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C. PROGRAM-SPECIFIC ASSUMPTIONS AND METHODS [1]
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Date: 2023-02
The Social Security Act average wage index (AWI) This section shows values for program parameters adjusted using these indices from the time that these adjustments became effective through 2031. Projected values for future years depend on the economic assumptions described in the preceding section of this report. requires that certain parameters affecting the determination of OASDI benefits and taxes be adjusted annually to reflect changes in particular economic measures. Formulas prescribed in the law, applied to reported statistics, change these program parameters annually. The law bases these automatic adjustments on measured changes in the nationaland the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI).This section shows values for program parameters adjusted using these indices from the time that these adjustments became effective through 2031. Projected values for future years depend on the economic assumptions described in the preceding section of this report.
AWI series, and the values of many of the wage-indexed program parameters. Each table shows projections under the three alternative sets of assumptions. Table V.C1 Tables and V.C2 present the historical and projected values of the CPI-based benefit increases, theseries, and the values of many of the wage-indexed program parameters. Each table shows projections under the three alternative sets of assumptions. Table V.C1 includes:
• The annual cost-of-living benefit increase percentages. The automatic cost-of-living adjustment Social Security Act Cost-of-living adjustments Theprovisions in thespecify increases in OASDI monthly benefits based on increases in the CPI. Volatility in oil prices has resulted in substantial volatility in cost-of-living adjustments over the last two decades. A large cost-of-living adjustment for December 2008 was followed by no cost-of-living adjustments for December 2009 and December 2010. More recent volatility in oil prices again affected the CPI, resulting in no cost-of-living adjustment for December 2015.resumed in December 2016. All three sets of assumptions include annual cost-of-living adjustments for all future years.
• The annual levels of and percentage increases in the AWI. Under section 215(b)(3) of the Social Security Act , Social Security benefit computations index taxable earnings (for most workers first becoming eligible for benefits in 1979 or later) using the AWI for each year after 1950. This procedure converts a worker’s past earnings to approximately average-wage-indexed equivalent values near the time of his or her benefit eligibility. Other program parameters presented in this section that are subject to the automatic-adjustment provisions also rely on the AWI. Under section 215(b)(3) of the, Social Security benefit computations index taxable earnings (for most workers first becoming eligible for benefits in 1979 or later) using thefor each year after 1950. This procedure converts a worker’s past earnings to approximately average-wage-indexed equivalent values near the time of his or her benefit eligibility. Other program parameters presented in this section that are subject to the automatic-adjustment provisions also rely on the AWI.
• The wage-indexed contribution and benefit base . For any year, the contribution and benefit base is the maximum amount of earnings subject to the OASDI payroll tax and creditable toward benefit computation. The Social Security Act defers any increase in the contribution and benefit base if there is no cost-of-living adjustment effective for December of the preceding year. There was no increase in the contribution and benefit base for 2010, 2011, or 2016 because there was no cost-of-living adjustment for the immediate prior December in each case. Under all three sets of assumptions, the contribution and benefit base is projected to increase for all future years. For any year, the contribution and benefit basethe maximum amount of earnings subject to the OASDI payroll tax and creditable toward benefit computation. The Social Security Act defers any increase in the contribution and benefit base if there is no cost-of-living adjustment effective for December of the preceding year. There was no increase in the contribution and benefit base for 2010, 2011, or 2016 because there was no cost-of-living adjustment for the immediate prior December in each case. Under all three sets of assumptions, the contribution and benefit base is projected to increase for all future years.
• The wage-indexed retirement earnings test exempt amounts. The exempt amounts are the annual amount of earnings below which beneficiaries do not have benefits withheld. A lower exempt amount applies for years prior to the year of attaining normal retirement age The exempt amounts are the annual amount of earnings below which beneficiaries do not have benefits withheld. A lower exempt amount applies for years prior to the year of attaining. A higher exempt amount applies beginning with the year in which a beneficiary attains normal retirement age. Starting in 2000, the retirement earnings test no longer applies beginning with the month of attaining normal retirement age. The Social Security Act defers any increase in these exempt amounts if there is no cost-of-living adjustment effective for December of the preceding year. There was no increase in these exempt amounts for 2010, 2011, or 2016 because there was no cost-of-living adjustment for the immediate prior December. Under all three sets of assumptions, the exempt amounts increase for all future years.
