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Old-Age and Survivors Insurance and Disability Insurance Trust Funds: 2004 Trustees' Projections

Introduction

The Trustees of the Old-Age and Survivors Insurance and Disability Insurance (OASDI) programs project in their 2004 report that the combined trust funds are sufficient to pay full benefits for the next 38 years, until 2042.

Traditionally, the Trustees have measured the trust funds' adequacy in terms of short-range (ten years) and long-range (75 years) valuation periods. According to the intermediate or best estimate assumptions of the 2004 Trustees' Report, the trust funds are in short-range actuarial balance. The combined assets of the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds are projected to increase from $1,531 billion in early 2004 to $3,584 billion (in current dollars) by 2013. While the combined trust funds are sufficient to pay full benefits for the next 38 years, the Trustees also report that both OASI and DI programs continue to face long-term deficits.

In addition, the Trustees provide an estimate of Social Security's deficit over the "infinite horizon." This deficit is significantly larger than the 75-year deficit because it counts future obligations over an indefinite period.

Trust Fund Ratios

OASDI. The OASDI 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 rise through 2016.

In 2018, a portion of the fund's annual interest earnings will have to be combined with tax revenue to pay annual benefits on time and in full. This combined funding approach will suffice until 2028, when total income, including tax revenue and interest earnings, will fall short of expenditures. At that 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 2042.

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 2004 Trustees' Report shows trust fund income rates rising slowly through 2080 due to a flat payroll tax and the increasing effect of the taxation of benefits.

Cost rates are also projected to rise slowly with faster increases by 2010. Cost rates will then increase rapidly between 2010 and 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 and continued relatively low birth rates. Over the 75-year long-term projection period, the difference between the summarized income and cost rates for OASDI is a deficit of 1.89 percent of taxable payroll.

Annual Trust Fund Balances

The OASDI trust funds are in short-range balance and are projected to remain positive until 2018. Thereafter, the deficit increases rapidly, reaching 2.4 percent of taxable payroll in 2025. The deficit continues to increase to 6.0 percent of taxable payroll in 2080.

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. The securities can be redeemed at any time to pay benefits or administer the Social Security program.

From 2004 until 2018, large sums of money will be flowing into the trust funds, and thus the U.S. Treasury will borrow large sums of money from Social Security. The situation changes after 2018, when the interest earned on the trust funds will supplement contributions.

Infinite Horizon Forecasts

With its 2003 report, the Trustees introduced the concept of an "infinite horizon" estimate of the status of the trust funds. Instead of a 75-year valuation period, this estimate projects future liabilities into the indefinite, infinite future.

As one might expect, with this method the Trustees estimate a much larger deficit of $10.4 trillion in present value terms. Two-thirds of this amount occurs in the years following 2079, although the Trustees provide no information as to how far this "infinite horizon" extends. Furthermore, while the Social Security Administration (SSA) routinely provides measures to evaluate its 75-year forecasts, it provides no such measures for the "infinite horizon" forecast. Given the absence of statistical evaluation, the evident uncertainty of an "infinite horizon," and the speed of economic change, it is difficult to see the utility of this concept or take such an estimate seriously.

Conclusions

In this report, the OASDI trust funds are projected to be adequately financed until 2042 when annual income is projected to be about 73 percent of the cost of benefits. There are numerous options for improving the long-term solvency of the program. If careful consideration is given now, Social Security's fiscal challenges can be met with relatively modest adjustments to the program, provided action is taken sooner rather than later to address them.

Footnotes

  1. 2004 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 Trustees' best estimates of future economic and demographic conditions.
  3. For a definition of short-range actuarial balance, see the 2004 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. For a definition of the 75-year long-term projection period, often called the long-range actuarial balance, see the 2004 Trustees' Report, page 40.
  6. Federal Insurance Contributions Act and Self-Employment Contributions Act.

Written by Laurel Beedon, Alison Shelton and Mitja Ng-Baumhackl, AARP Public Policy Institute
March 2004
©2004 AARP
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