[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)]
[Program Descriptions]
[Section 1. Social Security: The Old Age, Survivors, and Disability Insurance (OASDI) Programs]
[From the U.S. Government Printing Office, www.gpo.gov]





 
[1996 Green Book] SECTION 1. SOCIAL SECURITY: THE OLD AGE, SURVIVORS, AND DISABILITY INSURANCE (OASDI) PROGRAMS

                                CONTENTS

1996 Social Security Information
General
  Brief Description of Social Security Programs
  Concept of Social Insurance
  Financing Mechanism
Brief History
Social Security Coverage of the Work Force
Benefits
  Eligibility for Workers
  Disability
  Eligibility for Dependents and Survivors
Benefit Computation
  Full Retirement Age
  Trends in Retirement Age
  Trends in Longevity
  Average Indexed Monthly Earnings
  Benefit Formula
  Special Minimum Benefit
Benefit Amounts
Replacement Rates
Benefit Reduction and Increase
  Dual Entitlement
  Actuarial Reduction
  Delayed Retirement Credit
  Maximum Family Benefit
  Earnings Limit
  Offsets
  Suspension of Benefits to Prisoners
Cost-of-Living Adjustments
Taxation of Benefits
Determination of Disability Benefits
  Determination of Disability
  Application of Law and Regulations
  Federal Review of State Determinations
  Periodic Review of Individuals Receiving Disability     
            Benefits
  Medical Improvement Standard
  Medical Evidence
  Attorneys' Fees and Representation
Vocational Rehabilitation
Disability Claims and Appeals Structure
Changes in Enrollment and Applicant Backlogs
  Disability Insurance (DI) Awards and Recipients
  Pending Claims and Waiting Times
Characteristics of Recipients
  OASDI
  DI
Social Security Financing
  Current Law
  Status of OASDI Trust Funds
  How the Status of the Trust Funds is Measured
  Nature of the Social Security Trust Funds
Budgetary Treatment of OASDI
  Current Budget Rules Pertaining to Social Security
  Current House and Senate Procedural Rules to Protect Social 
            Security's Financial Condition
  Budgetary Treatment of Administrative Expenses
Legislative History
  Changes in the 95th Congress
  Changes in the 96th Congress
  Changes in the 97th Congress
  Changes in the 98th Congress
  Changes in the 99th Congress
  Changes in the 100th Congress
  Changes in the 101st Congress
  Changes in the 102d Congress
  Changes in the 103d Congress
  Changes in the 104th Congress
Appendix
  Relationship of Taxes to Benefits for Social Security 
            Retirees: Illustrations of the Amount of Time It 
            Takes To Recover the Value of Taxes Paid, Plus 
            Interest
  Illustrative Payback Times
References

                    1996 SOCIAL SECURITY INFORMATION

Tax rate:
Employee/employer each--7.65%;
    (6.20%--OASDI; 1.45%--HI).
Self-employed--15.30%;
    (12.40%--OASDI; 2.90%--HI).
Maximum taxable earnings base:

Social Security (OASDI)....................................      $62,700
Medicare (HI)..............................................     No Limit
                                                                        

Maximum FICA/SECA tax: \1\
---------------------------------------------------------------------------
    \1\ FICA/SECA tax paid by employers and self-employed can be 
partially deducted under income tax rules.

                                                                        
                                        OASDI              HI           
Employee/employer....................   $3,887  No limit.               
Self-employed........................    7,774  No limit.               
------------------------------------------------------------------------

OASDI workers covered.--1996 (est.)--142 million.
Average Wage Level.--1994--$23,753.53.
Earnings required for a quarter of coverage.--$640; ($2,560 for 4).
Earnings limit exempt amounts:
$12,500 for beneficiaries age 65-69;
    ($1 for $3 withholding rate).
$8,280 for beneficiaries under age 65;
    ($1 for $2 withholding rate).
Medicare (SMI) premium.--$42.50/month.
Number of OASDI beneficiaries (12/95) (in millions):

Total OASDI beneficiaries..................................       43.4  
    OASI beneficiaries.....................................       37.5  
        Retired workers....................................       26.7  
        Families and survivors.............................       10.9  
    DI beneficiaries.......................................        5.9  
        Disabled workers...................................        4.2  
        Family members.....................................        1.7  
                                                                        

Average monthly benefits (12/95):

Retired Worker.............................................       $720  
Retired worker and aged spouse.............................      1,215  
Disabled worker............................................        682  
Disabled worker, spouse and children.......................      1,140  
Aged widow(er).............................................        680  
Widowed mother/father and 2 children.......................      1,377  
                                                                        

              1996 SOCIAL SECURITY INFORMATION--Continued

                                                                        
           Monthly benefits for 1996 retirees              At 62   At 65
Low earner (45% of average wages).......................    $430    $537
Average earner..........................................     709     886
Maximum earner..........................................     999   1,248
------------------------------------------------------------------------

Long-range replacement rates (in percent):

Retirement at age 67 in 2030 and later:                                 
Low earner (45% of average wages)..........................         56  
Average earner.............................................         42  
Maximum earner.............................................         28  
                                                                        

COLA (effective January 1996).--2.6%.
Taxation of benefits--percent of benefits taxed:

                                                                        
         Percent taxed           Income threshold      Filing status    
Up to 50%.....................  $25,000-$34,000..  Individual.          
                                $32,000-$44,000..  Joint.               
Up to 85%.....................  $34,000 +........  Individual.          
                                $44,000 +........  Joint.               
------------------------------------------------------------------------

Substantial gainful activity:
$500/month disabled/nonblind;
$960/month blind.
OASDI Trust Fund operations (in billions of dollars):

                                                                        
                                        OASDI Trust Fund operations     
                                 ---------------------------------------
          Calendar year                                  Net            
                                   Income     Outgo   increase   Balance
1995............................    $399.5    $339.8     $59.7    $496.1
1996 (est.).....................     424.9     354.6      70.3     566.4
------------------------------------------------------------------------

Fiscal Year 1995 OASDI Outlays.--$336 billion--21.8% of total U.S. 
        Budget of $1.54 trillion.
SAA info.--1-800-SSA-1213.
SSA On Line.--http://www.ssa.gov/SSA----Home.html

Source: Social Security Administration and Board of Trustees 
(1996).

                                GENERAL

             Brief Description of Social Security Programs

    The Old-Age, Survivors, and Disability Insurance (OASDI) 
Programs provide monthly benefits to retired and disabled 
workers, their dependents and survivors. The OASDI Programs are 
contained in title II of the Social Security Act, and are 
commonly known as ``Social Security.'' Old-age benefits were 
provided for retired workers by the original Social Security 
Act of 1935, benefits for dependents and survivors were 
provided by the 1939 amendments, and benefits for disabled 
workers were enacted in 1956. The Hospital Insurance (HI) 
Program, enacted in 1965 as title XVIII of the Social Security 
Act, is closely related to the OASDI Program. (The HI Program 
is discussed in later sections.)

                      Concept of Social Insurance

    When the OASDI Programs were created, ``insurance'' was 
included in their titles to show that their purpose is to 
replace income that is lost to a family through the retirement, 
death, or disability of a worker who has earned protection 
against these ``risks.'' This protection was to be obtained by 
working in jobs that are covered under Social Security and 
therefore subject to payroll taxes that finance Social Security 
benefits. Once workers worked long enough in covered jobs to be 
``insured,'' they and their families would have eligibility for 
their benefits as a matter of ``earned right.'' The level of 
benefits is based on the amount the worker earned in covered 
jobs, and are paid without a test of economic need.
    However, the social ends the programs serve diverge 
somewhat from the insurance analogy. The programs are national, 
and coverage is generally compulsory and nearly universal. They 
are designed to address such social purposes as alleviating 
poverty, providing added protection of families versus single 
workers, and providing a larger degree of earnings replacement 
for low-paid versus high-paid workers. The OASDI Programs were 
therefore described as ``social'' insurance.

                          Financing Mechanism

    The primary source of revenue for OASDI is the payroll tax 
paid by workers covered by the program and their employers. 
OASI and DI have separate tax rates set by law. Coverage under 
Social Security is generally compulsory. Currently, an 
estimated 96 percent of the Nation's paid work force is covered 
either voluntarily or mandatorily.
    The taxes for wage and salaried workers are imposed under 
the Federal Insurance Contributions Act (FICA, chapter 21 of 
the Internal Revenue Code). Taxes are based on earnings up to 
the annual maximum taxable wage base ($62,700 in 1996 for 
OASDI, with no limit on wages subject to HI). The employee 
share of the payroll tax is withheld from wage and salary 
payments, and is matched by employers, currently at a rate of 
7.65 percent each. Self-employed persons are covered by the 
Self-Employment Contributions Act (SECA, chapter 2 of the 
Internal Revenue Code). They pay contributions on their net 
earnings annually up to the same maximum as employees, but at a 
rate that is equal to the combined employee-employer tax rate. 
However, the self-employed may deduct 7.65 percent from their 
net earnings before computing their Social Security tax and may 
also deduct half of their Social Security tax as a business 
expense for income tax purposes.
    Revenue from the OASI and DI portion of the tax is credited 
to the Old-Age and Survivors Insurance Trust Fund and the 
Disability Insurance Trust Fund. In addition, the revenue 
derived from the taxation of a portion of 50 percent of Social 
Security benefits is credited to each trust fund (for 
additional detail, see section on ``Taxation of Benefits''). 
The trust funds are the source of payment for: (1) monthly 
benefits when the worker retires, becomes totally disabled, or 
dies (including a financial interchange with the Railroad 
Retirement System), and (2) administrative expenses for the 
program. A discussion of OASDI administrative costs may be 
found in a later section on ``Budgetary Treatment of OASDI.''

                             BRIEF HISTORY

    The 1935 Social Security Act covered only workers in 
commerce and industry, then about 60 percent of the work force. 
At first, the act provided only monthly benefits to retired 
workers age 65 and over, and a lump-sum death benefit to the 
estate of these workers. The monthly benefits were to begin on 
January 1, 1942. The 1939 Social Security amendments provided 
benefits to dependents of retired workers (wives aged 65 and 
over and children under age 16); and to survivors of deceased 
workers (widows aged 65 and over, mothers caring for an 
eligible child, children under age 16, and dependent parents). 
In addition, the 1939 amendments provided that these benefits 
would begin in 1940. The 1939 amendments were the first in a 
nearly 40-year series of program expansions.
    In 1956, benefits were extended to disabled workers aged 
50-64, and to disabled children over age 18 of retired, 
disabled, or deceased workers, if they became disabled before 
age 18 (changed to disabled before age 22 in 1973). The 1958 
amendments provided benefits to dependents of disabled workers 
on the same basis as dependents of retired workers. Benefits 
for disabled workers under age 50 were provided in 1960.
    Monthly cash benefits were increased on an ad hoc basis 10 
times before the first automatic cost-of-living adjustment was 
implemented by the Social Security amendments of 1972. 
Beginning in 1975, benefits have been automatically adjusted to 
keep pace with inflation. Since 1975, there have been increases 
annually except during calendar year 1983, when the adjustment 
was delayed 6 months (see table 1-1).

