1999 Technical Panel

on

Assumptions and Methods

Report to the

Social Security Advisory Board

November 1999
.
TABLE OF CONTENTS

iii

 PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

Charter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

A. Economic and Demographic Projections Under Current Law . . . . . . . . . . . . . . 3

B. The Presentation of Information on Current Law . . . . . . . . . . . . . . . . . . . . . . . . 3

C. A New Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

D. The Types of Models That Are Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

E. Investment in Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

F. The Resources Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

II. EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

A. The Standard Assumptions Used to Evaluate Current Law . . . . . . . . . . . . . . . . 8

B. Further Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

III. RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

B. The Standard Assumptions Used to Evaluate Current Law . . . . . . . . . . . . . . . . 20

1. Real Wage Differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

2. Consumer Price Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

3. Fertility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

4. Mortality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

a. General Population Mortality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

b. Mortality for the Disabled Population . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

5. Immigration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

6. Return on Government Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

C. Further Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

1. Economic and Demographic Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

a. Labor Force Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

b. Marital Status and Benefits for Low-Income Survivors and Spouses . . . . 25

c. Disability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

2. Investment Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

a. Equity Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

b. Presentation of Results with “Additional” Returns Resulting 

from the Equity Premium. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

c. Consistency of Asset Returns with Other Variables. . . . . . . . . . . . . . . . . . 30

3. Presentation Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

a. Format of Trustees Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

b. Illustrating Uncertainty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

c. Cohort Versus Period Life Expectancy . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

d. Lifetime Value of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
iv

e. Alternative Projections of Benefits Under Current Law . . . . . . . . . . . . . . 35

f. Typical Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

g. Sustainability of the Trust Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

h. Unfunded Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

i. Reporting on the Distribution of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 38

j. Disability Insurance Projections of Incidence and Prevalence . . . . . . . . . . 38

4. Methodology and Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

a. Comparing Current Law and Reform Proposals Within a 

Consistent Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

b. Macro Effects of Alternative Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

c. Micro Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

d. Public Access and Future Advisory Efforts . . . . . . . . . . . . . . . . . . . . . . . . 46

e. Evaluating the Precision of Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

f. Consistency Among Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

IV. EXPLANATORY MATERIAL ON SELECTED TOPICS . . . . . . . . . . . . . . . 50

A. Economic Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

1. Real Wage Differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

a. Labor Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

b. Linkages Between Productivity and Real Wage Growth. . . . . . . . . . . . . . 52

2. Consumer Price Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

3. Rates of Labor Force Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

4. Return on Government Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

5. The Equity Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

a. The Equity Premium and SSA Projections. . . . . . . . . . . . . . . . . . . . . . . . . 59

b. Contributions from Academic Research . . . . . . . . . . . . . . . . . . . . . . . . . . 61

B. Demographic Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

1. Marital Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

2. Immigration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

3. Mortality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

a. The Forecasts in International Context. . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

b. Long-Term Trends in U.S. Mortality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

c. Biomedical Considerations and Causes of Death. . . . . . . . . . . . . . . . . . . . 66

d. References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

C. Methodology and Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

1. Micro Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

2. Public Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

3. The Uncertainty of Long-Term Forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

a. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

b. Uncertainty of Input Variables and Uncertainty in Outcomes . . . . . . . . . . 71

c. Alternative Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

d. Illustrating Approaches to Stochastic Projection . . . . . . . . . . . . . . . . . . . . 75

e. Stochastic Projection Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

f. Stochastic Projection Flowchart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

g. References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
v

4. Projections of Disability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

a. Description of OCACT’s Forecasting Procedure. . . . . . . . . . . . . . . . . . . . 82

b. Analysis of OCACT’s 1999 Intermediate Projections . . . . . . . . . . . . . . . . 83

c. Analysis of OCACT’s Forecasting Procedure . . . . . . . . . . . . . . . . . . . . . . 91

d. References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

V. APPENDIX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

A. Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

B. History of Technical Panels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

1. Establishment of Technical Panels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

2. 1991 Panels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

3. 1994-95 Panels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

4. 1999 Panel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
.
LIST OF TABLES, BOXES, AND FIGURES

vii

II. EXECUTIVE SUMMARY 

Table II.1. Effect of Panel’s Recommended Changes in the 

Intermediate Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Box Table of Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

III. RECOMMENDATIONS 

Table III.1. Effect of Panel’s Recommended Changes in the 

Intermediate Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Table III.2. Size of Changes in Actuarial Balance over the Last 10 Years. . . . . 19

Figure III.1. Cohort and Period Life Expectancies for Males 

and Females at Age 65 for Years 1990-2065. . . . . . . . . . . . . . . . . . 34

Figure III.2. DI Disabled Workers Prevalence Rates, by Select Age Groups, 

at end of Calendar Years 1970-2074 . . . . . . . . . . . . . . . . . . . . . . . . 39

Box A Checklist for Comparisons of Reform Plans and Current Law . . 41

Box Summary of Data and Modeling Needs. . . . . . . . . . . . . . . . . . . . . . 49

IV. EXPLANATORY MATERIAL ON SELECTED TOPICS 

Table IV.1. Historical Trends in Productivity and Real Wage Components,

1951-97, With and Without CPI Adjustment. . . . . . . . . . . . . . . . . . 51

Table IV.2. Average Real Rate on Constant Maturity Treasury Securities 

(CMT’s), January 1994 to August 1999 . . . . . . . . . . . . . . . . . . . . . 57

Figure IV.1. Total Fertility Rate: Actual and Middle Series Projections, 

1940-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Figure IV.2. Total Fertility Rate, Historical (1917-1996) and

Forecasted (1997-2096), with 95% Probability Intervals 

for Annual Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Figure IV.3. Trust Fund Ratios for OASDI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Figure IV.4. Trend in DI Expenditures Relative to GDP . . . . . . . . . . . . . . . . . . . 84

Figure IV.5. Historical and Projected DI Prevalence Rates . . . . . . . . . . . . . . . . . 85

Figure IV.6. Alternative Projections of DI Incidence. . . . . . . . . . . . . . . . . . . . . . 86

Figure IV.7. DI Incidence Rates by Age for 1992, 1997, 2020, and 2075. . . . . . 89

Figure IV.8. Actual and Projected Recovery and Death Rates. . . . . . . . . . . . . . . 90
.
ix

PREFACE

In January 1999, the Social Security Advisory Board convened the 1999 Technical

Panel on Assumptions and Methods—the first established by the Advisory Board since its

creation and the first since 1995. The Panel met from January to September 1999. In some

respects, its mission was similar to that of previous Technical Panels convened in

conjunction with Social Security Advisory Councils that themselves were replaced with

the permanent Advisory Board.1 In other respects, the Panel’s mission was made much

broader by the Board in response to the policy environment at the time the charter was

formed (see Charter following this Preface). As is traditionally done, the Board asked the

Panel to review the economic and demographic assumptions and the methods used to

project the status of the OASDI Trust Funds. In addition, the Board asked the Panel to

address issues regarding equity investments, implying that the assumptions and methods

in need of investigation for the first time extended to those now being used to evaluate

various reform proposals.

...the Panel’s mission was made much broader [than that of 

previous panels in order]...to address issues regarding equity 

investments....[T]he assumptions and methods in need of 

investigation for the first time extended to those now 

being used to evaluate various reform proposals.

Although the Panel met at a time when discussion of Social Security reform was

vigorous, at no time did the Panel discuss or debate any particular reform proposals. Nor

was it led by any desire to increase or decrease the estimated actuarial balance in the Old

Age, Survivors, and Disability Insurance (OASDI) program. Instead, it focused on

providing the best information available for making projections. With respect to reform,

the Panel directed its efforts solely to the assumptions and methods used for estimation

and how best to evaluate different types of reforms and compare them consistently. That

is, the Panel accepted as its mandate providing recommendations in a nonpartisan and

objective way in the best tradition of good government, following the lead of offices such

as the Office of the Chief Actuary within the Social Security Administration (SSA).

Although in other roles some members of the Panel have identified particular concerns

with Social Security policy or suggested various reforms, the Panel was able to work

together cooperatively to produce this unanimous report.

 1 The role of those Councils in appointing technical panels to advise on the assumptions and methods used

in the Trustees Report on the status of the OASDI Trust Funds was assumed by the Social Security

Advisory Board created by Congress in 1994. The 1999 Panel was the first technical panel established by

the new Board.
x

While the Panel was meeting, requests came forward to the General Accounting

Office and to a private actuarial organization to review the operations of the Office of the

Chief Actuary within the Social Security Administration. Although the Panel has made a

number of suggestions for improvement, it has found the work of the Office of the Chief

Actuary to be outstanding and the projection methodology to be reasonable as a whole.

The Office cooperated fully with the Panel and willingly offered assistance, as it has to

many others seeking information. To the extent the Panel members have concern here, it is

largely that resources were not made available historically to the Office of the Chief

Actuary, to the Office of Policy or its predecessors, or to other parts of government to

prepare adequately to assess various reform proposals. It is in this area that models and

methodologies are in most need of improvement. Despite its limited resources, the Office

of the Chief Actuary has provided clear and persuasive warnings of the problems facing

the Social Security system in the next century.

...the Panel was able to work together...to produce this 

unanimous report.

The Panel strongly recommends more research not merely as an academic exercise

but as a necessary complement to any reform process. Additional data and analysis are

crucial if policy makers are attempting to deal with such issues as providing protection

against poverty for older widows and divorcees or reducing the risk of future actuarial

imbalance following enactment of any new reform. Many potential improvements will

prove almost impossible to achieve until the estimation and evaluation capabilities of

several offices within SSA are increased significantly and working relations continue to

improve across those offices.

To the extent the Panel members have concern here, it is largely 

that resources were not made available historically...to prepare 

adequately to assess various reform proposals.
xi

CHARTER

1999 Technical Panel on Assumptions and Methods

The Panel of expert actuaries, economists, and demographers appointed by the

Social Security Advisory Board is charged with providing technical assistance to the

Board by reviewing the assumptions and methodology used by the Board of Trustees of

the Old Age, Survivors and Disability Insurance Trust Funds to project the future financial

status of the funds. Specifically, the Panel is asked to:

• Review key economic assumptions: productivity and labor force

participation, real wage growth, and the real interest rate and provide

expert opinion regarding the interaction of changes in the Consumer Price

Index (CPI) with other economic assumptions. 

• Review the assumptions regarding key demographic factors: in particular,

mortality; but also fertility, immigration, and disability incidence and

duration. 

• Provide expert opinion regarding expected growth in equity markets,

projected return on equity investments, and effects of possible investments

of Social Security funds on equity markets and the national economy.

• Review current forecasting methods. Address concerns about the internal

consistency of the Alternative I and III assumptions. Provide expert

opinion regarding alternative modeling methodologies that may best

illustrate the probability of variations around the central projections.
xii

ACKNOWLEDGMENTS

The Panel thanks the many persons who served this Panel

and its mission. We are particularly grateful to Stanford G. Ross,

Chair of the Social Security Advisory Board, who led the Board’s

efforts to organize the Panel and encouraged us in our work, and to

Joyce Manchester, staff economist for the Advisory Board, who

served as our principal staff person. 

We are indebted to the many individuals from the Office of

the Chief Actuary, the Office of Policy, and other offices within the

Social Security Administration who responded promptly and

graciously to our requests and provided us with the information

needed to carry out our work. We also thank officials from the

Department of the Treasury and other offices who prepared

information for the Panel’s meetings and otherwise facilitated our

work. The staff of the Social Security Advisory Board provided

valuable staff assistance and logistical support. Margaret Malone,

Beverly Rollins, and Jean Von Ancken were especially helpful.

Special thanks go to the following individuals from the

Office of the Chief Actuary at SSA: Harry Ballantyne, Sheldon

Baker, Felicitie Bell, Eli Donkar, Steve Goss, Lise Holler, Steve

McKay, William Ritchie, Patrick Skirvin, Alice Wade, and Tim

Zayatz. We also appreciate the work of individuals in the Office of

Research, Evaluation and Statistics at SSA: Barbara Butrica, Lee

Cohen, Howard Iams, James Moore, David Pattison, and Mikki

Waid. We are especially grateful to those civil servants who

devoted many days assisting us behind the scenes and to whom we

are unable to extend the recognition they deserve.
1

I. INTRODUCTION

In 1999, the Board of Trustees of the Old Age, Survivors and Disability Insurance

Trust Funds (OASDI) once again reported that Social Security remained out of balance for

the long term. Revenues are projected to be insufficient to meet promises of growing

benefits under current law. Because of that imbalance, the Social Security Administration

(SSA) has been called upon to examine a variety of reform options. The reports on those

options, many other SSA documents, and the Trustees Report itself have increasingly

come under the spotlight. After all, SSA serves as perhaps the most vital source of

information for the public and its elected representatives in seeking to gauge for

themselves the extent of any problems, the influence of different economic and

demographic conditions on those problems, and the viability of the proposed solutions.

...the Office of the Chief Actuary (OCACT) has been called 

upon to provide estimates for reform proposals that involve the 

investment of Social Security funds in private equities.

In recent years the Office of the Chief Actuary (OCACT) has been called upon to

provide estimates for reform proposals that involve the investment of Social Security

funds in private equities. In light of this significant expansion of OCACT’s traditional

responsibilities, the actuaries advised the Board that it would be helpful to have the views

of outside experts on the assumptions and methods that should be used in estimating those

proposals. Accordingly, the Board included in the charter for the 1999 Technical Panel a

request that the Panel provide expert opinion regarding expected effects of investment of

Social Security funds in equities. Stanford G. Ross, Chair of the Board, emphasized the

importance of addressing issues related to both current law and reform proposals. The

Panel’s report thus includes recommendations that go beyond the evaluation of the

existing system in which Trust Fund reserves are invested in government bonds. 

The Panel’s recommendations centered around the following findings:

• Under current law, OASDI may be more out of balance than currently

projected under intermediate assumptions. This is largely because of a

conservative estimate of improvements in life expectancy. But it also reflects a law

that has been designed in such a way that the ability to meet the growing cost of its

promised benefits is highly sensitive to economic and demographic conditions.

• Some vital pieces of information describing current law are missing in

the Trustees Report, and some current presentations at times lead to

misunderstanding. Despite a commendable job of putting out information, the

Trustees Report needs to inform the public of such issues as the lifetime value of

benefits promised under current law, alternative measures of unfunded obligations,

and the predicted growing prevalence of disability insurance receipt within almost all
2

age groups. Also, tables on life expectancy in the Trustees Report use a technical

measure that can easily be misinterpreted to indicate that estimated life expectancy

(and number of years of benefits) is less than it is actually projected to be for different

cohorts. Finally, the Trustees Report presents levels of future benefits that might not

materialize under current law even in the absence of reform.

• The public has been unable to obtain many essential pieces of

information that would help it weigh the relative merits of alternative

reform proposals. SSA has been moving heroically to try to meet the demands for

analyses of alternative reforms, but major holes still exist. For example, SSA cannot

fully evaluate the impact of proposals on predicted poverty levels of future retirees,

and on whether the reforms would make promises even more sensitive to changing

economic and demographic conditions. Some proposals, such as those that try to

improve fairness in the design of spousal benefits, cannot even be included in

congressional proposals because cost estimates and distributional consequences are

unavailable. No comprehensive standard has been set for comparing proposals and

their impact on the government’s budget as a whole or even stating their basic

parameters in a consistent manner. Responding to this concern goes far beyond the

responsibilities of the Office of the Chief Actuary, to the rest of SSA, and to such

offices as the Office of Management and Budget and the Congressional Budget Office.

• New types of methodologies and models are required to meet today’s

information requirements. SSA has been making strides in this area recently, but

the need is great. Newer models would make it possible to assess better the impacts of

alternative designs on distribution, on assessing the uncertainty or sustainability of any

law, on the total budget of the United States, and on saving and labor supply. 

• A special challenge is presented by proposals that would involve

investment in equities by individuals or by the Trust Funds. The 1999

Panel was the first to review the methods adopted by SSA to date in the area of equity

investment. It concludes that the assumption on the equity premium (return on stocks

over return on bonds) used by the Office of the Chief Actuary should be lowered in the

current economic environment. Furthermore, it is especially important not to show

high returns for equity investment through additional borrowing without any

assessment of the new risks that are involved.

• A clear appraisal of the required resources is necessary if these

challenges are to be met. This requirement extends to all the offices and agencies

responsible for assessing Social Security programs and policies within and outside the

Social Security Administration.
3

A. ECONOMIC AND DEMOGRAPHIC PROJECTIONS UNDER 

CURRENT LAW

The Panel’s first task was to review the economic and demographic assumptions

and methods currently in use. That has been the traditional role of this type of panel. In

basic respects, the Panel strongly supports the work of OCACT. In a few areas, however,

the Panel recommends change. First, it concurs with many demographers in noting that

projections of life expectancy by OCACT are unduly pessimistic, and that mortality rates

will likely decline even more than estimated. Second, it believes that the estimated future

increase in real earnings of workers tends to be understated, although the issue is still open

as to just how different tomorrow’s economy will be from that of yesterday. Third, it

suggests that real interest rates on government securities are likely to be somewhat lower

in the future than currently assumed.

...[the Panel] concurs with many demographers in noting 

that projections of life expectancy by OCACT are unduly 

pessimistic, and that mortality rates will likely decline 

even more than estimated.

Largely because of the suggested changes in mortality rates, the net effect of the

changes would worsen the measured actuarial imbalance of the present system. Longer

lives imply more years of Social Security benefits with only a partially offsetting rise in

revenues, because the current system does not increase the normal retirement age (NRA)

as life expectancy increases.

B. THE PRESENTATION OF INFORMATION ON CURRENT LAW

The Trustees Report helps give Congress sufficient advance notice of any large

actuarial imbalance so that it has adequate time to consider the merits of alternative ways

of restoring balance. In that regard, it has done a commendable job—one that might be

emulated by other programs and agencies that do not attempt to undertake such long-term

projections. But the Panel felt that improvements are needed in the presentation of

information. The important issue here is that the information conveyed be complete and

avoid inadvertently misleading the public and policy makers. For example, do projections

under high-cost and low-cost assumptions adequately display the uncertainty of the

projections? Are they meaningful? Do they convey how the projections might change in

response to different economic and demographic circumstances?

The Panel believes that a modest amount of additional information should be

included in the Trustees Report. Suggestions include the lifetime value of benefits

provided to different cohorts, the projected prevalence of Disability Insurance receipt in

the population as a whole and by age, and alternative measures of the actuarial obligations

and unfunded liabilities of the system. In some of these cases, SSA already makes the

calculations; in others, it can easily do so. The Panel also recommends that a more
4

thorough documentation of methods and assumptions be provided by SSA, and a separate

report by one panel member, Edward W. (Jed) Frees, will be made available as a first

approach at such an effort.

The important issue here is that the information conveyed be 

complete and avoid inadvertently misleading the public and 

policy makers.

At the same time, some items are reported in a way that has led to

misunderstanding among the public and elected officials. Thus, the technical measure of

life expectancy reported in the Trustees Report—although useful for some analytical

purposes—does not reflect the life expectancy of upcoming cohorts of retirees. Tables

showing growth in annual benefit levels over time do not demonstrate that succeeding

cohorts’ lifetime benefits are growing even faster than their annual benefit levels because

they will receive more years of benefits by living longer. The Report shows promises of

benefits under a legislated formula for benefit growth over time, but the law is

simultaneously unclear how such benefits could be paid when the Trust Funds run out of

money. A more balanced presentation of alternative benefit and tax streams, therefore, is

required to reflect current law. Thus, as the Trustees Report moves from a document used

primarily by some technical analysts to one that is used by the broader public to

understand the system, it needs to better accommodate their needs.

C. A NEW ENVIRONMENT

Making projections of the Social Security system under current law is only one

piece of the work facing analysts today. In the past few years, the Office of the Chief

Actuary within SSA has been called upon to make a variety of estimates based on varying

proposals for reform. Possible reforms include changes to the benefit formula, the

distribution of benefits among different recipients, the retirement age, the tax structure,

and the types of securities purchased by the Trust Funds. Other reforms establish

individual accounts funded by contributions and invested in a variety of assets, including

equities.

In assessing the reform proposals, SSA and other parts of 

government are being asked for a new and different level of 

information....Its current models do not address those

issues in a satisfactory way.
5

In assessing the reform proposals, SSA and other parts of government are being

asked for a new and different level of information as they evaluate those proposals.

Although SSA has been working diligently to try to fulfill the new requirements, many of

the efforts are still at an elementary stage. As a consequence, when advising on a variety

of policy proposals to date, some vital chores cannot be performed. For example, neither

SSA nor the rest of government is able to assess the impact on all revenues of government

(rather than just the Social Security Trust Funds). In addition, SSA is unable to examine a

variety of behavioral impacts on work and saving, show the possible distributional

impacts and the effect on poverty, demonstrate under reasonable assumptions the extent to

which various reforms increase or decrease the probability of being out of actuarial

balance by any given amount, or even estimate the actuarial impact of reforms that would

change rules for spouses (such as providing more equal benefits for all married couples

with the same level of earnings and taxes paid). Its current models do not address those

issues in a satisfactory way.

...a proposal that improved actuarial balance but increased the 

unified budget deficit might appear superior to one that did less 

for actuarial balance but reduced the unified budget deficit.

Those are crucial matters. Without such assessments, a proposal that improved

actuarial balance but increased the unified budget deficit might appear superior to one that

did less for actuarial balance but reduced the unified budget deficit. One that tended to

favor increased work or saving might not be credited with an impact on future government

revenues. A proposal that reduced the poverty rate overall might be assessed as hurting the

poor because one aspect of the proposal by itself did not improve their prospects. A reform

might look good because it reduced the actuarial imbalance under intermediate

assumptions, but no one would know that it actually increased the probability of being

several percentage points of payroll out of balance in the future. And, as has already

occurred, proposals that by some standards might improve the fairness of the system in the

way it treats different couples with the same level of earnings could not be fairly

considered in the context of a complex proposal with many interrelated provisions

because the impact of changing the related spousal benefit provisions could not be

estimated. SSA is currently working on new methods to fill this need.

D. THE TYPES OF MODELS THAT ARE NEEDED

Evaluation of reform proposals requires a variety of high-powered models. One

type of modeling would carefully account for different types of individuals according to

income level, work history, or family status. Such models can better display the

distributional consequences of reform proposals. For example, many current models are

inadequate when evaluating a policy that might provide a choice among a minimum

benefit, a new type of spousal benefit, or a benefit based on the worker’s own earnings.

Only with newer models can the full implications of the proposals be estimated.
6

Other modeling efforts would better allow an assessment of uncertainty.

Improvements would help demonstrate the level of uncertainty under current law as well

as assess the robustness or sustainability of any system to changing economic and

demographic conditions.

...many current models are inadequate when evaluating a 

policy that might provide a choice among a minimum benefit, 

a new type of spousal benefit, or a benefit based on the

worker’s own earnings.

Still other efforts would attempt to reflect the impact of reforms on different parts

of the federal budget as well as on household earnings and returns from saving. Less

elaborate models can ensure at least some consistency among economic variables. In sum,

these models are intended to provide better guidance on the consequences of steering the

ship in a different direction, not merely giving notice that it may be on a collision course.

E. INVESTMENT IN EQUITIES 

One of the most complicated of all matters in many newer reform proposals is

investment in assets other than government bonds, either directly by the Social Security

Trust Funds or by individuals within personal or individual accounts. Once the Office of

the Chief Actuary began estimating the effects of proposals with those types of changes, it

had to adopt new methods and assumptions. The Panel, therefore, undertook a first review

of the methods and assumptions underlying investment issues. The Panel believes that

such a review should become standard for future panels or ongoing task forces established

by the Advisory Board.

...a review of the methods and assumptions underlying 

investment issues...should become standard for future panels or 

ongoing task forces established by the Advisory Board.

Among the Panel’s recommendations in the area of investments is a moderate

decrease in the expected premium for ownership of stocks over bonds. In addition, the

Panel remains concerned that any equity investment be analyzed in a broader model that

takes into account other changes in the economy. Those changes could include the effects

on risk-bearing of a shift in asset ownership (e.g., the government owns more equities but

the public owns more government bonds and less equities), the impact on interest rates

arising from sales of government bonds, and the potential impact on net saving in the

economy. 
7

The Panel also warns about presentations that derive from arithmetic calculations

that tend to show that “financial arbitrage”—borrowing to purchase equities with a higher

expected rate of return—creates some sort of free lunch. To properly balance the

presentation, various assessments of risk must be undertaken at the same time. While there

is no easy way to do this, several options are suggested ranging from simple to more

complex.

The Panel also warns about presentations...that tend to 

show that “financial arbitrage”—borrowing to purchase 

equities with a higher expected rate of return—creates 

some sort of free lunch.

The Panel has prepared a tentative list of assumptions that should be stated and

analyses that should be applied consistently to all proposals and to current law. By

adopting such a standardized list, SSA can minimize the chance of unintentionally

favoring one type of proposal over another, as well as indicate to policy makers the types

of questions and issues that will need to be addressed when trying to design any broadbased reform. 

F. THE RESOURCES REQUIRED 

Although many of these issues require research by other parts of government, such

as the Office of Management and Budget, the Department of the Treasury, the

Congressional Budget Office, the Joint Committee on Taxation, the Congressional

Research Service, and the General Accounting Office, we believe that the Social Security

Administration is in the unique position of having the information, expertise, and integrity

to significantly inform the debate. Because of its unique position, however, demands on

the agency for information and analysis are escalating. The Panel strongly recommends

that resources be made available to enhance SSA’s ability to provide analysis in a way that

best informs the public; incorporates such considerations as uncertainty, distributional

consequences, and risk; and allows for consistent comparison of alternatives. At the same

time, the other government agencies must also begin to catch up on their own

responsibilities—such as showing the budgetary impact of alternative reforms. 

The Panel strongly recommends that resources be made 

available to enhance SSA’s ability to provide analysis in 

a way that best informs the public;...

When one considers that reform will likely affect almost every individual retiring

in the future and likely will shift trillions of dollars’ worth of benefits and taxes over the

next few decades, these efforts to enhance research and analysis capabilities could be

greatly beneficial to the public.
8

II. EXECUTIVE SUMMARY

A. THE STANDARD ASSUMPTIONS USED TO EVALUATE 

CURRENT LAW

The Panel recommends a number of changes to the actuarial assumptions

underlying the Trustees Report. In each case, the Panel was guided by trying to assess the

best information available to it, regardless of the impact on actuarial balance. The largest

changes recommended—in terms of their impact on actuarial balance—were to

increase projections of life expectancy and real earnings growth, and to decrease the

real interest rate on government securities. The first and last would decrease actuarial

balance, the middle one increase it, with a net impact of worsening the actuarial deficit by

about 0.5 percent of taxable payroll. At the same time, the Panel recognizes the uncertain

nature of any projection based on the uncertainty surrounding the economy and the future

demographic characteristics of the population. Several of its later suggestions would

attempt to demonstrate how the sensitivity of the program to alternative assumptions is

affected by different legal designs, such as indexing for life expectancy, prices, or wages.

Source: Office of the Chief Actuary, Social Security Administration.

Despite the variety of recommendations made here, the Panel strongly supports the

various modeling efforts that underlie the Social Security projections. Following the

recommendations would improve a process that has strong underpinnings and, indeed, is

the envy of much of the rest of the world.

