Appendix 11

ACTUARIAL STATES OF THE TRUST FUNDS

Factors Affecting Long-Range Costs

The estimates of the long-range cost of the Old-Age, Survivors, and Disability Insurance System are for the law as presently written and do not take into account any possible statutory changes in the future. The cost of these provisions as now enacted in the law will depend on demographic factors and on economic factors. It is also important to remember that any future legislation that results in changes in benefits or in the financing provisions will affect the actual cost of the program as it develops and that such changes would, of course, require new long-range actuarial cost estimates.

Table 16 in the section dealing with the expected short-range operations of the trust funds traced the history of the expenditures from the Old-Age, Survivors, and Disability Insurance Trust Funds as a percentage of taxable payroll. Several benefit increases are reflected in the expenditures; and several changes in the taxable earnings base are reflected in taxable earnings, as are changes in the earnings level of covered workers. Table 1 indicates when changes in the taxable earnings base have occurred and what relationship exists between (1) the expenditures as a percent of taxable payroll and (2) the contribution rates by employer and employee.

Substantial general benefit increases are responsible for the marked rise in expenditures as percent of taxable earnings since 1969. These increases are reflected in the percentages even after the substantial increases in the taxable earnings base that were enacted. Long-Range Cost Estimates

The long-range cost estimates for the Old-Age, Survivors, and Disability Insurance System presented in this Report are computed under dynamic assumptions with respect to the future levels of the benefits and of the taxable earnings base. These assumptions are based on the automatic adjustment provisions in present law. The estimates do not take into account any other possible future modification in either the benefits or the financing.

The amendments to the Social Security Act enacted in 1972 and 1973 included financing schedules based on dynamic assumptions as recommended by the 1971 Advisory Council on Social Security. Estimates based on such dynamic assumptions basically assume that the provisions for automatically adjusting the benefit table in accordance with the Consumer Price Index and for automatically adjusting the taxable earnings base in accordance with the increase in covered earnings per worker will continue to be a part of the structure of the system.

Tax schedules based on such dynamic assumptions provide the financing needed to increase the benefit table in step with the Consumer Price Index. However, increases beyond those provided under the present law that may be enacted in the future will require additional financing.

Table 20 compares the long-range average-cost of the Old-Age, Survivors, and Disability Insurance System over the 75-year projection period (1974-2048) with the average rate in the tax schedule in present law. Under the above set of assumptions, the OASDI System

1 Excerpt from the 1974 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, 93d Congress, 2d Session, House Document No. 93-313, pp. 34-38.

is shown to be underfinanced over the long-range, with a negative actuarial balance of about 3 percent of taxable payroll. This underfinancing is almost proportionately distributed between the two programs. Both OASI and DI have a long-range actuarial deficit equivalent to about 21 percent of their costs.

TABLE 20.-ESTIMATED ACTUARIAL BALANCE OF OLD-AGE, SURVIVORS, AND DISABILITY INSURANCE SYSTEM AS PERCENT OF TAXABLE PAYROLL, DYNAMIC ASSUMPTIONS 3

1 As measured over the 75-year period, 1974-2048.

2 Payroll is adjusted to take into account the lower contribution rates on self-employment income, on tips, and on multipleemployer "excess wages" as compared with the combined employer-employee rate. 3 See text for a description of the assumptions.

The results in table 20 are based on new actuarial assumptions as compared to those used in the past with respect to demographic factors as well as to economic factors. In regard to demographic factors. new population projections were prepared based on the results of the 1970 census under the assumption of significantly lower future fertility which have substantially affected the actuarial balance, as may be observed from table 21.

With respect to the economic factors, it is assumed that:

(a) The benefit table will be adjusted after 1974 to reflect increases in the Consumer Price Index.

(b) The taxable wage base and the exempt amount under the earnings test are both adjusted after 1974 to reflect increases in average earnings.

(c) Through 1980 the assumptions are similar to those used in developing the short-range cost estimates under Alternative I, which are presented earlier in this Report.

(d) Beyond 1980, the CPI will increase at an annual rate of 3 percent, while average earnings will increase at 5 percent. The results in table 20 should be read with full recognition of the uncertainties involved in the projection of economic factors over longrange periods. Because of the sensitivity of the projections to changes in economic assumptions, as illustrated in Appendix Table D, these results are subject to wide margins of variation.

As compared with the long-range cost estimates prepared last fall when the Social Security Amendments (P.L. 93-233) were under consideration, the present estimates show substantially higher costs. These higher costs are attributed mostly to a change in the population projections that are used to project the costs of the social security programs. The new projections are based on an ultimate total fertility rate of 2.1 babies per woman, which is close to population replacement rates, while the previous projections were based on ultimate rates of 2.3 and 2.8 babies per woman. The lower fertility rate that is now being projected results in a higher projected ratio of aged persons in the population to workers and therefore in higher costs to the pro

Although most of the increase in cost is expected to occur after the turn of the century (when the effects of the changes in the population projections are fully felt), part of it will already occur within the next few years, thereby producing a marked decline in the near future in the ratio of assets to expenditures in the absence of an immediate increase in income to both the OASI and DI Trust Funds. In the very short run (for the next 5-10 years) a reallocation of the current contributions could cover this problem. The overall QASHDI contribution rate in present law would be enough, if reallocated, to adequately support all three trust funds (OASI, DI and HI) during this period. However, after the next 5-10 years, a tax increase or contraints in the growth of benefits will nonetheless be needed for each of the three programs.

Another important factor that has affected the long-range cost of the program is the recent increase in the number of disabled-worker benefits that are being awarded. As was indicated in last year's report, a significant increase in the disabled-worker benefit awards has been experienced since 1971. The present cost estimates incorporate all the increases that have been experienced through the end of calendar year 1973.

