Short-Range Actuarial EstimatesFor the short range (2009-2018), the Trustees measure financial adequacy by comparing projected assets at the beginning of each year to projected program cost for that year under the intermediate set of assumptions. Having a trust fund ratio of 100 percent or more—that is, assets at the beginning of each year at least equal to projected cost for the year—is considered a good indication of a trust fund’s ability to cover most short-term contingencies. The projected trust fund ratios for OASI alone, and for OASI and DI combined, under the intermediate assumptions exceed 100 percent throughout the short-range period and therefore OASI and OASDI satisfy the Trustees’ short-term test of financial adequacy. Considering the DI program alone, however, its trust fund ratio is projected to fall below the 100 percent level by the beginning of 2014. Thus, DI fails to satisfy the Trustees’ short-term test of financial adequacy. Figure II.D1 below shows that the trust fund ratios for the combined OASI and DI Trust Funds reach a peak level in 2012 and begin declining thereafter.

Figure II.D1.—Short-Range OASDI Trust Fund Ratios

[Assets as a percentage of annual expenditures] Long-Range Actuarial EstimatesThe actuarial status of the program over the next 75 years is measured in terms of annual cost and income as a percentage of taxable payroll, trust fund ratios, the actuarial balance (also as a percentage of taxable payroll), and the open group unfunded obligation (expressed in present-value dollars and as percentages of taxable payroll and gross domestic product (GDP)). Considering Social Security’s annual cost and income as a percentage of the total U.S. economic output or GDP provides an additional important perspective.The year-by-year relationship between income and cost rates shown in figure II.D2 illustrates the expected pattern of cash flows for the OASDI program over the full 75-year period. Under the intermediate assumptions, the OASDI cost rate is projected to increase rapidly and first exceed the income rate in 2016, producing cash-flow deficits thereafter. Redemption of trust fund assets will allow continuation of full benefit payments on a timely basis until 2037, when the trust funds are projected to become exhausted. This redemption process will require a flow of cash from the General Fund of the Treasury. Pressures on the Federal Budget will thus emerge well before 2037. Even if a trust fund’s assets are exhausted, however, tax income will continue to flow into the fund. Present tax rates are projected to be sufficient to pay 76 percent of scheduled benefits after trust fund exhaustion in 2037 and 74 percent of scheduled benefits in 2083.

Figure II.D2.—OASDI Income and Cost Rates Under Intermediate Assumptions

[As a percentage of taxable payroll] Social Security’s cost rate is projected to rise rapidly from about 2012 through 2030 because the retirement of the baby-boom generation will cause the number of beneficiaries to rise much faster than the labor force. Thereafter, the cost rate is estimated to rise at a slower rate for about 5 years and then to remain fairly stable for the next 25 years. Continued reductions in death rates and maintaining birth rates at levels well below those from the baby-boom era and before will cause a continued increase in the average age of the population and will raise the cost rate from 16.7 percent of taxable payroll in 2060 to 17.7 percent by 2083 under the intermediate assumptions. After 2083, the increase in the average age of the population is likely to continue and to increase the gap between OASDI cost and income rates.The estimated number of workers per beneficiary is shown in figure II.D3. There were about 3.2 workers for every OASDI beneficiary in 2008. This ratio has been extremely stable, remaining between 3.2 and 3.4 since 1974. However, the baby-boom generation will have largely retired by 2030, and the ratio of workers to beneficiaries is projected to be only 2.2 at that time. Thereafter, the number of workers per beneficiary will slowly decline, and the OASDI cost rate will continue to increase, largely due to projected reductions in mortality.

Figure II.D3.—Number of Covered Workers Per OASDI Beneficiary The maximum projected trust fund ratios for the OASI, DI, and combined funds appear in table II.D1. The year in which the maximum projected trust fund ratio is attained and the year in which the assets are projected to be exhausted are shown as well.