Table II.1.—Effect of Panel’s Recommended Changes in the 

Intermediate Assumptions

(Change in OASDI actuarial balance and annual balance as a percent of taxable payroll)

Change in

actuarial

balance

Actuarial 

balance 

for 75-year

period

Annual 

balance

for 75th

year

1999 Trustees Report actuarial balance ................ -2.07% -6.44%

Increase ultimate rates of mortality decline .... -0.51%

Raise real wage differential............................... +0.20%

Lower return on government securities........... -0.20%

Panel-recommendation actuarial balance

(including interactions among recommended 

changes) ................................................................... -2.60% -7.70%
9

1. Real Wage Differential 

The real wage differential, or the long-term assumed rate of real annual

growth in the average annual wage in covered employment, should be raised by

0.2 percentage point to 1.1 percent. The growth rates for the low- and high-cost

options should be raised by equivalent amounts. At this time, the Panel

recommends an increase of 0.1 in the assumed rate of growth of long-term

productivity, with the remaining 0.1 being allocated to changes in the linkages

between productivity growth and the real wage differential (such as hours worked

and the share of employee compensation directed to wages). However, the Panel

acknowledges significant uncertainty both as to the level of future productivity and

our ability to measure it consistently in an economy placing increasing emphasis

on services, information, and quality.

2. Fertility 

The Panel recommends no change in the assumed long-term fertility rates.

However, the shifting composition of the population suggests that the Trustees

should continue to monitor fertility rates closely. 

3. Mortality 

Based upon long-term trends and international comparisons, the Panel

recommends that greater improvements in mortality be integrated into the

intermediate assumptions. Projected life expectancy at birth in 2070 should be

raised to the level currently projected for the high-cost assumptions, 3.7 years

above the current intermediate projection. The Panel recommends maintaining

the age distribution of the rates of decline in mortality the same as was assumed for

the intermediate assumptions in the 1999 Trustees Report. Those rates of decline

are fairly similar across the adult ages, rather than slower at advanced ages as in

the historical record. The current spread between the low- and high-cost

assumptions should be maintained around the new intermediate assumptions.

4. Immigration

The Panel suggests that the range between the low-cost and high-cost

assumptions should increase to perhaps plus or minus 50 percent of the

intermediate assumptions.
10

5. Return on Government Bonds 

The Panel recommends using a real annual interest rate of 2.7 percent in

both the short- and long-term projection periods for the government bonds

purchased by the OASDI Trust Funds. The current intermediate assumption is 3.0

percent. We recommend a high-cost rate of 2.0 percent and a low-cost rate of 3.5

percent. 

B. FURTHER RECOMMENDATIONS

The Panel made a variety of recommendations regarding additional economic and

demographic variables, investment issues, the ways that data and information are

presented, and the types of modeling efforts needed to make better and more informative

projections.

1. Economic and Demographic Issues

a. Labor Force Participation

The projected labor force participation rates of both older men and

older women should be examined carefully (projected rates for older women

appear low relative to older men). Further model development is needed to

deal explicitly and consistently with many types of reforms, such as further

changes in the retirement age or changes in levels of benefits, that could

affect those participation rates. Also, larger variations in participation rates

should be incorporated into the assumptions for the low- and high-cost

projections.

b. Marital Status and Benefits for Low-Income Survivors and Spouses

The Panel has concerns with the current projections of marital status.

Benefits paid to women as spouses or survivors represent a primary method by

which the current system deters poverty and near-poverty in old age. Some

survey-based projections suggest that the numbers and proportion of women

who will collect benefits as wives or widows could be lower than projected by

the Office of the Chief Actuary, whereas the number and proportion who will

be divorced and never married could be higher. If those projections are correct

and the estimates by OCACT of benefits to women are overestimated, two

problems arise. Not only would estimates of future actuarial costs to the Social

Security system be too high, but poverty rates estimated consistently with

OCACT’s assumptions would be too low. Thus, poverty could rise among

older women even as the system becomes more generous over time to other

beneficiaries. Up-to-date surveys and modeling on this issue have not received

priority within the government as a whole, thus making more tentative any
11

estimation done here. The Panel places a high value on investigating

alternative methods and data sources that are demographically representative

as support for improved projections related to marital and family status.

c. Disability

The Panel finds the forecasts of the size and cost of the Disability

Insurance program to be reasonable but recommends further work in two areas.

More research is needed to understand the recent improvement in mortality

rates among the DI population. And SSA needs to devote more resources to

understanding the factors causing the large fluctuations in incidence rates

that have occurred in the past and to developing more detailed behavioral

models that can predict the impact of changes in the DI program.

2. Investment Issues

a. Equity Premium

Evaluating the risks and returns to equity investment is critical to

reform proposals that involve investing Social Security funds in publicly

traded stocks. The Panel recommends that the average equity premium at

this time be set to 3 percent over the assumed real rate of interest on special

government bonds issued to the Trust Funds. Recent analyses by SSA have

used 4 percent. However, SSA should be prepared to modify the assumed

average equity premium as new insights on the size and determinants of the

equity premium become available. 

b. Presentation of Results with “Additional” Returns Resulting from the 

Equity Premium

When examining reform proposals that involve alternative

investments, as in equities, results should first be presented reflecting a

government bond rate of return on those investments. Doing so will avoid the

false inference that the equity premium comes with no corresponding increase

in risk or other cost for society. Calculations that explicitly incorporate the

equity premium should also include a price of risk. That can be accomplished

by adjusting the discount rate used for investment cash flows, by option pricing

methods, or by some other appropriately developed approach. SSA should

study those alternatives and further develop and standardize the methodology

used to evaluate risky investments. 
12

c. Consistency of Asset Returns with Other Variables

At present, the Trustees Report (as opposed to many reform proposals)

does not have to make assumptions on rates of return other than on government

bonds. In the future, the Panel suggests that rates of return on financial assets

should be checked for compatibility with the rate of inflation, the rate of return

on capital, and other relevant variables.

3. Presentation Issues

We suggest several areas of improvement regarding the presentation of

material in the Trustees Report: the format of the Trustees Report, the use of cohort

versus period life expectancy, the lifetime value of benefits (and possibly costs),

sustainability along with 75-year balance, and the prevalence of disability.

a. Format of Trustees Report

Several changes to the format of the Trustees Report would help

readers understand and interpret the data. The Report should be produced in a

manner that provides immediate cross references (including point and click

references in an electronic version) to the Summary Report, as well as to

backup material in other reports such as Actuarial Reports and SSA

distributional analyses. Also, graphs should more clearly illustrate the

uncertainty that surrounds the 75-year forecast, particularly in distant years.

b. Illustrating Uncertainty

The Trustees Report should use techniques to illustrate that much of

the uncertainty in projections can be reduced by targeting policy to specific

objectives, such as adjusting for increases in life expectancy so as not to throw

the system out of balance. Uncertainty in projections can also be reduced by

automatically adjusting benefit or tax formulas over time to reflect actual

economic and demographic outcomes.

c. Cohort Versus Period Life Expectancy

The Report should present cohort life expectancy in addition to period

life expectancy, as many readers mistakenly believe that the period life

expectancy indicates projected life expectancy for particular cohorts at

retirement age.
13

d. Lifetime Value of Benefits

We recommend that the Trustees Report place more emphasis on the

lifetime values of benefits that are paid out to typical retiring beneficiaries

and how they change over time from one cohort to the next. Some members are

interested also in the taxes paid by various types of workers annually and over

their lifetimes. 

e. Alternative Projections of Benefits Under Current Law

Because current law is vague as to how the full value of current law

benefits could be paid when the Trust Funds are exhausted, the Trustees

Report should show real annual future benefits under two scenarios. The

first scenario would be current law if current benefit levels are maintained and

taxes are raised. The second would be current law if current tax rates are

maintained and benefits are lowered proportionately so they are just covered

by current tax rates. 

f. Typical Workers

Current projections do not explicitly take into account the significant

number of zero earning years of many individuals. Research shows that almost

half the retired workers actually have benefits based on their own earnings that

are closer to those of the “low earner” example shown by the Office of the

Chief Actuary. The presentation in the Trustees Report and other displays

should be revised to include both a typical low earner and a typical average

earner, as well as a typical family, more representative of the actual

population.

g. Sustainability of the Trust Funds

Emphasis on the 75-year actuarial balance is misleading when the

imbalance tends to be greater nearer the end of the period. In such cases, we

recommend the up-front use of side-by-side comparisons that would

emphasize the sustainability of the system alongside the 75-year balance. For

example, the Trustees Report could show the tax increase required to leave the

system in good shape at the end of the 75-year forecast period, perhaps by

requiring that the ratio of Trust Fund assets to benefit costs be constant over the

last 2 years of the forecast. In addition, the income rate, cost rate, and actuarial

imbalance for the last few years (or the 75th year) should be shown side-byside with the imbalance over 75 years.
14

h. Unfunded Obligations

The Panel recommends that information on the size of the unfunded

obligations of Social Security, measured under alternative assumptions,

should be included in the Trustees Report.

i. Reporting on the Distribution of Benefits

SSA should make available when appropriate the distributional

analysis it now undertakes. One way to bring that analysis into public view is

to mention it in the Trustees Report and refer the interested reader to a specific

SSA Website.

j. Disability Insurance Projections of Incidence and Prevalence

The Trustees Report should show historical and projected rates of the

prevalence of receipt of disability insurance over time as well as incidence,

including the total rate and the total rate adjusted for age composition. In

addition, likely causes of movements in the rates of prevalence and incidence

should be identified. 

4. Methodology and Models

a. Comparing Current Law and Reform Proposals Within a Consistent 

Framework

A common set of assumptions and criteria should be used to compare

different reform proposals and current law in a consistent framework. We

present a prototype set of assumptions and criteria in the main body of the

Report.

b. Macro Effects of Alternative Policies

The Social Security system does not operate in isolation, but has effects

on the government’s fiscal situation and on the economy at large. The Social

Security Administration needs a more general capability to illustrate

interactions of the macroeconomy and the Social Security system,

particularly with regard to saving and labor supply. Even without a fully

developed model, these behavioral responses need to be treated consistently

and more comprehensively across proposals.

c. Micro Models

The Panel feels strongly that evaluation of economic and

demographic changes, and of reform proposals, should include an analysis

of behavioral and distributional effects. The Panel recommends that SSA
15

significantly broaden its newly emerging capability to use and integrate

microsimulation-based forecasts of the distribution of future incomes and

Social Security outcomes, and that distributional results be presented regularly

for different types of reform options. In many cases, actuarial costs (e.g., of

alternative spousal benefit structures) cannot be made accurately without such

models. An outside board of experts should examine the structure of the

microsimulation models and evaluate the purposes for which their predictions

will be most useful. 

d. Public Access and Future Advisory Efforts

Improving the information flow regarding Social Security projections

is strongly urged. We recommend that the SSA Office of the Chief Actuary be

given the resources needed to document further the current projection

system. In addition, we suggest creating ongoing advisory groups on specific

issues such as investment assumptions, or perhaps an ongoing technical panel

review.

e. Evaluating the Precision of Projections

The Panel discussed at length how best to evaluate and illustrate the

uncertainty of long-term projections. The Panel recommends development of a

model that is a stochastic counterpart to the model currently used to forecast

financial solvency. The model should be used to provide some quantitative

assessment to policy makers of the extent to which different policy designs

reduce or increase the probability of being out of actuarial balance. It should

also be used as a tool to understand the extent to which different policy designs

reduce or increase the sensitivity of Social Security to economic and

demographic changes that cannot be well predicted under any model.

f. Consistency Among Variables

Under current OCACT techniques, relationships among variables for

closely related groups are often estimated separately. As a consequence,

comparing the results of various equations sometimes leads to the result that

relationships are not economically, demographically, or actuarially plausible,

and ad hoc adjustments are required. The Panel believes that certain modern

statistical and econometric techniques might help in dealing with the situation

and recommends that SSA investigate such techniques.
16

1999 TECHNICAL PANEL ON 

ASSUMPTIONS AND METHODS

Table of Recommendations 

The Standard Assumptions Used to Evaluate Current Law

Real Wage Differential

Raise the real wage differential from 0.9 percent to 1.1 percent. Maintain the same

spread for the low- and high-cost options.

Fertility 

Maintain the currently assumed rates, and continue close monitoring. 

Mortality 

Accelerate the improvement in the mortality rate so that life expectancy at birth in

2070 is 3.7 years higher than under the current intermediate assumption. Maintain

the current spread between low- and high-cost options. 

Immigration 

Increase the spread to plus or minus 50 percent of the intermediate assumption.

Return on Government Bonds 

Reduce the real annual interest rate from 3.0 percent to 2.7 percent. Use 2.0 and

3.5 as the high-cost and low-cost rates.

Further Recommendations

Economic and Demographic Issues

• Labor force participation rates should be varied more across low-cost,

intermediate, and high-cost scenarios.

• Methods for estimating the marital status of future beneficiaries, the labor

force participation rates of older workers, the rate of mortality improvement

among the Disability Insurance population, and the underlying causes of

receipt of Disability Insurance need further development. 

Investment Issues

• For investments in stocks, assume an equity premium of 3 percent over the real

interest rates on Social Security’s bond investments. 

• The value or “cost” of the risk associated with equity investment should be

displayed and estimated. 

• Rates of return on financial assets should be consistent with other economic

variables.
17

Further Recommendations (cont.)

Presentation Issues (for the Trustees Report and elsewhere)

• The format can be improved to allow easier access and understanding.

• The uncertainty of projections should be displayed more clearly and in ways

that reflect better the relationship of that uncertainty to the design of the law.

• Cohort life expectancy should be shown (period life expectancy, as now

shown, is easily misunderstood).

• The lifetime value of benefits (and possibly taxes) for various types of workers

over time should be displayed.

• Alternative estimates of the unfunded obligations of the Social Security system

should be presented in the Trustees Report.

• Traditional definitions of “typical workers”—low and average earners—result

in an overstatement of the lifetime income and benefits of the typical lowincome and average-income worker and should be revised. 

• Less emphasis should be placed on the 75-year actuarial balance and more on

long-term sustainability (as reflected, for instance, in balance during the last

part of the projection period). 

• Benefits under existing tax rates and taxes under existing benefit rates should

be presented to better reflect consequences of current law.

• Prevalence rates for Disability Insurance, not just incidence rates of new

awards, should be displayed.

Methodology and Models

• A published consistent set of criteria is recommended for comparing reform

proposals and current law.

• General equilibrium modeling is necessary for consistency and to understand

interactions.

• Models (microsimulation) to demonstrate distributional effects, as well as to

estimate better those features influenced heavily by distributional factors, are

necessary and must be enhanced significantly. 

• Greater public access to Social Security information should be encouraged.

• Ongoing technical review of several issues is necessary.

• Modeling capabilities (stochastic modeling) are necessary to display

uncertainty and the effect of policy on that uncertainty.

• Estimation methodology would benefit from new techniques to reflect

consistency among variables.
18

III. RECOMMENDATIONS

A. OVERVIEW

As requested in the charter drawn up by the Social Security Advisory Board, the

1999 Technical Panel had two broad objectives. The first was to review the assumptions

and methods that go into the annual projections of the Social Security actuarial balance.

The second was to offer advice on issues dealing with equity markets and effects of

possible alternative investments within the context of reform proposals. In both areas, the

Panel also devoted attention to presentational issues and to areas in which the

methodology could be improved.

In its review of the assumptions underlying the projections, the Panel made no

attempt to target the actuarial balance that would result from choosing different values of

key variables. However, those who follow Social Security policy closely will, no doubt, be

interested in the effects on the actuarial balance that would arise from adopting the

recommended changes in economic and demographic assumptions. We present estimates

produced by OCACT of the effects of changing the intermediate assumptions of the 1999

Trustees Report to reflect the Panel’s three major recommendations on the actuarial

balance, as shown in Table III.1. The estimated change in actuarial balance for each

individual recommendation is calculated separately as a single change to the intermediate

assumptions of the 1999 Trustees Report. The estimate for the three recommendations

combined includes interaction among the recommended changes.

Source: Office of the Chief Actuary, Social Security Administration.

Table III.1.—Effect of Panel’s Recommended Changes in the 

Intermediate Assumptions

(Change in OASDI actuarial balance and annual balance as a percent of taxable payroll)

Change in

actuarial

balance

Actuarial 

balance 

for 75-year

period

Annual 

balance

for 75th

year

1999 Trustees Report actuarial balance ................ -2.07% -6.44%

Increase ultimate rates of mortality decline .... -0.51%

Raise real wage differential............................... +0.20%

Lower return on government securities........... -0.20%

Panel-recommendation actuarial balance

(including interactions among recommended 

changes) ................................................................... -2.60% -7.70%
19

If all three recommended changes in ultimate assumptions were made, OCACT

estimates that the OASDI actuarial balance would fall from -2.07 percent of taxable

payroll to about -2.60 percent of taxable payroll. Indeed, any measure of sustainability

would reflect an even greater absolute increase in imbalance as a percent of taxable

payroll. For example, the size of the differential between the income rate and the cost rate

in the 75th year would increase by an estimated 1.3 percent of taxable payroll from its

currently estimated shortfall of -6.44 percent of taxable payroll. 

To put the size of the change in actuarial balance in perspective, Table III.2 reports

the change in the 75-year actuarial balance that has occurred in each of the last 10 years in

the annual Trustees Reports. While a change of 0.5 percent is relatively large, it is not

unprecedented. In 1994, the balance declined by 0.66 percent of taxable payroll, and in

1992 it declined by 0.38 percent of taxable payroll.

Source: Office of the Chief Actuary, Social Security Administration.

The Panel wishes to emphasize that its other recommendations, with regard to

equity investments, presentational issues, and modeling, deserve as much, if not more,

attention than its rough estimates of the economic and demographic assumptions

underlying current law. Consider the estimates of the actuarial balance. They can be

displayed to reveal more than the uncertainty of the future. They also indicate the ways in

which the system design adds to or subtracts from sensitivity to the uncertain future. For

example, changes in life expectancies are uncertain, but the sensitivity of the system to

Table III.2.—Size of Changes in Actuarial Balance over the Last 10 Years

(As a percentage of taxable payroll)

Publication year

75-year

actuarial balance

Change from 

previous year

1999 -2.07 +0.12

1998 -2.19 +0.04

1997 -2.23 -0.03

1996 -2.19 -0.02

1995 -2.17 -0.04

1994 -2.13 -0.66

1993 -1.46 (1)

1 Between -0.005 and 0.005 percent of taxable payroll.

1992 -1.46 -0.38

1991 -1.08 -0.17

19902

2 In 1990, the Trustees Report showed two “intermediate assumptions,” II-A and II-B. The Table

reports the actuarial balance associated with II-B, the closer of the two to the current Alternative II.

-0.91 -0.21
20

those changes reflects its lack of indexing to those life expectancies. The Panel also

identified a variety of important areas in which much future research, analysis, and work

needs to be performed. Those areas include poverty rates, particularly of women, under

changing marital patterns; the extent to which labor force participation is likely to change

in the future; the need for consistent comparisons of reform proposals and current law; and

the ways in which equity premiums might be treated under various reforms involving

equity investment, to mention only a few. 

B. THE STANDARD ASSUMPTIONS USED TO EVALUATE 

CURRENT LAW

1. Real Wage Differential 

Under Social Security law, the benefits for each successive wave of retirees

are increased by indexing an individual’s earnings up to age 60 by the growth in

the economy’s average annual earnings. On the other hand, benefits after age 60

are indexed by the Consumer Price Index for Urban Wage Earners and Clerical

Workers (CPI-W), as reflected in the cost-of-living adjustment (COLA) to retirees.

An increase in economy-wide average earnings will raise both taxable payroll and

the benefits of each cohort of new retirees, but the benefits of existing retirees will

be unaffected. In effect, the growth in total benefits will lag behind the rise in

revenues. Thus, a higher growth of the real wage differential—or the difference

between the rate of growth of the nominal average annual wage in covered

employment and the rate of growth of prices—will lead to an improvement in the

actuarial balance. The Panel believes that the intermediate assumption for the

long-term rate of growth in the real wage differential should be raised by

0.2 percentage point from 0.90 percent to 1.10 percent. The growth rates for the

low- and high-cost assumptions should be raised by equivalent amounts.

The adjustment is influenced in part by the Panel’s belief that rates of

deterioration in the components of the linkage between the growth in labor

productivity and the real wage differential will be slower than currently projected,

especially over the long term. The Panel recommends shrinking the long-term

decline in both the earnings share of labor compensation and annual hours of work

by 0.05 percent.

The adjustment also reflects recent revisions in the methodology for

computing changes in the Consumer Price Index, which affect both the change in

the ratio of inflation as measured in the CPI and the national accounts and the

measured rate of productivity growth. Those methodological changes will lower

the reported rate of CPI increase, and a portion of the changes will be reflected in

the GDP price deflator. It makes little difference, from the perspective of real wage

growth, if those methodological reforms are allocated to changes in productivity or

the relative price ratio or some combination. The Bureau of Labor Statistics has

published an historical index of the CPI that is consistent with the new
21

methodology. At the time of the Panel’s deliberation, similar information on the

impact of the CPI revisions on the national accounts was in the process of revision.

For the present, the Panel recommends increasing the long-term rate of growth in

labor productivity by 0.1 percentage point to 1.4 percent annually and leaving the

change in the price ratio (pgdp/cpiw) at -0.1 percent annually. Differences in

methodology provide a basis for some decline in the GDP price deflator relative to

the CPI, but the two indices cover a different range of goods and services.

The Panel was of mixed mind over how to predict future productivity

growth. After examining recent experience, the members concluded that a major

change in the assumption on productivity growth would be a bit premature—

particularly in view of the imminent revisions of the national accounts. However,

the panel did believe that some change could be justified as a reflection of ongoing

revisions in the price indices. Therefore, the Panel recommends a small change in

the underlying assumed rate of long-term productivity growth of 1.3 percent per

year. However, calculations of average productivity in the 1980s and the 1990s so

far do not demonstrate a major shift in the rate of productivity growth. (For

example, from 1987 to 1997, the average productivity growth was slightly less

than 1.0 percent per year.) On the other hand, many members believe that with the

introduction of major new technologies, future productivity growth could move

back up toward the rates achieved in the postwar period up to 1973. In addition to

the uncertainty associated with the evolution of “true” productivity, its

measurement in an economy that places so much emphasis on services and

information, rather than goods, is extremely difficult. Obviously, productivity

growth is an item that needs to be monitored closely over time. Any projection at

any time by its nature will be tenuous because of both economic and measurement

uncertainty.

2. Consumer Price Index

In recent years, the projected rate of increase in the Consumer Price Index

has been reduced from 4.0 percent to 3.3 percent per year. Most of the reduction

reflects changes in the methodology of computing the CPI that will lower future

reported rates of price inflation. The Panel recommends no changes in those

assumptions. 

3. Fertility 

The Panel acknowledges the uncertainty of future fertility trends but

recommends no change now in the intermediate assumption. The persistence of

rates above 2.0 during the past decade suggests that the assumed intermediate rate

of 1.9 may be too low, but that rate appears to be reasonable over long periods of

time. This observation reflects demographers’ attempts to take into account

important changes in birth timing. Shifting to a different average age for first birth

temporarily distorts the total fertility rate (TFR), as it did in the United States more
22

than a decade ago and seems to be doing so now in other industrialized countries.

It also takes into account relatively higher fertility rates for population groups that

are (or have been) changing more rapidly in size or composition through

immigration. Rather than recommend changes in the rates currently assumed,

we suggest continued efforts to monitor the shifting composition of the

population. We also recommend continued study of hypotheses on whether and

how fast new immigrant or existing minority groups will in the future reflect the

average behavior of the population as it was composed in the past.

4. Mortality 

a. General Population Mortality

The Panel recommends more rapid improvement in mortality rates

under the intermediate (Alternative II) assumptions so that life expectancy at

birth projected for 2070 is about at the level currently projected for the highcost (Alternative III) assumptions (85.2 years). This would be 3.7 years higher

than the projection of 81.5 under the current intermediate assumptions. The

Panel supports the approach used under the intermediate assumptions for

making a gradual transition during the first 25 projection years from the

average rate of mortality decline for the period 1968-96 to ultimate assumed

rates of decline. Achieving the recommended life expectancy for 2070 would

require ultimate age-specific rates of mortality decline that are faster than

currently assumed for the intermediate assumptions. The Panel recommends

maintaining the age distribution of the rates of decline in mortality the same as

was assumed for the intermediate assumptions in the 1999 Trustees Report.

Those rates of decline are fairly similar across the adult ages, rather than

slower at advanced ages as in the historical record. 

The Panel’s recommendation is based on examination of long-term

trends in U.S. mortality, on examination of international evidence, and on

consideration of recent research on the biodemography of mortality and aging.

Although a case can be made for either slower or more rapid mortality decline,

the recommended path appears most prudent, and it approximates the view of a

substantial share of demographers. The size of the current range from low-cost

assumptions to high-cost assumptions appears to be appropriate, and a similar

spread should be retained for the future. We provide a justification for those

recommendations in the Explanatory Material. 

b. Mortality for the Disabled Population

The current actuarial projections imply a large and immediate reduction

in the rate of improvement in mortality rates of DI beneficiaries, relative to the

unusually rapid improvement in mortality rates in recent years. We recommend

further research into the causes of this unusually large recent improvement in
23

mortality rates to determine if the trends are likely to continue. The long-term

projected rates of improvement should be increased to be consistent with the

Panel’s recommendations for more rapid improvement in mortality for the

general population, and a more gradual transition between historical and

projected rates of mortality improvement should be considered.

5. Immigration

The Panel does not recommend any change in the intermediate forecast of

net immigration. The assumption of 900,000 persons annually is consistent with

recent experience and immigration law (keeping in mind that changes in the law,

such as occasional amnesties or new legal allowances for humanitarian admissions

are not projected). However, the range of uncertainty expressed in the Trustees’

low- and high-cost assumptions is too narrow. Therefore the Panel recommends

that the Trustees allow for a significantly broader range of possibilities in the

alternative population projections, perhaps on the order of plus or minus 50

percent of the central assumption.

6. Return on Government Bonds

The Panel recommends that in choosing a value for the real interest rate,

SSA use information available in financial market prices, moderated by

consideration of historical trends. Specifically, the term structure of nominal

interest rates and forecasts of future inflation imply a market forecast of future

values of the real interest rate. An effort should be made to make projections of

future real interest rates consistent with the term structure and with SSA forecasts

for inflation. Consistent with the Technical Panel’s recommendation of 3.3 percent

per year for the rate of inflation, the long-term real interest rate should be about 3.3

percent less than the long-term nominal interest rate. With current long-term

interest rates close to 6 percent, the Panel recommends a real rate assumption of

2.7 percent. To bracket the range of likely deviations from this value, we further

recommend that the rate be set to 2 percent in the high-cost scenario and 3.5

percent in the low-cost scenario.

Because factors other than expectations of future real rates can temporarily

influence the term structure, it is prudent to compare the real interest rate obtained

as discussed with historical experience. In fact, over the period 1926 to 1997, the

real return on long-term government investments has averaged approximately 2.4

percent, which is close to the 2.7 percent that we recommend as a median value.

