2008 OASDI Trustees Report

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C. PROGRAM-SPECIFIC ASSUMPTIONS AND METHODS
The demographic and economic assumptions and methods described in the previous sections are used in a set of models to project future income and cost under the OASDI program. In some cases, the economic assumptions result in the direct calculation of program parameters as described in the fol­lowing subsection. These parameters affect the level of payroll taxes col­lected and the level of benefits paid and are calculated using formulas described explicitly in the Social Security Act. In other cases, the combina­tion of demographic and economic assumptions are used indirectly to drive more complicated models that project the numbers of future workers covered under OASDI and the levels of their covered earnings, and the numbers of future beneficiaries and the expected levels of their benefits. The following subsections provide brief descriptions of the derivations of these program-specific factors.
1. Automatically Adjusted Program Parameters
The Social Security Act specifies that certain program parameters affecting the determination of OASDI benefits and taxes are to be adjusted annually, reflecting changes in particular economic measures. The law prescribes spe­cific formulas that, when applied to reported statistics, produce automatic revisions in these program parameters and hence in the benefit and tax com­putations. These automatic adjustments are based on measured changes in the national average wage index (AWI) and the CPI.1 In this section, values are shown for program parameters that are subject to automatic adjustment, from the time that such adjustments became effective through 2017. Pro­jected values for future years are based on the economic assumptions described in the preceding section of this report.
The following two tables present the historical and projected values of the CPI-based benefit increases, as well as the AWI series and the values of many of the wage-indexed program parameters. In each table, the projections are shown under the three alternative sets of economic assumptions described in the previous section. Table V.C1 includes:
The annual percentage increases which have been applied to OASDI benefits under automatic cost-of-living adjustment provisions in the Social Security Act, based on increases in the CPI.
The annual levels of and percentage increases in the AWI. Under sec­tion 215(b)(3) of the Social Security Act, the AWI for each year after 1950 is used to index the taxable earnings of most workers first becom­ing eligible for benefits in 1979 or later. This procedure converts a worker’s past earnings to approximately benefit equivalent values near the time of the worker’s benefit eligibility, and these indexed values are used to calculate the worker’s benefit amount. The AWI is also used to adjust most of the other program parameters that are subject to the auto­matic-adjustment provisions.
The wage-indexed OASDI contribution and benefit base—the maxi­mum amount of earnings for the specified year that are subject to the OASDI payroll tax and creditable toward benefit computation.
The wage-indexed retirement earnings test exempt amounts—the annual amount of earnings below which beneficiaries are not subject to benefit withholding. A lower exempt amount applies in years before a beneficiary attains normal retirement age (NRA). A higher amount applies for the year in which the beneficiary attains normal retirement age. The retirement test does not apply beginning with the attainment of normal retirement age.
 
Table V.C1.—Cost-of-Living Benefit Increases, Average Wage Index, Contribution and Benefit Bases, and Retirement Earnings Test Exempt Amounts, 1975-2017 
OASDI
benefit
increases1
(percent)
Average
wage index (AWI) 2
OASDI
contribution
and benefit
base 3
Retirement earnings
test exempt amount
Increase
(percent)
6 2.5
77 2.3
7 97,500
7 12,960
77 34,440
7102,000
713,560
736,120
7 2.3
7 97,500
7 12,960
7 34,440
7102,000
713,560
736,120
7 2.3
7 $97,500
7 $12,960
7 $34,440
7102,000
713,560
736,120

1
Effective with benefits payable for June in each year 1975-82, and for December in each year after 1982.

2
See table VI.F6 for projected dollar amounts of the AWI beyond 2017.

3
Amounts for 1979-81 were specified by Public Law 95-216. The bases for years after 1989 were increased slightly by changes to the indexing procedure, as required by Public Law 101-239.

4
Normal retirement age. See table V.C3 for specific values.

5
In 1955-82, the retirement earnings test did not apply at ages 72 and over; in 1983-99, the test did not apply at ages 70 and over; beginning in 2000, it does not apply beginning with the month of attainment of NRA. In the year of attainment of NRA, the higher exempt amount applies to earnings in the year prior to the month of NRA attainment. Amounts for 1978-82 specified by Public Law 95-216; for 1996-2002, Public Law 104‑121.

6
Originally determined as 2.4 percent, but pursuant to Public Law 106-554, is effectively 2.5 percent.

7
Actual amount, as determined under automatic-adjustment provisions.

Values for other wage-indexed parameters are shown in table V.C2. The table provides historical values from 1978, when the amount of earnings required for a quarter of coverage was first indexed, through 2008, and also shows projected amounts through 2017. These other wage-indexed program param­eters are:
The bend points in the formula for computing the primary insurance amount (PIA) for workers who reach age 62, become disabled, or die in a given year. As illustrated in figure V.C1, these bend points indicate three ranges in a worker’s average indexed monthly earnings (AIME) over which a certain percent factor, 90, 32, or 15 percent respectively, is applied to determine the worker’s PIA.
 
Bend points in the formula used to compute the maximum total amount of monthly benefits payable on the basis of the earnings of a retired or deceased worker. This formula is a function of the worker’s PIA, and, as shown in figure V.C2, relies on four intervals and percentages.
 
The amount of earnings required in a year to be credited with a quarter of coverage (QC). The number and timing of QCs earned is used to determine an individual’s insured status—the basic requirement for benefit eligibility under OASDI.
The old-law contribution and benefit base—the OASDI contribution and benefit base that would have been in effect in each year after 1977 under the automatic-adjustment provisions as in effect before the enact­ment of the 1977 amendments. This old-law base is used in determining special-minimum benefits for certain workers who have many years of low earnings in covered employment. Beginning in 1986, the old-law base is also used in the calculation of OASDI benefits for certain work­ers who are eligible to receive pensions based on noncovered employ­ment. In addition, it is used for certain purposes under the Railroad Retirement program and the Employee Retirement Income Security Act of 1974.
 
