CONTINUATION OF SECTION 1. SOCIAL SECURITY: THE OLD-AGE, SURVIVORS, AND DISABILITY INSURANCE (OASDI) PROGRAMS
SOCIAL SECURITY FINANCING Current Law Financing for OASDI Programs, as well as for the hospital insurance (HI) part of Medicare, is provided primarily by taxes levied on wages and net self-employment income. These taxes often are referred to as FICA and SECA taxes (Federal Insurance Contributions Act and Self-Employment Contributions Act, respectively). More than 95 percent of the work force, or an estimated 147.9 million workers in 1997 (of whom 3.3 million pay only HI taxes), is required to pay FICA or SECA. The FICA tax is paid equally by both employees and employers; the SECA tax is paid by the self-employed. Both taxes have three components: OASI, DI, and HI. The FICA tax was first levied in 1937 at a rate of 1 percent each for the employee and employer on earnings up to $3,000 a year. In 1998, the rate is 7.65 percent of which 6.2 percent goes to OASDI and 1.45 percent goes to HI. The SECA rate for the self- employed is 12.4 percent for OASDI and 2.9 percent for HI. The OASDI rate is levied on earnings up to $68,400 (up from $65,400 in 1997); the earnings level rises annually at the same rate as average wages in the economy. For the HI portion, all earnings are taxable. The three programs also receive interest income on securities recorded to its trust funds, income taxes levied on Social Security benefits, and income from various other minor sources. Most income to the system goes out directly to meet current benefit obligations. Any funds collected in excess of the amount needed to make benefit payments are credited to the OASI and DI Trust Funds as reserves, in the form of government securities. These reserves serve as a cushion against temporary shortfalls in revenues or large increases in outlays due to economic fluctuations. The trust funds also are credited with interest income. Social Security benefit outlays are drawn against the trust funds and are made under a permanent appropriation provided for in the Social Security Act. Administrative expenses also are charged against the trust funds, but are subject to an annual limitation set by appropriations acts. Before 1984, self-employed workers paid a tax rate which was less than the combined employee-employer rate. Effective in 1984, self-employed workers began to pay Social Security taxes that were equivalent to the combined employer-employee rate and to receive a partial credit against that tax through 1989. Effective in 1990 and thereafter, the credit was replaced with a system designed to achieve parity between employees and the self-employed. Under this system: --The base of the self-employment tax is adjusted downward to reflect the fact that employees do not pay FICA tax on the value of the employer's FICA tax. The base is equivalent to net earnings from self-employment (up to the taxable wage base), less 7.65 percent, and --A deduction is allowed for income tax purposes for half of SECA liability, to allow for the fact that employees do not pay income tax on the value of the employer's FICA tax. Tables 1-33, 1-34, 1-35 and 1-36 show FICA and SECA tax rates (in percent), taxes (in dollars), and taxable earnings bases, both past and future. Table 1-37 shows categories of workers exempt from FICA and SECA taxes. TABLE 1-33.--FICA AND SECA TAX RATES, SELECTED YEARS 1937-2000 [In percent] ---------------------------------------------------------------------------------------------------------------- Rate paid by employee and employer Self- Maximum Calendar year ----------------------------------- employed taxable OASI DI OASDI HI Total rate earnings ---------------------------------------------------------------------------------------------------------------- 1937.................................................... 1.0 ..... ..... ..... 1.0 ........ $3,000 1950.................................................... 1.5 ..... ..... ..... 3.0 ........ 3,000 1960.................................................... 3.0 0.25 2.75 ..... 3.0 4.5 4,800 1970.................................................... 3.65 0.55 4.20 0.60 4.8 6.9 7,800 1980.................................................... 4.52 0.56 5.08 1.05 6.13 8.1 25,900 1990.................................................... 5.60 0.60 6.20 1.45 7.65 15.3 51,300 1995.................................................... 5.26 0.94 6.20 1.45 7.65 15.3 \1\ 61,20 0 1996.................................................... 5.26 0.94 6.20 1.45 7.65 15.3 \1\ 62,70 0 1997.................................................... 5.35 0.85 6.20 1.45 7.65 15.3 \1\ 65,40 0 1998.................................................... 5.35 0.85 6.20 1.45 7.65 15.3 68,400 1999.................................................... 5.35 0.85 6.20 1.45 7.65 15.3 (\2\) 2000.................................................... 5.30 0.90 6.20 1.45 7.65 15.3 (\2\) ---------------------------------------------------------------------------------------------------------------- \1\ OASDI; no limit (HI). \2\ Not yet determined for OASDI; no limit (HI). Note.--Until 1991 the maximum taxable earnings for HI were the same as for OASDI. In 1991, 1992, and 1993 maximum taxable earnings were $125,000, $130,200, and $135,000 respectively, with no limit after 1993. Only 92.35 percent net self-employment earnings are taxable and half of the SECA taxes so computed is deductible for income tax purposes. Source: Congressional Research Service. TABLE 1-34.--FICA AND SECA TAX PAYMENTS FOR AVERAGE AND HIGH EARNERS, SELECTED YEARS 1950-97 ------------------------------------------------------------------------ Annual tax payments --------------------------------------- Calendar year Average earner \1\ High earner \1\ --------------------------------------- FICA \1\ SECA \2\ FICA \1\ SECA \2\ ------------------------------------------------------------------------ 1950............................ $38 ........ $45 ........ 1960............................ 120 $180 144 $216 1970............................ 297 427 374 538 1980............................ 767 1,014 1,588 2,098 1996............................ 1,968 3,126 6,787 10,768 Cumulative 1953-96 \3\.......... 105,322 157,039 205,699 314,144 1997............................ 2,045 3,248 6,955 11,042 ------------------------------------------------------------------------ \1\ Employee share only for FICA column. Average earner means someone who earned average wages throughout his or her working years (average wages are estimated for 1996 and 1997). For years before 1994, high earner means someone who earned the maximum wage level subject to OASDI and HI taxes. For 1994 onward it is assumed to be someone who earns $200,000 a year. \2\ Figures in table are net of income tax deduction equal to one half of SECA taxes. \3\ Includes interest compounded at rates of long-term Treasury issues. Encompasses a hypothetical 44-year career that began at age 21 and ended at age 65. Source: Congressional Research Service. TABLE 1-35.--PAYROLL TAX RATES FOR EMPLOYEES AND EMPLOYERS, 1937-2000 ---------------------------------------------------------------------------------------------------------------- Tax rates (percent) for employer and OASDI employee, each Calendar years wage base ------------------------------------------- \1\ Total OASI DI HI ---------------------------------------------------------------------------------------------------------------- 1937-49.................................................. $3,000 1.000 1.000 ......... ......... 1950..................................................... 3,000 1.500 1.500 ......... ......... 1951-53.................................................. 3,600 1.500 1.500 ......... ......... 1954..................................................... 3,600 2.000 2.000 ......... ......... 1955-56.................................................. 4,200 2.000 2.000 ......... ......... 1957-58.................................................. 4,200 2.250 2.000 0.250 ......... 1959..................................................... 4,800 2.500 2.250 0.250 ......... 1960-61.................................................. 4,800 3.000 2.750 0.250 ......... 1962..................................................... 4,800 3.125 2.875 0.250 ......... 1963-65.................................................. 4,800 3.625 3.375 0.250 ......... 1966..................................................... 6,600 4.200 3.500 0.350 0.350 1967..................................................... 6,600 4.400 3.550 0.350 0.500 1968..................................................... 7,800 4.400 3.325 0.475 0.600 1969..................................................... 7,800 4.800 3.725 0.475 0.600 1970..................................................... 7,800 4.800 3.650 0.550 0.600 1971..................................................... 7,800 5.200 4.050 0.550 0.600 1972..................................................... 9,000 5.200 4.050 0.550 0.600 1973..................................................... 10,800 5.850 4.300 0.550 1.000 1974..................................................... 13,200 5.850 4.375 0.575 0.900 1975..................................................... 14,100 5.850 4.375 0.575 0.900 1976..................................................... 15,300 5.850 4.375 0.575 0.900 1977..................................................... 16,500 5.850 4.375 0.575 0.900 1978..................................................... 17,700 6.050 4.275 0.775 1.000 1979..................................................... 22,900 6.130 4.330 0.750 1.050 1980..................................................... 25,900 6.130 4.520 0.560 1.050 1981..................................................... 29,700 6.650 4.700 0.650 1.300 1982..................................................... 32,400 6.700 4.575 0.825 1.300 1983..................................................... 35,700 6.700 4.775 0.625 1.300 1984..................................................... 37,800 7.000 5.200 0.500 1.300 1985..................................................... 39,600 7.050 5.200 0.500 1.350 1986..................................................... 42,000 7.150 5.200 0.500 1.450 1987..................................................... 43,800 7.150 5.200 0.500 1.450 1988..................................................... 45,000 7.510 5.530 0.530 1.450 1989..................................................... 48,000 7.510 5.530 0.530 1.450 1990..................................................... 51,300 7.650 5.600 0.600 1.450 1991..................................................... 53,400 7.650 5.600 0.600 1.450 1992..................................................... 55,500 7.650 5.600 0.600 1.450 1993..................................................... 57,600 7.650 5.600 0.600 1.450 1994..................................................... 60,600 7.650 5.260 0.940 1.450 1995..................................................... 61,200 7.650 5.260 0.940 1.450 1996..................................................... 62,700 7.650 5.260 0.940 1.450 1997..................................................... 65,400 7.650 5.350 0.850 1.450 1998..................................................... 68,400 7.650 5.350 0.850 1.450 1999..................................................... (\2\) 7.650 5.350 0.850 1.450 2000-.................................................... (\2\) 7.650 5.300 0.900 1.450 ---------------------------------------------------------------------------------------------------------------- \1\ The maximum amount of taxable earnings for the HI Program was the same as that for the OASDI Program for 1966-90; $125,000, $130,200, and $135,000 for 1991-93, respectively; no limit after 1993. \2\ Increases automatically with increases in the average wage index. Source: Office of the Actuary, Social Security Administration. TABLE 1-36.--TAX RATES FOR SELF-EMPLOYED INDIVIDUALS, 1980 AND AFTER ---------------------------------------------------------------------------------------------------------------- Total Calendar year OASI DI OASDI HI (OASDI and HI) ---------------------------------------------------------------------------------------------------------------- 1980..................................................... 6.2725 0.7775 7.05 1.05 8.10 1981..................................................... 7.0250 0.9750 8.00 1.30 9.30 1982..................................................... 6.8125 1.2375 8.05 1.30 9.35 1983..................................................... 7.1125 0.9375 8.05 1.30 9.35 1984..................................................... 10.4000 1.0000 11.40 2.60 \1\ 14.00 1985..................................................... 10.4000 1.0000 11.40 2.70 \1\ 14.10 1986-87.................................................. 10.4000 1.0000 11.40 2.90 \1\ 14.30 1988-89.................................................. 11.0600 1.0600 12.12 2.90 \1\ 15.02 1990-93.................................................. 11.2000 1.2000 12.40 2.90 15.30 1994-96.................................................. 10.5200 1.8800 12.40 2.90 15.30 1997-99.................................................. 10.7000 1.7000 12.40 2.90 15.30 2000-.................................................... 10.6000 1.8000 12.40 2.90 15.30 ---------------------------------------------------------------------------------------------------------------- \1\ Tax credits for the self-employed equaled 2.7 percent in 1984, 2.3 percent in 1985, and 2.0 percent in 1986- 89. The tax rate shown is not reduced for these credits. See text for explanation of change in tax treatment of the self-employed. Source: Congressional Research Service. TABLE 1-37.--WORKERS EXEMPT FROM FICA AND SECA TAXES ------------------------------------------------------------------------ ------------------------------------------------------------------------- --State and local government workers participating in alternative retirement systems (HI tax is mandatory for State and local government workers hired since April 1, 1986). --Election workers earning $1,000 or less a year (beginning in 1995). --Ministers who choose not to be covered, and certain religious sects. --Federal workers hired before 1984 (the HI portion is mandatory for all Federal workers). \1\ --College students working at their academic institutions. --Household workers earning less than $1,100 in 1998, or those under age 18 for whom household work is not their principal occupation. --Self-employed workers with annual net earnings below $400. ------------------------------------------------------------------------ \1\ Elected office holders, political appointees, and judges are mandatorily covered by both OASDI and HI regardless of when their service began. Source: Congressional Research Service. Status of OASDI Trust Funds Summary Social Security's financial condition is assessed annually by its Board of Trustees, comprised of the Secretaries of Treasury (who is the Managing Trustee), Labor, and Health and Human Services, the Commissioner of Social Security, and two representatives of the public. The Board of Trustees' 1997 Report was released on April 24, 1997. The Congressional Budget Office (CBO) also makes Social Security projections, the latest of which were released on January 7, 1998. The Trustees' projections cover a period extending 75 years into the future, whereas CBO's projections are only for the next 10 years. For this near-term period, both the Trustees and CBO show that through the remainder of this decade, and for some period into the next century, the favorable demographic pattern of a large baby boom generation at peak earning years, combined with the retirement of the relatively small generation born during the Depression, should ensure large trust fund reserves. Under the Trustees' ``intermediate'' (or moderate) set of assumptions, the annual excess of income over outlays will reach $127 billion by fiscal year 2006, and the reserve balance of the trust funds will represent 2.4 years' worth of outgo. [Under CBO's most recent assumptions, the annual excess of income over outlays will reach $179 billion by fiscal year 2006.] Table 1-38 shows both historical and projected operations of the combined OASI and DI Trust Funds in the short run according to CBO estimates released in January 1998. For the long run, the projections are troubling. For a number of years, the Trustees' Reports have projected long- range financing problems for the system. Although their latest report continues to show a near-term buildup of trust fund reserves, their intermediate forecast for the next 75 years shows that, on average, Social Security expenditures will be 17 percent more than its income. The trust fund buildup would peak at $2.9 trillion in nominal dollars in 2018, and then be drawn down as the post-World War II baby boomers retire (see chart 1- 2). The Trustees estimate that by 2015 the DI Trust Fund would be exhausted, and by 2031 the OASI Trust Fund would be exhausted as shown in table 1-39. On a combined basis the two trust funds would be exhausted in 2029. (The term ``exhausted'' is commonly used to indicate that trust fund reserves plus payroll taxes and other revenues would be insufficient to pay all benefits when they are due.) Background Social Security taxes flow into the Federal Treasury, with each program's share credited to separate trust funds (one for OASI, another for DI). The crediting occurs through the posting of interest-bearing Federal securities (the interest rate is the same as the average rate prevailing on outstanding Federal bonds with a maturity of 4 years or longer). When the government receives the money, it records new securities to the appropriate fund; when it makes payments, it writes some off. These securities represent obligations that the government has issued to itself. In effect, they are not assets for the government, but claims against it. Their primary TABLE 1-38.