V.C2 Table shows values for other wage-indexed parameters. The table provides historical values from 1978, when indexing of the amount of earnings required for a quarter of coverage first began, through 2022, and also shows projected values through 2031. These other wage-indexed program parameters are:
• The bend points in the formula for computing the primary insurance amount (PIA) for workers who reach age 62, become disabled, or die in a given year. As figure V.C1 illustrates, these two bend points define three ranges in a worker’s average indexed monthly earnings As figure V.C1 illustrates, these two bend points define three ranges in a worker’s(AIME). The formula for the worker’s PIA multiplies a 90, 32, or 15 percent factor by the portion of the worker’s AIME that falls within the three respective ranges, and then adds the resulting products together.
• The old-law contribution and benefit base—the contribution and benefit base that would have been in effect without enactment of the 1977 amendments. This old-law base Railroad Retirement program and the Employee Retirement Income Security Act of 1974 use the old-law base for certain purposes. Thisis used in determining special-minimum benefits for certain workers who have many years of low earnings in covered employment. Since 1986, the calculation of OASDI benefits for certain workers who are eligible to receive pensions based on noncovered employment uses the old-law base. In addition, theand the Employee Retirement Income Security Act of 1974 use the old-law base for certain purposes.
Covered employment For the short-range period, the age-sex-adjusted average weeks worked rises slightly as the age-sex-adjusted unemployment rate declines to its ultimate assumed value of 4.5 percent. After 2031, the average weeks worked for each age-sex group is assumed to remain constant. The projection method also accounts for changes in non-OASDI-covered employment and the increase in coverage of Federal civilian employment as a result of the 1983 Social Security Amendments. It also reflects changes in the number and employment status of other-than-LPR immigrants residing within the Social Security coverage area, such as undocumented immigrants and foreign workers and students with temporary visas. V.B2 Projections of the total U.S. civilian labor force and unemployment rate (see table ) are based on Bureau of Labor Statistics definitions from the Current Population Survey (CPS). These projections represent the average weekly number of employed and unemployed persons, age 16 and over, in the U.S. in a calendar year.for a calendar year is defined as the total number of persons who have any OASDI covered earnings (that is, earnings subject to the OASDI payroll tax) at any time during that year. For those age 16 and over, projected covered employment is the sum of age-sex groups, each reflecting the growth projected for the group’s total U.S employment and average weeks worked per year.For the short-range period, the age-sex-adjusted average weeks worked rises slightly as the age-sex-adjusted unemployment rate declines to its ultimate assumed value of 4.5 percent. After 2031, the average weeks worked for each age-sex group is assumed to remain constant. The projection method also accounts for changes in non-OASDI-covered employment and the increase in coverage of Federal civilian employment as a result of the 1983 Social Security Amendments. It also reflects changes in the number and employment status of other-than-LPR immigrants residing within the Social Security coverage area, such as undocumented immigrants and foreign workers and students with temporary visas.
