This article concerns proposals to change the Social Security system in the United States. Social Security is a social insurance program officially called "Old-Age, Survivors, and Disability Insurance" (OASDI), in reference to its three components. It is primarily funded through a dedicated payroll tax. During 2008, total benefits of $625 billion were paid out versus income (taxes and interest) of $805 billion, a $180 billion annual surplus. An estimated 162 million people paid into the program and 51 million received benefits, roughly 3.2 workers per beneficiary.
Reform proposals continue to circulate with some urgency, due to a long-term funding challenge faced by the program. Starting in 2016, program expenses begin to exceed revenues. This is due to the aging of the baby-boom generation (resulting in a lower ratio of paying workers to retirees), expected continuing low birth rate (compared to the baby-boom period), and increasing life expectancy. Further, the government has borrowed and spent the accumulated surplus funds, called the Social Security Trust Fund, while counting the funds as revenue, not debt. During 2008, the fund held $2.4 trillion in government bonds—essentially "IOUs" or claims on the government's general fund or tax revenues. This amount is part of the total national debt of $11.3 trillion as of May 12, 2009. By 2016, the government is expected to have borrowed nearly $3.7 trillion against the Social Security Trust fund. Between 2016 and 2037, Social Security has the legal authority to draw amounts from other government tax sources besides the payroll tax, to fully fund the program. However, this will liquidate the Trust Fund during that period. By 2037, the Trust Fund is expected to be officially exhausted, meaning that only the ongoing payroll tax collections thereafter will be available to fund the program. There are certain key implications to understand under current law, if no reforms are implemented:
- Payroll taxes will only cover 76% of the scheduled payout amounts after 2037. This declines to 74% by 2083. Without changes to the law, Social Security would have no legal authority to draw other government funds to cover the shortfall and payments would decline without a large tax/revenue increase or increase in eligibility age.
- Between 2016 and 2037, redemption of the trust fund balance to pay retirees will draw $3.7 trillion in government funds from sources other than payroll taxes. This is a funding challenge for the government overall, not just Social Security.
- The present value of unfunded obligations under Social Security as of January 1, 2009 was approximately $5.3 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall over the next 75 years. The estimated annual shortfall averages 1.9% of the payroll tax base or 0.7% of gross domestic product.
Former President George W. Bush called for a transition to a combination of a government-funded program and personal accounts ("individual accounts" or "private accounts") through partial privatization of the system. President Barack Obama "strongly opposes" privatization or raising the retirement age, but supports raising the cap on the payroll tax ($106,800 in 2009) to help fund the program.
Federal Reserve Chairman Ben Bernanke said on October 4, 2006: "Reform of our unsustainable entitlement programs should be a priority." He added, "the imperative to undertake reform earlier rather than later is great." The tax increases or benefit cuts required to maintain the system as it exists under current law are significantly higher the longer such changes are delayed. For example, raising the payroll tax rate to 14.4% during 2009 (from the current 12.4%) or cutting benefits by 13.3% would address the program's budgetary concerns indefinitely; these amounts increase to around 16% and 24% if no changes are made until 2037.
Background on funding challenges
Social Security is funded through the Federal Insurance Contributions Act (FICA), which is a payroll tax paid equally by the employee and the employer. During 2009, Social Security taxes will be levied on the first $106,800 of worker income; amounts earned above that are not taxed. Covered workers are eligible for retirement benefits and for disability benefits; if a covered worker dies, his or her spouse and children may receive survivors' benefits. The program does not have individual accounts and tax receipts are not invested on behalf of the worker. Instead, current receipts are used to pay current benefits (the system known as "pay-as-you-go"), as is typical of some insurance and defined-benefit plans.
In each year since 1983, tax receipts and other income have exceeded benefit payments and other expenditures, most recently (in 2008) by more than $180 billion. However, this annual "surplus" is expected to change to a deficit around 2016, when payments begin to exceed receipts. The fiscal pressures are due to demographic trends, where the number of workers paying into the program continues declining relative to those receiving benefits. The number of workers paying into the program was 6.1 per retiree in 1960; this declined to 3.2 in 2008 and is projected to decline to 2.1 by 2040. Further, life expectancy continues to increase, meaning retirees collect benefits longer. Federal Reserve Chairman Bernanke has indicated that the aging of the population is a long-term trend, rather than a proverbial "pig moving through the python."
The accumulated surpluses are invested in Treasury securities (treasuries) issued by the U.S. government, which are deposited in the Social Security Trust Fund. At the end of 2008, the Trust Fund stood at $2.4 trillion. The $2.4 trillion amount owed by the federal government to the Social Security Trust Fund is also a component of the U.S. National Debt, which stood at $11.3 trillion as of May 12, 2009. By 2016, the government is expected to have borrowed nearly $3.7 trillion against the Social Security Trust Fund.
The value of unfunded obligations under Social Security during FY 2007 was approximately $5.3 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall over the next 75 years. This is 1.9% of the payroll tax base or 0.7% of gross domestic product each year.
Because Social Security receipts currently exceed payments, the program also reduces the size of the annual federal budget deficit. For example, the budget deficit would have been $182 billion higher in 2007 (i.e., $344 billion rather than $162 billion published) if Social Security were accounted for separately from the overall budget.
Increasing unemployment due to the subprime mortgage crisis has significantly reduced the amount of payroll tax income that funds Social Security. The CBO projects that the "primary surplus" (i.e., cash tax collections less cash payouts) has declined to an estimated $16 billion for 2009 and a $10 billion deficit for 2010. Since the Social Security Trust Fund will accrue approximately $120 billion annually in interest during 2009 and 2010, the "surplus" (including interest) is projected to be $136 billion and $108 billion in those years, respectively. The crisis and recession of 2008-2009 also caused more to apply for both retirement and disability benefits than expected.
Current projections
Projections were made by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (OASDI) in their 69th annual report dated May 12, 2009. According to these projections, based on the system's current revenue and benefit structure, expenses will exceed tax receipts beginning in 2016. The trust fund is projected to continue to grow for several years thereafter because the analyses assume interest income from loans made to the US Treasury is available to cover the difference. However, the funds from loans made have been spent along with other revenues in the general funds in satisfying annual budgets. At some point, however, absent any change in the law, the Social Security Administration will finance payment of benefits through the net redemption of the assets in the trust fund. Because those assets consist solely of U.S. government securities, their redemption will represent a call on the federal government's general fund, which for decades has been borrowing the Trust Fund's surplus and applying it to its expenses to partially satisfy budget deficits. To finance such a projected call on the general fund, some combination of increasing taxes, cutting other government spending or programs, selling government assets, or borrowing would be required.
The balances in the trust fund are projected to be depleted either by 2037 (OASDI Trustees' 2009 projection), or by 2052 (Congressional Budget Office's projection) assuming proper and continuous repayment of the outstanding treasury notes. At that point, under current law, the system's benefits would have to be paid from the FICA tax alone. Revenues from FICA are projected at that point to be continue to cover about 76% of projected Social Security benefits if no change is made to the current tax and benefit schedules.
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