--HISTORICAL AND PROJECTED OPERATIONS OF THE COMBINED OASI AND DI TRUST FUNDS DURING FISCAL YEARS 1994-2008 [In millions of dollars] ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 actual actual actual projected projected projected projected projected projected projected projected projected projected projected projected ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Combined OASDI Trust Funds: Income: Revenues....................... $335.0 $351.1 $367.5 $392.0 $417.3 $438.2 $457.7 $477.1 $497.8 $520.7 $545.7 $574.4 $601.2 $629.8 $657.9 Intragovernmental: Taxes on benefits............ 5.7 5.5 6.2 6.9 8.8 9.3 9.3 10.5 11.2 12.1 12.9 13.8 14.9 16.0 17.2 Federal employer share....... 6.4 6.4 6.3 6.5 7.1 7.7 8.3 8.9 9.6 10.4 11.2 12.1 13.0 13.9 15.0 Interest..................... 29.2 33.3 36.5 41.2 46.5 52.8 59.0 65.4 72.2 79.5 87.4 96.1 105.5 115.4 126.0 Other........................ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -------------------------------------------------------------------------------------------------------------------------------------------------------------- Subtotal, intragovernmental 41.3 45.2 48.9 54.6 62.5 69.8 77.2 84.8 93.1 101.9 111.6 122.1 133.3 145.3 158.1 -------------------------------------------------------------------------------------------------------------------------------------------------------------- Total income............. 376.3 396.3 416.4 446.6 479.7 508.1 535.0 561.9 590.9 622.6 657.2 696.5 734.5 775.1 816.0 ============================================================================================================================================================== Outgo: Benefits....................... 313.2 328.9 343.3 358.3 371.8 387.5 404.8 423.9 444.7 467.2 491.5 518.1 547.0 577.6 610.0 Discretionary administration... 2.7 2.6 2.6 3.0 3.3 3.3 3.4 3.5 3.6 3.8 3.9 4.0 4.2 4.3 4.5 Treasury administration........ 0.2 0.3 0.2 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Railroad transfer.............. 3.5 4.1 3.6 3.7 3.8 3.8 3.8 3.7 3.8 3.8 3.8 3.8 3.8 3.9 3.9 Interest on tax transfers & interfund loans............... ....... ....... ....... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... Quinquennial................... ....... ....... 0.3 ......... ......... ......... ......... 0.6 ......... ......... ......... ......... ......... ......... ......... -------------------------------------------------------------------------------------------------------------------------------------------------------------- Total outgo.............. 319.6 335.8 350.0 365.3 379.1 394.8 412.2 431.8 452.4 475.0 499.4 526.2 555.2 586.1 618.6 ============================================================================================================================================================== Surplus.......................... 56.8 60.5 66.4 81.3 100.6 113.2 122.8 130.0 138.5 147.6 157.8 170.4 179.4 189.0 197.4 Memo: OASI surplus................... 60.7 31.6 51.5 67.9 87.1 98.7 105.8 111.4 120.2 130.0 140.8 153.7 163.8 174.7 184.7 DI surplus..................... -3.9 28.8 14.9 13.4 13.6 14.6 17.0 18.7 18.3 17.6 17.1 16.7 15.6 14.3 12.7 Balance.......................... 422.7 483.2 549.6 630.9 731.5 844.7 967.5 1,097.5 1,236.0 1,383.7 1,541.5 1,711.9 1,891.3 2,080.3 2,277.7 Memo: OASI balance................... 416.3 447.9 499.5 567.4 654.5 753.1 858.9 970.3 1,090.5 1,220.5 1,361.3 1,515.0 1,678.8 1,853.5 2,038.2 DI balance..................... 6.4 35.2 50.1 63.5 77.0 91.6 108.6 127.2 145.5 163.1 180.2 196.8 212.5 226.7 239.4 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Source: Congressional Budget Office. CHART 1-2. SOCIAL SECURITY TRUST FUND ASSETS <GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT> Note._At end of calendar year, constant 1997 dollars, in trillions. Source: Board of Trustees (1997; intermediate assumptions). TABLE 1-39.--MAXIMUM TRUST FUND RATIOS AND YEAR OF EXHAUSTION FOR THE OASDI TRUST FUNDS UNDER ALTERNATIVE ASSUMPTIONS ------------------------------------------------------------------------ Assumption OASI DI Combined ------------------------------------------------------------------------ Alternative I (optimistic): Maximum trust fund ratio (percent).... 469 1276 457 Year attained......................... 2017 2071 2018 Year of exhaustion.................... ........ ........ ........ Alternative II (intermediate): Maximum trust fund ratio (percent).... 306 152 265 Year attained......................... 2013 2003 2011 Year of exhaustion.................... 2031 2015 2029 Alternative III (pessimistic): Maximum trust fund ratio (percent).... 195 115 175 Year attained......................... 2007 1998 2001 Year of exhaustion.................... 2022 2007 2018 ------------------------------------------------------------------------ Source: Board of Trustees (1997). role is to be reserve ``spending authority.'' As long as a trust fund has a positive balance, the Treasury Department is authorized to make payments owed against it from the Treasury; the fund itself does not contain actual cash resources to do so. For more than three decades after Social Security taxes were first levied in 1937, the system's income routinely exceeded its outgo, and its trust funds grew. However, the situation changed in the early 1970s. Enactment of major benefit increases in the 1968-72 period was followed by higher inflation and leaner economic conditions than had been expected. Prices rose faster than wages, the post-World War II baby boom ended precipitously (leading to a large cut in projected birth rates), and Congress adopted faulty benefit rules in 1972 that overcompensated new Social Security retirees for inflation. These factors combined to sour the outlook for Social Security and it remained poor through the mid-1980s. Before 1971, the balances of the trust funds had never fallen below 1 year's worth of outgo. Beginning in 1973, the program's income lagged its outgo, and the trust funds declined rapidly. Congress had to step in five times during the 1970s and early 1980s to keep them from being exhausted. Although major changes enacted in 1977 greatly reduced the program's longrun deficit, they did not eliminate it, and the shortrun changes made by the legislation were not large enough to enable the program to withstand back-to-back recessions in 1980 and 1982. A disability bill in 1980 and temporary fixes in 1980 and 1981 were followed by another major reform package in 1983. The 1983 changes, along with better economic conditions, helped alter the picture. Income began to exceed outgo in 1983 and the trust funds grew substantially. Cumulatively, the changes were projected to yield $96 billion in surplus income by 1990, and to raise the trust funds' balances to $123 billion. The funds actually were credited with $200 billion in surplus income by 1990, and their balances reached $225 billion by the end of that year. Under the Congressional Budget Office January 1998 estimate, surplus income of $602 billion is projected for the 1994-2000 period, and the trust funds' balances would rise to $967 billion by the beginning of 2001. These assets would be equivalent to 240 percent of expenditures in 2001 (or almost 2\1/2\ years' worth of benefits). The longer range picture for Social Security has been worsening gradually since 1983. By raising Social Security's age for receiving full benefits from 65 to 67, subjecting benefits to income taxes, and making new Federal and nonprofit workers join the system, Congress had attempted in 1983 to eliminate the longrun problem. In fact, projections made then showed that Congress had stemmed the red ink, at least on average, for the following 75 years. However, the average condition of the two trust funds did not represent their condition over the entire period. The funds were not shown to be insolvent at any point, but their expenditures were expected to exceed their income by 2025 and to remain higher thereafter. Simply stated, 40 years of surpluses were to be followed by an indefinite period of deficits. With each passing year since 1983, the Trustees' 75-year averaging period has picked up 1 deficit year at the back end and dropped a surplus year from the front end. This, by itself, would cause the average condition to worsen. However, in recent reports assumptions about birth rates, economic growth, and wages have been lowered, causing further deterioration in the outlook. A small long-range deficit appeared in the 1984 report and the gap has grown larger (with the point of insolvency coming closer) in subsequent reports. The Trustees' April 1997 long-range forecast The 1997 report showed an average 75-year deficit equal to 17 percent of program income and projected that the trust funds (viewed on a combined basis) will become insolvent in 2029. These long-range projections assume that GDP will rise annually at rates ranging from 2.5 percent in 1996 to 1.3 percent in 2050, wages will rise at an ultimate rate of 4.4 percent per year, the cost of living will go up at a 3.5 percent rate, unemployment will average 6 percent, and Social Security benefits will fall in relative terms as the age at which full benefits are payable rises from 65 to 67 over the first few decades of the next century. The higher age for full benefits will mean that people retiring in the future at less than age 67 will get less than under the previous age rules. These assumptions by themselves would seem to bode well for the system; however, looming demographic shifts are projected to overwhelm them. During the next two decades, the 76 million baby boomers born between 1946 and 1964 will be in their prime productive years, and the ``baby trough'' generation of the 1930s Depression will be in retirement. Together, these factors will lead to a stable ratio of workers to recipients. However, as baby boomers begin retiring around 2010, this ratio will erode quickly. By 2025, most of the surviving baby boomers will be 65 and older. The number of people 65 and older is predicted to rise by 75 percent, growing from 35 million today to 61 million in 2025. The number of workers will have grown from 145 million to 166 million, or by only 15 percent. Consequently, the ratio of workers to recipients will have fallen from 3.3 to 1 today to 2.2 to 1 in 2025 and 2.0 to 1 in 2030. Projected worker/ beneficiary ratios and dependency rates are shown in table 1- 40. Under this forecast, the trust funds (on a combined basis) would be credited with surplus income until 2018 or so, bringing their balances to $2.9 trillion. They would decline thereafter and would be depleted by 2029. However, tax receipts begin lagging outgo much sooner, in 2012. At that point, the program would have to rely on the interest credited to its trust funds for part of its income. Repayment of this interest would have to be funded from general revenue. In 2019, the principal on the trust funds would begin to be drawn down. By 2025, $1 out of every $5 of the program's outgo would be dependent upon general fund expenditures for interest payments and the redemption of the government bonds credited to the trust funds. The government has never defaulted on the securities it posts to its trust funds, but the magnitude of these potential claims has prompted many observers to ask where the government will find the money to cover them. Unless economic and demographic conditions are better than currently assumed, the government will have three basic options: raise other taxes, curtail other spending, or borrow money from the financial markets. There is nothing now in the law that will dictate or determine what the government actually will (or can) do then. TABLE 1-40.--POPULATION, WORK FORCE, AND OASDI BENEFICIARY DATA AND DEPENDENCY RATIOS, SELECTED YEARS 1960-2040 ---------------------------------------------------------------------------------------------------------------- Work force measure 1960 1980 2000 2020 2040 ---------------------------------------------------------------------------------------------------------------- Total population (in millions)..................................... 190 235 285 328 355 Covered workers (in millions)...................................... 73 112 149 166 171 OASDI beneficiaries (in millions).................................. 14 35 46 69 86 Worker/beneficiary ratio........................................... 5.1 3.2 3.3 2.4 2.0 Aged dependency ratio \1\.......................................... 0.173 0.195 0.211 0.275 0.369 Total dependency ratio \2\......................................... 0.904 0.749 0.695 0.699 0.789 ---------------------------------------------------------------------------------------------------------------- \1\ Ratio of the number of persons aged 65 and over to the number of persons aged 20-64. \2\ Ratio of the number of persons aged 65 and over plus the number of persons aged under 20, to the number of persons aged 20-64. Source: Board of Trustees (1997; intermediate assumptions). Economists argue that if the surplus taxes projected for the next 15 years were to cause the government to borrow less from financial markets, more money would be available for investment, which could lead to greater economic growth. If this happened, extracting resources from the economy in the future to honor Social Security claims may be less burdensome. Put another way, if one accepts the premise that reductions in Federal borrowing today will increase the amount of resources available for investment, then surplus Social Security taxes today could help build a higher economic base in the future from which to draw the needed resources. However, surplus Social Security taxes do not necessarily reduce government borrowing from the markets. Reductions in borrowing occur when the government reduces its overall deficit, not when one of its programs generates surplus taxes. Even if economic growth were enhanced in the coming decades by less government borrowing, Social Security's problems would not necessarily be resolved. Enhanced economic growth could improve actuarial balance somewhat if it also improves worker productivity, but not proportionately because higher productivity would likely result in higher wages, which in turn would lead to larger benefits (see table 1-41). Further, as their numbers swell, the baby boomers and subsequent retirees will raise financial demands on all retirement systems, not only Social Security. The goods and services to be consumed by society cannot be stockpiled in advance, and the economy will have to adjust. Whether this adjustment would be mild or severe is mostly conjecture. The 1997 Trustees' Report projects that Social Security will generate sufficient tax receipts to cover its commitments during the next 15 years. The long-range outlook, however, leaves little about which to be sanguine. The program has a growing 75-year average deficit. The HI Trust Fund's problems are more imminent, as insolvency is projected for 2001.