Realized real rates in the 1990s, however, have been closer to the recommended

low-cost scenario. Therefore, it may become necessary to adjust the assumed rate

upward if the higher real rates of recent years persist.
24

C. FURTHER RECOMMENDATIONS

1. Economic and Demographic Issues

a. Labor Force Participation

With some exceptions, SSA is projecting that labor force participation

for future age and sex groups will remain fairly similar to what it is today. One

implication is reflected in projections that effectively assert that the labor force

participation rates of future cohorts of women of all ages have leveled out

relative to men, and that most of the catch-up has been achieved. While the

Panel for the most part finds the labor force participation projections

reasonable, it believes two areas need to be examined in more depth to

determine if improvements could be made. First, by examining the behavior of

successive cohorts, it has concluded that in older ages the participation rate of

women may move closer to that of men than has recently been projected by the

Social Security Administration. More recent cohorts of women have attained

higher levels of education and accumulated more experience in the workforce

relative to earlier cohorts. Some evidence suggests, therefore, that the catch-up

by younger to middle-age women entering the labor force in recent decades

will continue to be reflected in further increases in labor force participation as

the more recent generations move into older ages. 

The Panel also believes that improvements in longevity, along with

potentially dramatic changes in labor supply and demand in the near future,

could have significant effects on the participation rate of all older workers,

even under current law. Many proposals for reforming Social Security,

moreover, require the Office of the Chief Actuary to project the impact of

changing participation rates on benefits and the actuarial balance. SSA needs

to undertake or sponsor research that better accounts for the potential effects

on labor force participation of changes in retirement ages, changes in the

value of Social Security and Medicare benefits, trends in the availability of

private pension income, and other variables. The Panel recommends that

increased resources be devoted to this area of research but, beyond adjustment

for labor force participation of older women relative to men already noted,

holds in abeyance any recommended changes to the projections until some of

that research is undertaken.

Finally, given the uncertainty over labor force participation and its

importance to the actuarial projections—both under current law and under

many proposals to change the law—the Panel recommends that variations in

participation rates be incorporated into the alternative assumptions for the high

and low projections. At present, many of the parameters underlying labor force

projections are not varied among high-, intermediate-, and low-cost scenarios. 
25

b. Marital Status and Benefits for Low-Income Survivors and Spouses

The Panel recommends that SSA revise and extend the methodology

for estimating the marital status of future beneficiaries. Because of budgetary

pressures, about a decade ago the Department of Health and Human Services

ceased gathering data that enable the actuaries to adjust the projections to

changes in the relative levels of marriage rates by age. Surveys by the Census

Bureau, although they must be interpreted with caution, show that age-specific

marital patterns continue to change. One reason that this issue has become so

important—both for the projection of actuarial cost and for estimates of the

distribution of that cost—is that under some reasonable assumptions about

continuation of current patterns, the number of poor and near-poor older

women could increase substantially in the future.

The patterns of increasing poverty among older women reflect a much

higher incidence of never-married individuals and divorced individuals with

less than 10 years of marriage to the same spouse. Social Security law targets

much of its relief against low income in retirement through its spousal and

survivor provisions. That relief, however, is proportional to the Social Security

benefit attributable to the other spouse’s earnings and it applies in the case of

divorced individuals only to those with prior marriages of 10 years or more.

Those conditions are not necessarily related to need. One study by the Office

of Policy within SSA (Iams and Butrica 1999) indicated that the increase in

individuals not qualifying for spousal or survivors benefits might be so large

that it could have a significant impact on poverty rates. More specifically,

despite significant real growth in benefits per worker and in benefits for

married couples, poverty rates among retired women might not fall at all by

2020. In effect, the growing group of never married and divorced women

after short marriages—a group with higher-than-average vulnerability—

could occupy a larger percentage of the elderly population.

 The future marital status of women has a significant effect on

projections of OASDI actuarial balance and Supplemental Security Income

(SSI) costs—not just under current law, but even more so under some types of

reform proposals that the Office of the Chief Actuary has been estimating. The

Panel therefore recommends that OCACT begin by investigating under current

law the sensitivity of the financial projections to future marital status. Further,

OCACT should adapt or at least supplement its current methods with

alternative methods and data sources. A particular requirement is a set of data

that will produce projections that are representative across states and regions as

well as across demographic groups.

At the same time, it is crucial for the Office of Policy or other offices

within SSA to study the distributional implications and make them available

through public reports. We believe that these types of calculations cannot be

done well without some sort of microsimulation modeling. While efforts have
26

begun within SSA, they must be advanced much further. Even beyond SSA, we

hope the suggestions will be considered by other parts of the statistical

establishment and that they pay attention to the data requirements necessary

to monitor the trends.

c. Disability 

The Office of the Chief Actuary within SSA makes projections of

“incidence rates” for the Disability Insurance (DI) program as one piece of

their projection of future costs of the DI program. Those incidence rates show

the number of newly entitled DI beneficiaries during a year as a percentage of

the “exposed population,” or the number of U.S. citizens who are insured

under DI less the number who are currently entitled to receive benefits. A

second piece of the forecast of future costs comes from projections of death

rates, recovery rates, and conversion rates—the fraction of DI beneficiaries

reaching the normal retirement age. Combining the two pieces leads to a

projection of costs of the DI program as well as measures of “prevalence,” or

the ratio of the total number of DI beneficiaries to the size of the insured

population. While the Office of the Chief Actuary does not forecast prevalence

rates directly, they can be derived from the two pieces described above.

The Panel reviewed the projections of incidence and prevalence rates

and found them to be reasonable, even though most epidemiological studies

forecast continued improvements in objective measures of the health and

disability status of Americans. The projected increase in the fraction of the

U.S. population entitled to DI benefits is a result of demographic, economic,

and programmatic factors that outweigh the impact of technological

improvements in health care and health status. Perhaps the single most

important factor is the increasing average age of the DI insured population and

the fact that older individuals are more likely to apply for and be awarded DI

benefits than younger individuals.

However, the Panel questions OCACT’s forecast of a large, abrupt

reduction in the rate of improvement in mortality of DI beneficiaries after

1999. The Panel recommends further studies of the determinants of the rapid

improvement in those mortality rates in recent years to provide better guidance

on whether such rapid rates of improvement will continue in the future.

The Panel reviewed the general methodology that OCACT uses to

forecast inflows and outflows to the DI roles and concluded that the approach,

which can be approximately described as a “judgmentally-adjusted

extrapolation of historical trends,” appears to be a fast, simple, and costeffective method. It is not obvious that substantial investments in more detailed

behavioral models of the DI application and awards process would necessarily

result in more accurate long-term forecasts.
27

Nevertheless, the Panel believes that there could be substantial payoffs

to new investments in research and data gathering that would enable SSA to

develop more detailed dynamic behavioral models of the DI application,

appeals, and awards process. Such models are likely to yield more accurate

forecasts of the behavioral and distributional effects of policy changes and are

also likely to improve our understanding of the relative importance of the

various factors that have led to large swings in DI incidence rates in the past.

Unfortunately, few existing models are adequate for predicting the

behavioral and welfare impacts of currently contemplated changes to the DI

program and awards process, including the Disability Process Redesign

initiative.

2. Investment Issues

a. Equity Premium

For many reform proposals, SSA is called on to make a projection of

the average real rate of return on stocks. Historically, the average real rate on

stocks has been significantly higher than on bonds. Nevertheless, the Panel

recommends that when examining reform proposals that involve alternative

investments, results should first be presented reflecting a government bond

rate of return on those investments. By doing so, it will not lead readers or

reviewers of its estimates to assume that an equity premium comes with no

corresponding increase or shift in risk or other cost for society. Then it can

present a second set of estimates indicating some median state of the world that

assumes that the Trust Funds or individual accounts are able to earn a risk

premium. At the same time, it needs to formally note that this is not “free”

money, but comes at the cost of increased risk to the system. Those

nontraditional investments involve a shifting of risk in society and an increase

in risk for those who must bear it by covering any shortfall or accepting any

windfall.

Historically, before the recent period of very high valuation of stock,

the equity premium, which is the excess of the rate of return on stocks over the

rate of return on short-term riskless bonds, has averaged between 6 percent and

7 percent per year. Looking forward requires an estimate of the ex ante, or

expected, equity premium, and we recommend use of a conservative forecast

of an ex ante equity premium of 4 percent per year over the short-term riskless

rate. However, the Office of the Chief Actuary actually uses a benchmark

based on a long-term bond return, and the long-term bond return in the last 5

years has averaged approximately 1 percent above the short-term government

rate. Hence, recommending a 4 percent per year equity premium over the

riskless rate is equivalent to recommending a 3 percent premium over the

benchmark real rate on special issue bonds held by the Trust Funds. 
28

The recommendation of a lower-than-historical premium reflects

consideration of the high price-to-earnings and earnings-to-dividend ratios

at the time that this Report was written. Indeed, the Panel received some

recommendations that at current price-to-earnings ratios the equity premium

may be close to zero, at least temporarily. (Right now, given the difficult nature

of forecasting the premium, OCACT does not distinguish between short-term

and longer-term expected rates of return on stock investment.) We further

recommend that OCACT track academic progress on understanding the equity

premium and be prepared to modify the equity premium assumption

accordingly.

The Panel recognizes the tenuous nature of any assumption, as well as

the danger that under current methods of presentation, it appears to suggest that

the government can make money simply by borrowing more and investing the

proceeds (on behalf of itself or individuals) in the stock market. Nonetheless,

inasmuch as some assumption must be made, Panel members believed they

were compelled to provide an estimate of the average expected premium. We

strongly recommend that SSA and the Advisory Board conduct further

review than could be accomplished by this Panel with its relatively broad

mandate and short time to report. This type of review should not await the

appointment of some future panel that will review methods and assumptions

more broadly.

b. Presentation of Results with “Additional” Returns Resulting from the 

Equity Premium

One of the more difficult issues dealt with by the Panel was how risk

associated with returns on equity should be valued. Currently, when called

upon to evaluate proposals that involve equity investments, OCACT assumes

that realized returns will equal its government bond rate plus the expected

equity premium. At the same time, calculations of quantities such as the

actuarial balance involve discounting all cash flows at its bond rate. All else

equal, these assumptions have the effect of making proposals that include

equity investments appear advantageous even when there is no additional

saving or income being generated in the economy. As discussed in the section

on the equity premium, this result derives in part from neglecting the cost of

risk.

Using the expected return on equity is superficially consistent with the

rest of the methodology used by SSA, which bases calculations on expected

values of uncertain quantities such as rates of mortality decline and

productivity growth. It ignores the distribution of possible outcomes around

that expected return. Equity is fundamentally different in two respects,

however. The first is that the variance of equity returns, even on an annual

basis, is quite substantial. Unlike other adverse outcomes, low equity returns

affect the value of Trust Fund assets immediately. The omission of uncertainty
29

due to equity investments can be particularly misleading. The second

difference is that the risk of investing in equity can be avoided, with a

corresponding reduction in the expected return, by investing in less risky

assets. Thus, the nature of the risk is fundamentally different in that it can be

priced. This second difference is reflected in standard actuarial practice, which

requires that defined-benefit pension funds discount stock investments at a

higher rate to reflect the risk.

The Panel recognizes the need for a relatively simple way to adjust for

risk of equity investments, at least until more accurate methods can be

developed and implemented. A rough adjustment for the (negative) value of

risk can be accomplished simply by assuming that the cost of risk equals the

risk premium. That is, the differential between the return on government bonds

and the return on equity is reflected at the margin by the premium in the

market. Hence, if reform implies some movement toward equity purchases,

either by individuals or by the government, then the return from those

purchases equals the return on government bonds, plus the equity premium,

less some valuation of additional risk which at the margin is approximated by

the equity premium. In short, the benefit of any higher average return on

equity is offset in this measure by the cost of the associated additional risk.

This in part motivates the recommendation that equity investments first be

evaluated as if they are expected to return the rate on the special-issue bonds

held by the Trust Funds.

More formal modeling of the risks also can be obtained through the

examination of options. The purchase of an appropriate put option combined

with the sale of an appropriate call option can guarantee that some value will

be available in the future, not unlike the implicit promise of Social Security to

provide at least a minimum level of benefits that are capped at some level.

Option pricing techniques, then, determine the “cost” of risk by the prices that

are placed at the margin in the market for those risks. Options pricing

techniques are based on strong assumptions that have the benefit of making

many options-pricing formulas attractively simple. However, to the extent that

the assumptions abstract from reality, the application of the formulas may not

correctly price the risk. Nonetheless, we recommend that the techniques be

adapted to try to address questions related to risk borne by individuals and

the Social Security system in the face of equity investment. Such techniques

could be supplemented via stochastic simulations using a microsimulation

model to show the downside risk to an individual. 

Finally, we must note that the “loss” people associate with risk may

far exceed the expected or average loss measured in dollar terms. To take an

extreme example, suppose that an individual has 1/100 chances of starving and

99/100 of eating $500 of food for a month. The expected (average) amount of

food consumption equals $495, but the individual may be willing to accept the

surety of $250 of food consumption every month over the more risky
30

alternative. In effect, the individual is willing to pay an average of $245 per

period to avoid an average or expected loss of $5 of food consumption.

Measured in terms of the probability of starvation—1 percent in this

example—the risk may appear to be small. However, measured (more

appropriately) in terms of how much the person would pay to avoid this risk,

almost 50 percent of average consumption, the risk appears large. Thus, when

evaluating the risks associated with stock market investment, simply reporting

the probability of unfavorable events does not adequately reflect the degree of

risk. Some measure of the amount people would pay to avoid the risk is a more

appropriate—though more difficult to compute—measure.

c. Consistency of Asset Returns with Other Variables 

We have already emphasized the importance of ensuring that the

projected real interest rate be consistent with the term structure of interest rates

and the projected rate of inflation. The need for consistency extends to other

variables as well. For instance, the returns to corporate debt and equity

represent the return to the total corporate capital stock. Thus, the appropriately

weighted average of the rate of return on corporate debt and equity should

equal the rate of return on the corporate capital stock. Meanwhile, estimates of

the rate of return on corporate capital exist in the economics literature and

should be incorporated into forecasting of rates of return by SSA.

3. Presentation Issues

a. Format of Trustees Report

The Panel commends SSA and the Trustees for the high quality of

reporting that they already undertake and their attempt to improve that

reporting from year to year. Nonetheless, we believe that further improvements

are possible, some simply because of technological advances. The format of

the Trustees Report, we believe, could be simplified and made more userfriendly. The Panel struggled with an issue familiar to the Trustees and the

Office of the Chief Actuary: how to provide as much information as possible

without overwhelming the reader. One strong recommendation from the Panel

is to accommodate three types of readers. The first would benefit most from

the type of summary already provided in the publication, “Status of Social

Security and Medicare Programs: A Summary of the ... Annual Reports.” The

second type makes use of the more extensive Trustees Report. Here, too,

choices must constantly be made about what to present and what not to present,

and how far to go in providing fuller descriptions and presentations of

assumptions and potential outcomes under those assumptions.

(Recommendations on items to include or change in the complete annual

report follow.) The third type needs even further detail, more than can be

provided in a single document. That information is often contained in studies
31

produced by various parts of SSA. The third type of reader is much more likely

to access the Report or the Summary via the Internet and thus to take

advantage of the features that such a presentation mode can achieve.

We recommend that the Trustees Reports contain a continually

updated crosswalk that allows readers, as easily as possible, to move back

and forth at the three different levels. Thus, the Summary and the Trustees

Report would include footnotes and listings of sources of further information.

An electronic version of the Summary Report and the Trustees Reports would

then contain Website references, ideally with point-and-click capability that

would allow a reader, say, reviewing labor force participation, to move to

available reports on that specific subject.

Similarly, the front section of the Trustees Report could be made to

look more like the Summary Report to Congress. Quick references and hot

buttons to specific later chapters, sections, and related reports would allow the

user to explore the features of the Report to the greatest extent possible. Such

references also would allow SSA to show the depth and sophistication with

which it has investigated each set of assumptions and made its decisions.

We recognize that these types of reference and library functions require

a significant amount of effort and judgment. But we believe this would be a

worthwhile investment of energy and time by SSA and would enhance

significantly its ability to convey to the public and to policy makers the

information at its disposal. It would also demonstrate the depth to which the

actuaries and other offices within SSA have explored various issues.

b. Illustrating Uncertainty 

The Panel, like panels before it, has struggled also with the issue of

how better to present the uncertainty that surrounds forecasts. Two different

types of issues arise: 1) how that uncertainty is interpreted; and, 2) how

variation around some median forecast is demonstrated, including how the

range of uncertainty usually increases as one moves toward the far future. 

The current system of presenting low- and high-cost alternatives to

the intermediate assumptions is inadequate. The alternatives are useful in

demonstrating the sensitivity of the forecast to the underlying parameters

(section II.G of the Trustees Report). However, without any model of the

probabilities of the underlying parameters taking on the alternative values,

there is no way to use the alternatives to form a distribution of possible

outcomes. It is inadequate to show any forecast without an indication of the

uncertainty that surrounds it. We follow previous panels in strongly

recommending efforts toward stochastic modeling or similar techniques that

are better able to capture the interrelationship among assumptions. We are not

dogmatic in the recommendation, as we recognize that even stochastic

modeling requires some set of assumptions about the variance in future
32

outcomes—for example in fertility rates—that are hard to estimate. However,

the assumptions are in some way embedded in current methods of projection in

any case. 

Some modeling techniques allow for graphical presentations that are

better at displaying the range of uncertainty. What we seek is a method of

displaying to policy makers and the public just how uncertain is some average

cost outcome or date of exhaustion of the Trust Funds, and what are the

probabilities that events will be close to or far from that result. That the system

might have a very high probability of being out of balance by 2 or more

percent of taxable payroll, for instance, may be worth knowing regardless of

whether it has attained actuarial balance under some set of intermediate

assumptions.

The current presentation of uncertainty—as reflected in low-,

average- and high-cost assumptions—is also presented in a way that

emphasizes the fragility of the estimating process, but not the malleability of

the law. That is, displaying uncertainty is not performed solely to indicate that

the future is unknown but also to alert policy makers how that uncertainty and

risk to the system vary with policy choices. Current law, for instance, has

partially eliminated most (but not all) of the risks to the Trust Funds that might

be associated with changes in inflation. It has achieved this goal, among other

means, by indexing benefits after age 60 roughly to the change in prices, so

that lower inflation means lower increases in benefits. But the law has not

similarly reduced the risk to the system associated with the personal benefit of

living longer. Indeed, most of the projected imbalance in the system at the

current tax rate would not be there if the expected number of years in

retirement had been kept constant over time by indexing it for life expectancy.

(Nor would our suggested changes in life expectancy projections make much

difference for actuarial balance in such an indexed system.) Similarly, the law

can be adjusted to reflect changes in workers-to-retirees over time due to

fertility or immigration patterns—changes that must have an impact on all

government programs, not just Social Security, because of the effect on the

number of taxpayers. Or the law can be made less sensitive to the differential

indexing of initial benefits eventually available to those not yet retired vis-avis the benefits to those already retired. 

Thus, it is possible under different techniques—none of which is

perfect, but many of which are useful—to show how different reforms can

reduce significantly the probability of shortfalls in the future. It is our view

that the Social Security Administration must develop different techniques for

measuring uncertainty—not merely to refine predictions but to allow policy

makers to consider reforms to Social Security that would lessen its sensitivity

to adverse economic and demographic trends.
33

c. Cohort Versus Period Life Expectancy

 It is traditional for actuaries to present data on life expectancy (and

other projections) in “period” tables. Period tables indicate patterns for

particular individuals if they were to follow the same pattern in future years as

do people in the current period. In the case of life tables, Social Security

typically presents in the Trustees Report the expected life span of someone age

65, if that person were to have the same probability of death in years after age

65 as is projected for all persons in that year. Period tables are useful mainly as

an intermediate step for actuaries and others who are projecting out matrices of

future outcomes based upon a matrix of recent outcomes.

Many readers who are not actuaries, however, cannot understand the

period life tables, and they misuse them when reporting on life expectancies.

When people discuss projections of life expectancies, they usually have in

mind the actual number of years individuals are expected to live. This number

is not shown in the period tables because they do not take into account the

expected improvements after a given age. For someone turning 65 in 2020, for

example, the period table for 2020 gives their expected remaining years of life

under the mortality conditions projected for all ages in the year 2020 only. In

fact, the true life expectancy for this person will be greater since mortality is

projected to continue to decline after 2020. When that person turns 70 in 2025,

a 2020 cohort table reflects the life expectancy of someone age 70 in 2025,

whereas the period table uses the life expectancy for someone age 70 in 2020.

Thus, a cohort life table takes into account the full range of projected future

mortality rates rather than only those occurring up to some given calendar year.

The use of period versus cohort life expectancy, therefore, has led to

confusion among some policy makers who look to the Trustees Report for

information. When discussing retirement age, they think they can turn to the

period table to estimate number of years of expected retirement support, and

they cannot. To know that number they must use cohort tables. Use of period

tables tends to bias downward their perceptions of the number of years of

retirement support promised by Social Security (and Medicare). 

The Panel recommends that cohort life expectancy be published in

the Trustees Report in addition to the period life expectancy. The cohort life

expectancy provides the information that most readers of the Report would like

to see and would find most useful in thinking about the system.

As an example of the difference in expected lifetimes conveyed by

cohort life expectancy and period life expectancy, consider a 65-year-old

female born in 1955. According to the period life expectancy now published in

the Trustees Report, her life expectancy in 2020 at age 65 will be 19.8 years

(see Figure III.1). But taking into account expected improvements in life

expectancy after 2020 as reflected in cohort life expectancy raises her life

expectancy to 20.5 years.
34

Figure III.1.—Cohort and Period Life Expectancies for 

Males and Females at Age 65

 for Years 1990-2065

Source: Office of the Chief Actuary, Social Security Administration.

d. Lifetime Value of Benefits

The Trustees Reports have traditionally shown the value of annual

benefits in Social Security and the ways they are changing over time. However,

a large share of the growth of Social Security costs over the years has been the

expansion in the number of years of support provided. The growth in annual

benefits provided, therefore, is significantly smaller than the growth of lifetime

benefits. The expected lifetime value of benefits conveys more about the value

of the insurance package that people receive than does the annual figure. 

The Panel recommends that the Trustees Report contain at least one

simple presentation of the lifetime value of retiree and spousal benefits

expected by individuals who live to retirement age and then have retired in

the past or will retire in the future under current law.1

 This could be done for

some typical low-, average-, and high-wage persons. We believe that such a

 1 A separate calculation could also be made for the value of insurance arising from premature death or

disability. Survivor’s benefits and Disability Insurance benefits play an important role for those who die

before retirement age or who are disabled during their working years. For the Trustees Report, the Panel

suggests a more simplified analysis of retiree benefits to illustrate the lifetime value of retiree and

spousal benefits for those who live to retirement age.

10

12

14

16

18

20

22

24

1990 2000 2010 2020 2030 2040 2050 2060 2070

Calendar year of attainment of age 65

Life expectancy at 65 (in years)

Female Cohort

Female Period

Male Cohort

Male Period
35

presentation would be extremely informative concerning the benefits of the

system (note that the item is also one that is recommended for inclusion in

comparisons of proposals, as well).

Some members also believe that it would be useful to show lifetime

value of taxes paid by the same cohorts in order to facilitate a comparison of

Social Security taxes paid with Social Security benefits provided. A proper

comparison of taxes and benefits, however, is further complicated by the

necessity of correctly valuing the disability and death insurance provided prior

to retirement age. A fair comparison of taxes and benefits would require a

separate type of benefit calculation than that suggested in the previous

paragraph which only looks at persons surviving to retirement age. If there is

not space in the Trustees Report for this separate calculation, it could be made

available through electronic means.

e. Alternative Projections of Benefits Under Current Law

Under current law, once the Trust Funds are exhausted they are limited

in their ability to make payments of moneys not available to them. What would

actually happen as a legal matter at the time of exhaustion in an actuarially

imbalanced system is still unclear. Accordingly, offices such as the

Congressional Research Service have made projections of promised benefits

under different scenarios. One would be that tax rates are increased on future

generations of workers somehow to provide the level of benefits promised

under current formulas for benefit growth. Another is that benefits (or benefit

growth rates) are reduced proportionately to be payable under existing tax

rates. Although neither of these scenarios is likely to define precisely what

would result from reform—or what the government would do when writing

checks to beneficiaries at times when revenues and Trust Funds were

inadequate—each helps to set bounds on what the current system promises and

what current law allows. Table III.B5 of the Trustees Report, on the other hand,

only shows the first type of scenario and, therefore, is misleading when

presented by itself. The Panel recommends that at least these two types of

scenarios be presented when describing current law in an actuarially

imbalanced system.

f. Typical Workers

In several of its reports and tables (including table III.B5 in the 1999

Trustees Report), Social Security reports on benefits received by those with

“low earnings,” “average earnings,” “high earnings” and “maximum

earnings.” Recent research commissioned by SSA itself, however, now reveals

that the typical or average retiree falls closer to the low-earnings than the

average-earnings category. There is at least one obvious reason for this. The

Social Security assumption about average earnings is that the person receives

the average earnings of all workers for each year. But the assumption fails to
36

take into account the significant number of zero-earning years of many

individuals, particularly women and those who spend part of their lives in

noncovered activities. Whatever the reason, a majority of women and a

significant proportion of men fall closer to the low-earnings category than the

average-earnings category. 

As a result, individuals analyzing the program or changes to the

program are liable to be misled when looking at what is now called the average

earner and low earner. For the true average person (male and female alike), the

annual benefit is lower and the rate of return on contributions is higher than for

Social Security’s projected “average earner.” When reform is being considered,

changes to features like minimum benefits are liable not to affect SSA’s

“average earner” as much as they will affect the true average earner, and they

likely would help a true low earner but would not show up as helping SSA’s

low earner. We recommend that SSA realign its presentation of typical workers

as well as display complete distributional tables. Right now, SSA presents a

series on low, average, high, and maximum earners that essentially starts in the

middle of the earnings distribution (for men and women together, and, even

then, not fully representing men with fairly low lifetime earnings) and moves

upward from there. A new series should include a more typical low earner and

a more typical average earner as well as a typical high earner. 

The Panel recognizes that although the previous choice of typical

workers may have been misleading when examining the impact of Social

Security on the individual, it was a bit more on target in a period when policy

makers talked mainly about male workers. SSA did make adjustments to

combine an average- with a low-earnings spouse when presenting data on

couples, so that an average-low combination for a couple would be closer to

the situation of an average working couple. Nonetheless, the combination is

still inexact and misrepresents what are average and low.

 SSA is uniquely able to examine earnings and, to some extent, marital

status over long periods of time. Given the importance of women’s labor force

participation and the changing nature of marital status, we suggest that SSA

present a new set of typical workers and couples that would more “typically”

represent the actual population of men and women both now and in the near

future.

g. Sustainability of the Trust Funds 

The Panel would like to reinforce concerns about the overemphasis on

75-year actuarial balance raised by previous panels and addressed in part by

the procedures adopted by the 1994-96 Advisory Council on Social Security.

Currently the first year in the 75-year projection period has a positive cash

flow (with contributions exceeding benefit payments), whereas the 75th year
37

has a negative cash flow. With each new projection in recent history, a year

with negative cash flow is added, and the system is shown as more out of

balance.

When reformers aim only for 75-year balance, therefore, they usually

end up in a situation where their reforms only last a year before being shown

out of 75-year balance again. The 1994-96 Advisory Council wisely tried to

accept only reforms that produced sustainability over the longer term—

sustainability defined in a way that would ensure that taxes and benefits were

more or less in line after the 75th year.