Table V.C2.—Values for Selected Wage-Indexed Program Parameters,
Calendar Years 1978-2017 
AIME bend
points in PIA
formula 1
PIA bend points
in maximum-
family-benefit formula 2
Earnings
required for
a quarter of
coverage
Old-law
contribution
and benefit base 3
4/
5 $250
5 $17,700
5 $180
5 $1,085
5 $230
5 $332
5 $433

1
The formula to compute a PIA is (1) 90% of AIME below the first bend point, plus (2) 32% of AIME in excess of the first bend point but not in excess of the second, plus (3) 15% of AIME in excess of the second bend point. The bend points pertain to the first year a beneficiary becomes eligible for benefits.

2
The formula to compute a family maximum is (1) 150% of PIA below the first bend point, plus (2) 272% of PIA in excess of the first bend point but not in excess of the second, plus (3) 134% of PIA in excess of the second bend point but not in excess of the third, plus (4) 175% of PIA in excess of the third bend point.

3
Contribution and benefit base that would have been determined automatically under the law in effect prior to enactment of the Social Security Amendments of 1977. The bases for years after 1989 were increased slightly by changes to the indexing procedure to determine the base, as required by Public Law 101-239.

4
No provision in law for this amount in this year.

5
Amount specified for first year by Social Security Amendments of 1977; amounts for subsequent years subject to automatic-adjustment provisions.

In addition to the program parameters affecting the determination of OASDI benefits that reflect changes in the economy, there are certain legislated changes that have affected, and will affect, benefits. Two such changes are the scheduled increases in the normal retirement age and in the delayed retirement credits. Table V.C3 shows the scheduled changes in these parame­ters and the resulting effects on benefit levels expressed as a percentage of PIA.
 
