2015 OASDI Trustees Report

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V. ASSUMPTIONS AND METHODS UNDERLYING
ACTUARIAL ESTIMATES
The future income and cost of the OASDI program will depend on many demographic, economic, and program-specific factors. Trust fund income will depend on how these factors affect the size and composition of the working population as well as the level and distribution of earnings. Similarly, program cost will depend on how these factors affect the size and composition of the beneficiary population as well as the general level of benefits.
The Trustees make basic assumptions for several of these factors based on analysis of historical trends, historical conditions, and expected future conditions. These factors include fertility, mortality, immigration, marriage, divorce, productivity, inflation, average earnings, unemployment, real interest rate, and disability incidence and termination. Other factors depend on these basic assumptions. These other, often interdependent, factors include total population, life expectancy, labor force participation, gross domestic product, and program-specific factors. Each year the Trustees reexamine these assumptions and methods in light of new information and make appropriate revisions. The Trustees selected the assumptions for this report by the end of January 2015.
Future levels of these factors and their interrelationships are inherently uncertain. To address these uncertainties, this report uses three sets of assumptions, designated as intermediate (alternative II), low-cost (alternative I), and high-cost (alternative III). The intermediate set represents the Trustees’ best estimate of the future course of the population and the economy. With regard to the net effect on the actuarial status of the OASDI program, the low-cost set is more optimistic and the high-cost set is more pessimistic. The low-cost and high-cost sets of assumptions reflect significant potential changes in the interrelationships among factors, as well as changes in the values for individual factors.
While it is unlikely that all of the factors and interactions will differ in the specified directions from the intermediate values, many combinations of individual differences in the factors could have a similar overall effect. Outcomes with overall long-range cost as low as the low-cost scenario or as high as the high-cost scenario are very unlikely. This report also includes sensitivity analysis, where factors are changed one at a time (see appendix D), and a stochastic projection, which provides a probability distribution of possible future outcomes that is centered around the intermediate assumptions (see appendix E).
Readers should interpret with care the estimates based on the three sets of alternative assumptions. These estimates are not specific predictions of the future financial status of the OASDI program. Rather, they represent a reasonable range of future income and cost bounded by two plausible, albeit very unlikely, demographic and economic scenarios.
The Trustees assume that values for each of the demographic, economic, and program-specific factors change toward long-range ultimate values from recent levels or trends within the next 25 years. For extrapolations beyond the 75‑year long-range period, the ultimate levels or trends reached by the end of the 75‑year period remain unchanged. The assumed ultimate values represent average annual experience or growth rates. Actual future values will exhibit fluctuations or cyclical patterns, as in the past.
The following sections briefly discuss the various assumptions and methods required to make the estimates of trust fund financial status, which are the heart of this report.1 There are, of course, many interrelationships among these factors that are important but are beyond the scope of this discussion.
A. DEMOGRAPHIC ASSUMPTIONS AND METHODS
Table V.A1 displays the principal demographic assumptions relating to fertility, mortality, and net immigration for the three alternatives.
1. Fertility Assumptions
Birth rates by single year of age, for women aged 14 to 49, are the basis for the fertility assumptions. These rates apply to the total number of women, across all marital statuses, in the midyear population at each age.
Historically, birth rates in the United States have fluctuated widely. The total fertility rate2 decreased from 3.31 children per woman at the end of World War I (1918) to 2.15 during the Great Depression (1936). After 1936, the total fertility rate rose to 3.68 in 1957 and then fell to 1.74 by 1976. After 1976, the total fertility rate began to rise again until it reached a level of 2.07 for 1990. From 1991 to 2006, the total fertility rate averaged 2.03 children per woman. Then, the total fertility rate dropped from 2.12 in 2007 to 1.88 in 2012 and, based on preliminary data, to 1.87 in 2013. The recession and high unemployment are likely reasons for this drop. The estimated total fertility rate for 2014 is 1.88.
These variations in the total fertility rate resulted from changes in many factors, including social attitudes, economic conditions, birth-control practices, and the racial/ethnic composition of the population. The Trustees expect future total fertility rates to remain close to recent levels. Certain population characteristics, such as the higher percentages of women who have never married, of women who are divorced, and of young women who are in the labor force, are consistent with continued lower total fertility rates than experienced during the baby-boom era (1946-65). Based on consideration of these factors, the Trustees assume ultimate total fertility rates of 2.20, 2.00, and 1.80 children per woman for the low-cost, intermediate, and high-cost assumptions, respectively. The ultimate intermediate total fertility rate is unchanged from last year’s report. However, the ultimate low-cost and high-cost total fertility rates are 0.1 child per woman closer to the ultimate intermediate rate than in last year’s report.
