Social Security

Memorandum Refer to : TCC

Date: November 30, 2001

To: Stephen C. Goss, Chief Actuary

From: Alice H. Wade, Deputy Chief Actuary

Chris Chaplain, Actuary

Subject: Estimates of Long-Range OASDI Financial Effect of the Social Security 

Stabilization and Enhancement Act of 2001 (H.R. 3315) -

INFORMATION 

This memorandum provides long-range estimates of the financial effect on the 

OASDI program assuming enactment of the Social Security Stabilization and 

Enhancement Act of 2001 (H.R. 3315), as requested by Tom Vinson of 

Representative DeFazio’s staff. All estimates are based on the intermediate 

assumptions of the 2001 Trustees Report, with additional assumptions noted 

below. The comprehensive proposal would:

• Redefine the amount of earnings subject to the OASDI payroll tax,

• Invest a portion of the OASI Trust Funds in marketable securities

(including equities),

• Modify the benefit computation period in determining OASDI benefit

levels, and

• Increase benefits for beneficiaries over the age of 85.

Enactment of the comprehensive proposal described in this memorandum would 

improve the long-range OASDI actuarial balance by an estimated 1.89 percent 

of taxable payroll, changing the present-law actuarial deficit of 1.86 percent to 

an actuarial balance of +0.03 percent of taxable payroll. The OASDI annual 

balance for the year 2070 would improve by 2.00 percent of payroll, to an 

estimated level of -3.78 percent of payroll. The trust fund ratio for the 

combined OASDI program would increase to a peak of 626 percent in 2019, and 

then decline to a level of 164 percent at the end of the 75-year projection period. 
2

The remainder of this memorandum provides the following:

• Description of the equity yield assumption used in estimating the yield 

on the portion of the OASI Trust Fund that is invested in equities,

• Sensitivity analysis with regard to the equity yield assumption and/or the 

amount of equities held by the OASI Trust Fund,

• Description of the provisions of this bill, and 

• Brief listing of the individual provisions of the proposal, including the 

effect of each provision on the long-range OASDI actuarial balance 

(shown in table 1), and

• Table 2 that gives annual estimates including income rates, cost rates, 

balances, trust fund ratios, and equities held in the OASI Trust Funds, 

expressed as a percent of GDP. 

Description of the equity yield assumption 

As indicated above, estimates provided in this memorandum are based on the 

intermediate assumptions of the 2001 Trustees Report. In addition, the longterm ultimate average annual real yield assumed for equities is assumed to be 

6.5 percent. This is slightly lower than the expected real equity yield used for 

estimates produced by the Office of the Chief Actuary over the last several 

years. 

A consensus is forming among economists that equity pricing as indicated by 

price-to-earnings ratios may average somewhat higher in the long-term future 

than in the long-term past. This is consistent with broader access to equity 

markets and the belief that equities may be viewed as somewhat less “risky” in 

the future than in the past. Equity pricing will vary in the future as in the past. 

Price-to-earnings ratios were very high in the recent past, and are now lower. 

The ultimate average real equity yield assumed for estimates in this 

memorandum is consistent with an average ultimate level of equity pricing 

somewhat above the average level of the past. The extent of this ultimate 

change is unknown, but it is consistent with assuming a real equity yield 

somewhat below the long-range past average of about 7 percent. 

The assumption for an ultimate real equity yield of 7 percent that was used until 

this year was developed in 1995 with the 1994-6 Advisory Council. At the time, 

the Trustees assumption for the ultimate average real yield on long-term Treasury 

bonds was 2.3 percent. Real yields on corporate bonds are believed to bear a 

close relationship to Treasury bond yields of similar duration. The 2001 Trustees 

Report includes the assumption that the ultimate real yield on long-term Treasury 

bonds will average 3 percent, or 0.7 percentage point higher than in 1995. This 

increase in the assumed bond yield is consistent with a reduction in the perceived 

risk associated with equity investments.
3

Sensitivity analysis with regard to the equity yield assumption and/or the 

amount of equities held by the OASI Trust Fund

The Social Security Stabilization and Enhancement Act of 2001 specifies that 

a portion of the OASI Trust Fund be invested in marketable securities starting 

October 1, 2001, reaching 40 percent in 2016 and later. An investment board 

would determine the allocation of these marketable securities. For the purpose 

of these estimates, we have assumed that the yield achieved on this portion of 

the trust fund assets would, on average, be consistent with maintaining 50 

percent in domestic corporate equities and 50 percent in long-term U.S Treasury 

bonds. 