               SOCIAL SECURITY COVERAGE OF THE WORK FORCE

    In 1939, approximately 24 million persons worked in 
employment covered by the Social Security system. Over the 
years, major categories of workers were brought under the 
system, such as self-employed individuals, State and local 
government employees (on a voluntary basis), regularly employed 
farm and domestic workers, members of the armed services, and 
members of the clergy and religious orders (on a voluntary 
basis). In 1996, of a total work force of approximately 148.8 
million workers, about 142 million workers and an estimated 96 
percent of all jobs in the United States are covered under 
Social Security. Of the total work force, an estimated 13.7 
million workers were self-employed in 1996. In 1994, an 
estimated 87 percent of all earnings from jobs covered by 
Social Security were taxable (see tables 1-2 and 1-3).

TABLE 1-1.--SOCIAL SECURITY BENEFIT INCREASES SINCE THE BEGINNING OF THE
                                 PROGRAM                                
                              [In percent]                              
------------------------------------------------------------------------
                                                              Amount of 
                     Date increase paid                        increase 
------------------------------------------------------------------------
January 1996...............................................          2.6
January 1995...............................................          2.8
January 1994...............................................          2.6
January 1993...............................................          3.0
January 1992...............................................          3.7
                                                                        
January 1991...............................................          5.4
January 1990...............................................          4.7
January 1989...............................................          4.0
January 1988...............................................          4.2
January 1987...............................................          1.3
                                                                        
January 1986...............................................          3.1
January 1985...............................................          3.5
January 1984...............................................          3.5
July 1982..................................................          7.4
July 1981..................................................         11.2
                                                                        
July 1980..................................................         14.3
July 1979..................................................          9.9
July 1978..................................................          6.5
July 1977..................................................          5.9
July 1976..................................................          6.4
                                                                        
July 1975 \1\..............................................          8.0
April/July 1974 \2\........................................         11.0
October 1972...............................................         20.0
February 1971..............................................         10.0
February 1970..............................................         15.0
                                                                        
March 1968.................................................         13.0
February 1965..............................................          7.0
February 1959..............................................          7.0
October 1954...............................................         13.0
October 1952...............................................         12.5
October 1950...............................................         77.0
------------------------------------------------------------------------
\1\ Automatic COLAs began.                                              
\2\ Increase came in two steps.                                         
                                                                        
Source: Social Security Administration.                                 


                     TABLE 1-2.--CIVILIAN WORKERS COVERED BY SOCIAL SECURITY SYSTEM, 1939-94                    
                                                  [In millions]                                                 
----------------------------------------------------------------------------------------------------------------
                                                                                             OASDI and          
                          Year                            Paid civilian    OASDI    Percent   HI-only    Percent
                                                          employees \1\  coverage   covered   coverage   covered
----------------------------------------------------------------------------------------------------------------
1939 \2\................................................         43.6        24.0      55.1       24.0      55.1
1944 \2\................................................         51.2        30.8      60.2       30.8      60.2
1949 \2\................................................         56.7        34.3      60.5       34.3      60.5
1955....................................................         62.8        51.8      82.5       51.8      82.5
1960....................................................         64.6        55.7      86.2       55.7      86.2
1961....................................................         65.3        56.1      85.9       56.1      85.9
1962....................................................         66.4        57.3      86.3       57.3      86.3
1963....................................................         67.6        58.5      86.5       58.5      86.5
1964....................................................         69.3        60.1      86.7       60.1      86.7
1965....................................................         71.6        62.7      87.6       62.7      87.6
                                                                                                                
1966....................................................         73.6        64.9      88.2       64.9      88.2
1967....................................................         74.4        65.7      88.3       65.7      88.3
1968....................................................         75.9        67.1      88.4       67.1      88.4
1969....................................................         78.0        68.6      87.9       68.6      87.9
1970....................................................         77.8        69.9      89.9       69.9      89.9
1971....................................................         79.6        71.7      90.1       71.7      90.1
1972....................................................         82.6        74.7      90.4       74.7      90.4
1973....................................................         85.6        77.6      90.6       77.6      90.6
1974....................................................         85.4        77.3      90.5       77.3      90.5
1975....................................................         86.0        77.9      90.6       77.9      90.6
                                                                                                                
1976....................................................         89.2        81.0      90.9       81.0      90.9
1977....................................................         93.5        85.1      91.0       85.1      91.0
1978....................................................         97.0        88.4      91.2       88.4      91.2
1979....................................................         99.4        90.7      91.3       90.7      91.3
1980....................................................         98.9        89.3      90.3       89.3      90.3
1981....................................................         99.0        90.2      91.1       90.2      91.1
1982....................................................         98.3        89.8      91.4       89.8      91.4
1983....................................................        102.2        93.6      91.6       96.0      94.0
1984....................................................        105.5        97.9      92.7      100.3      95.0
1985....................................................        107.7       100.0      92.9      102.4      95.1
                                                                                                                
1986....................................................        110.2       104.1      94.4      106.5      96.6
1987....................................................        113.3       107.5      94.8      110.0      97.1
1988....................................................        115.6       109.8      95.0      112.4      97.3
1989....................................................        117.4       111.7      95.2      114.4      97.4
1990....................................................        117.0       111.3      95.2      114.1      97.5
1991....................................................        116.3       111.0      95.5      113.3      97.5
1992....................................................        117.8       112.7      95.7      114.8      97.5
1993....................................................        120.3       115.3      95.8      117.4      97.6
1994....................................................        124.6       119.7      96.1      121.8      97.8
----------------------------------------------------------------------------------------------------------------
\1\ Includes paid employees and self-employed for all years.                                                    
\2\ Monthly average for these years, all other years as of December.                                            
                                                                                                                
Source: Office of Research and Statistics, Social Security Administration.                                      


                         TABLE 1-3.--CIVILIAN WAGES COVERED BY OASDI SYSTEM, 1950-94 \1\                        
                                              [Dollars in billions]                                             
----------------------------------------------------------------------------------------------------------------
                                                     Earnings in                                       Taxable  
                                                 covered employment               Covered            earnings as
                                                --------------------    Total    earnings             a percent 
                 Year                    Total                        earnings     as a     Taxable    of total 
                                       earnings              Self-   in covered   percent  earnings  earnings in
                                                 Employed  employed  employment  of total              covered  
                                                                                 earnings             employment
----------------------------------------------------------------------------------------------------------------
1950.................................     186.1     109.8  ........      109.8       59.0      87.5         79.7
1955.................................     257.4     171.6      24.5      196.1       76.2     157.5         80.3
1960.................................     324.9     236.0      29.2      265.2       81.6     207.0         78.1
1965.................................     428.8     311.4      40.3      351.7       82.0     250.7         71.3
1970.................................     631.7     483.6      48.0      531.6       85.2     415.6         78.2
                                                                                                                
1975.................................     940.1     717.2      70.4      787.6       83.8     664.7         84.4
1976.................................   1,037.2     797.2      76.8      874.7       84.3     737.7         84.3
1977.................................   1,140.4     879.5      80.6      960.1       84.2     816.6         85.0
1978.................................   1,288.6     998.9      93.7    1,092.6       84.8     915.6         83.8
1979.................................   1,437.1   1,122.0     100.2    1,222.2       85.0   1,067.0         87.3
                                                                                                                
1980.................................   1,548.4   1,231.0      97.8    1,328.8       85.8   1,180.7         88.9
1981.................................   1,696.5   1,352.0      98.9    1,450.9       85.5   1,294.1         89.2
1982.................................   1,764.0   1,418.0      98.6    1,516.6       86.0   1,365.3         90.0
1983.................................   1,870.8   1,502.0     113.2    1,615.2       86.3   1,454.1         90.0
1984.................................   2,086.0   1,671.5     129.3    1,800.8       86.3   1,608.8         89.3
                                                                                                                
1985.................................   2,246.2   1,794.5     142.3    1,936.8       86.2   1,722.6         88.9
1986.................................   2,389.2   1,921.0     160.8    2,081.8       87.1   1,844.4         88.6
1987.................................   2,571.4   2,057.1     179.9    2,237.0       87.0   1,960.0         87.6
1988.................................   2,767.3   2,227.9     199.7    2,427.6       87.7   2,088.4         86.0
1989.................................   2,933.7   2,371.7     210.9    2,582.6       88.0   2,239.5         86.7
                                                                                                                
1990 \2\.............................   3,108.3   2,511.3     195.6    2,706.9       87.1   2,358.7         87.1
1991 \2\.............................   3,192.4   2,565.2     197.2    2,762.4       86.6   2,423.5         87.7
1992 \2\.............................   3,389.1   2,718.7     210.0    2,928.7       86.5   2,534.5         86.5
1993 \2\.............................   3,522.4   2,796.3     224.8    3,021.1       85.8   2,635.8         87.2
1994 \2\.............................   3,756.8   2,986.3     243.1    3,229.4       86.0   2,818.5         87.3
----------------------------------------------------------------------------------------------------------------
\1\ Sum of wages and salaries and proprietors' income with inventory valuation and capital consumption          
  adjustments, as estimated by the Bureau of Economic Analysis in the National Income and Product Accounts.     
\2\ Preliminary.                                                                                                
                                                                                                                
Source: Social Security Administration (1995) and Office of Research and Statistics, Social Security            
  Administration.                                                                                               

    While coverage is compulsory for most types of employment, 
approximately 6.7 million workers did not have any coverage 
under Social Security in 1994. The majority of these noncovered 
workers were and still are in State and local governments or 
the Federal Government (see tables 1-4 and 1-5 for the most 
recently available statistical breakout). Beginning January 1, 
1983, Federal employees were covered under the Medicare (HI) 
portion of the Social Security tax, and all Federal employees 
hired after 1983 are covered under the OASDI portion as well. 
In 1991, 70.2 percent of State and local government workers 
(14.4 million out of 20.5 million) were covered by Social 
Security. Beginning January 1, 1984, all employees of nonprofit 
organizations became covered, and as of April 1983 terminations 
of Social Security coverage by State government entities were 
no longer allowed. State and local employees hired after March 
31, 1986 are mandatorily covered under the Medicare Program and 
must pay HI payroll taxes. Beginning July 1, 1991, State and 
local employees who were not members of a public retirement 
system were mandatorily covered under Social Security. This 
requirement was contained in the 1990 Omnibus Budget 
Reconciliation Act (Public Law 101-508).