for 2096 are 69.1, 69.3, and 69.5 percent for the low-cost, intermediate, and high-cost assumptions, respectively. For women age 16 and over, the projected age-adjusted covered-worker rates for 2096 are 66.8, 66.4, and 66.1 percent for the low-cost, intermediate, and high-cost assumptions, respectively. An important factor in the variation among the projected rates for the three alternatives is the portion of the men and women in the population that is projected to be other-than-LPR immigrants. For men, the intermediate projected rate for 2096 is lower than the 2020 age-adjusted rate of 70.7 percent primarily due to the projected increase in the portion of the Social Security area population that consists of other-than-LPR immigrants. For women, the intermediate projected rate for 2096 is higher than the 2020 age-adjusted rate of 63.7 percent because the projected increase in the age-adjusted labor force participation rate more than offsets the projected increase in the portion of the population that will be other-than-LPR immigrants. The covered-worker rate is the ratio of OASDI covered workers to the Social Security area population. For men age 16 and over, the projected age-adjusted covered-worker ratesfor 2096 are 69.1, 69.3, and 69.5 percent for the low-cost, intermediate, and high-cost assumptions, respectively. For women age 16 and over, the projected age-adjusted covered-worker rates for 2096 are 66.8, 66.4, and 66.1 percent for the low-cost, intermediate, and high-cost assumptions, respectively. An important factor in the variation among the projected rates for the three alternatives is the portion of the men and women in the population that is projected to be other-than-LPR immigrants. For men, the intermediate projected rate for 2096 is lower than the 2020 age-adjusted rate of 70.7 percent primarily due to the projected increase in the portion of the Social Security area population that consists of other-than-LPR immigrants. For women, the intermediate projected rate for 2096 is higher than the 2020 age-adjusted rate of 63.7 percent because the projected increase in the age-adjusted labor force participation rate more than offsets the projected increase in the portion of the population that will be other-than-LPR immigrants.
Eligibility for worker benefits under the OASDI program requires some threshold level of work in covered employment. A worker satisfies this requirement by his or her accumulation of quarters of coverage AWI . Its value in 2022 is $1,510. (QCs). Prior to 1978, a worker earned one QC for each calendar quarter in which he or she earned at least $50. In 1978, when annual earnings reporting replaced quarterly reporting, the amount required to earn a QC (up to a maximum of four per year) was set at $250. As specified in the law, the Social Security Administration has adjusted this amount each year since then according to changes in the. Its value in 2022 is $1,510.
For the other-than-LPR immigrant population, the model generates substantially lower percentages attaining fully insured status. The model constructs simulated work histories using past coverage rates, earnings distributions, and amounts required for crediting QCs, and develops them in a manner that replicates historical individual variations in work patterns. The probability of covered employment in any year is assumed to be higher for those who have worked more consistently in the recent past. Model parameters are selected so that simulated fully insured percentages are consistent with the fully insured percentages estimated by the short-range model for the recent historical period. The long-range fully insured model uses 30,000 simulated work histories for each sex and birth cohort, representing everyone except the other-than-LPR immigrant population.For the other-than-LPR immigrant population, the model generates substantially lower percentages attaining fully insured status. The model constructs simulated work histories using past coverage rates, earnings distributions, and amounts required for crediting QCs, and develops them in a manner that replicates historical individual variations in work patterns. The probability of covered employment in any year is assumed to be higher for those who have worked more consistently in the recent past. Model parameters are selected so that simulated fully insured percentages are consistent with the fully insured percentages estimated by the short-range model for the recent historical period.
The short-range model award retired-worker beneficiaries develops the number of retired-worker beneficiaries by applyingrates to the aged fully insured population, excluding those already receiving retired-worker, disabled-worker, aged-widow(er), or aged-spouse benefits, and by applying termination rates to the number of
For age 62, the model projects this percentage by using a linear regression based on the historical relationship between this percentage, the employment rate at age 62, and the number of months from age 62 to normal retirement age. The percentage for ages 70 and over is nearly 100 because delayed retirement credits cannot be earned after age 70. The long-range model projects the percentage for each age 63 through 69 based on historical experience with an adjustment for changes in the portion of the primary insurance amount that is payable at each age of entitlement. The model adjusts these percentages for ages 62 through 69 to reflect changes in the normal retirement age. The long-range model projects the number of retired-worker beneficiaries who were not previously converted from disabled-worker beneficiary status as a percentage of the exposed population.For age 62, the model projects this percentage by using a linear regression based on the historical relationship between this percentage, the employment rateat age 62, and the number of months from age 62 to normal retirement age. The percentage for ages 70 and over is nearly 100 because delayed retirement credits cannot be earned after age 70. The long-range model projects the percentage for each age 63 through 69 based on historical experience with an adjustment for changes in the portion of the primary insurance amount that is payable at each age of entitlement. The model adjusts these percentages for ages 62 through 69 to reflect changes in the normal retirement age.