Although there is no perfect way to demonstrate long-term patterns of

sustainability, the members of this Panel remain concerned that many

designers of reform try to reach balance simply by targeting their plans only at

the 75-year actuarial deficit. Often they do not recognize that reaching balance

over the 75-year horizon is not adequate if it is long-term balance they really

want to achieve. Accordingly, they need summary statistics up front to help

them visualize the broader situation and permit examination of the balance

over different time horizons. 

We suggest that some simple alternatives would go a long way toward

solving this problem. The income rate, cost rate, and actuarial imbalance for

the last few years (or even the last, 75th year) can always be shown side by side

with the imbalance over 75 years. That can be done in tables such as I.G2 in

the 1999 Trustees Report, so that readers do not misinterpret or use data out of

its broader context. The advantage of that method is that it requires no

additional calculations on the part of the actuaries. At the same time, it offers

the reader a chance to investigate the fiscal health of the system over a different

time horizon.

h. Unfunded Obligations 

The members of the Panel also believe that alternative estimates of

costs and taxes for the combined OASDI system under current law over all

future periods would be worth incorporating more fully into the Trustees

Report. The Office of the Chief Actuary calculates three measures of unfunded

obligations of the OASDI Trust Funds as of a given valuation date. First, the

“open-group surplus or deficiency” is based on the assets and liabilities for all

current workers and beneficiaries as well as future new entrants to the system

over the next 75-year period, measured from the valuation date.1

 Second, the

“closed-group transition gain or cost” is similar to the open-group measure

with the following exceptions. No new entrants to the system after the

 1 It represents the difference between a) the assets at the beginning of the period plus the present value of

tax income over the next 75 years, and b) the present value of the projected cost of the program over the

next 75 years.
38

valuation date are assumed1, and the 75-year period is extended to 100 years to

capture the lifetimes of all persons included in the valuation. Finally, the

“maximum transition cost” represents the transition cost for continuing the

Social Security program in a completely different form.2 The approach is

similar to the one developed for past service credits under the Personal

Security Account (PSA) plan for the 1994-96 Advisory Council.

Although the numbers are subject to a variety of interpretations and are

sensitive to assumptions, private plans are currently required to report similar

calculations. We are not suggesting that the numbers be unduly emphasized or

displace current presentations, but the Panel believes that they are important

enough to incorporate in the Trustees Report, both as raw numbers and as a

proportion of gross domestic product.

Perhaps such alternate estimates could be summarized in a section of

the Trustees Report and mentioned briefly in the front of the Trustees Report

and in the Summary Report with a reference to the larger examination of the

issues later in the Report or in an on-line appendix.

i. Reporting on the Distribution of Benefits 

The Social Security Administration has recently developed the

capability to forecast not only the aggregate Trust Fund balance and the

“typical worker” scenario, but also the future poverty status and other related

issues concerning the distribution of benefits. Although the methodologies

require additional testing and review, they signify a new era for SSA forecasts.

SSA and other government agencies should find a way to bring the new

studies into public view as soon as possible. One way to do that is to mention

the new methodology in the Trustees Report and to refer the interested reader

to the Website of the Office of Policy and to related reports such as those on the

modeling income in the near term (MINT) model. (See the upcoming section

on microsimulation for more on the point.)

j. Disability Insurance Projections of Incidence and Prevalence 

In our suggestions for estimating the actuarial costs of disability

insurance, we noted that there is a need to understand the actual prevalence of

disability as well as the incidence of new net awards coming into the system.

Here we raise a parallel concern with presentation of data even in the absence

 1 Specifically, only persons in the system who are 15 years or older as of the valuation date are included in

the calculations.

 2 It is computed as the difference between a) the value of the assets on the valuation date plus the present

value of revenue from taxation of future benefits payable on the old form (under the old system), and b)

the present value of all future benefits payable after the valuation date based on earnings before the

valuation date (earnings credited under the old form). Future benefits payable on the old form for

workers who have not reached benefit eligibility age (62) are calculated on a proportional past-servicecredit basis.
39

of changes in the models. When Social Security reports a relatively constant

incidence rate by age, it could easily imply to the reader that the percentage of

people in each age category projected to receive disability benefits will be

level, but that interpretation would be incorrect. What constant incidence

means roughly is that net newcomers into the system are coming on board at

about the same rate over time. But the prevalence of disability is projected, at

least at the time of this report, to go up significantly by age, and as a

proportion of the population to go up even faster because of the aging of the

population. That increase has significant and important implications for

actuarial cost, as the age-specific increases imply one or more changes ahead.

Those changes could include increases in causes of disability, changes in the

definitions of disability as interpreted administratively, or lesser ability of

society to find work opportunities for those eligible for disability insurance

under current law but currently working nonetheless.

We believe that very few are aware of the Social Security projections or

their implications. Therefore, we recommend that the Trustees Report itself

contain one simple graph and a table of prevalence rates of disability insurance

by age, by all ages, and by an age-adjusted calculation (see Figure III.2). This

last set of numbers reflects what would be happening on average to prevalence

because of changing numbers receiving disability insurance even if there were

no change in the age distribution. For example, the gross prevalence rate

increases from about 35 per thousand disability insured to about 54 per

thousand disability insured between 1998 and 2015, while the age-sex adjusted

rate rises from about 35 per thousand to about 42 per thousand.

Figure III.2.—DI Disabled Workers Prevalence Rates, 

by Select Age Groups, at end of Calendar Years 1970-2074

(Per thousand disability insured)

Source: Office of the Chief Actuary, Social Security Administration.

0

25

50

75

100

125

150

175

1970 1985 2000 2015 2030 2045 2060 2075

Calendar year

Ages 55-64

Ages 45-54

Ages 35-44

Ages 25-34

Ages <25

Gross prevalence rate

Age-sex adjusted rate

Historical Estimated
40

4. Methodology and Models

a. Comparing Current Law and Reform Proposals Within a Consistent 

Framework 

SSA has always been in a world in which it must constantly analyze

reform proposals and indicate the impact of those proposals on actuarial

balance. Recent years, however, have brought new demands. Estimates for

three alternative reform plans were published by the 1994-96 Advisory

Council on Social Security, but many other estimates have since been provided

formally and informally to members of Congress or other commissions

suggesting reform. Most of these plans have included investment in stocks

along with more traditional provisions. Informed public debate and, ultimately,

intelligent public policy would be greatly facilitated if all policy options and

current law were evaluated and presented in a consistent framework and

manner. As a step toward a consistent framework for evaluation, we suggest

the development of a common set of features or parameters and outcomes

that must be specified by each reform proposal to project the effects of those

proposals and to ensure that they are compared on an equal basis.

We include below a specific set of recommended features that could

serve as a template for consistent evaluation of proposals and presentation of

results. The first section of the checklist outlines the characteristics of Social

Security policy that must be fully specified by a proposal to evaluate various

effects of the proposal. The second section briefly lists the sorts of assumptions

that must be made to calculate the effects of a proposal. That list puts some

focus on assumptions related to investment issues associated with equity

because equity investment of retirement accounts and/or Social Security is a

relatively new consideration for SSA. Other economic and demographic

assumptions have been covered elsewhere in this report. The third section of

the checklist outlines some of the economic effects and implications of

proposals that should be analyzed. Of course, the checklist is not definitive; it

is a starting point that should be refined.
41

A Checklist for Comparisons of Reform Plans and Current Law

(The default value for parameters is current law, where appropriate.)

 Plan Characteristics

Funding sources

• Contributions (tax policy)

Payroll tax rate

Employee

Employer

Self-employed

Cap

Tax treatment of contributions

• Transfers from general revenues

• Sensitivity to investment returns

Benefits

• Retirement age

Full benefit eligibility

Earliest eligibility

• Benefit calculation

Benefit formula

AIME

Adjustment for retirement at 

other than normal retirement age

Earnings test

Benefits related to life expectancy

Taxation of benefits

Treatment of COLA

Minimum benefit

Disability benefits

Survivor benefits

Dependent benefits

Sensitivity to investment returns

Guarantees (floor, ceiling, etc.)

Taxation of investment returns

Investment

• Inside Trust Funds

Fraction invested in private securities

Menu of securities

Who manages investments? 

At what cost?

Effect of fluctuations in investment 

returns

Adjust benefits, taxes, or size 

of trust fund?

• Private accounts

What asset allocations are permitted?

Default allocation?

Guaranteed floor on benefits?

Administrative costs

Taxation of investment returns

Transferability of accounts to 

survivors, ex-spouses

Annuitization rules

Early withdrawal

Loan provisions

Treatment of transition 

• Paying for benefits of current retirees

• Transfers from general revenues

SSA Valuation Assumptions1

Investment return statistics

• Means, variances, covariances, serial 

correlation

Discounting assumptions

Economic Implications

Exploration of key sensitivities

• Rates of return on government bonds and 

equity

• Labor supply response rates

Projections of revenues, costs, and 

Trust Fund balances of 

Social Security system

• Implications for unified budget

Net taxes and benefits

• Distributional considerations

Intergenerational

Intragenerational

Prevalence of poverty

Marital status

Cost of guarantees

Macroeconomic implications

• Asset prices, interest rates

• National saving and investment

Incentive effects

• Labor supply effects

• Risk-taking in individual accounts

1 In addition to the current set of assumptions, evaluation of plans with either private or public investment accounts will

need the following assumptions. It is important to use a common set of assumptions to evaluate different proposals.
42

In some cases, our concern is that proposals be more completely

specified, for example, with respect to rules for disability payments or the

income taxation of benefits. In other cases, our concern is with a consistent

presentation of outcomes. Not all the outcome estimates are under the control

of SSA. For example, two proposals may restore the same amount of actuarial

balance to the OASDI Trust Funds but have very different effects on general

revenues or on the budget as a whole. For the latter estimates, the Treasury and

Office of Management and Budget, or the Joint Committee on Taxation and the

Congressional Budget Office, may need to be involved. Another worrisome

comparison would occur when two proposals involve different amounts of

equity investment. A potential problem arises when SSA projects its costs

under some bond interest rate, but then attributes a stock market return to

individual accounts or to the trust fund investment. If two plans differ only in

the amount of equity investment, and SSA assumes that equity returns always

dominate bond returns, then the plan with the greater amount of equity

investment will always tend to look better if the additional risk of equity

returns is not accounted for. 

Some outcomes cannot be derived from figures on actuarial balance—

for example, projected impact on poverty among the elderly. Certainly the

actuarial balance alone does not capture the risks involved in reform proposals

or the possible range of impacts on individuals. Many of the items may require

analysis that may take awhile to perform and require the participation of

offices within SSA other than the Office of the Chief Actuary. We recognize

that in cases like these—as opposed, say, to the specification of plan

parameters—it often will not be possible to present all or even most needed

information up front. Nonetheless, it should be an expectation of those who

propose plans that SSA will attempt to undertake such analyses.

We recognize that the legislative process proceeds at a pace not under

the control of SSA or other agencies. Moreover, SSA has not been built up

over the years to be able to handle the recent level of demand for reform

analyses that has been coming its way. We suggest most strongly, nonetheless,

that a standard set of plan specifications and outputs eventually should be

expected, even if some of the output analysis can be released only over time. In

addition, every effort should be made to ensure that policy makers are not

misled in picking among proposals by an inconsistent way of presenting

results.

Finally, where a reform proposal does not specify changes, and

OCACT makes an assumption for the proposal or assumes that no change is

being proposed, that assumption should be formally stated. It would be

possible, for instance, for SSA to develop a checklist of plan features similar to

the one we suggest here. When SSA provides information on particular plans,

it can then indicate precisely which items have not yet been specified in the
43

plan or not yet estimated. Such a standard presentation would better alert

policy makers and the public to what they do not know, which is often as

crucial to decision-making as what is known.

b. Macro Effects of Alternative Policies

OCACT provides actuarial estimates of program changes for a

significant number of requesters, including members of the Executive Branch

and Congress. The full impact of reform, however, cannot be determined well

only through actuarial calculations of impacts on Trust Fund balances, but

needs to be investigated using one or more broader frameworks. Ideally that

would involve some amount of detailed modeling, but at a minimum it means

that a more elaborate economy-wide and government-wide balance sheet is

needed. Often the other government and economic effects feed back into

Social Security actuarial calculations—as when effects on labor supply change

the amount of Social Security tax collected. Therefore, although the advances

we suggest here may require other offices of government to participate and go

beyond issues of actuarial balance, they often are required as well to perform a

thorough job of actuarial balance estimation.

In evaluating the revenue and cost projections for Social Security,

one of the first required steps is to consider the budgetary impact on the rest

of the government expenditures and revenues, rather than to focus

exclusively on the impact on the financial position of Social Security. For

example, if Social Security taxes are raised, some of those additional taxes will

effectively reduce the amount of earnings subject to income tax (and Social

Security tax), thereby reducing general revenues along with any net changes in

Social Security tax revenue. If Social Security retirement ages are changed,

labor supply will also be altered, which will lead to changes in collections of

income taxes as well as Social Security taxes. Internal to SSA itself, changes in

benefit levels in Social Security will affect the numbers of individuals

receiving Supplemental Security Income (SSI) and vice-versa. While some

government-wide effects—for example, a change in food stamp benefits—

would be difficult to calculate every time a proposal or amendment to a

proposal was put forward, others are simply too large to ignore. SSA must

collaborate with the rest of government to begin to deal with these vital

issues—even if, strictly speaking, it is not solely or even primarily the “job” of

the Office of the Chief Actuary. It is someone’s job, and other offices within

SSA and the budget offices in the Executive Branch and in Congress have an

obligation to make sure that the broader budgetary perspective is provided. 

Social Security policies also affect the consumption and saving of

individuals, as well as the incentives to supply labor. Those behavioral

responses, in turn, feed back into the costs of Social Security and the taxes that

it and the rest of government are able to collect. A great degree of uncertainty

surrounds the quantitative importance of the feedback effects. But rather than
44

assume that these feedback effects are zero (as is current practice in many, but

not all, cases), it would be valuable to develop models that would incorporate

the behavioral adjustments into the projections. Where the uncertainty is large,

as it often is, it is often better to provide alternative estimates under different

assumptions, thereby providing information in the form of some sensitivity

analysis. 

One of the key macroeconomic variables that may be affected by

Social Security policy is national saving, which determines how much wealth

the United States accumulates over time. Although it might be tempting to

assume that any additional saving within the Social Security system (or within

individual accounts associated with Social Security reform) leads to an equal

increase in national saving, such an assumption might not be realistic. The

additional saving could be offset, in part or in whole, by decreased saving

elsewhere in the government’s budget or by decreased private saving. Again,

models would be extremely valuable in assessing and taking account of the

potential offsets to increased saving in the Social Security system. Once again,

sensitivity analysis is needed given the range of uncertainty.

SSA already indirectly incorporates some behavioral responses some

of the time. For instance, it usually makes some assumption about changes in

retirement patterns when the early or normal retirement age is increased. For

changes in the normal retirement age by itself, it suggests close to a zero

response. Right now, however, the procedure is ad hoc, leading to the danger of

inconsistency later when other proposals are examined. For example,

simultaneous changes that increase the retirement age, require deposits to

individual accounts, and reduce the value of annual benefits made available

under Social Security have all sorts of interactive effects. Increasing the

retirement age may induce work and increase or reduce saving. Mandatory

individual accounts may lead to a build up of savings in individual accounts,

which would be partially offset by some decline in other forms of private

saving and induce less work if the increase in net saving is positive. And any

reduction in annual benefits may induce both more work and saving (absent

the other changes). Such changes are simply difficult to handle in the absence

of a more complete model that consistently takes some account of behavior.

c. Micro Models 

The Panel strongly endorses efforts to use and integrate

microsimulation-based forecasts of the distribution of future incomes and

Social Security outcomes. The Office of the Chief Actuary should work

closely with the Office of Policy and other government agencies to encourage,

foster, and nurture the growth and use of the models. Moreover, the inner

workings of the models should be examined and recalibrated routinely after

review by outside experts on the structure and capabilities of the models. 
45

The value of microsimulation models is often misunderstood. For

projections of single variables, such as mortality rates or economic growth or

future participation in private pension plans, they often add little value.

Generally, the models make projections on the basis of assumptions derived

from other estimation procedures. Accuracy in the projection of a single

variable usually requires an understanding of broad social and economic trends

but is often less dependent upon interactions with other variables or with the

detailed ways that changes might play out among households of different

types. On the other hand, if there are important interactions that need to be

modeled, then microsimulation becomes a valuable tool. For example, if there

was strong evidence that mortality rates varied by economic and social status,

and birth rates also varied by status of adults, then it would be hard to project

those interactions over time without some sort of microsimulation model.

Microsimulation modeling is most helpful for examining distributional issues

and for analyzing situations in which cross-sectional correlations in the

population are important. In other words, microsimulation models are

particularly useful for longitudinal projections tracing the behavior of

individuals and families over time under varying and complex economic

conditions. Such behavior cannot be captured by the current Social Security

projection model, which takes cross-sectional snapshots of the behavior of the

entire population at each point in time.

The advantage to microsimulation models stands out when estimators

have to deal with what might be called “either-or” cases in which the choice

varies widely among households of different characteristics. For example, with

the growth in two-earner couples, many more now receive benefits on the basis

of their own earnings records rather than as spouses of partners. Trends over

time in the claiming of worker benefits in lieu of spousal benefits are not linear

and cannot be projected simply by extrapolating from the past. Instead, one

must project the data for households of different types and with different

earnings splits among couples, as well as take into account the impact of

divorce and similar “family” situations on the numbers of individuals who will

qualify for spousal benefits (another either-or condition).

Another example of either-or modeling involves multiple options in the

benefit formula. For example, some proposals would provide for benefits

under a traditional benefit formula or a minimum, whichever is greater (along

with a third option, a spousal or survivors benefit). One cannot accurately

project the cost and distributional effect of options such as these without a

microsimulation model.

Still another example of where microsimulation helps is when policy

makers want to constrain the impact of a policy change on particular

individuals. Suppose, for example, that future shortfalls were to lead policy

makers to reduce benefits, but they did not want to reduce those benefits for the
46

poorer third of beneficiaries. With microsimulation, it would be possible to

develop a formula that would meet that objective; it would be difficult and less

accurate under other techniques.

Finally, at least some reform efforts (e.g., the National Commission on

Retirement Policy) wished to examine options for earnings sharing and other

possible designs for spousal/survivors benefits. To be estimated, however,

earnings sharing and other spousal/survivors benefit formulas require a good

deal of information on the income patterns among spouses over time. Because

SSA did not have adequate microsimulation models at the time, it could not

provide cost estimates on options, much less the distributional impact and

potential reduction in poverty levels of different alternatives. Because options

could not be estimated, they were excluded from the proposals. Here,

therefore, is a primary case where the lack of microsimulation capability is

literally shaping policy that will affect tens of millions of individuals. 

d. Public Access and Future Advisory Efforts

The Panel recommends to SSA, to its Trustees, and to those in charge

of the SSA budget that adequate resources be provided to help document the

current system. Although the suggestion is not new, extraordinary demands

placed on the Office of the Chief Actuary in recent years for analysis of

legislative proposals and development of assumptions and projection methods

have stretched existing resources. As a result, it has been extremely difficult to

adequately address the need for thorough public documentation of all areas

involved in making financial projections. To try to assist in this development, a

prototype summary document was prepared by the Panel under the direction of

Edward W. (Jed) Frees and will be published separately by the Advisory Board

and made available on its Website. The Office of the Chief Actuary will make

cross-references to the study on its Website. In addition, OCACT has indicated

its intention to increase the level of detail and comprehensiveness of

documentation available to the public and to update this documentation more

frequently. The content of the Frees paper is expected to provide considerable

help in this effort. The Panel recommends that the more complete

documentation should contain links and references to existing studies and that

such links (in an electronic version) be accessible, when possible, through

point-and-click techniques on a Website. 

By documenting more of their work—it is, of course, impossible to

document everything—SSA would open itself to outside academia in ways

that would go beyond what a technical panel can do on occasion. Effectively,

SSA would avail itself of many more intellectual resources to improve its

projections. At the same time, the work of future advisory panels would be

expedited if a summary were available. 
47

The 1995 Technical Panel recommended that there be an ongoing

advisory Technical Panel. The 1999 Panel, in turn, has recommended that

further advice be sought in a number of areas, such as how to treat returns from

the types of investment options put forward in a number of reform proposals.

We believe that the Advisory Board and SSA together should consider what

types of advisory processes might best achieve the objective sought by both

technical panels: an ongoing review in a way that allows SSA to achieve its

mission in the most efficient way possible.

e. Evaluating the Precision of Projections 

Like the 1995 Panel, we recommend development of models that

would represent a stochastic counterpart to the methods currently used to

forecast financial solvency of the OASDI system. As a first step, we propose a

cohort model to deal with the interactions among variables affecting the

population generally, such as mortality and fertility. At the same time, we

recognize that a model based on individuals might be better to deal with risks

inherent in some proposals.

With a stochastic projection system, one computes an entire

distribution of projected future outcomes. We suggest that initially a model

might be constructed using mean projected assumptions corresponding to

those of the current deterministic system under the intermediate assumptions.

At the same time, the model could mimic the organizational structure of the

long-range deterministic model without getting too involved in the short-range

model.

To repeat comments made in a slightly different context, stochastic

modeling has two primary roles to play in the Trustees Report. First, it is far

superior to the current presentation of Alternatives I and III in displaying the

range of uncertainty in the actuaries’ forecasts. The alternatives are useful only

in establishing the sensitivity of the forecast to changes in parameters, whether

individually or in groups. Second, it is a useful tool to understand the

interaction among variables. In particular, it can help policy makers understand

that much of the uncertainty in forecasts is due not to future unknown

economic and demographic forces but rather to the lack of built-in flexibility in

the program itself and its lack of adaptability to changes in those economic and

demographic forces. The models can help policy makers target a reduction in

this sensitivity along with, say, any reduction in actuarial imbalance under

some intermediate assumption.

f. Consistency Among Variables

The Office of the Chief Actuary uses a complex model of the U.S.

economy that depends upon many inputs. As we have stressed elsewhere in

this report, it is critical to model the relationship among the inputs so that
48

sensible projections result from the model. As a technique to understand the

relationship among variables, OCACT uses regression in several areas of the

projections. In the absence of other information about economic or

demographic structural relations, regression methods have enjoyed substantial

popularity in the applied sciences as a tool that is useful for understanding

empirical relationships.

When SSA analysts estimate their models, they fit relationships among

variables with data observed over time. Because data are typically available on

an annual basis, most regression estimations use only a small number of data

points, thus causing estimators to be more unreliable than they might be with a

longer series of information. Further, several relationships are estimated

individually by each age and sex cohort, so that many regression equations are

estimated. When SSA fits the many regression equations, it sometimes finds

that the estimated relationships are not economically, demographically, or

actuarially plausible and that ad hoc adjustments are required.

We recommend that SSA sponsor research, either internally or

externally, that investigates the use of modern statistical and econometric

techniques as an alternative to their current procedures. Modern techniques,

such as seemingly unrelated regressions or shrinkage estimation, take

advantage of information in neighboring cohorts, such as when estimating

relationships by each age-sex cohorts. These techniques not only produce more

efficient estimators but also mitigate the need for ad hoc adjustments.
49

Summary of Data and Modeling Needs 

• Real Wages.—Measuring “true” productivity in an economy that places increasing

emphasis on services and information, rather than goods, is difficult. The Federal

statistical system should receive support for long-proposed initiatives to measure

service production as well as it currently measures production in manufacturing and

other traditional sectors. 

• Marital Status.—Up-to-date surveys of marital status have not received priority

within the government as a whole. SSA should either receive support to collect such

data or adopt alternative methods to exploit existing data sources that are both

geographically and demographically representative of the marital and family status of

future beneficiaries.

• Labor Force Participation.—Further model development is needed to examine

the labor force participation of older individuals and deal explicitly and consistently

with many types of reforms, such as further changes in the retirement age or changes

in levels of benefits. Such reforms could affect projected labor force participation rates

of both older men and older women.

• Microsimulation Modeling.—The Panel feels strongly that evaluation of

economic and demographic changes, and of reform proposals, should include an

analysis of distributional effects. The Panel recommends continued use and integration

of microsimulation-based forecasts of the distribution of future incomes and Social

Security outcomes throughout the various government agencies. Within SSA, the

Panel recommends continued support for ongoing modeling efforts such as CORSIM,

MINT, and the Projected Cohorts Model (PCM). 

• Evaluation of Uncertainty.—SSA should develop a model that is a stochastic

extension of the model currently used to forecast financial solvency. The model should

be used to provide some quantitative assessment to policy makers of the extent to

which different policy designs reduce or increase the probability of being out of

actuarial balance. It should also be used to understand the extent to which different

policy designs reduce or increase the sensitivity of Social Security to economic and

demographic changes that cannot be well predicted under any model.

• Linking Surveys with Administrative Records.—SSA should increase its

support for and use of individual-level survey data for studying retirement and

disability that contain links to its administrative records. Prominent examples include

the Health and Retirement Survey (HRS) and the Survey of Income and Program

Participation (SIPP).

• Employer-Based Data.—SSA should increase its support for collection of firmlevel information on pensions, health insurance, and fringe benefit packages.

Additional information is also needed to improve understanding of the factors

affecting productivity, working conditions, compensation packages, and the overall

demand for older workers.

• Disability.—SSA should devote more resources to developing explanatory models

that help to understand and forecast incidence rates of Disability Insurance, both under

current law and under various changes in policy. In addition, SSA should explore the

causes of the recent rapid improvements in mortality among the DI population. 
50

IV. EXPLANATORY MATERIAL ON SELECTED TOPICS

The Panel believes that several topics deserve a more lengthy explanation than

could be provided in the recommendations themselves. Some discussions are also fairly

technical in nature. This part of the report covers those issues.

A. ECONOMIC ISSUES

The Panel examined several economic issues at length: the procedures for

projecting real earnings growth, the implications of recent methodological changes in the

Consumer Price Index, and future trends in rates of labor force participation. In addition,

the Panel discussed various ways to make consistent projections of real interest rates and

the equity premium.

1. Real Wage Differential

Recommendation: See Executive Summary.

Explanation: The rate of growth of real earnings, known as the real wage

differential, has a moderate effect on the estimate of actuarial balance in the

OASDI program. Although it increases tax revenues and initial benefit payments

(or primary insurance amounts) by about the same percentage, retirement benefits

for those already retired grow only with a cost-of-living adjustment that reflects

inflation. The lag between earnings growth and benefit growth implies that higher

rates of real earnings growth improve the actuarial balance of the Trust Funds.

Although the growth of real earnings can be projected directly as the difference

between the growth of annual earnings per worker in covered employment and the

rate of CPI inflation, it is useful to link it to projections of future growth in labor

productivity. The linkage between productivity and real earnings has four major

components: 1) the share of labor compensation in total GDP, 2) earnings as a

share of total compensation, 3) hours per worker, and 4) the ratio of the GDP price

deflator to the CPI:

Thus, for example, the intermediate projections of the 1999 Trustees

Report are based on an assumed long-term rate of real earnings growth of 0.9

percent. That rate is the result of annual growth in labor productivity of 1.25

percent and a net decline in the linkages of 0.35 percentage points per year.