          TABLE 1-4.--ESTIMATED SOCIAL SECURITY COVERAGE, 1994          
------------------------------------------------------------------------
                                      Total      Noncovered    Percent  
                                    (millions)   (millions)    covered  
------------------------------------------------------------------------
Workers \1\......................        145.5          6.7         95.4
Jobs: \2\                                                               
    State and local government                                          
     \3\.........................         21.7          5.5         74.7
    Federal civilian.............          4.2          1.5         64.3
    Students \4\.................          2.3          2.2          4.3
------------------------------------------------------------------------
\1\ Includes both employees and self employed.                          
\2\ Because workers may work at more than one job during the year, the  
  total number of noncovered jobs exceeds the total number of noncovered
  workers. Because this table includes workers who worked only in a     
  noncovered job at any time during the year, it shows a higher number  
  of noncovered jobs than does table 1-2, which is based on coverage    
  status in December of each year.                                      
\3\ Excludes students.                                                  
\4\ Includes students employed at both public and private colleges and  
  universities.                                                         
                                                                        
Source: Social Security Administration.                                 

    While the most recent year for which actual data are 
available is 1991, the Social Security Administration estimates 
that in 1994, 23.2 million individuals will work at some time 
during the year for a State or local government, and the wages 
of 70 percent of these individuals will be covered by Social 
Security.

 TABLE 1-5.--ESTIMATED SOCIAL SECURITY COVERAGE OF WORKERS WITH STATE OR
                    LOCAL GOVERNMENT EMPLOYMENT, 1991                   
            [Based on 1-percent sample; numbers in thousands]           
------------------------------------------------------------------------
                                       All workers   Covered    Percent 
                State                      \1\       workers    covered 
------------------------------------------------------------------------
Alabama..............................         350         316         90
Alaska...............................          81          32         40
Arizona..............................         349         309         89
Arkansas.............................         192         173         90
California...........................       2,194         916         42
                                                                        
Colorado.............................         326         110         34
Connecticut..........................         252         165         65
Delaware.............................          65          50         77
Florida..............................         983         859         87
Georgia..............................         574         448         78
                                                                        
Hawaii...............................         105          80         76
Idaho................................         113         106         94
Illinois.............................         981         499         51
Indiana..............................         434         372         86
Iowa.................................         270         230         85
                                                                        
Kansas...............................         250         222         89
Kentucky.............................         319         239         75
Louisiana............................         398         119         30
Maine................................         110          48         44
Maryland.............................         396         345         87
                                                                        
Massachusetts........................         325          43         13
Michigan.............................         784         664         85
Minnesota............................         414         326         79
Mississippi..........................         220         194         88
Missouri.............................         381         295         77
                                                                        
Montana..............................          93          77         83
Nebraska.............................         160         142         89
Nevada...............................          89          25         28
New Hampshire........................          88          74         84
New Jersey...........................         580         544         94
                                                                        
New Mexico...........................         172         136         79
New York.............................       1,673       1,491         89
North Carolina.......................         562         504         90
North Dakota.........................          70          61         87
Ohio.................................         850          32          4
                                                                        
Oklahoma.............................         278         244         88
Oregon...............................         259         232         90
Pennsylvania.........................         733         674         92
Rhode Island.........................          73          54         74
South Carolina.......................         310         278         90
                                                                        
South Dakota.........................          74          66         89
Tennessee............................         397         324         82
Texas................................       1,316         729         55
Utah.................................         161         144         89
Vermont..............................          54          52         96
                                                                        
Virginia.............................         508         467         92
Washington...........................         428         361         84
West Virginia........................         150         122         81
Wisconsin............................         451         376         83
Wyoming..............................          66          56         85
                                      ----------------------------------
      Total..........................      20,461      14,425         70
------------------------------------------------------------------------
\1\ Includes seasonal and part-time workers for whom State and local    
  government employment was not their major job.                        
                                                                        
Source: Office of Research and Statistics, Social Security              
  Administration.                                                       

                                BENEFITS

                        Eligibility for Workers

Insured status
    Benefits can be paid to workers, and their dependents or 
survivors, only if the worker has worked long enough in covered 
employment to be ``insured'' for these benefits. Insured status 
is measured in terms of ``quarters of coverage.''
    Before 1978, one quarter of coverage was earned for each 
calendar quarter in which a worker was paid $50 or more in 
wages for covered employment (except for agricultural labor). 
Since the beginning of 1978 the crediting of quarters of 
coverage has been on an annual rather than a quarterly basis up 
to a maximum of four quarters of coverage per year. In 1978, a 
worker earned one quarter of coverage (up to a maximum of four) 
for each $250 of annual earnings reported from covered 
employment or self-employment. The amount of annual earnings 
needed for a quarter of coverage is increased each year in 
proportion to increases in average wages in the economy. In 
1996 the amount of earnings needed for a quarter of coverage is 
$640. Table 1-6 shows amounts needed since 1978.

    TABLE 1-6.--AMOUNT OF COVERED WAGES NEEDED TO EARN ONE QUARTER OF   
                           COVERAGE SINCE 1978                          
                                                                        
                                                                        
1978.......................................................         $250
1979.......................................................          260
1980.......................................................          290
1981.......................................................          310
1982.......................................................          340
1983.......................................................          370
1984.......................................................          390
1985.......................................................          410
1986.......................................................          440
1987.......................................................          460
1988.......................................................          470
1989.......................................................          500
1990.......................................................          520
1991.......................................................          540
1992.......................................................          570
1993.......................................................          590
1994.......................................................          620
1995.......................................................          630
1996.......................................................          640
1997.......................................................      \1\ 670
1998.......................................................      \1\ 690
1999.......................................................      \1\ 720
2000.......................................................      \1\ 750
2001.......................................................      \1\ 780
------------------------------------------------------------------------
\1\ Based on economic assumptions in the 1996 Annual Report of the Board
  of Trustees of the Federal Old-Age and Survivors Insurance and        
  Disability Insurance Trust Funds.                                     
                                                                        
Source: Office of the Actuary, Social Security Administration.          

    For the purpose of the OASI Program, there are two types of 
insured status: ``fully insured'' and ``currently insured.'' 
Workers are fully insured for benefits for themselves and for 
their eligible dependents if they have earned one quarter of 
coverage for each year elapsing after the year they reached age 
21 up to the year in which they reach age 62, become disabled, 
or die. Fully-insured status is required for eligibility for 
all types of benefits except certain survivor benefits. No 
matter how young, a worker must have at least six quarters of 
coverage to be fully insured, with the minimum number 
increasing with age. A worker with 40 quarters of coverage is 
fully insured for life.
    Survivors of a worker who was not fully insured may still 
be eligible for benefits if the worker was currently insured. 
Workers are currently insured if they have six quarters of 
coverage during the thirteen calendar quarters ending with the 
quarter in which they died.
    Workers are insured for disability if they are fully 
insured and have a total of at least 20 quarters of coverage 
during the 40-quarter period ending with the quarter in which 
they became disabled. Workers who are disabled before age 31 
are insured for disability if they have total quarters of 
coverage equal to half the calendar quarters which have elapsed 
since the worker reached age 21, ending in the quarter in which 
they became disabled. However, a minimum of 6 quarters of 
coverge is required.
Age
    Workers must be at least age 62 to be eligible for 
retirement benefits. There is no minimum age requirement for 
disability benefits, but disabled workers who attain the ``full 
retirement age'' (see below) automatically receive full 
retirement benefits, rather than disability benefits. 
Disability benefits are computed as if the worker reached full 
retirement age on the day he became totally disabled.

                               Disability

Definition
    Generally, disability is defined as the inability to engage 
in substantial gainful activity by reason of a physical or 
mental impairment. The impairment must be medically 
determinable and expected to last for not less than 12 months, 
or to result in death. Applicants may be determined to be 
disabled only if, due to such an impairment, they are unable to 
engage in any kind of substantial gainful work, considering 
their age, education, and work experience. The work need not 
exist in the immediate area in which the applicant lives, nor 
must a specific job vacancy exist for the individual. Moreover, 
no showing is required that the worker would be hired for the 
job if she applied.
    There are special definition and eligibility requirements 
for persons who are blind, which are described in the section 
on ``Determination of Disability Benefits.''
    The Commissioner \1\ has specific regulatory authority to 
prescribe the criteria for determining when earnings derived 
from employment demonstrate an individual's ability to engage 
in substantial gainful activity (SGA).
---------------------------------------------------------------------------
    \1\ Throughout the remainder of this section when Commissioner is 
used, it is the Commissioner of Social Security.
---------------------------------------------------------------------------
    Effective January 1, 1990, the SGA earnings level was 
raised to $500 a month (net of impairment-related work 
expenses), based on regulations published by the Commissioner. 
Table 1-7 shows SGA amounts applicable to nonblind disabled 
workers since 1968.

               TABLE 1-7.--MONTHLY SGA AMOUNTS SINCE 1968               
------------------------------------------------------------------------
                              Year                                  SGA 
------------------------------------------------------------------------
July 1968-73....................................................    $140
1974-75.........................................................     200
1976............................................................     230
1977............................................................     240
1978............................................................     260
1979............................................................     280
1980-89.........................................................     300
1990 and thereafter.............................................     500
------------------------------------------------------------------------
Source: Office of Research and Statistics, Social Security              
  Administration.                                                       

Waiting period
    An initial 5-month waiting period is required before DI 
benefits are paid. Benefits are payable beginning with the 
sixth full month of disability. However, benefits may be paid 
for the first full month of disability to a worker who becomes 
disabled within 60 months after termination of DI benefits from 
an earlier period of disability (for a disabled widow or 
widower the period is 84 months).
Work incentive provisions
    The law provides a 45-month period for disabled 
beneficiaries to test their ability to work without losing 
their entitlement to all benefits. The period consists of (1) a 
``trial work period'' (TWP), which allows disabled 
beneficiaries to work for up to 9 months (within a 5-year 
period) \2\ with no effect on their disability or Medicare 
benefits; followed by (2) a 36-month ``extended period of 
eligibility,'' during the last 33 of which cash disability 
benefits are suspended for any month in which the individual is 
engaged in SGA. Medicare coverage continues so long as the 
individual remains entitled to disability benefits and, 
depending on when the last month of SGA occurs, may continue 
for 3 to 24 months after entitlement to disability benefits 
ends. When Medicare entitlement ends because of the 
individual's work activity, but she is still medically 
disabled, she may purchase Medicare protection.
---------------------------------------------------------------------------
    \2\ Only one TWP is allowed in any one period of disability. The 
TWP is completed only if the 9 months are within a 60-month period. By 
regulation, earnings of more than $200 a month constitute ``trial 
work.''
---------------------------------------------------------------------------
    If beneficiaries medically recover to the extent that they 
no longer meet the definition of disability, disability and 
Medicare benefits are terminated 3 months thereafter, 
regardless of the status of their trial work period or extended 
period of eligibility. However, persons who contest this 
determination may elect to continue to receive disability 
benefits (subject to recovery) and Medicare benefits while 
their appeal is being reviewed.