For the intermediate assumptions, the projected total fertility rate rises until it reaches 2.07 for 2022. This reflects the assumption that the drop in the total fertility rate below 2.0 children per woman during the recent economic downturn was in part a deferral in childbearing that will be largely offset with full economic recovery. Thereafter, the total fertility rate follows a linear trend toward the ultimate level in 2027. The assumed low-cost and high-cost total fertility rates trend away from the intermediate path and reach the ultimate values in 2023 and 2032, respectively. Note that the projected total fertility rates reach their ultimate levels earlier than assumed in last year’s report (i.e., earlier than the 25th year of the projection period).
2. Mortality Assumptions
For the projections in this year’s report, ultimate average annual percentage reductions in future mortality rates were assumed by age group, sex, and cause of death. These assumptions were then used to estimate future central death rates, also by age group, sex, and cause of death. From these estimated central death rates, probabilities of death by single year of age and sex were calculated.
Historical death rates are calculated for years 1900‑2011 for ages below 65 (and for all ages for years prior to 1968) using data from the National Center for Health Statistics (NCHS).3 For ages 65 and over, final Medicare data on deaths and enrollments for years 1968 through 2011 and preliminary data for 2012 are used. Death rates by cause of death are produced for all ages for years 1979‑2011 using data from the NCHS.
The total age-sex-adjusted death rate4 declined at an average annual rate of 1.06 percent between 1900 and 2011. Between 1979 and 2011, the period for which death rates were analyzed by cause, the total age-sex-adjusted death rate, for all causes combined, declined at an average rate of 0.96 percent per year.
Death rates have declined substantially in the U.S. since 1900, with rapid declines over some periods and slow or no improvement over the other periods. Historical death rates generally declined more slowly for older ages and more rapidly for children than for the rest of the population. Between 1900 and 2011, the age-sex-adjusted death rate for 65 and over declined at an average rate of 0.79 percent per year, while declining at an average rate of 3.11 percent per year for ages under 15.
Many factors are responsible for historical reductions in death rates, including increased medical knowledge, increased availability of health-care services, and improvements in sanitation and nutrition. Considering the expected rate of future progress in these and other areas, the Trustees present three alternative sets of ultimate annual percentage reductions in central death rates by age group and cause of death, for 2039 and later. The intermediate set, alternative II, represents the Trustees’ best estimate. The average annual percentage reductions for alternative I (low-cost) are smaller than those for alternative II, while those for alternative III (high-cost) are larger. These ultimate annual percentage reductions are the same as those in last year’s report.
For the years 2012 through 2014, the assumed annual reductions in central death rates are the same as the average annual reductions by age group, sex, and cause of death experienced between 2001 and 2011. After 2014, annual reductions in central death rates for alternative II are assumed to transition rapidly from the trend experienced between 2001 and 2011, until they reach the ultimate annual percentage reductions for 2039 and later. The assumed reductions in death rates under alternatives I and III also rapidly approach their ultimate levels, but start from levels which are, respectively, 50 and 150 percent of the corresponding alternative II level.
Table V.A1 contains historical and projected age-sex-adjusted death rates for the total population (all ages), for ages under 65, and for ages 65 and over. Age-sex adjustment eliminates the effect of a changing distribution of population by age and sex, allowing the pure effects of changes in death rates to be observed. Under the intermediate assumptions, projected age-sex-adjusted death rates are slightly lower for ages under 65, and slightly higher for ages 65 and over, than the death rates in last year’s report. These changes primarily result from incorporating an additional year of historical data.
The projected average annual rate of decline for the total age-sex-adjusted death rate is about 0.41 percent, 0.78 percent, and 1.18 percent between 2014 and 2089 for alternatives I, II, and III, respectively. In keeping with the patterns observed in the historical data, the assumed future rates of decline are greater for younger ages than for older ages, but to a substantially lesser degree than in the past. Accordingly, the projected age-sex-adjusted death rates for ages 65 and over decline at average annual rates of about 0.36 percent, 0.69 percent, and 1.04 percent between 2014 and 2089 for alternatives I, II, and III, respectively. The projected age-sex-adjusted death rates for ages under 15 decline at average annual rates of about 0.79 percent, 1.58 percent, and 2.58 percent between 2014 and 2089 for alternatives I, II, and III, respectively.