Table V.C3.—Legislated Changes in Normal Retirement Age and Delayed Retirement
Credits, for Persons Reaching Age 62 in Each Year 1986 and Later
Year of
attainment of
age 62
Normal
retirement
age (NRA)
Credit for each
year of delayed
retirement after
NRA (percent)
3 1/2
103 1/2
117 1/2
3 1/2
103 1/2
117 1/2
4 1/2
104 1/2
122 1/2
4 1/2
104 1/2
122 1/2
5 1/2
105 1/2
127 1/2
5 1/2
105 1/2
127 1/2
6 1/2
106 1/2
132 1/2
6 1/2
79 1/6
98 8/9
105 5/12
111 11/12
131 5/12
78 1/3
97 7/9
104 2/3
111 2/3
132 2/3
77 1/2
96 2/3
103 1/2
110 1/2
131 1/2
7 1/2
76 2/3
95 5/9
102 1/2
132 1/2
7 1/2
75 5/6
94 4/9
101 1/4
108 3/4
131 1/4
93 1/3
74 1/6
92 2/9
98 8/9
106 2/3
130 2/3
73 1/3
91 1/9
97 7/9
105 1/3
129 1/3
72 1/2
96 2/3
71 2/3
88 8/9
95 5/9
102 2/3
126 2/3
70 5/6
87 7/9
94 4/9
101 1/3
125 1/3
86 2/3
93 1/3
2. Covered Employment
Projections of the total labor force and unemployment rate are based on Bureau of Labor Statistics definitions from the Current Population Survey (CPS), and thus represent the average weekly number of employed and unemployed persons, aged 16 and over, in the U.S. in a calendar year. Total covered workers in a year are the number of persons who have any OASDI covered earnings (earnings subject to the OASDI payroll tax) at any time during the year. For those aged 16 and over, projected covered employment is the sum of age-sex components, each of which is projected as a ratio to the CPS concept of employment. For those under age 16, projected covered employment is the sum of age-sex components, each of which is projected as a ratio to the Social Security area population. The projection methodology accounts for changes in the business cycle, the quarterly pattern of growth in employment within each year, changes in non-OASDI covered employment, the increase in coverage of Federal civilian employment as a result of the 1983 Social Security Amendments, and changes in the number and employ­ment-status of other immigrants estimated to be residing within the Social Security coverage area.
Covered-worker rates are defined as the ratio of OASDI covered workers to the Social Security area population. The age-adjusted coverage rate for males age 16 and over is projected to be 71.2, 70.6, and 70.2 percent for 2082 for the low cost, intermediate, and high cost assumptions, respectively, com­pared to the 2006 level of about 71.7 percent. (Age-adjusted covered worker rates are adjusted to the 2006 age distribution of the Social Security area population.) For females, the projected age-adjusted coverage rate changes from its 2006 level of 63.1 percent to 64.4, 63.8, and 63.1 percent for 2082 for the low cost, intermediate, and high cost assumptions, respectively.
3. Taxable Payroll and Payroll Tax Revenue
The OASDI taxable payroll is the amount of earnings in a year which, when multiplied by the combined employee-employer tax rate, yields the total amount of taxes due from wages and self-employed income in the year. Tax­able payroll is used in estimating OASDI income and in determining income and cost rates and actuarial balances. (See section IV.B.1, Annual Income Rates, Cost Rates, and Balances, for definitions of these terms.) Taxable pay­roll is computed from taxable earnings, defined as the sum of wages and self-employment earnings subject to the Social Security tax. In computing tax­able payroll, wages are adjusted to take into account the “excess wages” earned by workers with multiple jobs whose combined wages exceed the contribution and benefit base. Also, from 1983 through 2001, taxable payroll includes deemed wage credits for military service. Prior to 1984, the self-employed tax rate was less than the combined employee-employer rate, thus taxable self-employed earnings were weighted to reflect this. Also, prior to 1988, employers were exempt from Social Security tax on part of their employees’ tips; taxable payroll was reduced by half of this exempt amount to take this into account.
The computation of taxable earnings for employees, employers, and the self-employed is based on total earnings in covered employment. Covered earn­ings are summed from component sectors of the economy, including private, State and local, Federal civilian, and military. Covered earnings for each sec­tor are based on the projected growth of U.S. earnings and a factor that reflects any projected change in coverage (e.g., the increase in coverage in the Federal civilian sector due to mandatory coverage of newly hired employees). The level of taxable earnings reflects only the portion of cov­ered earnings that is at or below the contribution and benefit base. The por­tion of covered earnings that is taxable (i.e., at or below the base) was about 89.5, 86.9, and 82.8 percent for 1983, 1994, and 2000, respectively. This ratio of taxable earnings to covered earnings rose to about 85.8 in 2002, then fell to 83.3 by 2006. The average annual rate of change in the ratio was about -0.3 percent between 1983 and 2006.
Most of this decline was due to a relative increase in wages for high earners. This decline is assumed to continue at a slower rate through 2017 for the intermediate and high cost assumptions. The projected taxable earnings ratios in 2017 are 83.7, 82.9, and 82.1 percent for the low cost, intermediate, and high cost assumptions, respectively. After 2017, the taxable-to-covered earnings ratio is approximately constant.
Payroll tax revenue is computed by applying the scheduled tax rates to tax­able wages and self-employment income, taking into account the lag between the time the tax liability is incurred and when the taxes are col­lected. In the case of wages, employers are required to deposit withholding taxes with the Treasury on a schedule determined by the amount of tax liabil­ity incurred. (Generally, the higher the amount of liability, the sooner the taxes must be paid—ranging from the middle of the following month for employers with few employees to the next banking day after wages are paid for companies with very large payrolls.) Self-employed workers are required to make estimated tax payments on their earnings four times during the year, as well as making up any under-estimate on their individual income tax return. The pattern of actual receipts by the Treasury is taken into account when estimating self-employed tax collections.
4. Insured Population
Eligibility for benefits under the OASDI program requires some minimal level of work in covered employment. This requirement is established by a worker’s accumulation of quarters of coverage (QCs). Prior to 1978, one QC was credited for each calendar quarter in which at least $50 was earned. In 1978, when quarterly reporting of earnings was replaced by annual reporting, the amount required to earn a QC (up to a maximum of four per year) was set at $250. Since then, this amount has been adjusted each year according to changes in the AWI. Its value in 2008 is $1,050.
There are three types of insured status which can be acquired by a worker under the OASDI program. Each of these statuses is determined by the num­ber and recency of QCs earned. Fully insured status is acquired by any worker whose total number of QCs is greater than or equal to the number of years elapsed after the year of attainment of age 21 (but not less than six). Once a worker has accumulated 40 QCs, he or she remains permanently fully insured. Disability insured status is acquired by any fully insured worker over age 30 who has accumulated 20 QCs during the 40-quarter period end­ing with the current quarter; any fully insured worker aged 24-30 who has accumulated QCs during one-half of the quarters elapsed after the quarter of attainment of age 21 and up to and including the current quarter; and any fully insured worker under age 24 who has accumulated six QCs during the 12-quarter period ending with the current quarter. Currently insured status is acquired by any worker who has accumulated six QCs during the 13-quarter period ending with the current quarter. Periods of disability are excluded from the above described QC requirements for insured status (but do not reduce the minimum of six QCs).
There are many types of benefits payable to workers and their family mem­bers under the OASDI program. A worker must be fully insured to be eligi­ble for a primary retirement benefit, and for his or her spouse or children to be eligible for auxiliary benefits. A deceased worker must have been either currently insured or fully insured at the time of death for his or her children (and their mother or father) to be eligible for benefits. If there are no eligible surviving children, the deceased worker must have been fully insured at the time of death for his or her surviving spouse to be eligible. A worker must be disability insured to be eligible for a primary disability benefit, and for his or her spouse or children to be eligible for auxiliary benefits.
Historical estimates of the fully insured population, as a percentage of the Social Security area population, are made by age and sex for each birth cohort beginning with 1900. These percentages are based on 30,000 simu­lated work histories for each sex and birth cohort, which are constructed from past coverage rates, median earnings, and amounts required for credit­ing QCs. These work histories are developed by a model which assumes that persons who have recently been out of covered employment are likely to remain out of covered employment. This model is aligned such that the sim­ulated fully insured percentages reproduce fairly closely the fully insured percentages estimated from the Continuous Work History Sample from 1970 to date. The fully insured population for future years is projected using this model, reflecting estimated future coverage rates, median earnings, and amounts required for crediting QCs.
Historical estimates of the disability insured population, as a percentage of the fully insured population, are made by age and sex for each birth cohort beginning with 1900. These percentages are based on the same simulated work histories used to project the fully insured percentages. Additional adjustments are made to bring the simulated disability insured percentages into close agreement with those estimated from the Continuous Work His­tory Sample. The principal adjustment is for periods of disability (which are not explicitly taken into account in the model). These periods (which reduce the normally applicable QC requirements) have a negligible effect on fully insured status at retirement age, but a substantial effect on disability insured status. The disability insured population for future years is projected using this model, reflecting projections of the fully insured population.
Projections of the currently insured population are not made. This is because the number of beneficiaries who are entitled to benefits based solely on cur­rently insured status has been very small, and is expected to remain small in the future.