                Eligibility for Dependents and Survivors

    Dependents' benefits are payable in addition to benefits 
payable to the worker.
Spouse's benefit
    A benefit is payable to a spouse of a retired or disabled 
worker under one of the following conditions: (1) currently-
married spouse is at least 62 or is caring for one or more of 
the worker's entitled children who are disabled or have not 
reached age 16; or (2) divorced spouse is at least 62, is not 
married, and the marriage had lasted at least 10 years before 
the divorce became final. A divorced spouse may be entitled 
independently of the worker's retirement if both the worker and 
divorced spouse are age 62, and if the divorce has been final 
for at least 2 years.
Widow(er)'s benefit
    A monthly survivor benefit is payable to a widow(er) or 
divorced spouse of a worker who was fully insured at the time 
of death. The widow(er) or divorced spouse must be unmarried 
(unless the remarriage occurred after the widow(er) first 
became eligible for benefits as a widow(er)); and must be 
either (a) age 60 or older or (b) age 50-59 and disabled 
throughout a waiting period of 5 consecutive calendar months 
that began no later than 7 years after the month the worker 
died or after the end of his or her entitlement to benefits as 
a widowed mother or father.
Child's benefit
    A monthly benefit is payable to an unmarried child, or 
eligible dependent grandchild, of a retired, disabled, or 
deceased worker who was fully or currently insured at death. 
The child or grandchild must be either: (1) under age 18; (2) a 
full-time elementary or secondary student under age 19; or (3) 
a disabled person age 18 or over whose disability began before 
age 22. A grandchild is eligible for benefits on a 
grandparent's earnings record if the grandchild was adopted by 
the grandparent and may be entitled under certain circumstances 
if there is no adoption. If adopted by the surviving spouse of 
that grandparent, the child would be eligible if he lived with 
or received one-half support from the grandparent prior to the 
grandparent's death.
Mother's/father's benefit
    A monthly survivor benefit is payable to a mother (father) 
or surviving divorced mother (father) if: (1) the deceased 
worker on whose account the benefit is payable was fully or 
currently insured at time of death and (2) the mother (father) 
or surviving divorced mother (father) is not married and has 
one or more entitled children of the worker in his or her care. 
These payments continue as long as the youngest child being 
cared for is under age 16 or disabled (see ``Child's benefit'' 
above).
Parent's benefit
    A monthly survivor benefit is payable to a parent, age 62 
or over, of a deceased fully-insured worker. The worker must 
have been providing at least one-half of the parent's support.
Lump-sum death benefit
    A one-time lump-sum benefit of $255 is payable upon the 
death of a fully or currently-insured worker to the surviving 
spouse who was living with the deceased worker or was eligible 
to receive monthly cash survivor benefits upon the worker's 
death. If there is no eligible spouse, the lump-sum death 
benefit is payable to any child of the deceased worker who is 
eligible to receive monthly cash benefits as a surviving child. 
If there is no surviving spouse, or children of the worker 
eligible for monthly benefits, then the lump-sum death benefit 
is not paid.
      
    [See table 1-7a for 1995 OASDI beneficiary statistics; 
table 1-7b for OASDI benefits paid 1940-95; table 1-7c for 
monthly benefit amounts for selected families; and the 
``Benefit Computation'' section for further information on 
AIME.]

            TABLE 1-7a.--OASDI BENEFICIARIES IN CURRENT PAYMENT STATUS AND NEW AWARDS, DECEMBER 1995            
----------------------------------------------------------------------------------------------------------------
                                                       Number in                            Number of           
                                                        current     Percent of   Average   new awards   Average 
                                                        payment    beneficiary   monthly       (in     new award
                                                      (thousands)   population   benefit   thousands)           
----------------------------------------------------------------------------------------------------------------
Retired workers.....................................      26,673         61.5        $720       1,609       $689
Wives and husbands of retired workers...............       3,026          7.0         370         259        334
Children of retired workers.........................         442          1.0         322         101        298
Disabled workers....................................       4,185          9.6         682         646        694
Wives and husbands of disabled workers..............         264          0.6         164          63        175
Children of disabled workers........................       1,409          3.2         183         401        176
Widowed mothers and fathers.........................         275          0.6         478          52        464
Surviving children..................................       1,884          4.3         469         306        464
Widows and widowers.................................       5,052         11.6         680         415        667
Disabled widow(er)s.................................         173          0.4         458          30        458
Parents.............................................           4        (\1\)         591       (\2\)        607
Special age-72......................................           1        (\1\)         192       (\2\)        136
                                                     -----------------------------------------------------------
      Totals and averages...........................      43,387        100.0        $649       3,382       $587
----------------------------------------------------------------------------------------------------------------
\1\ Less than 0.05 percent.                                                                                     
\2\ Fewer than 500.                                                                                             
                                                                                                                
Source: Office of Research and Statistics, Social Security Administration.                                      


                TABLE 1-7b.--OASDI BENEFITS PAID, 1940-95               
                        [In millions of dollars]                        
------------------------------------------------------------------------
                  Year                     OASDI       OASI        DI   
------------------------------------------------------------------------
1940...................................        $35        $35  .........
1950...................................        961        961  .........
1960...................................     11,245     10,677       $568
1970...................................     31,863     28,796      3,067
1980...................................    120,511    105,074     15,437
1985 \1\...............................    186,196    167,360     18,836
1990 \1\...............................    247,796    222,993     24,803
1991 \1\...............................    268,098    240,436     27,662
1992 \1\...............................    286,030    254,939     31,091
1993 \1\...............................    302,402    267,804     34,598
1994 \1\...............................    316,772    279,068     37,704
1995 \1\...............................    332,580    291,682     40,898
------------------------------------------------------------------------
\1\ Unnegotiated checks not deducted.                                   
                                                                        
Source: Office of Research and Statistics, Social Security              
  Administration.                                                       

                          BENEFIT COMPUTATION

    All monthly benefits are computed based on a worker's 
primary insurance amount (PIA). The PIA is a monthly amount 
based on the application of the Social Security benefit formula 
to a worker's average lifetime covered earnings. It is also the 
monthly benefit amount payable to a worker who retires at the 
full retirement age, or becomes entitled to disability 
benefits.

                          Full Retirement Age

    Benefits for retired workers, aged spouses and widow(er)s 
taken before the ``full retirement age'' are subject to an 
actuarial reduction. The full retirement age is the earliest 
age at which unreduced retirement benefits can be received. The 
full retirement age currently is age 65, but it will gradually 
rise in two steps beginning in the next century. First, the 
full retirement age will increase by 2 months for each year 
that a person is born after 1937, until it reaches age 66 for 
those who were born in 1943. Second, it will increase again by 
2 months for each year that a person is born after 1954, until 
it reaches age 67 for those who were born after 1959. Early 
retirement still will be available, beginning at age 62 for 
workers and their spouses, and at age 60 for widow(er)s, but 
benefits will be lower. The actuarial reduction on retirement 
benefits at age 62 ultimately will be 30 percent, instead of 
the present 20 percent. The age for full benefits for aged 
spouses and widow(er)s likewise will rise to 67.
    Benefits of workers who choose to retire after their full 
retirement age are increased by ``delayed retirement credits,'' 
as are the benefits payable to their widow(er)s. The delayed 
retirement credit is 1 percent per year for workers who 
attained age 65 before 1982, and 3 percent per year for workers 
who attained age 65 between 1982 and 1989. Starting in 1990, 
the delayed retirement credit increases by one-half of 1 
percent every other year until it reaches 8 percent for workers 
reaching age 65 after 2007 (see section on ``Benefit Reduction 
and Increase''). Table 1-8 shows the schedule of increases in 
the full retirement age and delayed retirement credits for 
workers.

 TABLE 1-7c.--MONTHLY BENEFIT AMOUNTS FOR SELECTED BENEFICIARY FAMILIES 
 WITH FIRST ELIGIBILITY IN 1995, FOR SELECTED WAGE LEVELS, DECEMBER 1995
------------------------------------------------------------------------
                                       Worker with yearly earnings equal
                                                      to                
                                     -----------------------------------
         Beneficiary family            Federal                 Maximum  
                                       minimum    Average      taxable  
                                       wage \1\   wage \2\  earnings \3\
------------------------------------------------------------------------
RETIRED WORKER FAMILIES: \4\                                            
Average indexed monthly earnings....    $969.00  $1,929.00    $3,493.00 
Primary insurance amount............     571.50     886.70     1,238.70 
Maximum family benefit..............     873.70   1,618.70     2,167.60 
Monthly benefit amount:                                                 
  Retired worker claiming benefits:                                     
      Worker alone at age 62 \4\....     457.00     709.00       990.00 
      Worker at age 62 with spouse                                      
       \4\..........................     671.00   1,041.00     1,454.00 
      Worker at age 65 with spouse..     742.00   1,152.00     1,609.00 
SURVIVOR FAMILIES: \5\                                                  
Average indexed monthly earnings....     873.00   1,931.00     4,627.00 
Primary insurance amount............     540.00     887.40     1,413.30 
Maximum family benefit..............     810.10   1,619.70     2,473.00 
Monthly benefit amount:                                                 
  Survivors of worker deceased at                                       
   age 40: \5\                                                          
      One surviving child...........     405.00     665.00     1,059.00 
      Widowed mother/father and one                                     
       child........................     810.00   1,330.00     2,118.00 
      Widowed mother/father and two                                     
       children.....................     810.00   1,617.00     2,472.00 
DISABLED WORKER FAMILIES: \6\                                           
Average indexed monthly earnings....     927.00   1,929.00     4,069.00 
Primary insurance amount............     557.80     886.70     1,327.40 
Disability maximum family benefit                                       
 \7\................................     808.30   1,330.10     1,991.10 
Monthly benefit amount:                                                 
  Disabled worker age 50: \6\                                           
      Worker alone..................     557.00     886.00     1,327.00 
      Worker, spouse, and one child.     807.00   1,328.00    1,989.00  
------------------------------------------------------------------------
\1\ Annual earnings are calculated by multiplying the Federal minimum   
  hourly wage ($4.25 when this table was prepared) by 2,080 hours. In   
  1996, Congress increased the minimum wage in two stages to $5.15 per  
  hour as part of Public Law 104-188. This increase will be reflected in
  benefit calculations for this table beginning with the fourth quarter 
  of 1996.                                                              
\2\ Worker earned the national average wage in each year used in the    
  computation of the benefit.                                           
\3\ Worker earned the maximum amount of wages that can be credited to a 
  worker's Social Security record in all years used in the computation  
  of the benefit.                                                       
\4\ Assumes the worker began to work at age 22, retired at age 62 in    
  1995 with maximum reduction, and had no prior period of disability.   
\5\ Assumes the deceased worker began to work at age 22, died in 1995 at
  age 40, had no earnings in that year, and had no prior period of      
  disability.                                                           
\6\ Assumes the worker began work at age 22, became disabled at age 50, 
  and had no prior disability.                                          
\7\ The 1980 amendments to the Social Security Act provide for different
  family maximum amount for disability cases. For disabled workers      
  entitled after June 1980, the maximum is the smaller of (1) 85 percent
  of the worker's AIME (or 100 percent of the PIA, if larger) or (2) 150
  percent of the PIA.                                                   
                                                                        
Source: Social Security Administration.                                 