\7\ Resources could be reallocated to HI from Social Security; however, this would only move Social Security's problems closer. If Social Security and HI are considered together, their combined expenditures are expected to be higher than their tax receipts beginning in 1999 and to remain higher thereafter. Their outgo as a percent of the Nation's payrolls would rise from 15.2 percent today to 24 percent in 2025, a level that contrasts sharply with a combined tax rate that is set now in the law at 15.3 percent. As a percent of GDP, Social Security and HI outgo would rise from about 6.4 percent today to 9.9 percent in 2025 (see table 1-42). Including supplemental medical insurance (SMI) expenditures would raise the Social Security and HI outgo from 7 to 13 percent of GDP. In contrast, the tax receipts and premiums collected to support these programs are projected to hover in the range of 7-8 percent of GDP throughout the period. --------------------------------------------------------------------------- \7\ As a result of passage of Public Law 105-33, the Balanced Budget Act of 1997, the HI Trust Fund is projected to be solvent until 2006 or 2007. These changes in the law were passed after the 1997 Trustees' Report was issued. TABLE 1-41.--OASDI INCOME RATE, COST RATE, AND ACTUARIAL BALANCE PROJECTIONS OVER 25-, 50-, AND 75-YEAR PERIODS \1\ [As a percentage of taxable payroll] ------------------------------------------------------------------------ Ultimate percentage increase in wages \2\ Valuation period -------------------------------- 3.9 4.4 4.9 ------------------------------------------------------------------------ Summarized income rate: 25-year: 1997-2021................. 13.68 13.62 13.57 50-year: 1997-2046................. 13.48 13.41 13.34 75-year: 1997-2071................. 13.45 13.37 13.30 Summarized cost rate: 25-year: 1997-2021................. 13.68 13.28 12.89 50-year: 1997-2046................. 15.43 14.86 14.30 75-year: 1997-2071................. 16.20 15.60 14.99 Balance: 25-year: 1997-2021................. +0.00 +0.35 +0.68 50-year: 1997-2046................. -1.95 -1.45 -0.96 75-year: 1997-2071................. -2.75 -2.23 -1.69 ------------------------------------------------------------------------ \1\ Based on intermediate estimates with various real-wage assumptions. \2\ The first value in each pair is the assumed ultimate annual percentage increase in average wages in covered employment. The second value is the assumed ultimate annual percentage increase in the Consumer Price Index. The difference between the two values is the real-wage differential. Source: Board of Trustees (1997). These projections are not based on pessimistic economic assumptions. A modest but sustained rise in GDP and moderate inflation and unemployment are assumed as shown in table 1-43. In large part, the projections hinge on demographic factors that are in place today--the post-World War II baby boom, the subsequent birth dearth, and the general aging of society. These projections suggest that to restore longrun solvency, income needs to be raised or expenditures cut. Beyond possible changes to the programs themselves, important unknowns that can alter the outlook include whether an effective means can be found to rein in the spiraling cost of medical care generally and whether future technological advances will propel productivity. TABLE 1-42.--ESTIMATED COST OF OASDI AND HI PROGRAMS, SELECTED CALENDAR YEARS 1997-2075 [As percent of gross domestic product] ------------------------------------------------------------------------ OASDI Calendar year OASDI HI and HI ------------------------------------------------------------------------ Annual cost rates: 1997............................... 4.66 1.76 6.41 1998............................... 4.65 1.81 6.46 1999............................... 4.65 1.86 6.52 2000............................... 4.65 1.92 6.57 2001............................... 4.66 1.97 6.63 2002............................... 4.67 2.03 6.70 2003............................... 4.68 2.08 6.76 2004............................... 4.69 2.13 6.83 2005............................... 4.71 2.18 6.89 2006............................... 4.72 2.23 6.95 2010............................... 4.87 2.43 7.30 2015............................... 5.27 2.77 8.04 2020............................... 5.80 3.18 8.99 2025............................... 6.27 3.61 9.88 2030............................... 6.57 4.01 10.57 2035............................... 6.64 4.31 10.95 2040............................... 6.56 4.49 11.05 2045............................... 6.50 4.59 11.08 2050............................... 6.50 4.63 11.13 2055............................... 6.58 4.67 11.25 2060............................... 6.64 4.74 11.39 2065............................... 6.67 4.84 11.51 2070............................... 6.68 4.96 11.64 2075............................... 6.69 5.08 11.77 Summarized cost rates: 1997-2021.......................... 5.20 2.51 7.71 1997-2046.......................... 5.71 3.16 8.88 1997-2071.......................... 5.90 3.50 9.40 ------------------------------------------------------------------------ Note.--Summarized rates are calculated on the present value basis including the value of the trust funds in the first year and the cost of reaching and maintaining a target trust fund level of 1 year's expenditures by the last year. Totals do not necessarily equal the sum of rounded components. Source: Board of Trustees (1997; intermediate assumptions). TABLE 1-43.--SELECTED ECONOMIC ASSUMPTIONS, SELECTED YEARS 1960-2075 -------------------------------------------------------------------------------------------------------------------------------------------------------- Average annual percentage change in-- Average Average Average ---------------------------------- Real-wage annual annual annual Calendar year Average differential \3\ interest unemployment percentage Real annual wage Consumer (percent) rate \4\ rate \5\ increase GDP \1\ in covered Price (percent) (percent) in labor employment Index \2\ force \6\ -------------------------------------------------------------------------------------------------------------------------------------------------------- 1960-64........................................................ 4.6 3.4 1.2 2.2 3.7 5.7 1.3 1965-69........................................................ 4.2 6.1 3.9 2.2 5.2 3.8 2.1 1970-74........................................................ 3.5 6.6 6.2 0.4 6.7 5.4 2.3 1975........................................................... -0.6 6.7 9.1 -2.4 7.4 8.5 1.9 1976........................................................... 5.6 8.5 5.7 2.8 7.1 7.7 2.4 1977........................................................... 4.9 6.8 6.5 0.3 7.1 7.1 2.9 1978........................................................... 5.0 8.9 7.7 1.2 8.2 6.1 3.2 1979........................................................... 2.9 10.1 11.4 -1.3 9.1 5.8 2.6 1980........................................................... -0.3 9.4 13.4 -4.0 11.0 7.1 1.9 1981........................................................... 2.5 9.7 10.3 -0.5 13.3 7.6 1.6 1982........................................................... -2.1 6.4 6.0 0.4 12.8 9.7 1.4 1983........................................................... 4.0 5.0 3.0 2.0 11.0 9.6 1.2 1984........................................................... 6.8 7.3 3.5 3.8 12.4 7.5 1.8 1985........................................................... 3.7 4.7 3.5 1.2 10.8 7.2 1.7 1986........................................................... 3.0 4.6 1.6 3.0 8.0 7.0 2.0 1987........................................................... 2.9 4.6 3.6 1.0 8.4 6.2 1.7 1988........................................................... 3.8 5.3 4.0 1.3 8.8 5.5 1.4 1989........................................................... 3.4 3.9 4.8 -0.9 8.7 5.3 1.8 1990........................................................... 1.3 5.1 5.2 -0.1 8.6 5.5 0.7 1991........................................................... -1.0 3.0 4.1 -1.1 8.0 6.7 0.4 1992........................................................... 2.7 4.9 2.9 2.0 7.1 7.4 1.2 1993........................................................... 2.3 2.5 2.8 -0.3 6.1 6.8 0.7 1994........................................................... 3.5 3.0 2.5 0.5 7.1 6.1 2.3 1995........................................................... 2.0 3.9 2.9 1.0 6.9 5.6 0.9 1996........................................................... 2.5 4.2 2.9 1.4 6.6 5.4 1.2 1997........................................................... 2.5 4.0 3.2 0.8 6.6 5.4 1.3 1998........................................................... 2.0 3.2 3.2 0.0 6.7 5.7 0.9 1999........................................................... 2.0 4.1 3.2 0.8 6.7 5.8 0.9 2000........................................................... 2.0 4.3 3.4 0.9 6.7 5.8 1.0 2001........................................................... 2.0 4.3 3.5 0.8 6.6 5.9 1.1 2002........................................................... 2.0 4.4 3.5 0.9 6.6 6.0 1.0 2003........................................................... 2.0 4.5 3.5 1.0 6.6 6.0 0.8 2004........................................................... 2.0 4.5 3.5 1.0 6.5 6.0 0.9 2005........................................................... 2.0 4.5 3.5 1.0 6.4 6.0 0.9 2006........................................................... 2.0 4.5 3.5 0.9 6.3 6.0 0.9 2010........................................................... 1.8 4.5 3.5 1.0 6.2 6.0 0.7 2020........................................................... 1.3 4.4 3.5 0.9 6.2 6.0 0.2 2030........................................................... 1.4 4.4 3.5 0.9 6.2 6.0 0.2 2040........................................................... 1.4 4.4 3.5 0.9 6.2 6.0 0.2 2050........................................................... 1.3 4.4 3.5 0.9 6.2 6.0 0.1 2060........................................................... 1.3 4.4 3.5 0.9 6.2 6.0 0.1 2070........................................................... 1.3 4.4 3.5 0.9 6.2 6.0 0.1 2075........................................................... 1.3 4.4 3.5 0.9 6.2 6.0 0.1 -------------------------------------------------------------------------------------------------------------------------------------------------------- \1\ The real gross domestic product is the gross domestic product, expressed in 1992 dollars. \2\ The consumer price index is the value of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), averaged over 12 (or 60) months. \3\ The real-wage differential is the difference between the percentage increases, before rounding, in (1) the average annual wage in covered employment, and (2) the average annual Consumer Price Index. \4\ The average annual interest rate is the average of the nominal rates for special public-debt obligations issuable to the trust funds. \5\ Through 2006, the rates shown are unadjusted civilian unemployment rates. After 2006, the rates are total rates (including military personnel), adjusted by age and sex based on the labor force for 1995, and averaged over 12 (or 60) months. \6\ The labor force is the total for the United States (including military personnel), averaged over 12 (or 60) months. Source: Board of Trustees (1997; intermediate assumptions). How the Status of the Trust Funds is Measured In the short range, the financial soundness of each of the trust funds can be assessed by considering the size of the trust fund balance in absolute terms, as a percentage of the annual expenditures, and with reference to whether the balance is growing or declining. In the long range, the traditional measure of financial soundness has been the actuarial balance of the system. The actuarial balance is defined as the difference between the total summarized income rate and the total summarized cost rate. Because the Social Security Program has been designed as a contributory system in which those who pay the taxes supporting the system are considered to be earning the right to future benefits, Congress has traditionally required long-range estimates of the program's actuarial balance and has set future tax rates with a view to assuring that the income of the program will be sufficient to cover its outgo. Under current procedures, the long-range actuarial analysis of the cash benefits program covers a 75-year period, which would generally be long enough to cover the anticipated retirement years of those currently in the work force. The long-range status of the trust funds is often expressed in terms of percent of taxable payroll rather than in dollar amounts. This permits a direct comparison between the tax rate actually in the law and the cost of the program. For example, if the program is projected to have a deficit of 2 percent of taxable payroll, the OASDI tax rates now in the law would have to be increased by 1 percentage point each for employee and employer (a total of 2 percent) in order to pay for the benefits due. Alternatively, the program could be brought back into balance by an equivalent reduction in benefit outgo or by a combination of revenue increases and outgo reductions. If the program is projected to have a deficit of 2 percent of taxable payroll, and expenditures are projected to be 10 percent of taxable payroll, then, under the given set of assumptions, 20 percent (2 divided by 10) of expenditures could not be met with that tax schedule. In 1997, the total taxable payroll is estimated to be $3.23 trillion. Thus, in 1997 terms, 2 percent of payroll represented about $65 billion. Long-range projections are affected by three basic types of factors: (1) demographic factors, such as rates of fertility, life expectancy, and labor force participation, which determine the number of workers in relation to nonworking beneficiaries; (2) economic factors such as unemployment, productivity, and inflation; and (3) factors specifically related to the Social Security Program, such as benefit levels, total number of covered workers, and percent of eligible workers drawing early retirement benefits. The actuaries at SSA employ three sets of alternative economic and demographic assumptions. Alternative I is based on optimistic assumptions; alternative II is based on intermediate assumptions; and alternative III is based on pessimistic assumptions. Alternative II is considered the most balanced estimate of long-term solvency and is the most frequently cited. It is clear that underlying factors cannot be predicted with any certainty as far into the future as 75 years, and that long-range projections should not be taken as absolute predictions of deficits or surpluses in the funds. Beginning with the 1988 Trustees' Report, the Social Security Trustees used an alternative method of determining actuarial balance. Under the ``present value'' method, interest earnings on the fund are more fully recognized. Calculations were based on the present value of future income, outgo, and taxable payroll by discounting the future annual amounts at an assumed rate of interest. Traditionally, the Trustees based their