velop, the benefit estimates in future Comparison of Actual Experience With reports may reasonably be expected to be more precise. It will probably al• Estimates in the Trustees' Reports ways be desirable to have some range, however, which from a relative stand• By Robert J. Myers* point should be smaller than in ear• lier reports, but in absolute terms of EACH YEAR the Board of Trustees of siderably higher than those of the dollars may be rather large. It is im• the Federal old-age and survivors In• first report in regard to benefit dis• possible to predict with complete ac• surance trust fund is required to sub• bursements and lower in regard to curacy the level of benefit disburse• mit to Congress a report dealing with contribution collections. ments 5 years in the future, especially the past and prospective operations In the first two Trustees' reports, since the benefits actually paid de• and status of the trust fund. These only a single estimate was presented. pend on substantial retirement from reports were first required by the So• The third and fourth reports gave a covered employment, which in turn cial Security Act Amendments of 1939, single estimate for the first 2 years depends on economic conditions. and in accordance with these amend• and a range for the next 3 years, ments the first report was submitted except that the fourth gave a range Table 1 shows the actual and esti• 1 mated benefit disbursements accord• in January 1941. in estimated contributions for all 5 ing to the various reports, and table One of the most important features years. In the fifth and sixth reports 2 gives similar data on contributions.2 of these reports is the estimates of a single figure is given only for the The figures presented as contribution the expected operation and status of first year, with a range for the next income have been modified to reflect the trust fund during the ensuing 5 4 years, while the seventh and eighth the continuous freezing of the contri• fiscal years. The first estimates dealt reports followed the same procedure bution rate at 2 percent for employers with the expected experience for the for benefit disbursements but used a and employees combined, and the sub• 5 fiscal years 1941-45, and each subse• range for contributions for all years. sequent revision in the eventual rates quent report has dealt with a like This transition in method of pres• as made in the Social Security Act period, advanced by 1 year. Now that entation represents a gradual adop• actual data are available for 7 full tion of the viewpoint that a range in 2 In the eighth report the contribution fiscal years, a comparison of actual ex• future cost estimates is desirable. A estimates include appropriated reimburse• ments for the veterans' survivor benefits perience with the various estimates single figure may safely be given for for 1948-52 under section 210 of the 1946 is of interest in showing the increas• the first fiscal year shown in each re• amendments to the Social Security Act; ing effectiveness and accuracy of the port, since the estimate is not pre• no such appropriations have yet been estimates as the program has grown. pared until that year is almost half made although payments certified through the calendar year 1947 totaled $4.6 million. The comparisons made here have completed and there is a sound basis In earlier reports no account was taken been confined to benefits and contri• for the estimate. As more and more of these provisions, either in regard to butions, since these comprise the bulk experience and larger benefit rolls de• benefit disbursements or contributions. of total expenditures and income, re• spectively. Administrative costs and Table 1.—Actual benefit disbursements, fiscal years 1941-47, and estimated benefits interest earnings play a relatively according to various Trustees' reports, fiscal years 1941-52 minor part in the expected operation [In millions] and status of the trust fund and are therefore omitted from this dis• Report 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 cussion. Short-range cost estimates on a cal• Actual data endar-year basis had been developed ------at the time the 1939 amendments were Eighth $64 $110 $149 $185 $240 $321 $426 considered by Congress (S. Rept. 734, Estimates of Trustees' reports 76th Cong., 1st sess., p. 17). The first Trustees' report pointed out that First $78 $165 $274 $402 $548 Second 113 166 225 290 $360 these estimates had been stated to be Third:1 Low 155 205 260 320 $380 subject to a range of error because High 155 205 295 585 775 they had been made prior to the devel• Fourth: Low 181 214 255 307 $365 opment of any actual experience and High 181 214 268 365 455 before the economic effects of the de• Fifth: Low 238 311 386 450 $512 fense program were foreseeable. As High 238 343 479 566 627 Sixth: a result, the first report went on to Low 323 407 480 549 $618 state, the 1939 estimates were con- High 323 481 569 654 723 Seventh: Low 423 507 590 674 $761 * Actuarial Consultant, Social Security High 423 576 683 782 870 Administration. Eighth: 1 The first report was not published, but Low 509 599 681 768 $855 all subsequent reports have been released High 509 676 786 888 964 as either House or Senate documents. 