2011   Financial Report of the United States Government

Notes to the Financial Statements

Note 26. Social Insurance

The Statement of Social Insurance presents the projected actuarial present value of the estimated future revenue and estimated future expenditures of the Social Security, Medicare, Railroad Retirement, and Black Lung social insurance programs which are administered by the SSA, HHS, RRB, and DOL, respectively. These estimates are based on the economic and demographic assumptions presented later in this note as set forth in the relevant Social Security and Medicare trustees’ reports and in the agency financial report of HHS and in the relevant agency performance and accountability reports for SSA and RRB and the annual financial report for DOL. The projections are based on the continuation of program provisions contained in current law. The estimates in the consolidated Statements of Social Insurance (SOSI) of the open group measures are for persons who are participants or eventually will participate in the programs as contributors (workers) or beneficiaries (retired workers, survivors, and disabled) during the 75-year projection period (Black Lung is projected only through September 30, 2040, because the projection period will terminate on September 30, 2040).

Contributions and earmarked taxes consist of: payroll taxes from employers, employees, and self-employed persons; revenue from Federal income taxation of Old-Age Survivors and Disability Insurance (OASDI) and railroad retirement benefits; excise tax on coal (Black Lung); and premiums from, and State transfers on behalf of, participants in Medicare. Income for all programs is presented from a consolidated perspective. Future interest payments and other future intragovernmental transfers have been excluded upon consolidation. Expenditures include scheduled benefit payments and administrative expenses. Scheduled benefits are projected based on the benefit formulas under current law. However, current Social Security and Medicare law provides for full benefit payments only to the extent that there are sufficient balances in the trust funds.

Actuarial present values of estimated future revenue (excluding interest) and estimated future expenditures for the Social Security, Medicare, and Railroad Retirement social insurance programs are presented for three different groups of participants: (1) current participants who have attained eligibility age, (2) current participants who have not attained eligibility age, and (3) future participants who are new entrants expected to become participants in the future. Current participants in the Social Security and Medicare programs form the “closed group” of taxpayers and/or beneficiaries who are at least 15 years of age at the start of the projection period. For the 2007 Medicare projections, current participants are at least 18 years of age at the beginning of the projection period. Since the projection period for the Social Security, Medicare, and Railroad Retirement social insurance programs consists of 75 years, the period covers virtually all of the current participants’ working and retirement years, a period that could be greater than 75 years in a relatively small number of instances. Future participants for Social Security and Medicare include births during the projection period and individuals below age 15 (below age 18 for the Medicare programs for 2007) as of January 1 of the valuation year. Railroad Retirement’s future participants are the projected new entrants as of January 1 of the valuation year.

The present values of future expenditures in excess of future revenue are the current amount of funds needed to cover projected shortfalls, excluding the starting trust fund balances, over the projection period. They are calculated by subtracting the actuarial present values of future scheduled contributions and dedicated tax income by and on behalf of current and future participants from the actuarial present value of the future scheduled benefit payments to them or on their behalf.

The trust fund balances as of the valuation date for the respective programs, including interest earned, are in the table shown below. Substantially all of the Social Security (OASDI) and Medicare Hospital Insurance (HI), and Supplementary Medical Insurance (SMI) trust fund balances consist of investments in special non-marketable U.S. Treasury securities that are backed by the full faith and credit of the U.S. Government.

Social Insurance Programs Trust Fund Balances 1
(In billions of dollars)
2011
2010
2009
2008
2007
Social Security 2,609 2,540 2,419 2,238 2,048
Medicare:
HI 272 304 321 312 300
SMI Part B 71 76 59 53 38
SMI Part D 1 1 1 3 1
Railroad Retirement 26 25 22 33 32
Black Lung (6) (6) (6) (10) (10)
1 As of the valuation date of the respective programs.

Social Security

The Old Age and Survivors Insurance (OASI) program, created in 1935, and the Disability Insurance (DI) program, created in 1956, collectively referred to as OASDI or “Social Security,” provides cash benefits for eligible U.S. citizens and residents. Eligibility and benefit amounts are determined under the laws applicable for the period. Current law provides that the amount of the monthly benefit payments for workers, or their eligible dependents or survivors, is based on the workers’ lifetime earnings histories.

The primary financing of the OASDI Trust Funds are taxes paid by workers, their employers, and individuals with self-employment income, based on work covered by the OASDI Program. Refer to the Social Insurance segment in the Unaudited Supplemental Information section for additional information on Social Security program financing.

That portion of each trust fund not required to pay benefits and administrative costs is invested, on a daily basis, in interest-bearing obligations of the U.S. Government. The Social Security Act authorizes the issuance by the Treasury of special nonmarketable, intragovernmental debt obligations for purchase exclusively by the trust funds. Although the special issues cannot be bought or sold in the open market, they are redeemable at any time at face value and thus bear no risk of fluctuation in principal value due to changes in market yield rates. Interest on the bonds is credited to the trust funds and becomes an asset to the funds and a liability to the General Fund of the Treasury. These Treasury securities and related interest are eliminated in consolidation at the Governmentwide level.