The projections are heavily influenced by past rates of change in

productivity and the linkages, but they are ultimately based on subjective

judgments about future trends. Those historical trends in productivity growth and

the linkages to real earnings growth are shown in Table IV.1. The historical data

earnings

worker

---------------------- output

hours

---------------- compensation

output

× ------------------------------------ earnings

compensation × ------------------------------------ hoursworker × ------------------ PGDP

CPI = × ----------------
51

have been adjusted by the Social Security Administration to be consistent with

current concepts. Thus, for example, historical data of the Consumer Price Index

have been adjusted to be consistent with current concepts.1 The table provides

measures of the average rate of change over various periods extending back to

1951.

Because of the difficulty of making projections over long periods, the Panel

believes that adopting a common historical period as a basis for the assumed future

growth rates would have significant value. The Trustees should deviate from the

standard framework only when they are relatively confident in a specific

alternative. It also seems reasonable to place greater reliance on the recent relative

to the distant past. Thus, the Panel concurs with prior suggestions that

consideration should be given to weighted averages of the historical data over a

standard period. An example of geometric-weighted averages for productivity and

the linkages is shown in the table, extending over the full period for which program

 1 Kenneth J. Stewart and Stephen B. Reed, “Consumer Price Index Research Series Using Current

Methods, 1978-98,” Monthly Labor Review (June 1999): 29-38.

Table IV.1.—Historical Trends in Productivity and Real Wage Components,

1951-97, With and Without CPI Adjustment

(Annual rates of change)

Period

Nonfarm

 business

productivity

Total

economy

productivity

Component linkages to average real earnings

Average

real

earnings CPI-W

Compensation

 divided by

GDP

Earnings

 divided by

compensation

Hours

 per

week

Price

ratio

Unadjusted data

1951-97 1.85 1.81 -0.06 -0.26 -0.26 -0.13 1.09 3.99

1973-97 1.10 1.00 -0.17 -0.19 -0.11 -0.45 0.07 5.39

1987-97 1.05 0.91 -0.11 0.08 0.28 -0.42 0.75 3.43

1992-97 0.96 0.78 -0.18 0.34 0.57 -0.44 1.08 2.66

Geometric

 weights 1.47 1.36 -0.06 -0.13 -0.08 -0.28 0.81 4.25

1999 Trustees Report

Alt. I — 1.56 0.00 -0.09 0.00 -0.10 1.37 2.30

Alt. II — 1.26 0.00 -0.17 -0.10 -0.10 0.89 3.30

Alt.III — 0.97 0.00 -0.26 -0.20 -0.10 0.41 4.30

Adjusted for CPI methodological changes

1951-97 1.85 1.90 -0.06 -0.26 -0.26 0.16 1.47 3.59

1973-97 1.10 1.09 -0.17 -0.19 -0.11 -0.09 0.52 4.92

1987-97 1.05 0.98 -0.11 0.08 0.28 -0.14 1.09 3.07

1992-97 0.96 0.82 -0.18 0.34 0.57 -0.23 1.33 2.41

Geometric

 weights 1.47 1.44 -0.06 -0.13 -0.08 0.01 1.18 3.86
52

data are available. The geometric weights decline at an annual rate of 0.95. While

such a projection strategy may seem unduly mechanical, it may provide a more

disciplined and readily acceptable basis for the projections.

a. Labor Productivity

The current intermediate assumption calls for a growth rate in longterm productivity of 1.25 percent. A sharp break in U.S. productivity growth

occurred in the early 1970s. Over the full period of 1951-97, growth averaged

1.9 percent per year, but only 1.1 percent since 1973. The current assumption

lies between these two numbers, and it is slightly below the geometricweighted average. Since 1995, U.S. productivity growth has accelerated, but it

is too early to determine if those improvements are more than cyclical. They

were, for example, preceded by several years of very poor performance even in

the early 1990s—part of the period some believe to be part of a new period of

greater productivity growth. The gains are heavily concentrated in durable

manufacturing, and there is little evidence of significant gains in industries that

are heavy users of the new information technologies. However, it is difficult to

measure the output of some of these service industries, and the productivity

gains may be held back by transitory problems of adjusting to the new

technologies. On balance, the Panel concluded that it would be reasonable to

increase the current assumptions slightly, and the Trustees should be prepared

to make large adjustments if the recent gains in actual productivity are

sustained.

The measurement of labor productivity is also affected by the recent

methodological changes in the CPI because some of those changes will lead to

revisions in the national accounts. Preliminary estimates of those revisions are

incorporated in the historical data of Table IV.1; but the publication of the new

national accounts will alter both the estimate of productivity growth and the

rate of change in the price ratio. For the Trustees’ ultimate focus on real

earnings growth, however, it makes little difference if the methodological

reforms are allocated to changes in productivity or the relative price ratio or

some combination.

b. Linkages Between Productivity and Real Wage Growth

Historical rates of change in the four components of the linkages are

shown in Table IV.1. The Panel believes that the net effect of the intermediate

assumption is to provide an overly pessimistic view of future growth in real

wages relative to productivity growth. Much of the past decline in the ratio of

earnings to labor compensation can be traced to the growth in employer

contributions to social insurance and private health insurance. Future increases

in contributions for social insurance are explicitly not to be incorporated in the

projections, and projections of health insurance costs are extremely
53

problematic. On the other hand, the recent sharp rise in the ratio is partly due to

an unsustainable decline in employer contributions for private pensions,

induced by large capital gains in existing retirement accounts. Questions were

also raised by the Panel about the assumption of continued declines in hours

worked. Hours worked have actually increased over the last decade.

Accordingly, the Panel recommends a smaller rate of deterioration (by 0.05

percent) in both the ratio of earnings to labor compensation and in hours per

week.

The greatest uncertainty is associated with projections in the ratio of

output prices (those that apply to GDP) to the Consumer Price Index for urban

wage earners. In the past, the CPI tended to rise much more rapidly than the

GDP price deflator, but the recent revisions in the methodology for computing

the CPI should eliminate most of the difference. The current assumption of a

0.1 annual percentage rate of decline in the price ratio has been justified by the

expected difference between price changes measured with a Laspeyres index,

as used in the CPI, compared to the chained price index of the national

accounts. But that expected difference may decline in importance when the

CPI weights are updated more frequently. Large differences also arise in the

composition of the goods and services that are included in the two indices that

create greater uncertainty about relative rates of change. In particular, major

sectors of the economy, such as government and nonprofit institutions, are

assumed to have no significant productivity growth, and the price indices

simply parallel the growth in wages. Many of these sectors are excluded from

the CPI. Prices of imported products are also fully reflected in the CPI, but

have no direct impact on the GDP price deflator. Recent differences are

strongly influenced by the falling prices for computers which are more

important in GDP than in consumption. On balance, the Panel concludes that

the current assumption of a small annual decline in the price ratio over a long

period of time is reasonable.

2. Consumer Price Index

Recommendation: See Executive Summary.

Explanation: Changes in the economy-wide rate of inflation have only

modest effects on the financial balance of the fund, because the system is largely

indexed against variations in the price level. However, while the methodological

changes in the computation of the CPI will have no effect on the future path of

nominal wages, initial benefits, or interest rates, they will reduce the annual costof-living adjustments. Reductions in the cost-of-living adjustments have a

cumulative effect on individual beneficiaries that increases with the number of

years that they live after age 62. The changes in the CPI since 1995 are estimated

to have reduced the annual rate of increase in the CPI by about 0.5 percentage

points per year. That is, the reforms will reduce a typical retiree’s benefit at age 72
54

by about 5 percent relative to the situation under the 1995 concepts. That translates

into an improvement in the actuarial balance of about 0.75 percentage points over

the period of 1999-2073.

The Trustees’ projections incorporated the bulk of these CPI changes by

creating a historical series that was designed to be consistent with the current

methodology. The Panel recommends that the Trustees now incorporate improved

estimates of a consistent CPI, such as recently published by the Bureau of Labor

Statistics (BLS). The BLS incorporated a larger number of the changes and had

greater information on which to base its judgments about the effects on the

historical data.

As shown in Table IV.1, the current assumptions of the long-term rate of

change in the CPI seem consistent with the historical experience, although they are

higher than the experience over the past decade. The Panel recommends no change

in the assumed rates of change for each of the three alternatives.

3. Rates of Labor Force Participation

Recommendation: See Executive Summary.

Explanation: The Trustees’ projections assume that the age-specific rates

of labor force participation for both men and women will be relatively constant in

the future. The aggregate participation rate declines slightly in the projections

because of a gradual aging of the workforce. The Panel believes that the

projections are consistent with developments during the 1990s in which the prior

patterns of a declining rate of participation for older males and a rising rate for

females appear to have come to an end. However, the projections assume a

continued large difference between the participation rates of men and women—

about 15 percent on average—that struck some members of the Panel as too large.

The participation rates of women should be reexamined on a cohort basis to assure

that current high rates of participation by younger age groups are carried forward

in future years. That is, for older individuals, female labor force participation rates

relative to male participation rates look too low. 

Much additional research is also needed to determine the influence of

increases in the Social Security retirement age on the labor force participation of

older workers. Here we believe that a much greater turnaround is possible and

that, moreover, the model needs to account consistently for the influences of such

policy changes as increases in retirement age, changes in annual and lifetime value

of benefits, and labor force demand, among others.

The Panel also believes that variations in the participation rates should be

incorporated as part of the alternative high- and low-cost projections.
55

4. Return on Government Bonds

Recommendation: See Executive Summary.

Explanation: The Trustees Report shows the nominal interest rate on

special public-debt obligations issued to the Trust Funds as one of the economic

assumptions. In fact, that nominal interest rate is directly related to the assumed

real rate of interest and the assumed rate of inflation. Hence the Panel discussed

the importance of making consistent projections of interest rates in the future.

Consistency requires recognizing the linkages among real and nominal interest

rates and the rate of inflation. 

For low rates of inflation and low nominal interest rates, the real interest

rate is well approximated by the nominal interest rate minus the rate of inflation.

Nominal interest rates on government bonds of various maturities are readily

observable in financial markets, and the long-term rate of inflation suggested by

the Technical Panel elsewhere in this report is 3.3 percent per year. Therefore, in

order for the real interest rate to be consistent with the projected rate of inflation,

the (long-term) real interest rate should be approximately equal to the long-term

nominal interest rate minus 3.3 percent.

An alternative source of information about the real interest rate is

potentially available from the prices of Treasury Inflation-Indexed Securities

(TIIS, formerly called TIPS), though the market in these securities is still relatively

new and perhaps not as liquid as the market for conventional Treasury securities.

However, as this market matures, it may prove to be a useful guide to future

inflation and the real interest rate.

Until then, we recommend that in choosing nominal interest rates and

inflation rates—and, implicitly, a real interest rate—SSA use information available

in other financial market prices, moderated by consideration of historical trends,

that is reflected in “the term structure of interest rates.” The term structure of

interest rates is the relationship between the maturity of government securities and

their yield. Embedded in the term structure is an implicit estimate of future shortterm interest rates. According to the “expectations hypothesis,” the long-term rates

reflect the market’s expectations about what rates of return will be in the future.

The logic underlying the expectations hypothesis is that (risk-neutral) investors

with long horizons, say 30 years, could invest in 30-year bonds or in a sequence of

30 1-year bonds. If the expected final return over 30 years from investing in the 30-

year bonds were significantly higher than the expected return over 30 years from

investing in a sequence of 1-year bonds, investors would rush to invest in 30-year

bonds. Such behavior would drive up the price and drive down the expected rate of

return on the bonds. Thus, the expected return on a 30-year bond cannot

significantly exceed the expected return on a sequence of 30 1-year bonds. A

similar argument implies that the expected return on a 30-year bond cannot be

significantly lower than the expected return on a sequence of 30 1-year bonds

(because investors would sell 30-year bonds, thus driving down the price and
56

driving up the expected return on the bonds). Therefore, the expected returns on a

30-year bond and on a sequence of 30 1-year bonds are approximately equal.

Hence the annualized expected rate of return on a 30-year bond is approximately

equal to the average of the expected rates of return on 1-year bonds over the next

30 years. Thus, it is common to use the term structure to try to infer expectations of

future interest rates.

Using the term structure to predict real rates is complicated by the fact that

we can only observe the nominal term structure. To infer expectations about future

real rates, we must subtract expected inflation, an unobservable quantity, from the

observed nominal rates. Since SSA must forecast inflation for other calculations, it

makes sense to use this inflation forecast as the basis for determining the real

interest rate from nominal interest rates. Hence, we recommend subtracting the

SSA inflation estimate from the long-term (i.e., over 10-year) nominal rate in the

term structure to approximate the long-term real interest rate. Consistent with the

Technical Panel’s recommendation of 3.3 percent per year for the rate of inflation,

the long-term real interest rate should be about 3.3 percent less than the long-term

nominal interest rate. The current term structure is fairly flat in the long end, with

long-term interest rates close to 6 percent at the time the Panel met. This leads us

to recommend a real rate assumption of 2.7 percent. To bracket the range of likely

deviations from this value, we further recommend that the rate be set to 2 percent

in the high-cost scenario and 3.5 percent in the low-cost scenario.

Basing the real interest rate entirely on the term structure of interest rates

without considering other evidence, however, would be unwise for three reasons.

First, factors other than expectations of future real rates can temporarily influence

the term structure. Second, there is considerable uncertainty about expected

inflation. And third, the expectations hypothesis has not performed well

historically. We therefore recommend also considering historical experience in

determining rate estimates. 

Among the many interest rates available, the first item to determine is the

appropriate reference rate. During the 1990s, the rate on new issues to the Trust

Funds has averaged about 20 basis points above the 10-Year Treasury Constant

Maturity Rate and about 20 basis points below the 30-Year Treasury Constant

Maturity Rate. (A basis point is 1/100th of a percentage point.) Because SSA is

required to credit itself with a weighted average of bond rates, either one, adjusted

by the corresponding average basis point differential, would seem to be a

reasonable benchmark. 

Based on standard data from Ibbotson, over the period 1926 to 1997 the

realized real return on long-term government investments has averaged

approximately 2.4 percent, which is below the 2.7 percent that we recommend as a

median value. The series on long-term government bonds goes back further than

that for Constant Maturity Treasury securities, so the exact maturity of the
57

underlying bonds cannot be determined. Table IV.2 shows the average Constant

Maturity Treasury Rates over the last 5 years, based on data available from the

Federal Reserve. 

Source: Federal Reserve Bank of Chicago.

The table reveals that realized real rates in the 1990s have been much

higher than those earlier in the 20th century. In fact, they exceed the recommended

low-cost scenario. We recommend a lower rate than has been the case in recent

historical experience partly because the high realized rates in recent years are often

attributed to lower than anticipated inflation rates. However, it may become

necessary to adjust the assumed rate upward if the recent higher real rates persist.

5. The Equity Premium 

Recommendation: See Executive Summary.

Explanation: For many reform proposals, the Office of the Chief Actuary

is called upon to make a projection of the average real rate of return on stocks. The

stocks may be held inside the Trust Fund or in individual accounts overseen by

SSA. Much of the Panel’s discussion focused on how the risk and returns

associated with these investments should be reflected both in calculations such as

the actuarial balance, and in any summary comparison of proposals. 

Here we elaborate on what is known about the equity premium and on the

reasons for our recommendations. The recommendations can be summarized as

follows:

• The Panel recommends that the average equity premium be set to a constant

3 percent over the assumed real rate of interest on government bonds used in

other SSA calculations. 

Table IV.2.—Average Real Rate on Constant Maturity Treasury Securities 

(CMT’s), January 1994 to August 1999

10 year

CMT

30 year

CMT

Minimum nominal rate ............................... 4.28 4.81

Maximum nominal rate .............................. 8.00 8.13

Average nominal rate .................................. 6.24 6.52

Average special issue differential ............... 0.21 -0.07

Average CPI inflation.................................. 2.47 2.47

Average adjusted real rate .......................... 3.98 3.98
58

• SSA should be prepared to modify the assumed average equity premium as

new insights on the size and determinants of the equity premium become

available. 

• When examining reform proposals that involve alternative investments, results

should first be presented reflecting a government bond rate of return on those

investments. This will avoid the false inference that the equity premium comes

with no corresponding increase in risk or other cost for society.

• Calculations that explicitly incorporate the equity premium should also include

a price of risk. This can be accomplished by adjusting the discount rate used

for investment cash flows or by option pricing methods. SSA should study

these alternatives and further develop and standardize the methodology used to

evaluate risky investments. 

Traditionally, the equity premium refers to the difference between the

expected return on a diversified stock portfolio and the expected return on shortterm government securities (for example, 6-month Treasury bills). Since

expectations cannot be directly measured, discussions of the premium generally

focus on the historical realized equity premium, or ex post premium. The ex post

equity premium has averaged between 6 percent and 7 percent per year this

century. Looking forward, however, requires an estimate of the ex ante equity

premium.

In recent years, the premium on stocks has significantly exceeded the

historical average. For example, since 1990 the average premium on stocks has

been approximately 13 percent per year. Since most of these returns were in the

form of capital gains rather than dividend increases, price-dividend ratios are now

at record levels. At the same time, price-earnings ratios, which some consider more

stable indicators of firm valuation, are near record levels. Both these measures

suggest that for equity returns to equal what they have been historically,

extraordinarily high levels of earnings growth must be sustained in the future. The

reason is as follows. If prices are high relative to current dividends, it must be that

investors anticipate very high future dividends to compensate. Consistent with this,

substantial empirical evidence shows that a large value of the price-dividend ratio

predicts lower stock returns in the future (for example, Campbell and Shiller

1998). 

Several qualitative explanations have been suggested for the price run-up

and for lower expected returns in the future. “Rational” explanations include the

fact that the baby boom is entering peak saving years, that productivity has

escalated due to technological improvements, and that there have been major

political changes around the world. Rates of participation in the stock market are

increasing, in part because the growth of mutual funds has lowered the cost of

investing and made diversification feasible. On the other hand, “irrational

exuberance” could be fueling the price rise. If so, the bubble could eventually
59

burst, or prices could stagnate for years. For all of those reasons, many observers

believe that expected returns looking forward are lower than they have been in the

past. 

In considering a recommendation for the ex ante equity premium, the Panel

restricted its attention to choosing a constant value for the equity premium over the

entire 75-year projection period. A reasonable alternative is based on the notion

that the current price-dividend and price-earnings ratios are very high. This

alternative would project stock prices to fall in the near term or medium term (thus

earning a very low, or even negative, equity premium in the near term or medium

term). After the fall in stock prices, stocks would earn an equity premium closer to

the historical average of 6 percent or 7 percent per year. We chose not to follow

this alternative strategy because any prediction of the size and timing of a fall in

stock prices is necessarily highly speculative.

The recommendation of the Panel was clearly influenced by the high level

of stock prices at the time of its report. The Panel recognizes, therefore, that the

Trustees or any other group attempting to make its own projection would need to

take into account any significant change in stock prices between the time that this

report is issued and the time it makes its own assumption. In effect, the Panel

believes that the higher such measures as the price-earnings ratio and the pricedividend ratio, the lower should be the equity return attributed to stock investments

either by the Trust Funds or in individual accounts.

a. The Equity Premium and SSA Projections

The Panel therefore recommends that SSA use a conservative forecast

of an ex ante equity premium of 4 percent per year over the short-term riskless

rate. However, SSA actually uses a benchmark based on a long-term bond

return, and the long-term bond return in the last 5 years has averaged

approximately 1 percent above the short-term government rate. For instance,

the average annual return since January 1994 on 6-month Treasury securities is

5.21 percent, versus 6.23 percent on the 10-year constant maturity Treasury.

Hence, recommending a 4 percent per year equity premium over the risk-free

rate is equivalent to recommending a 3 percent premium over SSA’s

benchmark real rate. 

To think about how the equity premium should be treated in SSA

projections, it is important to understand why the premium exists in the first

place. The equity premium is understood by economists to be compensation

for the risk of investing in stocks rather than in safe government securities—it

is the “price of risk.” For the same expected rate of return, investors would

prefer to put their money in safe bonds rather than risky stocks. To induce them

to hold stocks instead, the expected return on the stocks must be higher than on

bonds. If Trust Fund assets are invested in the stock market, the rules for how

shortfalls are covered will determine whether taxpayers or beneficiaries bear
60

the market risk. As a first approximation, it is reasonable to assume that the

higher expected returns on the stock investments are offset by the cost of the

increased risk to taxpayers and beneficiaries. Equivalently, if 1 dollar of

investment is transferred from bonds to stocks, there is no net benefit to the

system.

Under OCACT’s current method of evaluating proposals featuring

investments in stocks, however, a dollar of stock investment will appear to be

worth more than a dollar in present value terms. Why this occurs is easiest to

understand in a simple numerical example. Imagine that a plan calls for

investing $1 million in the stock market for 1 year. Using the recommended

expected equity premium of 3 percent over the recommended government

bond rate of 2.7 percent implies a return of 5.7 percent, and an expected cash

flow of $1,057,000. The cash flow later feeds into calculations, as perhaps best

demonstrated by an actuarial balance, that require taking a present value. Since

all expected cash flows are discounted at the government bond rate, the present

value of the investment would be calculated as $1,057,000/1.027 = $1,029,211.

It appears that the plan has improved the financial status of the system by

$29,211, just by moving $1 million into equities for a year. If the investment is

held for more years, the distortion is magnified by the effect of compounding.

There are several ways to avoid the bias. The simplest is to adjust the

discount rate used to discount cash flows from stocks. The standard textbook

approach (and the one used by private pension funds) is to use a risk-adjusted

rate. In the context of the above example, the cash flow at the end of the year

should be discounted at 5.7 percent rather than at 2.7 percent. The higher

discount rate reflects the higher return required as compensation for risk.

Discounting $1,057,000 at 5.7 percent results in a present value of $1,000,000,

and hence no distortion. Note that this is equivalent, in present value terms, to

assuming that the stock investment only returns the government bond rate and

then discounting by the government bond rate. We recommend the latter

approach because it represents the smallest deviation from SSA’s current

methodology that does not introduce a bias in favor of stock market

investments. 

We also recommend that SSA explore more sophisticated approaches

to quantifying the risk and return from stock market investments. Options

pricing theory allows us to calculate how much the capital markets would

charge for certain types of return guarantees. For instance, a put option

guarantees that the return on a stock will be no less than a pre-specified floor

level, since it gives the owner of the option the right to sell the stock on a prespecified future date at a pre-specified price. If Social Security recipients gain

when the stock market appreciates, but are protected from large falls in stock

prices, it is as if they own a put option, given to them by future generations of

taxpayers. In general, the cost of reducing risk can be equated to the price of

the options purchased. There are two advantages to using the options pricing
61

approach. First, the method quite reliably explains market prices of options,

eliminating the need for complicated and potentially controversial modeling

assumptions. Second, the formula for pricing options is easy to implement and

familiar to the financial community.

b. Contributions from Academic Research

Both the equity premium and the prospect of investing Trust Fund or

individual account assets in the stock market have spurred a large volume of

academic research and debate. It is worthwhile to briefly summarize the major

issues here. We recommend that SSA follow the research and consider its

merits in developing a policy on evaluating stock market investments.

The “equity premium puzzle” refers to the finding that the observed

historical equity premium is higher than can be easily explained in a standard

utility-based economic model. If people are only moderately risk-averse, it is

surprising in the context of the model that they require a 7 percent premium for

stock investments. Such a large premium is especially surprising considering

that market downturns have been relatively infrequent and, with the dramatic

exception of the Great Depression, not too severe. Economists have varied

reactions to the puzzle. Some conclude that the models are inadequate and that

the premium is fair, others conclude that the high returns were a historical

accident that was not entirely anticipated. Still others view the high premium

as a near arbitrage opportunity and counsel people to invest more in the market

to take advantage of the high return relative to risk. The debate pertains to SSA

primarily because the lack of consensus on how to explain historical returns

underscores the difficulty of predicting a forward-looking equity premium. 

Investment of Trust Fund or individual account assets in the stock

market has potential implications for general equilibrium and distributional

considerations. Some researchers suggest that if SSA transfers large sums of

money from government securities into stocks, the forces of supply and

demand will increase the cost of borrowing to the government and lower the

return on stocks. Reliable estimates of the size of these effects, and further

exploration of the factors that might mitigate them, await further research. A

number of researchers have pointed out that investing Trust Fund assets in the

market on behalf of low-income beneficiaries may improve welfare. If that

group is unable to save on their own but would like to invest in the market if

they had the money, then SSA can make them better off by investing on their

behalf. Trust Fund investments also help that group avoid the potentially high

transactions costs involved with small individual investments. Of course, other

beneficiaries may oppose exposing their retirement income to stock market

risk. Until there is some consensus on how to quantify those benefits, it seems

prudent to abstract from the effects as recommended above.
62

B. DEMOGRAPHIC ISSUES

The Panel examined the projections of marital status and mortality at some length.

It also looked at the process of projecting levels of immigration. 

1. Marital Status

Recommendation: See Executive Summary.

Explanation: The Trustees’ current methodology for estimating the marital

status of future beneficiaries has lacked key data for a decade. Specifically, the

method requires annual rates of new marriage and divorce by age of husband

crossed with age of wife. Data for age-specific marriages and divorces were

reported for a substantial subset of states by the National Center for Health

Statistics through 1988, when budget shortfalls caused the center to eliminate

them. No other statistical agency has filled the breach, since Social Security is

almost unique among government programs in needing information about an

individual’s marital rather than household status. Consequently the actuaries have

had to project the relative levels of marriage rates by age based in large part on

survey data from the 1980s. Marital patterns have been changing throughout the

1990s, as suggested by data for total marriages that continue to be available.

Given the continued absence of up-to-date age-specific data, as well as the

questionable quality of other data currently available, the Panel recommends that

SSA and the Trustees investigate alternative methods and data sources. In doing so,

it will be important to pay particular attention to data that will produce projections

that are both representative across states and regions as well as across demographic

groups. SSA could, for instance, consider modeling data from marital histories

gathered by the Census Bureau via regularly conducted national surveys together

with Social Security records, and check the results by gathering data from those

states that supply current data (adjusting for any bias resulting from incomplete

coverage).

The Social Security Administration’s Office of Research, Evaluation, and

Statistics has developed a shorter-term model (MINT) that includes demographic

estimates for the baby boom cohort. This model includes more recent information

about age-specific marriage and divorce patterns based on data from the Survey of

Income and Program Participation, combined with Social Security records. Its

results confirm independent projections, such as Goldstein’s (Demography, August

1999). In particular, the MINT model suggests that the Trustees may be

underestimating the never-married and divorced proportion of the future elderly.

Close attention needs to be paid to projections of these groups.

This raises two concerns, one regarding eventual costs to the system and

one regarding the system’s goal of providing income security for the elderly. First,

married people, widows and widowers, and divorced people whose marriage lasted
63

for at least 10 years can claim benefits as spouses or survivors if such a benefit

exceeds the benefit they would receive based on their own earnings. Generally

lower lifetime earnings of women, relative to men, cause the majority of women to

take this option. While the proportion of married women who will benefit by

claiming benefits on their own earnings is increasing, the MINT model estimates

that the majority of baby boom women will still do better to claim a spouse or

survivor benefit. At the same time, an increase in the proportion of female benefit

claimants who have never married, or who divorced before 10 years of marriage,

will reduce costs to the Trust Fund, since fewer women than projected will have

the option of claiming a higher spousal or survivor benefit. 

Second, the MINT projections of never-married baby boom women

suggest that the increase is particularly pronounced among the African American

population. Elderly African American women already have relatively high poverty

rates, as do never-married and divorced black women in general. It is important

that those who are assessing Social Security reform proposals be able to assess

their likely impact on those who are particularly vulnerable. 