1 The third report used 3 estimates, but only the low and high are shown here. Amendments of 1947, which lead to a tion in 1942 and earlier was much the actual experience. The ratio of combined rate of 3 percent in the cal• more uniform than this, being about estimates to actual figures ranged endar years 1950-51 and 4 percent 26 1/2, 25 1/2, 25, and 23 percent, re• only from 98 percent to 104 percent thereafter. spectively. If the factor of uneven for the years 1942 to 1947. The bene• The modification of the contribu• quarterly distribution of contribution fit estimates in the first report were tion figures was accomplished solely income had been taken into account, increasingly in excess of the actual from the data in the various reports. the modified contribution figures for experience, being more than double The figure shown in the report for a those years for which an increase in the benefits paid in 1944 and 1945. particular year was multiplied by the the rate was scheduled would have For one thing, in these first estimates ratio of the actual contribution rate been slightly higher than those shown, it was not anticipated that retirements (or in the case of the future years, by at most by 2 or 3 percent relatively.5 would be so materially deferred as the scheduled rate in the Social Secu• This small differential, of course, has they actually were as the result of the rity Act Amendments of 1947) to the no appreciable effect on the following favorable wartime employment con• rate used in that report. When the analysis. ditions. contribution rate increased in the par• A comparison of the actual experi• The benefit estimates in the second ticular year, the average rate in effect ence with that estimated for each of report were also somewhat in excess in the year, taking into account the the fiscal years 1941-47 is made in of actual experience, but only by about 3-month lag in collections, was used.3 table 3. Except for the first report, 10-20 percent. In the third report, This method is only approximate since the benefit estimates made for the in which a range was first introduced, it assumes an even distribution first year in each report (reading the low estimate was close to actual throughout the year in regard to both down the diagonal) were very close to experience for 1945 and 1946 but more total covered pay roll and contribu• than 10 percent below for 1947. How• tion income. Actually, even if the ever, the high estimate was consist• payroll base were level over the 5For example, applying the recent, and most uneven, quarterly distribution to the ently too high, being more than 80 course of a year, the contribution in• data from the second report for fiscal year percent above the actual experience come would vary by calendar quarters 1943 (as previously discussed in footnote for 1946 and 1947. because of the $3,000 maximum on 3), 271/2 percen t of the pay roll from taxable wages.4 which contributions are received during In the fourth report, apparently be• the year would have the 4-percent rate cause of the considerable overesti• In recent years, when the effect of applicable, and correspondingly the 2-per• mates for 1941-44 in the preceding cent rate would pertain to the remaining the trend in total covered pay roll is 721/2 percent . The average rate would reports, the benefit estimates were eliminated, it is found that about 27 1/2 thus be 2.55 percent, or 2 percent greater significantly lower than the actual percent of the contribution income is relatively than the average rate of 21/2 per • experience for 1945-47, and generally received with respect to the first cal• cent based on equal quarterly distribution. lower for each succeeding year; in endar quarter (i. e., is received in the Table 2.—Actual contributions, fiscal years 1941-47, and estimated contributions accord• second quarter), with the correspond• ing to various Trustees' reports adjusted to correspond to actual or scheduled future ing figures for the 3 succeeding quar• contribution rates,1 fiscal years 1941-52 ters being 26 1/4, 25, and 21 percent, respectively; the quarterly distribu- [In millions] Report 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 3 For example, in the second report the contribution schedule used in the esti• Actual data mates provided for a combined employer------employee rate of 2 percent for calendar Eighth $688 $896 $1,130 $1,292 years 1940-42 and 4 percent for calendar $1,310 $1,238 $1,459 years 1943-45. For the fiscal year 1943 (July 1, 1942, to June 30, 1943) the con• Estimates of Trustees' reports tribution income was based on wages for First $667 $725 $725 $725 $725 the period April 1, 1942, to March 31, 1943 Second 900 1,115 1,100 1,100 $1,100 (because of the 3-month lag in collec• Third:2 Low 1,105 1,245 1,310 908 $940 tions), so that the average rate used was High 1,105 1,245 1,355 1,424 1,480 21/2 percen t (9 months at 2 percent and Fourth: 3 months at 4 percent). The actual rate Low 1,268 1,299 1,196 910 $832 High 1,306 1,352 1,365 1,288 1,056 was 2 percent, so that the modification Fifth: factor was 0.80 (2 percent divided by2 1/2 Low 1,305 953 814 712 $746 High 1,305 1,110 956 948 1,182 percent), which when applied to the fig• Sixth: ure of $1,394 million published in the re• Low 1,128 1,025 1,094 1,123 $1,289 port yields the $1,115 shown in table 2. High 1,128 1,136 1,230 1,320 1,548 Seventh: 4 Individuals with wages in excess of Low 1,403 1,407 1,299 1,502 $2,024 $3,000 are taxed on the first $3,000 of High l,409 1,450 1,459 l,683 2,279 Eighth: 3 wages, and all wages thereafter from the Low 1,548 1,477 1,784 2,479 $2,730 same employer during the calendar year High 1,631 1,676 1,966 2,687 f&f lull are exempt. For instance, the taxes in 2,976 respect to a $12,000 individual would all 1 The actual combined employer and employee rate and 4 percent thereafter. be paid in the second quarter of the year has been 2 percent in calendar years 1937-48; under 2 The third report used 3 estimates, but only the the Social Security Act Amendments of 1947 it is low and high are shown here. on his wages in the first quarter. scheduled at 2 percent in 1949, 3 percent in 1950-51, 3 See text footnote 2. fact, for 1947 the estimates were 14- uncertainties of the economic and percent for the eighth and last report. 