  TABLE 1-8.--INCREASES IN FULL RETIREMENT AGE AND DELAYED RETIREMENT CREDITS, WITH RESULTING BENEFIT, AS A PERCENT OF PRIMARY INSURANCE AMOUNT [PIA],  
                                               PAYABLE AT SELECTED AGES, FOR PERSONS BORN IN 1924 OR LATER                                              
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               Credit for each      Benefit, as a percent of PIA, beginning at age--    
                                                                               year of delayed ---------------------------------------------------------
          Year of birth            Age 62 attained in--   ``Normal retirement     retirement                                                            
                                                                 age''           after normal       62         65         66          67          70    
                                                                                retirement age                                                          
--------------------------------------------------------------------------------------------------------------------------------------------------------
1924.............................  1986................  65..................                3         80        100         103         106         115
1925-26..........................  1987-88.............  65..................           3\1/2\         80        100    103\1/2\         107    117\1/2\
1927-28..........................  1989-90.............  65..................                4         80        100         104         108         120
1929-30..........................  1991-92.............  65..................           4\1/2\         80        100    104\1/2\         109    122\1/2\
1931-32..........................  1993-94.............  65..................                5         80        100         105         110         125
1933-34..........................  1995-96.............  65..................           5\1/2\         80        100    105\1/2\         111    127\1/2\
1935-36..........................  1997-98.............  65..................                6         80        100         106         112         130
1937.............................  1999................  65..................           6\1/2\         80        100    106\1/2\         113    132\1/2\
1938.............................  2000................  65, 2 mo............           6\1/2\    79\1/6\    98\8/9\   105\5/12\  111\11/12\   131\5/12\
1939.............................  2001................  65, 4 mo............                7    78\1/3\    97\7/9\    104\2/3\    111\2/3\    132\2/3\
1940.............................  2002................  65, 6 mo............                7    77\1/2\    96\2/3\    103\1/2\    110\1/2\    131\1/2\
1941.............................  2003................  65, 8 mo............           7\1/2\    76\2/3\    95\5/9\    102\1/2\         110    132\1/2\
1942.............................  2004................  65, 10 mo...........           7\1/2\    75\5/6\    94\4/9\    101\1/4\    108\3/4\    131\1/4\
1943-54..........................  2005-16.............  66..................                8         75    93\1/3\         100         108         132
1955.............................  2017................  66, 2 mo............                8    74\1/6\    92\2/9\     98\8/9\    106\2/3\    130\2/3\
1956.............................  2018................  66, 4 mo............                8    73\1/3\    91\1/9\     97\7/9\    105\1/3\    129\1/3\
1957.............................  2019................  66, 6 mo............                8    72\1/2\         90     96\2/3\         104         128
1958.............................  2020................  66, 8 mo............                8    71\2/3\    88\8/9\     95\5/9\    102\2/3\    126\2/3\
1959.............................  2021................  66, 10 mo...........                8    70\5/6\    87\7/9\     94\4/9\    101\1/3\    125\1/3\
1960 or later....................  2022 or later.......  67..................                8         70    86\2/3\     93\1/3\         100         124
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Ballantyne (1984).                                                                                                                              

                        Trends in Retirement Age

    Table 1-9 shows the percentage of workers who elected to 
receive retirement benefits at selected ages since the 
beginning of the Social Security Program. It clearly 
illustrates a trend toward early retirement. Retirement at age 
62 has become the norm. Reduced benefits were not available to 
women until 1956, and to men until 1961. Table 1-10 shows the 
percentage of retired workers electing reduced benefits since 
they first became available.

  TABLE 1-9.--PERCENTAGE OF WORKERS ELECTING SOCIAL SECURITY RETIREMENT BENEFITS AT VARIOUS AGES SINCE 1940 \1\ 
----------------------------------------------------------------------------------------------------------------
                                                                              Ages 63-            Ages   Average
                                Year                                  Age 62     64     Age 65    66+      age  
----------------------------------------------------------------------------------------------------------------
1940...............................................................    (\2\)    (\2\)      8.3     91.7     68.8
1945...............................................................    (\2\)    (\2\)     17.9     82.1     69.6
1950...............................................................    (\2\)    (\2\)     23.1     76.9     68.7
1955...............................................................    (\2\)    (\2\)     41.2     58.8     68.4
1960...............................................................     10.0      7.9     35.3     46.7     66.8
1965...............................................................     23.0     17.7     23.4     35.9     65.8
1970...............................................................     27.8     23.2     36.9     12.1     64.4
1975...............................................................     35.7     24.5     31.1      8.7     64.0
1980...............................................................     40.5     22.2     30.7      6.6     63.9
1985...............................................................     57.2     21.1     17.7      4.0     63.7
1990...............................................................     56.6     20.2     16.6      6.7     63.7
1994...............................................................     58.9     20.0     15.7      5.4     63.6
----------------------------------------------------------------------------------------------------------------
\1\ Excludes conversions at age 65 from disability to retirement rolls.                                         
\2\ Retirement before age 65 was not available.                                                                 
                                                                                                                
Source: Congressional Research Service and Social Security Administration.                                      

                          Trends in Longevity

    Table 1-11 shows how life expectancies have increased since 
Social Security benefits were first paid in 1940, and what they 
are projected to be in the future, as well as fertility and 
death rates.

                    Average Indexed Monthly Earnings

    Except for workers who became eligible for benefits before 
1984, or who are eligible for a ``Special Minimum Benefit'' 
(see below), the primary insurance amount (PIA) is determined 
through a formula applied to the worker's average indexed 
monthly earnings (AIME). The AIME is a dollar amount that 
represents the average monthly earnings from Social Security-
covered employment over most of the worker's adult life indexed 
to the increase in average annual wages. Indexing the earnings 
to changes in wage levels ensures that the same relative value 
is accorded to wages no matter when earned. Because actual 
average-wage data take over a year to become available, past 
earnings are updated to the second calendar year (the 
``indexing year'') before the worker becomes eligible for 
retirement (age 62) or, if earlier, becomes disabled or dies. 
This means that the year a worker turns age 60 is used as the 
indexing year for computing retirement benefits. Earnings in 
and after the indexing year are not indexed.

 TABLE 1-10.--NUMBER OF SOCIAL SECURITY RETIRED WORKER NEW BENEFIT AWARDS AND PERCENT RECEIVING REDUCED BENEFITS
                     BECAUSE OF ENTITLEMENT BEFORE AGE 65, AS OF DECEMBER OF GIVEN YEAR \1\                     
                                              [Numbers in millions]                                             
----------------------------------------------------------------------------------------------------------------
                                                                  Total              Men              Women     
                         Year \1\                          -----------------------------------------------------
                                                             Number  Percent   Number  Percent   Number  Percent
----------------------------------------------------------------------------------------------------------------
1956......................................................      0.9       12      0.6  .......      0.4       31
1960......................................................      1.0       21      0.6  .......      0.4       60
1965......................................................      1.2       49      0.7       43      0.4       60
1970......................................................      1.3       63      0.8       57      0.5       72
1975......................................................      1.5       73      0.9       69      0.6       79
1980......................................................      1.6       76      0.9       73      0.7       80
1985......................................................      1.7       74      1.0       70      0.7       79
1986......................................................      1.7       74      1.0       71      0.7       79
1987......................................................      1.7       74      1.0       71      0.7       79
1988......................................................      1.6       74      0.9       70      0.7       78
1989......................................................      1.7       73      1.0       69      0.7       78
1990......................................................      1.7       74      1.0       71      0.7       78
1991......................................................      1.7       72      1.0       69      0.7       76
1992......................................................      1.7       72      1.0       69      0.7       76
1993......................................................      1.7       72      1.0       70      0.7       75
1994......................................................      1.6       73      0.9       70      0.7       76
1995......................................................      1.6       72      0.9       69      0.7       75
----------------------------------------------------------------------------------------------------------------
\1\ Data for 1985-90 based on a 1-percent sample; data for other years based on 100 percent. Includes           
  conversions at age 65 from disability to retirement rolls.                                                    
                                                                                                                
Source: Office of Research and Statistics, Social Security Administration.                                      