Medicare

The Medicare Program, created in 1965, has two separate trust funds: the Hospital Insurance (HI, Medicare Part A) and Supplementary Medical Insurance (SMI, Medicare Parts B and D) Trust Funds. HI pays for inpatient acute hospital services and major alternatives to hospitals (skilled nursing services, for example) and SMI pays for hospital outpatient services, physician services, and assorted other services and products through the Part B account and pays for prescription drugs through the Part D account. Though the events that trigger benefit payments are similar, HI and SMI have different earmarked financing structures. Similar to OASDI, HI is financed primarily by payroll contributions. Other income to the HI Trust Fund includes a small amount of premium income from voluntary enrollees, a portion of the Federal income taxes that beneficiaries pay on Social Security benefits and interest credited on Treasury securities held in the HI Trust Fund. These Treasury securities and related interest are eliminated in the consolidation at the Governmentwide level.

For SMI, transfers from the General Fund of the Treasury represent the largest source of income for both Parts B and D. Generally, beneficiaries finance the remainder of Parts B and D costs via monthly premiums to these programs. With the introduction of Part D drug coverage, Medicaid is no longer the primary payer for beneficiaries dually eligible for Medicare and Medicaid. For those beneficiaries, States must pay a portion of their estimated foregone drug costs into the Part D account (referred to as State transfers). As with HI, interest received on Treasury securities held in the SMI Trust Fund is credited to the fund and these Treasury securities and related interest are eliminated in consolidation at the Governmentwide level. Refer to the Social Insurance segment in the Unaudited Supplemental Information section for additional information on Medicare program financing.

The Medicare Prescription Drug, Improvement, and Modernization Act (MMA), enacted on December 8, 2003, created the Part D account in the SMI Trust Fund to account for the prescription drug benefit that began in 2006. The MMA established within SMI two Part D accounts related to prescription drug benefits: the Medicare Prescription Drug Account and the Transitional Assistance Account. The Medicare Prescription Drug Account was used in conjunction with the broad, voluntary prescription drug benefits that commenced in 2006. The Transitional Assistance Account was used to provide transitional assistance benefits, beginning in 2004 and extending through 2005, for certain low-income beneficiaries prior to the start of the new prescription drug benefit.

Affordable Care Act (ACA)

The Affordable Care Act improves the financial outlook for Medicare substantially; however, the effects of some of the new law’s provisions on Medicare are not known at this time, with the result that the projections are very uncertain, especially in the longer-range future. For example, the ACA initiative for aggressive research and development has the potential to reduce Medicare costs in the future; however, as specific reforms have not yet been designed, tested, or evaluated, their ability to reduce costs cannot be estimated at this time, and thus no specific savings have been reflected in the projections for the initiative.

Another important example involves lower payment rate updates to most categories of Medicare providers in 2011 and later. These updates will be adjusted downward by the increase in productivity experienced in the economy overall. Since the provision of health services tends to be labor-intensive and is often customized to match an individuals’ specific needs, most categories of health providers have not been able to improve their productivity to the same extent as the economy at large. Over time, the productivity adjustments mean that the prices paid for health services by Medicare will grow about 1.1 percent per year more slowly than the increase in prices that providers must pay to purchase the goods and services they use to provide health care services. Unless providers could reduce their cost per service correspondingly, through productivity improvements, or other steps, they could eventually become unwilling or unable to treat Medicare beneficiaries.

It is possible that providers can improve their productivity, reduce wasteful expenditures, and take other steps to keep their cost growth within the bounds imposed by the Medicare price limitations. Similarly, the implementation of payment and delivery system reforms, facilitated by the ACA research and development program, could help constrain cost growth to a level consistent with the lower Medicare payments. These outcomes are far from certain, however. The feasibility of such sustained improvements is debatable. Without fundamental changes in current health care delivery systems and payment mechanisms the Medicare price constraints would probably become unworkable in which case Congress would likely override them, much as they have done to prevent the reductions in physician payment rates otherwise required by the sustainable growth rate formula in current law.

The reductions in provider payments reflected in these updates, if implemented for all future years as required under current law, could have secondary impacts, for beneficiary access to care; utilization, intensity and quality of services; and other factors. These possible impacts are speculative, and at present there is not consensus among experts as to their potential scope. Further research and analysis will help to better inform this issue and may enable the development of specific projections of secondary effects under current law in the future.

Because knowledge of the potential long-range effects of the productivity adjustments, delivery and payment innovations, and certain aspects of the Affordable Care Act is so limited, in August 2010, the HHS Secretary working on behalf of the Medicare Board of Trustees, established an independent panel of technical of expert actuaries and economists to review the assumptions and methods used by the Medicare Trustees to make projections of the financial status of the trust funds. The members of the Panel were selected in October 2010 and began their deliberations in November 2010. They were asked to focus their immediate attention on the long-range Medicare expenditure growth rate assumption. In its interim report, the Panel found that the long-range Medicare growth rate assumptions used in the 2010 Medicare Trustees Report and in the 2010 Statement of Social Insurance for the current-law projections were not unreasonable in light of the provisions of the Affordable Care Act. The Panel recommended the continued use of a supplemental analysis, similar to the illustrative projection in the 2010 Medicare Trustees Report, for the purpose of illustrating the higher Medicare costs that would result if the reduction in physician payment rates and the productivity adjustments to most other provider payment updates are not fully implemented as required under current law.1

The Panel members noted the extreme difficulty involved in developing long-range Medicare cost growth assumptions, due to the many uncertainties that surround not only the long-term evolution of the U.S. health care system but also the system’s interaction with the provisions of the Affordable Care Act. The Medicare Trustees will continue their efforts, with the assistance of the panel, to develop possible improvements to the cost growth assumptions underlying the 2010 Medicare Trustee Report.

