This memorandum updates the memorandum issued on January 26, 1999 for the President's plan. Since that time, minor refinements in the estimates have been made that have a very small effect on the results. The projected years of trust fund exhaustion are unchanged, and the estimated actuarial balances are within 0.01 percent of taxable payroll of the estimates presented earlier. This memorandum also provides detailed year-by-year estimates of OASDI combined trust fund operations, assets, asset purchases, and asset yields.
The president's plan calls for transfers to be made from the General Fund of the Treasury of the United States to the Old-Age, Survivors, and Disability Insurance (OASDI) trust funds for each year 2000 through 2014. The amount of transfer for each year would be specified in law as a percentage of the OASDI effective-taxable payroll. In each year 2000 through 2014, 21 percent of the transfer would be used to purchase stock and 79 percent would be used to purchase special interest-bearing obligations of the Treasury. All dividends would be reinvested in stock until the market value of all stock held by the OASDI trust funds reached 14. 6 percent of total OASDI trust fund, assets. Thereafter, the percentage of total trust fund assets that is held in stocks would be maintained at 14.6 percent.
These provisions of the proposal would extend the estimated year in which the combined OASDI trust funds would become exhausted by 23 years, from 2032 to 2055. It would reduce the size of the estimated long-range OASDI actuarial deficit by 1. 44 percent of taxable payroll (by over one half), from 2.19 to 0.75 percent of taxable payroll. (Due to interaction among provisions, a complete elimination of the actuarial deficit will require additional OASDI changes that would reduce the present law deficit by up to 1.0 percent of taxable payroll.) These estimates are based on the intermediate assumptions of the 1998 Trustees Report and other assumptions described below.
If transfers were invested only in government bonds, the estimated year of trust fund exhaustion would be extended by 17 years, from 2032 to 2049. The estimated long-range OASDI actuarial deficit would be reduced by 0.98 percent of taxable payroll, from 2.19 to 1.21 percent of taxable payroll. This result also provides an indication of the sensitivity of the estimates to variation in the expected yield on stock. If, for example, the actual yield on stock over the next 50 years is no greater than the expected yield on government bonds, the estimated year of trust fund exhaustion would be extended from 2032 to 2049, rather than to 2055 with expected stock yield.
Stock investments would be managed by several brokerage firms, selected by competitive bid. Stock investments would be required to reflect the composition of all publicly traded stock in the United States (for example, the composition of the Wilshire 5000 index).
Transfers from the General Fund of the Treasury would be made each year 2000 through 2014. Amounts transferred for the purpose of special bonds are assumed to be distributed evenly across durations to maturity of from 1 to 15 years. The estimated amount of transfer for each year is shown below, based on estimates of effective taxable payroll using the intermediate assumptions of the 1998 Trustees Report.
Amounts transferred would indirectly reflect values for years 2000 through 2014 that are about 62 percent of the total expected unified budget surplus over this period estimated by the office of Management and Budget for the President's Fiscal Year 2000 Budget. Actual transfers for each year would be specified as the product of (a) the specified percentage of OASDI effective taxable payroll (computed using Fiscal Year 2000 Budget assumptions), and (b) the then-current estimated taxable payroll at the beginning of each year of transfer. As estimates of taxable payroll for each year are revised with increasingly complete data, adjustments to transfers for the year would be made.
OASDI Trust Fund Assets in Stock
The 1994-96 Advisory Council on Social Security requested estimates assuming that the total annual real yield on stock investments would ultimately average about 7 percent, approximately the average (geometric mean) yield on stocks so far this century. (Total yield includes dividends as well as capital growth.) Estimates for this proposal are based on a more conservative assumption for the average ultimate total annual real yield of stock at 6.75 percent. The nearly four-percentage-point difference between this assumed ultimate real stock yield and the Trustees' 2.8-percent assumed ultimate real yield on government bonds held by the trust funds is assumed to be maintained throughout the 75-year projection period.