Demographers express a wide range of views on the likely rate of future decline in death rates. For example, some believe that the long-standing historical tendency for mortality to decline more slowly at the highest ages will cease in the future. Others believe that biological factors, social factors, and limitations on health care spending may slow future rates of decline in mortality.5
The Trustees periodically revise the assumed ultimate rates of decline in mortality based on experience and new conditions. Evolving trends in health care and lifestyle will determine what modifications to the assumed ultimate rates of decline in mortality will be warranted for future reports.
3. Immigration Assumptions
Projections of the total Social Security area population reflect assumptions for annual legal immigration, legal emigration, “other immigration,” and “other emigration.” Legal immigration consists of persons who are granted legal permanent resident status. Legal emigration consists of legal permanent residents and citizens who leave the Social Security area population. Net legal immigration is the difference between legal immigration and legal emigration. “Other immigration” consists of immigrants who enter the Social Security area in a given year and stay to the end of that year without having legal permanent resident status, such as undocumented immigrants and temporary foreign workers and students. “Other emigration” consists of other immigrants who leave the Social Security area population or who adjust their status to become legal permanent residents. Net other immigration is the difference between other immigration and other emigration. Net immigration refers to the sum of net legal immigration and net other immigration.
Immigration assumptions differ for the low-cost, intermediate, and high-cost scenarios. The low-cost scenario includes higher annual net immigration and the high-cost scenario includes lower annual net immigration. The immigration assumptions were modified for this year’s report to reflect the President’s 2014 executive actions on immigration.
Legal immigration increased after World War II to around 300,000 persons per year and remained around that level until shortly after 1960. With the Immigration Act of 1965 and other related changes, annual legal immigration increased to about 400,000 and remained fairly stable until 1977. Between 1977 and 1990, legal immigration once again increased, averaging about 565,0006 per year.
The Immigration Act of 1990, which took effect in fiscal year 1992, restructured the immigration categories and increased significantly the number of immigrants who may legally enter the United States. Legal immigration averaged about 780,0001 persons per year during the period 1992 through 1999. Legal immigration increased to about 895,000 in 2000 and about 1,060,000 in 2001, primarily due to an increase in the number of persons granted legal permanent resident status as immediate relatives of U.S. citizens, the only category of legal immigration that is not numerically limited. However, legal immigration declined to less than 770,000 by 2003 as processing slowed and the number of pending applications increased. From 2003 to 2006, processing accelerated and legal immigration increased until it reached about 1,215,000 for 2006. For 2007 through 2009, legal immigration decreased to about 1,110,000 and declined further to about 1,050,000 for 2010, 1,055,000 for 2011, 1,020,000 for 2012, and 990,000 for 2013. The estimated level of legal immigration for 2014 is 1,000,000.
The intermediate alternative assumes that annual legal immigration will be 1,060,000 persons for 2015 and later. Alternatives I and III assume that ultimate annual legal immigration will be 1,260,000 persons and 860,000 persons, respectively, for 2016 and later. The ultimate assumption for each alternative is 10,000 higher than the level assumed in last year’s report, due to the President’s 2014 executive actions on immigration.
The assumed ratios of annual legal emigration to legal immigration are 20, 25, and 30 percent for alternatives I, II, and III, respectively. This range is consistent with the limited historical data for legal emigration from the Social Security area. These ratios are unchanged from last year’s report. Under the intermediate alternative, by combining the ultimate annual legal immigration and emigration assumptions, ultimate annual net legal immigration is 795,000 persons. For the low-cost and high-cost scenarios, ultimate annual net legal immigration is about 1,010,000 persons and 600,000 persons, respectively.
This year’s report continues with the new methodology introduced in last year’s report for projecting the other immigrant population. Three categories of other immigrants are modeled separately: (1) those that were never authorized to enter the Social Security area; (2) those legally admitted for a limited period of time such as students, temporary workers, and exchange visitors (“nonimmigrants”); and (3) those that were nonimmigrants, but have overstayed their visas. In addition, other emigration is estimated by applying distinct departure rates to each of the three separate other-immigrant categories, by age and sex.
The estimated number of other immigrants residing in the Social Security area increased from 9.1 million persons for January 1, 2000, to 14.1 million persons for January 1, 2008. The estimated other-immigrant population is 13.3 million persons for January 1, 2009, 13.4 million persons for January 1, 2010 and January 1, 2011, and 13.3 million persons for January 1, 2012. The estimates for these 4 years are significantly lower than estimates for prior years’ levels, and this is likely due to the recession.