Under this procedure, the percentage of the Social Security area population aged 62 and over that is fully insured is projected to increase from its esti­mated level of 81.0 for December 31, 2005, to 90.5, 90.6, and 91.0 for December 31, 2085, under alternatives I, II, and III, respectively. The per­centage for females is projected to increase significantly, while that for males is projected to decline somewhat. Under alternative II, for example, the per­centage for males is projected to decrease slightly during this period from 92.6 to 91.3, while that for females is projected to increase from 72.1 to 90.0.
5. Old-Age and Survivors Insurance Beneficiaries
The number of OASI beneficiaries is projected for each type of benefit sepa­rately, by the sex of the worker on whose earnings the benefits are based, and by the age of the beneficiary. For selected types of benefits, the number of beneficiaries is also projected by marital status.
For the short-range period, the number of retired-worker beneficiaries is developed by applying award rates to the aged fully insured population less those insured persons entitled to retired-worker, disabled-worker, aged- widow(er)’s, or aged-spouse’s benefits, and by applying termination rates to the number of persons already receiving retired-worker benefits.
For the long-range period, the number of retired-worker beneficiaries not previously converted from disabled-worker beneficiary status is projected as a percentage of the exposed population, i.e., the aged fully insured popula­tion less persons entitled to or converted from disabled-worker benefits and fully insured persons entitled only to widow(er)’s benefits. For age 62, a lin­ear regression is developed based on the historical relationship between this percentage and the labor force participation rate. The regression coefficients are then used to project this percentage based on the projected labor force participation rate for age 62. The percentage for ages 70 and over is assumed to be nearly 100, because delayed retirement credit can no longer be earned after age 70. The percentage for each age 63 through 69 is projected based on historical experience with an adjustment for changes in the portion of the pri­mary insurance amount that is payable at each age of entitlement. As the nor­mal retirement age increases, the number of retired-worker beneficiaries not automatically converted from disabled-worker beneficiary status as a per­centage of the exposed population, is gradually adjusted downward.
For the long-range period also, the number of retired-worker beneficiaries previously converted from disabled-worker beneficiaries is calculated sepa­rately in a manner consistent with the calculation of disabled-worker benefi­ciaries.
The number of aged-spouse beneficiaries (excluding those who are also receiving a retired-worker benefit) is estimated from the population projected by age and sex. The benefits of aged-spouse beneficiaries are based on the earnings records of their husbands or wives, who are referred to as “earners.” In the short-range period, insured aged-spouse beneficiaries are projected in conjunction with the retired-worker beneficiaries. Uninsured aged-spouse beneficiaries are projected by applying award rates to the aged uninsured male or female population, and by applying termination rates to the popula­tion already receiving such benefits.
In the long-range period, aged-spouse beneficiaries are estimated separately for those married and divorced. The number of married aged-spouse benefi­ciaries is projected by applying a series of factors to the number of spouses aged 62 and over in the population. These factors represent the probabilities that the spouse and the earner meet all of the conditions of eligibility—i.e., the probabilities that: (1) the earner is 62 or over; (2) the earner is insured; (3) the earner is receiving benefits; (4) the spouse is not receiving a benefit for the care of an entitled child; (5) the spouse is not insured; and (6) the spouse is not eligible to receive a significant government pension based on earnings in noncovered employment. To the resulting number of spouses a projected prevalence rate is applied to calculate the estimated number of aged-spouse beneficiaries.
The number of divorced aged-spouse beneficiaries is estimated by applying the same factors to the number of divorced persons aged 62 and over in the population, with three differences. First, an additional factor is required to reflect the probability that the person’s former earner spouse is still alive (otherwise, the person may be entitled to a divorced widow(er)’s benefit). Second, a factor is required to reflect the probability that the marriage to the earner spouse was at least 10 years in duration. Third, factor (3) above is not applied because, effective as of January 1985, a divorced person generally need not wait to receive benefits until the former earner spouse is receiving benefits.
The projected numbers of children under age 18, and students aged 18 and 19, who are eligible for benefits as children of retired-worker beneficiaries, are based on the projected number of children in the population. In the short-range period, the number of entitled children is developed by applying award rates to the number of children in the population where both parents are alive, and by applying termination rates to the number of children already receiving benefits.
In the long-range period, the number of entitled children is projected sepa­rately by sex of the earner parent. The number of entitled children is pro­jected for each age under 18 from the latest beneficiary data by reflecting changes in the following: the number of children in the population and the proportion of retired workers aged 62 to 71 to the population aged 20 to 71. For student beneficiaries, factors are applied to the number of children aged 18 and 19 in the population, representing the probabilities that the parent is alive, aged 62 or over, insured, and receiving a retired-worker benefit. Another factor is applied representing the probability that the child is attend­ing a secondary school.
The number of disabled children, aged 18 and over, of retired-worker benefi­ciaries is projected from the adult population. In the short-range period, award rates are applied to the population, and termination rates are applied to the number of disabled children already receiving benefits. In the long-range period, disabled children are projected in a manner similar to that for student children with the inclusion of a factor reflecting the probability of being dis­abled before age 22.
In the short-range period, the number of entitled young-spouse beneficiaries is developed by applying award rates to the number of awards to children of retired workers, where the children are either under age 16 or disabled, and by applying termination rates to the number of young spouses already receiv­ing benefits. In the long-range period, young-spouse beneficiaries are pro­jected as a proportion of the projected number of child beneficiaries of retired workers, taking into account projected changes in average family size.
The number of aged-widow(er) beneficiaries (excluding those who are also receiving a retired-worker benefit) is projected from the population by age and sex. In the short-range period, fully insured aged-widow(er) beneficia­ries are projected in conjunction with the retired-worker beneficiaries. Unin­sured aged-widow(er) beneficiaries are projected, by applying award rates to the aged uninsured male or female population, and by applying termination rates to the population already receiving such benefits. In the long-range period, aged-widow(er) beneficiaries are projected by marital status. Four factors are applied to the number of widow(er)s in the population aged 60 and over. These factors represent the probabilities that (1) the deceased earner is fully insured at death, (2) the widow(er) is not receiving a benefit for the care of an entitled child, (3) the widow(er) is not fully insured, and (4) the widow(er)’s benefits are not withheld because of receipt of a significant government pension based on earnings in noncovered employment. In addi­tion, some insured widow(er)s who had not applied for their retired-worker benefits are assumed to receive widow(er)’s benefits. Also, the same factors are applied to the number of divorced persons aged 60 and over in the popu­lation, with additional factors representing the probability that the person’s former earner spouse is deceased and that the marriage was at least 10 years in duration.
In the short-range period, the number of disabled-widow(er) beneficiaries is developed by applying award rates to the uninsured male or female popula­tion, and by applying termination rates to the population already receiving a disabled-widow(er) benefit. In the long-range period, the number is projected for each age 50 up to NRA as percentages of the widowed and divorced pop­ulations, adjusted for the insured status of the deceased spouse, the preva­lence of disability, and the probability that the disabled spouse is not receiving another type of benefit.
The projected numbers of children under age 18, and students aged 18 and 19, who are entitled for benefits as survivors of deceased workers, are based on the projected number of children in the population whose mothers or fathers are deceased. In the short-range period, the number of entitled chil­dren is developed by applying award rates to the number of orphaned chil­dren, and by applying termination rates to the number of children already receiving benefits.
In the long-range period, the number of child-survivor beneficiaries is pro­jected in a manner analogous to that for student beneficiaries of retired work­ers, with the factor representing the probability that the parent is aged 62 or over replaced by a factor that represents the probability that the parent is deceased.
In the short-range period, the numbers of entitled mother-survivor and father-survivor beneficiaries are developed by applying award rates to the number of awards to child-survivor beneficiaries, where the children are either under age 16 or disabled, and by applying termination rates to the number of mother-survivors and father-survivors already receiving benefits. In the long-range period, mother-survivor and father-survivor beneficiaries, assuming they are not remarried, are estimated from the number of child-sur­vivor beneficiaries, taking into account projected changes in average family size.
The number of parent-survivor beneficiaries is projected based on the histor­ical pattern of the number of such beneficiaries.
Table V.C4 shows the projected number of beneficiaries under the OASI pro­gram by type of benefit. Included among the beneficiaries who receive retired-worker benefits are persons who also receive a residual benefit con­sisting of the excess of an auxiliary benefit over their retired-worker benefit. Estimates of the number and amount of such residual payments are made separately for spouses and widow(er)s.
 