If less than 50 percent of the marketable securities were to be invested in 

equities or if actual real yields on equities were to average less than 6.5 percent, 

the long-range actuarial balance under this proposal would be less than indicated 

above. For example, if actual real yields on the marketable securities held in the 

OASI Trust Fund during the next 75 years were to average only 3 percent, the 

same level as assumed for long-term Treasury bonds, this comprehensive 

proposal would not provide for adequate financing for the OASDI program. 

However, the long-range actuarial deficit would still be reduced considerably. 

The long-range OASDI actuarial balance would improve by an estimated 1.52 

percent of taxable payroll, reducing the present-law actuarial deficit of 1.86 

percent to 0.34 percent of taxable payroll. 

It must be noted that the uncertainties associated with equity investments and 

bond yields mean that actual experience could vary substantially from the 

estimates provided in this memorandum. In particular, there is a potential that 

real equity yields could average less than 3 percent over long periods of time, 

although this is not very likely. 

Description of the provisions of this bill 

Provision 1: Eliminate the OASDI contribution and benefit base in 

determining the amount subjected to FICA and SECA payroll tax

For earnings in years after 2001, change the OASDI contribution and benefit 

base to be a benefit base only. This means that there would be no limit on the 

amount of an individual's covered earnings that would be subject to OASDI 

payroll taxes, but the base would continue to be used to establish the maximum 

annual amount of earnings that is credited for the purpose of benefit 

computation.
4

Provision 2: Beginning in 2002, establish an exempt amount ($4,000 for 

2002) that would serve to exclude up to that amount of covered earnings from 

Social Security employee payroll taxes. 

Beginning in 2002, establish an exempt amount that would serve to exclude up 

to that amount of covered earnings from the employee portion (1/2 of the selfemployed portion) of the OASDI payroll taxes. The exempt amount would be set 

at $4,000 in 2002, and would be increased each year after 2002 by increases in 

the Social Security average wage index. Earnings exempted due to this 

provision would still be included in determining OASDI benefit amounts.

Provision 3: Beginning in 2003, increase the benefits of beneficiaries who are 

age 85 or older. The maximum increase in benefits would be 5 percent.

For years after 2002, increase the level of benefits for all beneficiaries who age 85 

or older. This amount of increase in an individual's present-law benefit level for a 

given calendar year would be determined by multiplying:

• 0.25 percent by

• The number of calendar years, before the given calendar year, in which the 

individual was age 85 or older.

The maximum amount of increase would be 5 percent. 

For a given calendar year, benefit levels under present law would be increased by 

0.25 percent for those who are age 85 as of the beginning of the given calendar 

year, by 0.50 percent for those who are age 86 as of the beginning of the given 

calendar year, .... , and by 5.00 percent who are age 104 as of the beginning of 

the given calendar year.
5

Provision 4: Change in calculation of AIME

Provision 4a: Increase the number of benefit computation years used in determining 

AIME:

Provision 4a would apply in determining benefits for retired workers and their dependents 

and for survivors of deceased workers. This provision does not apply in determining 

benefits for disabled workers and their dependents.

In calculating the AIME for a retired worker under present law, the highest 35 years of 

indexed earnings are generally used in determining the numerator of the AIME and a 

benefit computation period of 35 years is used in determining the denominator. Under 

this provision, the number of years of earnings used in calculating the numerator and 

denominator of the AIME, are both gradually increased, reaching 38 years for individuals 

who have no periods of disability and who become newly eligible for retired worker 

benefits after 2010.

The chart below indicates the phase in schedule of the above changes.