The SOSI projections are based on current law. Therefore, the productivity adjustments are assumed to occur in all future years, as required by the Affordable Care Act. In addition, an almost 30 percent reduction in Medicare payment rates for physician services in January 2012 is assumed to be implemented as required under current law, despite the virtual certainty that Congress will continue to override this reduction. Therefore, it is important to note that the actual future costs for Medicare are likely to exceed those shown by these current-law projections.

The extent to which actual future Part A and Part B costs exceed the projected current-law amounts due to changes to the productivity adjustments and physician payments depends on both the specific changes that might be legislated and on whether Congress would pass further provisions to help offset such costs. As noted, these examples only reflect hypothetical changes to provider payment rates.

It is likely that in the coming years Congress will consider, and pass, numerous other legislative proposals affecting Medicare. Many of these will likely be designed to reduce costs in an effort to make the program more affordable. In practice, it is not possible to anticipate what actions Congress might take, either in the near term or over longer periods.

The Medicare Board of Trustees, in their annual report to Congress, references an alternative scenario to illustrate the potential understatement of costs under current law. This alternative scenario assumes that the productivity adjustments are gradually phased out over the 16 years starting in 2020 and that the physician fee reductions are overridden. These examples were developed by management for illustrative purposes only; the calculations have not been audited; and the examples do not attempt to portray likely or recommended future outcomes. Thus, the illustrations are useful only as general indicators of the substantial impacts that could result from future legislation affecting the productivity adjustments and physician payments under Medicare and of the broad range of uncertainty associated with such impacts. The table below contains a comparison of the Medicare 75-year present values of income and expenditures under current law with those under the alternative scenario illustration.

Medicare Present Values (in billions) (Unaudited)
 
2011 Consolidated
SOSI
Illustrative Alternative
Scenario 1, 2
Income
Part A $15,104 $15,104
Part B 3 5,086 7,740
Part D 4 2,484 2,484
  Total Income $22,674 $25,328
Expenditures
Part A $18,356 $23,640
Part B 18,940 28,744
Part D 9,950 9,950
  Total Expenditures $47,246 $62,334
Part A $3,252 $8,536
Part B 13,854 21,004
Part D 7,466 7,466
  Excess of Expenditures over Income $24,572 $37,006
1These amounts are not presented in the 2011 Trustees’ Report.
2 At the request of the Trustees, the Office of the Actuary at CMS has prepared an illustrative set of Medicare Trust Fund projections that differ from current law. No endorsement of the illustrative alternative to current law by the Trustees, CMS, or the Office of the Actuary should be inferred.
3 Excludes $13,854 billion and $21,004 of General Revenue Contributions from the 2011 Consolidated SOSI projection and the Illustrative Alternative Scenario’s projection, respectively; i.e., to reflect Part B income on a consolidated Governmentwide basis.
4 Excludes $7,466 billion of General Revenue Contributions from both the 2011 Consolidated SOSI projection and the Illustrative Alternative Scenario’s projection, respectively; i.e., to reflect Part D income on a consolidated Governmentwide basis.

As expected, the differences between the current-law projections and the illustrative alternative are substantial for Part A and Part B. All Part A fee-for-service providers are affected by the productivity adjustments, so the current law projections reflect an estimated 1.1 percent reduction in annual Part A cost growth each year. If the productivity adjustments were gradually phased out, as illustrated under the alternative scenario, the present value of Part A expenditures is estimated to be roughly 29 percent higher than the current-law projection. As indicated above, the present value of Part A income is unchanged under the alternative scenario.

The Part B expenditure projections are significantly higher under the alternative scenario than under current law, both because of the assumed gradual phase-out of the productivity adjustments and the assumption that the scheduled physician fee reductions would be overridden and based on annual increases in the Medicare Economic Index. The productivity adjustments are assumed to affect more than half of Part B expenditures at the time their phase-out is assumed to begin. Similarly, physician fee schedule services are assumed to be roughly 30 percent higher under the alternative scenario than under current law at that time. The combined effect of these two factors results in a present value of Part B expenditures under the alternative scenario that is approximately 52 percent higher than the current-law projection.

The Part D projections are unaffected under the alternative projection because the services are not impacted by the productivity adjustments or the physician fee schedule reductions.

Social Security and Medicare-Demographic and Economic Assumptions

The Boards of Trustees 2 of the OASDI and Medicare Trust Funds provide in their annual reports to Congress short-range (10-year) and long-range (75-year) actuarial estimates of each trust fund. Because of the inherent uncertainty in estimates for 75 years into the future, the Boards use three alternative sets of economic and demographic assumptions to show a range of possibilities. Assumptions are made about many economic and demographic factors, including GDP, earnings, the CPI, the unemployment rate, the fertility rate, immigration, mortality, disability incidence and terminations and, for the Medicare projections, health care cost growth. The assumptions used for the most recent set of projections shown in Tables 1A (Social Security) and Table 1B (Medicare) are generally referred to as the “intermediate assumptions,” and reflect the trustees’ reasonable estimate 3 of expected future experience. For further information on Social Security and Medicare demographic and economic assumptions, refer to SSA’s Performance and Accountability Report and HHS’ Agency Financial Report.