                            TABLE 1-11.--SELECTED DEMOGRAPHIC ASSUMPTIONS, 1940-2070                            
----------------------------------------------------------------------------------------------------------------
                                                                  Age-sex-            Life expectancy \3\       
                                                                  adjusted   -----------------------------------
                                                       Total     death rate       All birth         At age 65   
                   Calendar year                     fertility    \2\ (per   -----------------------------------
                                                      rate \1\    100,000)                                      
                                                                                Male    Female    Male    Female
----------------------------------------------------------------------------------------------------------------
1940...............................................      2.23        1,532.8     61.4     65.7     11.9     13.4
1945...............................................      2.42        1,366.4     62.9     68.4     12.6     14.4
1950...............................................      3.03        1,225.3     65.6     71.1     12.8     15.1
1955...............................................      3.50        1,134.2     66.7     72.8     13.1     15.6
1960...............................................      3.61        1,128.6     66.7     73.2     12.9     15.9
1965...............................................      2.88        1,103.6     66.8     73.8     12.9     16.3
1970...............................................      2.43        1,041.8     67.1     74.9     13.1     17.1
1975...............................................      1.77          934.0     68.7     76.6     13.7     18.0
1976...............................................      1.74          923.2     69.1     76.8     13.7     18.1
1977...............................................      1.79          898.0     69.4     77.2     13.9     18.3
1978...............................................      1.76          892.4     69.6     77.2     13.9     18.3
1979...............................................      1.82          864.2     70.0     77.7     14.2     18.6
1980...............................................      1.85          878.1     69.9     77.5     14.0     18.4
1981...............................................      1.83          853.8     70.4     77.8     14.2     18.6
1982...............................................      1.83          828.5     70.8     78.2     14.5     18.8
1983...............................................      1.81          836.1     70.9     78.1     14.3     18.6
1984...............................................      1.80          829.6     71.1     78.2     14.4     18.7
1985...............................................      1.84          831.8     71.1     78.2     14.4     18.6
1986...............................................      1.84          824.8     71.1     78.3     14.5     18.7
1987...............................................      1.87          816.1     71.3     78.4     14.6     18.7
1988...............................................      1.93          824.5     71.2     78.3     14.6     18.7
1989...............................................      2.01          804.1     71.5     78.6     14.8     18.9
1990...............................................      2.07          789.0     71.8     78.8     15.0     19.0
1991...............................................      2.07          778.8     71.9     78.9     15.1     19.1
1992 \4\...........................................      2.06          764.3     72.2     79.2     15.2     19.3
1993 \4\...........................................      2.04          784.2     71.9     78.9     15.1     19.0
1994 \4\...........................................      2.04          775.9     72.2     79.0     15.3     19.0
1995 \4\...........................................      2.04          763.8     72.3     79.2     15.4     19.2
1996...............................................      2.03          757.0     72.5     79.3     15.4     19.2
2000...............................................      2.02          731.3     73.0     79.7     15.6     19.4
2005...............................................      1.99          700.5     73.9     80.2     15.9     19.5
2010...............................................      1.96          677.3     74.5     80.5     16.1     19.7
2015...............................................      1.93          657.4     74.9     80.9     16.3     19.9
2020...............................................      1.90          638.4     75.3     81.2     16.5     20.1
2025...............................................      1.90          620.4     75.6     81.5     16.7     20.3
2030...............................................      1.90          603.2     76.0     81.8     16.9     20.5
2035...............................................      1.90          587.0     76.3     82.1     17.1     20.7
2040...............................................      1.90          571.5     76.6     82.4     17.3     21.0
2045...............................................      1.90          556.7     76.9     82.7     17.5     21.2
2050...............................................      1.90          542.7     77.2     83.0     17.7     21.4
2055...............................................      1.90          529.3     77.5     83.3     17.9     21.6
2060...............................................      1.90          516.5     77.8     83.6     18.0     21.8
2065...............................................      1.90          504.3     78.1     83.8     18.2     22.0
2070...............................................      1.90          492.6     78.4     84.1     18.4     22.2
----------------------------------------------------------------------------------------------------------------
\1\ The total fertility rate for any year is the average number of children who would be born to a woman in her 
  lifetime if she were to experience the birth rates by age observed in, or assumed for, the selected year, and 
  if she were to survive the entire childbearing period. The ultimate total fertility rate is assumed to be     
  reached in 2020.                                                                                              
\2\ The age-sex-adjusted death rate is the crude rate that would occur in the enumerated total population as of 
  April 1, 1980, if that population were to experience the death rates by age and sex observed in, or assumed   
  for, the selected year.                                                                                       
\3\ The life expectancy for any year is the average number of years of life remaining for a person if that      
  person were to experience the death rates by age observed in, or assumed for, the selected year.              
\4\ Preliminary or estimated.                                                                                   
                                                                                                                
Source: Board of Trustees (1996), intermediate assumptions.                                                     

    There are several steps in determining the AIME: (1) the 
``index'' for a worker's earnings is determined by multiplying 
the earnings for a given year by the ratio of the average wage 
for the indexing year divided by the average wage for that 
year; and (2) the number of ``computation years'' is based on 
the number of years elapsing after 1950 (or year of attainment 
of age 21, if later) up to the year the worker attains age 62, 
becomes disabled, or dies, minus any ``dropout'' years. There 
are five dropout years in retirement and survivor computations 
(for workers disabled before age 47, the number of dropout 
years varies from one to four, depending on the worker's age 
and number of child care dropout years). The minimum number of 
computation years is two.
    The computation years are selected from the highest indexed 
yearly earnings in all years of earnings after 1950, up to a 
maximum of 35 years. (The highest 35 years are selected in 
computing retirement benefits for all workers born after 1929.) 
The sum of the indexed earnings in the selected years is 
divided by the number of months in the computation period (i.e, 
the number of the selected years times 12) to determine the 
AIME.
    The indexed earnings histories (rounded to whole dollars) 
are illustrated in table 1-12 for three hypothetical workers 
retiring in 1996 at age 62. The actual earnings for the three 
workers are shown in the first three columns. These are 
multiplied by the indexing factor (column 4) to arrive at 
indexed earnings (last 3 columns of table 1-12). The indexing 
factor for 1960 is based on average wages when the individual 
turned 60 ($23,753.53), divided by average wages for 1960 
($4,007.12). The highest 35 years of indexed earnings are used. 
For example, a lifelong full-time worker who had maximum 
creditable earnings would drop low earnings in 1958, 1962, 
1963, 1964, and 1965, and would have total indexed earnings of 
$1,536,031 (see table 1-12). Dividing this by the number of 
months in the computation period (35 years  12 months 
= 420 months) results in average indexed monthly earnings 
(AIME) of $3,657. The corresponding AIMEs for the average and 
low earners are $1,981 and $891, respectively. Low earners are 
defined as earning 45 percent of the average wage.

                            Benefit Formula

    The Primary Insurance Amount (PIA) is determined by 
applying the ``primary benefit formula'' to the AIME. For a 
worker becoming eligible in 1996, the PIA is determined as 
follows:


------------------------------------------------------------------------
                                               Average indexed monthly  
                  Factor                              earnings          
------------------------------------------------------------------------
90 percent................................  first $437, plus            
32 percent................................  $437 through $2,635, plus   
15 percent................................  over $2,635                 
------------------------------------------------------------------------


    Applying this formula to the AIMEs of the three 
hypothetical workers results in PIAs of $538.50 for the low-
wage worker, $887.30 for the average-wage worker, and $1,249.90 
for the maximum-wage worker. (For the low-wage worker, the 1996 
special minimum benefit (see below) PIA of $532.90 is less than 
AIME-based PIA of $538.50, and therefore is not used to 
determine his or her benefits.) The numbers $437 and $2,635 are 
often referred to as ``bend points'' of the PIA formula. These 
are adjusted each year by the change in average wages. After 
the year of initial eligibility (age 62 for retired workers), 
the PIA is increased each year for the increase in the Consumer 
Price Index (CPI). The PIAs of $538.50, $887.30, and $1,249.90 
would be in effect for January through November 1996, and will 
be increased by the cost-of-living adjustment effective 
beginning December 1996.

                     TABLE 1-12.--EARNINGS HISTORIES FOR HYPOTHETICAL WORKERS AGE 62 IN 1996                    
                                           [Rounded to nearest dollar]                                          
----------------------------------------------------------------------------------------------------------------
                                         Nominal earnings                              Indexed earnings         
             Year              ------------------------------------ Indexing -----------------------------------
                                 Low \1\  Average \2\  Maximum \3\   factor    Low \1\  Average \2\  Maximum \3\
----------------------------------------------------------------------------------------------------------------
1956..........................     1,590       3,532        4,200     6.7245  \4\ 10,6                          
                                                                                    89  \4\ 23,754       28,243 
1957..........................     1,639       3,642        4,200     6.5226  \4\ 10,6                          
                                                                                    89  \4\ 23,754       27,395 
1958..........................     1,653       3,674        4,200     6.4657  \4\ 10,6                          
                                                                                    89  \4\ 23,754   \4\ 27,156 
1959..........................     1,735       3,856        4,800     6.1605  \4\ 10,6                          
                                                                                    89  \4\ 23,754       29,570 
1960..........................     1,803       4,007        4,800     5.9278  \4\ 10,6                          
                                                                                    89  \4\ 23,754       28,454 
1961..........................     1,839       4,087        4,800     5.8123    10,689      23,754       27,899 
1962..........................     1,931       4,291        4,800     5.5351    10,689      23,754   \4\ 26,569 
1963..........................     1,978       4,397        4,800     5.4027    10,689      23,754   \4\ 25,933 
1964..........................     2,059       4,576        4,800     5.1905    10,689      23,754   \4\ 24,915 
1965..........................     2,096       4,659        4,800     5.0987    10,689      23,754   \4\ 24,474 
1966..........................     2,222       4,938        6,600     4.8100    10,689      23,754       31,746 
1967..........................     2,346       5,213        6,600     4.5562    10,689      23,754       30,071 
1968..........................     2,507       5,572        7,800     4.2632    10,689      23,754       33,253 
1969..........................     2,652       5,894        7,800     4.0303    10,689      23,754       31,436 
1970..........................     2,784       6,186        7,800     3.8397    10,689      23,754       29,950 
1971..........................     2,924       6,497        7,800     3.6560    10,689      23,754       28,517 
1972..........................     3,210       7,134        9,000     3.3297    10,689      23,754       29,967 
1973..........................     3,411       7,580       10,800     3.1336    10,689      23,754       33,843 
1974..........................     3,614       8,031       13,200     2.9578    10,689      23,754       39,043 
1975..........................     3,884       8,631       14,100     2.7521    10,689      23,754       38,805 
1976..........................     4,152       9,226       15,300     2.5745    10,689      23,754       39,390 
1977..........................     4,401       9,779       16,500     2.4289    10,689      23,754       40,077 
1978..........................     4,750      10,556       17,700     2.2502    10,689      23,754       39,829 
1979..........................     5,166      11,479       22,900     2.0692    10,689      23,754       47,385 
1980..........................     5,631      12,513       25,900     1.8982    10,689      23,754       49,164 
1981..........................     6,198      13,773       29,700     1.7246    10,689      23,754       51,222 
1982..........................     6,539      14,531       32,400     1.6346    10,689      23,754       52,962 
1983..........................     6,858      15,239       35,700     1.5587    10,689      23,754       55,646 
1984..........................     7,261      16,135       37,800     1.4722    10,689      23,754       55,648 
1985..........................     7,570      16,823       39,600     1.4120    10,689      23,754       55,916 
1986..........................     7,795      17,322       42,000     1.3713    10,689      23,754       57,595 
1987..........................     8,292      18,427       43,800     1.2891    10,689      23,754       56,462 
1988..........................     8,700      19,334       45,000     1.2286    10,689      23,754       55,286 
1989..........................     9,045      20,100       48,000     1.1818    10,689      23,754       56,726 
1990..........................     9,463      21,028       51,300     1.1296    10,689      23,754       57,949 
1991..........................     9,815      21,812       53,400     1.0890    10,689      23,754       58,154 
1992..........................    10,321      22,935       55,500     1.0357    10,689      23,754       57,480 
1993..........................    10,410      23,133       57,600     1.0268    10,689      23,754       59,146 
1994..........................    10,689      23,754       60,600     1.0000    10,689      23,754       60,600 
1995..........................  \5\ 11,1                                                                        
                                      03  \5\ 24,673       61,200     1.0000  \5\ 11,1                          
                                                                                    03  \5\ 24,673       61,200 
----------------------------------------------------------------------------------------------------------------
\1\ Worker with earnings equal to 45 percent of the Social Security average wage index.                         
\2\ Worker with earnings equal to the Social Security average wage index.                                       
\3\ Worker with earnings equal to the Social Security maximum taxable earnings.                                 
\4\ Dropout years.                                                                                              
\5\ Estimated.                                                                                                  
                                                                                                                
Source: Office of the Actuary, Social Security Administration.                                                  

    The PIA is recomputed after each year that an entitled 
worker has earnings that may lead to a higher benefit.
    Other methods for determining a PIA also exist, and PIAs 
based on different methods must be compared to select the 
highest one, which is used to determine the worker's benefits. 
The most common of these other methods is the one used to 
determine the special minimum PIA. This PIA is designed to 
assist workers with long-term low earnings.

