Three types of financial measures are useful in assessing the actuarial status of the Social Security trust funds under the financing approach specified in current law: (1) annual cash-flow measures, including income and cost rates, and balances; (2)
trust fund ratios; and (3) summary measures like
actuarial balances and unfunded obligations. The first long-range estimates presented are the series of projected
annual balances (or net cash flow), which are the differences between the projected annual income rates and annual cost rates (expressed as percentages of the taxable payroll). In assessing the financial condition of the program, particular attention should be paid to the level and trend of the annual balances at the end of the long-range period.
The next measure discussed is the pattern of projected trust fund ratios. The trust fund ratio represents the proportion of a year’s projected cost that could be paid with the funds available at the beginning of the year. Particular attention should be paid to the level and year of maximum trust fund ratio, to the
year of exhaustion of the funds, and to the stability of the trust fund ratio in cases where the ratio remains positive at the end of the long-range period. When a program has positive trust fund ratios throughout the 75-year projection period and these ratios are stable or rising at the end of the period, the program financing is said to achieve sustainable
solvency.
The final measures discussed in this section summarize the total income and cost over
valuation periods that extend through 75 years and to the infinite horizon. These measures indicate whether projected income will be sufficient for the period as a whole. The first such measure, actuarial balance, indicates the size of any surplus or shortfall as a percentage of the taxable payroll over the period. The second, open group unfunded obligation, indicates the size of any shortfall in present-value dollars. This section also includes a comparison of covered workers to beneficiaries, a generational decomposition of the infinite horizon unfunded obligation, the test of long-range close actuarial balance, and the reasons for change in the actuarial balance from the last report.
If the 75-year actuarial balance is zero (or positive), then the trust fund ratio at the end of the period will be at 100 percent (or greater), and financing for the program is considered to be sufficient for the 75-year period as a whole. Financial adequacy, or solvency, for each year is determined by whether the trust fund asset level is positive throughout the year. Whether or not financial adequacy is stable in the sense that it is likely to continue for subsequent 75-year periods is also important to the actuarial status of the program. One indication of this stability is achieving sustainable solvency, which requires that trust fund ratios be positive throughout the period and be at a constant or rising level for the last several years of the long-range period. When sustainable solvency is achieved, it is likely that subsequent Trustees Reports will also show projections of financial adequacy (assuming no changes in demographic and economic assumptions or the law). The actuarial balance and the open group unfunded obligation over the infinite horizon provide additional measures of the financial status of the program for the very long range.
Basic to the consideration of the long-range actuarial status of the trust funds are the concepts of income rate and cost rate, each of which is expressed as a percentage of taxable payroll. Other measures of the cash flow of the program are shown in Appendix
F. The annual income rate is the sum of the income from payroll taxes and the income from
taxation of benefits, expressed as a percentage of OASDI taxable payroll for the year. The OASDI
taxable payroll consists of the total earnings that are subject to OASDI taxes, with some relatively small adjustments.
1
The annual cost rate is the ratio of the cost of the program to the taxable payroll for the year. The cost is defined to include scheduled benefit payments,
administrative expenses, net transfers from the trust funds to the
Railroad Retirement program under the
financial-interchange provisions, and payments for
vocational rehabilitation services for disabled beneficiaries. For any year, the income rate minus the cost rate is referred to as the balance for the year.
2
Table IV.B1 presents a comparison of the estimated annual income rates and cost rates by trust fund and alternative. Detailed long-range projections of trust fund operations, in current dollar amounts, are shown in table
VI.F8.
The projections for OASI under the intermediate assumptions show the income rate generally rising from about 11 percent of taxable payroll in recent years to 11.45 percent for 2084, due to the gradually increasing effect of the taxation of benefits. The projected income from the taxation of benefits, expressed as a percentage of taxable payroll, is expected to increase for two reasons. First, benefits are rising faster than payroll. Second, the benefit-taxation threshold amounts are not indexed, so that an increasing share of benefits will be subject to tax. The pattern of the cost rate is much different. The cost rate, which increased substantially in 2009 due to the effects of the recent economic
recession, remains fairly stable through 2015 as the economic recovery through this period roughly offsets the effects of the aging population. From about 2015 to 2035, the cost rate rises rapidly because the retirement of the
baby-boom generation will increase the number of beneficiaries much faster than subsequent relatively low-birth-rate generations will increase the labor force. From 2035 to 2050, the cost rate declines somewhat as the baby-boom generation ages, causing an increase in the average age of beneficiaries. Benefits increase annually with price inflation rather than wage inflation, so as beneficiaries increase in age, their benefit amounts drop relative to current average taxable earnings. Thereafter, the cost rate rises slowly because of the projected reductions in death rates, reaching 15.17 percent of taxable payroll for 2084.