conclusion about the long-range actuarial condition of the program on the ``closeness'' of the income and cost rates when averaged over a 75-year period. If the income rate was between 95 and 105 percent of the cost rate over this projection period, the system was said to be in close actuarial balance. The 1991 Trustees' Report incorporated a more refined measure of actuarial soundness designed to reveal problems occurring at any time during the 75-year measuring period. The 5-percent tolerance (i.e., the amount of acceptable actuarial deficit) was retained in measuring the program's actuarial soundness for the 75-year period as a whole, but less tolerance is now permitted for shorter periods of valuation. The spread between income and outgo is evaluated throughout the measuring period in reaching a conclusion of whether close actuarial balance exists, with the amount of acceptable deviation gradually declining from 5 percent for the full 75- year period to 0 (or no acceptable deviation) for the first 10- year segment of the measuring period. To meet the short-range test of financial adequacy, the reserve balance at the end of the first 10-year segment must be at or higher than 100 percent of annual expenditures, a condition that is consistent with the 10-year segment of the long-range test of close actuarial balance. The reserve balance also must be expected to reach that level within the first 5 years and then remain there. Under this revised limit, if income were at least 95 percent of the cost level for the 75- year period as a whole, the trust funds still could be deemed to be out of close actuarial balance if income and outgo were too small, compared to cost, for shorter segments of the measuring period. Under these measures, the Trustees concluded in their 1997 report, as they did in their six previous reports, that OASDI is not in close actuarial balance over the long run. In the long run, income and expenditures are generally expressed as a percentage of the total amount of earnings subject to taxation under the OASDI Program. Summarized income and cost rates over the 75-year long-range period are determined through present- value calculations and by taking into account actual beginning fund balances and targeted ending fund balances (or reserves) of 100 percent of annual expenditures. Overall, for the period 1997-2071, the difference between the summarized income and cost rates for the OASDI Program is a deficit of 2.23 percent of taxable payroll based on the intermediate assumptions. Therefore, on a combined basis, the OASDI Program is not in close actuarial balance over the next 75 years. In addition, the individual OASI and DI Trust Funds are not in close actuarial balance. Income from OASDI payroll taxes represents 12.4 percent of taxable payroll. Since the tax rate is not scheduled to change in the future under present law, OASDI payroll tax income as a percentage of taxable payroll remains constant at 12.4 percent. Adding the OASDI income from the income taxation of benefits to the income from payroll taxes yields a total ``income rate'' of 12.63 percent. This rate is estimated to increase gradually to 13.34 percent of taxable payroll by the end of the 75-year projection period based on the intermediate assumptions. The growth is attributable, in part, to increasing proportions in both the number of beneficiaries and the amount of their benefits subject to taxation in the future. These proportions will increase because the income thresholds, above which benefits are taxable, are fixed dollar amounts, and, as time goes by, the incomes of more people will exceed them due to the expected rise in wages and prices. OASDI expenditures for benefit payments and administrative expenses currently represent about 11.49 percent of taxable payroll. This cost rate is estimated to remain below the corresponding income rate for the next 15 years, based on the intermediate assumptions. However, with the retirement of the 76 million members of the baby boom generation starting in about 2010, OASDI costs will increase rapidly relative to the taxable earnings of workers. By 2075 the OASDI cost rate is estimated to reach 19.42 percent under the intermediate assumptions, resulting in an annual deficit of 6.07 percent (see table 1-44). Table 1-45 shows estimated trust fund assets; table 1-46 shows estimated trust fund operations, both over the long run. Nature of the Social Security Trust Funds Contrary to popular belief, Social Security taxes are not deposited into the Social Security Trust Funds. They flow each day into thousands of depository accounts maintained by the government with financial institutions across the country. Along with many other forms of revenues, these Social Security taxes become part of the government's operating cash pool, or what is more commonly referred to as the U.S. Treasury. In effect, once these taxes are received, they become indistinguishable from other moneys the government receives. They are accounted for separately through the issuance of Federal securities to the Social Security Trust Funds--which basically involves a series of bookkeeping entries by the Treasury Department--but the trust funds themselves do not receive or hold money. They are simply accounts. Similarly, benefits are not paid from the trust funds, but from the Treasury. As the checks are paid, securities of an equivalent value are removed from the trust fund accounts. TABLE 1-44.--ESTIMATED INCOME RATES AND COST RATES, AS A PERCENTAGE OF TAXABLE PAYROLL, SELECTED CALENDAR YEARS 1997-2075 -------------------------------------------------------------------------------------------------------------------------------------------------------- OASI DI Combined ----------------------------------------------------------------------------------------------------------- Calendar year Income Income Income rate Cost rate Balance rate Cost rate Balance rate Cost rate Balance -------------------------------------------------------------------------------------------------------------------------------------------------------- 1997........................................ 10.91 9.97 0.94 1.71 1.51 0.20 12.63 11.49 1.14 1998........................................ 10.92 10.05 0.86 1.71 1.56 0.15 12.63 11.61 1.02 1999........................................ 10.92 10.08 0.84 1.71 1.60 0.11 12.64 11.68 0.95 2000........................................ 10.82 10.09 0.74 1.81 1.64 0.18 12.64 11.73 0.91 2001........................................ 10.83 10.08 0.75 1.82 1.68 0.13 12.65 11.77 0.88 2002........................................ 10.84 10.09 0.75 1.82 1.74 0.08 12.66 11.83 0.83 2003........................................ 10.84 10.09 0.76 1.82 1.79 0.03 12.66 11.87 0.79 2004........................................ 10.85 10.09 0.77 1.82 1.85 -0.03 12.67 11.93 0.74 2005........................................ 10.86 10.07 0.78 1.82 1.90 -0.09 12.67 11.98 0.70 2006........................................ 10.86 10.07 0.79 1.82 1.96 -0.14 12.68 12.03 0.65 2010........................................ 10.91 10.34 0.57 1.82 2.14 -0.31 12.73 12.48 0.26 2015........................................ 10.99 11.38 -0.39 1.83 2.24 -0.41 12.82 13.62 -0.80 2020........................................ 11.09 12.84 -1.75 1.83 2.30 -0.47 12.92 15.14 -2.22 2025........................................ 11.18 14.13 -2.96 1.83 2.39 -0.56 13.01 16.53 -3.51 2030........................................ 11.25 15.07 -3.82 1.84 2.40 -0.56 13.09 17.47 -4.38 2035........................................ 11.30 15.49 -4.19 1.84 2.35 -0.51 13.14 17.84 -4.70 2040........................................ 11.32 15.42 -4.10 1.84 2.36 -0.52 13.16 17.78 -4.61 2045........................................ 11.34 15.32 -3.98 1.84 2.46 -0.62 13.18 17.78 -4.60 2050........................................ 11.37 15.45 -4.08 1.84 2.52 -0.68 13.21 17.97 -4.76 2055........................................ 11.40 15.80 -4.40 1.85 2.55 -0.71 13.25 18.36 -5.11 2060........................................ 11.43 16.20 -4.77 1.85 2.53 -0.68 13.28 18.72 -5.45 2065........................................ 11.46 16.46 -5.00 1.85 2.51 -0.67 13.30 18.97 -5.67 2070........................................ 11.48 16.65 -5.17 1.85 2.53 -0.69 13.32 19.18 -5.86 2075........................................ 11.49 16.85 -5.36 1.85 2.57 -0.72 13.34 19.42 -6.07 -------------------------------------------------------------------------------------------------------------------------------------------------------- Note.--Totals may not add due to rounding. Source: Board of Trustees (1997; intermediate assumptions). TABLE 1-45.--ESTIMATED TRUST FUND ASSETS, SELECTED CALENDAR YEARS 1997- 2075 [As a percentage of annual expenditures] ------------------------------------------------------------------------ Beginning of calendar year OASI DI Combined ------------------------------------------------------------------------ 1997................................... 160 108 153 1998................................... 173 122 166 1999................................... 186 130 178 2000................................... 198 136 189 2001................................... 209 145 200 2002................................... 220 150 209 2003................................... 231 152 219 2004................................... 242 151 228 2005................................... 253 147 236 2006................................... 264 140 244 2010................................... 298 95 264 2015................................... 299 12 252 2020................................... 249 0 198 2025................................... 162 0 110 2030................................... 50 0 0 2035................................... 0 0 0 2040................................... 0 0 0 2045................................... 0 0 0 2050................................... 0 0 0 2055................................... 0 0 0 2060................................... 0 0 0 2065................................... 0 0 0 2070................................... 0 0 0 2075................................... 0 0 0 Trust fund is estimated to become exhausted in.......................... 2031 2015 2029 ------------------------------------------------------------------------ Note.--The assets for the combined funds for years after a component fund has been exhausted are shown for illustrative purposes only, since no legal authority exists for interfund borrowing between OASI and DI. Totals may not add due to rounding. Source: Board of Trustees (1997; intermediate assumptions). When more Social Security taxes are received than are spent, the money does not sit idle in the Treasury, but is used to finance other operations of the government. The surplus is then reflected in a higher balance of securities being posted to the trust funds. Simply put, these balances, like those of a bank account, represent a promise that, if needed to pay Social Security benefits, the government will obtain resources in the future equal to the value of the securities. Are the Federal securities issued to the trust funds the same sort of financial assets that individuals and other entities buy? Yes. They earn interest at market rates, have specific maturity dates, and by law represent ``obligations'' of the U.S. Government. But what confuses people is that they often see these securities as assets for the government. When an individual buys a government bond, he has established a financial claim against the government. When the government issues a security to one of its own accounts, it hasn't purchased anything or established a claim against some other person or entity. It is simply creating an IOU from one of its accounts to another. Hence, the building up of Federal securities in the Social Security Trust Fund is not a means in and of itself for the government to accumulate assets. Federal securities in the trust fund establish claims against the government for the Social Security system, but the Social Security system is part of the government. Those claims are not resources the government has at its disposal to pay future Social Security benefits. TABLE 1-46.--ESTIMATED OPERATIONS OF THE COMBINED OASI AND DI TRUST FUNDS, SELECTED CALENDAR YEARS 1997-2075 [Constant 1997 dollars, in billions] ---------------------------------------------------------------------------------------------------------------- Income Assets at Calendar year excluding Interest Total Outgo end of interest income income year ---------------------------------------------------------------------------------------------------------------- 1997..................................................... $407.7 $43.7 $451.3 $370.8 $647.4 1998..................................................... 409.1 47.1 456.2 377.0 706.5 1999..................................................... 414.4 50.4 464.8 384.1 765.1 2000..................................................... 420.4 53.8 474.3 390.9 823.5 2001..................................................... 427.6 57.1 484.8 398.6 882.0 2002..................................................... 434.4 60.5 494.9 406.9 940.3 2003..................................................... 441.3 63.9 505.2 414.9 998.7 2004..................................................... 448.6 67.1 515.7 423.9 1056.7 2005..................................................... 457.2 70.3 527.5 433.0 1115.6 2006..................................................... 464.7 73.3 538.0 442.3 1173.5 2010..................................................... 497.4 81.3 578.7 489.0 1378.5 2015..................................................... 533.1 87.1 620.2 568.1 1484.6 2020..................................................... 565.7 77.2 642.9 665.0 1293.5 2025..................................................... 596.9 44.5 641.3 760.4 717.0 2030..................................................... 0.0 0.0 0.0 0.0 0.0 2035..................................................... 0.0 0.0 0.0 0.0 0.0 2040..................................................... 0.0 0.0 0.0 0.0 0.0 2045..................................................... 0.0 0.0 0.0 0.0 0.0 2050..................................................... 0.0 0.0 0.0 0.0 0.0 2055..................................................... 0.0 0.0 0.0 0.0 0.0 2060..................................................... 0.0 0.0 0.0 0.0 0.0 2065..................................................... 0.0 0.0 0.0 0.0 0.0 2070..................................................... 0.0 0.0 0.0 0.0 0.0 2075..................................................... 0.0 0.0 0.0 0.0 0.0 ---------------------------------------------------------------------------------------------------------------- Note.