Table 1A
Social Security - Demographic and Economic Assumptions

Demographic Assumptions
Year Total
Fertility
Rate 1
Age-Sex
Adjusted
Death Rate 2
(per 100,000)
Net
Immigration 3
(persons)
Period Life
Expectancy
at Birth 4
Male Female
2011 2.07 766.5 895,000 75.9 80.6
2020 2.05 707.8 1,195,000 77.1 81.4
2030 2.02 648.7 1,115,000 78.2 82.4
2040 2.00 596.6 1,070,000 79.3 83.3
2050 2.00 550.8 1,050,000 80.3 84.1
2060 2.00 510.5 1,040,000 81.3 84.9
2070 2.00 474.9 1,030,000 82.1 85.7
2080 2.00 443.2 1,030,000 82.9 86.4
1 The total fertility rate for any year is 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, the selected year, and if she were to survive the entire childbearing period. The ultimate total fertility rate of 2.0 is assumed to be reached in 2035.
2 The age-sex-adjusted death rate is the crude rate that would occur in the enumerated total population as of April 1, 2000, if that population were to experience the death rates by age and sex assumed for the selected year. The death rate is a summary measure and not a basic assumption; it summarizes the effects of the basic assumptions from which it is derived.
3 Net immigration is the number of persons who enter during the year (both legally and otherwise) minus the number of persons who leave during the year. It is a summary measure and not a basic assumption; it summarizes the basic assumptions from which it is derived.
4 The period life expectancy for a group of persons born in the selected year is the average that would be attained by such persons if the group were to experience in succeeding years the death rates by age assumed for the given year. It is a summary measure and not a basic assumption; it summarizes the effects of the basic assumptions from which it is derived.

Economic Assumptions
Year Real
Wage
Differential 5
(percent)
Average
Annual Wage
in Covered
Employment 6
(percent
change)
CPI 7
(percent
change)
Real
GDP 8
(percent change)
Total Employment 9
(percent change)
Average
Annual
Interest
Rate 10
(percent)
2011 2.9 4.1 1.2 2.7 0.7 3.1
2020 1.1 3.9 2.8 2.1 0.5 5.7
2030 1.2 4.0 2.8 2.2 0.5 5.7
2040 1.2 4.0 2.8 2.2 0.5 5.7
2050 1.2 4.0 2.8 2.2 0.5 5.7
2060 1.1 3.9 2.8 2.1 0.5 5.7
2070 1.1 3.9 2.8 2.1 0.4 5.7
2080 1.2 4.0 2.8 2.1 0.4 5.7
5 The real-wage differential is the difference between the percentage increases, before rounding, in the average annual wage in covered employment, and the average annual CPI.
6 The average annual wage in covered employment is the total amount of wages and salaries for all employment covered by the OASDI program in a year divided by the number of employees with any such earnings during the year. It is a summary measure and not a basic assumption; it summarizes the basic assumptions from which it is derived.
7 The CPI is the annual average value for the calendar year of the CPI for urban wage earners and clerical workers.
8 The real GDP is the value of total output of goods and services produced in the U.S., expressed in 2005 dollars. It is a summary measure and not a basic assumption; it summarizes the effects of the basic assumptions from which it is derived.
9 Total employment represents the total of civilian and military employment in the U.S. economy. It is a summary measure and not a basic assumption; it summarizes the basic assumptions from which it is derived.
10 The average annual interest rate is the average of the nominal interest rates, which, in practice, are compounded semiannually for special-issue Treasury obligations sold only to the trust funds in each of the 12 months of the year. It is a summary measure and not a basic assumption; it summarizes the basic assumptions from which it is derived.

Table 1B
Medicare - Demographic and Economic Assumptions

Medicare - Demographic Assumptions
Year
Total
Fertility
Rate 1
Age-Sex
Adjusted
Death Rate 2
(per 100,000)
Net
Immigration 3
(persons)
2011 2.07 766.5 895,000
2020 2.05 707.8 1,195,000
2030 2.02 648.7 1,115,000
2040 2.00 596.6 1,070,000
2050 2.00 550.8 1,050,000
2060 2.00 510.5 1,040,000
2070 2.00 474.9 1,030,000
2080 2.00 443.2 1,030,000
1 The total fertility rate for any year is 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, the selected year, and if she were to survive the entire childbearing period. The ultimate total fertility rate is assumed to be reached in 2035.
2 The age-sex-adjusted death rate is the crude rate that would occur in the enumerated total population as of April 1, 2000, if that population were to experience the death rates by age and sex assumed for the selected year. The death rate is a summary measure and not a basic assumption; it summarizes the effects of the basic assumptions from which it is derived.
3 Net immigration is the number of persons who enter during the year (both legally and otherwise) minus the number of persons who leave during the year. It is a summary measure and not a basic assumption; it summarizes the basic assumptions from which it is derived.

