OLD AGE SURVIVORS INSURANCE

by

William Larsen

September 7, 2000

SUMMARY

The current unfunded liability stand at over $17 Trillion based on the assumptions used. Using Al Gores plan and diverting $2.3 Trillion in general revenues extends solvency of the program until 2055. However, in 2055 the unfunded liability has grown to over $332.3 Trillion. This is an increase of just about 20 times or 2,000%. Does Al Gore's plan for Social Security make sense for our children?

Old Age Survivors Insurance is a fairly simple program to model. Granted, there are thousands of calculations. However, the relationships between variables and the number of variables are fairly limited and well defined.

POPULATION PROJECTIONS

Social Security has provided me with their population projection till year 2080. This file contained data back to 1937. Each year lists the number of individuals by age, starting with age 0 and going to age 100. It also listed the number of males and females, married, single, widowed and divorced by each age. The cash flow projection uses this file.

VARIABLES

Inflation affects only benefits paid after the initial OASI benefit has been calculated. Changing inflation affects only benefits paid.

Wages affect the initial OASI benefit and OASI revenues each year. Changing this variable changes future OASI benefits and the cash flow of OASI.

United States Treasury Rate affects the interest income earned by the OASI trust fund. Changing this rate will change each years interest income and the cash flow of OASI.

Unemployment is kept constant or could be changed. In this analysis, it is kept constant at the current 4.0%. The reason is very simple why this is done. This produces the greatest amount of OASI revenues possible. Reducing unemployment to zero could lead to higher inflation which in turn would raise OASI benefits and overall costs. Increasing unemployment would reduce OASI revenues. Using the current very low unemployment rate yields BEST CASE SCENARIO for OASI.

OASI Tax Rate is kept constant at 10.6% of payroll.

Economic Growth is not used. This variable is the result of increased goods produced. It is increased wages and increased workers due to an increase in population. The result of increased wages and population is Economic Growth. This variable is calculated and not assumed.

There are very few variables. The OASI benefit formula makes calculating the average OASI benefit in any given year extremely simple and accurate. If the number of years used in the OASI benefit increases past 35, there could be some error induced. However, with only 35 of the best working years being used, the average wage is accurate to within 1%. In fact using the average wage to calculate the average OASI benefit for a specific year underestimates the actual benefit. Again this results in BEST CASE SCENARIO for OASI.

ASSUMPTIONS
Wage Growth	4.0%
US Treasury Rate	6.9% decreasing over ten years to 5.6%
Percent of potential work base which works	74.19%
OASI Tax Rate	10.6%
Average Wage	$30,916 per year in 2000
COLA	3%

There are several tables showing different cash flows based on current, proposed and theoretical requirements. The first column lists the year. This is followed by the average wage in the year. The rest of the columns are fairly self explainable. The last three columns show the calculated worker/retiree ratio, percent of benefits payable from tax revenues and calculated economic growth based on the assumptions used for each year.

Projection 2000 shows OASI going cash negative in year 2018. Insolvency occurs in 2043. In 2043 the shortfall for OASI is $1.3 Trillion. OASI will be able to pay 67% of projected benefits. By 2068, the ability to pay projected benefits will drop to 60%. The largest the OASI trust fund grows to is $8.14 Trillion. The amount of surplus OASI taxes between year 2000 and year 2018 totals $1.869 Trillion. Interest credited will total $2.594 Trillion.

Al Gore plans to divert $2.3 Trillion from General Tax Revenues to Social Security. The largest the OASI trust fund grows to is $15.4 Trillion. The affect of doing this is the insolvency date moves out to 2056. This shift in general revenues is equivalent to an OASI tax increase of 0.685 percentage points or roughly 6.5%. It does nothing for the long term solvency of OASI. OASI still goes insolvent. Using General Revenue to shore up Social Security does not credit those who's federal income taxes were used with any benefits. OASI benefits will still be awarded based on OASI wages earned.

Al Gore is telling the American voter he will eliminate the federal debt by 2012. Will he also take credit for the huge debt as a result of redeeming these US Treasuries between years 2019 and 2055 when this $15.4 Trillion in Unites States Treasury Notes must be sold?

Based on these high wage growth assumptions the current unfunded liability of OASI stands at about $17 Trillion. However, with lower wage growth, the size of this value will drop. Using the same numbers, what is the unfunded liability in 2055 when OASI goes insolvent? Well it is easy to determine. Looking at the fully funded table in the year 2055 shows the OASI fund requiring $332.3 Trillion. Of course under Al Gore's plan, the OASI fund has been completely drained.