Table II.D1.—Projected Maximum Trust Fund Ratios Attained and

Trust Fund Exhaustion Dates Under the Intermediate Assumptions Year of trust fund exhaustion The actuarial balance is a measure of the program’s financial status for the 75-year valuation period as a whole. It is essentially the difference between income and cost of the program expressed as a percentage of taxable payroll over the valuation period. This single number summarizes the adequacy of program financing for the period. When the actuarial balance is negative, the actuarial deficit can be interpreted as the percentage that could be added to the current-law income rate for each of the next 75 years, or subtracted from the cost rate for each year, to bring the funds into actuarial balance. Because the effects of future changes are unlikely to follow this pattern, this measure should be viewed only as providing a rough indication of the amount of change that is needed over the 75‑year period as a whole. In this report, the actuarial balance under the intermediate assumptions is a deficit of 2.00 percent of taxable payroll for the combined OASI and DI Trust Funds. The actuarial deficit was 1.70 percent in the 2008 report and has been in the range of 1.70 percent to 2.07 percent for the last 10 reports. The actuarial deficit increases relative to the level estimated in last year’s report primarily because of revised economic data through 2008, the significant near-term effects of the current economic recession, and the longer-term effects of lower ultimate mortality rates.Another way to illustrate the financial shortfall of the OASDI system is to examine the cumulative value of income less cost, in present value. Figure II.D4 shows the present value of cumulative OASDI income less cost through the next 75 years. The balance of the combined trust funds peaks at $2.6 trillion in 2016 (in present value) and then turns downward. This cumulative amount continues to be positive, indicating trust fund assets, or reserves, through 2036. However, after 2036 this cumulative amount becomes negative, indicating a net unfunded obligation. Through the end of 2083, the combined funds have a present-value unfunded obligation of $5.3 trillion. This unfunded obligation represents 1.9 percent of future taxable payroll and 0.7 percent of future GDP through the end of the 75-year projection period. The 0.1 percentage point difference between the unfunded obligation as a share of taxable payroll (1.9 percent) and the actuarial balance (2.0 percent) reflects the additional requirement of an ending trust fund balance equal to 1 year’s cost for the actuarial balance calculation.

Figure II.D4.—Cumulative OASDI Income Less Cost, Based on Present Law Tax Rates

and Scheduled Benefits

[Present value as of January 1, 2009, in trillions] Still another important way to look at Social Security’s future is to view its annual cost and tax income as a share of U.S. economic output. Figure II.D5 shows that Social Security’s cost as a percentage of GDP is projected to grow from 4.8 percent in 2009 to 6.1 percent in 2030, and then to peak at almost 6.2 percent in 2034. Thereafter, OASDI cost as a percent of GDP is projected to decline reaching a level around 5.8 percent for the period 2050 through 2083. However, Social Security’s scheduled tax revenue is projected to decline from its current level of about 5.0 percent of GDP, reaching about 4.4 percent by 2083. Income from payroll taxes declines generally in relation to GDP in the future because an increasing share of employee compensation is assumed to be provided in fringe benefits, making wages a shrinking share of GDP.

Figures II.D2, II.D4, and II.D5 show that the program’s financial condition is worsening at the end of the period. Overemphasis on summary measures for a 75‑year period can lead to incorrect perceptions and to policy prescriptions that do not achieve sustainable solvency. Thus, careful consideration of the trends in annual deficits and unfunded obligations toward the end of the 75-year period is important. In addition, summary measures for a time period that extends to the infinite horizon are included in this report. These measures provide an additional indication of Social Security’s very long-run financial condition, but are subject to much greater uncertainty. These calculations show that extending the horizon beyond 75 years increases the unfunded obligation. Over the infinite horizon, the shortfall (unfunded obligation) is $15.1 trillion in present value, or 3.4 percent of future taxable payroll and 1.2 percent of future GDP. These calculations of the shortfall indicate that much larger changes may be required to achieve solvency beyond the 75-year period as compared to changes needed to balance 75-year period summary measures. The measured unfunded obligation over the infinite horizon is increased from $13.6 trillion in last year’s report. In the absence of any changes in assumptions, methods, and starting values, the unfunded obligation over the infinite horizon would have risen to $14.3 trillion due to the change in the valuation date. The additional increase in the unfunded obligation over the infinite horizon is largely the result of the changes in near-term economic and ultimate mortality assumptions. Expressed as percentages of taxable payroll and of GDP, the measured unfunded obligation over the infinite horizon increased from 3.2 percent and 1.1 percent, respectively, in last year’s report.Significant uncertainty surrounds the intermediate assumptions. The Trustees utilize several methods to help illustrate that uncertainty. One approach is the use of low-cost (alternative I) and high-cost (alternative III) assumptions. Figure II.D6 shows the projected trust fund ratios for the combined OASI and DI Trust Funds under the intermediate, low-cost, and high-cost assumptions. The low-cost alternative reflects a set of assumptions that improves the projected financial status of the trust funds relative to the financial status under the intermediate set of assumptions. The low-cost alternative includes a higher ultimate total fertility rate, slower improvement in mortality, a higher real-wage differential, and lower unemployment. The high-cost alternative, in contrast, includes a lower ultimate total fertility rate, more rapid improvement in mortality, a lower real-wage differential, and higher unemployment. These alternatives are not intended to suggest that all parameters would be likely to differ from the intermediate values in the same direction, but are intended to illustrate the effect of scenarios that are, on balance, very favorable or unfavorable for the program’s financial status. The actual outcome for future costs is unlikely to be as extreme as either of the outcomes portrayed by the low- and high-cost projections. The method for constructing these low- and high-cost projections does not provide an estimate of the probability that actual experience will lie within or outside the range they define.