Thus, the Panel urges the Trustees to refine both short-term and long-term

capabilities to estimate the effects on the Trust Fund of various reform proposals

given the treatment of spouses and survivors, divorced persons, and never-married

persons, and the likely number of people in each group. It also urges other parts of

the government to be responsive to the important need of Social Security for

improved survey data in this area.

2. Immigration

Recommendation: See Executive Summary.

Explanation: The Panel notes that of the three components of net

immigration, only one is well documented. The accuracy of the number of legal

immigrants is likely to be quite high, but neither the number of emigrants nor the

number of illegal immigrants is known with precision.

Partly because of the limited data on current emigration and illegal

immigration, the Panel feels that the range of uncertainty expressed in the

Trustees’ low and high assumptions is too narrow. Moreover, there have been

periods in the past when legal immigration fell well below that allowed by statute.

On the other hand, there is some doubt as to whether recent attempts to curb illegal

immigration are effective. Some writers have suggested that the combination of

projected future labor shortages in the United States and rapid population growth

in developing countries will lead to higher immigration, legal or otherwise. 

The Trustees’ low assumption of 750,000 is well above the lower bound of

300,000 net immigrants in a recent forecast by the Bureau of the Census. The

Trustees’ high assumption of 1,150,000 is below that of the Census Bureau’s high

forecast of 1,370,000. Therefore the Panel recommends that the Trustees allow for
64

a significantly broader range of possibilities in the alternative population

projections, perhaps on the order of plus or minus 50 percent of the central

assumption.

3. Mortality

Recommendation: See Executive Summary.

Explanation: A workshop on mortality projection convened by the

Institute of Medicine and the National Research Council, while recognizing the

great uncertainty in long-term mortality forecasts, generally supported forecasts of

mortality decline at average historical rates. Those average historical rates imply

more rapid decline than that projected by SSA in its intermediate projections

(Stoto and Durch 1993: 558, 571-72. The Lee-Carter 1992 forecasts were viewed

favorably, at least for the short and medium term; they predict mortality decline

that are, overall, more consistent with the SSA rapid decline scenario.). These

historical rates of decline are in line with the summary recommendation of this

Panel. A recent review (Wilmoth 1998) also takes this position. Some wellinformed articles also argue that future mortality declines will be more rapid, or

less rapid, than the historical averages (Olshansky et al. 1990; Manton et al. 1991).

The Panel believes, however, that these historical rates provide a prudent

intermediate forecast, although they currently correspond more closely—at least in

life expectancy at birth after a few decades—to the SSA high-cost assumption for

mortality. Some evidence in support of that view is reviewed below.

a. The Forecasts in International Context

According to the SSA intermediate assumption, life expectancy at birth

for U.S. females will not reach the level currently enjoyed by French women in

1995 until 2033; by Swedish women, until 2026; and by Japanese women, until

2049. For U.S. males, the corresponding dates are 2002, 2026, and 2029. It is

difficult to understand why the United States should lag so far behind other

countries. Indeed, the SSA assumptions for females imply that it will take

more than three times as long to achieve gains in life expectancy as it took

France and Japan, and twice as long as it took Sweden, with differences for

males somewhat less dramatic. 

Because such a high proportion of people in the United States now

survive into old age, mortality trends at older ages have a very important

influence on life expectancy at birth. A careful and highly regarded study of

trends in mortality for those above age 80 in nine countries with good data

shows that mortality decline at these ages accelerated steadily from the 1950s

to the 1980s (Kannisto et al. 1994:802). The average annual rate of decline for

women ages 80 to 89 rose from just under 1 percent in the 1950s to over 2

percent in the 1980s, with the corresponding figures for men going from just

over 0.6 percent to just over 1.4 percent. Rates of decline at ages 90 to 99 were
65

similar to those just described for males, but a bit less dramatic. During the

1980s, the average annual rate of decline in 19 countries with good data was

1.8 percent for women in their 80s, and 1.2 percent for women in their 90s. For

males, the corresponding figures were 1.2 percent and 1.0 percent. The rates of

decline projected for the United States by SSA are one-half to one-third of

those rates, at 0.6 percent for females in both age groups, and about 0.5 percent

for males in both age groups (SSA Actuarial Study No. 112). A study by

Horiuchi and Wilmoth (1995) assesses international data showing similar

though less dramatic contrasts with the SSA assumptions for mortality for ages

60 to 64 and 75 to 79 in five countries with low mortality. 

It is possible, of course, that the United States is simply different from

these other countries. However, it easier to see why this might be so for levels

of mortality than it is for rates of decline. At the least, the experience of other

nations demonstrates conclusively that U.S. mortality can fall a long way

without encountering biomedical limits. Indeed, mortality in Japan has already

achieved more than 75 percent of the gains foreseen for the United States in

2070, according to the SSA intermediate projection. 

b. Long-Term Trends in U.S. Mortality

Between 1900 and 1996, the age-adjusted death rate for U.S. males

declined at the rate of 0.94 percent per year, and for females at 1.30 percent.

SSA assumes that over the next 75 years, the rates of decline will average 0.58

percent for males, and 0.51 percent for females, substantially slower than the

historical averages (based on tables presented to the Technical Advisory Panel

in March). It is arguable that trends back to the beginning of the century are

less relevant than the experience in its second half, say since 1954 (date chosen

to coincide with the period divisions in the tables provided). From 1954 to

1996, the average rate of decline for males was 0.80 percent, including a period

from 1954 to 1968 when mortality of males was actually increasing. That rate

is still substantially higher than the assumed future rate of decline of 0.58

percent up to 2073. For females from 1954 to 1996, the rate of decline was

1.13 percent, more than twice as great as the assumed future rate of 0.51

percent. The rates of decline assumed by SSA imply that the age-adjusted

death rate in 2073 would be 18 percent greater for males than the level reached

by extrapolating the average rate since 1954, and for females the SSA

assumption would be 60 percent higher than the extrapolated historical level. If

we focus on the more relevant death rates above age 65, the same kind of

calculation shows that SSA assumptions would be 13 percent higher for males

in 2073 and 56 percent higher for females. 

The main divergence from historical trends occurs for females. Some

justification can be found in the slow rate of decline (0.47 percent per year

overall, and only 0.33 percent above age 65) observed during the most recent

period, 1982-1996. It is important that the slowdown be understood, and this is
66

a prime research need. One possibility is that the slowdown reflects the delayed

effects of an increase in smoking by women. In our view, however, it is prudent

to assume that the slowdown is temporary, based on the continuing rapid and

accelerating rates of decline observed for females in other countries. The rate

of decline since 1982 is by far the slowest reported for any of the periods in the

table presented to the Panel. 

The high-cost assumption in the 1999 Trustees Report is that the death

rates adjusted for age and sex decline by 1 percent per year over the next 75

years, about 0.5 percent faster than the intermediate assumption. This is a bit

slower than the average female experience since 1954, and a bit faster than the

average male experience. We believe that it would be prudent to adopt the type

of life expectancy expected by 2074 in the current high-cost assumption in

deriving a new intermediate assumption. 

Although SSA has been criticized for assuming that mortality declines

at younger ages will be far slower than the historical average experience, we

believe that their assumption is well-founded and should be maintained.

Examination of the age pattern of mortality decline in the United States over

the past 50 years, and in other countries with low mortality (such as Japan,

Sweden, and France), indicates that there has been a shift in this pattern. The

age pattern of mortality decline has moved away from more rapid declines at

younger ages, and toward more equal rates of decline or even more rapid ones

at older ages. 

c. Biomedical Considerations and Causes of Death

The discussion has focused on historical and international trends in

mortality, with no reference to causes of death, biology, or medicine. Some

analysts argue that biological limits to mortality will make it increasingly

difficult to achieve gains in the future, as deaths from infectious disease have

largely been overcome and the remaining causes of death have more to do with

degenerative processes. Other analysts, however, interpret the biological

evidence to suggest that dramatic gains may be imminent. Although the

demographic approach may seem to ignore a large body of knowledge, it is not

clear that forecasts could be improved or would be altered by introducing

insights from other fields. Over the past century, there has been a major change

in the structure of deaths by cause in the United States, yet the rate of mortality

decline has been remarkably steady, for example as summarized by the LeeCarter (1992) k-index. Experts in some causes of death need not be particularly

successful at forecasting its overall future progress over the next 75 years. 

Health research is directed sometimes at one cause of death, sometimes

at others. As we look to the future through a biomedical lens, it is easy to focus

on the potential for dramatic progress (genome project, specific medical

procedures, the mortality of population subgroups with healthy life styles).
67

However, it is also easy to focus on the potential for stagnation or deterioration

(AIDS, drug resistant strains of old diseases, trends in Eastern Europe and subSaharan Africa). We suggest that given our current state of knowledge, the best

guides we have to the future are past trends and international experience.

Trends have been surprisingly regular over the past century, and international

experience suggests at least a continuation and perhaps an acceleration of longterm trends in the United States, at least at older ages. There is no suggestion in

the international mortality trends that an upper biomedical limit to life

expectancy is being reached. On the contrary, mortality decline at older ages is

accelerating. 

d. References 

Horiuchi, Shiro, and John R. Wilmoth. 1995. “The Aging of Mortality

Decline.” Annual Meetings of the Population Association of America, San

Francisco, April 6-8, and the Gerontological Society of America, November

15-19.

Kannisto, Vaino, Jens Lauritsen, A. Roger Thatcher, and James Vaupel.

1994. “Reductions in Mortality at Advanced Ages: Several Decades of

Evidence from 27 Countries.” Population and Development Review v.20, n.4

(December): 793-810.

Lee, Ronald D. and Lawrence Carter. 1992. “Modeling and Forecasting

the Time Series of U.S. Mortality.” Journal of the American Statistical

Association v.87, n.419 (September): 659-71.

Manton, Kenneth, Eric Stallard, H. Dennis Tolley. 1991. “Limits to

Human Life Expectancy: Evidence, Prospects, and Implication.” Population

and Development Review v.17, n.4 (December): 603-38.

Olshansky, S. Jay, B. A. Carnes, and C. Cassel. 1990. “In Search of

Methuselah: Estimating the Upper Limits to Human Longevity.” Science

v.250, n.4981 (November): 634-40.

Stoto, Michael A. and Jane S. Durch. 1993. “Forecasting Survival,

Health, and Disability: Report on a Workshop.” Population and Development

Review v.19, n.3 (September): 557-82. 

Wilmoth, John R. 1998. “The Future of Human Longevity: A

Demographer’s Perspective.” Science 280: 395-97.
68

C. METHODOLOGY AND MODELS

1. Micro Models 

Recommendation: See Executive Summary.

Explanation: The Technical Panel was impressed with the presentations

made by the Office of Policy and its MINT (Modeling Income in the Near Term)

and cohort projection models. These models are showing that, under some

reasonable projections, the demographic and distributional characteristics of the

baby boom generation in retirement are likely to be quite different than those of the

current generation. In particular, according to these models, women’s odds of

being divorced and never married will rise, as will the probability that future

cohorts of women will have their own private pensions and entitlements to old-age

and survivors retirement benefits based on work, not marriage. Without having

time to fully assess these models, the Panel nonetheless felt that this type of

development was absolutely crucial. And it is extremely timely since these are the

types of outcomes that need to be examined under alternative reform scenarios.

Steve McKay and others within OCACT have been working on developing a

microsimulation model using SSA’s Continuous Work History Sample, Master

Beneficiary Record, and NUMIDENT files. More recently, they have done work

with the Office of Research, Evaluation, and Statistics based on the CORSIM

model. Over time, the capabilities of SSA and other governmental agencies in

distributional forecasting should grow to the same level of expertise and accuracy

as the macroeconomic forecasts by OCACT. 

As noted in the recommendations, it is impossible to know the potential

impacts of a variety of reforms—both actuarial cost and distributional impact—

without such models. We note, in particular, the inability of reform commissions

and members of Congress to put various reforms of spousal and survivors benefits

in their proposals because they could receive no assessment from SSA of their

costs and distributional impacts. In this particular case, the goal of any reform is

generally to reach some distributional objective—e.g., lower poverty rates for the

very old—and that goal must be assessed against cost and impact on who would

pay to achieve the aim. But the issue goes beyond the inability to assess options

offered by others in a timely manner. Neither SSA nor other government agencies

can provide information on some types of reform options to policy makers—either

formally in the form of studies or informally in the form of policy advice.

Although SSA has developed some capabilities in these areas in recent years, the

Panel hopes that SSA as well as other government agencies will continue to

increase their investment in these capabilities. Within SSA, the Office of the Chief

Actuary and the Office of Policy, among others, need to work closely together to

develop this capability, as the issue goes beyond any particular office.
69

2. Public Access 

Recommendation: See Executive Summary.

Explanation: The projection model of the OASDI system is complex and

understood by few. Serious policy discussions are hampered by the fact that so

few people understand the methodology. Because other agencies or groups do not

understand SSA methods, those groups try to develop alternative models without

the benefit of SSA’s 65 years of experience. Both SSA and these other groups

spend substantial amounts of time comparing and contrasting these competing

models. In addition, even well-informed consumers do not understand SSA

methods. Thus, SSA upper management spends substantial amounts of time

defending their projections.

The model’s complexity leads to perceived and real problems as well. In

many places, the development of the system appears to be uneven. And the fact

that the current system is developed and managed by different people implies that

the parts sometimes do not fit together smoothly. This, of course, is only a natural

development from improvements made over time and the level of demand on the

Office of the Chief Actuary. Nonetheless, one consequence is that the

methodology is frequently difficult to explain and cumbersome to use. A way to

better tap both outside and inside resources, we believe, would be to provide an

overview of the entire methodology. An overview would help both the SSA

actuaries and other professionals in understanding the working of the various

components.

We recommend that adequate resources be provided to better document the

current system. Although this point has been made repeatedly (see the 1958

quotation below), documentation still has not happened. We recognize that not

everything can easily be documented and cross-referenced, but the perfect need not

be the enemy of the good. To help initiate such an effort, a prototype summary

document titled, “Summary of Social Security Administration Projections of the

OASDI System,” was prepared under the direction of Panel member Edward W.

(Jed) Frees and will be forthcoming from the Advisory Board.

The more that SSA can document its current work, the more it would open

itself to outside academia and thus be able to take advantage of many more

intellectual resources to improve the projections. In particular, the availability of a

summary would make the work of future advisory panels more useful. A

supplemental approach suggested by the 1995 Technical Panel, would be to create

an ongoing advisory Technical Panel. We have suggested either that an ongoing

Panel be established or that SSA obtain sets of advisors on topics of particular

importance. The idea may be particularly fruitful given the ongoing nature of the

Social Security Advisory Board.
70

A quotation from the Subcommittee for Actuarial Cost Estimates of the

1958 Advisory Council is still apt today. The quotation appears in Actuarial Study

49, “Methodology Involved in Developing Long-Range Cost Estimates for the

OASDI System,” by R.J. Myers. “We also recommend that the Actuary adopt the

practice of assembling in a single report a detailed description of the technique

used in making cost estimates, the actuarial formulas and factors used and their

bases or derivation and the actual calculations. Such report would be a public

document available to any one for reference or study purposes. It would simplify

the work of future Advisory Councils.”

3. The Uncertainty of Long-Term Forecasts 

a. Introduction

Forecasts of the financial status of the system 75 years in the future will

obviously be quite uncertain and must rest on many assumptions that will not

in fact be satisfied in the future. It is important that decision makers have a

guide to the uncertainty of the forecasts on which they base their plans.

Forecasters typically assess and describe this uncertainty by preparing a range

of forecasts based on different sets of assumptions, or scenarios. A scenario

consists of a set of assumptions about the future trajectories of the key

variables, such as fertility, mortality, the growth rate of wages, interest rates,

inflation, disability and so on. These assumed trajectories are then bundled

together into the scenarios. The range of the forecasts of financial status across

these high-cost and low-cost scenarios is intended to give a sense of the

uncertainty associated with the intermediate forecast. 

Unfortunately, there are serious problems with this scenario method. It

assumes that trajectories are always high or always low, thereby ruling out the

possibility of events such as the baby boom and bust. It combines trajectories

in rigid ways, such as high fertility always going with high mortality in the

SSA projections, thereby ruling out the possibility that in some year fertility

might be unusually high at the same time that mortality was unusually low.

These two difficulties are instances of the extremely strong assumptions that

are made about the correlation of forecast errors over time and across variables.

They lead to a third problem—the different aspects of the high and low

scenarios will have different amounts of uncertainty associated with them. For

example, the likelihood that fertility will fall within the high-low range in some

given year may be much less than the likelihood that the summary actuarial

balance will fall within the high-low range. A fourth problem is that no

probabilities are associated with the forecast ranges, so that a user has only a

vague sense that the forecaster believes it likely that the outcomes will fall

within the range. The lack of probabilities makes it almost impossible to

compare the sensitivity of different policy regimes to changes in demographic
71

and economic conditions. Policy makers therefore target some measure of

sustainability under some intermediate conditions rather than try to ensure that

what they promise will be unsustainable with only a small probability.

The problem of inconsistency is readily illustrated from OCACT’s

population forecasts. In the projection for 2070, the high-low range for the

population age 0 to 19 is plus or minus 34 percent. The range for the working

ages (20-64) is plus or minus 20 percent, and the range for the elderly (65+) is

plus or minus 9 percent. The total dependency ratio is the ratio of youth and

elderly to the working-age population, and we would expect it to be highly

uncertain, as it is a ratio of highly uncertain quantities, as we have just seen.

However, it has a range of only plus or minus 5 percent. This cannot be right,

but the strong assumptions underlying the scenario method force a high

number of children always to coincide with a low number of elderly, and

conversely, so that much of the uncertainty in this variable is assumed away. In

the case of Social Security finance, the total dependency ratio is irrelevant; it is

only the old-age dependency ratio that matters. However, the kind of

inconsistency just illustrated permeates the entire structure of uncertainty,

although most instances are less dramatic. 

b. Uncertainty of Input Variables and Uncertainty in Outcomes

One way to form an impression of the uncertainty of population

forecasts is to look at the record. Figure IV.1 plots the central fertility forecast

by the Bureau of the Census, published in various years back to the mid-1940s.

We see that it was not unusual for the forecasts to be wrong by as much as 1.0

or 1.5 births within 10 or 15 years of publication. Attempts to forecast fertility

during the baby boom and baby bust years fared particularly badly. Only in the

past 20 years, when fertility has been more stable, has the forecast record

improved. The challenge to the forecaster is to incorporate a realistic amount

of uncertainty into the forecast. The Office of the Chief Actuary now forecasts

a long-run level of fertility (the Total Fertility Ratio) of 1.9 children per

woman, with a high-low range of 2.2 to 1.6 children (see Chapter III.

Recommendations for a discussion of this assumption). The high-low range of

0.6 children is reasonable given the current methodology, but seems narrow

when set against the experience of the past half century, during which period

fertility had a range about three times this wide. Would it be possible, then to

incorporate a more realistic measure of uncertainty in the Actuarial forecast?
72

Figure IV.1.—Total Fertility Rate: 

Actual and Middle Series Projections, 1940-2005

Year

Note: Middle Series is calculated as the simple average of moderate high and moderate low

series, when no middle series is forecast.

Source: U.S. Census Bureau, Current Population Reports, Series P-25 and Lee 1999.

A starting point is to develop a probabilistic forecast of some input to

the actuarial forecast, let us say fertility. It could be based on a time series

model of fertility, fitted to historical data. Figure IV.2 plots such a forecast,

showing the mean forecast, and 95 percent probability intervals. These

intervals should contain the future level of fertility in any particular year 95

percent of the time. Note that these bounds are very wide, at 0.8 to 3.1 children

per woman, and although for this reason they seem unlikely to be too narrow,

they also seem to contain little useful information. Total Fertility Rate

1940 1950 1960 1970 1980 1990 2000

1.5

2.0

2.5

3.0

3.5

4.0

Forecast

Actual
73

Figure IV.2.—Total Fertility Rate, Historical (1917-1996) and

Forecasted (1997-2096), with 95% Probability Intervals 

for Annual Values

Source: Lee and Tuljapurkar, forthcoming.

One’s first thought is simply to take the bounds (or the bounds for some

other probability) to be the high and low bounds on the trajectory range for the

high and low scenarios of OCACT’s forecasts of the system’s finances. That

would be a mistake, however. What matters for the long-term finances of the

system is not the level of fertility in any particular year but, roughly speaking,

the long-term average level of fertility, which is a different matter. The bounds

on the long-term average can be calculated from the fitted time-series model of

fertility, and will depend very sensitively on the degree of autocorrelation of

errors in the fertility forecast. If there is no autocorrelation, then if fertility is

higher than the forecast in one year, that tells us nothing about what it will be

in the next year. In this case, there will be tendency for errors to cancel out over

the long term, and the 95 percent interval for the long-term average of fertility

over a 75-year horizon will be only one-ninth as wide as the interval for a

single year. More realistically, however, errors are likely to be persistent. If the

forecast is too high in one year, it is likely to be too high in the next year as

well, because the social or economic conditions that caused the error are likely

to change fairly slowly over time. At the extreme, errors will be perfectly

correlated, in which case the 95 percent probability interval for the forecast in a

single year would be no wider than the interval for the forecast of the long-run

average level of fertility. Clearly it is critically important to know the degree of

autocorrelation of forecast errors for the input, and to take it into account. 

1900 1950 2000 2050 2100

0.5

1

1.5

2

2.5

3

3.5

4

Year

Total Fertility Rate (Children per Woman)

2.5%tile

50%tile

97.5%tile
74

In the case of fertility, the autocorrelation of errors in a fitted model is

quite high at about 0.96, so there is some cancellation of errors over time, but

not a great deal. When we calculate the probability interval for the average

level of fertility over a 75-year horizon, the interval is about 60 percent as wide

as for a single year. For some other inputs, the autocorrelation of errors is less,

and the reduction in interval width is therefore more dramatic. For example, for

the real interest rate, the interval for the 75-year average is only about one-third

as wide as for an annual value, and the reduction for the rate of real wage

growth is similar. 

Could OCACT calculate the probability bounds for these long-run

average values of the inputs, and use them to define the high-low ranges? On

reflection, there is a further problem with this step. If we use a 95 percent

interval for fertility, and for mortality, and for all the six additional inputs for

which OCACT assumes a range, then the probability of all of these inputs

simultaneously exceeding or falling short of these bounds would be far, far less

than 5 percent. If fertility and mortality vary independently, for example, the

chance that both would be outside their 95 percent ranges at the same time

would be only 0.05 squared, or 0.0025. In other words, the right ranges for all

the inputs considered together would have to be much narrower, with less

probability coverage, in order for their joint range to have 95 percent

probability coverage. With eight uncertain inputs, each should have a

probability range of only about 33 percent rather than 95 percent, if they are

independent. 

Even after all these adjustments, it would still not be possible to derive

appropriate bounds for OCACT to use. First, the variables enter into the

calculations of actuarial balance in a highly nonlinear way, with lags and

repeatedly cumulated functions of inputs. Second, there would remain the

problem that the extreme bounds for the inputs are bundled together in an

arbitrary way to form the scenarios. There is no reason why positive errors in

forecasting fertility should invariably be associated with positive errors in

forecasting mortality, as assumed by OCACT in using the scenario-based

method. Third, there would remain the problem that the consequences of inputs

fluctuating over time are not assessed in the scenario method, even for

fluctuations within the high-low range. 

We must conclude that there is no good way to combine statistical

estimates of the uncertainties of forecasts of the input variables with the

scenario method to form improved estimates of the forecasts of the system’s

finances. Instead, it is necessary to take a different approach if we want to

improve on the evaluation of the uncertainty of the forecasts. 
75

c. Alternative Approaches

One possible approach is what might be called the “random scenario”

method. In the random scenario method, the assumed trajectories of each

uncertain variable in each scenario are multiplied by a random variable. The

distribution of that random variable is chosen so that there is a given

probability, for example two-thirds, that the trajectory lies within the specified

high-low range for that input variable (see Lee 1999). Through Monte Carlo

simulation, hundreds or thousands of different trajectories are estimated. The

high-low ranges themselves could be selected in any way, but would typically

be chosen subjectively by experts. This approach has been used in population

forecasting, for example by Lutz and Scherbov (1998). It may solve the two

problems of arbitrary bundling of trajectories into scenarios and lack of

cancellation of forecast errors across different input variables. But it retains the

seriously problematic assumption that errors in forecasting any input are

perfectly correlated over time, ruling out fluctuations in inputs and preventing

any cancellation of errors over time. Furthermore, whether experts can

successfully attach probability interpretations to their assumed high-low is not

clear. 

Another approach to assessing uncertainty is to analyze the past

performance of forecasts that have been done using a similar method. This

method has been applied to population forecasts (Keyfitz 1981; Stoto 1983; all

recent projection publications by the U.S. Bureau of the Census; Keilman

1999). It is not clear whether it could be usefully applied to OCACT’s forecasts

of the system's finances, but it would be worth doing some further research on

this possibility. Analyses of this sort include Myers (1981), Bayo (1990), and

Lee and Tuljapurkar (in press). 

A third approach is to develop statistical time-series models of the key

inputs using historical data, and then to use stochastic simulation to produce

stochastic forecasts for the finances of the system. This approach has been

taken by Lee and Tuljapurkar (1998, and references therein, and in press). This

method will be described briefly below as an illustration of the possibilities. 

d. Illustrating Approaches to Stochastic Projection 

SSA should begin serious efforts to develop a stochastic forecasting

system to model uncertainty. Although there are many ways of modeling

uncertainty, we have the most experience with probabilistic methods. This

section reviews several different currently available stochastic projection

methods and outlines the development of a new stochastic projection model

that would meet the needs of SSA and its customers.
76

Several important efforts have already been made at developing a

stochastic forecasting system. To illustrate, the 1994-96 Technical Panel

described two stochastic forecasting methods. The Employee Benefits

Research Institute (EBRI) subsequently considerably enhanced one of these

models. Another example is the work by Frees et al. (1997) that extends the

SSA work of Foster (1994). In Frees et al., the authors provide a fully

endogenous model of wage, unemployment, inflation and investment returns

using multivariate time series methods. Another important example is the

Mountain View Research—University of California at Berkeley (MVR-UCB)

approach, described as follows.

The MVR-UCB Stochastic Projection Approach. In the basic model,

four input variables are treated as stochastic: fertility, mortality, real wage

growth, and real interest rates. In some runs involving investment of the Trust

Funds in equities, the rate of return on the S&P 500 is also treated as

stochastic. All other input variables are set to the intermediate values used by

OCACT. Fertility and mortality are both age-distributed variables, not single

rates. Special models are used to express the variation over time in these

distributions of rates using a single parameter (see Lee and Tuljapurkar 1994).

In the case of fertility, that single parameter is the total fertility rate (TFR). For

mortality, that parameter is an index, kt

, which drives the level of the logs of the

age-specific rates. These parameters are then modeled as time-series processes

(for example, kt is modeled as a random walk with drift) that form the basis for

the forecasts. 

Demographic accounting identities link fertility, mortality and net

immigration to the evolution of the size and age distribution of the population.

