May 1997

The Basics of Social Security

The U.S. Congress enacted the Social Security Act in 1935, creating the Old-Age and Survivors Insurance (OASI) program, which provided retirement income benefits to workers ages 65 and older in commerce and industry (except railroads). The system became effective in 1937, and is financed by a payroll tax paid by employers and employees. In 1939, the system was expanded to cover dependents and survivors of covered workers. Legislation enacted in 1950 and subsequent years allowed states the option, under certain conditions, to provide Social Security coverage to their employees. The Social Security Act Amendments of 1983 prohibited states from opting out of the Social Security program. In 1990, Social Security coverage became mandatory for state and local employees not covered by a state or local government retirement plan.

In 1956, the Disability Insurance (DI) program was added to the Social Security program, providing income to disabled workers. In 1958, dependents of disabled workers receiving benefits under the DI program became eligible for benefit payments.

Currently, the U.S. Department of the Treasury credits the Medicare and Social Security trust funds with any annual excess of Social Security and Medicare tax revenues over the amount spent for current benefits. By law, these assets must be invested in special securities issued by the Treasury. The government then spends these "assets" to ease fiscal pressures on other programs. The trust fund surpluses are not reserved for future Social Security and Medicare benefits but are bookkeeping entries showing how much the Social Security and Medicare programs have lent to the Treasury (or alternatively, what is owed to Social Security and Medicare, including interest, by the Treasury). When the trust funds go into negative cash flow, the Treasury must start repaying the money.

For budgetary purposes, the date on which the trust funds go into negative cash flow (i.e., the benefit payments exceed the income from payroll taxes and the taxation of benefits) is more important than the insolvency date (i.e., the date on which the trust fund is projected to exhaust its funds and be unable to pay benefits on time and in full). This date is more important because it marks the point at which the government must provide cash from general revenues to the programs rather than receive surplus cash from them to fund other current spending.

According to the 1997 Social Security Board of Trustees Annual Report, under intermediate assumptions, the combined OASDI trust fund is expected to go into negative cash flow in 2019 and be exhausted by 2029. The DI trust fund is expected to go into negative cash flow in 2007 and be exhausted by 2015, and the OASI trust fund is expected to go into negative cash flow in 2021 and be exhausted by 2031.

The Social Security trust funds are derived from payroll taxes assessed on employers and employees. Under current law, the payroll taxes are assessed as follows.

    OASI payroll taxes for 1997 are based on a combined employer/employee rate of 10.7 percent of earnings up to a maximum taxable amount of $65,400. The maximum taxable amount of earnings increases in proportion to increases in the average wage level. The tax rate is scheduled to remain constant for years 1997-1999 and then decrease to 10.6 percent in 2000 and afterward. In 1996, $363.7 billion was collected for the OASI trust fund.

    DI payroll taxes for 1997 are based on a combined employer/employee rate of 1.7 percent of earnings, up to a maximum taxable amount of $65,400. The maximum taxable amount of earnings increases in proportion to increases in the average wage level. The tax rate is scheduled to remain at 1.7 percent for years 1998-1999, then increase to 1.8 percent in 2000 and afterward. In 1997, $60.7 billion was collected for the DI trust fund.

The fluctuations in the tax rate for the OASI and DI trust funds occurred because of a reallocation of funds. In 1992, the DI trust fund went into negative cash flow and was projected to become insolvent in 1995. To alleviate this problem, Congress enacted the Social Security Domestic Employment Reform Act of 1994 (P.L. 103-387), which reallocated a portion of OASI taxes to the DI trust fund, effective retroactively.

In 1996, 37.7 million beneficiaries received benefit payments from the OASI program, with an average monthly benefit amount of $669.45. In 1996, 6.1 million individuals, disabled workers and their dependents received benefit payments, with average monthly benefit amount was $603.67. Under intermediate assumptions, the number of OASI beneficiaries is projected to increase to 39.0 million in 2000 and to 70.5 in 2030 and the number of DI beneficiaries is projected to increase to 7.0 million in 2000 and to 11.5 in 2030.

In 1945, the number of covered workers per OASDI beneficiary was 41.9. By 1965 that number was 4.0 and in 1995, 3.3. Under intermediate assumptions, the number of covered workers per OASDI beneficiary is estimated to be 3.2 in 2000, 2.0 in 2030, and 1.9 in 2060.

In 1996, total benefit payments from the OASI trust fund were $302.9 billion. Total benefit payments from the DI trust fund were $44.2 billion.

Treasury Secretary Robert E. Rubin acts as the Managing Trustee, and John R. Dryer, Principal Deputy Commissioner of Social Security, acts as the Acting Secretary of the OASDI trust funds. The other trustees include: Cynthia A. Metzler, Acting Secretary of Labor; Donna E. Shalala, Secretary of Health and Human Services; John J. Callahan, Acting Commissioner of Social Security; Stephen G. Kellison; and Marilyn Moon.

For more information, contact Ken McDonnell (202) 775-6342, e-mail: mcdonnell@ebri.org, Kelly Olsen (202) 775-6330, e-mail: olsen@ebri.org.
Source: EBRI Databook on Employee Benefits, fourth edition, forthcoming.
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