                        Special Minimum Benefit

    The special minimum benefit is not based on the amount of a 
worker's average earnings, but instead on his or her number of 
years of covered employment. It is structured to provide a 
larger benefit than would otherwise be payable to those who 
worked in covered employment for many years but had low 
earnings. The amount of the special minimum is computed by 
multiplying the number of years of coverage in excess of 10 
years and up to 30 years by $11.50 for monthly benefits payable 
in 1979, with automatic cost-of-living increases applicable to 
years 1979 and later. The number of years of coverage for the 
purpose of qualifying for a special minimum benefit equals the 
number obtained by dividing total creditable wages in 1937-50 
by $900 (not to exceed 14), plus the number of years after 1950 
and before 1991 for which the worker is credited with at least 
25 percent of the annual maximum taxable earnings. For this 
purpose, for years after 1978, annual maximum taxable earnings 
are defined as the ``old-law'' taxable earnings base (i.e., the 
hypothetical earnings base that would be in effect if the ad 
hoc increases in the base enacted in 1977 were disregarded). In 
addition, for years after 1990, a year of coverage is earned if 
the worker is credited with at least 15 percent of the ``old-
law'' taxable earnings base. The special minimum benefit is not 
subject to the delayed retirement credit provisions described 
earlier.

                            BENEFIT AMOUNTS

    The monthly benefit amount payable to a disabled worker 
under age 65, or to a retired worker who first receives 
benefits at the full retirement age, is the PIA rounded to the 
next lower dollar, if not already a multiple of $1. Auxiliary 
benefit amounts are also based on the worker's PIA. Table 1-13 
lists major types of benefits and the percent of the insured 
worker's PIA that is applicable to benefits paid at the full 
rate, unreduced for early election of retirement.

                           REPLACEMENT RATES

    Frequently, Social Security benefits are discussed in terms 
of how much of a person's preretirement earnings the benefits 
represent. Benefits expressed as a percent of a person's 
earnings in the year before retirement are called replacement 
rates. Table 1-14 shows replacement rates based on the benefits 
of hypothetical workers who retired at the full retirement age 
after full-time careers with steady earnings equal to: (1) 45 
percent of average earnings in the economy as recorded through 
the Social Security average wage index (low earner); (2) 100 
percent of average earnings in the economy (average earner); 
and (3) the Social Security maximum taxable earnings base 
(maximum earner).

   TABLE 1-13.--PERCENTAGE OF PRIMARY INSURANCE AMOUNT (PIA) PAID FOR   
                   DEPENDENTS' AND SURVIVORS' BENEFITS                  
------------------------------------------------------------------------
                                                                 Percent
                    Type of monthly benefit                      of PIA 
------------------------------------------------------------------------
Dependents: \1\                                                         
  Wives, husbands--age 65.....................................  \3\ 50.0
  Mothers, fathers, children, grandchildren...................      50.0
Survivors: \1\                                                          
  Widows, widowers--age 65 \2\................................  \3\ 100.
                                                                       0
  Dependent parent--age 62....................................      82.5
  Widows, widowers--age 60; disabled--ages 50-59..............      71.5
  Mothers, fathers, children..................................      75.0
------------------------------------------------------------------------
\1\ Subject to maximum family benefit limitation.                       
\2\ Subject to general limitation that the survivor cannot get a higher 
  benefit than the deceased worker would be getting if alive.           
\3\ These percentages decrease as the full retirement age increases for 
  workers born after 1937.                                              
                                                                        
Source: Congressional Research Service.                                 

                     BENEFIT REDUCTION AND INCREASE

    Social Security benefits may be reduced, withheld, or 
increased for various reasons.

                            Dual Entitlement

    An individual may be entitled to benefits both as a worker, 
based on his or her own earnings, and also as a dependent 
(spouse or widow(er)) of another worker. In these cases, the 
individual does not collect both benefits. The amount of the 
benefit as a spouse or widow(er) is offset dollar for dollar by 
the amount of any benefit the individual is entitled to as a 
worker. In other words, she first always receives the benefit 
based on his or her work record, and the dependent benefit is 
payable only to the extent it is greater than the worker 
benefit. In effect, the total amount ``dually entitled'' 
recipients receive is equal to the larger of the two benefits.

                          Actuarial Reduction

    This term is used to signify that the reduction imposed on 
``early retirement'' benefits is approximately one that will, 
if the recipient lives a normal lifespan, lead to the same 
total lifetime benefits as would be paid if the person chose 
``full retirement'' benefits. It applies to: entitlement before 
the full retirement age for retired workers; spouses (including 
divorced spouses) of a retired or disabled worker (if 
entitlement is not based on having a child beneficiary in their 
care); and widows, widowers, and surviving divorced spouses. At 
the time of initial entitlement, reductions in benefit amounts 
are made for these benefit categories, as described below.

                            TABLE 1-14.--SOCIAL SECURITY REPLACEMENT RATES, 1940-2040                           
                                                  [In percent]                                                  
----------------------------------------------------------------------------------------------------------------
                                                                    Year of          Replacement rates \1\      
                                                                   attaining -----------------------------------
                          Year of birth                             normal                                      
                                                                  retirement  Low earner    Average     Maximum 
                                                                    age \2\       \3\     earner \4\  earner \5\
----------------------------------------------------------------------------------------------------------------
1875............................................................       1940        39.4        26.2        16.5 
1885............................................................       1950        33.2        19.7        21.2 
1895............................................................       1960        49.1        33.3        29.8 
1900............................................................       1965        45.6        31.4        32.9 
1905............................................................       1970        48.5        34.3        29.2 
1910............................................................       1975    \7\ 59.9        42.3        30.1 
1911............................................................       1976        60.1        43.7        32.1 
1912............................................................       1977        61.0        44.8        33.5 
1913............................................................       1978        63.4        46.7        34.7 
1914............................................................       1979        64.4        48.1        36.1 
1915............................................................       1980        68.1        51.1        32.5 
1916............................................................       1981        72.5        54.4        33.4 
1917............................................................       1982    \6\ 65.8    \6\ 48.7    \6\ 28.6 
1918............................................................       1983    \7\ 63.5        45.8        26.3 
1919............................................................       1984    \7\ 62.6        42.8        23.7 
1920............................................................       1985    \7\ 61.1        40.9        22.8 
1921............................................................       1986    \7\ 60.3        41.1        23.1 
1922............................................................       1987    \7\ 59.5        41.2        22.6 
1923............................................................       1988    \7\ 58.4        40.9        23.0 
1924............................................................       1989    \7\ 57.9        41.6        24.1 
1925............................................................       1990        58.2        43.2        24.5 
1935............................................................       2000        57.1        42.4        25.6 
1945............................................................       2011        56.2        41.9        27.2 
1955............................................................       2021        56.2        41.8        27.8 
1965............................................................       2032        56.0        41.8        27.7 
1975............................................................       2042        56.0        41.8       27.6  
----------------------------------------------------------------------------------------------------------------
\1\ Total monthly benefits payable for year of entitlement at normal retirement age expressed as percent of     
  earnings in year prior to entitlement for workers with steady career earnings. Projections for 1996 and later 
  are based on the intermediate II assumptions of the 1996 OASDI Trustees' Report.                              
\2\ Normal retirement age will rise from 65 starting with workers who attain age 62 in 2000 and will ultimately 
  reach 67 for workers attaining age 62 in 2022 and later.                                                      
\3\ Earnings equal to 45 percent of the ``Social Security average-wage index.''                                 
\4\ Earnings equal to the ``Social Security average-wage index.''                                               
\5\ Earnings equal to the maximum wage taxable for Social Security purposes.                                    
\6\ ``Transition guarantee'' under 1977 amendments.                                                             
\7\ Special minimum benefit.                                                                                    
                                                                                                                
Source: Office of the Actuary, Social Security Administration.                                                  

Retired workers
    Today, the reduction rate is five-ninths of 1 percent for 
each month of entitlement before age 65 (maximum reduction of 
20 percent). Workers retiring today at age 62 therefore receive 
80 percent of the PIA.
    Although the minimum age of eligibility for reduced 
benefits remains age 62 (age 60 for widows and widowers), the 
increase in the full retirement age will be accompanied by 
increases in the amount of reduction for retirement at age 62 
for individuals born after 1937. For them, the PIA will be 
reduced by five-twelfths of 1 percent for each month in excess 
of 36. For example, for persons born from 1943 through 1954, 
for whom the normal retirement age will be 66, the benefit 
payable at age 62 will be 75 percent of the PIA. For persons 
born in 1960 and later, for whom the normal retirement age will 
be 67, the benefit payable at age 62 will be 70 percent of the 
PIA (see table 1-8).
Spouses
    The current reduction rate is twenty-five thirty-sixths of 
1 percent for each month of entitlement before full retirement 
age. The maximum reduction is 25 percent. For spouses born 
after 1937, the benefit will be reduced by five-twelfths of 1 
percent for each month of early retirement in excess of 36 
months.
Widow(er)s
    Today, the rate of reduction is nineteen-fortieths of 1 
percent for each month of entitlement between age 60 and age 65 
(maximum reduction of 28.5 percent). There is no scheduled 
increase in the maximum reduction for widow(er)s. Disabled 
widow(er)s ages 50 to 59 receive 71.5 percent of the PIA.
      