Medicare - Economic Assumptions
Year
Real
Wage
Differential 4
(percent)
Average
Annual Wage
in Covered
Employment
(percent change)
CPI 5
(percent
change)
Real
GDP 6
(percent
change)
Per Beneficiary Cost
(percent change) 7
Real
Interest
Rate 8
(percent)
HI
SMI
Part B
Part D
2011 2.9 4.1 1.2 2.7 2.3 3.7 3.1 1.5
2020 1.1 3.9 2.8 2.1 3.3 5.5 6.5 2.9
2030 1.2 4.0 2.8 2.2 4.6 4.9 5.7 2.9
2040 1.2 4.0 2.8 2.2 4.9 4.5 5.4 2.9
2050 1.2 4.0 2.8 2.2 3.9 4.1 5.1 2.9
2060 1.1 3.9 2.8 2.1 3.7 4.1 4.8 2.9
2070 1.1 3.9 2.8 2.1 3.6 3.9 4.6 2.9
2080 1.2 4.0 2.8 2.1 3.3 3.7 4.4 2.9
4 The real-wage differential is the difference between the percentage increases, before rounding, in the average annual wage in covered employment, and the average annual CPI.
5 The CPI is the annual average value for the calendar year of the CPI for urban wage earners and clerical workers.
6 The real GDP is the value of total output of goods and services produced in the U.S., expressed in 2005 dollars. It is a summary measure and not a basic assumption; it summarizes the effects of the basic assumptions from which it is derived.
7 These increases reflect the overall impact of more detailed assumptions that are made for each of the different types of service provided by the Medicare program (for example, hospital care, physician services, and pharmaceutical costs). These assumptions include changes in the payment rates, utilization, and intensity of each type of service.
8 The average annual interest rate earned on new trust fund securities, above and beyond the rate of inflation.

Railroad Retirement

The Railroad Retirement and Survivor Benefit program pays full retirement annuities at age 60 to railroad workers with 30 years of service. The program pays disability annuities based on total or occupational disability. It also pays annuities to spouses, divorced spouses, widow(er)s, remarried widow(er)s, surviving divorced spouses, children, and parents of deceased railroad workers. Medicare covers qualified railroad retirement beneficiaries in the same way as it does Social Security beneficiaries. The Railroad Retirement and Survivors’ Improvement Act of 2001 (RRSIA) liberalized benefits for 30-year service employees and their spouses, eliminated a cap on monthly benefits for retirement and disability benefits, lowered minimum service requirements from 10 to 5 years, and provided for increased benefits for widow(er)s.

The RRB and the SSA share jurisdiction over the payment of retirement and survivor benefits. RRB has jurisdiction if the employee has at least 5 years (if performed after 1995) of railroad service. For survivor benefits, RRB requires that the employee’s last regular employment before retirement or death be in the railroad industry. If a railroad employee or his or her survivors do not qualify for railroad retirement benefits, the RRB transfers the employee’s railroad retirement credits to SSA.

Payroll taxes paid by railroad employers and their employees are a primary source of income for the Railroad Retirement and Survivor Benefit Program. By law, railroad retirement taxes are coordinated with Social Security taxes. Employees and employers pay tier I taxes at the same rate as Social Security taxes. Tier II taxes finance railroad retirement benefit payments that are higher than Social Security levels.

Other sources of program income include: financial transactions with the Social Security and Medicare Trust Funds, earnings on investments, Federal income taxes on railroad retirement benefits, and appropriations (provided after 1974 as part of a phase out of certain vested dual benefits). The financial interchange between RRB’s Social Security Equivalent Benefit (SSEB) Account, the Federal Old-Age and Survivors Insurance Trust Fund, the Disability Insurance Trust Fund, and the Federal Hospital Insurance Trust Fund is intended to put the latter three trust funds in the same position they would have been had railroad employment been covered under the Social Security Act. From a Governmentwide perspective, these future financial interchanges and transactions are intragovernmental transfers and are eliminated in consolidation.

Railroad Retirement-Employment, Demographic and Economic Assumptions

The most recent set of projections are prepared using employment, demographic and economic assumptions and reflect the Board Members’ reasonable estimate of expected future experience.

Three employment assumptions were used in preparing the projections and reflect optimistic, moderate and pessimistic future passenger rail and freight employment. The average railroad employment is assumed to be 218,000 in 2011 under the moderate employment assumption. This employment assumption, based on a model developed by the Association of American Railroads, assumes that (1) passenger service employment will remain at the level of 44,000 and (2) the employment base, excluding passenger service employment, will decline at a constant 2.0 percent annual rate for 23 years, at a falling rate over the next 25 years, and remain level thereafter. All the projections are based on an open-group (i.e., future entrants) population.

The moderate (middle) economic assumptions include a long-term cost of living increase of 3.0 percent, an interest rate of 7.5 percent, and a wage increase of 4.0 percent. The cost of living assumption reflects the expected level of price inflation. The interest rate assumption reflects the expected return on NRRIT investments. The wage increase reflects the expected increase in railroad employee earnings.

Sources of the demographic assumptions including mortality rates and total termination rates, remarriage rates for widows, retirement rates and withdrawal rates, are listed in Table 2. For further details on the employment, demographic, economic and all other assumptions, refer to the U.S. Railroad Retirement Board Annual Report, and the 24th Actuarial Valuation of the Assets and Liabilities under the Railroad Retirement Acts (Valuation Report) as of December 31, 2007, with Technical Supplement.