The table below provides the estimated percentage of OASDI trust fund assets that would be held in stock at the end of each year 2000-14. The stock holdings are estimated to reach the level of 14.6 percent of total trust fund assets at the end of 2014, after which point this percentage would be maintained under the proposal.
If the average yield on stocks is greater or less than assumed over the period 2000-14, the year in which the specified level of 14.6 percent of assets in stock is reached would be sooner or later than the end of 2014.
The portion of the total value of publicly-traded stock in the United States that is held by the OASDI trust funds will depend not only on the yield achieved in the market, but also on the rate of growth in the total market value of all stock. The total value of stock represented in the Wilshire 5000 index (a fair representation of all publicly-traded stock in the United States) was $9.3 trillion at the beginning of 1998. Assuming that the total market value of publicly-traded stock will rise generally by the rate of growth in GDP after 1998, the trust funds would hold less than 4 percent of the total market value, on average, over the next 40 years.
Detailed Tables of Year-By-Year Estimates
The President's proposal for strengthening Social Security, presented in the State of the Union address on January 19, would involve three steps: specified transfers to the trust funds, investment of a portion of these transfers in stock, and additional changes needed to extend solvency to at least 2075. This balance of this memorandum addresses the first two of these three steps only, because the provisions for the third step have not, as yet, been specified.
The attached tables provide estimates of the annual financial operations of the combined OASI and DI trust funds under the plan for years 2000 through the year of trust fund exhaustion. Estimates are provided for the plan with specified transfers from the General Fund of the Treasury and investment of 21 percent of these transfers in stock, as indicated in the State of the Union speech.
Tables 1 through 4 provide estimates in current dollars for each year. Because the compound effects of price inflation make it difficult to meaningfully compare current-dollar values over long periods of time, additional tables are provided with adjusted values. Tables 1.1 through 4.1 provide the estimates in constant 1999 dollars. All values in these tables are adjusted to discount for the increase in prices after 1999, as measured by the increase in the CPI-W. Finally, tables 1.2 through 4.2 provide the estimates in the form of percentages of Gross Domestic product (GDP).
Tables 1, 1.1, and 1.2 present estimated future trust fund operations under present law and the proposal in current dollars, constant dollars, and percentage of GDP, respectively. The year in which the combined trust fund reaches its maximum level varies considerably depending on the measure used. Under the plan with stock investment, the maximum is nearly $15 trillion current dollars in 2037 (Table 1), nearly $5.1 trillion constant 1999 dollars in 2025 (Table 1.1) , 40.7 percent of GDP in 2021 (Table 1.2) and 735 percent of the annual cost of the OASDI program in 2015 (Table 2).
Tables 2, 2.1, and 2.2 present the estimated trust fund assets at the beginning of each year, distributed by amount in bonds and amount in stock. Under the intermediate assumptions of the 1998 Trustees Report, the Trust funds reach the level of 14.6 percent of assets held in the form of stock early in the year 2015.
Tables 3, 3.1, and 3.2 present the estimated annual cash flow for the OASDI program under present law and under the plan. Under the plan (reflecting specified transfers and stock), net purchase of assets would turn to net sale of assets in 2015, 2 years later than estimated under present law. It should be noted that the sale of assets indicated in these tables reflects only the proposed transfers to the OASDI program with stock held at 14.6 percent of trust fund assets. When further changes are added to eliminate the entire actuarial deficit, the asset sales will likely be reduced from the estimates shown. For the purpose of these tables, interest on bonds is assumed to be automatically reinvested in bonds, while dividends and annual capital gains (and losses) on stock are assumed to be reinvested in stock. Net purchase and sale of bonds and stock are net of these reinvestments.
Tables 4, 4.1, and 4.2 present the estimated net annual amount of interest (yield) on trust fund assets under present law and the plan. Under the plan, between 21 and 22 percent of the yield on assets comes from stock after 2014. This is higher than the 14.6-percent of assets held in stock due to the higher assumed yield on stock.
Stephen C. Goss
Alice H. Wade