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October 10, 2003
Refer To:   
Robert M. Ball
Stephen C. Goss,
Chief Actuary
Estimated OASDI Financial Effects for Two Provisions that Would Improve Social Security Financing
Plus a Balancing Tax-Rate Increase--INFORMATION

This memorandum provides estimates for a proposal that you have outlined. The attached tables 1.0 and 1.1 provide estimates of the effects of two basic provisions (tables 1.0) plus the effects of an additional possible increase in the combined OASDI payroll tax rate that would achieve solvency for the 75-year projection period (tables 1.1). All estimates reflect the intermediate assumptions of the 2003 Trustees Report. These estimates reflect contributions from many individuals in the Office of the Chief Actuary, particularly Alice Wade, Jason Schultz, Bill Piet, and Chris Chaplain.

Two Basic Provisions Alone

Tables 1.0 provide estimates of the financial effects on the OASDI program of two basic provisions that you have described. The total effect of these provisions, including interaction, would be to reduce the size of the 75-year actuarial deficit by 0.94 percent of payroll, from 1.92 to 0.97 percent of payroll.

Briefly described, the two provisions are:

  1. Increase the OASDI contribution and benefit base by an additional 2 percent (beyond wage indexing) for years 2004 through 2036. This change is projected to result in 90 percent of OASDI covered earnings being taxable for 2036 and later. About 6 percent of covered workers have earnings above the current-law taxable maximum each year, and would thus be affected by this provision. This provision alone would reduce the OASDI actuarial deficit by an estimated 0.61 percent of payroll.
  2. Effective December 2004, base the OASDI COLA on a new CPI-W series that would reflect a superlative formula, of the type currently used for the new "chained" CCPI-U. This provision is assumed to reduce the OASDI annual COLA by an average of 0.22 percentage point. This provision alone would reduce the OASDI actuarial deficit by an estimated 0.35 percent of payroll.

Table 1.0, attached, provides certain projected measures of the actuarial status of the OASDI program assuming that these two provisions would be enacted. With enactment of these two provisions alone, the year in which the annual cost of the program begins to exceed the annual income would be advanced 2 years, from 2018 under current law, to 2020. The estimated year of combined OASDI Trust Fund exhaustion would be advanced by 13 years, from 2042 under current law, to 2055.

Table 1.0a provides estimated annual income (non-interest, interest, and total), outgo, and assets at the end of the year in current dollars, under the provisions of the proposal. This table also provides estimated OASDI effective taxable payroll under the proposal. Table 1.0b provides the estimated effect of enacting these two provisions only on the Federal Unified Budget. It should be noted that all estimates in this table are based on the intermediate assumptions of the 2003 OASDI Trustees Report, and thus do not match estimates presented by the Office of Management and Budget. Table 1.0c provides the estimates effect of enacting these 2 provisions on the net cash flow from the OASDI combined Trust Funds to the General Fund of the Treasury. For the purpose of the illustration in Table 1.0c, the OASDI program is assumed to receive transfers or to have the authority to borrow from the General Fund of the Treasury in order to maintain full payment of scheduled benefits after Trust Fund exhaustion. This is true for both the proposal, and for the comparative illustration to a "Theoretical Social Security with PAYGO transfers."

Two Provisions Plus a Balancing Tax-Rate Increase

Tables 1.1 provide estimates for a more complete proposal, which includes, in addition to the two provisions described above, a payroll tax-rate increase of 1.22 percent for employers and employees, each (for a total combined increase of 2.44 percent) in 2038. This is the year in which the nominal dollar level of Trust Fund assets would begin to decline with the two provisions alone (see table 1.0a). The tax-rate increase in table 1.1 is computed to achieve exact actuarial balance for the 75-year period 2003 through 2077. However, estimates for this proposal show a declining trust fund ratio (TFR) at the end of the period 75-year period. Thus, with this single "balancing tax-rate increase" added to the two basic provisions, the proposal would not achieve sustainable solvency. However, if the proposal is amended to include additional periodic balancing tax-rate increases based on achieving OASDI actuarial balance under the projections of subsequent Trustees Reports, then sustainable solvency would be achieved.

Tables 1.1a, 1.1b, and 1.1c provide estimated effects on annual trust fund operations, the Federal Unified Budget, and on the net cash flow from the OASDI combined Trust Funds to the General Fund of the Treasury.

Stephen C. Goss



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