2006 OASDI Trustees Report

III. FINANCIAL OPERATIONS OF THE TRUST FUNDS AND
LEGISLATIVE CHANGES IN THE LAST YEAR

A. OPERATIONS OF THE OLD-AGE AND SURVIVORS INSURANCE
(OASI) AND DISABILITY INSURANCE (DI) TRUST FUNDS, IN
CALENDAR YEAR 2005

Detailed information on the operations of the OASI and DI Trust Funds¹ during calendar year 2005 is presented in this section. Chapter IV provides projections for calendar years 2006-80.

1. OASI Trust Fund

A statement of the income and disbursements of the Federal Old-Age and Survivors Insurance Trust Fund in calendar year 2005, and of the assets of the fund at the beginning and end of the calendar year, is presented in table III.A1. Included in total receipts during calendar year 2005 were $508.7 billion in employment tax contributions. These contributions were partially offset by transfers totaling $1.9 billion to the General Fund of the Treasury for the estimated amount of refunds to employees who worked for more than one employer during a year and paid contributions on total earnings in excess of the contribution and benefit base.

Net contributions thus amounted to $506.9 billion, an increase of 7.2 percent over the amount in the preceding year. The increase in OASI tax contributions from calendar year 2004 to calendar year 2005 is due to increased earnings and the increase in the contribution and benefit base. (Table VI.A1 shows the tax rates and contribution and benefit bases in effect for past years.)

Income based on taxation of benefits amounted to $13.8 billion in 2005. This amount is lower than the receipts for 2004 because a sizable positive adjustment was made in 2004 reflecting updated data for prior years. Nearly 99 percent of this income represented amounts credited to the trust funds, based on estimated Federal personal income taxation of benefits, generally in advance of the actual receipt of taxes by the Treasury. The remaining 1 percent of the total income from taxation of benefits represented amounts withheld from the benefits paid to nonresident aliens.

Transfers among the General Fund of the Treasury and the OASI and DI Trust Funds are made periodically to adjust prior payments for the cost attributable to the granting of noncontributory wage credits for military service prior to 1957. In 2005, $350,000,000 was transferred from the OASI Trust Fund to the general fund.

Note: Totals do not necessarily equal the sums of rounded components.

Special payments are made to uninsured persons who meet certain requirements. The costs associated with providing such payments are largely reimbursable from the General Fund of the Treasury. Accordingly, transfers totaling $123,236 were made in 2005, reflecting costs incurred in fiscal years 1999-2004.

The OASI Trust Fund was credited with interest netting $84.0 billion, an increase of about 6.3 percent over 2004. Credited interest consisted of (1) interest earned on the investments of the trust fund, (2) interest on transfers between the trust fund and the general fund account for the Supplemental Security Income (SSI) program due to adjustments in the allocation of administrative expenses, (3) interest arising from the revised allocation of administrative expenses among the trust funds, (4) interest on certain reimbursements to the trust fund (see following discussion of administrative expenses), and (5) interest on a transfer to the DI Trust Fund for the cost of vocational rehabilitation services that had been erroneously charged to that fund. The remaining $2,256 of receipts consisted of gifts received under the provisions authorizing the deposit of money gifts or bequests in the trust funds.

Of the $441.9 billion in total disbursements, $435.3 billion was for net benefit payments. The amount of net benefit payments in calendar year 2005 represents an increase of 4.9 percent over the corresponding amount in calendar year 2004. This increase was due to (1) an increase in the total number of beneficiaries and (2) an increase in the average benefit amount primarily because of the automatic cost-of-living benefit increase of 2.7 percent which became effective for December 2004 under the automatic-adjustment provisions in section 215(i) of the Social Security Act.

Provisions of the Railroad Retirement Act require an annual financial interchange between the Railroad Retirement and OASDI programs. The purpose of such provisions is to put the OASI and DI Trust Funds in the same financial position they would have been had railroad employment always been covered by Social Security. Under those provisions, the Railroad Retirement Board and the Commissioner of Social Security determined that a transfer of $3.6 billion to the Social Security Equivalent Benefit Account from the OASI Trust Fund was required in June 2005.