Projected income rates under the low-cost and high-cost sets of assumptions are very similar to those projected for the intermediate assumptions because they are largely a reflection of the payroll tax rates specified in the law, with the gradual change from taxation of benefits noted above. In contrast, OASI cost rates for the low-cost and high-cost assumptions differ significantly from those projected for the intermediate assumptions. For the low-cost assumptions, the OASI cost rate decreases from 2010 through 2013, then rises until it peaks in 2033 at 12.73 percent of payroll. The cost rate then generally declines gradually, reaching 10.79 percent of payroll for 2084, at which point the income rate reaches 11.19 percent. For the high-cost assumptions, the OASI cost rate rises from 2012 through the end of the 75-year period. It rises at a relatively fast pace between 2012 and 2035 because of the aging of the baby-boom generation. Subsequently, the projected cost rate continues rising and reaches 22.18 percent of payroll for 2084, at which point the income rate reaches 11.85 percent.
The pattern of the projected OASI annual balance is important in the analysis of the financial condition of the program. Under the intermediate assumptions, the annual balance is negative in 2010, positive from 2011 through 2017, and then negative thereafter. This annual deficit rises rapidly, reaching 3.23 percent of taxable payroll by 2035, and generally rises thereafter (except for the period 2038-52), reaching 3.72 percent of taxable payroll for 2084.
Under the low-cost assumptions, the projected OASI annual balance is negative in 2010, positive from 2011 through 2020, and then becomes negative, with the annual deficit peaking at 1.46 percent of taxable payroll for 2033. Then the annual deficit declines until 2063, when the OASI annual balance becomes positive, reaching a surplus of 0.40 percent of payroll in 2084. Under the high-cost assumptions, in contrast, the OASI balance is projected to be negative in 2010, positive for only 3 years (through 2013), and to be negative thereafter, with a deficit of 1.69 percent for 2020, 6.06 percent for 2050, and 10.33 percent of payroll for 2084.
Notes:1. The income rate excludes interest income.
2. Some historical values are subject to change due to revisions of taxable payroll.
3. Totals do not necessarily equal the sums of rounded components.
Under the intermediate assumptions, the cost rate for DI, which rose substantially from 2.01 percent of taxable payroll in 2008 to 2.35 percent for 2010 due to the economic recession, generally declines to 2.10 percent for 2039, and increases gradually thereafter to 2.26 percent for 2084. The income rate increases only very slightly from 1.84 percent of taxable payroll for 2011 to 1.86 percent for 2084. The annual deficit is 0.52 percent in 2011 and reaches 0.40 percent for 2084.
Under the low-cost assumptions, the DI cost rate generally declines from 2.30 percent of payroll for 2010 to 1.52 percent for 2084. The annual balance is negative for the first 8 years and is positive throughout the remainder of the long-range period. For the high-cost assumptions, the DI cost rate rises much more, reaching 3.18 percent for 2084. The annual deficit is 0.65 percent in 2010 and reaches 1.29 percent for 2084.
Figure IV.B1 shows the patterns of the OASI and DI annual income rates and cost rates. The income rates shown here are only for alternative II in order to simplify the graphical presentation because, as shown in table
IV.B1, the variation in the income rates by alternative is very small. Income rates increase generally, but at a slow rate for each of the alternatives over the long-range period. Both increases in the income rate and variation among the alternatives result primarily from the relatively small component of income from taxation of benefits. Increases in income from taxation of benefits reflect increases in the total amount of benefits paid and the increasing share of individual benefits that will be subject to taxation because benefit taxation threshold amounts are not indexed.
The patterns of the annual balances for OASI and DI can be inferred from figure
IV.B1. For each alternative, the magnitude of each of the positive balances, as a percentage of taxable payroll, is represented by the distance between the appropriate cost-rate curve and the income-rate curve above it. The magnitude of each of the deficits is represented by the distance between the appropriate cost-rate curve and the income-rate curve below it.