 Change in Calculation of AIME for Retired Worker With no Periods of 

Disability

 (assumes the retired worker gets no credit for child care years) 

Newly Eligible in Years: 2007 –

2008

2009 -

2010 

2011+

Present Law

Years in Numerator135 35 35

Denominator (in years)

2

35 35 35

Proposal

Years in Numerator136 37 38

Denominator (in years)

2

36 37 38

1

 Years in Numerator: Refers to the number of years of earnings used in calculating the 

numerator of the AIME.

2

 Denominator (in years): Refers to the benefit computation period (in years) used in 

calculating the denominator of the AIME.
6

Under current law, the number of benefit computation years for a retired worker of a 

deceased worker is determined by subtracting 5 dropout years from the number of 

elapsed years

1

. Under this proposed provision, the increase in the number of benefit 

computation years would be accomplished by reducing the number of dropout years, 

ultimately to two. 

Provision 4b: Credit up to 3 child-care dropout years in determining the number of years 

used in calculating the AIME for OASDI benefits.

Under this provision, credit up to 3 child-care dropout years, for workers who 

attain age 62, become disabled, or die after 2010. In the case of a disabled worker, 

this provision would increase the number of child-care dropout years under 

present law by up to 3 additional years. To credit a worker with a child-care 

dropout year, the following conditions must be met: 

• The year must be included in the worker's computation base years,

• The child was under age 12 throughout the year,

• The worker is the parent or stepparent of the child, and

• The worker had earnings below a certain threshold amount during the year. 

The threshold amount is set at $3,000 for calendar year 2007. The $3,000 

level is indexed both backwards and forwards by the Social Security average 

wage index.

Dropout years are phased in by one additional year for new eligibles in each year 

2007, 2009, and 2011. This phase in of the dropout years is consistent with the 

phase in of the increase in the number of years used in determining the AIME.

 

1

 The number of elapsed years used in determining the AIME for retired worker benefits equals 

the number of years from age 22 through the year prior to reaching the earliest eligibility age (age 

62), excluding any disability years. The number of elapsed years used in determining the AIME 

for deceased worker benefits equals the number of years from age 22 through the year prior to 

death, excluding any disability years. 
7

Provision 5: Invest a portion of the OASI Trust Fund in marketable 

securities beginning on or after Oct 1, 2001, reaching 40 percent of assets for 

2016 and later.

An Independent Social Security Investment Oversight Board shall establish in 

the OASI Trust Fund an investment fund comprised of:

• A Government Securities Investment Fund;

• A Fixed Income Investment Fund which would be invested in insurance 

contracts, certificates of deposits, etc.;

• A Common Stock Index Investment Fund; and

• Other investment funds as the Board may provide by regulation.

The portion of the OASI Trust Fund that would be held in this investment fund 

is targeted to be:

• 8 percent as of the end of 2004, 

• 16 percent as of the end of 2007, 

• 24 percent as of the end of 2010, 

• 32 percent as of the end of 2013, and 

• 40 percent as of the end of 2016 and for each year thereafter. 

For the purpose of these estimates, we have assumed that the yield achieved on 

this portion of the trust fund assets would, on average, be consistent with 

maintaining 50 percent in domestic corporate equities and 50 percent in longterm U.S Treasury bonds. 

Alice H. Wade

Christopher J. Chaplain
Table 1. Estimated Long-Range OASDI Financial Effect Social 

Security Stabilization and Enhancement Act of 2001, H.R. 3315 

(Rep. DeFazio)

Estimated Change in 

 Long-range OASDI 

 Actuarial Balance 

 Provision (percent of taxable payroll)

1

Beginning in 2002, eliminate the OASDI contribution and benefit base in determining 

the amount of covered earnings subject to FICA and SECA payroll tax. Retain the 

base for benefit determination. 2.13

2 Beginning in 2002, establish an exempt amount ($4,000 for 2002) that would serve to 

exclude up to that amount of covered earnings from the employee portion (1/2 of the 

self-employed portion) of the Social Security payroll taxes. The $4,000 exempt 

amount would be increased in years after 2002 by increases in the average wage 

index. -0.95

3 Beginning in calendar year 2003, increase the benefits of beneficiaries who are age 85 

or older. For a given calendar year, benefit levels under present law would be 

increased by 0.25 percent for those who are age 85 as of the beginning of the calendar 

year, by 0.50 percent for those who are age 86 as of the beginning of the calendar year, 