V.C4 Table shows the projected number of beneficiaries under the OASI program by type of benefit. The retired-worker beneficiary counts include those persons who receive a residual auxiliary benefit in addition to their retired-worker benefit. The office makes estimates of the number and amount of residual payments separately for spouses and widow(er)s.
) . The Office of the Chief Actuary projects the number of newly awarded beneficiaries for each future year by multiplying assumed age-sex-specific disability incidence rates and the projected disability-exposed population by age and sex. The d isability incidence rate is the ratio of the number of new beneficiaries awarded benefits each year to the number of individuals who meet insured requirements but are not yet receiving benefits (the disability-exposed populationThe Office of the Chief Actuary projects the number of newly awarded beneficiaries for each future year by multiplying assumed age-sex-specificrates and the projected disability-exposed population by age and sex.
V.C3 Figure illustrates the projected incidence rates under the three alternatives along with historical rates. Incidence rates have varied substantially during the historical period since 1970 due to a variety of demographic and economic factors, along with changes in legislation and program administration. The solid lines in figure V.C3 show the age-sex-adjusted incidence rate consistent with the age-sex distribution of the disability-exposed population for 2000. This adjustment allows a meaningful comparison of incidence rates over time by focusing on the likelihood of being awarded disabled worker benefits, excluding the effects of a changing distribution of the population toward ages where disability is more or less likely.
V.C3 The dashed lines in figure represent the gross (unadjusted) incidence rates. The changing age‑sex distribution of the exposed population over time influences these unadjusted rates. The gross incidence rate fell below the age‑sex-adjusted rate between 1975 and 2000 as the baby-boom generation increased the size of the younger working-age population, where disability incidence is lower than in older populations. After 1990, the gross rate generally increased relative to the age‑sex-adjusted rate as the baby-boom generation moved into an age range where disability incidence peaks. The projected gross incidence rate generally declines relative to the age-sex-adjusted rate as the baby-boom generation moves above the normal retirement age and the lower-birth-rate cohorts of the 1970s enter prime disability ages (50 to normal retirement age). As these smaller cohorts age beyond normal retirement age, by about 2050, the gross incidence rate returns to a higher relative level under the intermediate assumptions. Thereafter, the gross rate remains higher than the age-sex-adjusted rate, and reflects the persistently higher average age of the working-age population, which is largely due to lower birth rates since 1965, and to the increase in the normal retirement age.
The ultimate incidence rates represent the expected average rates of incidence for the future. This projected pattern of incidence over the next several years is based on the expectation that disability applications will increase to pre-pandemic levels as the COVID-19 pandemic recedes and the economy fully recovers from the 2020 recession. In 2031, at the end of the short-range period, age-sex-specific incidence rates are assumed to reach the ultimate rates assumed for the long-range projections. These ultimate age-sex-specific disability incidence rates were selected based on careful analysis of historical levels and patterns and expected future conditions, including the impact of scheduled increases in the normal retirement age.The ultimate incidence rates represent the expected average rates of incidence for the future.
Beneficiaries stop receiving disability benefits when they die, experience an improvement in their medically-determinable impairment such that they are deemed able to engage in substantial gainful activity, or return to substantial work. Disabled-worker beneficiaries who return to substantial work for an extended period are deemed to have recovered, and their benefits are then terminated. The termination rate is the ratio of the number of terminations for these reasons to the average number of disabled-worker beneficiaries during the year.