As shown in table 21, other factors affecting the cost of the program are changes in economic assumptions, which include modifications in the projected labor-force participation rates and unemployment rates, short-range assumptions regarding increases in average earnings, and both short-range and long-range assumptions regarding increases in the CPI (with the long-range assumptions changing from 2-3/4% to 3%), as well as the elimination of the 3/8 percent margin used inprevious long-range cost estimates. The remaining itemized factor affecting the actuarial balance is a small increase in the rates of retirement among the eligible aged population that has been observed in the last two years.

TABLE 21.—CHANGE IN OLD-AGE, SURVIVORS, AND DISABILITY INSURANCE LONG-RANGE ACTUARIAL BALANCE! AS PERCENT OF TAXABLE PAYROLL BY TYPE OF ASSUMPTION

Represents the difference over the 75-year period, 1974-2048, between the average tax rate and the average cost. Payroll is adjusted to take into account the lower contribution rate on self-employment income, on tips, and on multipe-employer "excess wages" as compared with the combined employer-employee rate.

Table 22 shows the current-cost of the OASDI System (including the cost of maintaining one year's expenditures on hand) for selected years over the next 75 years, expressed as percent of taxable payroll, in

It may be observed that the annual cost of the Old-Age, Survivors, and Disability Insurance System is projected to increase slowly throughout the remainder of this century and that after the turn of the century it will increase rapidly until leveling at about 17-18 percent of taxable payroll after the year 2025.

According to the present 75-year projections, the cost of the OldAge, Survivors, and Disability Insurance System could be divided into three periods of 25 years each. The first period is projected to be a period of slowly increasing costs. The second period involves fast increases in cost, while the third period is characterized by high but level costs.

TABLE 22.-ESTIMATED "CURRENT-COST" OF OLD-AGE, SURVIVORS, AND DISABILITY INSURANCE SYSTEM AS PERCENT OF TAXABLE PAYROLL UNDER DYNAMIC ASSUMPTIONS, FOR SELECTED YEARS, 1985-2045

1 Represents the cost as percent of taxable payroll of all expenditures in the year, including amounts needed to maintain the funds at about 1 year's expenditures.

2 Payroll is adjusted to take into account the lower contribution rate on self-employment income, on tips, and on multipleemployer "excess wages" as compared with the combined employer-employee rate.

* See text for a description of the assumptions.

Represents the arithmetic average of the "current-cost" for the 75-year period 1974-2048.

The increasing costs in the second period as well as the high costs in the third period are due principally, but not totally, to the demographic effect of the projected large aged population as compared to the working population. Some of the cost, however, is due to what could be considered anomalies in the automatic benefit adjustment provisions in present law. As is discussed in the appendix and as may be noted from Appendix Table C, the present automatic provisions are projected to result in awarded benefits that would increase faster than average earnings in the future. The differential in trends between average awarded benefits and average covered earnings would be relatively minor during this century (because of the way benefits. are calculated under present law), but it is projected to increase substantially thereafter.

The Board of Trustees has suggested to the Department of Health, Education, and Welfare that the present Advisory Council be asked to study this matter, as well as other ways of dealing with the emerging

CONCLUSION

The long-range actuarial cost estimates for the old-age, survivors, and disability insurance program prepared in accordance with dynamic assumptions as to both benefits and taxable earnings show an actuarial balance of -2.98 percent of taxable payroll over the valuation period of 75 years, which substantially exceeds the acceptable limit of variation of 5 percent of the cost of the program (0.69 percent of taxable payroll).

The principal reason for the increase in the actuarial imbalance, as compared to that reflected by the cost estimates used last fall by the Congress, is a change in the long-range population projections underlying the cost estimates, which are now based on the results of the 1970 Čensus and on lower future fertility assumptions than were previously used for such projections.

Although the new population and fertility projections will have a major impact after the turn of the century on the long-range cost estimates, they will not have a significant effect in the short run. According to present short-range cost estimates, action to increase the combined income of the OASDI and hospital insurance systems for the next 5-10 years is not necessary right now. Although, when considered separately, the Disability Insurance Trust Fund and, to some extent, the Old-Age and Survivors Insurance Trust Fund decline in terms of both absolute dollar amounts and as a percent of outgo, the Hospital Insurance Trust Fund is increasing more rapidly than previously projected, with the result that it is developing an excess of funds. The Board noted that one of the possible ways that the projected short-range excess of outgo over income in the cash benefit funds can be avoided is a reallocation of the total program income among the three funds (OASI, DI, and HI) by revising the contribution rates scheduled in present law without increasing the total rate. However, in order to maintain the HI Trust Fund in actuarial balance, any reduction in the HI tax rates in the early years would have to be offset by compensatory increases in later years.

The present assumptions as to the rate of increase in the CPI, in both the short-range and the long-range estimates, assume some deceleration from recent rates of increase. If this deceleration does not occur, or occurs more slowly than assumed, the reallocation noted above may not be sufficient over the next 5-10 years to prevent a decline in the funds. And, of course, if such deceleration does not occur and if, as is assumed, recent fertility trends should continue, the additional financing needed over the long-range will be increased.

Although there is of necessity a considerable degree of uncertainty inherent in the long-range demographic and economic assumptions and consequently in the projections that flow from those assumptions, it is certain that additional income to the cash benefits program or some adjustment in the benefit structure will be needed eventually. However, in view of this inherent uncertainty and the fact that the newly appointed Advisory Council on Social Security is studying the long-range financial status of the social security system, the Board is not recommending a specific increase in the combined OASDHI contribution rates scheduled in present law. The Board believes that there is ample time to await the Council's findings and recommenda