[Budget of the United States Government]
[III. Building on Our Economic Prosperity]
[2. Saving Social Security]
[From the U.S. Government Publishing Office, www.gpo.gov]


 
                       2.  SAVING SOCIAL SECURITY

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  ``For 60 years, Social Security has meant more than an ID number on a tax form, more than even a monthly check
in the mail. It reflects our deepest values, the duties we owe to our parents, to each other, to our children
and grandchildren, to those who misfortune strikes, to our ideals as one America.''
 
                                      President Clinton
                                      April 1998
 

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  Social Security is one of the most successful Government programs in 
United States history. Since its creation more than 60 years ago, Social 
Security has formed the bedrock of retirement security for Americans. 
Social Security is more than a retirement program, though. It is a 
promise, a guarantee. For millions of Americans who grow old after a 
lifetime of work, who become disabled or suffer the death of a family 
breadwinner, Social Security has meant that America will stand by them.
  Right now, the future of Social Security is uncertain. The pending 
retirement of 76 million baby boomers will put new financial pressure on 
the Social Security system. By early in the next century, the Social 
Security trust fund will have to start drawing on its own reserves in 
order to pay beneficiaries, reversing the self-financing nature of the 
system that has existed since its inception. As this trend continues to 
grow, some thirty years into the 21st Century, Social Security will have 
only enough resources to cover 72 cents on the dollar of currently 
promised benefits. Put simply, if no changes are made, Social Security 
will eventually go broke.
   In order to preserve the system that so many Americans rely upon, the 
President is urging the Nation to take measures this year. In 1998, he 
has led the way with a series of regional bipartisan forums to build 
public awareness about the nature and scope of the problem, and to build 
public consensus for solutions.
   This year, the Administration intends to work with Congress on a 
bipartisan basis to fix Social Security, guided by the five principles 
he stated last year. The time to act is now. First, if we take measures 
today, the changes to fix Social Security will be far simpler than if we 
confront the problem after it has grown. Acting now provides the 
opportunity to take advantage of America's strong economy and the 
Government's first budget surpluses in a generation. The future of 
Social Security presents a huge challenge for America, but with serious 
effort and bipartisan engagement, it is a challenge we as a Nation are 
well prepared to meet.

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                                      Principles for Social Security Reform
 
  The President has announced five principles with which to evaluate proposals for correcting Social Security's
long-range imbalance.
 
  First, any reform should strengthen and protect Social Security for the 21st Century. The basic program has
been one of this Nation's greatest successes, and it should not be abandoned.
 
  Second, reform should maintain universality and fairness in the program. For half a century, Social Security
has been a progressive guarantee for citizens.
 
  Third, Social Security must provide a benefit that people can count on. Regardless of the ups and downs of the
economy or the financial markets, Social Security must provide a solid and dependable foundation of retirement
security.
 
  Fourth, Social Security must continue to provide financial security for disabled and low-income beneficiaries.
Social Security is not just a retirement program. It is also a disability insurance and life insurance program.
One out of three Social Security beneficiaries is not a retiree.
 
  Fifth, Social Security reform must preserve America's fiscal discipline.
 

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A Long-term Commitment to Workers and Their Families