--Figures are not shown for years after which the combined OASI and DI Trust Funds are estimated to be exhausted. Adjustment from current to constant dollars is by the CPI. Totals may not add due to rounding. Source: Board of Trustees (1997; intermediate assumptions). What then is the purpose of the trust funds? Generally speaking, the Federal securities issued to any Federal trust fund represent ``permission to spend.'' As long as a trust fund has a balance of securities posted to it, the Treasury Department has legal authority to keep issuing checks for the program. In a sense, the mechanics of a Federal trust fund are similar to those of a bank account. The bank takes in a depositor's money, credits the amount to the depositor's account, and then loans it out. As long as the account shows a balance, the depositor can write checks that the bank must honor. In Social Security's case, its taxes flow into the Treasury, and its trust funds are credited with Federal securities. The government then uses the money to meet whatever expenses are pending at the time. The fact that this money is not set aside for Social Security purposes does not dismiss the government's responsibility to honor the trust funds' account balances. As long as the trust funds have balances, the Treasury Department must continue to issue Social Security checks. The key point is that the trust funds themselves do not hold financial resources to pay benefits. Rather, they provide authority for the Treasury Department to use whatever money it has on hand to pay them. The significance of having trust funds for Social Security is that they represent a long-term commitment of the government to the program. While the funds do not hold ``resources'' that the government can call on to pay Social Security benefits, the balances of Federal securities posted to them represent and have served as financial claims against the government--claims on which the Treasury has never defaulted, nor used directly as a basis to finance anything but Social Security expenditures. How does the Social Security Trust Fund differ from the financing of other government programs? The Treasury Department maintains accounts for all government programs. The difference is that many other programs, particularly those not accounted for through trust funds, get their operating balances--i.e., their permission to spend--through the annual appropriations process. Congress must pass legislation (an appropriations act) each year giving the Treasury Department permission to expend funds for them. In technical jargon, this permission to spend is referred to as ``budget authority.'' For many programs accounted for through trust funds, annual appropriations are not needed. As long as their trust fund accounts show a balance of Federal securities, the Treasury Department has ``budget authority'' to expend funds for them. Another difference is that a trust fund account earns interest, since it is comprised of Federal securities. In the case of the Social Security Trust Funds, the interest is equal to the prevailing average rate on outstanding Federal securities with a maturity of 4 years or longer. This interest is credited to the trust funds twice a year (on June 30 and December 31) by issuing more securities to them. So in effect, a trust fund account can automatically build future ``budget authority'' for the program, but other accounts, dependent on annual appropriations, cannot. Does taking Social Security out of the Federal budget change where the surplus taxes go? Legislation enacted in 1990 (the Budget Enforcement Act, included in Public Law 101-508) removed Social Security taxes and benefits from the budget and from calculations of the budget deficit. In large part this was done both to prevent Social Security from masking the size of the deficit and to protect it from budgetary cuts. Taking Social Security off budget was based on the supposition that Congress would act differently in trying to achieve deficit-reduction targets if Social Security surpluses were not counted in reaching the budget totals. However, removing Social Security from the Federal budget does not change where Social Security taxes go. The Federal budget is not a cash management account--it is simply a statement or summary of what policymakers want the government's financial flows to be during any given period. Whether this summary is presented in a unified or fragmented form will not in and of itself change how much money is received and spent by the government, and it will not alter where Federal tax receipts of any sort go. Social Security taxes will go into the Treasury regardless of whether the program is counted in reaching budget totals. Social Security taxes will go elsewhere only if Congress decides they will go elsewhere. Are surplus Social Security taxes giving the government more money to spend? The fact that surplus Social Security taxes are used by the government to meet other financial commitments does not necessarily mean that the government has more money to spend than it would have if these receipts were not available. Decisions about Social Security funds and the finances of the rest of the government have never been made in isolation of one another, and those decisions have had overlapping influences. Past increases in Social Security taxes may have made it more difficult for Congress to raise other forms of taxes. For instance, Social Security taxes were raised in 1977 to shore up the program's financing, but the following year Congress enacted reductions in income taxes to offset the impact of these hikes. Similarly, the earned income credit (EIC), which reduces income taxes or permits a refundable credit to be paid to low-income workers, is intended in part to offset the Social Security tax bite. Hence, other taxes might have taken the place of the surplus Social Security taxes if Social Security tax rates were lower than they are now. Therefore, whether these surplus taxes are allowing the government to spend more is a matter of conjecture. Are surplus Social Security taxes allowing the government to borrow less from the public? Today, the government is spending more overall than it is taking in through taxes and covers the shortfall by borrowing money. No single activity of the government determines the size of this shortfall. To say surplus Social Security taxes are reducing the amount that must be borrowed assumes that all other spending and taxation decisions have been made without any regard for Social Security's income and outgo, and vice versa. If increases in Social Security taxes over the past decade have caused other taxes to be reduced or kept them from rising, such increases may have added little to the government's total revenues. By the same token, when Social Security taxes are smaller than the program's spending--as they were for all but five fiscal years after 1957 and through 1984--it is not clear that this shortfall causes the government to borrow more than it would otherwise. Government borrowing from the public is not clearly linked to any particular aspect of what the government does. It borrows as it needs to, for whatever obligations it has to meet. Therefore, whether surplus Social Security taxes are currently allowing the government to borrow less from the public than it otherwise would is also a matter of conjecture. Isn't there some way to actually save the Social Security surpluses? Perceiving that surplus Social Security taxes simply give the government more money to spend, people sometimes ask why they can't be invested in stocks or bonds. They believe that this would really save the money for the future. Actually, the surplus Social Security taxes collected today are not the means through which the future cost of the system will be met. Most of today's taxes are used to cover payments to today's retirees. In 1997, the system's taxes will amount to an estimated $408 billion; its expenditures, $371 billion. At their peak in 2011, the balances of the Social Security Trust Funds are expected to equal only 2\2/3\ years' worth of payments. Thus, the future costs of the system, as is the case today, will largely be met through future taxation. The promise of future benefits rests primarily on the government's ability to levy taxes in the future, not on the balances of the trust funds. The more immediate concern about investing the surplus taxes elsewhere is that doing so would reduce the government's revenues. How would the government make up this loss? What other taxes would take their place, what spending would be cut--or would the government simply borrow more money from the financial markets? In a sense, the idea of investing surplus Social Security taxes in private investments is only half a proposal. If the government borrowed money from the financial markets to make up the loss, it simply would be putting money into the markets with one hand and taking it back with another. On balance, it would not have added any new money to the Nation's pool of investment resources. If, on the other hand, the government were to reduce its spending or raise other taxes, it would not have to borrow any new funds (or it would borrow less than the full amount of Social Security money it diverted to the markets). This approach presumably would result in a net increase in savings in the economy. The bottom line is that it is not simply how surplus Social Security taxes are invested that determines whether real savings is increased. Rather, it is the steps that fiscal policymakers take to reduce the government's overall draw on financial markets that really matter. BUDGETARY TREATMENT OF OASDI Social Security and other Federal programs that operate through trust funds were counted officially in the budget beginning in fiscal year 1969. This action was taken administratively by President Johnson. At the time Congress did not have a budgetmaking process. In 1974, with passage of the Congressional Budget and Impoundment Control Act (Public Law 93-344), Congress adopted procedures for setting budget goals through passage of annual budget resolutions. Like the budgets prepared by the President, these resolutions were to reflect a ``unified'' budget that included trust fund programs such as Social Security. Financial problems confronting Social Security and concern over its growing costs led to enactment of a number of benefit changes in 1977, 1980, 1981, and 1983. However, because the Federal budget deficit remained large, interest in curbing Social Security spending continued. This consideration of Social Security constraints led to concerns that changes in Social Security were being proposed for budgetary purposes rather than programmatic ones. In response, measures were enacted in 1983, 1985, and 1987 making the program a more distinct part of the budget and permitting floor objections (points of order) to be raised against budget bills containing Social Security changes. Later in the decade, when Social Security surpluses emerged, critics argued that the program was masking the size of budget deficits. In response, Congress in 1990 excluded Social Security from calculations of the budget and largely exempted it from procedures for controlling spending (Omnibus Budget Reconciliation Act of 1990, Public Law 101-508). By these actions, however, Congress excluded Social Security from procedural constraints designed to discourage measures that would increase deficits. Concerned that this change would encourage Social Security spending increases and tax cuts that could weaken Social Security's financial condition, Congress also included provisions permitting floor objections to be raised against bills that would erode the balances of the Social Security Trust Funds. A more detailed explanation of budget and procedural rules affecting Social Security follows. Table 1-47 shows projected budget surpluses and deficits with and without Social Security. TABLE 1-47.--PROJECTED BUDGET SURPLUSES AND DEFICITS \1\ WITH AND WITHOUT SOCIAL SECURITY, 1997-2008 [By fiscal year, in billions of dollars] ------------------------------------------------------------------------ Without Year With Social Social Security Security ------------------------------------------------------------------------ 1997.......................................... +$8 -$73 1998.......................................... +9 -92 1999.......................................... +2 -111 2000.......................................... +1 -122 2001.......................................... +13 -116 2002.......................................... +67 -71 2003.......................................... +53 -95 2004.......................................... +70 -88 2005.......................................... +75 -95 2006.......................................... +115 -64 2007.......................................... +130 -59 2008.......................................... +138 -59 ------------------------------------------------------------------------ \1\ Surpluses are depicted with +, deficits with -. Source: Congressional Budget Office, March 1998 baseline projections. Current Budget Rules Pertaining to Social Security Two key elements of the budget process are explicit dollar limits on discretionary spending (mostly for programs requiring annual appropriations) and a ``pay-as-you-go'' rule that requires that increases in direct spending (mostly for entitlement programs) and/or cuts in revenues must be offset by other changes so as not to increase the deficit. Originally written to cover the period from fiscal years 1991 to 1995, these budget rules apply through fiscal year 1998 (as a result of provisions in the Omnibus Budget Reconciliation Act of 1993--Public Law 103-66). If the explicit spending limits or ``pay-as-you-go'' rules are violated during this period, the President may be required to sequester funds (i.e., cut spending). By law, Social Security is not to be included in these calculations and is exempt from any potential sequestration, with the exception of administrative expenses (which are counted as discretionary spending). Table 1-48 shows total OASDI administrative expenses, and administrative expenses as a percentage of benefit payments. The law further permits floor objections to be raised against budget bills (so- called ``reconciliation'' bills) that contain Social Security measures. TABLE 1-48.--NET ADMINISTRATIVE EXPENSES AND ADMINISTRATIVE EXPENSES AS A PERCENTAGE OF BENEFIT PAYMENTS, FISCAL YEARS 1992-96 [Dollars in billions] ---------------------------------------------------------------------------------------------------------------- Administrative expenses as a percentage of benefit payments Total paid from Fiscal year administrative -------------------------------- expenses OASI Trust DI Trust Combined Fund \1\ Fund \1\ funds \1\ ---------------------------------------------------------------------------------------------------------------- 1992........................................................... $2.668 0.7 2.8 0.9 1993........................................................... 2.955 0.8 2.8 1.0 1994........................................................... 2.896 0.7 2.8 0.9 1995........................................................... 2.870 0.6 2.7 0.9 1996........................................................... 