Financing and Solvency of Social Security
Old Age Survivors and Disability Insurance Trust Funds: 1998 Trustees' Projections
Research Report
Laurel Beedon, AARP Public Policy Institute
Charles Ford, AARP Public Policy Institute
May 1998
Table of Contents: Introduction | Trust Fund Ratios | Annual Cost and Income Rates | Annual Trust Fund Balances | Trust Fund Assets | Conclusions
Introduction
The Trustees of the Old Age, Survivors and Disability Insurance (OASDI) programs project in their 1998 report that the combined trust funds are sufficient to pay full benefits for the next 34 years, until 2032.1 This is three years further into the future than the insolvency date projected in the 1997 report.
According to the 1998 Trustees' Report intermediate or best estimate assumptions,2 the trust funds are in short-range (ten year) actuarial balance.3 The combined assets of the Old Age, Survivors (OASI) and Disability Insurance (DI) trust funds increased from $567.0 billion in December of 1996 to $655.5 billion in December of 1997 and are estimated to reach $1,800 billion by January 2007. The Trustees also report that while the combined trust funds are sufficient to pay full benefits for the next 34 years, both OASI and DI continue to face long-term deficits.
Trust Fund Ratios
OASI. The OASI trust fund ratio, the number that represents projected trust fund assets at the beginning of the year as a percentage of expenditures at the end of the year, is projected to increase from 177 percent in 1998 to a peak of 324 percent in 2012 and then decline rapidly until exhaustion4 in 2034 (Figure 1).
DI. The Trustees project the DI trust fund will be able to pay benefits four years longer than was projected in 1997. The DI trust fund ratio, 131 percent at the beginning of 1998, is estimated by the Trustees to peak at a ratio of 201 percent in 2004. After this, the DI trust fund will decline, and be exhausted in 2019.
OASDI. If the OASI and DI trust fund expenditures are combined, outgo is projected to exceed current taxes beginning in 2013, when a portion of the funds' annual interest earnings will have to be combined with tax revenue to pay annual benefits. This will suffice until 2021, when total income, including tax revenue and interest earnings, will fall short of expenditures. At this time, the trust fund principal along with accruing tax revenues will have to be spent. If no action is taken, the combined funds will be exhausted in 2032. (In 1997, the peak ratio for the combined funds was estimated to be 265 percent in 2011 and the year of exhaustion 2029.)
Top of PageAnnual Cost and Income Rates
Another indicator of the financial status of the trust funds is a series of projected annual income and annual cost rates.
Income Rates. The 1998 Trustees' Report shows trust fund income rates rising slowly and steadily through 2075 due to a flat payroll tax and the increasing effect of the taxation of benefits (Figure 2). Cost rates are also projected to rise slowly until 2010. They will then increase rapidly for about 20 years (to 2030) as the baby-boomers retire, then decline slightly as the baby-boomers age and the small birth cohort of the late 1970s leaves the workforce. Thereafter, cost rates rise slowly, but steadily (Figure 2), reflecting projected increases in life expectancy.
Annual Trust Fund Balances
Annual trust fund balances for OASDI are projected to be positive through 2012. Thereafter, the deficit rises rapidly, reaching two percent of taxable payroll in 2020. The deficit continues to rise to 6.29 percent of taxable payroll in 2072 (Figure 3).
Trust Fund Assets
The assets of the trust funds, primarily FICA and SECA5 taxes not needed to pay current benefits, are invested by the Treasury in special issue, interest-bearing government securities, i.e., the trust funds are lending money to the Treasury. The securities can be redeemed at any time to pay benefits or administer the Social Security program. The Treasury must redeem the securities by transferring cash from another source (for example, income taxes) to the trust funds.
From 1998 through 2012, large sums of money will be flowing into the trust funds, and thus large sums of money will be borrowed by the Treasury. The situation reverses in 2019, and the trust fund securities are redeemed by the Treasury, paid for with potential budget surpluses or general revenues raised at that time.
Conclusions
The OASDI trust funds are projected to be adequately financed until 2032 when annual income is projected to be about three-quarters of the cost of benefits.
The Public Trustees in their 1998 message observe: "The financing problem facing Social Security is significant but could be solved by small gradual changes IF those changes are enacted soon...Acting soon and using the opportunity offered by budget surpluses may provide an opportunity to experiment with different ways of supplementing Social Security without making deep immediate reductions in Social Security benefits. The practical implementation challenges of private accounts and other investment proposals need careful assessment. Social Security is too important to American workers and their families both now and into the future to change the program without extensive scrutiny."
Footnotes
11998 Annual Report of the
Board of Trustees of the Federal Old-age and Survivors
Insurance and Disability Insurance Trust Funds.
2 All discussion, unless
otherwise noted, is based upon the alternative II or
intermediate assumptions. These are the actuaries' best
estimates of future economic and demographic conditions.
3 For a definition of
short-range actuarial balance see the 1998 Trustees'
Report, page 71.
4 The year of exhaustion is the first
year that a trust fund is unable to pay benefits on time and
in full.
5 Federal Insurance Contributions Act
and Self-Employment Contributions Act.
Written by Laurel Beedon and figures by Charles Ford, AARP Public Policy Institute
May 1998
©1998 AARP
May be copied only for noncommercial purposes and with
attribution; permission required for all other purposes.
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