I. OVERVIEW

C. HIGHLIGHTS

The more important developments since the 1994 Annual Report was issued are shown below:

• During calendar year 1994, OASDI benefits amounting to $316.8 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 1994 was 42.9 million.
• In 1994, an estimated 139 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 $381.1 billion in calendar year 1994, and expenditures were $323.0 billion. The assets of the combined funds, therefore, increased by $58.1 billion, from $378.3 billion at the end of December 1993 to $436.4 billion at the end of December 1994.
• Assets at the beginning of the year, as a percentage of expenditures during the year, increased from 117 percent at the begin ning of 1994 to an estimated 128 percent at the beginning of 1995, for the combined OASI and DI Trust Funds.
• Interest earnings on the invested assets of the combined OASI and DI Trust Funds were $31.1 billion in calendar year 1994. This represented an effective annual interest rate of 8.0 percent, earned by the combined assets during calendar year 1994. During the same period, the average interest rate on new securities purchased by the trust funds was 7.1 percent.
• Administrative expenses for the OASDI program were $2.7 billion in calendar year 1994, or about 0.8 percent of benefit payments in the year.
• An automatic benefit increase of 2.8 percent became effective for December 1994. The OASDI contribution and benefit base was increased from $60,600 for 1994, to $61,200 for 1995.
• A greater portion of the OASDI tax rate was allocated to the DI Trust Fund effective retroactively with respect to wages paid after December 31, 1993, and to self-employment income for tax able years beginning after such date. This reallocation of tax rates changed the expected date of exhaustion of the DI Trust Fund from 1995 to 2016 under the `intermediate' set of assumptions of this report. The intermediate set of assumptions represents the Trustees' `best estimates' of likely future economic and demographic conditions.

The major findings of this report are summarized below:

• 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 $436.4 billion, or 128 percent of annual expenditures, to $1,273 billion, or 230 percent of annual expenditures, at the beginning of the year 2004, based on the intermediate assumptions.
• The OASI Trust Fund is expected to increase rapidly during the next 10 years, from 139 percent of annual expenditures at the beginning of 1995 to about 246 percent of annual expenditures at the beginning of the year 2004, based on the intermediate assumptions.
• The DI Trust Fund is expected to increase rapidly for most of the next 10 years, rising from 54 percent of annual expenditures at the beginning of 1995 to 142 percent of annual expenditures at the beginning of 2003, 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 2003, becoming 140 percent at the beginning of 2004.
• In the long range (i.e., the next 75 years) income and expenditures are generally expressed as a percentage of the total amount of earnings subject to taxation under the OASDI program (referred to as `taxable payroll'). Summarized income and cost rates over the 75-year period are determined through present-value calculations and by taking into account actual beginning fund balances and targeted ending fund balances (or reserves) of 100 percent of annual expenditures.
• Overall, for the period 1995-2069, the difference between the summarized income and cost rates for the OASDI program is a deficit of 2.17 percent of taxable payroll based on the intermediate assumptions, slightly larger than the difference of 2.13 percent in last year's report.
• On a combined basis, the OASDI program is not in `close actuarial balance' over the next 75 years. (To be in close actuarial balance, the OASDI program must meet the long-range test described in the section entitled Actuarial Estimates later in this report.) 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 1994 Annual Report.
• Income from OASDI payroll taxes represents 12.4 percent of taxable payroll--made up of the 6.2 percent tax rate paid by employees and a matching amount paid by their employers. (Self-employed workers pay OASDI taxes at the combined employee-employer rate.) Since these tax rates are not scheduled to change in the future under present law, OASDI payroll tax income as a percentage of taxable payroll remains constant at 12.4 percent.
• The income tax revenues that result from taxing up to one-half of the benefits are transferred to the OASI and DI Trust Funds and are currently equivalent to about 0.2 percent of taxable payroll. (Additional revenue resulting from taxing more than 50 percent, up to 85 percent, of benefits is transferred to the Hospital Insurance Trust Fund.) Adding the OASDI income from the taxation of benefits to the income from payroll taxes 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. The growth is attributable, in part, to increasing proportions in both the number of beneficiaries and the amount of their benefits subject to taxation in the future. These proportions will increase because the income thresholds, above which benefits are taxable, are not indexed to future increases in average prices or average income.
• OASDI expenditures for benefit payments and administrative expenses currently represent about 11.5 percent of taxable payroll. This `cost rate' is estimated to remain below the corresponding income rate for the next 18 years, 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 19.0 percent under the intermediate assumptions, resulting in an annual deficit of about 5.7 percent.
• Expressed as a percentage of gross domestic product (GDP), the cost of the OASDI program is estimated to rise from its current level of 4.8 percent of GDP to 6.8 percent of GDP by the end of the 75-year projection period.
• Under the intermediate assumptions, the excess of OASDI tax revenues over expenditures for the next 18 years, 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 2020 and continuing thereafter, under the intermediate assumptions. In this circumstance, trust fund assets would be redeemed to cover the difference. The assets of the combined OASI and DI Trust Funds are estimated to be depleted under present law in 2030 based on the intermediate assumptions.
• The assets of the trust funds are generally invested in special securities of the U.S. Treasury. The initial accumulation of assets will result in a substantial cash flow from the trust funds to the general fund of the Treasury, and the amount of special securities held by the combined trust funds will increase. The subsequent redemption of securities will cause this cash flow to reverse. The magnitude and pattern of these cash flows have important economic and public policy implications that extend beyond the operation of the OASDI program itself.
• Because the OASDI program is not in close actuarial balance, the long-range deficits of both the OASI and DI Trust Funds should be addressed. The Secretary of Health and Human Services has directed the current Advisory Council on Social Security to conduct an extensive review of Social Security financing issues and develop recommendations for restoring the long-range actuarial balance of the OASDI program.

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