During the period from 2000 to 2006, the estimated level of annual other immigration averaged about 1.4 million persons. However, during 2007 to 2010 (the recession and its surrounding years), annual levels dropped significantly, averaging only about 0.7 million persons. Estimated levels for 2011 through 2014 increase from about 0.6 million persons in 2011 to about 1.2 million persons in 2014. Under the intermediate assumptions, annual other immigration is 1.4 million for 2015, and increases to 1.55 million for 2018 and 2019, reflecting a recovery from recession-depleted levels of the other-immigrant population. Subsequently, it decreases to the ultimate level of 1.35 million persons for 2022. For the low-cost and high-cost scenarios, the future ultimate annual other immigration is 1.65 million persons and 1.05 million persons, respectively, for 2022 and later. The ultimate assumption for each alternative is 50,000 lower than in last year’s report, due to changes expected as a result of the President’s 2014 executive actions on immigration.
Emigration from the other-immigrant population includes those who leave the Social Security area and those who adjust their status to become legal permanent residents. This other-immigrant population is highly mobile and far more likely to leave the Social Security area than is the citizen or legal permanent resident population.
Under the intermediate assumptions, the total annual number of other emigrants who leave the Social Security area averages about 555,000 through the 75‑year projection period. In addition, the ultimate annual number of other immigrants who adjust status to become legal permanent residents is assumed to be 450,000 for the intermediate assumptions. This ultimate annual number who adjust status is one-third of the ultimate annual number of other immigrants entering the Social Security area. For the low-cost and high-cost scenarios, the total annual number of other emigrants averages about 650,000 and 435,000, respectively, through the 75‑year projection period. The ultimate annual number of people adjusting status to legal permanent resident status is assumed to be 550,000 persons and 350,000 persons, for the low-cost and high-cost scenarios, respectively. While the ultimate annual number of people adjusting status to become legal permanent residents is unchanged from last year’s report, the annual number of other emigrants who leave the Social Security area is about 65,000 to 75,000 lower than in last year’s report for each alternative. This lower level of other emigration reflects the impact of the November 2014 presidential executive actions on immigration.
Under the assumptions and methods described above, the projected size of the other-immigrant population grows substantially. This growth reflects the excess of annual other immigration over the combined annual numbers of emigrants and deaths that occur within the other-immigrant population.
Estimates of net other immigration for 2005 through 2011 are based on data from the Department of Homeland Security. The estimated level is 1,145,000 for 2005, decreasing to 805,000 for 2006 and 75,000 for 2007. For 2008, estimated net other immigration is negative, at ‑755,000, but returns to a positive level of 105,000 for 2009. Since 2009, estimated net other immigration has fluctuated while increasing to 400,000 by 2014.
Under the intermediate assumptions, projected net other immigration is about 670,000 persons for 2015, and about 740,000 persons for 2018. Net other immigration then sharply decreases to about 470,000 for 2022, primarily due to the decline in the number of other immigrants entering the country. This is followed by a more gradual decrease after 2022 to about 340,000 for 2040 and 285,000 for 2090. The decline in net other immigration after 2022 is due to the increasing number of other immigrants residing in the Social Security area. Because the number of other immigrants leaving the Social Security area is based on rates of departure, an increase in the number of other immigrants residing in the Social Security area results in an increase in the number who emigrate out of the area. All other components of other immigration and emigration are assumed to be stable after 2022, and thus do not contribute toward any change in net other immigration. Under the intermediate assumptions, the projected average annual level of net other immigration over the 75-year projection period is about 360,000 persons. For the low-cost and high-cost assumptions, projected average annual net other immigration is about 455,000 persons and 250,000 persons, respectively.
The projected average total level of net immigration (legal and other, combined) is about 1,155,000 persons per year during the 75-year projection period under the intermediate assumptions. For the low-cost and high-cost assumptions, projected average annual total net immigration is about 1,465,000 persons and 850,000 persons, respectively.
Demographers express a wide range of views about the future course of immigration for the United States. Some, like the 2011 Technical Panel mentioned in the previous section, believe that net immigration will increase substantially in the future. Others believe that potential immigrants may be increasingly attracted to other countries, that potential immigrants may be fewer due to lower birth rates in many countries, or that changes in the law or enforcement of the law could reduce immigration.
Total
fertility
rate1
Age-sex-adjusted death rate 2
per 100,000, by age
Net immigration3 4
Legal 5
Other 6
2012 7