28 percent lower. In the fifth, sixth, military situation. As may readily be In fact, it is noteworthy that, for the and seventh reports, the benefit esti• realized, the high estimate proved to fourth and subsequent reports, the mates have reasonably closely ap• be the more accurate because of the difference between the low and high proximated or "bracketed" the actual full-employment conditions that pre• cost estimates for the most distant data. vailed after the war, as well as the year considered has in all cases been For the contribution estimates, the generally increasing wage rates. only about $100 million. As a sub• first report showed a successively de• The actual data in the fourth re• stantial backlog of beneficiaries has creasing ratio of estimated to actual port agreed very closely with the esti• been built up, estimates can un• amounts, the ratios for 1944 and 1945 mates for the first 3 years. For 1947, doubtedly be made with greater and being only about 55 percent. This however, the estimates, which had a greater accuracy, so that these de• divergence, of course, was a result of narrow range, were both significantly creasing differentials are completely the unforeseen and unforeseeable lower because the continued rise in justified. sharp rise in pay rolls due to the war. pay rolls in the postwar period had Next, turning to the range in esti• Thus, specifically, the taxable pay roll not been foreseen; rather, a drop had mated contribution income in table 2, for the calendar year 1947 was $78 been expected. we again find that the third report billion, or more than 2 1/2time s the The 1947 estimates of the fifth and had a considerable range—57 per• 1939 figure of $30 billion. sixth reports were also considerably cent, measuring from the low to the The contributions estimated in the lower than the actual experience. In high estimate. In the fourth report second report came considerably fact, even the estimate made in the the corresponding figure was 27 per• closer to the actual amounts, although middle of the fiscal year 1947, namely, cent, while the fifth report had they were some 10-15 percent lower that of the seventh report, was some• the greatest range—more than 58 for 1944, 1945, and 1946. By the time what farther below the actual data percent. However, in the sixth report these estimates were made, there was than the first-year estimates have the relative range decreased to some better indication of the imme• usually been. 20 percent, while in the seventh report diate rise in pay rolls that was likely Another matter of interest is the it was only 13 percent and in the to occur because of the demands of range shown in the estimates for fu• eighth report only about 9 percent. the war. ture years. Considering first the These relatively small variations in The third report, issued at the be• benefit disbursements in table 1, and an element that in the past had varied ginning of the calendar year 1943, looking only at the most distant year by more than 100 percent and in the showed a very close agreement be• estimated in each report, it may be future is apt to fluctuate greatly with tween actual and estimated contribu• seen that the relative variation from economic conditions arise from the tion income for 1943 to 1945. For low to high estimate was more than fact that the economic assumptions 1946 and 1947 the actual data were 100 percent in the third report, de• for the end of the period were about much closer to the high estimate than creased to about 25 percent for the the same for both low and high es• the low one. The range selected had fourth report and 22 percent for the timates. been made quite wide because of the fifth report, and was only about 13 On the whole, the analysis indicates that the estimates in the various Trus• tees' report1 s have been reasonably- Table 3.—Estimates in Trustees' reports as percent of actual amounts, by fiscal year 1941-47accurate, considering the drastic eco• nomic changes that have occurred Report 1941 1942 1943 1944 1945 1946 1947 during the past 7 years as well as the effect of the war. The need for a Benefit payments substantial range in the estimates, First 122 150 184 217 228 particularly in the latter years of each Second 103 111 122 121 112 5-year period, seems to be clearly in• Third 104 111 108-123 100-182 89-182 Fourth 98 89 79-83 72-86 dicated. It is noteworthy that the Fifth 99 97-107 91-112 Sixth 101 96-113 contributions were estimated some• Seventh 99 what more closely than the benefit payments in the first few years of Contributions 1 operation, but that in the. last 2 or 3 years this situation has been First 97 81 64 56 55 Second 100 99 85 84 89 reversed. Such a situation might be Third 98 96 100-103 73-115 64-101 expected because, as the benefit roll Fourth 98-101 99-103 97-110 62-88 Fifth 100 77-90 56-65 is built up, it does not change sharply Sixth 91 70-78 from year to year since it is cumula• Seventh 96-97 tive—that is, most beneficiaries stay 1 Estimates in the Trustees' reports adjusted to Note: When only 1 figure is shown there was a on the rolls and their benefit rate re• reflect the freezing of the contribution rate at a com• single estimate. When 2 figures are shown, there bined employee-employer rate of 2 percent instead of were 2 or more estimates and the range shown is mains the same. The pay roll on following the increases scheduled in the Social Secu• based on the lowest and highest. rity Act Amendments of 1939 and subsequent amend• ments thereto. (Continued on page 52) (Continued from page 31) which the contributions are based can fluctuate considerably from year to year and to a greater extent over a 5-year period as economic conditions change. For this reason, future vari• ations in the range could well be ex• pected to be smaller for estimated benefit payments than for estimated contribution income.