Table 2
Railroad Retirement Demographic Actuarial Assumptions (Sources)
Mortality Rates 1 Mortality after age retirement 2007 RRB Annuitants Mortality Table
Mortality after disability retirement 2007 RRB Disabled Mortality Table for Annuitants with Disability Freeze
2007 RRB Disabled Mortality Table for Annuitants without Disability Freeze
Mortality during active service 2003 RRB Active Service Mortality Table
Mortality of widow annuitants 1995 RRB Mortality Table for Widows
Total Termination Rates 2 Termination for spouses 2007 RRB Spouse Total Termination Table
Termination for disabled children 2004 RRB Total Termination Table for Disabled Children
Widow Remarriage
Rate 3
1997 RRB Remarriage Table
Retirement Rates 4 Age retirement See the Valuation Report
Disability retirement See the Valuation Report
Withdrawal Rates 5 See the Valuation Report
1 These mortality tables are used to project the termination of eligible employee benefit payments within the population.
2 Total termination rates are used to project the termination of dependent benefits to spouses and disabled children.
3 This rate is used to project the termination of spousal survivor benefits.
4 The retirement rates are used to determine the expected annuity to be paid based on age and years of service for both age and disability retirees.
5 The withdrawal rates are used to project all withdrawals from the railroad industry and resultant effect on the population and accumulated benefits to be paid.

Black Lung-Disability Benefit Program

The Black Lung Disability Benefit Program provides for compensation and medical benefits for eligible coal miners who are totally disabled due to pneumoconiosis (black lung disease) as a result of their coal mine employment. The same program also provides for survivor benefits for eligible survivors of coal miners who died due to pneumoconiosis. DOL operates the Black Lung Disability Benefit Program. BLDTF provides benefit payments to eligible coal miners totally disabled by pneumoconiosis and to eligible survivors when no responsible mine operator can be assigned the liability.

Black lung disability benefit payments are funded by excise taxes from coal mine operators based on the sale of coal, as are the fund’s administrative costs. These taxes are collected by the Internal Revenue Service (IRS) and transferred to the BLDTF, which was established under the authority of the Black Lung Benefits Revenue Act, and administered by the Treasury. Prior to October 3, 2008, the Black Lung Benefits Revenue Act provided for repayable advances to the BLDTF from the general fund of Treasury, in the event that BLDTF resources were not adequate to meet program obligations.

Black Lung-Demographic and Economic Assumptions

The demographic assumptions used for the most recent set of projections are the number of beneficiaries and their life expectancy. The beneficiary population data is updated from information supplied by the program. The beneficiary population is a nearly closed universe in which attrition by death exceeds new entrants by a ratio of more than ten to one. SSA Life Tables are used to project the life expectancies of the beneficiary population.

The economic assumptions used for the most recent set of projections are coal excise tax revenue estimates, Federal civilian pay raises, medical cost inflation, and the interest rate on new debt issued by the BLDTF. Projections are sensitive to changes in the tax rate and changes in interest rates on debt issued by the BLDTF.

Estimates of future receipts of the black lung excise tax are based on projections of future coal production and sale prices prepared by the Energy Information Agency of DOE. Treasury’s Office of Tax Analysis provides the first 11 years of tax receipt estimates. The remaining years are estimated using a growth rate based on both historical tax receipts and Treasury’s estimated tax receipts. The coal excise tax rate structure is $1.10 per ton of underground-mined coal and $0.55 per ton of surface-mined coal sold, with a cap of 4.4 percent of sales price. Based on Treasury’s interpretation of the Act, the higher excise tax rates will continue until the earlier of December 31, 2018, or the first December 31 after 2008, in which there exist no (1) balance of repayable debt described in section 9501 of the Internal Revenue Code and (2) unpaid interest on the debt. Starting in 2019, the tax rates revert to $0.50 per ton of underground-mined coal and $0.25 per ton of surface-mine coal sold, and a limit of 2.0 percent of sales price.

OMB supplies assumptions for future monthly benefit rate increases based on increases in the Federal pay scale and future medical cost inflation based on increases in the CPIM, which are used to calculate future benefit costs. During the current projection period, future benefit rate increases 0.0 percent in 2012 and medical cost increases 3.2 percent in 2012, and ranges from 3.6 percent to 3.8 percent thereafter. Estimates for administrative costs for the first 11 years of the projection are supplied by DOL’s Budget Office, based on current year enacted amounts, while later years are based on the number of projected beneficiaries.

Public Law 110-343, Division B—Energy Improvement and Extension Act of 2008, enacted on October 3, 2008, in section 113, (1) allowed for the temporary increase in coal excise tax rates to continue an additional 5 years beyond the current statutory limit, and (2) restructured the BLDTF debt by refinancing the outstanding repayable advances (which had higher interest rates) with the proceeds from issuing discounted debt instruments similar in form to zero-coupon bonds (which had lower interest rates), plus a one-time appropriation. Public Law 110-343 also allowed that any debt issued by the BLDTF subsequent to the refinancing may be used to make benefit payments, other authorized expenditures, or to repay debt and interest from the initial refinancing. All debt issued by the BLDTF was effected as borrowing from the Treasury’s Bureau of the Public Debt.

Statement of Changes in Social Insurance Amounts

The Statement of Changes in Social Insurance Amounts reconciles the change (between the current valuation and the prior valuation) in the present value of future revenue less future expenditures for current and future participants (the open group measure) over the next 75 years (except Black Lung is projected only through September 30, 2040, because the projection period will terminate on September 30, 2040). The reconciliation identifies several components of the changes that are significant and provides reasons for the changes. The following disclosures relate to the Statement of Changes in Social Insurance Amounts including the reasons for the components of the changes in the open group measure during the reporting period from the end of the previous reporting period for the Federal Government’s social insurance programs.

Social Security

All estimates relating to the Social Security program in the Statement of Changes in Social Insurance Amounts are presented as incremental to the prior change. As an example, the present values shown for economic data and assumptions, represent the additional effect that these new data and assumptions have, once the effects from the demography and the change in the valuation period have been considered.