Figure II.D6.—Long-Range OASDI Trust Fund Ratios Under Alternative Assumptions

[Assets as a percentage of annual cost] This report also provides long-range sensitivity analysis for the OASDI program, varying one parameter at a time, in Appendix D. These estimates provide further illustrations of the uncertainty surrounding projections into the future, but do not provide any measure of the probability that future outcomes will fall within or outside the ranges shown.A third approach that measures uncertainty uses stochastic simulations to develop a range of projections and does provide estimates of the probability that future outcomes will fall within or outside a given range. The results of the stochastic simulations, discussed in more detail in Appendix E, suggest that trust fund exhaustion is highly probable sometime during the 75-year period (see figure II.D7). Further, the stochastic results suggest that outcomes as good as the low-cost alternative or as bad as the high-cost alternative are unlikely. However, the relationship between the stochastic results and the low- and high-cost alternatives may change as the methodology for the stochastic simulations is further developed. As noted in Appendix E, future improvements and refinements are expected to be more likely to expand rather than reduce the indicated range of uncertainty.

Figure II.D7.—Annual Trust Fund Ratios The long-range OASDI actuarial deficit of 2.00 percent of taxable payroll for this year’s report is larger than the deficit of 1.70 percent of taxable payroll shown in last year’s report under intermediate assumptions. Changes in near-term economic growth and ultimate mortality assumptions, as well as changes in starting values, are the main reasons for the increase in the deficit.For this year’s intermediate projections, real GDP growth starts at a lower level than was assumed last year for 2008 and then declines through the second quarter of 2009. The recovery from the recession brings economic activity to the projected stable, sustainable path by the end of 2015. These revised economic assumptions account for about half of the estimated reduction in the program’s actuarial balance relative to last year’s report. The effect of the recession on the actuarial balance would be smaller than projected in this report if the recovery were such that economic output substantially overshoots the projected sustainable path, a phenomenon observed in some past business cycles. For a detailed description of the specific changes identified in table II.D2 below, see section IV.B7 on page 68.

Table II.D2.—Reasons for Change in the 75-Year Actuarial Balance

Under Intermediate Assumptions [As a percentage of taxable payroll] Valuation period^{a}

In changing from the valuation period of last year’s report, which was 2008-82, to the valuation period of this report, 2009-83, the relatively large negative annual balance for 2083 is included. This change in the valuation period results in a larger long-range actuarial deficit. The fund balance at the end of 2008, i.e., at the beginning of the projection period, is included in the 75-year actuarial balance.

The open group unfunded obligation over the 75-year projection period has increased from $4.3 trillion (present discounted value as of January 1, 2008) to $5.3 trillion (present discounted value as of January 1, 2009). The measured unfunded obligation would be expected to increase by about $0.3 trillion due to advancing the valuation date by 1 year and including the additional year 2083. Changes in methods, revisions in assumptions, and updated data further increased the measured unfunded obligation by about $0.7 trillion.Figure II.D8 shows that this year’s projections of annual balances (noninterest income minus cost) are lower than those in last year’s report throughout the 75-year projection period.

Figure II.D8.—OASDI Annual Balances: 2008 and 2009 Trustees Reports

[As a percentage of taxable payroll under the intermediate assumptions]

SSA Home | Privacy Policy | Website Policies & Other Important Information | Site Map | Actuarial Publications | May 12, 2009 |