A disbursement of $58 million was made in 2005 to cover the costs of vocational rehabilitation services furnished to disabled widow(er) beneficiaries and to those children of retired or deceased workers who were receiving benefits on the basis of disabilities that began before age 22. Reimbursement from the trust funds for the costs of vocational rehabilitation services is made only in those cases where the services contributed to the successful rehabilitation of the beneficiaries. The $58 million disbursement consisted of (1) a transfer to the DI Trust Fund of $56 million for costs erroneously charged to that fund over the period of October 1987 through March 2003, and (2) $2 million for current costs.

The remaining $3.0 billion of disbursements from the OASI Trust Fund represented net administrative expenses. The expenses incurred by various Federal agencies for administering the OASDI and Medicare programs are allocated and charged directly to each of the trust funds through which those programs are financed, on the basis of provisional estimates. Similarly, the expenses allocated for administering the SSI program are charged directly to the General Fund of the Treasury on a provisional basis. Periodically, as actual experience develops and is analyzed, adjustments to the allocations of administrative expenses for prior periods are effected by interfund transfers and transfers between the OASI Trust Fund and the general fund account for the SSI program, with appropriate interest adjustments. As described earlier, the interest adjustments arising from the reallocation of administrative expenses are recorded in the trust fund accounting under investment income.

The vast majority of OASI disbursements recorded as administrative expenses represent the cost of administering the program and are charged to the trust fund by the Social Security Administration ($2.2 billion in 2005). In addition, the Department of the Treasury charges directly to the trust fund certain expenses that it incurs in helping to administer the OASI program ($729 million in 2005). In addition a relatively small adjustment to administrative expenses is an offset ($251,376 in 2005) representing income from the sale of excess supplies and equipment.

Finally, certain net reimbursements are made from the General Fund of the Treasury for administrative costs incurred by the Social Security Administration in performing certain legislatively mandated activities that are not directly related to the OASI program. These reimbursements include the costs associated with union activities related to administering the OASI program and providing information to participants in certain pension plans. Such reimbursements totaled $8 million in 2005.

The assets of the OASI Trust Fund at the end of calendar year 2005 totaled $1,663.0 billion (10.8 percent more than at the end of 2004), consisting of $1,663.7 billion in U.S. Government obligations and, as an offset, an extension of credit amounting to $0.7 billion against securities to be redeemed within the following few days. The effective annual rate of interest earned by the assets of the OASI Trust Fund during calendar year 2005 was 5.4 percent, as compared to 5.7 percent earned during calendar year 2004. A detailed listing of OASI Trust Fund holdings by type of security, interest rate, and year of maturity at the end of each calendar year 2004 and 2005 can be found in appendix A.

All securities held by the trust funds are backed by the full faith and credit of the United States Government, as required by law. Those currently held by the OASI Trust Fund are special issues (i.e., securities sold only to the trust funds). These are of two types: short-term certificates of indebtedness and long-term bonds. The certificates of indebtedness are issued on a daily basis for the investment of receipts not required to meet current expenditures, and they mature on the next June 30 following the date of issue. Special-issue bonds, on the other hand, are normally acquired only when special issues of either type mature on June 30. The amount of bonds acquired on June 30 is equal to the amount of special issues maturing, less amounts required to meet expenditures on that day.

Section 201(d) of the Social Security Act provides that the obligations issued for purchase by the OASI and DI Trust Funds shall have maturities fixed with due regard for the needs of the funds. The usual practice has been to spread the holdings of special issues, as of each June 30, so that the amounts maturing in each of the next 15 years are approximately equal. Accordingly, the amounts and maturity dates of the OASI special-issue bonds purchased on June 30, 2005, with an interest rate of 4.125 percent, were selected so that the maturity dates of the total portfolio of special issues were spread evenly over the 15-year period 2006-20. The amount of bonds purchased on June 30, 2005 is shown in table III.A7.

2. DI Trust Fund

A statement of the income and disbursements of the Federal Disability Insurance Trust Fund in calendar year 2005, and of the assets of the fund at the beginning and end of the calendar year, is presented in table III.A2.

Line entries in the DI statement are similar to those in the OASI statement and the explanations of the OASI entries generally apply to DI as well.

Net contributions amounted to $86.1 billion, an increase of 7.2 percent from the amount in the preceding calendar year. This increase is attributable to the same factors, insofar as they apply to the DI program, that accounted for the change in contributions to the OASI Trust Fund.

