2 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 2.19 percent of taxable payroll based on the intermediate assumptions, slightly larger than the difference of 2.17 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 77 percent 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 1995 Annual Report.
• Income from OASDI payroll taxes will remain at a constant rate of 12.4 percent of taxable payroll. Adding the OASDI income from the taxation of benefits to the income from payroll taxes currently yields a total "income rate" of 12.6 percent. This total income rate is estimated to increase gradually to 13.3 percent of taxable payroll by the end of the 75-year projection period based on the intermediate assumptions, as the number of beneficiaries with benefit amounts subject to taxation rises in the future.
• OASDI expenditures for benefit payments and administrative expenses currently represent about 11.6 percent of taxable payroll. These expenditures are estimated to remain below tax revenues until 2012, based on the intermediate assumptions. 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 18.8 percent under the intermediate assumptions, resulting in an annual deficit of about 5.5 percent. Annual tax revenue would be sufficient to cover only 71 percent 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 6.6 percent of GDP by the end of the 75-year projection period, and the annual deficit is estimated to be 1.9 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 continuing thereafter, under the intermediate assumptions. 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.

D. TRUST FUND FINANCIAL OPERATIONS

1. Income

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 1995, OASDI payroll tax income amounted to $359.0 billion, representing 90 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 $5.8 billion in 1995. (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 1995 amounted to $35.0 billion. As an offset to income, $0.3 billion was transferred from the OASI and DI Trust Funds to the general fund of the Treasury to adjust past reimbursements for the cost of noncontributory wage credits for military service prior to 1957.

2. Expenditures

3. Trust Fund Assets

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 1995, interest income to the combined OASI and DI Trust Funds represented 8.8 percent of total OASDI income. On a combined basis, interest income in 2005 would represent an estimated 12.5 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.

E. INTRODUCTION TO ACTUARIAL ESTIMATES

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.

F. ECONOMIC AND DEMOGRAPHIC ASSUMPTIONS

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. Table I.F1 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.

These key assumptions for this report are quite similar to the assumptions used in the 1995 report. The only significant change in any of the ultimate economic or demographic assumptions is an increase in the assumed ultimate rates of mortality improvement for ages under 65. The rate of improvement for the non-elderly was increased to be greater than the rate assumed for the elderly, which is consistent with experience throughout this century. An additional change was made in the distribution of annual net immigration. The net number of other-than-legal immigrants assumed to enter the Social Security area population each year was increased by 50,000, while the net number of legal immigrants was decreased by 50,000. These changes are consistent with estimates based on recent data from the Immigration and Naturalization Service (INS). Under the intermediate assumptions, the ultimate assumed level of net annual immigration of 900,000 is the combination of 600,000 net legal immigrants per year and 300,000 net other-than-legal immigrants per year.

Revisions of other economic and demographic assumptions for the early years of the projection period, based on data collected since the 1995 report, had little effect in the long range, with the exception of changes in the level of wages and self-employment income reported in the National Income and Product Accounts (NIPA) for 1994 and later. Lower levels of wages and self-employment income result in lower estimated amounts of OASDI taxable payroll throughout the 75-year projection period.

These assumptions reflect a careful assessment of past data and future prospects. No major changes in ultimate economic or demographic assumptions, other than those made for immigration, were deemed necessary to ensure that the financial projections continue to be based on a plausible range of economic and demographic conditions. Other changes in assumptions and methods reflected in the estimates in this report are discussed in section II.F.

Recent and expected future changes in the calculation of the CPI by the Bureau of Labor Statistics and recent changes in the methodology used in measuring real GDP growth by the Bureau of Economic Analysis were not reflected in the development of assumptions for this report. The analysis that must be undertaken to fully incorporate the implications of these changes, including particularly the magnitude of the effect of each change and the extent to which their separate effects may be offsetting, will be completed in time to make any necessary adjustments in next year's report.

G. SHORT-RANGE ACTUARIAL ESTIMATES

For example, OASDI assets at the beginning of calendar year 1996 amounted to $496 billion, while assets at the beginning of 1960 were $22 billion. The asset level in 1996 would be sufficient to cover roughly 17 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.

OASI Trust Fund

As shown in figure I.G1, the OASI trust fund ratio is estimated to increase from 148 percent at the beginning of 1996 to 239 percent by 2005, 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 and then decline slightly after 2001. 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.

DI Trust Fund

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 near the end of the short-range projection period. This situation is similar to projections made for the 1995 Annual Report.

OASI and DI Trust Funds, Combined

As shown, the trust fund ratio for OASI and DI on a combined basis is estimated to increase from 140 percent at the beginning of 1996 to 221 percent by 2005, based on the intermediate assumptions. While the ratio would also increase throughout the 10-year period based on the low cost assumptions, it would begin to decline after the year 2000 under the high cost assumptions (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.

H. LONG-RANGE ACTUARIAL ESTIMATES

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

For calendar year 1996, 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 beneficiaries will become subject to taxation. Thus, the income rate is projected to increase somewhat from its current level, reaching about 13.32 percent of taxable payroll by the year 2070. 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 15 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 2070 the cost rate is estimated to have reached 13.12 percent, 18.83 percent, and 28.02 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 1995, 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.

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 2021, 2012, and 2000, under alternatives I, II, and III, respectively, resulting in positive annual balances. Thereafter, under the intermediate assumptions, the annual deficit would rise rapidly, reaching 2 percent of taxable payroll by 2020 and 5.51 percent in the year 2070. Under alternative I, a temporary period of deficits in excess of 1 percent of taxable payroll (from 2027 through 2036) 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 14 percent of taxable payroll by the year 2070.

2. Summarized Income Rates, Cost Rates, and Balances

A surplus is shown under the intermediate alternative II assumptions for the first subperiod only; 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 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 table I.H2.

The difference between the summarized income and cost rates is called the 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 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 2.19 percent under intermediate assumptions were addressed by raising scheduled tax rates by 1.10 percent for employees and employers, each, and by 2.20 percent for the self-employed, then OASDI assets at the beginning of 1996, 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 1996, the combined assets of the OASI and DI Trust Funds represented about 140 percent of combined annual expenditures estimated for the year. Under alternatives I and II, this ratio would increase at least until 2012. Based on the intermediate assumptions, assets would accumulate to a peak of 245 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 269 percent and the year of exhaustion was estimated to be 2030.

For OASI and DI, separately, the peak fund ratios based on the intermediate assumptions are 284 and 136 percent, respectively, in this year's report and 311 percent and 142 percent, respectively, in last year's report. The reduction in the maximum fund ratio for OASI, DI, and the combined program results primarily from lower expected payroll revenue, based on revised historical wage data (see section II.F2g for details). Table I.H3 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 1996 through 2070.

Under the low cost alternative I assumptions, the combined trust fund ratio roughly levels off during the retirement years of the baby-boom generation, but resumes increasing by 2040, 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 2016.

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 16 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

I. CONCLUSION

1. Short-term Status

2. Long-term Status

The intermediate estimates indicate that the combined trust funds would be sufficient to enable the timely payment of benefits for the next 33 years. Relative to annual expenditures, the combined trust funds would continue to grow during the next 15 years, reaching a peak of about 2.4 times annual expenditures. Considering each fund separately, the OASI Trust Fund would have sufficient funds for the next 35 years, and the DI Trust Fund for the next 19 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 20 years.

For each of the next 16 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 5.51 percent of taxable earnings by 2070, 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 2000, and the shortfall would grow eventually to be 14.24 percent of taxable earnings by 2070.

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 2.4 to about 1.9 times annual expenditures, during the same period.

3. Recommendations