Table V.C4.—OASI Beneficiaries With Benefits in Current-Payment Status
at the End of Calendar Years 1945-2085 [In thousands]
Widow-
widower
Mother-
father

1
Included among the beneficiaries who receive retired-worker benefits are persons who also receive a resid­ual benefit consisting of the excess of an auxiliary benefit over their retired-worker benefit.

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. Totals do not necessarily equal the sums of rounded components.
6. Disability Insurance Beneficiaries
Benefits are paid from the DI Trust Fund to disabled workers who satisfy the disability insured requirements, are unable to engage in substantial gainful activity due to medically determinable physical or mental impairment severe enough to satisfy the requirements of the program, and have not yet attained normal retirement age. Spouses and children of such disabled workers may also receive DI benefits provided they satisfy certain criteria, principally meeting age requirements.
The number of disabled workers receiving benefits in a given year (i.e., in current-payment status) is projected using standard actuarial methods that reflect future new benefit awards, terminations due to death and recovery, and conversions from disability to retired-worker beneficiary status after which benefits are paid from the OASI Trust Fund.
The prevalence of disability (arising from the likelihood of becoming disabledincidenceas well as the likelihood that disability ceasestermination) is cap­tured by the ratio of the number of disabled-worker beneficiaries in current-pay­ment status to the disability insured population (this ratio is referred to as the disabled-worker prevalence rate). The balance of this section describes the methods and assumptions used for projecting the number of disability bene­ficiaries. Incidence rates and termination rates are the key factors in these projections. This section illustrates these rates as well as the projected bene­ficiary population and prevalence rates.
a. Disability Incidence
The number of new benefit awards each year divided by the number of indi­viduals who meet insured requirements but are not yet receiving benefits (the disability exposed population) is referred to as the disability incidence rate. New awards are projected for each year by applying assumed age-sex-spe­cific disability incidence rates to the projected disability exposed population by age and sex. Projections of the disability insured population are described in section V.C.4 of this report.
For the first 10 years of the projection period (through 2017) incidence rates reflect several factors including: (1) aspects of program administration (pro­cessing of the special disability workload described in section IV.A.2, efforts to reduce the disability backlog, and recent changes to how claims are adju­dicated); (2) assumed future unemployment rates; and (3) underlying trends in incidence. After 2017, age-sex-specific incidence rates are assumed to trend toward the ultimate rates assumed for the long-range projections, reaching these ultimate rates in 2027. The ultimate age-sex-specific disabil­ity incidence rates are selected based on careful analysis of historical levels and patterns and expected future conditions, including the impact of sched­uled increases in the normal retirement age.2 The ultimate incidence rates are assumed to represent the likely average rates of incidence for the future.
For the intermediate alternative, the ultimate age-sex-adjusted incidence rate (adjusted to the disability exposed population for the year 2000) for ages through 64 is assumed to be 5.2 awards per thousand exposed population.3 This level is about 1 percent higher than the average rate for the historical period 1970 through 2007. The ultimate age-sex-adjusted incidence rates for the low cost and high cost alternatives are assumed to be 4.2 and 6.2 awards per thousand exposed, or about 19 percent lower and 20 percent higher than the average for the historical period, respectively. For the 2008 report, the ultimate assumed age-sex-adjusted incidence rates are essentially the same as in last year’s report.
Historical incidence rates and assumed incidence rates under the three alter­natives are illustrated in figure V.C3. Incidence rates have varied within a wide range over the past 35 years. This variation is attributed to a variety of demographic and economic factors, along with the effects of changes due to legislation and program administration.4 The solid lines in figure V.C3 illus­trate values of the incidence rate, age-sex adjusted to the distribution of the disability exposed population for 2000. Such adjustment facilitates meaning­ful comparisons over long periods of time by focusing on the likelihood of becoming disabled, and excluding the effects of a changing distribution of the population toward ages where disability is inherently more or less likely.
gross (unadjusted) incidence rates are also shown in figure V.C3 in dashed lines. Unadjusted rates are influenced by the changing age‑sex distribution of the exposed population over time. The gross incidence rate fell substantially below the age‑sex-adjusted rate between 1975 and 1995 as the baby-boom generation swelled the size of the younger working-age population, where disability incidence is low. After 1995, the gross rate rose relative to the age‑sex-adjusted rate, reflecting the aging of the baby-boom generation into higher ages, where disability incidence increases substantially. After about 2023, the gross incidence rate declines relative to the age-sex-adjusted rate as the baby-boom generation moves above the normal retirement age (NRA), and is replaced at prime disability ages (50 to NRA) by the smaller cohorts born in the 1970s. As these smaller cohorts age past NRA, by about 2050, the gross inci­dence rate returns to a higher relative level under the intermediate assumptions. Thereafter, the gross rate remains higher, reflecting the persistently higher average age of the working-age population, which is largely due to lower birth rates since 1965.
 
