    [Budget of the United States Government]
    [III. Creating a Better Government]
    [15. Social Security]
    [From the U.S. Government Publishing Office, www.gpo.gov]

                              15.  SOCIAL SECURITY

      ----------------------------------------------------------------------

                              Table 15-1.  Federal Resources in Support of Social Security
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                   Estimate
                   Function 650                   2000   -----------------------------------------------------------
                                                 Actual     2001      2002      2003      2004      2005      2006
    ----------------------------------------------------------------------------------------------------------------
    Spending:
      Discretionary Budget Authority..........     3,210     3,447     3,520     3,597     3,680     3,759     3,845
      Mandatory Outlays:
        Existing law..........................   406,048   430,000   451,575   473,544   497,967   524,312   552,950
    Tax Expenditures:
      Existing law............................    24,800    25,980    27,300    28,450    29,690    31,270    33,000
    ----------------------------------------------------------------------------------------------------------------

      ----------------------------------------------------------------------
      The Old-Age, Survivors, and Disability Insurance (OASDI) programs,
    commonly known as Social Security, are crucial to the economic well-
    being of tens of millions of Americans. Social Security will spend an
    estimated $455 billion in 2002 to provide more than 46 million
    beneficiaries with comprehensive protection against loss of income due
    to the retirement, disability, or death of a wage earner.
      Social Security provides monthly benefits to retired and disabled
    workers who gain insured status and to their eligible spouses, children,
    and survivors. The Social Security Act of 1935 provided retirement
    benefits, and the 1939 amendments provided benefits for survivors and
    dependents. These benefits now comprise the Old Age and Survivors
    Insurance (OASI) program. Congress provided benefits for disabled
    workers by enacting the Disability Insurance (DI) program in 1956 and
    added benefits for the dependents of disabled workers in 1958. About 30
    percent of Social Security beneficiaries are disabled workers and their
    families, or survivors of deceased workers. (See Table 15-2.)
      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 to protect the resources,
    self-reliance, and self-respect of those suffering from non-work-related
    disabilities. DI protection can be extremely valuable, especially for
    young families who are unable to sufficiently protect themselves against
    the risk of the worker's disability.
       The Government expects to collect $539 billion in Social Security
    taxes in 2002. These taxes will be credited to the OASI and DI trust
    funds, along with $76 billion of interest on Treasury securities held by
    the trust funds.
       In 2000, Social Security paid out a total of $402 billion to 45
    million beneficiaries. These payments included $289 billion in benefits
    to 31 million retired workers and dependent family members, and about
    $59 billion in benefits to seven million survivors of deceased workers.
    Through the DI program, Social Security paid $54 billion in benefits to
    more than six million disabled workers and their families.

    The Long-Range Challenge

       Social Security is designed to be self-financed; its most important
    revenue source is the payroll tax. Pressure on the financing system is
    growing due to two demographic factors: members of the baby boom and
    subsequent generations are having fewer

    [[Page 116]]

      ----------------------------------------------------------------------

                   Table 15-2.  Social Security Beneficiaries
                       (Thousands of OASDI beneficiaries)
    ------------------------------------------------------------------------
                                                                      2002
                                                                    Estimate
    ------------------------------------------------------------------------
    Retired workers and families:
      Retired workers.............................................    28,976
      Wives and husbands..........................................     2,779
      Children....................................................       453

    Survivors of deceased workers:
      Aged widows and widowers, and dependent parents.............     4,696
      Children....................................................     1,891
      Widowed mothers and fathers with child beneficiaries in            194
       their care.................................................
      Disabled widows and widowers................................       210

    Disabled workers and families:
      Disabled workers............................................     5,303
      Wives and husbands..........................................       162
      Children....................................................     1,505
                                                                   ---------
    Total.........................................................    46,169
    ------------------------------------------------------------------------
       ---------------------------------------------------------------------