.... , and by 5.00 percent who are age 104 as of the beginning of the calendar year. -0.02

4a For survivors and retirement benefits, reduce the number of dropout years (nonchildcare) from 5 to 2; phased in by reducing one additional dropout year for new 

eligibles in each year 2007, 2009, and 2011. Thus, the benefit computation period for 

retirees who become eligible after 2010 and who have no periods of disability would 

be increased by 3 years. 0.23

4b Provide up to 3 child-care dropout years when determining the AIME for OASDI 

benefits. These years would be granted to a parent who had earnings below a specified 

threshold during the year and provided care to his/her child under the age of 12. Also, 

these years must be includable in the parent's computation base years. Dropout years 

are phased in by one additional year for new eligibles in each year 2007, 2009, and 

2011. (This provision reflects interaction with provision 4a.) -0.14

Total for Provisions 1-4 (including interaction among provisions) 1.52

5 Invest a portion of the OASI Trust Funds in marketable securities beginning Oct 1, 

2001, reaching 40 percent of assets in marketable securities for 2016 and later. The 

yield achieved on these marketable securities is assumed, on average, to be consistent 

with maintaining 50 percent in domestic corporate equities and 50 percent in longterm U.S Treasury bonds. (This provision reflects interaction with provisions 1- 4.) 0.37

Total for Provisions 1-5 (including interaction among provisions) 1.89

Based on the intermediate assumptions of the 2001 Trustees Report under present law, the long-range 

actuarial balance for the 75-year period (2001-2075) is -1.86 percent of taxable payroll.

November 13, 2001 Office of the Chief Actuary, SSA
Table 2 Social Security Stabilization and Enhancement Act of 2001 (H. R. 3315)

