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Old-Age Survivors Insurance and Disability Insurance Trust Funds: 2001 Trustees' Projections

Introduction

The Trustees of the Old-Age and Survivors Insurance and Disability Insurance (OASDI) programs project in their 2001 report that the combined trust funds are sufficient to pay full benefits for the next 37 years, until 2038. While long-range assumptions have not changed, more favorable near-term changes account for slightly improved projections. Thus, the insolvency date is one year further into the future than projected in the 2000 Report.

According to the intermediate or best estimate assumptions of the 2001 Trustees' Report, the trust funds are in short-range (10-year) actuarial balance. The combined assets of the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds increased from $896.1 billion in December 1999 to $1,049.4 billion in December 2000 and are estimated to reach $3,378.9 billion by 2010. The Trustees also report that while the combined trust funds are sufficient to pay full benefits for the next 37 years, both OASI and DI programs 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 that year's expenditures, is projected to increase from 246 percent in 2001 to a peak of 480 percent in 2015 and then decline rapidly until exhaustion in 2038. (See Figure 1.)

DI. The Trustees project the DI trust fund will be able to pay benefits three years longer than was projected in 2000. The DI trust fund ratio, 195 percent at the beginning of 2001, is estimated by the Trustees to peak at a ratio of 261 percent in 2007. After this, the DI trust fund will decline, and be exhausted in 2026.

OASI and DI Trust Fund Ratios Estimates from the 2001 Trustees' Report

OASDI. If the OASI and DI trust fund expenditures are combined, outgo is projected to exceed current taxes beginning in 2016, when a portion of the funds' annual interest earnings will have to be combined with tax revenue to pay annual benefits. This combined funding approach will suffice until 2025, 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 2038. (In 2000, the peak ratio for the combined funds was estimated to be 418 percent in 2015 and the year of exhaustion 2037.)

Annual 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.

The 2001 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. (See Figure 2.) Cost rates are also projected to rise slowly with faster increases by 2010. Cost rates 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 steadily but slowly, reflecting projected increases in life expectancy. (See Figure 2.) In the long range (75 years) the difference between the summarized income and cost rates for OASDI is a deficit of 1.86 percent of taxable payroll.

OASDI Annual Income and Cost Rates Estimates from the 2001 Trustees' Report

 

Annual Trust Fund Balances

Annual trust fund balances for OASDI are projected to remain positive until 2016. Thereafter, the deficit rises rapidly, reaching over 2 percent of taxable payroll in 2023. The deficit continues to rise to 6.05 percent of taxable payroll in 2075. (See Figure 3.)

OASDI Annual Trust Fund Balances Estimates from the 2001 Trustees' Report

 

Trust Fund Assets

The U.S. Treasury invests assets of the trust funds, primarily FICA and SECA taxes not needed to pay current benefits, in special issue, interest-bearing government securities, i.e., the trust funds lend money to the U.S. Treasury. The securities can be redeemed at any time to pay benefits or administer the Social Security program. The U.S. Treasury must redeem the securities by transferring cash from another source (for example, income taxes) to the trust funds.

From 2001 until 2016, large sums of money will be flowing into the trust funds, and thus the U.S. Treasury will borrow large sums of money. The situation reverses in 2025, and the trust fund securities are redeemed by the U.S. Treasury, paid for with potential budget surpluses or general revenues raised at that time.

Conclusions

In this report, the OASDI trust funds are projected to be adequately financed until 2038 when annual income is projected to be about 73 percent of the cost of benefits. The Trustees urge that these "long-range deficits...be addressed in a timely way." There are numerous options for improving the long-term solvency of the program. If careful consideration is given now, radical changes can be avoided and the program can be made actuarially sound for the long-term.

Footnotes

  1. 2001 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 2001 Trustees' Report, page 30.
  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 Steven R. Gregory, AARP Public Policy Institute
April 2001
©2001 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
Public Policy Institute, Public Affairs, AARP, 601 E Street, NW, Washington, DC 20049