2.862 0.6 2.5 0.8 ---------------------------------------------------------------------------------------------------------------- Source: Office of the Actuary, Social Security Administration. Current House and Senate Procedural Rules to Protect Social Security's Financial Condition Under the budget rules that existed before 1991, Social Security was included in calculations of the budget deficit. This rule had the effect of potentially thwarting attempts to expand Social Security benefits or cut taxes if such attempts were not accompanied by measures to offset the cost or revenue loss. Floor objections could be raised against such actions if they violated the budget totals or allocations. If measures that raised benefits or cut taxes were enacted, other programs were potentially threatened with sequestration because the deficit would be made larger. The old process imposed the same fiscal discipline on Social Security as applied to other programs. Since Social Security is now exempt from the budget limits (except its administrative expenses), these fiscal constraints no longer apply. In their place are rules intended to make it difficult to bring up measures for a vote that would weaken the program's financial condition. These procedural rules are sometimes referred to as the Social Security ``firewall'' provisions. In the House, a floor objection can be raised against a bill that proposes more than $250 million in Social Security spending increases or tax cuts over 5 years (counting the fiscal year it becomes effective and the following 4 years) unless the bill also contains offsetting changes to bring the net impact within the $250 million limit. Costs of prior legislation that fall within the 5-year period must be counted. An objection also can be raised against a measure that would increase long-range (75-year) average costs or reduce long- range revenues by at least 0.02 percent of taxable payroll. In the Senate, budget resolutions must include separate amounts for Social Security income and outgo for the first year and 5-year period covered by the resolution (i.e., separate from the budget totals). These amounts cannot cause the balances of the Social Security Trust Funds to be lower than projected under current law. Measures that would do so are subject to an objection, which can be overridden only by a vote of three-fifths of the Senate. Once the resolution is enacted, subsequent measures that on balance would cause Social Security outlay increases or revenue reductions are also subject to objection, which again can be overridden only by a three-fifths vote. Budgetary Treatment of Administrative Expenses The costs of administering the Social Security Retirement and Disability Programs are financed from the Social Security Trust Funds, subject to annual appropriations. Traditionally these costs are low, now comprising less than 1 percent of annual benefit payments (see table 1-48). During fiscal year 1996, they amounted to $2.9 billion. These trust-fund-financed administrative funds comprised about 50 percent of the Social Security Administration's fiscal year 1996 administrative budget. The agency received another 16 percent from the Medicare Trust Funds, as well as 34 percent from general revenues for administration of the Supplemental Security Income Program. SSA's total 1996 administrative budget was $5.3 billion (excluding the special appropriations for disability processing, automation investments, funding for additional continuing disability reviews, and funding for the Office of the Inspector General). Social Security benefit payments were taken off budget as provided by the Budget Enforcement Act (BEA) of 1990. The BEA specifically exempts certain programs from the discretionary spending cap, but not SSA's administrative expenses. LEGISLATIVE HISTORY (For a description of legislative changes made in the 95th- 102d Congresses, refer to the 1996 Green Book.) Changes in the 103d Congress The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66) made the following tax changes relating to Social Security and Medicare: Increased taxation of benefits Made up to 85 percent of Social Security benefits subject to the income tax for recipients whose income plus one-half of their benefits exceed $34,000 (single) and $44,000 (couple). Eliminated maximum taxable earnings base for HI Subjected all earnings to the HI tax, effective in 1994. The Social Security Administrative Reform Act of 1994 (Public Law 103-296) made significant administrative and program changes: Independent agency Established the Social Security Administration as an independent agency, effective March 31, 1995. Substance abusers Restricted DI and SSI benefits payable to drug addicts and alcoholics by creating sanctions for failing to get treatment, limiting their enrollment to 3 years, and requiring that those receiving DI benefits have a representative payee (formerly required only of SSI recipients). The Social Security Domestic Reform Act of 1994 (Public Law 103-387): Domestic workers Raised the threshold for Social Security coverage of household employees from remuneration of $50 in wages a quarter to $1,000 a year. Disability Insurance Trust Fund financing Reallocated a percentage of taxes from the OASI fund to the DI fund (see table 1-35). Barred benefit payments to the criminally insane Extended the prohibition against benefit payments to prisoners to those in public institutions who committed serious crimes but are found not guilty by reason of insanity, or incompetent to stand trial. Changes in the 104th Congress Summary of major provisions of the ``Senior Citizens' Right To Work Act of 1996'' (Incorporated into Public Law 104-121, the Contract With America Advancement Act of 1996): Establishment of a continuing disability review (CDRs) authorization An authorization to provide additional administrative funding to enable the Social Security Administration to increase CDRs is created. Amounts spent for CDRs above the already assumed base funding levels are not subject to the discretionary spending caps through fiscal year 2002. SSA must report annually on CDR expenditures and savings to the Social Security, Supplemental Security Income, Medicaid and Medicare Programs. Increase in the Social Security earnings limit Gradually raised the earnings limit for those between age 65 and 70 to $30,000 by the year 2002, phased in over 7 years as follows: ------------------------------------------------------------------------ Year Prior law New law ------------------------------------------------------------------------ 1996.......................................... $11,520 $12,500 1997.......................................... $11,880 $13,500 1998.......................................... $12,240 $14,500 1999.......................................... $12,720 $15,500 2000.......................................... $13,200 $17,000 2001.......................................... $13,800 $25,000 2002.......................................... $14,400 $30,000 ------------------------------------------------------------------------ Senior citizens between full retirement age (currently age 65) and 70 who earn over the given earnings limit continue to lose $1 in benefits for every $3 earned over the new limit. After 2002, the annual exempt amounts are indexed to growth in average wages. The substantial gainful activity (SGA) amount applicable to individuals under 65 who are eligible for disability benefits on the basis of blindness is no longer linked to the earnings limit amount for those now age 65 to 69. As under prior law, this SGA amount continues to be wage- indexed in the future, and is projected to rise to $14,400 by 2002. Entitlement of stepchildren to child's benefits based on actual dependency on stepparent support Benefits are payable to a stepchild only if it is established that the stepchild is dependent upon the stepparent for at least one-half of his or her financial support. In addition, benefits to the stepchild are terminated if the stepchild's natural parent and stepparent are divorced. The dependency requirement is effective for stepchildren who become entitled or reentitled to benefits 3 months after March 1996. In cases of a subsequent divorce, benefits to stepchildren terminate 1 month after the divorce becomes final. Stepparents are required to notify SSA of the divorce. In addition, SSA is required to notify annually those potentially affected by this provision. Denial of benefits based on disability to drug addicts and alcoholics An individual is not considered disabled for purposes of entitlement to cash Social Security and Supplemental Security Income disability benefits if drug addiction or alcoholism is the contributing factor material to his or her disability. Individuals with drug addiction or alcoholism who have another severe disabling condition (such as AIDS, cancer, cirrhosis) can qualify for benefits based on that disabling condition. If a person qualifying for benefits based on another disability is also determined to be an alcoholic or drug addict incapable of managing his or her benefits, a representative payee will be appointed to receive and manage the individual's checks. Recipients who are unable to manage their own benefits as a result of alcoholism or drug addiction will be referred to the appropriate State agency for substance abuse treatment services. For each of 2 years beginning with fiscal year 1997, $50 million is authorized to fund additional drug (including alcohol) treatment programs and services. Individuals entitled to benefits before the month of enactment continue to be eligible for benefits until January 1, 1997. Benefit and contribution statement pilot Requires the Commissioner of Social Security to conduct a 2-year pilot study, beginning in 1996, of the efficacy of providing individual benefit and contribution information to recipients of old-age and survivors insurance benefits. Protection of Social Security and Medicare Trust Funds Codifies Congress' understanding of present law that the Secretary of the Treasury and other Federal officials are not authorized to use Social Security and Medicare funds for debt management purposes. Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (Public Law 104-193) Denial of benefits to those unlawfully present in the United States.--Prohibits payment of Social Security benefits to any noncitizen in the United States who is not lawfully present in the United States, unless the payment is made pursuant to a totalization agreement or treaty obligation. Omnibus Consolidated Rescissions and Appropriations Act of 1996 (Public Law 104-134) Mandatory electronic funds transfers.--Provides that Federal payments, including Social Security and Supplemental Security Income benefits payable beginning after July 1996 to persons with bank accounts, must be paid by electronic funds transfer (EFT). All recurring Federal payments made after January 1, 1999 will be made by EFT, except that the Secretary of the Treasury may waive the requirement under certain circumstances. Debt collection.--Provides Social Security Administration with permanent debt collection authorities, including administrative offset of other Federal benefit payments, offset of Federal salaries, reporting of delinquent debt to credit bureaus, use of private collection agencies, and assessment of late charges. Changes in the 105th Congress Summary of major provisions of the Revenue Reconciliation Act of 1997 (incorporated into Public Law 105-34) Expanded SSA records for tax collection.--Provides that, for an application for a Social Security number (SSN) for a person under age 18, SSA must collect the SSNs of each parent, in addition to currently required evidence of age, identity, and citizenship, and share this information with the Internal Revenue Service for administration of tax benefits based on support or residency of a child. Exclusion of termination payments made to insurance salesmen.--Payments made to a self-employed insurance salesman after his agreement to work for the insurance company has terminated are excluded from Social Security coverage if: he performed no additional work for the company in that taxable year; he entered into a covenant not to compete with the company; and the amount of the payment was based entirely on the policies he sold during the last year of the agreement which remain in force and not on his length of service or overall earnings from the company. APPENDIX Relationship of Taxes to Benefits for Social Security Retirees: Illustrations of the Amount of Time it Takes To Recover the Value of Taxes Paid, Plus Interest The issue of the relative value of Social Security benefits, compared to the value of the payroll taxes paid to earn those benefits, is often brought up in discussions of the nature of the program. This comparison is complex and involves many judgments, and is not easily answered with general aggregate numbers. In addition to all the technical factors that must be addressed, the nature of the Social Security law complicates such computations. Not only do analysts disagree on the proper techniques to use in making calculations, there are often fundamental disagreements involving subjective factors: what work patterns to use; what part of the Social Security tax to count; whether to include the employer's share of the tax; and what rate of interest to use. This analysis seeks to avoid judgmental conclusions by providing a range of illustrations that vary these subjective factors. It does not evaluate the ``moneysworth'' of Social Security (answering whether recipients get a good deal from their investment), nor does it provide an ``actuarial analysis'' of how whole age cohorts fare. Rather, it simply presents illustrations of the amount of time it takes, and is projected to take, to recover the value of taxes paid plus interest (see table 1-52). The illustrations represent a range of possible payback times, depending on variations in the assumptions used. In this way, no conclusions are made--but the illustrations allow readers to make their own judgments. Many things complicate any determination of the relationship of benefits to taxes for future retirees. For example, although Social Security tax rates and benefit formulas are set by law, they are not immutable. Since Congress has modified taxes and benefits many times since the beginning of the program, it is clearly inconsistent with the program's history to calculate taxes and benefits into the future on the assumption that these key elements will not change. There is little doubt they eventually will be altered, as it is projected that demographic phenomena will cause the program's projected outgo to outstrip its resources significantly 33 years from now. Higher taxes or benefit cuts would be necessary, at that point or before, if the self-supporting character of the program is to be continued. These changes obviously would affect the relationship of taxes to benefits. However, the nature of future changes is unknown, whereas current law is a given. Therefore, in order to assess the relationship of future taxes and benefits, this analysis uses calculations that are useful in presenting possible outcomes of policies currently incorporated in the law. Calculations of the relationship of benefits to taxes for future retirees involve many key factors. The rate of Social Security taxation is set by law. The portion of the tax that provides cash benefits (Old-Age, Survivors, and Disability Insurance, or OASDI) to employees is 6.2 percent. However, the old-age and survivors insurance portion of the tax, currently 5.35 percent, and from which retirement benefits are paid, is scheduled to drop to 5.3 percent in 2000 and remain level thereafter. The tax rate applies to earnings up to a maximum amount. The ``maximum taxable earnings'' is $65,400 in 1997 but will rise in the future at the same rate as average wages in the economy. Therefore, the amount of Social Security taxes an employee will pay under current law is a direct function of her earnings. If one knows the amounts of an individual employee's earnings, and what the maximum taxable earnings are each year, the amount of tax paid is easily calculated. Future initial benefit amounts are also in part a function of one's earnings. Benefits are computed at first eligibility (age 62 for retirement) by a method that indexes both earnings over the worker's career and the benefit formula to changes in average wages in the economy. After age 62, benefits rise in tandem with the cost of living. As these factors are unknown, future benefit amounts cannot be predicted with certainty. Further complicating the issue is the nature of the program. As a ``social insurance'' program, Social Security has both social and insurance goals. The social-goal features provide a design that deliberately gives a better return on taxes to some workers than to others. For example, the basic formula for calculating Social Security benefits is tilted to replace a higher proportion of earnings for low-paid workers. Also, a complex array of dependents' benefits is available at no additional cost for workers with families. As with insurance, the exact relationship of Social Security benefits received to total taxes paid cannot be predicted for each and every worker. Thus, workers who die before or shortly after retirement and leave no survivors may collect only a few dollars in benefits or perhaps none at all. Other workers may collect Social Security benefits for many years after retirement and receive benefits substantially greater than the value of their Social Security taxes. Workers who become disabled or die at an early age might have paid relatively little in Social Security taxes, but they or their families may receive benefits for many years, recovering the value of the worker's taxes many times. There really is no ``typical'' Social Security beneficiary with a ``typical'' work history. An ``average'' benefit can be the result of many different