Rejda, "Financing the Social Security Program," – SK (1999)
Main test: trust fund ratio = assets / projected benefit pmts for that yr. A ratio of 100% or higher is a good test of short-term adequacy. OASDI funds pass this test, but HI does not. SMI is tested less stringently.
Long-Range Financial Outlook (1998-2072)
Long range income measured as a %-age of taxable payroll.
Projections: income rates remain relatively constant while cost rates rise substantially.
Starting in 2010, the OASI cost rate will increase rapidly due to the baby boom age reaching retirement age.
Reasons Why Costs Are Rising Faster Than Income
Main reason: baby boomers in 2010.
Also: HI cost rates increases both in the use and cost of health care per person.
Going ahead, the # of workers per OASDI Beneficiary will drop from 3.4 to about 1.8.
OTOH, workers’ wages will increase and they will produce more – which will help to offset the decline.
Long-Range Actuarial Balance of Each Trust Fund = the difference between annual income and costs as a %-age of taxable payroll. This could mean either the amount needed to be added to the income rate; OR the needed decrease in the cost rate.
Key Dates in Long-Range OASI and DI Financing
2013 – OASDI outgo exceeds tax income.
2019 – DI Trust Fund assets exhausted.
2021 – OASDI outgo exceeds tax plus interest income.
2032 – Combined OASDI trust fund assets exhausted.
2034 – OASI trust fund assets exhausted.
Social Security and Medicare Compared with the Economy
Ettlinger, Chapter 6: Solvency Regulation
Why the Concern About Solvency?
The Meaning of Solvency
Bankruptcy = a company’s liabilities exceed the market value of its assets.
Solvency = a company’s ability to meet financial obligations as they become due, even those from insured losses that might be claimed years from now.
Technically insolvent = when a company fails to satisfy state minimum capital requirements. This can happen even if the company’s admitted assets exceed its total liabilities, and is paying its current bills.
Roles of Policyholders’ Surplus
Financial Capacity – the ability to fund additional operations from existing resources.
Margin for Risk and Uncertainty
Risk Usual to All Business – all businesses have risk. Risk related to the individual business = unique risk. Business risk = the firm’s inability to maintain a competitive position and stable growth in earnings. Financial risk =