    children and are predicted to have longer life spans than previous
    generations. The consequence of these trends is that the ratio of
    workers paying into the system for each beneficiary will decline from
    5.1 in 1960 to 3.4 today to 2.1 in 2030. These demographic trends will
    strain the Government's ability to make benefit payments at current
    payroll tax rates. Based on the 2001 Trustee's Report, the Social
    Security trust funds are expected to run a cash surplus until 2016.
    However, cash revenues will fall short of expenditures after that time,
    and the trust funds will exhaust their assets in 2038 unless corrective
    action is taken. After 2038, payroll taxes are projected to cover 73
    percent of expenditures. Social Security is largely ``pay-as-you-go,''
    meaning current retirement benefits are financed by current payroll
    contributions. Another source of pressure on the trust funds is the
    rapid growth of the DI program, which is expected to accelerate as baby
    boomers reach the age at which they are increasingly prone to
    disabilities. As a result of these trends, Social Security's spending
    path is unsustainable in the long run.
       The Social Security system faces a long-term unfunded liability of
    $8.7 trillion. In addition, the pay-as-you-go structure of Social
    Security leads to substantial generational inequities in average rate of
    return. Future retirees on average can expect to get back from Social
    Security barely more than they put in. The first generations of workers
    covered by Social Security experienced low payroll tax rates because
    there were relatively few retirees to support in the early years of the
    program. The earliest cohorts also paid taxes for only a portion of
    their working lives. Consequently, these early generations enjoyed a
    high rate of return from the program because the benefits they received
    exceeded their payroll tax contributions by a comfortable margin. As the
    system matured, payroll taxes rose to support an expanding beneficiary
    population, and rates of return declined. (See Chart 15-1.)

       Restoring Social Security to financial balance solely through benefit
    cuts or tax increases would only worsen the returns that workers would
    get from the system. One way to address the long-term financial crisis
    is to allow individuals to keep some of their payroll taxes in personal
    retirement accounts that can earn higher rates of return through
    investment in private equities markets. The President is committed to
    modernizing and reforming Social Security, so that the system will be
    better able to meet the needs of tomorrow's retirees. The President will
    form a commission that will examine Social Security and present
    recommendations for reform next fall.

    [[Page 117]]

    Principles for Reform

       The President believes that Social Security reform should be based on
    the following principles:
       Modernization must not change existing benefits for current
              retirees or near-retirees, and it must preserve the disability
              and survivors' components. The promises made to current
              retirees must be kept.
       The Social Security surplus must be  preserved only for
              Social Security. For 30 years, Social Security surpluses have
              been used to mask spending increases in programs unrelated to
              Social Security. Surpluses in the Social Security trust funds
              will total $2.6 trillion over the next 10 years. These
              surpluses will be saved for Social Security reform and will be
              used to reduce debt held by the public until Social Security
              reform is enacted.
       Social Security payroll taxes must not be increased, as they
              have been 20 times since the program began in 1937.
       The Government itself must not invest Social Security funds
              in the private economy.
       Successful Social Security reform, which addresses both the
              long-term unfunded liability and the generational inequities,
              must be built upon a core of individually controlled,
              voluntary personal retirement accounts that will augment the
              Social Security safety net.

    Social Security Administration (SSA)

       To operate a program that affects tens of millions of beneficiaries
    and involves a significant share of all Federal outlays requires an
    efficient and responsive administrative structure. SSA administers the
    OASI and DI programs. SSA also runs the Supplemental Security Income
    (SSI) program for low-income aged and disabled individuals, which is
    part of the Income Security function

    [[Page 118]]

    (see Chapter 14). In addition, the agency provides services that support
    the Medicare program on behalf of the Health Care Financing
    Administration, which is part of the Medicare function (see Chapter 13).
       SSA undertakes a variety of activities in administering its programs.
    SSA is responsible for paying benefits to more than 50 million people
    every month, processing more than six million claims for benefits each
    year, handling approximately 59 million phone calls to its 800-number,
    and issuing 138 million Social Security statements. Other activities
    include issuing Social Security numbers, maintaining earnings records
    for wage earners and self-employed individuals, updating beneficiary
    eligibility information, educating the public about the programs,
    combating fraud, and conducting research, policy analysis and program
    evaluation. These activities are largely integrated across the various
    programs administered by SSA.
       SSA faces enormous management challenges as a result of the aging of
    the baby boom generation. SSA's work force is aging and is likely to
    experience a wave of retirements in the next 10 years. During the same
    time frame, the agency's workloads will increase dramatically as members
    of the baby boom generation reach their peak years of disability risk
    and then begin to retire. Responding to these challenges will require
    that SSA rethink how it does business and develop innovative ways to
    manage its growing workloads.
       The Administration proposes $7.7 billion for SSA, an increase of $0.5
    billion, or 6.3 percent, above the 2001 enacted level of $7.2 billion.
    This amount includes sufficient resources to ensure stable staffing in
    2002 and will allow SSA to maintain performance in key service delivery
    areas such as retirement claims processing. It will allow SSA to process
    about 100,000 more initial disability claims in 2002 than in 2001. This
    funding also will help SSA continue its multi-year continuing disability
    review (CDR) plan, eliminating the CDR backlog in 2002, as well as
    increase the number of SSI non-disability eligibility redeterminations
    conducted. In addition, this amount includes resources for SSA to
    continue to modernize its computer infrastructure and offer more
    services in an online environment.
       SSA's Performance Plan for 2002 includes a number of performance
    indicators that reflect the President's commitment to modernizing the
    agency's operations. The budget includes resources to help the agency
    meet the goals of responsive programs, excellent customer service,
    strong program integrity, and strengthened public understanding of
    Social Security. Like the agency's administrative activities, these
    goals cut across programs. SSA's broad goals and related performance
    measures for 2002 are described below.