V.C4 Figure illustrates gross and age-sex-adjusted total termination rates (including both recoveries and deaths) for disabled-worker beneficiaries for the historical period since 1970, and for the projection period through 2100. As with incidence rates, the age-sex-adjusted termination rate illustrates the real change in the tendency to terminate benefits. Changes in the age-sex distribution of the beneficiary population influence the gross termination rate. A shift in the disabled-worker beneficiary population to older ages, as occurred over the past 20 years when the baby-boom generation moved into pre-retirement ages, increases gross death termination rates relative to the age-sex-adjusted rates.
V.C5 Figure compares the historical and projected (intermediate) levels of incidence, termination, and conversion on both a gross basis and an age-sex-adjusted basis. Incidence rates have varied widely, and the Trustees expect the age-sex adjusted rates under the intermediate assumptions to remain near the middle of the high and low extremes experienced since 1970. Termination rates have declined and the Trustees expect them to continue to decline, largely because of declining death rates.
As mentioned above in the discussion of incidence and termination rates, the age-sex-adjusted prevalence rate isolates the changing trend in the underlying likelihood of receiving benefits for the insured population, without reflecting changes in the age distribution of the population. As with incidence rates, gross disability prevalence rates declined relative to the age-sex-adjusted rate when the baby-boom generation reached working age between 1970 and 1990; this trend reflects the lower disability prevalence rates lowerassociated with younger ages. Conversely, the gross rate of disability prevalence has increased relative to the age-sex-adjusted rate after 1990 due to the aging of the baby-boom generation into ages with higher disability prevalence rates.
V.C5 Table presents projections of the numbers of auxiliary beneficiaries paid from the DI Trust Fund. As indicated at the beginning of this subsection, auxiliary beneficiaries are qualifying spouses and children of disabled workers. A spouse must either be at least age 62 or have an eligible child beneficiary in his or her care who is either under age 16 or disabled prior to age 22. A child must be: (1) under age 18, (2) age 18 or 19 and still a student in high school, or (3) age 18 or older and disabled prior to age 22.
VI.G6 The OASDI taxable payroll (see table ) for a year is computed as the amount of earnings which, when multiplied by the combined OASDI employee-employer payroll tax rate for that year, yields the total amount of payroll taxes due from wages paid and self-employment net earnings for the year. The Trustees use taxable payroll to determine income rates, cost rates, and actuarial balances. Taxable payroll is derived by adjusting total taxable earnings to account for categories of earnings that are taxed at rates other than the combined employee-employer rate and to take into account amounts credited as wages that were not included in normally reported wages. For 1951 and later, taxable earnings are reduced by one-half of the amount of wages paid to employees with multiple jobs that exceed the contribution and benefit base. For 1983 through 2001, deemed wage credits for military service after 1956 are added to taxable earnings. The self-employment tax rates for 1951 through 1983 were less than the combined employee-employer rates; therefore, the self-employment component of taxable payroll for those years is reduced by multiplying the ratio of the self-employment rate to the combined employee-employer rate times the taxable self-employment net earnings. Finally, for 1966 through 1979, employers were exempt from paying their share of payroll tax on their employees’ tips and, for 1980 through 1987, employers paid tax on only part of their employees’ tips. For those years, the taxable payroll is reduced by half of the amount of tips for which the employer owed no payroll tax.
These are the same assumptions that the Trustees used for the end of the short-range period (2030) for the 2021 report. For this report, the Trustees assume a level for the taxable ratio at the end of the short-range period (2031) of 84.0 percent for the low-cost assumptions, 82.5 percent for the intermediate assumptions, and 81.0 percent for the high-cost assumptions.These are the same assumptions that the Trustees used for the end of the short-range period (2030) for the 2021 report.