1
The total fertility rate for any year is the average number of children that would be born to a woman in her lifetime if she were to experience, at each age of her life, the birth rate observed in, or assumed for, the selected year, and if she were to survive the entire childbearing period.

2
Based on the enumerated total population as of April 1, 2010, if that population were to experience the death rates by age and sex observed in, or assumed for, the selected year.

3
Net immigration values are rounded to the nearest 5,000.

4
Estimates do not include persons who attained legal permanent resident status under the special one-time provisions of the Immigration Reform and Control Act of 1986.

5
Historical estimates of net legal immigration assume a 25 percent reduction in legal immigration due to legal emigration.

6
Historical net other immigration estimates depend on a residual method, using Department of Homeland Security January 1 stock estimates for 2005 through 2012.

7
Fertility is estimated starting in 2013, mortality starting in 2012, and immigration starting in 2013.

4. Total Population Estimates
The starting Social Security area population for December 31, 2012, is derived from the Census Bureau’s estimate of the residents of the 50 States and D.C. and U.S. Armed Forces overseas. Adjustments are made to reflect mortality assumptions for the aged population since 2010 that are consistent with Medicare and Social Security data, net immigration assumptions for the aged population since 2010, estimates of the net undercount in the 2010 census, inclusion of U.S. citizens living abroad (including residents of U.S. territories), and inclusion of non-citizens living abroad who are insured for Social Security benefits. The Office of the Chief Actuary projects the population in the Social Security area by age, sex, and marital status for December 31 of each year 2013 through 2090 by combining the assumptions for future fertility, mortality, and immigration with assumptions for marriage and divorce. Previous sections of this chapter present the assumptions for future fertility, mortality, and immigration. Assumptions for future rates of marriage and divorce reflect historical data from the National Center for Health Statistics, the Census Bureau, and selected individual States.
For the estimates in this report, it is assumed that Social Security will expand its guidelines to recognize all auxiliary beneficiaries of same-sex marriages and that all States will eventually recognize same-sex marriages. The effect on marriage rates is assumed to be fully realized within 24 years, reflecting both the gradual acceptance of same-sex marriage in all States and behavioral changes in the population consistent with the acceptance.
This report presents a July 1 (i.e., midyear) population for each year, which is derived from surrounding December populations. Table V.A2 shows the historical and projected population for July 1 by broad age group, for the three alternatives. It also shows the aged and total dependency ratios (see table footnotes for definitions).
Aged 1
Total 2
2014  3

1
Ratio of the population at ages 65 and over to the population at ages 20-64.

2
Ratio of the population at ages 65 and over and the population under age 20 to the population at ages 20‑64.

3
Estimated.

Notes:
1. Historical data are subject to revision.
2. Totals do not necessarily equal the sums of rounded components.
5. Life Expectancy Estimates
Life expectancy, or average remaining number of years expected prior to death, is an additional way to summarize the Trustees’ mortality assumptions. This report includes life expectancy in two different forms (period and cohort) for two separate purposes.
Cohort life expectancy does not use death rates for a single year, but for the series of years in which the individual will actually reach each succeeding age if he or she survives. Cohort life expectancy provides an individual’s expected average remaining lifetime at a selected age in a given year, using actual or expected future changes in death rates. Table V.A4 presents historical and projected life expectancy calculated on a cohort basis. Cohort life expectancy is somewhat greater than period life expectancy for a given year because: (a) death rates at any age tend to decline over time; and (b) cohort life expectancy uses death rates from future years, while period life expectancy uses death rates only from the given year.
Life expectancy at a given age reflects death rates at that and all older ages. Period life expectancy is somewhat related to the age-sex-adjusted death rate discussed in section V.A.2. However, life expectancy places far greater weight on death rates at lower ages than at higher ages. Therefore, changes in death rates at lower ages have far greater effects in changing life expectancy over time. It is important to keep this concept in mind when considering trends in life expectancy.