Year Cost Rate

Income 

Rate

Annual 

Balance

Trust 

Fund 

Ratio 

1-1-year

2001 10.50 12.72 2.22 239 - 12.40 -

2002 9.39 12.69 3.30 264 - 12.40 -

2003 9.41 12.70 3.29 301 - 12.40 0.1

2004 9.44 12.71 3.26 338 - 12.40 0.3

2005 9.50 12.71 3.21 373 - 12.40 0.5

2006 9.57 12.72 3.15 408 - 12.40 0.8

2007 9.68 12.73 3.05 441 - 12.40 1.1

2008 9.81 12.74 2.93 472 - 12.40 1.4

2009 9.98 12.75 2.77 499 - 12.40 1.8

2010 10.16 12.76 2.61 525 - 12.40 2.2

2011 10.35 12.77 2.42 547 - 12.40 2.7

2012 10.59 12.78 2.19 566 - 12.40 3.1

2013 10.85 12.78 1.93 583 - 12.40 3.6

2014 11.13 12.79 1.66 596 - 12.40 4.2

2015 11.43 12.80 1.37 607 - 12.40 4.7

2016 11.74 12.81 1.07 615 - 12.40 5.3

2017 12.06 12.82 0.76 621 - 12.40 5.9

2018 12.38 12.83 0.45 625 - 12.40 6.1

2019 12.71 12.84 0.13 626 - 12.40 6.3

2020 13.03 12.85 -0.18 626 - 12.40 6.5

2021 13.33 12.87 -0.46 625 - 12.40 6.6

2022 13.62 12.89 -0.73 623 - 12.40 6.8

2023 13.90 12.90 -0.99 620 - 12.40 6.9

2024 14.16 12.92 -1.24 616 - 12.40 7.0

2025 14.41 12.93 -1.47 611 - 12.40 7.0

2026 14.64 12.95 -1.69 606 - 12.40 7.1

2027 14.85 12.96 -1.89 600 - 12.40 7.2

2028 15.04 12.98 -2.06 594 - 12.40 7.2

2029 15.21 12.99 -2.21 588 - 12.40 7.2

2030 15.35 13.00 -2.34 582 - 12.40 7.2

2031 15.48 13.02 -2.46 575 - 12.40 7.2

2032 15.59 13.03 -2.56 569 - 12.40 7.2

2033 15.67 13.04 -2.64 562 - 12.40 7.1

2034 15.73 13.04 -2.68 557 - 12.40 7.1

2035 15.76 13.05 -2.71 551 - 12.40 7.0

2036 15.78 13.06 -2.72 546 - 12.40 7.0

2037 15.78 13.06 -2.72 542 - 12.40 6.9

2038 15.77 13.07 -2.71 537 - 12.40 6.9

2039 15.75 13.07 -2.69 533 - 12.40 6.8

2040 15.74 13.07 -2.66 529 - 12.40 6.8

2041 15.72 13.08 -2.65 525 - 12.40 6.7

2042 15.71 13.08 -2.63 521 - 12.40 6.7

2043 15.70 13.08 -2.62 517 - 12.40 6.6

2044 15.70 13.08 -2.62 513 - 12.40 6.6

2045 15.71 13.09 -2.62 508 - 12.40 6.5

2046 15.72 13.09 -2.63 504 - 12.40 6.5

2047 15.74 13.10 -2.64 499 - 12.40 6.5

2048 15.76 13.10 -2.66 494 - 12.40 6.4

2049 15.78 13.10 -2.68 488 - 12.40 6.4

2050 15.82 13.11 -2.71 482 - 12.40 6.4

2051 15.86 13.11 -2.75 476 - 12.40 6.3

2052 15.91 13.12 -2.80 469 - 12.40 6.3

2053 15.97 13.12 -2.85 462 - 12.40 6.2

2054 16.03 13.13 -2.90 454 - 12.40 6.2

2055 16.10 13.14 -2.96 445 - 12.40 6.1

2056 16.16 13.14 -3.02 437 - 12.40 6.1

2057 16.23 13.15 -3.08 427 - 12.40 6.0

2058 16.30 13.15 -3.14 418 - 12.40 6.0

2059 16.36 13.16 -3.20 407 - 12.40 5.9

2060 16.42 13.16 -3.26 397 - 12.40 5.8

2061 16.49 13.17 -3.32 386 - 12.40 5.7

2062 16.55 13.18 -3.37 374 - 12.40 5.6

2063 16.60 13.18 -3.42 362 - 12.40 5.5

2064 16.66 13.19 -3.48 350 - 12.40 5.4

2065 16.72 13.19 -3.53 337 - 12.40 5.3

2066 16.77 13.19 -3.58 324 - 12.40 5.2

2067 16.83 13.20 -3.63 310 - 12.40 5.0

2068 16.88 13.20 -3.68 296 - 12.40 4.9

2069 16.94 13.21 -3.73 281 - 12.40 4.8

2070 16.99 13.21 -3.78 266 - 12.40 4.6

2071 17.04 13.22 -3.82 251 - 12.40 4.5

2072 17.09 13.22 -3.87 234 - 12.40 4.3

2073 17.15 13.22 -3.92 218 - 12.40 4.2

2074 17.20 13.23 -3.97 200 - 12.40 4.0

2075 17.25 13.23 -4.02 183 - 12.40 3.8

2076 17.31 13.24 -4.07 164 - 12.40 3.7

Summarized Rates: OASDI

2001 Cost Rate

-2075 13.48 13.51 0.03 1.89

Office of the Chief Actuary

Based on Intermediate Assumptions of the 2001 Trustees Report Social Security Administration

 November 20, 2001

Equities Held in 

the OASI Trust 

Fund as a % of 

GDP (Beg. of 

Year)

 Change 

in OASDI 

Payroll Tax 

Rate 

OASDI 

Payroll Tax 

Rate

Income 

Rate

Actuarial 

Balance

Change in 

Actuarial 

Balance