Given the stochastic models for fertility and mortality, and the assumptions

made about net immigration, it is possible to calculate one future stochastic

“sample path” for the population through Monte Carlo simulation. Random

variables are drawn from the specified distributions and are used to fix fertility

and mortality at each step, from the present to whatever forecast horizon is

selected, say 75 years. The result is a single projection of the population,

reflecting the random draws. This process can be repeated to get a second

random projection, and then repeated over and over again until we have, say,

1,000 different random population trajectories. For any desired quantity, say

the old-age dependency ratio in 2055, we can plot the frequency distribution of

ratios that is an estimate of the probability distribution. 

The method also draws on estimated cross-sectional age profiles of

payroll tax payments and of benefits received. They are then projected over

time by the stochastic productivity growth rate—multiplicatively for taxes, and

in a more complicated manner for benefits. When the age-specific tax

payments and benefits are multiplied times the stochastic population age

distribution, they generate stochastic forecasts of payroll tax revenues and

expenditures on benefits. Once again accounting identities link these quantities
77

to the evolution of the Trust Fund balance and to other quantities of interest for

Social Security finances. The stochastic interest rate determines the rate of

return earned by the Trust Funds or the cost of borrowing if the fund becomes

negative. It is a feature of the model that there is no economic feedback. For

example, there is no effect of the level of the Trust Funds on the rate of interest

or on the productivity of labor. 

As an example of the output of this approach, Figure IV.3 plots the

median Trust Fund balance together with probability bounds for intervals of 67

percent and 95 percent probability. 

Figure IV.3.—Trust Fund Ratios for OASDI

(Assets as percent of annual expenditures)

Source: MVR-UCB stochastic projections.

e. Stochastic Projection Principles

The MVR-UCB model is based on fitted cross-sectional age profiles

for taxes and benefits, which are then driven by stochastic productivity growth.

In this approach, many of the details of interest to SSA are implicit in the

cross-sectional age profile, such as marital status and changing labor force

participation rates. For SSA purposes, it is important to make those and other

elements explicit and perhaps stochastic in their own right. Therefore, a strong

argument exists for developing a stochastic projection method that is linked

more directly to the structure and content of the current deterministic

projection model used by the actuaries. The following discussion suggests how

this might be done.

2000 2020 2040 2060 0

100

200

300

400

500

600

700

Year

Trust Fund Ratio

2.5%tile

16.7%tile

50%tile

83.3%tile

97.5%tile
78

We recommend the development of a model that is a stochastic

extension of the model currently used by OCACT to forecast financial

solvency. Initially, we propose a cohort model, not a model that follows

individuals over time. Although models following individuals over time are

useful for assessing the adequacy of Social Security benefits, they require a

further stage of development. Of course, many Social Security proposals

introduce elements of individual accounts. To analyze the adequacy of Social

Security benefits under such proposals, effort should be devoted to modeling

individuals over time as well.

With a stochastic projection system, one computes an entire

distribution of projected future outcomes. We propose that an immediate goal

is to construct a system in which the mean projection assumptions correspond

to those of the current deterministic system under the intermediate

assumptions. To accomplish this, we further recommend that the model

development mimic the organizational structure of the long-range deterministic

model. The long-range deterministic model is simpler than the deterministic

short-range version.

The techniques recommended to model uncertainty involve time-series

analysis of data and simulation of future paths of the system. Following the

structure of the current long-range model, the projection system could be

decomposed into several components:

• Demographic and population projections

• U.S. economy employment

• OASDI economy employment

• U.S. economy projections

• OASDI economy earnings

• Beneficiary population projections

• Benefit awards

• Model of investment returns (new)

Initially, each component of the projection would forecast the future

using simple data-driven models, where the choice of the model is influenced

by theory. For components that are difficult to implement, the current SSA

deterministic methods can be used initially. The goal is to evolve to a full

structural model of the OASDI economy, with behavioral models to anticipate

future paths.
79

f. Stochastic Projection Flowchart

To be specific, here is one outline of a flowchart to provide stochastic

projections of the OASDI system. The Technical Panel is not wedded to this

proposed flowchart. The purpose is to provide a concrete suggestion.

Presumably, criticisms and counterproposals will provide better flowcharts in

subsequent iterations.

(1) Demographic and population projections

Stochastic projections of the mortality and fertility components

have been well documented by Ron Lee and other members of the

Technical Panel. SSA could use its existing deterministic filters for deaths

of spouses, marriages, divorces, and immigrants, if necessary.

(2) U.S. economy employment

The projection of the labor force participation rate developed by

OCACT is well suited to stochastic projections. It would require the ratio

of real GDP to potential GDP and disability prevalence rates as inputs.

For unemployment rates, one could initially use the long-range

constants that are currently used by OCACT. Alternatively, the

unemployment rate could be part of the U.S. economy projections.

(3) OASDI economy employment

Initially, OCACT could use its existing deterministic filters. The

filters would take stochastic U.S. economy employment as input and yield

stochastic OASDI economy employment as output. Additional research is

required to assess the degree of estimation error on the forecasting error.

(4) U.S. economy projections

Initially, OCACT could develop stochastic components in separate

modules, as under the current projection system. Simple models such as

univariate time series models could be used initially. Over time, more

complete models could evolve, including vector autoregressive models,

multivariate time series models, conditionally heteroscedastic models, and

error correction models.

A number of separate modules would have to be developed. The

separate modules include models to forecast full-employment labor force

participation rates and unemployment rates as well as labor productivity.

Those forecasts would be used to forecast GDP, potential GDP, and the

ratio of real to potential GDP. In addition, models are needed to forecast the
80

components of earnings per worker. The components include earnings per

dollar of compensation, compensation per dollar of production, labor

productivity, and hours worked. Forecasts of the components are then used

to forecast earnings per worker. Finally, OCACT would need to develop

models to forecast unemployment, inflation, and the GDP price deflator.

The long-run goal would be to integrate the separate models into

one cohesive model of the U.S. economy.

(5) OASDI economy earnings

Initially OCACT could use its existing deterministic filters. The

filters would take stochastic U.S. economy earnings (from step 4) as input

and yield stochastic OASDI economy earnings as output. Additional

research is required to assess the degree of estimation error on the

forecasting error.

(6) Beneficiary population projections

Initially OCACT could use its existing deterministic filters. These

filters would take the stochastic population as input and yield a stochastic

beneficiary population as output. Again, additional research is required to

assess the degree of estimation error on the forecasting error. In particular,

analysis should be performed to ensure that the beneficiary filters are not

affected by the size and characteristics of the simulated stochastic

population.

(7) Benefit awards

Initially OCACT could use its existing deterministic filters.

Additional research is required to assess the degree of estimation error on

the forecasting error. Attempts should be made to integrate a model such as

the CORSIM model into the stochastic projection model. In addition, effort

should also be made to introduce stochastic simulation of the payout

patterns.

(8) Investment return models

There are many privately developed models on investment returns,

such as the one developed by the Employee Benefits Research Institute

(EBRI). Some of that existing methodology can be applied in the SSA

model.
81

g. References

Bayo, Francisco. 1990. “A Simple Evaluation of Projections in OASDI

Trustees Reports.” Actuarial Note #132, Social Security Administration. 

Foster, Rick. 1994. “A Stochastic Evaluation of the Short-Range

Economic Assumptions in the 1994 OASDI Trustees Report.” Actuarial Study

No. 109, Social Security Administration, Office of the Chief Actuary, Room

700, Altmeyer Building, Baltimore, MD 21235.

Frees, Edward, Yeuh Chuan Kung, Marjorie Rosenberg, Virginia

Young and Siu-Wai Lai. 1997. “Forecasting Social Security Actuarial

Assumptions.” North American Actuarial Journal v.1, n.4, 49-82.

Keilman, Nico. 1999. “How Accurate Are the World Population

Projections?” In Wolfgang Lutz, James W. Vaupel, and Dennis A. Ahlburg,

eds, Frontiers of Population Forecasting. A Supplement to Volume 24 of

Population and Development Review. (New York: Population Council), 15-41.

Keyfitz, Nathan. 1981. “The Limits of Population Forecasting.”

Population and Development Review v.7, n.4 (December): 579-93. 

Lutz, Wolfgang and Sergei Scherbov. 1998. “An Expert-Based

Framework for Probabilistic National Population Projections: The Example of

Austria.” European Journal of Population 14: 1-17. 

Lee, Ronald. 1999. “Probabilistic Approaches to Population

Forecasting.” In Wolfgang Lutz, James W. Vaupel, and Dennis A. Ahlburg,

eds, Frontiers of Population Forecasting. A Supplement to Volume 24 of

Population and Development Review. (New York: Population Council),

156-90.

Lee, Ronald and Shripad Tuljapurkar. forthcoming. “Population

Forecasting for Fiscal Planning: Issues and Innovations.” In Alan Auerbach

and Ronald Lee, eds., Demography and Fiscal Policy (Cambridge University

Press). 

Lee, Ronald and Shripad Tuljapurkar. 1998. “Stochastic Forecasts for

Social Security.” In David Wise, ed., Frontiers in the Economics of Aging.

(Chicago: University of Chicago Press), 393-420.

Lee, Ronald and Shripad Tuljapurkar. 1994. “Stochastic Population

Projections for the U.S.: Beyond High, Medium and Low.” Journal of the

American Statistical Association v.89, n.428 (December): 1175-89.

Myers, Robert J. 1981. “Actual Costs of the Social Security System

Over the Years as Compared with Those Estimated in 1935.” Actuarial Note

#110 (November), Social Security Administration. 
82

Stoto, Michael. 1983. “The accuracy of population projections.”

Journal of the American Statistical Association v.78, n.381: 13-20. 

4. Projections of Disability Insurance

The Panel evaluated the procedures the Office of the Chief Actuary uses to

forecast the costs and Trust Fund balances of the Disability Insurance (DI)

program. Particular attention was devoted to one of the most uncertain aspects of

these forecasts, future inflows into the DI roles. The Panel concluded that the

OCACT’s overall forecasting procedure and the particular forecasts it produced for

the 1999 Trustees Report are reasonable, with the exception of its projections of

mortality rates of DI beneficiaries. These conclusions will be explained in more

detail below. We begin with a brief description of the method OCACT uses to

make its projections, followed by an analysis of particular aspects of its 1999

forecasts. We conclude with a discussion of the pros and cons of using more

detailed behavioral models of the disability application, appeals, and awards

process for long-term forecasting and policy evaluation.

a. Description of OCACT’s Forecasting Procedure

OCACT forecasts inflows of new DI beneficiaries using projected

incidence rates that equal the ratio of newly entitled DI beneficiaries during a

year to the exposed population. The latter quantity equals the total number of

U.S. citizens who are insured under the DI program less the number who are

currently entitled to receive benefits. OCACT forecasts outflows using

projected death and recovery rates, including conversions—that is, the number

of DI worker beneficiaries reaching the normal retirement age. The total

population of DI beneficiaries is then forecasted recursively, beginning with a

current population and adding projected inflows and subtracting projected

outflows. The forecasting procedure produces implied forecasts of prevalence

rates, defined as the ratio of the total number of currently entitled DI

beneficiaries to the size of the insured population. Note that OCACT does not

forecast prevalence rates directly. Instead, prevalence rates are derived from

separate projections of incidence, death, and recovery rates, and the total

number of conversions.

Given forecasts of the number of DI beneficiaries for separate age-sex

cells, OCACT forecasts total costs of the DI program using projections of agesex adjusted average annual benefits per DI beneficiary under current law, and

its forecasts of administrative expenses. This procedure yields total projected

outflows. Projected inflows are the sum of forecasted DI tax contributions,

income from taxation of benefits, and Trust Fund earnings. Given a starting

balance for the DI Trust Fund, future Trust Fund balances are forecasted

recursively, adding total inflows and subtracting total outflows. 
83

The Office of the Chief Actuary continuously monitors and studies the

factors affecting inflows and outflows to the DI rolls. Based on these analyses,

OCACT produces projections of incidence, death, and recovery rates that could

be described as “judgmentally-adjusted extrapolations” of historical trends and

the average levels in these rates. Thus, recent trends toward increasing or

decreasing incidence, recovery or death rates are generally not projected to

continue forever. Instead, most forecasts exhibit some degree of “mean

reversion,” meaning that the long-run forecasts of these rates tend to move

back towards the long-run average incidence rates that have been observed in

the past. The reversion implies that OCACT’s forecasts will generally lie

within a “confidence band” formed by extrapolating the high and low values of

incidence rates experienced in the past.

b. Analysis of OCACT’s 1999 Intermediate Projections

OCACT’s 1999 intermediate projections predict that the ratio of DI

Trust Fund balances to annual expenditures will increase from 153 percent at

the beginning of 1999 to 213 percent in 2004, and will decline thereafter until

the projected exhaustion date of 2020. A few simple graphs may help to

provide a better sense of the assumptions underlying OCACT’s projections.

Figure IV.4 summarizes the historical and projected trends in the cost of the DI

program, measured by the ratio of DI expenditures to GDP. The figure shows a

rapid rise in the cost of the DI program since its inception in 1956 until the

mid-1970s, followed by two relatively short downturns. The cost of the

program declined from 1977 to 1990 during a period of tightened award

standards initiated under the Carter Administration and continued under the

Reagan and Bush Administrations, and a decline occurred during the good

economic times of recent years. OCACT projects continued growth in the

program over the next 75 years, peaking at 0.946 percent of GDP in 2027.

After that point, the ratio of DI expenditures to GDP is projected to fall until

2040, a delayed consequence of low fertility during 1975-1980. [Note that the

intervening rise (2040-55) results from the “echo” of the baby boomers.] The

projection calls for a second drop in the ratio after 2055, a result of forecasts of

average benefit levels that do not increase as rapidly as GDP during this period. 
84

Figure IV.4.—Trend in DI Expenditures Relative to GDP

Figure IV.5 plots historical and projected DI prevalence rates over the

period 1988 to 2075. These rates have increased steadily over the period 1988

to 1996, pausing briefly in 1997 and 1998. OCACT projects a particularly

rapid increase in DI prevalence until 2030, by which time most of the baby

boom generation will have reached normal retirement age. Thereafter

prevalence continues to grow at a more moderate rate, reaching 7 percent of the

insured population by 2075. The projected increases in DI prevalence rates

stand in marked contrast to numerous epidemiological studies that have found

consistent trends of improvement in most “objective” measures of health

status, and corresponding reductions in the frequency of disabling impairments

and incidence of chronic disabilities. (See, e.g., Freedman and Soldo, 1994,

Lee and Skinner, 1999, Manton, Corder and Stallard, 1997, and Singer and

Manton, 1999.) The improvements in health and reductions in chronic

disability rates parallel the steady reduction in overall mortality rates among

Americans. Is it reasonable to forecast continued growth in the fraction of the

U.S. population receiving DI benefits even though epidemiological studies

forecast that Americans are getting healthier? 

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Calendar year

Ratio of DI expenditures to GDP

Historical Projected
85

Figure IV.5.—Historical and Projected DI Prevalence Rates

To provide some insight into this question, Figure IV.5 also presents an

“adjusted” forecast of prevalence rates based on the counterfactual assumption

that the age distribution of the U.S. will remain at its 1998 values. Adjusted

prevalence rates increase by a much smaller amount, from about 4 percent in

1998 to 5 percent by 2075. The smaller increase indicates that only about 40

percent of the total projected increase in prevalence rates of 3.2 percentage

points can be attributed to forecasts of increased DI incidence rates and

reduced termination rates. The bulk of the increased prevalence rates is due to

the projected aging of the U.S. population and the fact that, at least up to ages

near early retirement age, older individuals are more likely to apply for and be

awarded DI benefits than younger individuals. 

While population aging explains the bulk of the increase in prevalence

of DI receipt, we still face the question of whether OCACT’s projection of

steady increases in incidence rates is reasonable, given that it appears

inconsistent with the trend towards improved health discussed above. Many

empirical studies have shown that both self-reported and “objective” measures

of health and disability status are strong predictors of which individuals decide

to apply for DI benefits. (See, e.g. Benítez-Silva et al. 1999a; Bound 1991;

Bound and Burkhauser 1998; Halpern, J. and J. A. Hausman 1986; Hu, J.,

K. Lahiri, D. R. Vaughan, and B. Wixon 1997; Kreider, 1999; and Lahiri, K.,

D. R. Vaughan, and B. Wixon 1995.) However, the strong explanatory power

of health status at the individual level gets “averaged away” at the aggregate

level. At that level, the effect of the steadily improving trends in

0%

1%

2%

3%

4%

5%

6%

7%

8%

1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Calendar year

Percent of insured population

Unadjusted

Age-sex adjusted

Historical Projected
86

epidemiological measures of health and disability status appears to be

overwhelmed by changes in other factors that appear to have been responsible

for the large swings in incidence rates in the past. We can see this clearly in

Figure IV.6, which presents historical and projected trends in the aggregate

incidence rates.

Figure IV.6.—Alternative Projections of DI Incidence

Incidence rates are defined as the ratio of the number of newly entitled

DI beneficiaries to the exposed population (the total number of people insured

for DI benefits less those who are entitled to receive such benefits). The graphs

plot incidence rates derived from historical data on new entitlements and the

exposed population from 1970 to present and from OCACT’s intermediate

case projections from 1999 to 2075. Since the data on new entitlements and the

exposed population start in 1988, the graph plots approximations to aggregate

incidence rates over the period 1970 to 1987 calculated from weighted

averages of annual age/sex incidence rates during this period using weights

equal to the fraction of the DI insured population in each age/sex group in

each year. These differ slightly from the exact aggregate incidence rates which

should be calculated from weights derived from the exposed population instead

of the DI insured population.

Historically, incidence rates varied from a high of 0.79 percent in 1974

to a low of 0.33 percent in 1982, followed by another rapid increase in the early

1990s, and peaking at 0.61 percent in 1992. The large fluctuations in incidence

rates appear to be far too large and rapid to be explained by corresponding

changes in the underlying health and disability status of Americans over this

period.

A number of recent studies have shown that demographic, social,

political, and economic variables are much stronger predictors of changes in

aggregate DI incidence and prevalence rates than changes in underlying health

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Calendar year

Ratio of new entitlements to exposed population

OCACT’s forecast

1992 incidence rates

1997 incidence rates

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Calendar year

Ratio of new entitlements to exposed population

OCACT’s forecast

1974 incidence rates

1982 incidence rates
87

status of the U.S. population. For example, Stapleton et al. (1994) and Rupp

and Stapleton (1995) analyzed aggregate application and awards data and

concluded that the most important factors affecting incidence rates include: 1)

benefit levels, 2) program leniency as measured by award probabilities and

audit rates, 3) strength of the demand for labor (as measured by unemployment

rates), 4) the availability (or lack thereof) of alternative sources of support, and

5) social attitudes, particularly those affecting any possible stigma associated

with receiving DI benefits. They noted that, “Long term trends in the

prevalence of disabling conditions may be influencing long-term growth in

applications and awards (in some cases negatively), but with one exception

(AIDS/HIV), we did not find convincing evidence of health trends explaining

the recent acceleration of applicant and award growth. ... However, expansion

of the population with qualifying disabilities due to legislative and regulatory

changes and increased awareness of disabling conditions might have

substantially contributed to application and award growth.”1

Previous empirical work suggests an explanation for the “paradox” that

DI prevalence and incidence rates have generally increased over time while the

prevalence of chronic disability has decreased. The key is to recognize that the

determination of whether a person is “disabled” according to SSA’s definition

(i.e., “the inability to engage in any substantial gainful activity by reason of any

medically determinable physical or mental impairment which can be expected

to result in death or which has lasted or can be expected to last for a continuous

period of at least 12 months”) is not a clear-cut decision based entirely on

objectively determinable measures of physical and mental impairments.

Instead, disability determinations involve subjective decisions and relative

evaluations that may change over time with changes in the political, social, and

technological environment. Clearly, the nature of physical/mental conditions

that are regarded as disabling is very different in today’s “information

economy” than they were in an industrial/agrarian economy in the 1800s. It is

not surprising therefore that Actuarial Study 114 (1999) documents significant

changes in the distribution of impairments that are listed as the primary reasons

for being awarded DI benefits. In particular, in recent years mental conditions

account for a much bigger share of disabilities, accounting for over 20 percent

of all awards, compared to only 11 percent of all awards in 1982. Political

changes in the definitions of “disability” are also evident in the 1996 Social

Security amendments, which disallowed alcoholism and drug abuse as

impairments that qualify an individual for DI or SSI benefits. State-level

variations in political philosophies may also account for the otherwise large

unexplained state-to-state variations in DDS award rates (see Gruber and

Kubik 1997 and Social Security Advisory Board 1997). 

 1 Rupp and Stapleton (1995): 49-50.
88

To the extent that “disability” is partly a socially determined concept, it

may share many characteristics with other socially determined concepts such

as “poverty”. Just as poverty rates may not necessarily decrease as the nation

gets richer, DI prevalence rates may not decrease as the nation gets healthier.

That could happen, for example, if society defines the “poor” as the x percent

of our society who have the lowest income. Similarly there might be a

tendency for society to define disability as the y percent of our society who

have the poorest health. Indeed, the prevalence of DI receipt could grow over

time as our society gets healthier and wealthier, since a wealthier society may

be more willing and able to support an increasingly larger share of its least

healthy citizens on the DI roles.

The Panel believes that OCACT’s forecast of a steady but moderate

increase in incidence rates represents an appropriate degree of caution given

the large swings in incidence rates that have occurred in the past. This

conclusion is supported in part by the “confidence bands” presented in Figure

IV.6. Those bands were formed by assuming that the historical high and low

age-sex specific incidence rates that occurred in 1974 and 1982 would persist

into the future.1

 The left-hand panel of Figure IV.6 shows that OCACT’s

projection lies between these bands, which represent extreme high and low

rates that seem unlikely to occur again in the future. The right-hand panel of

Figure IV.6 shows OCACT’s projection also lies within a narrower set of

confidence bands formed by assuming that the high and low incidence rates

observed in the more recent past (i.e., those achieved in 1992 and 1997,

respectively) will continue to hold in the future.

Note that the bands in the left hand panel of figure IV.6 imply that

aggregate incidence rates would have decreased between 1975 and 1990 even

though age/sex incidence rates are assumed to remain fixed at their 1974 or

1982 values by construction. This is another illustration of the importance of

“compositional effects” due to changing demographics. The wave of baby

boomers (who were still relatively young between 1975 and 1990) caused the

mean age of the U.S. population to decrease, whereas after 1990 the aging of

the baby boomers combined with the effects of increasing lifespans and

decreased fertility rates in the 1970s and 1980s caused the mean age of the

U.S. population to increase. Since DI incidence rates increase with age, the

decrease in the mean age of the U.S. population between 1975 and 1990 is

 1 The bands presented in figure IV.6 are population average incidence rates formed by taking weighted

averages of the age/sex incidence rates experienced in the years 1974, 1982, 1992 and 1997, where the

weights are the projected fractions of the exposed population in each age/sex category and were

calculated using OCACT’s projection of the exposed population under the intermediate assumptions.

However changes in the assumption about the future path of age/sex incidence rates will produce

corresponding changes in the exposed population, and to be fully consistent the weights used to compute

the bands presented in figure IV.6 should be recomputed to reflect this. However it is unlikely that such an

adjustment would have a major impact on the bands, which in any case are only presented for illustrative

purposes.
89

responsible for part of the decrease in aggregate DI incidence rates. Conversely

the increase in the mean age of the U.S. population after 1990 has the opposite

effect. Thus, the bands provide another way of illustrating the importance of

demographic shifts as one of the factors behind changes in aggregate incidence

rates for DI.

Figure IV.7 presents OCACT’s projections of age-sex specific

incidence rates for 2020 and 2075 respectively. Except for ages 65 and 66, their

projections lie entirely within the bands formed by the high and low age-sex

specific incidence rates experienced in 1992 and 1997, respectively. The higher

projected incidence rates for those over 65 is due to the impact of the increase

in the normal retirement age (NRA) from 65 to 67. For someone who is older

than the NRA, DI and old-age (OA) retirement benefits are perfect substitutes.

SSA’s procedure is to automatically convert DI beneficiaries to OA

beneficiaries at this age. However, there may be a small incentive to apply for

DI benefits prior to the NRA, and this is reflected in OCACT’s projections.

Those at ages 65 and 66 do not have much incentive to apply for DI benefits if

the Medicare eligibility age remains at 65, suggesting that OCACT’s

projections of incidence rates for these ages might be a bit too high. But the

relatively small number of people in this age range implies that changes in the

incidence rate assumptions for this group are unlikely to have a major impact

on OCACT’s forecasts. Overall, the Panel felt that OCACT’s projection of a

gradual increase in incidence rates to levels that are somewhat higher than the

low values experienced in the current strong economic environment was

appropriate.

Figure IV.7.—DI Incidence Rates by Age for 1992, 1997, 2020, and 2075

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

20 25 30 35 40 45 50 55 60 65

Age

Percent of exposed population entitled to DI

1992

1997

2020

2075
90

The only aspect of OCACT’s DI forecasts that the Panel did not think

was reasonable is their projection of a sudden reduction in the rate of mortality

improvement beginning after 1999. Figure IV.8 presents OCACT’s projections

of mortality and recovery rates for DI beneficiaries along with historical values

over the period 1988 to 1998. Notice the large increase in “recovery rates”

following the 1996 amendments which disallowed disability-qualifying

impairments in the areas of alcoholism and drug addiction. Although

significant increases in expenditures for Continuing Disability Reviews are

likely to result in a higher recovery rate in future years, the total number of

recoveries is relatively small. Reasonable variations in the projected recovery

rate are unlikely to have an important impact on OCACT’s projections of DI

roles and expenditures.

Figure IV.8.—Actual and Projected Recovery and Death Rates

However, OCACT’s mortality assumptions can have a much bigger

impact on its projections of DI roles and expenditures. Over the period 1988 to

1998, mortality rates declined at a rate of 2.8 percent per year, whereas after

1999 OCACT projects that this rate of improvement will decrease to only 0.5

percent. Such a sudden break does not seem reasonable. The Panel feels that

more research should be devoted to understanding the causes of the seemingly

abnormally high historical rate of decline in mortality rates of DI beneficiaries

in recent years. In addition, research should examine whether this group is

somehow special and is likely to experience continued high rates of mortality

improvement in the future. In the meantime, it may be a good idea to gradually

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Calendar year

Percent of currently entitled DI beneficiaries

Death rate

Recovery rate

Historical Projected
91

reduce the projected rate of decline in mortality rates from the high 2.8 percent

historical rates towards the rate of approximately 1 percent recommended by

the Panel to be the new overall intermediate projection for mortality.

Otherwise, OCACT’s intermediate forecast is likely to be too optimistic,

somewhat underestimating the size of the long-term actuarial deficit of the DI

program and overestimating the projected date of exhaustion of the DI Trust

Fund.

c. Analysis of OCACT’s Forecasting Procedure

The Panel evaluated the adequacy of OCACT’s methodology of using

judgmentally adjusted extrapolations of historical trends in incidence, death,

and recovery rates to project the evolution of the DI program. The question is

whether more formal econometric models of incidence, death, and recovery

rates might be used to improve their projections. More formal modeling might

involve including covariates that could account for the impact of changes in

programmatic and economic factors, and epidemiological measures of health

and disability status of the U.S. population. In particular, incidence into the DI

program can be modeled at a greater level of detail as it depends upon

individuals’ propensities to apply for DI benefits and the leniency of the

“gatekeepers.” Those gatekeepers are the 54 state Disability Determination

Services that process initial applications and reconsiderations, and the

Administrative Law Judges and Appeals Council that process appeals. OCACT

does not produce explicit projections of the probability that an individual will

apply for benefits or appeal a denial, or the probability that an application or

appeal will be awarded. Instead, its projections are based on incidence rates

that represent the net effect of a series of application, appeals, and awards

decisions.

