Methodology Changes for Estimates of Provisions that Affect Social Security

The annual Trustees Report provides financial estimates of the Social Security program under current law. Changes made in methodology, assumptions, and starting data between the 2008 and 2009 Trustees Report are noted in the 2009 Trustees Report. In addition, we have made two significant changes to the methodology and presentation of estimates for provisions that would alter current law. These two changes, which are described below, were not used for estimates for provisions and proposals (groups of provisions) that are based on the intermediate assumptions of the 2008 and earlier Trustees Reports.

1. Provisions intended to change the amount of payroll tax income are estimated with a new methodology. The methodology improves estimates of employer and employee behavioral responses to any change in the taxable maximum or any change in the payroll tax rate above or below the taxable maximum.
• Behavioral Response by the Employer: We assume all other compensation (other than payroll taxes paid by the employer) would be reduced proportionally to completely offset the increase in payroll taxes paid by the employer. The employer’s total compensation, therefore, is assumed to remain the same.
• Behavioral Response by the Employee: We assume that, if the employee’s payroll taxes are increased, some employees will shift some amount of earnings to compensation not subject to payroll taxes. The amount of earnings shifted reflects the earnings level of the employee and the increase in the tax rate for the employee. For employees with earnings below $10,680 in 2009 (10 percent of the taxable maximum), no shift in earnings is assumed. For employees with earnings above this amount, we assume the proportion shifted increases as the employee’s earnings increases.
  
  
2. The presentation of annual income rate, annual cost rate, and annual balance, as well as the presentation of the long-range actuarial balance and actuarial deficit for those proposals that would alter taxable payroll, is changed.

With the new presentation, all rates and summary measures are expressed in terms of taxable payroll under present law. This new presentation reduces the measured amount of interaction among provisions, thus simplifying the consideration of multiple provisions. Previously, the rates and summary measures were expressed in terms of taxable payroll as estimated under the proposal.