Figure V.C3.—DI Disabled-Worker Incidence Rates, 1970-2085
[Awards per thousand disability exposed]
b. Disability Termination
Disability benefits may be terminated if a beneficiary dies or recovers from the disabling condition (as indicated by either medical improvement or return to work). The termination rate is the ratio of the number of termina­tions to the average number of disabled-worker beneficiaries during the year.
Termination rates are projected by age, sex, and reason for termination. In addition, in the long-range period (post-2017) termination rates are also assumed to vary by duration of entitlement to disabled-worker benefits.
In the short-range period (through 2017), the age-sex-adjusted death rate (adjusted to the 2000 disabled-worker population) under the intermediate assumptions is projected to gradually decline from 27.9 deaths per thousand beneficiaries in 2007 to about 23.9 per thousand by 2017.5 The age-sex- adjusted recovery rate under the intermediate assumptions is assumed to rise from a relatively low level of 10 per thousand beneficiaries in 2007 (reflect­ing temporarily lower levels of continuing disability reviews) to 12 per thou­sand beneficiaries by 2017. Under low cost (high cost) assumptions, total age-sex-adjusted termination rates due to death and recovery are assumed to increase (decrease) to levels roughly 10-15 percent higher (lower) than those under the intermediate assumptions.
For the long-range period (post-2017), death and recovery rates are projected relative to rates by age, sex, and duration of entitlement over the base period 1996-2000.6 The ultimate age-sex-adjusted recovery rate for disabled work­ers is assumed to be about 10.8 per thousand beneficiaries. Ultimate age-sex- adjusted recovery rates for low cost and high cost alternatives are assumed to reach about 13.1 and 8.6 recoveries per thousand beneficiaries, respectively. For all three sets of assumptions, the ultimate recovery rates are reached in the twentieth year of the projection period (2027). In contrast, death rates by age and sex are assumed to change throughout the long-range period at the same rate as for death rates in the general population. From the age-sex- adjusted death rate of 27.9 per thousand beneficiaries in 2007, rates of 21.4, 12.2, and 7.7 per thousand disabled-worker beneficiaries are projected for 2085 under the low cost, intermediate, and high cost assumptions, respec­tively.
Figure V.C4 illustrates gross and age-sex-adjusted total termination rates for disabled-worker beneficiaries for the historical period since 1970, and for the projection period through 2085. As with incidence rates, the age-sex-adjusted termination rate provides an illustration of the real change in the tendency to terminate benefits. The gross rate is influenced by changes in the age-sex distribution of the beneficiary population. A shift in the beneficiary population to older ages, as when the baby-boom generation moves into pre-retirement ages, results in an increase in the gross death termination rate as long as death rates by age and sex are constant or declining.
 
Figure V.C4.—DI Disabled-Worker Termination Rates, 1970-2085
[Terminations per thousand disabled-worker beneficiaries]
c. Comparison of Incidence, Termination, and Conversion
Incidence and termination rates are the foundation for development of the projected levels of disabled-worker beneficiaries in current-payment status up to the normal retirement age (NRA) at which time beneficiaries are con­verted to retired-worker status and thereby leave the DI rolls. For all dis­abled-worker beneficiaries reaching the NRA in a given year, the disability “conversion” rate is, by definition 100 percent. For beneficiaries at all other ages this rate is zero. Conversions are simply a transfer of beneficiaries at NRA from the DI Trust Fund account to the OASI Trust Fund account. After conversion, recovery from the disabling condition is no longer considered. Conversions do represent a form of exit from the DI rolls and therefore must be accounted for in disabled-worker beneficiary totals.
Figure V.C5 compares the historical and projected (intermediate) levels of incidence, termination, and conversion on both gross and age-sex adjusted bases. The rates for incidence and termination (death and recovery) are described above. The conversion ratio is the number of conversions in a given year (i.e., beneficiaries who reach the NRA) divided by the average number of disabled-worker beneficiaries at all ages in that year. The ratio is a constant on an age-sex-adjusted basis, except for the two periods during which the NRA increases under current law. But on a gross basis, the conver­sion ratio rises and falls with the change in the age distribution of disabled workers reflecting the changing proportion of all disabled-worker beneficia­ries who attain the NRA in a given year.
Termination rates have declined and are expected to continue to fall, largely because of declines in death rates. Incidence rates have varied widely and are assumed for the intermediate projection (on an age-sex-adjusted basis) to remain near the middle of the high and low extremes experienced since 1970. The gross conversion ratio increases in the future due to aging of the beneficiary population.
 