The DI application, awards, and appeals process has been modeled

econometrically using individual panel data at a much finer level of detail by

Hu et al. (1997), Lahiri et al. (1995) and Benítez-Silva et al. (1999a). The third

paper estimated in a detailed reduced-form model an individual’s decision to

apply for DI and SSI benefits, the DDS “first stage” award decision, the

decision by rejected applicants to appeal an initial rejection, and the “second

stage” decision by SSA’s Administrative Law Judges and Appeals Council

whether to award or deny an appeal. 

The studies suggest that there could be important payoffs to modeling

the awards and appeals process in greater detail, since such efforts could lead

to improved understanding of the factors affecting DI incidence rates. For

example, the Benítez-Silva et al. (1999a) paper found that there is a large

apparent return to appealing an initial rejection by the DDS. Those who appeal

have a significantly higher chance of being awarded benefits, raising the

probability of award from 54 percent at the first-stage decision made by the

DDS to a 70 percent “ultimate award rate” when the option to appeal was
92

considered. However, the increased award rate comes at the cost of substantial

delays. The mean time between application and award at the first stage is 5

months compared to a mean time between application and award of 15 months

for those who received benefits after one or more stages of appeal. Although

the long delays are certainly an unintended consequence of backlogs in the

appeals process resulting from the rapid growth in applications in the early

1990s, the Benítez-Silva et al. (1999a) paper suggests that delays appear to

function as an implicit type-dependent “application fee” that dissuades

opportunistic behavior. That is, individuals who do not regard themselves as

being disabled are far less likely to apply or appeal than individuals who do

regard themselves as being disabled.

Research is also being done on the role SSA may play in affecting

individuals’ self-perceptions of disability status. Recent work by Benítez-Silva

et al. (1999b) shows that among DI applicants, self-reported disability status is

an unbiased indicator of SSA’s ultimate award decision (i.e., accounting for the

possibility of a successful appeal of an initial denial). This finding suggests

that the way SSA administers its DI awards process might have an important

bearing on the “social standard” that the public perceives about what

impairments constitute “disability.” Further empirical work based on

psychological and economic models may give us deeper insights into the

factors influencing individuals’ self-perceived disability status, and how those

factors could affect their decisions about whether or not to work and whether

or not apply for DI benefits.

However, most existing micro studies are based on reduced-form

econometric models that are not appropriate for forecasting the effects of

policy changes, such as changes in award rates, audit rates, or benefit levels.

For these sorts of forecasts, a structural econometric approach is required, such

as the existing static structural models of the DI application process by Halpern

and Hausman (1978) and Krieder (1999). However, those models cannot

capture the dynamics of the appeals process. Given the large number of DI

entitlements that come via successful appeals, it is essential to model the

dynamics of the entire DI awards and appeals process if we are going to be able

to make accurate policy forecasts. One way to do this is by modeling the

sequential decision process of whether or not to apply for DI benefits via

dynamic programming (DP) methods. The DP framework is rich enough to

explicitly account for the potential returns, uncertainties, and “hassle costs”

associated with submitting an initial application for benefits, and deciding

whether to appeal or re-apply if denied. Work along those lines is currently in

progress as part of an integrated model of social insurance that is being

developed by Buchinsky and Rust (1999). The DP approach has been very

successful in modeling and predicting retirement behavior (see, e.g. Rust and

Phelan 1997). But it remains to be seen whether the DI application decision

can be successfully integrated into these models to produce accurate forecasts

of changes in various aspects of the DI program and awards process.
93

Furthermore, it is unclear whether a “rational” DP model can accurately

capture all the psychological factors affecting application and appeals

decisions.

Reduced-form econometric models can be useful for forecasting

provided there is no change in the existing “policy regime.” As OCACT is

charged with making projections under current law, reduced-form econometric

models may be adequate for its purposes. However, our ability to predict

behavior at the individual level requires a large number of covariates, so an

econometric approach to forecasting would require auxiliary forecasts for all of

the model’s covariates, substantially complicating OCACT’s forecasting

problem. Furthermore, economists currently have only a rudimentary

understanding of all the factors affecting applications and awards, and

relatively little is known about the role of psychological, social, and political

factors. Panel members are aware of no other forecasting models that are

capable of taking into account most of the key determinants of application and

appeals decisions.

Given our limited knowledge about the determinants of applications,

appeals, and awards, it is not clear that a more detailed econometric model

would necessarily generate more accurate aggregate forecasts than the less

formal and explicit judgmental forecasting procedure used by OCACT. For the

limited purpose of forecasting DI Trust Fund balances, the Panel concluded

OCACT’s existing “judgmental forecasting” procedure appears to be a fast,

simple, and cost-effective method. 

Nevertheless, the Panel believes that a substantial investment in

developing improved dynamic models of the disability application and awards

process is justified if SSA is interested in policy evaluation—that is, the

evaluation of the behavioral, distributional, and welfare impacts of alternative

policies. This capability is especially important in view of the “Disability

Process Redesign” effort that SSA has been considering over the last 5 years.

Some of the proposed changes that are under consideration include improving

the standardizations of the awards process via functional impairment indices to

reduce some of the large state-to-state variation in award decisions, and

procedures designed to reduce the delays involved in submitting applications

and appeals. Improved models could be used to predict whether substantial

reductions in delays could significantly increase individuals’ incentives to

apply or appeal, and to provide better insight into whether standardized

functional impairment indices could reduce the magnitude of the “Type 1 and

2” classification errors in the DI awards process.

There are encouraging signs that SSA is investing resources necessary

to develop such models, including their funding of the Disability Evaluation

Survey (DES) (a public release version of which will be available after 2002),

and their funding of an academic “Disability Institute” to study these issues in
94

more detail. Although more detailed econometric models may not have a huge

payoff in terms of improved accuracy of long term forecasts, these models

could have a huge payoff in another area. They could lead to an improved

understanding of the disability awards process, the factors leading to continued

growth in the program, and the impact of new policies designed to improve the

targeting of scarce tax dollars to the individuals who need them the most.

d. References

Benítez-Silva, H., M. Buchinsky, H-M.Chan, J. Rust, and S.

Sheidvasser. 1999a. “An Empirical Analysis of the Social Security Disability

Application, Appeal and Award Process.” Labour Economics 6: 147-78.

Benítez-Silva, H., M. Buchinsky, H-M.Chan, J. Rust, and S.

Sheidvasser. 1999b. “How Large Is the Bias in Self-Reported Disability

Status?” manuscript, Yale University.

Benítez-Silva, H., M. Buchinsky, H-M.Chan, J. Rust, and S.

Sheidvasser. 1999c. “How Large Are the Classification Errors in the Social

Security Disability Award Process?” manuscript, Yale University.

Bound, J. 1991. “Self-Reported Versus Objective Measures of Health in

Retirement Models.” Journal of Human Resources v.26, n.1: 106-38.

Bound, J. and R. Burkhauser. 1998. “Economic Analysis of Transfer

Programs Targeted on People with Disabilities.” Forthcoming in O.

Ashenfelter and D. Card (eds.), Handbook of Labor Economics, Amsterdam,

North Holland Press.

Buchinsky, M. and J. Rust. 1999. “Dynamic Structural Models of

Retirement and Disability,” manuscript, Yale University.

Cutler, D. and M. McClellan. 1999. “Why is Health Changing Among

the Old?” manuscript.

Freedman, V. and B. Soldo. 1994. Trends in Disability at Older Ages.

National Academy Press, Washington, D.C. Gruber, J. and J. Kubik. 1997.

“Disability Rejection Rates and the Labor Supply of Older Workers.” Journal

of Public Economics 64: 1-23.

Halpern, J. and J.A. Hausman. 1986. “A Model of Applications for the

Social Security Disability Insurance Program.” Journal of Public Economics

31: 131-61.

Hu, J., K. Lahiri, D.R. Vaughan, and B. Wixon. 1997. “A Structural

Model of Social Security’s Disability Determination Process.” ORES Working

Paper No. 72, Office of Research, Evaluation, and Statistics, Social Security

Administration, 500 E Street SW, Washington, D.C.
95

Kreider, B. 1999. “Disability Applications: The Role of Measured

Limitation on Policy Inferences.” manuscript, Department of Economics,

University of Virginia.

Lahiri, K., D.R. Vaughan, and B. Wixon. 1995. “Modeling SSA’s

Sequential Disability Determination Process Using Matched SIPP Data.”

Social Security Bulletin v.58, n.4: 3-42.

Lee, R. and J. Skinner. 1999. “Will Aging Baby Boomers Bust the

Federal Budget?” Journal of Economic Perspectives v.13, n.1: 117-40.

Manton, K, L Corder and E. Stallard. 1997. “Chronic Disability Trends

in Elderly United States Populations: 1982-1984,” Proceedings of the National

Academy of Sciences: Medical Sciences 94: 2593-98.

Rupp, K. and D. Stapleton. 1995. “Determinants of the Growth in the

Social Security Administration’s Disability Programs.” Social Security

Bulletin 58: 43-70.

Rupp, K. and C. Scott. 1996. “Trends in the Characteristics of DI and

SSI Disability Awardees and the Duration of Program Participation.” Social

Security Bulletin 59: 3-21.

Rust, J. and C. Phelan. 1997. “How Social Security and Medicare

Affect Retirement Behavior in a World of Incomplete Markets.” Econometrica

v.65, n.4: 781-831.

Singer, B. and K. Manton. 1999. “Implications of Disability Decline for

Medicare.” manuscript.

Social Security Advisory Board. 1997. “How SSA's Disability

Programs Can Be Improved.” Report 6, Social Security Advisory Board,

available on the web at http://www.ssab.gov/Report6.html

Stapleton, D., B. Barnow, K. Coleman, K. Dietrich, and G. Lo. 1994.

“Labor Market Conditions, Socioeconomic Factors and the Growth of

Applications and Awards for SSDI and SSI Disability Benefits: Final Report.”

Lewin-VHI, Inc. and the Department of Health and Human Services, The

Office of the Assistant Secretary for Planning and Evaluation.

Zayatz, Tim. 1999. “Social Security Disability Insurance Program

Worker Experience.” Actuarial Study No. 114, Office of the Chief Actuary,

Social Security Administration, Baltimore, Maryland.
96

V. APPENDIX

A. GLOSSARY

Actuarial balance. The difference between the summarized income rate and the

summarized cost rate over a given valuation period.

Actuarial deficit. A negative actuarial balance.

Alternatives I, II, or III. See “Assumptions.”

Annual balance. The difference between the income rate and the cost rate in a given year.

Assets. Treasury notes and bonds, other securities guaranteed by the Federal Government,

certain Federally sponsored agency obligations, and cash, held by the trust funds for

investment purposes.

Assumptions. Values relating to future trends in certain key factors which affect the

balance in the trust funds. Demographic assumptions include fertility, mortality, net

immigration, marriage, divorce, retirement patterns, disability incidence and termination

rates, and changes in the labor force. Economic assumptions include unemployment,

average earnings, inflation, interest rates, and productivity. Three sets of economic

assumptions are discussed in this report—

• Alternative I is characterized as a “low cost” set—it assumes relatively rapid

economic growth, low inflation, and favorable (from the standpoint of program

financing) demographic conditions.

• Alternative II is the “intermediate” set of assumptions, and represents the Trustees’

“best estimates” of likely future economic and demographic conditions.

• Alternative III, characterized as a “high cost” set, assumes slow economic growth,

more rapid inflation, and financially disadvantageous demographic conditions.

Average wage index. The average amount of total wages for each year after 1950,

including wages in noncovered employment and wages in covered employment in excess

of the OASDI contribution and benefit base. These amounts are used to index the earnings

of most workers first becoming eligible for benefits in 1979 or later, and for automatic

adjustments in the contribution and benefit base, bend points, earnings test exempt

amounts, and other wage-indexed amounts. 

Award. An administrative determination that an individual is entitled to receive a

specified type of OASDI benefit. Awards can represent not only new entrants to the

benefit rolls but also persons already on the rolls who become entitled to a different type

of benefit. Awards usually result in the immediate payment of benefits, although

payments may be deferred or withheld depending on the individual’s particular

circumstances.

BLS. Bureau of Labor Statistics.
97

Baby boom. The period from the end of World War II through the mid-1960s marked by

unusually high birth rates.

Bend points. The dollar amounts defining the AIME or PIA brackets in the benefit

formulas.

Beneficiary. A person who has been awarded benefits on the basis of his or her own or

another’s earnings record. The benefits may be either in current-payment status or

withheld.

Board of Trustees. A Board established by the Social Security Act to oversee the

financial operations of the Federal Old-Age and Survivors Insurance Trust Fund and the

Federal Disability Insurance Trust Fund. The Board is composed of six members, four of

whom serve automatically by virtue of their positions in the Federal Government: the

Secretary of the Treasury, who is the Managing Trustee, the Secretary of Labor, the

Secretary of Health and Human Services, and the Commissioner of Social Security. The

other two members are appointed by the President and confirmed by the Senate to serve

as public representatives. Stephen G. Kellison and Marilyn Moon began serving 4-year

terms on July 20, 1995. 

CMT. Constant Maturity Treasury (securities).

COLA. Cost-of-living adjustment.

CORSIM. OCACT and ORES are developing a microsimulation model to evaluate the

cost and/or distributional effects of alternative Social Security policies. The model is

derived from the CORSIM microsimulation model developed at Cornell University.

Consumer Price Index—CPI. Relative measure of inflation. In this report, all references

to the CPI relate to the Consumer Price Index for Urban Wage Earners and Clerical

Workers (CPI-W). 

Cost rate. The cost rate for a year is the ratio of the cost (also called outgo, expenditures,

or disbursements) of the program to the taxable payroll for the year. In this context, the

outgo is defined to include benefit payments, special monthly payments to certain

uninsured persons who have 3 or more quarters of coverage (and whose payments are

therefore not reimbursable from the general fund of the Treasury), administrative

expenses, net transfers from the trust funds to the Railroad Retirement program under the

financial-interchange provisions, and payments for vocational rehabilitation services for

disabled beneficiaries; it excludes special monthly payments to certain uninsured persons

whose payments are reimbursable from the general fund of the Treasury (as described

above), and transfers under the interfund borrowing provisions.

Covered employment. All employment and self-employment creditable for Social

Security purposes. Almost every kind of employment and self-employment is covered

under the program. In a few employment situations, for example, religious orders under a

vow of poverty, foreign affiliates of American employers, or State and local governments,

coverage must be elected by the employer. However, effective July 1991, coverage is
98

mandatory for State and local employees who are not participating in a public employee

retirement system. In a few situations, for example, ministers or self-employed members

of certain religious groups, workers can opt out of coverage.

Covered worker. A person who has earnings creditable for Social Security purposes on

the basis of services for wages in covered employment and/or on the basis of income from

covered self-employment.

Disability. For Social Security purposes, the inability to engage in substantial gainful

activity (see “Substantial gainful activity—SGA”) by reason of any medically

determinable physical or mental impairment that can be expected to result in death or to

last for a continuous period of not less than 12 months. Special rules apply for workers

age 55 or older whose disability is based on blindness.

The law generally requires that a person be disabled continuously for 5 months before he

or she can qualify for a disabled-worker benefit.

Disability incidence rate. The proportion of workers in a given year, insured for but not

receiving disability benefits, who apply for and are awarded disability benefits.

Disability Insurance (DI) Trust Fund. See “Trust fund.”

Disability termination rate. The proportion of disabled-worker beneficiaries in a given

year whose disability benefits terminate as a result of the individual’s recovery, death, or

attainment of normal retirement age.

Disabled-worker benefit. A monthly benefit payable to a disabled worker under normal

retirement age and insured for disability. Before November 1960, disability benefits were

limited to disabled workers aged 50-64.

Earnings. Unless otherwise qualified, all wages from employment and net earnings from

self-employment, whether or not taxable or covered.

Gross Domestic Product—GDP. The total dollar value of all goods and services

produced by labor and property located in the United States, regardless of who supplies

the labor or property.

HRS. Health and Retirement Survey.

Income rate. Ratio of income from tax revenues on a liability basis (payroll-tax

contributions and income from the taxation of benefits) to the OASDI taxable payroll for

the year.

Inflation. An increase in the volume of money and credit relative to available goods,

resulting in an increase in the general price level.

Insured status. The state or condition of having sufficient quarters of coverage to meet

the eligibility requirements for retired-worker or disabled-worker benefits, or to permit

the worker’s spouse and children or survivors to establish eligibility for benefits in the

event of his or her disability, retirement, or death. See “Quarters of coverage.”
99

Interest. A payment in exchange for the use of money during a specified period.

Interest rate. Interest rates on new public-debt obligations issuable to Federal trust funds

(see “Special public-debt obligation”) are determined monthly. Such rates are set equal to

the average market yield on all outstanding marketable U.S. securities not due to mature

for at least 4 years from the date of the determination. The “effective” interest rate for a

trust fund is the ratio of the interest earned by the fund over a given period of time to the

average level of assets held by the fund during the period. The effective rate of interest

thus represents a measure of the overall average interest earnings on the fund’s portfolio

of assets.

Long range. The next 75 years. Long-range actuarial estimates are made for this period

because it is approximately the maximum remaining lifetime of current Social Security

participants.

MINT. Model of income in the near term.

Normal retirement age. The age at which a person may first become entitled to

unreduced retirement benefits. Currently age 65, but scheduled under present law to

increase gradually to 67 for persons reaching that age in 2027 or later, beginning with an

increase to 65 years and 2 months for persons reaching age 65 in 2003.

OASDI. Old-Age and Survivors Insurance and Disability Insurance.

PCM. Projected cohorts model.

PSA. Personal security account.

Pay-as-you-go financing. A financing scheme where taxes are scheduled to produce just

as much income as required to pay current benefits, with trust fund assets built up only to

the extent needed to prevent exhaustion of the fund by random economic fluctuations.

Payroll taxes. A tax levied on the gross wages of workers.

Present value. The equivalent value, at the present time, of a future stream of payments

(either income or expenditures). The present value of a future stream of payments may be

thought of as the lump-sum amount that, if invested today, together with interest earnings

would be just enough to meet each of the payments as they fell due. At the time of the last

payment, the invested fund would be exactly zero. For example, a home mortgage of

$100,000 represents the present value at 8 percent interest of future monthly payments of

$714.40 for the next 30 years. Present values are widely used in calculations involving

financial transactions over long periods of time to account for the time value of money

(interest) and the changing value of the dollar (inflation).

Quarters of coverage. Basic unit of measurement for determining insured status. In

1999, a worker receives one quarter of coverage (up to a total of four) for each $740 of

annual covered earnings. The amount of earnings required for a quarter of coverage is

subject to annual automatic increases in proportion to increases in average wages.
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Real-wage differential. The difference between the percentage increases in 1) the

average annual wage in covered employment and 2) the average annual Consumer Price

Index.

SIPP. Survey of Income and Program Participation.

SSI. Supplemental Security Income.

Social Security Act. Provisions of the law governing most operations of the Social

Security program. Original Social Security Act is Public Law 74-271, enacted August 14,

1935. With subsequent amendments, the Social Security Act consists of 20 titles, of which

four have been repealed. The Old-Age, Survivors, and Disability Insurance program is

authorized by title II of the Social Security Act. 

Special public-debt obligation. Securities of the United States Government issued

exclusively to the OASI, DI, HI, and SMI Trust Funds and other Federal trust funds.

Section 201(d) of the Social Security Act provides that the public-debt obligations issued

for purchase by the OASI and DI Trust Funds shall have maturities fixed with due regard

for the needs of the funds. The usual practice in the past has been to spread the holdings of

special issues, as of each June 30, so that the amounts maturing in each of the next 15

years are approximately equal. Special public-debt obligations are redeemable at par

value at any time and carry interest rates determined by law (see “Interest rate”).

Statutory blindness. Central visual acuity of 20/200 or less in the better eye with the use

of a correcting lens or tunnel vision of 20o

 or less.

Substantial gainful activity—SGA. The level of work activity used to establish

disability. A finding of disability requires that a person be unable to engage in substantial

gainful activity. Under current regulations, a person who is not statutorily blind and is

actually earning more than $700 a month (net of impairment-related work expenses) is

ordinarily considered to be engaging in substantial gainful activity. A person who is

statutorily blind (see “Statutory blindness”) is not considered to be engaging in substantial

gainful activity, for the purpose of determining a condition of disability, unless the

person’s earnings are more than $1,110 a month in 1999 (net of impairment-related work

expenses). This amount for the blind is subject to adjustment each year to reflect increases

in average wage levels.

TFR. Total fertility rate.

TIIS. Treasury Inflation-Indexed Securities (formerly called TIPS).

Taxable earnings. Wages and/or self-employment income, in employment covered by the

OASDI and/or HI programs, that is under the applicable annual maximum taxable limit.

For 1994 and later, no maximum taxable limit applies to the HI program.

Taxable payroll. A weighted average of taxable wages and taxable self-employment

income. When multiplied by the combined employee-employer tax rate, it yields the total

amount of taxes incurred by employees, employers, and the self-employed for work

during the period.
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Termination. Cessation of payment of a specific type of benefit because the beneficiary

is no longer entitled to receive it. For example, benefits might terminate as a result of the

death of the beneficiary, the recovery of a disabled beneficiary, or the attainment of age 18

by a child beneficiary. In some cases, the individual may become immediately entitled to

another type of benefit (such as the conversion of a disabled-worker beneficiary at normal

retirement age to a retired-worker beneficiary).

Total fertility rate. The average number of children who would be born to a woman in

her lifetime if she were to experience the birth rates by age observed in, or assumed for, a

specified year, and if she were to survive the entire childbearing period.

Trust fund. Separate accounts in the United States Treasury in which are deposited the

taxes received under the Federal Insurance Contributions Act, the Self-Employment

Contributions Act, contributions resulting from coverage of State and local government

employees; any sums received under the financial interchange with the railroad retirement

account; voluntary hospital and medical insurance premiums; and transfers of Federal

general revenues. Funds not withdrawn for current monthly or service benefits, the

financial interchange, and administrative expenses are invested in interest-bearing Federal

securities, as required by law; the interest earned is also deposited in the trust funds.

• Old-Age and Survivors Insurance (OASI). The trust fund used for paying monthly

benefits to retired-worker (old-age) beneficiaries and their spouses and children and to

survivors of deceased insured workers.

• Disability Insurance (DI). The trust fund used for paying monthly benefits to

disabled-worker beneficiaries and their spouses and children and for providing

rehabilitation services to the disabled.

• Hospital Insurance (HI). The trust fund used for paying part of the costs of inpatient

hospital services and related care for aged and disabled individuals who meet the

eligibility requirements.

• Supplementary Medical Insurance (SMI). The trust fund used for paying part of the

costs of physician’s services, outpatient hospital services, and other related medical

and health services for voluntarily enrolled aged and disabled individuals.

Year of exhaustion. The year in which a trust fund would become unable to pay benefits

when due because the assets of the fund were exhausted.
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B. HISTORY OF TECHNICAL PANELS

1. Establishment of Technical Panels

In 1968, the Social Security Act was amended to provide for the

appointment of an Advisory Council every 4 years beginning in 1969. The purpose

of the Councils was to review the status of the Social Security and Medicare Trust

Funds as well as the scope of coverage and adequacy of benefits under the Social

Security and Medicare programs. The statute specifically authorized the Councils

to engage the technical assistance necessary to carry out their functions.

Five quadrennial Advisory Councils (1971, 1975, 1979, 1991, 1994-96)

convened panels of experts to assist them in their deliberations. Those panels,

generally consisting of economists and actuaries, were charged primarily with

reviewing the economic and demographic assumptions and the methodology

underlying the cost projections included in the most recent OASDI Trustees

Report. Only the 1991 Council appointed a technical panel to look solely at the

Medicare projections, and it met in the same year as the OASDI technical panel

appointed by the Council. The 1984 Advisory Council, which focused almost

exclusively on Medicare, and the 1988 Council, which looked at the DI program,

did not convene technical panels.

2. 1991 Panels

In appointing the 1991 Advisory Council, then-Secretary of Health and

Human Services Louis Sullivan directed the Council’s attention to a broader

agenda than called for by the statute governing establishment of Advisory

Councils. He asked that the Council look at ways of providing more stable

financing for health care (including long-term care) for the aged, the disabled, the

poor and the uninsured. To assist it in accomplishing such a broad mandate, the

Council convened three groups of experts and assigned a distinct task to each.

• The Council appointed two separate technical panels to look at the

assumptions and methodology used in the Trustees Reports on OASDI and the

Medicare programs, with only one expert (actuary and current Public Trustee

Steve Kellison) serving on both panels.

o The OASDI panel (which met from May through June of 1990)

limited its review to key economic and demographic projections.

o The second panel (which met from June through December

1990) was the first and only panel ever convened by an Advisory

Council to focus on the Medicare projections. While it consisted

primarily of experts in health economics and devoted most of its

attention to health cost issues, the panel also commented on

certain of the trustees’ broader assumptions. In brief, the
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Medicare panel supported all of the conclusions and

recommendations of the OASDI panel except the

recommendation concerning the best estimate of real wage

growth over the long run. The Medicare panel recommended

that the ultimate 1.3 percent growth rate included in the 1990

Trustees Report be lowered to 0.7 percent, rather than to 1.0

percent as the OASDI panel had recommended.

• In January 1991, following completion of the work of both technical panels

and based on the blending of their projections, the Council convened a third

panel, the Expert Panel on the Future of Income Security and Health Care.

o The panel consisted of all of the members of the technical panels

plus two experts on long-term care. Its job was to project the

health care financing and income security environment of the

early 1990s forward to 2020 and to assess what implications the

projections might have for policy makers.

o The panel’s fundamental conclusion was that, in the absence of

major change, projected future gains in income and wealth

would be significantly eroded by the resources required to

support the health care sector.

3. 1994-95 Panels

The 1994-96 Advisory Council (which submitted its report in January

1997) looked only at the OASI and DI programs. It convened two separate

technical panels with no overlapping membership.

• The Technical Panel on Assumptions and Methods was appointed in August

1994 and reported in October 1995. It included a demographer, as well as

economists and actuaries, and was charged with reviewing the key

assumptions and projection methodology used in the OASDI report. The panel

was specifically directed to build on the work of the 1991 Technical Panel and

the work done by and for the Public Trustees in the intervening years.

• The Technical Panel on Trends and Issues in Retirement Saving was appointed

in October 1994 to assist the Council in analyzing the relative roles of the

public and private sectors in the provision of retirement income. In addition to

nine economists, the panel included a law professor and three employee benefit

experts. It met through March of 1995 and reported in September 1995. Its

primary charge was to develop evaluation criteria and to use them to discuss a

range of policy options to deal with the long-range Social Security imbalance

and to improve the well being of future retirees.
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4. 1999 Panel

Legislation enacted in 1994 established the Social Security Administration

as an independent agency and created an independent, bipartisan Social Security

Advisory Board. The Advisory Board assumed the role of the Advisory Councils

in appointing technical panels to advise on the assumptions and methods used in

the Trustees Report to evaluate the status of the OASDI Trust Funds. The first

Technical Panel appointed by the Advisory Board met from January through

September 1999 and issued this report in November. The role of the Panel was

expanded to include investigation of the assumptions and methods used to evaluate

various reform proposals.