Assumptions Used for the Components of the Changes for the Social Security Program

The present values included in the Statement of Changes in Social Insurance Amounts are for the current and prior years and are based on various economic and demographic assumptions used for the intermediate assumptions in the Social Security Trustees Reports for those years. Table 1A summarizes these assumptions for the current year.

Present values as of January 1, 2010, are calculated using interest rates from the intermediate assumptions of the 2010 Social Security Trustees Report. All other present values in the Statement of Changes in Social Insurance Amounts are calculated as a present value as of January 1, 2011. Estimates of the present value of changes in social insurance amounts due to changing the valuation period and changing demographic data and assumptions are presented using the interest rates under the intermediate assumptions of the 2010 Social Security Trustees Report. Since interest rates are an economic estimate and all estimates in the Statement of Changes in Social Insurance Amounts are incremental to the prior change, all other present values in the Statement of Changes in Social Insurance Amounts are calculated using the interest rates under the intermediate assumptions of the 2011 Social Security Trustees Report.

Changes in Valuation Period

The effect on the 75-year present values of changing the valuation period from the prior valuation period (2010-84) to the current valuation period (2011-85) is measured by using the assumptions for the prior period and applying them, in absence of any changes, to the current valuation period. Changing the valuation period removes a small negative net cashflow for 2010 and replaces it with a much larger negative net cashflow for 2085. The present value of future net cashflows (including or excluding the combined OASI and DI Trust Fund assets at the start of the period) was therefore decreased (made more negative) when the 75-year valuation period changed from 2010-84 to 2011-85.

Changes in Demographic Data and Assumptions

The ultimate demographic assumptions for the current valuation period are the same as those for the prior valuation period. However, the starting demographic values were changed. The economic recovery has been slower than was assumed for the prior valuation period.

Except for updating starting values of population levels, inclusion of each of these demographic data sets decreases the present value of future net cashflows.

The following demographic methods were changed in the current valuation.

Both of these changes to demographic methods decrease the present value of future net cashflows.

Changes in Economic Data and Assumptions

The ultimate economic assumptions for the current valuation period are the same as those for the prior valuation period. However, the starting economic values and near-term economic growth rate assumptions were changed. The economic recovery has been slower than was assumed for the prior valuation period.

Inclusion of each of these economic revisions decreases the present value of future net cashflows.

A change to the methodology for projecting labor force participation was implemented in the current valuation period. The assumed effect of gains in life expectancy on labor force participation for persons over 40 was doubled, significantly increasing projected participation rates at higher ages. Disability prevalence was added as an input variable to the labor force model for persons over normal retirement age, partially offsetting increases in the labor force due to changes in life expectancy. Inclusion of these changes to labor force participation projections increase the present value of future net cashflows.

Changes in Methodology and Programmatic Data

Several methodological improvements and updates of program-specific data are included in the current valuation and the most significant are identified below.

Changes in Law or Policy

There were no legislative changes, included in the current valuation and not in the prior valuation, that are projected to have a significant effect on the present value of the 75-year net cashflows.

Medicare

All estimates relating to the Medicare program in the Statement of Changes in Social Insurance Amounts are presented as incremental to the prior change. As an example, the present values shown for demographic assumptions, represent the additional effect that these assumptions have, once the effects from the change in the valuation period and projection base have been considered.

Assumptions Used for the Components of the Changes for the Medicare Program

The present values included in the Statement of Changes in Social Insurance Amounts are for the current and prior years and are based on various economic and demographic assumptions used for the intermediate assumptions in the Medicare Trustees Reports for those years. Table 1.B summarizes these assumptions for the current year.

Present values as of January 1, 2010, are calculated using interest rates from the intermediate assumptions of the 2010 Medicare Trustees Report. All other present values in the Statement of Changes in Social Insurance Amounts are calculated as a present value as of January 1, 2011. Estimates of the present value of changes in social insurance amounts due to changing the valuation period, projection base, and demographic assumptions are determined using the interest rates under the intermediate assumptions of the 2010 Medicare Trustees Report. Since interest rates are economic assumptions, the estimates of the present values of changes in economic assumptions are presented using the interest rates under the intermediate assumptions of the 2011 Medicare Trustees Report.

Changes in Valuation Period

The effect on the 75-year present values of changing the valuation period from the prior valuation period (2010-84) to the current valuation period (2011-85) is measured by using the assumptions for the prior valuation period and applying them, in the absence of any other changes, to the current valuation period. Changing the valuation period removes a small negative net cashflow for 2010 and replaces it with a much larger negative net cashflow for 2085. The present value of future net cashflow was therefore decreased (made more negative) when the 75-year valuation period changed from 2010-84 to 2011-85.

Change in Projection Base

Actual revenue and expenditures in 2010 were different than what was anticipated when the 2010 Medicare Trustees Report projections were prepared. Part A revenue was lower than estimated and Part A expenditures were higher than anticipated, due to the impacts of the economic recession. Part B total revenue and expenditures were lower than estimated based on actual experience. For Part D, actual revenue and expenditures were both slightly lower than prior estimates. The net impact of the Part A, B, and D projection-base changes is a slight decrease in the future net cashflow.

Changes in Demographic Data and Assumptions

The demographic assumptions used in the Medicare projections are the same as those used for the Old-Age, Survivors and Disability Insurance (OASDI) and are prepared by the Office of the Chief Actuary at the Social Security Administration (SSA).