Of the $88.0 billion in total disbursements, $85.4 billion was for net benefit payments. This represents an increase of 9.2 percent over the corresponding amount of benefit payments in calendar year 2004. This increase in DI benefit payments is due to the same factors that resulted in the net increase in benefit payments from the OASI Trust Fund. However, the number of persons receiving benefits from the DI Trust Fund increased more rapidly in 2005 than the number receiving benefits from the OASI Trust Fund largely due to a) the current ages of the baby-boom generation, b) the scheduled increase in the normal retirement age (NRA), and c) the special administrative action, undertaken by SSA beginning in 2001, to identify and award benefits from the DI Trust Fund to a substantial number of current and former recipients of SSI benefits whose disability-insured status under the DI program was not previously recognized. Total DI disbursements started to exceed non-interest income in 2005, but were still less than total income, including interest.

Note: Totals do not necessarily equal the sums of rounded components.

The assets of the DI Trust Fund at the end of calendar year 2005 totaled $195.6 billion, consisting of $195.7 billion in U.S. Government obligations and, as an offset, an extension of credit amounting to $0.1 billion against securities to be redeemed within the following few days. The effective annual rate of interest earned by the assets of the DI Trust Fund during calendar year 2005 was 5.5 percent, compared to 5.7 percent earned during calendar year 2004. A detailed listing of DI Trust Fund holdings by type of security, interest rate, and year of maturity at the end of each calendar year 2004 and 2005 can be found in appendix A.

3. OASI and DI Trust Funds, Combined

A statement of the operations of the income and disbursements of the OASI and DI Trust Funds, on a combined basis, is presented in table III.A3. The entries in this table represent the sums of the corresponding values from tables III.A1 and III.A2. For a discussion of the nature of these income and expenditure transactions, reference should be made to the two preceding subsections covering OASI and DI separately.

Note: Totals do not necessarily equal the sums of rounded components.

To provide a context for estimates of future trust fund income and expenditures provided later in this report, table III.A4 compares past estimates of contributions and benefit payments for calendar year 2005, as shown in the 2001-05 Annual Reports, with the corresponding actual amounts in 2005.²

A number of factors can contribute to differences between estimates and subsequent actual amounts, including actual values for key demographic, economic, and other variables that differ from previously assumed levels. In addition, new legislation or other administrative initiatives that were unanticipated at the time the earlier estimates were completed can contribute to such differences. For example, in the case of DI benefit payments, the special administrative action, noted in the previous subsection and described in greater detail in the section on short-range estimates, has affected the estimates. Both the size of the resulting workload and the schedule for the completion of these cases have been revised several times over the past 4 years. The evolving understanding of this special workload played a significant role in the past variation in estimates for DI benefits in 2005.

At the end of calendar year 2005, about 48.4 million persons were receiving monthly benefits under the OASDI program. Of these persons, about 40.1 million and 8.3 million were receiving monthly benefits from the OASI Trust Fund and the DI Trust Fund, respectively. The number of persons receiving benefits from the OASI and DI Trust Funds grew by 1.0 percent and 4.6 percent, respectively, during the calendar year. The estimated distributions of benefit payments in calendar years 2004 and 2005, by type of beneficiary, are shown in table III.A5 for each trust fund separately.

Note: Totals do not necessarily equal the sums of rounded components.

Net administrative expenses charged to the OASI and DI Trust Funds in calendar year 2005 totaled $5.3 billion. This amount represented 0.9 percent of contribution income and 1.0 percent of expenditures. Corresponding percentages for each trust fund separately and for the OASDI program as a whole are shown in table III.A6 for each of the last 5 years.

Changes in the invested assets of the OASI and DI funds between the end of 2004 and the end of 2005 are a result of the acquisition and disposition of securities during calendar year 2005. Table III.A7 presents these investment transactions for each trust fund separately and combined. Tables VI.A5 and VI.A6, presented in appendix A, show the assets of the OASI and DI Trust Funds at the end of calendar years 2004 and 2005.

Note: All investments are shown at par value.

¹Trust fund data are available by month, quarter, or year on the Social Security website at www.socialsecurity.gov/OACT/ProgData/fundsQuery.html.

²Estimated amounts used to calculate percentage errors are before rounding to amounts shown in the annual reports.

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