d. DI Beneficiaries and Disabled-Worker Prevalence Rates
The detailed projections of disabled-worker awards, terminations, and con­versions are combined using standard actuarial methods to project the num­ber of disabled workers receiving benefits (i.e., in current-payment status) over the next 75 years. The projected numbers of disabled workers in cur­rent-payment status are presented in table V.C5. The number of disabled workers in current-payment status is projected to grow from 7.1 million at the end of 2007, to 12.2 million, 14.1 million, and 14.8 million at the end of 2085, under the low cost, intermediate, and high cost assumptions, respec­tively. Of course, much of this growth is a direct result of the growth and aging of the population described earlier in this chapter. Also shown in table V.C5 are disabled-worker prevalence rates on both gross (unadjusted) and age-sex-adjusted bases. Discussion of auxiliary beneficiary projections appears below.
 
Table V.C5.—DI Beneficiaries With Benefits in Current-Payment Status at the End of Calendar Years 1960-2085 [Beneficiaries in thousands; prevalence rates per thousand disability insured]
Disabled
worker beneficiaries
Disabled-worker prevalence rates
Age-sex adjusted
Note: Totals do not necessarily equal the sums of rounded components.
Figure V.C6 illustrates the historical and projected disabled-worker preva­lence rates on both a gross (unadjusted) basis and on an age-sex-adjusted basis (adjusted to the age-sex distribution of the insured population for the year 2000).
 