In the future, the cost of OASI, DI, and the combined OASDI programs as a percentage of taxable payroll will not necessarily be within the range encompassed by alternatives I and III. Nonetheless, because alternatives I and III define a reasonably wide range of demographic and economic conditions, the resulting estimates delineate a reasonable range for consideration of potential future program costs.
Long-range OASDI cost and income are generally expressed as percentages of taxable payroll. Also of interest are estimates of income and cost expressed as shares of
gross domestic product (GDP), the value of goods and services produced during the year in the United States. Under alternative II, OASDI cost generally rises from about 4.8 percent of GDP currently to a peak of 6.1 percent in 2035. Then OASDI cost as a percent of GDP is projected to decline to a low of 5.9 percent in 2055 and increase slowly thereafter, reaching a level around 6.0 percent by 2084. Full estimates of income and cost are presented on this basis in Appendix
VI.
F.
2 beginning on page 185.
The estimated OASDI cost rate is expected to remain relatively stable for the next 5 years, as the economy recovers. Between 2015 and 2035, the cost rate is expected to rise rapidly primarily because the number of beneficiaries is expected to rise substantially more rapidly than the number of covered workers as the baby-boom generation retires. Because the baby-boom generation had low fertility rates relative to their parents, and those low fertility rates are expected to persist, the ratio of beneficiaries to workers is expected to rise rapidly and reach a permanently higher level after the baby-boom generation retires. After 2035, the ratio of beneficiaries to workers rises slowly due to increasing longevity. A comparison of the numbers of covered workers and beneficiaries is shown in table
IV.B2.
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Coveredworkers per OASDI beneficiary
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OASDI beneficiaries per 100 covered workers
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Notes: 1. The number of beneficiaries does not include uninsured individuals who receive benefits under Section 228 of the Social Security Act. Costs are reimbursed from the General Fund of the Treasury for most of these individuals.
2. Historical covered worker and beneficiary data are subject to revision.
3. Totals do not necessarily equal the sums of rounded components.
The impact of the demographic shifts under the three alternatives on the OASDI cost rates is clear if one considers the projected number of OASDI beneficiaries per 100
covered workers. As compared to the 2009 level of 33 beneficiaries per 100 covered workers, this ratio is estimated to rise to 46 by 2030 and 48 by 2035 under intermediate assumptions, as the growth in beneficiaries greatly exceeds the growth in workers. By 2085, this ratio rises further under the intermediate and high-cost assumptions, reaching 51 under the intermediate assumptions, and 69 under the high-cost assumptions. Under the low-cost assumptions, this ratio rises to 43 by 2035 and then declines to 38 by 2085. The significance of these numbers can be seen by comparing figure
IV.B1 to figure
IV.B2.
For each alternative, the shape of the curve in figure IV.B2, which shows beneficiaries per 100 covered workers, is strikingly similar to that of the corresponding cost-rate curve in figure
IV.B1, thereby emphasizing the extent to which the cost of the OASDI program as a percentage of taxable payroll is determined by the age distribution of the
population. Because the cost rate is basically the product of the number of beneficiaries and their average benefit, divided by the product of the number of covered workers and their average taxable earnings (and because average benefits rise at about the same rate as average earnings), it is to be expected that the pattern of the annual cost rates is similar to that of the annual ratios of beneficiaries to workers.
Table IV.B2 also shows the number of covered workers per OASDI beneficiary, which was about 3.0 in 2009. Under the low-cost assumptions, this ratio declines to 2.3 by 2035, and then generally rises throughout the remainder of the period, reaching 2.6 in 2085. Under the intermediate assumptions, this ratio declines generally throughout the long range period, reaching 2.1 in 2035 and 1.9 in 2085, while under the high-cost assumptions, this ratio decreases steadily to 1.4 in 2085.
Trust fund ratios are useful indicators of the adequacy of the financial resources of the Social Security program at any point in time. The trust fund ratio for a year is defined as the assets at the beginning of a year, which do not include advance tax transfers, expressed as a percentage of the cost during the year. When the trust fund ratio is positive for a year, but is not positive for the following year, the trust fund becomes exhausted during that year. Under present law, the OASI and DI Trust Funds do not have the authority to borrow other than in the form of advance tax transfers. Therefore, exhaustion of the assets in either fund during a year would mean there are no longer sufficient assets in the fund to pay the full amount of benefits scheduled for the year under present law.