work histories and thus be based on different amounts of taxes paid. For example, because the benefit formula does not require that all earnings be used in the benefit computation, workers with gaps in their earnings history may receive the same benefits as other workers, but pay less in total taxes. Nevertheless, models can produce projections of future benefits, based on assumptions about wage and price growth, for workers with designated work histories and characteristics. This analysis makes such projections using several common assumptions about illustrative workers. It assumes that each worker retires at age 65 in January of the designated year after having worked full time in employment covered by Social Security beginning at age 21. Similarly, all the illustrations reflect three lifetime earnings patterns--workers who always earned either (1) the Federal minimum wage; (2) a wage equal to Social Security's ``average wage series''; or (3) a wage equal to the maximum amount creditable under Social Security. These work histories and characteristics are necessarily arbitrary. Many variations could be constructed that would alter the payback times. However, by comparing similar examples of workers in what may be considered illustrative situations one may make a number of observations without having to resolve all the judgmental questions concerning what constitutes a typical worker or having to provide a voluminous array of illustrations. Calculations are based on the alternative II (intermediate) assumptions of the 1997 Social Security Trustees' Report to forecast wage and price growth. Under these assumptions, wages grow for most of the projected period by 4.4 percent a year, prices by 3.5 percent. Although using common assumptions and focusing on certain examples allows comparisons across generations, there are other factors that can be varied depending on one's view of the Social Security system. Among these is whether to count the employer's share of the payroll tax. There is some disagreement concerning who really bears the burden of the Social Security tax paid by employers. Some say that employees pay for the employer's share of the tax in the form of foregone wages. Others maintain that employers are actually paying for income maintenance protection that they would have to pay for anyway in one form or another in the absence of the Social Security Program, and that they absorb part of it and pass the rest along to the general public in the form of higher prices. This analysis does not attempt to resolve this debate, but rather presents examples using both assumptions. Another variable subject to the reader's judgment is the proportion of the Social Security tax to apply to retirement benefits. The payroll tax consists of three elements--old-age and survivors insurance (OASI), disability insurance (DI), and hospital insurance (HI). Because the DI and HI Programs have earmarked taxes, their own trust funds, and designated tax rates specified in the law, they are clearly and easily excludable from computations of taxes that pay for retirement benefits. OASI taxes pay for survivor as well as retirement benefits, and it would be inconsistent to include taxes that pay for survivor benefits on the tax side, but not include the value of survivor benefits on the benefit side, in computing payback times. However, there is no separate allocation of taxes in the law for survivor or old-age benefits. It is possible to derive hypothetical year-by-year tax allocations for old-age benefits by assuming that such taxes would be in the same proportion to OASI tax rates as old-age benefits are to OASI benefits for each year. The Social Security Administration's actuaries have year-by-year projections of these benefits and this analysis uses them to compute taxes attributable solely to old-age benefits. A problem with this approach is that the survivor portion of the tax cannot so easily be assigned to a benefit. While the DI and HI taxes protect against risks that really do not involve an element of choice--every worker could become too disabled to work or suffer illness in old age--there is an element of choice in whether a worker has dependents. Nevertheless, the worker still must pay the full OASI tax. An unmarried childless worker can maintain that it is inaccurate to say that only the old-age portion of the OASI tax should be used to compute the payback times of his retirement benefit when he is forced to pay a tax (the survivor portion of the OASI tax) for which he can derive no benefit. Also, it can be asserted that this approach understates the value of the accumulated taxes because it does not take account of the subsidy provided by workers who die before reaching retirement. However, such a subsidy is theoretical, whereas the illustrations refer to individuals who in fact have survived to retirement age and use the tax they actually would have paid. Because Social Security taxes are adjusted periodically to take account of current and projected program experience, it can reasonably be assumed that any subsidy effect is reflected in the rate of the OASI tax. Again, this analysis does not resolve the argument of whether to count the survivor portion of the OASI tax. It simply shows both ways of computing the relationship of benefits to taxes. Of course, any calculation of such a relationship is heavily dependent on the interest rate assumptions used. The value of taxes over time is equivalent to their worth if invested. However, the amount of interest is not easily determinable. Were the value of taxes paid invested wisely its total real worth theoretically could be many times its nominal value. On the other hand, it is possible that the principal could be wiped out by poor investment choices. To obtain a middle ground, consisting of a reasonable and safe investment history, one could assume that the value of taxes paid was always placed in U.S. Government obligations. Excess Social Security taxes have always been invested in U.S. Government securities, so, to provide illustrations, we use the effective interest rates earned by the Social Security Trust Funds over the years and those projected for the future. Under the alternative II assumptions, average annual interest rates are projected ultimately to be 6.2 percent, a ``real'' interest rate of 2.7 percent (i.e., 2.7 percent above inflation). The interest is assumed to be tax free. The cumulative value of taxes plus interest at the 3 different earnings levels for workers retiring in 1997 are shown in tables 1-49, 1-50, and 1-51. Illustrative Payback Times Table 1-52 shows past and projected payback times for workers retiring in various years from 1940 to 2025. In these illustrations, benefits are for the worker alone. However, the value of the benefit could be higher if the worker had dependents who were eligible for benefits. For example, if these workers had spouses who also were the full retirement age and were not entitled to a Social Security benefit on their own account, then the value of the monthly benefit TABLE 1-49.--SOCIAL SECURITY TAXES PAID BY A WAGE EARNER WHO HAS ALWAYS EARNED THE MINIMUM WAGE, 1953-96 ---------------------------------------------------------------------------------------------------------------- Tax rates (in percent) Taxes paid Effective ---------------------------------------------------- interest Calendar year Earnings rate \2\ OASI Old age \1\ OASI Old age (in percent) ---------------------------------------------------------------------------------------------------------------- 1953.............................. $1,560 1.500 1.085 $23.40 $16.93 2.310 1954.............................. 1,560 2.000 1.470 31.20 22.94 2.296 1955.............................. 1,560 2.000 1.509 31.20 23.54 2.198 1956.............................. 1,993 2.000 1.526 39.86 30.42 2.401 1957.............................. 2,080 2.000 1.548 41.60 32.21 2.492 1958.............................. 2,080 2.000 1.555 41.60 32.34 2.516 1959.............................. 2,080 2.250 1.739 46.80 36.17 2.578 1960.............................. 2,080 2.750 2.111 57.20 43.91 2.598 1961.............................. 2,184 2.750 2.094 60.06 45.73 2.755 1962.............................. 2,392 2.875 2.187 68.77 52.32 2.825 1963.............................. 2,461 3.375 2.563 83.06 63.07 2.923 1964.............................. 2,600 3.375 2.553 87.75 66.37 3.084 1965.............................. 2,600 3.375 2.529 87.75 65.76 3.184 1966.............................. 2,600 3.500 2.568 91.00 66.78 3.483 1967.............................. 2,886 3.550 2.604 102.45 75.14 3.753 1968.............................. 3,293 3.325 2.415 109.49 79.52 3.950 1969.............................. 3,328 3.725 2.710 123.97 90.20 4.437 1970.............................. 3,328 3.650 2.661 121.47 88.55 5.074 1971.............................. 3,328 4.050 2.961 134.78 98.54 5.286 1972.............................. 3,328 4.050 2.973 134.78 98.94 5.406 1973.............................. 3,328 4.300 3.101 143.10 103.19 5.754 1974.............................. 3,883 4.375 3.168 169.88 123.03 6.218 1975.............................. 4,368 4.375 3.184 191.10 139.06 6.593 1976.............................. 4,784 4.375 3.201 209.30 153.12 6.731 1977.............................. 4,784 4.375 3.213 209.30 153.70 6.958 1978.............................. 5,512 4.275 3.153 235.64 173.80 7.199 1979.............................. 6,032 4.330 3.206 261.19 193.36 7.524 1980.............................. 6,448 4.520 3.355 291.45 216.33 8.568 1981.............................. 6,968 4.700 3.514 327.50 244.87 9.947 1982.............................. 6,968 4.575 3.460 318.79 241.07 11.178 1983.............................. 6,968 4.775 3.645 332.72 253.96 10.768 1984.............................. 6,968 \3\ 4.926 \3\ 3.776 343.24 263.12 11.601 1985.............................. 6,968 5.200 3.993 362.34 278.25 11.213 1986.............................. 6,968 5.200 3.997 362.34 278.52 11.091 1987.............................. 6,968 5.200 4.002 362.34 278.83 10.063 1988.............................. 6,968 5.530 4.257 385.33 296.64 9.773 1989.............................. 6,968 5.530 4.264 385.33 297.08 9.573 1990.............................. 7,670 5.600 4.320 429.52 331.37 9.324 1991.............................. 8,606 5.600 4.321 481.94 371.91 9.090 1992.............................. 8,840 5.600 4.320 495.04 381.92 8.745 1993.............................. 8,840 5.600 4.315 495.04 381.47 8.322 1994.............................. 8,840 5.260 4.050 464.98 357.99 8.040 1995.............................. 8,840 5.260 4.046 464.98 357.70 7.859 1996.............................. 9,100 5.260 4.045 478.66 368.08 7.615 ----------------------------------------------------------------------------- Total taxes paid 1953-96: Accumulated without interest.. ........... ........... ........... 9,719.26 7,367.75 Accumulated with interest..... ........... ........... ........... 38,363.69 28,751.26 ---------------------------------------------------------------------------------------------------------------- \1\ Old-age tax rates were derived by applying the ratio of old-age benefits/total OASI benefits to the OASI tax rates. \2\ Interest rates for 1953-96 are from the SSA Office of the Actuary, and reflect the interest rate earned by the Social Security Trust Funds. \3\ In 1984, employees received a tax credit of 0.3 percent against OASDI taxes. The OASI and old-age tax rates reflect a proportional allocation of the tax credit. Note.--Initial benefit amount upon retirement in January 1997 at age 65: $603.00 worker only; $904.00 worker and spouse (both age 65). Source: Kollmann (1997). TABLE 1-50.--SOCIAL SECURITY TAXES PAID BY A WAGE EARNER WITH AVERAGE EARNINGS, 1953-96 \1\ ---------------------------------------------------------------------------------------------------------------- Tax rates (in percent) Taxes paid Effective ---------------------------------------------------- interest Calendar year Earnings rate \3\ OASI Old age \2\ OASI Old age (in percent) ---------------------------------------------------------------------------------------------------------------- 1953.............................. $3,139.44 1.500 1.085 $47.09 $34.07 2.310 1954.............................. 3,155.64 2.000 1.470 63.11 46.40 2.296 1955.............................. 3,301.44 2.000 1.509 66.03 49.81 2.198 1956.............................. 3,532.36 2.000 1.526 70.65 53.91 2.401 1957.............................. 3,641.72 2.000 1.548 72.83 56.39 2.492 1958.............................. 3,673.80 2.000 1.555 73.48 57.13 2.516 1959.............................. 3,855.80 2.250 1.739 86.76 67.05 2.578 1960.............................. 4,007.12 2.750 2.111 110.20 84.59 2.598 1961.............................. 4,086.76 2.750 2.094 112.39 85.57 2.755 1962.............................. 4,291.40 2.875 2.187 123.38 93.87 2.825 1963.............................. 4,396.64 3.375 2.563 148.39 112.67 2.923 1964.............................. 4,576.32 3.375 2.553 154.45 116.83 3.084 1965.............................. 4,658.72 3.375 2.529 157.23 117.82 3.184 1966.............................. 4,938.36 3.500 2.568 172.84 126.84 3.483 1967.............................. 5,213.44 3.550 2.604 185.08 135.74 3.753 1968.............................. 5,571.76 3.325 2.415 185.26 134.55 3.950 1969.............................. 5,893.76 3.725 2.710 219.54 159.75 4.437 1970.............................. 6,186.24 3.650 2.661 225.80 164.61 5.074 1971.............................. 6,497.08 4.050 2.961 263.13 192.37 5.286 1972.............................. 7,133.80 4.050 2.973 288.92 212.09 5.406 1973.............................. 7,580.16 4.300 3.101 325.95 235.04 5.754 1974.............................. 8,030.76 4.375 3.168 351.35 254.45 6.218 1975.............................. 8,630.92 4.375 3.184 377.60 274.77 6.593 1976.............................. 9,226.48 4.375 3.201 403.66 295.30 6.731 1977.............................. 9,779.44 4.375 3.213 427.85 314.19 6.958 1978.............................. 10,556.03 4.275 3.153 451.27 332.84 7.199 1979.............................. 11,479.46 4.330 3.206 497.06 367.99 7.524 1980.............................. 12,513.46 4.520 3.355 565.61 419.83 8.568 1981.............................. 13,773.10 4.700 3.514 647.34 484.01 9.947 1982.............................. 14,531.34 4.575 3.460 664.81 502.73 11.178 1983.............................. 15,239.24 4.775 3.645 727.67 555.42 10.768 1984.............................. 16,135.07 \4\ 4.926 \4\ 3.776 794.86 609.29 11.601 1985.............................. 16,822.51 5.200 3.993 874.77 671.77 11.213 1986.............................. 17,321.82 5.200 3.997 900.73 692.38 11.091 1987.............................. 18,426.51 5.200 4.002 958.18 737.35 10.063 1988.............................. 19,334.04 5.530 4.257 1,069.17 823.09 9.773 1989.............................. 20,099.55 5.530 4.264 1,111.51 856.95 9.573 1990.............................. 21,027.98 5.600 4.320 1,177.57 908.48 9.324 1991.............................. 21,811.60 5.600 4.321 1,221.45 942.58 9.090 1992.............................. 22,935.42 5.600 4.320 1,284.38 990.89 8.745 1993.............................. 23,132.67 5.600 4.315 1,295.43 998.23 8.322 1994.............................. 23,753.53 5.260 4.050 1,249.44 961.95 8.040 1995.............................. 24,705.66 5.260 4.045 1,299.52 999.67 7.859 1996.............................. 25,723.87 5.260 4.045 1,353.08 1,040.50 7.615 ----------------------------------------------------------------------------- Total taxes paid 1953-96: Accumulated without interest.. ........... ........... ........... 22,856.79 17,371.77 Accumulated with interest..... ........... ........... ........... 