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 of the annual balances at the end of the long-range period and the time at which the annual balances may change from positive to negative values.
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 adequate 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 future 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 adequate 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 in succeeding reports is also important when considering the actuarial status of the program. One indication of this stability, or sustainable solvency, is the behavior of the trust fund ratio at the end of the projection period. If trust fund ratios for the last several years of the long-range period are positive and constant or rising, then 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 for the infinite future 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 tax contribution rate and the ratio of income from
taxation of benefits to the OASDI taxable payroll for the year. The OASDI
taxable payroll consists of the total earnings which are subject to OASDI taxes, with some relatively small adjustments.
1 As such, it excludes net investment income and reimbursements from the General Fund of the Treasury for the costs associated with special monthly payments to certain uninsured persons who attained age 72 before 1968 and who have fewer than 3
quarters of coverage.
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, special monthly payments to certain uninsured persons who have 3 or more quarters of coverage (and whose payments are therefore not reimbursable from the General Fund of the Treasury),
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. (In this context, the term balance does not represent the
assets of the trust funds, which are sometimes referred to as the balance in the trust funds.)
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 rising due to the gradually increasing effect of the taxation of benefits. The pattern of the cost rate is much different. From about 2010 to 2030, the cost rate increases rapidly as the
baby-boom generation reaches
retirement eligibility age. After 2030, the cost rate remains fairly stable for about 40 years and thereafter rises slowly reflecting projected reductions in death rates and continued relatively low birth rates. The cost rate reaches 15.20 percent of taxable payroll for 2082. By comparison, the income rate reaches 11.43 percent of taxable payroll for 2082.
Projected income rates under the low cost and high cost sets of assumptions are very similar to those projected for the intermediate assumptions as they are largely a reflection of the tax rates specified in the law. 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 cost rate decreases through 2009, then rises, until it peaks in 2034 at a level of 13.10 percent of payroll. The cost rate then declines gradually, reaching a level of 11.06 percent of payroll for 2082 (at which point the income rate reaches 11.20 percent). For the high cost assumptions, the cost rate rises throughout the 75-year period. It rises at a relatively fast pace between 2010 and 2030 because of the aging of the baby-boom generation. Subsequently, the projected cost rate continues rising and reaches 21.62 percent of payroll for 2082 (at which point the income rate reaches 11.79 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 positive for 10 years (through 2017) and is negative thereafter. This annual deficit rises rapidly, reaching 2 percent of taxable payroll by 2025, and continues rising generally thereafter, to a level of 3.76 percent of taxable payroll for 2082.
Under the low cost assumptions, the projected OASI annual balance is positive for 13 years (through 2020) and then becomes negative, with the annual deficit peaking at 1.82 percent of taxable payroll for 2034. Thereafter, the annual deficit declines. By 2072, the OASI annual balance becomes positive, reaching a surplus of 0.15 percent of payroll in 2082. Under the high cost assumptions, however, the OASI balance is projected to be positive for only 7 years (through 2014) and to be negative thereafter, with a deficit of 1.87 percent for 2020, 5.79 percent for 2050, and 9.84 percent of payroll for 2082.