The trust fund ratio serves an additional important purpose in assessing the actuarial status of the program. When the financing is adequate for the timely payment of full benefits throughout the long-range period, the stability of the trust fund ratio toward the end of the period indicates the likelihood that this projected adequacy will continue for subsequent Trustees Reports. If the trust fund ratio is positive throughout the period and is level (or increasing) at the end of the period, then projected adequacy for the long-range period is likely to continue for subsequent reports. Under these conditions, the program financing achieves sustainable solvency.
Table IV.B3 shows, by alternative, the estimated trust fund ratios (without regard to advance tax transfers that would be effected) for the separate and combined OASI and DI Trust Funds. Also shown in this table is the year in which a fund is estimated to become exhausted.
Based on the intermediate assumptions, the OASI trust fund ratio rises slightly from 399 percent at the beginning of 2010, reaching a peak of 403 percent at the beginning of 2012. Thereafter, the OASI trust fund ratio declines steadily, with the OASI Trust Fund becoming exhausted in 2040. The DI trust fund ratio has been declining steadily since 2003, and is estimated to continue to decline from 158 percent at the beginning of 2010 until the trust fund becomes exhausted in 2018.
The trust fund ratio for the combined OASI and DI Trust Funds under the intermediate assumptions declines from 355 percent for 2010, with the combined funds becoming exhausted in 2037. In last year’s report, the peak trust fund ratio for the combined funds was estimated to be 369 percent for 2012 and the year of exhaustion was estimated to be 2037.
Under the intermediate assumptions, OASDI cost is projected to exceed non-interest income in 2010 and 2011 due to increased benefits and reduced tax revenue as a result of the economic recession, and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the Trust Funds in earlier years. For 2012‑14, however, non-interest income will exceed cost as the economy recovers. OASDI cash flow, excluding interest, will then become negative in 2015 due to demographic trends. Throughout the period 2010 through 2024, trust fund income, including interest income, is more than is needed to cover costs, so combined trust fund assets will continue to grow. Beginning in 2025, combined trust fund assets will diminish until assets are exhausted in 2037.
Based on the low-cost assumptions, the trust fund ratio for the DI program increases from 2017 through the end of the long-range projection period, and reaches the extremely high level of 1,799 percent for 2085. At the end of the long-range period, the DI trust fund ratio is rising by 36 percentage points per year. For the OASI program, the trust fund ratio rises to a peak of 422 percent for 2018, drops to a low of 282 percent for 2048, and rises thereafter to a level of 457 percent for 2085. At the end of the period, the OASI trust fund ratio is rising by 8 percentage points per year. For the OASDI program, the trust fund ratio peaks at 376 percent for 2019, falls to 306 percent for 2041, and increases thereafter, reaching 622 percent for 2085. Because the trust fund ratios are large and increasing at the end of the long-range period, subsequent Trustees Reports are likely to contain projections of adequate long-range financing of the OASI, the DI, and the combined OASDI programs under the low-cost assumptions. Thus, under the low-cost assumptions, each program would achieve sustainable solvency.
In contrast, under the high-cost assumptions, the OASI trust fund ratio is estimated to peak at 400 percent for 2011, thereafter declining to fund exhaustion by the end of 2032. The DI trust fund ratio is estimated to decline from 156 percent for 2010 to fund exhaustion by the end of 2015. The combined OASI and DI trust fund ratio is estimated to decline from 354 percent for 2010 to fund exhaustion by the end of 2029.
Thus, because large, persistent annual deficits are projected under all but the low-cost assumptions, it is likely that income will eventually need to be increased, program costs will need to be reduced, or both, in order to prevent exhaustion of the trust funds.
Even under the high-cost assumptions, however, the combined OASI and DI funds on hand plus their estimated future income would be able to cover their combined cost for 19 years (until 2029). Under the intermediate assumptions, the combined starting funds plus estimated future income would be able to cover cost for 27 years (until 2037). The program would be able to cover cost for the foreseeable future under the more optimistic low-cost assumptions. In the 2009 report, the combined trust funds were projected to become exhausted in 2029 under the high-cost assumptions and in 2037 under the intermediate assumptions.