  Nearly every American is touched by Social Security at some point in 
their lives, either as a recipient of benefits or as a relative of a 
beneficiary. Social Security, officially known as Old-Age, Survivors, 
and Disability Insurance (OASDI), provides families with comprehensive 
protection against loss of income due to the retirement, disability or 
death of a wage earner.
  While most Social Security beneficiaries are retired workers, Social 
Security is more than a retirement program. Nearly one third of Social 
Security beneficiaries are disabled workers and their families, or 
survivors of deceased workers (see Table 2-1). Many beneficiaries would 
face a high risk of poverty without the income protection provided by 
Social Security.
  When President Roosevelt signed Social Security into law, most seniors 
were poor. Shortly before Roosevelt established the program, one elderly 
person sent a letter begging him to end the ``stark terror of penniless 
old age.'' Since then, Social Security benefits have significantly 
improved the well-being of the Nation. The poverty rate among the 
elderly declined by 64 percent over the past three decades, in large 
part due to Social Security. In 1967, 29.5 percent of the Nation's 
senior citizens lived in poverty. By 1997, that figure had dropped to 
10.5 percent.
  Social Security was founded on two important principles: social 
adequacy and individual equity. Social adequacy means that benefits will 
provide a certain standard of living for all contributors. Individual 
equity means that contributors receive benefits directly related to the 
amount of their contributions. These principles still guide Social 
Security today.
  Social Security was originally designed to provide a continuing source 
of income to help eligible workers maintain a household when they 
retired. In 1935, personal savings, family support, and State welfare 
programs were the main sources of income for those age 65 and older who 
did not work.
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         Table 2-1.  SOCIAL SECURITY PROVIDES UNIVERSAL BENEFITS
                   (Thousands of OASDI Beneficiaries)
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                                                                  2000
                                                                Estimate
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Retired workers and families:
  Retired workers.............................................    27,941
  Wives and husbands..........................................     2,850
  Children....................................................       447
 
Survivors of deceased workers:
  Children....................................................     1,932
  Widowed mothers and fathers with child beneficiaries in
   their care.................................................       214
  Aged widows and widowers, and dependent parents.............     4,822
  Disabled widows and widowers................................       193
 
Disabled workers and families:
  Disabled workers............................................     4,939
  Wives and husbands..........................................       186
  Children....................................................     1,459
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Total.........................................................    44,983
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  Before Social Security, about half of those over 65 depended on 
others, primarily relatives and friends, for all of their income. The 
same was often true for people with disabilities. Today, two thirds of 
those over age 65 get at least half of their income from Social Security 
(see Chart 2-1). Social Security benefits account for about 40 percent 
of all income that goes to the elderly population. For an average-wage 
worker retiring in 1998, Social Security replaced more than 40 per cent 
of his or her pre-retirement earnings. With Social Security, the vast 
majority of those over age 65 and those with disabilities can live 
relatively independent lives. Moreover, their families no longer carry 
the sole responsibility of providing their financial support.
  Disability Insurance (DI) provides income security for workers and 
their families when workers lose their capacity to work due to 
disability. Before DI, workers often had no such protection, although in 
some cases employees whose injuries were job-related may have received 
State worker's compensation benefits. Congress enacted DI in 1956 to 
protect the resources, self-reliance, dignity, and self-respect of those 
suffering from non-work-related disabilities. DI protection can be 
extremely valuable, especially for young families who could not 
sufficiently protect themselves against the risk of the worker's 
disability.
  Social Security is especially important for women, who make up 60 
percent of all Social Security beneficiaries, and an even greater 
percentage--72 percent--of all beneficiaries over age 85. Benefits to 
spouses of retirees and survivors of deceased workers are a critical 
source of old-age income for women, who are more likely to take time out 
of the paid workforce to raise children or care for aging parents.
  Social Security also makes up a larger share of retirement income for 
women than it does for men. The program accounted for 51 percent of the 
total income of elderly unmarried women in 1996, including widows. It 
provided 39 percent of the income of

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elderly unmarried men, and 36 percent of income of elderly married 
couples. Moreover, women are more likely to rely on Social Security for 
all of their retirement income (see Table 2-2).
  Social Security plays a larger role in women's retirement income than 
men's for several reasons. First, women live longer on average, and the 
inflation-indexing of Social Security benefits protects their buying 
power over time. Second, women on average have lower lifetime earnings 
than men due to the fact that women in general take more years out of 
the work force, are more likely to work part-time, and are more likely 
to earn lower wages than men, even in year-round full-time work. Because 
women have lower earnings, the progressive nature of the Social Security 
benefit formula enhances the role of these benefits in women's 
retirement income. Finally, women are less likely than men to retire 
with private pensions, and their pensions are smaller than those 
received by men, again due to lower lifetime earnings. While the 
differences between men's and women's work patterns and earnings are 
expected to shrink in next few decades, they are not expected to 
disappear entirely.

