September 2000

The Basics of Social Security

Updated With the 2000 Board of Trustees Report

  • 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 or, currently, paying down government debt. 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 significant 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 2000 Social Security trustees' report, under intermediate assumptions, the combined Old-Age, Survivors and Disability Insurance (OASDI) trust fund expenses are expected to exceed income from taxes in 2015. By 2025, OASDI expenses are expected to exceed income from taxes plus interest income (negative cash flow), and the trust fund is expected to be exhausted by 2037. The DI trust fund is expected to go into negative cash flow in 2012 and to be exhausted in 2023, and the OASI trust fund is expected to go into negative cash flow in 2026 and be exhausted by 2039.
  • 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 2000 are based on a combined employer/employee rate of 10.6 percent of earnings up to a maximum annual taxable amount of $76,200. The maximum taxable amount of earnings increases in proportion to increases in the average wage level. In 1999, total income for the OASI trust fund was $457.0 billion: $396.4 billion was in payroll taxes, $10.9 billion was in taxation of benefits, and $49.8 billion was interest income.
  • DI payroll taxes for 2000 are based on a combined employer/employee rate of 1.8 percent of earnings, up to a maximum taxable amount of $76,200. The maximum taxable amount of earnings increases in proportion to increases in the average wage level. In 1999, total income for the DI trust fund was $69.5 billion: $63.2 billion was from payroll taxes, $0.7 billion was from taxation of benefits, and $5.7 billion was from interest income.
  • 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 1999, 38.1 million beneficiaries received benefit payments from the OASI program. In 1999, 6.5 million individuals, disabled workers, and their dependents received benefit payments. Under intermediate assumptions, the number of OASI beneficiaries is projected to increase to 40.5 million in 2005 and to 71.0 million in 2030, and the number of DI beneficiaries is projected to increase to 8.1 million in 2005 and to 12.1 million in 2030.

Estimated Average Monthly Social Security Benefits:
Before and After the December 1999 Cost-of-Living Adjustment (COLA)

 

 

Before 2.4% COLA

After 2.4% COLA

All Retired Workers

$ 785

$ 804

Aged Couple, Both Receiving Benefits

1,316

1,348

Widowed Mother and Two Children

1,573

1,611

Aged Widow(er) Alone

757

775

Disabled Workers, Spouse and One Or More Children

1,225

1,255

All Disabled Workers

736

754

 

  • In 1945, the number of covered workers per OASDI beneficiary was 41.9. By 1965, that number was 4.0, and in 1999, it was 3.4. Under intermediate assumptions, the number of covered workers per OASDI beneficiary is estimated to be 3.3 in 2005, 2.1 in 2030, and 2.0 in 2060.
  • In 1999, total benefit payments from the OASI trust fund amounted to $334.4 billion. Total benefit payments from the DI trust fund were $51.4 billion.
  • Treasury Secretary Lawrence H. Summers acts as the Managing Trustee of the OASDI trust funds, and William A. Halter, Commissioner of Social Security, is the Secretary. The other trustees include: Alexis M. Herman, Secretary of Labor; Donna E. Shalala, Secretary of Health and Human Services; Kenneth S. Apfel, Commissioner of Social Security; Stephen G. Kellison, Chief Actuary of The Variable Annuity Life Insurance Company; and Marilyn Moon, an Economist at the Urban Institute.

For more information, contact Ken McDonnell (202) 775-6342, e-mail mcdonnell@ebri.org

Source: Employee Benefit Research Institute, EBRI Databook on Employee Benefits, fourth edition; and U.S. Social Security Administration, 1998 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and the Disability Insurance Trust Funds, 2000 (Baltimore, MD: U.S. Social Security Administration, 2000).

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