      Ensure integrity of Social Security programs: The budget supports
    activities undertaken by SSA to ensure the integrity of records and
    payments. These activities include reviewing claimants' eligibility for
    continued benefits, collecting debt, detecting overpayments, and
    investigating and deterring fraud.
       In 2002, SSA expects to eliminate the backlog of more than
              four million CDRs that built up prior to 1996. CDRs help
              increase public confidence in the integrity of SSA's
              disability programs by ensuring that only people who continue
              to be disabled receive benefits.
       In 2002, SSA plans to perform 2.3 million non-disability
              redeterminations, an increase of 205,000 redeterminations over
              the 2001 level and 78,000 over the 2000 level.

      Promote responsive programs: SSA's programs must reflect the interests
    of beneficiaries and society as a whole. Programs must evolve to reflect
    changes in the economy, demographics, technology, medicine, and other
    areas. Many DI and SSI beneficiaries with disabilities, for example,
    want to be independent and work. Many of them can work, despite their
    impairments, if they receive the support they need. Yet less than one
    percent of disabled beneficiaries in any given year actually leave SSA's
    programs due to employment. Americans with disabilities should have
    every freedom to meet their full potential and participate as full
    members in the economic marketplace.

    [[Page 119]]

       As part of the New Freedom Initiative, the President will work for
    swift implementation of the Ticket to Work and Work Incentives
    Improvement Act. Enacted in 1999, the Act aims to help disabled
    beneficiaries enter or re-enter the work force. This law expands
    beneficiaries' choice of employment service providers, allows persons
    with disabilities to keep or obtain Federal health benefits when they
    enter, re-enter, or remain in the work force, and authorizes SSA to
    carry out demonstration projects to identify effective ways to help DI
    beneficiaries return to work. SSA began implementation of the new law in
    2000, and the budget includes funding to continue and build on these
    activities in 2002.

      Deliver  customer-responsive  service: Roughly three-quarters of SSA's
    total administrative budget is devoted to the day-to-day work generated
    by requests for service from the general public. Much of this work takes
    the form of determining eligibility for benefits. The time required to
    process benefit claims is affected by the design of the eligibility
    determination procedures, as well as by the level of resources dedicated
    to claims-processing activities and the number of claims received. The
    President's Budget supports efforts to streamline these procedures.
       In 2002, the average processing time for hearings (i.e., the
              elapsed time from the receipt of ``request for hearing'' to
              ``notice of decision'') at SSA's Office of Hearings and
              Appeals will be 259 days, an improvement from 297 days in
              2000.
       The Internet is a crucial tool in the Administration's plan for a
    Government that is more efficient and responsive to citizens. SSA will
    undertake activities to fully realize the power of the Internet to
    improve customer service delivery.
       By the end of 2002, SSA plans to offer 30 percent of the
              agency's customer-initiated services electronically, either
              via the Internet or through automated telephone service. In
              2000, only 10 percent of these services were available
              electronically.

      Strengthen public understanding of Social Security programs: The
    budget supports the development, production, and distribution of
    products to educate the public about Social Security benefits and Social
    Security's larger impact on society. SSA conducts an annual survey to
    measure public understanding of Social Security programs and issues and
    undertakes a variety of activities to increase public awareness.
       In 2002, SSA projects that 75 percent of the public will be
              knowledgeable about Social Security programs, an increase from
              the 2000 goal of 65 percent.

    Tax Expenditures

       Social Security recipients pay taxes on their Social Security
    benefits when their overall income, including Social Security, exceeds
    certain income thresholds. Social Security beneficiaries will pay $13.5
    billion in income taxes on their benefits in 2002 and $79.3 billion over
    the period 2002 to 2006. If all Social Security benefits were subject to
    income taxes, taxes would increase by an estimated $27 billion in 2002
    and $150 billion from 2002 through 2006.