80,694.71 60,595.36 ---------------------------------------------------------------------------------------------------------------- \1\ This table uses the average wage series for indexing earnings, for the period 1953-95, developed by SSA in computing benefit amounts. The average wage for 1996 is based on Alternative II assumptions in the 1997 report of the Social Security Board of Trustees. \2\ Old-age tax rates were derived by applying the ratio of old-age benefits/total OASI benefits to the OASI tax rates. \3\ Interest rates for 1953-96 are from the SSA Office of the Actuary. \4\ In 1984, employees received a tax credit of 0.3 percent against OASDI taxes. The OASI and old-age tax rates reflect a proportional allocation of the tax credit. Note.--Initial benefit amount upon retirement in January 1997 at age 65: $933.00 worker only; $1,399.00 worker and spouse (both age 65). Source: Kollmann (1997). TABLE 1-51.--SOCIAL SECURITY TAXES PAID BY A WAGE EARNER WITH MAXIMUM TAXABLE EARNINGS, 1953-96 ---------------------------------------------------------------------------------------------------------------- Tax rates (in percent) Taxes paid Effective ---------------------------------------------------- interest Calendar year Earnings rate \2\ OASI Old age \1\ OASI Old age (in percent) ---------------------------------------------------------------------------------------------------------------- 1953.............................. $3,600 1.500 1.085 $54.00 $39.07 2.310 1954.............................. 3,600 2.000 1.470 72.00 52.93 2.296 1955.............................. 4,200 2.000 1.509 84.00 63.37 2.198 1956.............................. 4,200 2.000 1.526 84.00 64.10 2.401 1957.............................. 4,200 2.000 1.548 84.00 65.03 2.492 1958.............................. 4,200 2.000 1.555 84.00 65.31 2.516 1959.............................. 4,800 2.250 1.739 108.00 83.47 2.578 1960.............................. 4,800 2.750 2.111 132.00 101.33 2.598 1961.............................. 4,800 2.750 2.094 132.00 100.51 2.755 1962.............................. 4,800 2.875 2.187 138.00 105.00 2.825 1963.............................. 4,800 3.375 2.563 162.00 123.01 2.923 1964.............................. 4,800 3.375 2.553 162.00 122.54 3.084 1965.............................. 4,800 3.375 2.529 162.00 121.40 3.184 1966.............................. 6,600 3.500 2.568 231.00 169.52 3.483 1967.............................. 6,600 3.550 2.604 234.30 171.84 3.753 1968.............................. 7,800 3.325 2.415 259.35 188.35 3.950 1969.............................. 7,800 3.725 2.710 290.55 211.42 4.437 1970.............................. 7,800 3.650 2.661 284.70 207.55 5.074 1971.............................. 7,800 4.050 2.961 315.90 230.95 5.286 1972.............................. 9,000 4.050 0.973 364.50 267.57 5.406 1973.............................. 10,800 4.300 3.101 464.40 334.87 5.754 1974.............................. 13,200 0.375 3.168 577.50 418.24 6.218 1975.............................. 14,100 4.375 3.184 616.88 448.87 6.593 1976.............................. 15,300 4.375 3.201 669.38 489.69 6.731 1977.............................. 16,500 4.375 3.213 721.88 530.11 6.958 1978.............................. 17,700 4.275 3.153 756.67 558.09 7.199 1979.............................. 22,900 4.330 3.206 991.57 734.09 7.524 1980.............................. 25,900 4.520 3.355 1,170.68 868.96 8.568 1981.............................. 29,700 4.700 3.514 1,395.90 1,043.70 9.947 1982.............................. 32,400 4.575 3.460 1,482.30 1,120.92 11.178 1983.............................. 35,700 4.775 3.645 1,704.68 1,301.16 10.768 1984.............................. \3\ 37,800 \3\ 4.926 \3\ 3.776 1,862.03 1,427.40 11.601 1985.............................. 39,600 5.200 3.993 2,059.20 1,581.35 11.213 1986.............................. 42,000 5.200 3.997 2,184.00 1,678.81 11.091 1987.............................. 43,800 5.200 4.002 2,277.60 1,752.70 10.063 1988.............................. 45,000 5.530 4.257 2,488.50 1,915.74 9.773 1989.............................. 48,000 5.530 4.264 2,654.40 2,046.50 9.573 1990.............................. 51,300 5.600 4.320 2,872.80 2,216.34 9.324 1991.............................. 53,400 5.600 4.321 2,990.40 2,307.66 9.090 1992.............................. 55,500 5.600 4.320 3,108.00 2,397.79 8.745 1993.............................. 57,600 5.600 4.315 3,225.60 2,485.57 8.322 1994.............................. 60,600 5.260 4.050 3,187.56 2,454.12 8.040 1995.............................. 61,200 5.260 4.046 3,219.16 2,476.35 7.859 1996.............................. 62,700 5.260 4.045 3,298.02 2,536.14 7.615 ----------------------------------------------------------------------------- Total taxes paid 1953-96: Accumulated without interest.. ........... ........... ........... 49,417.47 37,679.43 Accumulated with interest..... ........... ........... ........... 145,768.34 109,879.77 ---------------------------------------------------------------------------------------------------------------- \1\ Old-age tax rates were derived by applying the ratio of old-age benefits/total OASI benefits to the OASI tax rates. \2\ Interest rates for 1953-96 are from the SSA Office of the Actuary. \3\ In 1984, employees received a tax credit of 0.3 percent against OASDI taxes. The OASI and old-age tax rates reflect a proportional allocation of the tax credit. Note.--Initial benefit amount upon retirement in January 1997 at age 65: $1,326.00 worker only; $1,989.00 worker and spouse (both age 65). Source: Kollmann (1996a). TABLE 1-52.--NUMBER OF YEARS TO RECOVER TAXES PLUS INTEREST FOR VARIOUS WORKERS RETIRING AT AGE 65, \1\ SELECTED YEARS 1940-2025 ------------------------------------------------------------------------ Minimum Average Maximum Year of retirement earner earner earner ------------------------------------------------------------------------ Illustration 1: Years to recover employee's OASI taxes 1940................................... (\2\) 0.1 0.2 1960................................... 0.5 0.8 1.0 1980................................... 1.5 2.0 2.1 1997................................... 6.0 8.5 11.3 2005................................... 8.4 12.0 16.2 2015................................... 9.7 14.1 20.8 2025................................... 9.6 14.6 24.7 Illustration 2: Years to recover combined employee-employer OASI taxes 1940................................... (\2\) 0.2 0.4 1960................................... 1.0 1.6 2.0 1980................................... 3.0 3.9 4.4 1997................................... 13.6 20.2 28.5 2005................................... 19.4 29.7 45.5 2015................................... 22.8 37.0 71.3 2025................................... 22.5 38.8 125.7 Illustration 3: Years to recover retirement portion of employee's OASI taxes 1940................................... (\2\) 0.1 0.2 1960................................... 0.4 0.6 0.7 1980................................... 1.1 1.4 1.6 1997................................... 4.4 6.2 8.1 2005................................... 6.1 8.6 11.5 2015................................... 7.1 10.2 14.7 2025................................... 7.2 10.8 17.7 Illustration 4: Years to recover retirement portion of combined employee-employer OASI taxes 1940................................... (\2\) 0.2 0.4 1960................................... 0.7 1.1 1.4 1980................................... 2.2 2.8 3.1 1997................................... 9.6 13.9 19.1 2005................................... 13.5 19.9 28.4 2015................................... 15.9 24.2 39.2 2025................................... 16.2 26.2 52.4 ------------------------------------------------------------------------ \1\ Under the alternative II assumptions and taking into account benefit increases and continued accrual of interest after retirement but not the taxation of benefits. The retiree is assumed to attain age 65 and retire in January of the designated year. The current law increase in the retirement age is reflected. \2\ Less than 0.1 years. Source: Kollmann (1997). would increase by 50 percent. This would shorten the payback times considerably. While these illustrations do not purport to address the ``moneysworth'' question, they do show the relationship of payback times of past, current, and future beneficiaries. It is readily apparent that past retirees recovered the value of their taxes very quickly. Payback times have lengthened for workers retiring today, but they are still significantly shorter than those projected for future retirees. This decline in value is ameliorated somewhat by the projection that future retirees are expected to live longer, and thus collect benefits longer. Table 1-53 shows the life expectancies for people turning age 65 in the illustrated years. TABLE 1-53.--LIFE EXPECTANCY AT AGE 65, SELECTED YEARS 1940-2025 ------------------------------------------------------------------------ Life expectancy (in years) Year ------------------------- Male Female ------------------------------------------------------------------------ 1940.......................................... 11.9 13.4 1960.......................................... 12.9 15.9 1980.......................................... 14.0 18.4 1997.......................................... 15.6 19.2 2005.......................................... 16.0 19.5 2015.......................................... 16.4 19.8 2025.......................................... 16.8 20.2 ------------------------------------------------------------------------ Note.--The life expectancy for any year is the average number of years of life remaining for a person if that person were to experience the death rates by age observed in or assumed for the selected year. Actual average lifetimes will probably be a little longer than the projected expectancies because of lower mortality rates assumed in future years. Source: Board of Trustees (1997). Defenders of Social Security tend to discount the phenomenon of lengthening payback times, arguing that the program serves social ends that transcend calculations of which individuals, or generations, obtain some sort of balance-sheet profit or loss. They point out that pay-as-you-go retirement systems such as Social Security by their nature often provide large returns on the contributions of the initial generations. In the early years of such programs, the ratio of workers to recipients is very high, allowing tax or contribution rates to be low. As the program matures, rates rise to reflect the increase in the number of beneficiaries. This feature is not unique to Social Security. Establishing benefit levels for early recipients in excess of what contributions would dictate is also found in private pension systems. Furthermore, proponents of Social Security note that providing ``adequate'' benefits to initial Social Security recipients that were essentially ``unearned'' in relation to their contributions to the system was deliberate social policy. Providing a minimum level of protection to the first workers to participate in the system was considered more important, in a period of economic depression, than concerns about excessive rates of return on taxes paid. Besides, the social benefits of giving a measure of economic independence for the elderly, and later for orphaned children, surviving spouses, and the disabled, are believed by many to be immense. Thus, some argue younger workers are in large part relieved from the financial burden of supporting their parents, and the elderly are afforded an opportunity to live independently and with dignity. Critics of Social Security point to these social welfare features as a basic flaw in the program. They argue that by combining the goals of social adequacy, which is welfare- related, with individual equity, which loosely ties benefits to taxes paid, the program has become a mishmash that accomplishes neither goal well and creates inequities. One inequity they cite is that future beneficiaries will on the whole receive retirement benefits inferior to those that the equivalence of their taxes could purchase in the private sector. Furthermore, they say when interest is included, many workers (for example, those earning at least average wages; see table 1-52) will not recoup what they and their employer paid in taxes. Often buttressing these arguments are calculations that show what individuals could receive if their Social Security taxes were invested privately. This latter argument is dependent on the interest rate assumed on private investment. Arriving at the ``proper'' interest rate is problematic. Those who project high investment returns often refer to the historical performance of the stock market, showing that a portfolio of broad-based stocks would have earned on average substantial rates of return over the years, and that this performance can be expected to continue in the future. Also, high real interest rates may not seem so unlikely given the relationship of nominal interest rates and inflation over the past decade. On the other hand, private investments have an element of risk that critics believe should be unacceptable in providing a national system of retirement income, and that if a safe-as- possible mix of investment vehicles were used instead, projected rates of return would be smaller. They also contend that recent high real interest rates are a historical anomaly that will not be sustained in the future. The key point for the reader is to be aware of the influence exerted by the projected rate of return in these sorts of calculations, and the large degree to which the argument about the value of Social Security hinges around it. REFERENCES Ballantyne, H.C. (1984). Present policies and methods regarding the long-term adjustment of benefits. Social Security Bulletin, 47(10), pp. 9-12. Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund. (1996, June 5). The 1996 annual report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (House Document 104-228). Washington, DC: U.S. Government Printing Office. Board of Trustees, Federal Hospital Insurance Trust Fund. (1996, June 1). The 1996 annual report of the Board of Trustees of the Federal Hospital Insurance Trust Fund (House Document 104-227). Washington, DC: U.S. Government Printing Office. Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund. (1991, May 22). 1991 annual report of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund (House Document 102-88). Washington, DC: U.S. Government Printing Office. Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund. (1988, May 9). The Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (House Document 100-192). Washington, DC: U.S. Government Printing Office. Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund. (1984, April 5). 1984 annual report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (House Document 98-200). Washington, DC: U.S. Government Printing Office. Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund. (1983, June 27). 1983 annual report Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund (House Document 98- 74). Washington, DC: U.S. Government Printing Office. Committee on Economic Security. (1935). Report to the President. Washington, DC: U.S. Government Printing Office. Congressional Budget Office. (1996, May). The economic and budget outlook: Fiscal years 1997-2006. Washington, DC: Author. Kollman, G. (1996a). How long does it take new retirees to recover the value of their Social Security taxes? (94-5 EPW). Washington, DC: Congressional Research Service. Kollman, G. (1997). Social Security: The relationship of taxes and benefits for past, present, and future retirees (95-149 EPW). Washington, DC: Congressional Research Service. Social Security Administration. (1995). Annual Statistical Supplement to the Social Security Bulletin, 1995. Washington, DC: Author. Social Security Administration. (1986). Report of the Commission on the Evaluation of Pain (SSA Pub. 64-031- 3197). Washington, DC: Author. Svahn, J.A., & Ross, M. (1983). Social Security Amendments of 1983: Legislative history. Social Security Bulletin, 46(7), pp. 3-48.