Program Trends

  Growth in Retirement Benefits: Social Security is facing financial 
stress due to changing demographics and its own financing structure. The 
program is largely ``pay-as-you-go''--current retirement benefits are 
financed by current payroll contributions. Such financing worked well in 
the past, when five workers paid for every retiree. However, when the 
large baby boom generation retires, eventually only two workers will pay 
for every retiree (see Chart 2-2). Furthermore, while the system's 
financial burden will increase greatly with the baby boomers' 
retirement, the Social Security Trustees do not expect demographic 
trends to improve markedly in later periods.
  Two demographic factors are especially important. Baby boomers and 
subsequent generations are having fewer children and are expected to 
live longer than previous generations. In 1957, women had an average of 
3.7 children, compared to 2.02 today. In 1935, life expectancy was 63 
years for females, 60 for males. By contrast, baby boomers on average 
have a much longer life expectancy--73 years for females and 67 for 
males. The life expectancy for people born in 2000 is 80 years for 
females, 74 years for males. The longer people live, the longer they 
will collect Social Security. The longer that people spend in 
retirement, the larger the pool of retirees who need to be supported at 
any one time, and the fewer there are working who can contribute to 
provide that support.

  Growth in Disability Benefits: Social Security's disability component 
has grown rapidly since its inception. The program provided about $48 
billion to 6.2 million disabled beneficiaries and their family members 
in 1998, compared to $57 million for 150,000 disabled workers in 1957.
  What has caused the program growth? Laws, regulations, and court 
decisions over the years have expanded eligibility for benefits. 
Recently, more and more baby boomers are reaching the age at which they 
are increasingly prone to disabilities, and the number of women insured 
has risen. As the caseload grows, it becomes more important
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                           Table 2-2.  SOCIAL SECURITY IS CRUCIAL TO RETIREMENT INCOME
          (Percentage of those over age 65 who relied on Social Security for their entire income, 1996)
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                                                                                              Social Security is
                                                                                              sole income source
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 Unmarried women............................................................................                25%
Unmarried men...............................................................................                20%
Married couples.............................................................................                 9%
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to ensure that those on the rolls are all, in fact, eligible for 
benefits. To maintain DI's integrity, the Administration proposes to 
maintain support for additional continuing disability reviews--periodic 
reviews of individual cases that ensure that only those eligible 
continue to receive benefits.
  In any given year, very few DI beneficiaries return to work. Many are 
just too severely disabled to work. Others, however, could work and want 
to work, but they face significant obstacles to doing so. To address 
this problem, the budget includes a comprehensive package of proposals 
to help disabled beneficiaries enter or re-enter the work force (see 
Chapter 3, ``Investing in Education and Training'').

The Long-range Challenge

  Social Security is designed to be self-financed; its most important 
revenue source is the payroll tax. Current economic and demographic 
forecasts indicate, however, that revenues will fall short of 
expenditures in the next century unless corrective action is taken. The 
combined OASI and DI trust funds are not in balance over the next 75 
years--the period over which the Social Security Trustees have 
traditionally measured Social Security's well-being. The projected 
financial shortfall is largely due to the demographic trends discussed 
above. In their 1998 report, the Trustees estimated that starting in 
2013, annual tax revenues coming into the trust funds will fall short of 
benefit payments.
  For many years, annual tax revenues going into the combined trust 
funds have exceeded benefit outlays, a situation projected to continue 
through 2012. The excess revenues are invested in special interest-
bearing Treasury securities. These securities, like regular Treasury 
securities, are backed by the full faith and credit of the U.S. 
Government. The trust funds are credited with the amount of principal as 
well as the interest paid on the securities. However, with no changes to 
current law, beginning in 2013, the program