The ultimate demographic assumptions for the current valuation period are the same as those for the prior valuation period. However, the starting demographic values were changed.

These changes have little impact on the present values of future expenditures and revenue.

Changes in Economic and Other Health Care Assumptions

The economic assumptions used in the Medicare projections are the same as those used for the Old-Age, Survivors and Disability Insurance (OASDI) and are prepared by the Office of the Chief Actuary at the Social Security Administration (SSA).

The ultimate economic assumptions for the current valuation period are the same as those for the prior valuation period. However, the starting economic values and near-term economic growth rate assumptions were changed. The economic recovery has been slower than was assumed for the prior valuation period.

The interest rates assumed in the short-range period are lower for the current valuation period.

Inclusion of each of these economic revisions decrease the present value of future net cashflow.

The health care assumptions are specific to the Medicare projections. The following health care assumptions were changed in the current valuation:

These changes had a net negative impact on the future net cashflow for total Medicare. For Part A, these changes resulted in a net increase to the present value of both revenue and expenditures, with an overall increase on the future net cashflow. For Part B, these changes resulted in a net increase to the present value of both revenue and expenditures with an overall decrease on the future net cashflow.

Changes in Law or Policy

Although Medicare legislation was enacted since the prior valuation date, most of the provisions have a negligible impact on the present value of the 75-year revenue, expenditures, and net cashflow. However, the enacted changes to the physician payment update very slightly increased the present value of expenditures, and decreased the 75-year present value of future net cashflow.

Railroad Retirement

The largest change in the open group measure of the Railroad Retirement social insurance program is due to changes in economic data and assumptions. Although ultimate economic assumptions remained the same, select economic assumptions were updated in 2011 along with the following other components of changes in the open group measure.

Changes in Valuation Period

The change in the valuation period (from 2010-2084 to 2011-2085) had a minimal effect on the social insurance open group measure.

Changes in Demographic Data and Assumptions

Demographic assumptions were not changed between 2010 and 2011. Changes in demographic data had a minimal effect on the open group measure.

Changes in Economic Data and Assumptions

Ultimate economic assumptions were not changed from last year’s report, but the select economic assumptions were. The actual COLA of 0.0 percent was used for 2011 in place of the 0.5 percent COLA assumed for 2011 in last year’s Statement of Social Insurance. A wage increase rate of 2.4 percent was used for 2010 rather than the assumed 4 percent wage increase rate used for 2010 in last year’s Statement of Social Insurance. Also, the actual 2010 investment return of 14.4 percent was higher than the assumed 7.5 percent investment rate used for 2010 in last year’s Statement of Social Insurance. Economic data and assumptions for Cost of Living Adjustments, wage increase rate, and investment return were updated in 2011 and had the greatest effect on the open group measure.

Changes in Methodology and Programmatic Data

There were no changes in methodology and programmatic data.

Changes in Law or Policy

There were no changes in law or policy.

Black Lung

The significant assumptions used in the projections of the Black Lung social insurance program presented in the Statement of Social Insurance are the number of beneficiaries, life expectancy, coal excise tax revenue estimates, the tax rate structure, Federal civilian pay raises and medical cost inflation. These assumptions also affect the amounts reported on the Statement of Changes in Social Insurance Amounts. From fiscal year 2010 to fiscal year 2011, the decrease in the assumptions about coal excise tax revenues represents the largest decrease in the open group measure. From fiscal year 2010 to fiscal year 2011, the coal excise tax revenue projections were revised downward to reflect current year experience and a decrease in future collections. From fiscal year 2010 to fiscal year 2011, the increase in the assumptions about beneficiaries, including costs (not associated with medical inflation or Federal civilian pay raises), number, type, age, and life expectancy represents the largest increase in the open group measure. From fiscal year 2010 to fiscal year 2011, the assumptions about the beneficiaries were revised downward to reflect current year experience and a decrease in future expenditures. From fiscal year 2010 to fiscal year 2011, the increases and decreases with respect to changes in assumptions for Federal civilian pay raises for income benefits, medical cost inflation for medical benefits, and administrative costs were based on revisions to reflect current year experience and future costs. From fiscal year 2010 and fiscal year 2011, the change in economic assumption about the interest rate represents the change in the discount rate from 3.75 percent to 3.375 percent. There were no changes in law or policy from fiscal year 2010 to fiscal year 2011.

Footnotes

1The Interim Report of the Technical Panel of the Medicare Trustees Report is available at http://aspe.hhs.gov/health/medpanel/2010/interim1103.shtml. (Back to Content)

2There are six trustees: the Secretaries of the Treasury (managing trustee), Health and Human Services, and Labor; the Commissioner of the Social Security Administration; and two public trustees who are generally appointed by the President and confirmed by the Senate for a 4-year term. By law, the public trustees are members of two different political parties. (Back to Content)

3Statement of Federal Financial Accounting Standard (SFFAS) No. 33: Pensions, Other Retirement Benefits, and Other Postemployment Benefits: Reporting the Gains and Losses From Changes in Assumptions and Selecting Discount Rates and Valuation Dates, effective for fiscal years beginning after September 30, 2009, revised SFFAS No. 17: Accounting for Social Insurance, paragraphs 25, 27 (2), and 27 (4), by replacing the term “best estimate” with “reasonable estimate.” (Back to Content)


Last Updated:  February 16, 2012