Figure V.C6.—DI Disabled-Worker Prevalence Rates, 1970-2085
[Rate per thousand disability insured]
Changes in prevalence rates are a direct result of changes in incidence rates and termination rates. The patterns depicted for these rates in figure V.C5 are helpful for understanding the trend in prevalence rates (annual rates are not directly comparable and cannot be simply combined, as their denominators differ).
Prevalence rates have increased primarily because: (1) termination rates have declined; and (2) incidence rates at younger ages have increased relative to rates at higher ages. Gross prevalence rates have increased more than age-sex-adjusted prevalence rates since the baby-boom generation began to move into the ages 50 through NRA, where incidence rates are relatively high. With this upward shift in the age distribution of the disabled population, gross conversions to retired worker status at NRA have naturally increased as well. In the future, prevalence rates are projected to grow at a slower pace reflecting assumed stabilization in three factors: the age distribution of the general population, the age distribution of the disability insured population, and relative rates of incidence by age. With these factors gradually stabiliz­ing, the remaining force influencing prevalence rates is the declining death termination rate, which is projected to continue to have a small influence toward higher disabled worker prevalence rates in the future.
As mentioned above in the discussion of incidence and termination rates, the age-sex-adjusted prevalence rate isolates the changing trend in the true likeli­hood of receiving benefits for the insured population, free from the effects of an aging population. For disability prevalence rates, like incidence rates, the entrance of the baby-boom generation into working ages caused the gross rate of disability to decline relative to the age-sex-adjusted rate between 1975 and 1995, due to lower disability prevalence rates at younger ages. Conversely, the gross rate of disability prevalence increases relative to the age-sex-adjusted rate after 1995 due to the aging of the baby-boom genera­tion into ages with higher disability prevalence rates.
The age-sex-adjusted disabled-worker prevalence rate for ages through 64 is projected to grow from 40.0 per thousand disability insured at the end of 2007, to 47.4 per thousand at the end of 2085 under the intermediate assump­tions. As mentioned above, the growth in prevalence is expected to slow rel­ative to the historical period.
Under the low cost and high cost assumptions, the age-sex-adjusted disabil­ity prevalence rate is projected to decrease to 35.6 per thousand and increase to 59.6 per thousand insured workers at the end of 2085, respectively.
Table V.C5 presents projections of the numbers of auxiliary beneficiaries paid from the DI Trust Fund. As indicated at the beginning of this subsec­tion, such auxiliary beneficiaries consist of qualifying spouses and children of disabled workers. In the case of children, the child must be either (1) under age 18, (2) age 18 or 19 and still a student in high school, or (3) over age 18 and disabled prior to age 22. In the case of spouses, the spouse must either be at least age 62, or have, in his or her care, an eligible child benefi­ciary who is either under age 16 or disabled prior to age 22.
In general, the number of such auxiliary beneficiaries is projected in a man­ner that is related to the projected number of disabled-worker beneficiaries. In the short-range period (2008-17), this is accomplished for family members of disabled-worker beneficiaries by projecting incidence and termination rates for each category of auxiliary beneficiary. After 2017, the child benefi­ciaries at ages 18 and under are projected in relation to the projected number of children in the population, by applying factors representing the probability that either of their parents is a disabled-worker beneficiary. The remaining categories of children and spouses are projected in a similar manner.
7. Average Benefits
Average benefits are projected by type of benefit based on recent historical averages, projected average primary insurance amounts (PIAs), and pro­jected ratios of average benefits to average PIAs. Average PIAs are calcu­lated from projected distributions of beneficiaries by duration from year of award, average awarded PIAs, and increases in PIAs since the year of award, reflecting automatic benefit increases, recomputations to reflect additional covered earnings, and other factors. Future average awarded PIAs are calcu­lated from projected earnings histories, which are developed using a combi­nation of the actual earnings histories associated with a sample of awards based on 2004 entitlements, and more recent actual earnings levels by age and sex for covered workers.
For several types of benefits—retired-worker, aged-spouse, and aged-widow(er) benefits—the percentage of the PIA that is payable depends on the age at initial entitlement to benefits. Projected ratios of average benefits to average PIAs for these types of benefits are based on projections of age distributions at initial entitlement.
8. Benefit Payments
For each type of benefit, benefit payments are calculated as the product of a number of beneficiaries and a corresponding average monthly benefit. In the short-range period, benefit payments are calculated on a quarterly basis. In the long-range period, all benefit payments are calculated on an annual basis, using the number of beneficiaries on December 31. These amounts are adjusted to include retroactive payments to newly awarded beneficiaries, and other amounts not reflected in the regular monthly benefit payments.
Lump-sum death payments are calculated as the product of (1) the number of such payments, which is projected on the basis of the assumed death rates, the projected fully insured population, and the estimated percentage of the fully insured population that would qualify for benefits, and (2) the amount of the lump-sum death payment, which is $255 (not indexed in future years).
9. Administrative Expenses
The projection of administrative expenses through 2017 is based on histori­cal experience and the expected growth in average wages. Additionally, esti­mates for the first several years of the projection are provided by the Office of Budget of the Social Security Administration. For years after 2017, administrative expenses are assumed to increase because of increases in the number of beneficiaries and increases in the average wage which will more than offset assumed improvements in administrative productivity.
10. Railroad Retirement Financial Interchange
Railroad workers are covered under a separate multi-tiered plan, the first tier being very similar to OASDI coverage. An annual financial interchange between the Railroad Retirement fund and the OASI and DI funds is made reflecting the difference between (1) the amount of OASDI benefits that would be paid to railroad workers and their families if railroad employment had been covered under the OASDI program and administrative expenses associated with these benefits, and (2) the amount of OASDI payroll tax and income tax that would be received with allowances for interest from railroad workers.
The effect of the financial interchange with the Railroad Retirement program is evaluated on the basis of trends similar to those used in estimating the cost of OASDI benefits. The resulting effect is annual short-range costs of about $4-5 billion and a long-range summarized cost of 0.03 percent of taxable payroll to the OASDI program.
11. Benefits to Uninsured Persons
Some older persons had little or no chance to become fully insured for Social Security benefits during their working lifetimes. Special payments from the OASI Trust Fund may be granted to uninsured persons who either: (1) attained age 72 before 1968, or (2) attained age 72 in 1968 or later and had 3 quarters of coverage for each year after 1966 and before the year of attainment of age 72. Benefits and costs associated with uninsured persons of the first type above are reimbursable from the General Fund of the Treasury. All projected costs associated with reimbursable and non-reimbursable pay­ments to uninsured persons are insignificant.
12. Military-Service Transfers
Beginning in 1966, the OASI and DI Trust Funds were reimbursed annually for the cost (including administrative expenses) of providing additional bene­fit payments resulting from noncontributory wage credits for military service performed prior to 1957. The 1983 amendments modified the reimbursement mechanism and the timing of the reimbursements, and required a transfer in 1983 to include all future costs attributable to the wage credits. The amend­ments also require adjustments to that 1983 transfer every fifth year, begin­ning with 1985, to account for actual data.
13. Income From Taxation of Benefits
Under present law, the OASI and DI Trust Funds are credited with the addi­tional income taxes attributable to the taxation of up to the first 50 percent of OASI and DI benefit payments. (The remainder of the income taxes attribut­able to the taxation of up to 85 percent of OASI and DI benefit payments is credited to the HI Trust Fund.)
For the short-range period, income to the trust funds from such taxation is estimated by applying the following two factors to total OASI and DI benefit payments: (1) the percentage of benefit payments (limited to 50 percent) that is taxable, and (2) the average marginal tax rate applicable to those benefits.
For the long-range period, income to the trust funds from such taxation is estimated by applying projected ratios of taxation of OASI and DI benefits to total OASI and DI benefit payments. Because the income thresholds used for benefit taxation are, by law, constant in the future, their values in relation to future income and benefit levels will decline. Thus, ratios of income from taxation of benefits to the amount of benefits are projected to increase gradu­ally. Ultimate tax ratios for OASI and DI benefits are estimated by eliminat­ing the current threshold amounts for taxation of OASDI benefits completely and adjusting the OASDI beneficiary distribution in a recent Current Popula­tion Survey for the projected 75th year age-sex distribution of the SSA bene­ficiary population.

1
Details of these indexation procedures are published annually in the Federal Register, and are also avail­able on the Social Security website at www.socialsecurity.gov/OACT/COLA/index.html.

2
Incidence rates are adjusted upward to account for additional workers who are expected to file for disabil­ity benefits (rather than retirement benefits) in response to greater reductions in retirement benefits as the NRA rises.

3
The ultimate age-sex-adjusted disability incidence rate is reported as new awards per thousand exposed in this year’s report. For last year’s report, the rate was reported on an entitlement basis rather than a new award basis. The incidence rates in this year’s report are essentially equivalent to those reported for last year’s report and have the same ultimate effect on benefit payments and beneficiaries in current-payment status.

4
A more detailed discussion of the recent history of the DI program is presented in Actuarial Study 118, “Social Security Disability Insurance Program Worker Experience,” June 2005. This study can be found at www.socialsecurity.gov/OACT/NOTES/s2000s.html.

5
Projections are distinguished between the short range (through 2017) and the long range (after 2017). While short-range assumptions vary within the 10-year short-range period, the full phase in to the ultimate assumptions is not achieved until 2027. Death rates differ in this regard as explained in the text.

6
The termination rate analysis was based on work presented in Actuarial Study 118, “Social Security Dis­ability Insurance Program Worker Experience,” June 2005. This study can be found on the Social Security website at www.socialsecurity.gov/OACT/NOTES/s2000s.html.


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