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will use interest income from these trust fund reserves to help pay 
benefits. Starting in 2021, payroll tax and interest income will no 
longer be sufficient. The program will need to spend the principal held 
in reserve in order to meet benefit obligations. The Trustees forecast 
that the reserves will run out in 2032. At that point, annual payroll 
tax revenue will be sufficient to pay about 72 percent of benefits 
promised under current law.
  The long-range fiscal health of the trust fund is determined by 
economic as well as demographic factors. Such things as productivity 
improvements contribute to economic growth, which in turn bolsters 
revenues coming into the trust funds as workers enjoy low unemployment 
rates and higher real wages. However, even under optimistic assumptions 
about future productivity improvements and real wage growth, the 
demographic forecasts indicate that there simply will not be enough 
workers in the labor force to cover the expected retirement costs of the 
baby boom and subsequent generations.
  The President believes it is critical to address this financing 
shortfall now, for several reasons. First, addressing the issue now 
expands the number of options available for dealing with the problem. 
Second, there is time to engage in careful deliberation and develop a 
well-thought-out plan that protects vulnerable populations. Third, the 
healthy American economy and existence of a budget surplus provides a 
rare opportunity to tackle the problem from a position of strength. 
Finally, making decisions now will allow individuals sufficient time to 
adjust their retirement planning, if necessary. Guided by the principles 
he described last year, the President believes the Administration and 
Congress can fulfill America's long-standing promise to future 
generations.

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                                The President's Framework to Save Social Security
 
 
 
  In his State of the Union address, the President unveiled his proposal to save Social Security by using some
of the projected budget surplus to strengthen the system and by investing a portion of the surplus in equities
to raise the rate of return. These actions will substantially improve the program's fiscal position,
strengthening it until mid-century. It will require tough choices and a bipartisan approach to fix Social
Security, and to reach the President's overall goal of saving the Trust Fund at least until 2075. During this
year, the President will work with the Congress to restore the system to fiscal health, and to address his other
priorities including protections for the elderly at high risk of poverty.
 
  Devote 62 percent of the budget surplus for the next 15 years to Social Security: The Administration proposes
to set aside 62 percent of the projected unified budget surplus of the next 15 years for Social Security. This
amounts to more than $2.7 trillion in additional resources available to meet future Social Security benefit
obligations.
 
  Increase returns through private investment: The Administration proposes tapping the power of private
financial markets to increase the resources to pay for future Social Security benefits. Roughly one-fifth of the
unified budget surplus set aside for Social Security would be invested in corporate equities or other private
financial instruments. Because only about one-fifth of the surplus set aside for Social Security would be
invested in equities, the share of the stock market held by the Trust Fund would be limited. A mechanism to
insulate investment decisions from political considerations would be developed. Under this plan, most of the
surplus funds set aside for Social Security would continue to be invested in special Treasury securities.
 
  Provide additional fiscal reforms: The proposals described above will extend the life of the Social Security
Trust Fund until 2055--but do not achieve the President's goal of saving Social Security for 75 years. The
President has called for a bipartisan effort with all to make the difficult, but sensible and achievable choices
to save the system through 2075.
 
  Reduce elderly poverty: Although Social Security has made great strides in reducing poverty in the past 30
years, some groups among the elderly still face high poverty rates. Elderly widows, for example, experience a
poverty rate of 18 percent, nearly eight percentage points higher than the general population of the same age
group. The President will work to see that Social Security protections for elderly women and other especially
vulnerable beneficiaries are improved.
 
  Encourage work: Social Security's rules discourage retired individuals from working because benefits are
reduced when a retiree's earnings exceed a certain level. In 1996, the President and the Congress raised that
level of earnings--so that by the year 2002, retirees could earn as much as $30,000 before their benefits would
be affected. The President believes that an overall Social Security solvency agreement should remove the
barriers to work that are a result of the earnings test.
 
  Pay down the debt: This program will continue the Administration's policy of fiscal responsibility, through
which, for the first time in 29 years, the Federal Government last year actually reduced the amount of debt that
it must finance with the public. The contributions to the Social Security Trust Fund will further reduce the
level of publicly-held debt by two-thirds, to the lowest percentage of GDP since 1917. This will add to the
Nation's savings and help our economy continue to grow.
 

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