REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) 184
Sensitivity Analysis. Projections of the future financial status of the OASDI program depend on many demographic and
economic assumptions, including fertility, mortality, net immigration, average wages, inflation, and interest rates on Treasury
securities. The income will depend on how these factors affect the size and composition of the working population and the
level and distribution of wages and earnings. Similarly, the cost will depend on how these factors affect the size and
composition of the beneficiary population and the general level of benefits.
Because perfect long-range projections of these factors are impossible and actual experience is likely to differ from the
estimated or assumed values of these factors, this section is included to illustrate the sensitivity of the long-range projections
to changes in assumptions by analyzing six key assumptions: total fertility rate, average annual reduction in death rates, net
immigration, real-wage differential, CPI change, and real interest rate. For this analysis, the intermediate assumptions are
used as the reference point, and each selected assumption is varied individually. The variation used for each individual
assumption reflects the levels used for that assumption in the low-cost (Alternative I) and high-cost (Alternative III)
projections. For example, when analyzing sensitivity with respect to variation in real wages, income, and expenditure
projections using the intermediate assumptions are compared to the outcome when projections are done by changing only the
real wage assumption to either low-cost or high-cost alternatives.
The low-cost alternative is characterized by assumptions that improve the financial status of the program (relative to the
intermediate assumption) such as slower improvement in mortality (beneficiaries die younger). In contrast, assumptions
under the high-cost alternative worsen the financial outlook. All present values are calculated as of January 1, 2018 and are
based on estimates of income and cost during the 75-year projection period 2018-2092.
Table 2 shows the effects of changing individual assumptions on the present value of estimated OASDI expenditures in
excess of income (the shortfall of income relative to expenditures in present value terms). The assumptions are shown in
parentheses. For example, if the annual reduction in death rates were changed from 0.77 percent, the intermediate
assumption, to 0.41 percent, meaning that people die younger, the shortfall for the period of estimated OASDI income
relative to cost would decrease to $13,574 billion from $16,057 billion; if the annual reduction were changed to 1.15 percent,
meaning that people live longer, the shortfall would increase to $18,761 billion.
A higher fertility rate means more workers relative to beneficiaries over the projection period, thereby lowering the
shortfall relative to the intermediate assumption. Table 2 demonstrates that if the ultimate total fertility rate were changed
from 2.0 children per woman, the intermediate assumption, to 1.8 children per woman, the shortfall for the period of
estimated OASDI income relative to cost would increase to $17,591 billion from $16,057 billion; if the ultimate rate were
changed to 2.2 children per woman, the shortfall would decrease to $14,509 billion.
The annual real-wage differential is the difference between the percentage increases in: (1) the average annual wage in
OASDI covered employment; and (2) the average annual CPI. Higher real wage growth results in faster income growth
relative to expenditure growth. As shown in Table 2, if the ultimate real-wage differential were changed from 1.20 percentage
points, the intermediate assumption, to 0.58 percentage points, the shortfall for the period of estimated OASDI income
relative to cost would increase to $18,489 billion from $16,057 billion; if the ultimate real-wage differential were changed
from 1.20 to 1.82 percentage points, the shortfall would decrease to $12,378 billion.
Table 2 demonstrates that if the ultimate annual increase in the CPI were changed from 2.6 percent, the intermediate
assumption, to 2.0 percent, the shortfall for the period of estimated OASDI income relative to cost would increase to $16,535
billion from $16,057 billion; if the ultimate annual increase in the CPI were changed to 3.2 percent, the shortfall would
decrease to $15,551 billion. The seemingly counter-intuitive result that higher CPI increases result in decreased shortfalls
(and vice versa) is explained by the time lag between the effects of the CPI changes on taxable payroll and on benefit
payments. The effect on taxable payroll due to a greater increase in average wages is experienced immediately, while the
effect on benefits is experienced with a lag of about one year. For this reason, larger increases in the CPI cause earnings and
income to increase sooner and, therefore, by more each year, than benefits and cost.
Immigration generally occurs at relatively young adult ages, so there is no significant effect on beneficiaries (and,
therefore, on benefits) in the early years of the projection period, but the effect on the numbers of workers (and, therefore, on
payroll tax income) is immediate. Therefore, even in the early years, the present values, year by year, are generally higher (less
negative in later years) for higher net annual immigration. However, the increased payroll taxes for a given year are eventually
offset by benefits paid in that year to earlier immigrant cohorts. Therefore, the present values based on the three assumptions
about net annual immigration become more similar at the end of the projection period. Table 2 shows that if the intermediate
immigration assumptions were changed so that the average level for the 75-year period decreased from 1,272,000 persons to
952,000 persons, the present value of the shortfall for the period of estimated OASDI income relative to cost would increase to
$16,914 billion from $16,057 billion. If, instead, the immigration assumptions were changed so that net annual immigration
would be expected to average 1,607,000 persons, the present value of the shortfall would decrease to $15,274 billion.
Finally, Table 2 shows the sensitivity of the shortfall to variations in the real interest rate or, in present value
terminology, the sensitivity to alternative discount rates assuming a higher discount rate results in a lower present value. If
the ultimate real interest rate were changed from 2.7 percent, the intermediate assumption, to 2.2 percent, the shortfall for the