For projection purposes, the office splits the payroll tax contributions related to wages into amounts paid in the same quarter as incurred and in the following quarter. Self-employed workers must make estimated tax payments on their earnings four times during the year and make up any underestimate on their individual income tax returns. The projection splits the self-employed tax liabilities by collection quarter to reflect this pattern. The Office of the Chief Actuary projects payroll tax contributions using the patterns of tax collection required by Federal laws and regulations. The office determines payroll tax liabilities by multiplying the scheduled tax rates for each year by the amount of taxable wages and self-employment net earnings for that year. The office then splits these liabilities into amounts by collection period. For wages, Federal law requires that employers withhold OASDI and HI payroll taxes and Federal individual income taxes from employees’ pay. As an employer’s accumulation of such taxes (including the employer share of payroll taxes) meets certain thresholds, which the Department of the Treasury determines, the employer must deposit these taxes with the U.S. Treasury by a specific day, depending on the amount of money involved.For projection purposes, the office splits the payroll tax contributions related to wages into amounts paid in the same quarter as incurred and in the following quarter. Self-employed workers must make estimated tax payments on their earnings four times during the year and make up any underestimate on their individual income tax returns. The projection splits the self-employed tax liabilities by collection quarter to reflect this pattern.
It also shows the contribution and benefit base for each year through 2022. V.C6 Table shows the payroll tax contribution rates applicable under current law in each calendar year and the allocation of these rates between the OASI and DI Trust Funds.It also shows the contribution and benefit base for each year through 2022.
For the long-range period, the office estimates the income to the trust funds from taxation of benefits by applying projected ratios of taxation of OASI and DI benefits to total OASI and DI scheduled benefits. These tax ratios rely on estimates from the Office of Tax Analysis in the Department of the Treasury. The Office of the Chief Actuary’s estimates reflect the following assumptions: (1) The income thresholds used for benefit taxation are specified in the Internal Revenue Code to be constant in the future, and have never been changed, while income and benefit levels continue to rise. Accordingly, projected ratios of income from taxation of benefits to the amount of benefits increase gradually. (2) A permanent level shift upward in the ratios is projected for 2026 and beyond due to the expiration of the personal income tax provisions in Public Law 115-97, the Tax Cuts and Jobs Act of 2017. (3) Because indexation of income tax brackets is not specified in the Social Security Act, and because periodic changes have been made in the past to avoid indefinite compression of the income tax brackets relative to income levels (bracket creep), the Trustees assume that such periodic changes will occur in the future. As a result, after the tenth year of the projection period, income tax brackets are assumed to rise with average wages, rather than with the C-CPI-U as specified under current law. Thus, the income tax brackets are projected to roughly maintain their levels relative to the income distribution.
Scheduled lump-sum death benefits are estimated as the product of: (1) the number of lump-sum death payments projected on the basis of the assumed death rates, the projected fully insured population, and the estimated percentage of the fully insured population that will qualify for lump-sum death payments; and (2) the amount of the lump-sum death payment, which is $255 (unindexed since 1973).
V.C7 Table shows, under the intermediate assumptions, future benefit amounts payable upon retirement at the normal retirement age and at age 65, for various hypothetical workers attaining age 65 in 2022 and subsequent years. The illustrative benefit amounts in table V.C7 are presented in CPI-indexed 2022 dollars—that is, adjusted to 2022 levels by the CPI indexing series shown in table VI.G6 . As a point of comparison, table V.C7 also shows the national average wage index (AWI) for 2022 and subsequent years in CPI-indexed 2022 dollars.
and reflect very low, low, medium, and high career-average levels of pre-retirement earnings starting at age 21. The fifth pattern assumes the earnings history of a steady maximum earner starting at age 22. The four scaled-earnings patterns derive from earnings experienced by insured workers during calendar years 1999 through 2018. These earnings levels differ by age. The career-average level of earnings for each scaled case targets a percent of the AWI. V.C7 Table shows five different pre-retirement earnings patterns. Four of these patterns assume the earnings history of workers with scaled-earnings patternsand reflect very low, low, medium, and high career-average levels of pre-retirement earnings starting at age 21. The fifth pattern assumes the earnings history of a steady maximum earner starting at age 22. The four scaled-earnings patterns derive from earnings experienced by insured workers during calendar years 1999 through 2018. These earnings levels differ by age. The career-average level of earnings for each scaled case targets a percent of the AWI.
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