    Generally benefits continue to be paid at these reduced 
rates for as long as the recipients remain on the rolls. 
However, at attainment of the full retirement age for all 
recipients, and also at age 62 for a widow, widower, and a 
surviving divorced spouse, the number of months of reduction is 
adjusted by dropping months for which full benefits were not 
paid. Data on benefits paid to new retired workers in 1995 
indicates that 72 percent of all such benefits were actuarially 
reduced (69 percent of those payable to men, and 75 percent to 
women). Table 1-10 presents information on the number of 
workers retiring in a given year who file for actuarially 
reduced benefits.

                       Delayed Retirement Credit

    A worker is eligible for a delayed retirement credit (DRC) 
for each month the worker: (1) was fully insured; (2) had 
attained full retirement age but was not yet age 70; and (3) 
did not receive benefits because the worker had not filed an 
application or was working. Each DRC increases the worker's 
monthly benefit by one-twelfth of 1 percent for workers who 
attained age 62 before 1979 and by one-fourth of 1 percent for 
workers attaining age 62 from 1979 through 1986 (unless the 
benefit is based on a special minimum PIA). The increase is 
applicable to the worker's monthly benefit amount but not to 
the PIA. Therefore, dependents' benefits are generally not 
affected. The exception is that an individual receiving 
benefits as a widow(er) or surviving divorced spouse is 
entitled, for months after May 1978, to the same increase that 
was applied to the benefit of the worker, or for which the 
worker was eligible at the time of death.
    As a result of the Social Security amendments of 1983, 
beginning with workers who attain age 65 in 1990 (i.e., age 62 
in 1987) the increment for delaying retirement past the normal 
retirement age (DRC) will increase by one-half of 1 percent 
every second year until reaching 8 percent per year of delayed 
retirement for workers attaining age 65 after 2007 (see table 
1-8).

                         Maximum Family Benefit

Old Age and Survivor Insurance (OASI)
    The maximum monthly amount that can be paid on a worker's 
earnings record varies with the PIA. For benefits payable on 
the earnings records of retired and deceased workers, the 
maximum varies from 150 to 188 percent of the PIA. The family 
maximum cannot be exceeded regardless of the number of 
recipients entitled on that earnings record. The family maximum 
is computed by adding fixed percentages of dollar amounts that 
are part of the PIA. For the family of a worker who turns 62 or 
dies in 1996, the total amount of benefits payable is limited 
to:

  150 percent of the first $559 of PIA, plus;
  272 percent of PIA from $559 through $806, plus;
  134 percent of PIA from $806 through $1,052, plus;
  175 percent of PIA over $1,052.

The dollar amounts in this benefit formula (i.e., the ``bend 
points'') are adjusted annually by the same index used to 
update the bend points in the primary benefit formula.
    Whenever the total of the individual monthly benefits 
payable to all the recipients entitled on one earnings record 
exceeds the maximum, each dependent's or survivor's benefit is 
reduced in equal proportion to bring the total within the 
maximum.
    In computing the maximum family benefit for entitlements 
based on a single earnings record, any benefit payable to a 
divorced spouse or to a surviving divorced spouse is not 
included.
Disability Insurance (DI)
    The maximum family benefit is the smaller of 85 percent of 
the worker's average indexed monthly earnings (AIME), or 150 
percent of the worker's primary insurance amount (PIA). 
However, in no case can the benefit be less than 100 percent of 
the worker's PIA.

                             Earnings Limit

    The earnings limit is a provision in the law that reduces 
benefits for nondisabled recipients who earn income from work 
above a certain amount.
    Variations of the earnings limit have been part of the 
Social Security Program since its beginning. In 1996, 
recipients under age 65 may earn up to $8,280 a year in wages 
or self-employment income without having their benefits 
affected. Those aged 65-69 can earn up to $12,500 a year. For 
earnings above these amounts, recipients under age 65 lose $1 
of benefits for each $2 of earnings, and those age 65-69 lose 
$1 in benefits for every $3 of earnings. The earnings limit 
does not apply to recipients over age 69, or to those who are 
disabled. The earnings limits rise each year indexed to the 
rise in average wages in the economy.
    Beginning in 1996, the exempt amounts for those who have 
attained the full retirement age will be increased on an ad hoc 
basis, according to the following schedule:

------------------------------------------------------------------------
                          Year                             Exempt amount
------------------------------------------------------------------------
1996....................................................         $12,500
1997....................................................          13,500
1998....................................................          14,500
1999....................................................          15,500
2000....................................................          17,000
2001....................................................          25,000
2002....................................................          30,000
------------------------------------------------------------------------

    These changes were included in Public Law 104-121 enacted 
on March 29, 1996. After 2002, the exempt amounts for those who 
have attained the full retirement age again will be adjusted to 
rise at the same rate as average wages in the economy.
    Before enactment of Public Law 104-121, about 1.4 million 
recipients lost some or all of their benefits because of the 
earnings limit each year. They represented about 4 percent of 
all recipients. Of recipients age 65-69, about 10 percent 
(925,999) were affected, and an additional 140,000 persons were 
estimated to be deterred from filing for benefits because of 
the earnings limit.
    Retired workers whose benefits are not paid due to the 
earnings limit for one or more months are compensated through 
future increases in their benefit amount known as delayed 
retirement credits, or DRCs (discussed earlier). For workers 
under age 65, their actuarial reduction factor is reduced. 
Beneficiaries age 65-69 get a DRC for each month benefits were 
not paid.

Examples of effects of the earnings limit:


    1. John--Age 63 with $4,000 in annual benefits before               
     the earnings limit is applied:                                     
        Earnings in 1996...................................     $9,280  
        Exempt amount for under age 65.....................      8,280  
                                                            ------------
        Excess over exempt amount..........................      1,000  
        Benefit reduction = 50 percent of excess...........        500  
        Benefits John will receive in 1996.................      3,500  
    2. Ida--Age 67 with $4,000 in annual benefits before                
     the earnings limit is applied:                                     
        Earnings in 1996...................................     13,100  
        Exempt amount for 65 and older.....................     12,500  
                                                            ------------
        Excess over exempt amount..........................        600  
        Benefit reduction = 33\1/3\ percent of excess......        200  
        Benefits Ida will receive in 1996..................      3,800  
                                                                        


    The earnings limit does not apply to pensions, rents, 
dividends, interest, and other types of ``unearned'' income. 
These forms of income have always been exempted in order to 
encourage savings for retirement to supplement Social Security.
History of the earnings limit
    The earnings limit was part of the original plan that led 
to Social Security. The 1935 report of the Committee on 
Economic Security appointed by President Franklin D. Roosevelt 
recommended that no benefits be paid before a person had 
``retired from gainful employment.'' Initially, the Social 
Security Act provided that benefits would not be paid for any 
month in which the individual had received ``wages with respect 
to regular employment.'' Before any benefits were payable under 
the program, Congress modified this provision in the Social 
Security amendments of 1939. No benefits would be paid for any 
month in which wages from covered employment were $15 or more. 
This arrangement prevailed until 1950.
    The 1950 amendments extended Social Security coverage to 
the bulk of nonfarm self-employed workers. Because it was 
believed that many self-employed people never retired and 
therefore would never receive benefits, the 1950 act exempted 
persons age 75 and over from the earnings limit. In addition, 
in the first of many legislative actions to increase the amount 
of earnings permitted, allowable monthly income from wages was 
increased from $14.99 to $50.
    Over the years, the earnings limits, the affected ages, and 
the formulas for reducing benefits have been changed many 
times. Starting with the 1954 amendments, benefits were no 
longer totally withheld if the retiree had earnings above the 
monthly exempt amount. Instead, a reduced benefit was payable. 
In addition, the 1954 act exempted persons age 72 and over from 
the earnings limit.
    The 1972 amendments reduced benefits by $1 for every $2 of 
earnings above the exempt amount. The 1972 amendments also 
provided that, beginning in 1975, the exempt amounts would be 
``indexed'' to rise at the same rate as wage growth. To 
compensate workers who did not receive benefits for months 
between ages 65 and 72, the amendments established the delayed 
retirement credit.
    In the consideration of major Social Security legislation 
in 1977, there was considerable pressure to eliminate the 
earnings limit for persons over age 65. As a compromise, the 
earnings limit was raised for persons age 65 and older, and 
since then two different exempt amounts have applied, one for 
those under full retirement age (currently age 65) and one for 
those between full retirement age and age 70. (The 1977 
amendments also lowered from 72 to 70 the age at which the 
earnings limit would no longer apply, to be effective in 1982, 
later postponed until 1983.) In response to criticism that the 
monthly earnings limit discriminated in favor of workers who 
had substantial but irregular employment (e.g., teachers), 
Congress also eliminated the monthly limit except for the first 
year of retirement. In 1980, Congress extended the monthly 
limit to the year a dependent beneficiary became ineligible for 
benefits.
    As part of major legislation restoring financial integrity 
to the Social Security system in 1983, Congress made two 
liberalizations affecting persons who continue to work after 
attaining retirement age. The first provided that, beginning in 
1990, beneficiaries who have attained the full retirement age 
will lose only $1 in benefits for each $3 in earnings above the 
exempt amount. The second increased the delayed retirement 
credit (DRC). Prior to the increase, the DRC was equal to one-
fourth of 1 percent for each month (3 percent a year) beyond 
the full retirement age that a person did not receive benefits. 
Under the 1983 provision, the DRC increases gradually to two-
thirds of 1 percent per month between 1990 and 2009 (8 percent 
a year).
    As a result of a legislative change in the Deficit 
Reduction Act of 1984, the Social Security Administration 
requests earlier reports of earnings from beneficiaries who are 
most likely to have earnings in excess of the exempt amount. As 
a result, these beneficiaries have their benefits reduced in 
the actual year that they have excess earnings, rather than 
receiving overpayments which must then be recouped later when 
they may no longer be working.
    On March 29, 1996, President Clinton signed H.R. 3136, the 
Contract with America Advancement Act of 1996 (Public Law 104-
121), which increases the Social Security earnings limit 
``exempt amounts''--the amount of earnings Social Security 
recipients may earn before their benefits are reduced--for 
recipients between the ``full retirement age'' (currently age 
65) and age 70. Their exempt amounts will increase gradually by 
higher amounts than under prior law over the period 1996-2000, 
and then more rapidly over the next 2 years, reaching $30,000 
in 2002.
    Table 1-14a shows amounts exempt from the earnings limit 
since 1975.
Earnings of retired workers
    Of 9.5 million recipients entitled to retired worker 
benefits who were under the age of 70 in 1993, about 3.5 
million had earnings from work. Table 1-15 shows the 
distribution of the earnings of these workers.

                                Offsets

Offset for other public disability benefits
    When a worker receiving Social Security disability benefits 
also qualifies for other disability benefits that are provided 
by Federal, State or local governments or worker's 
compensation, any Social Security benefits payable to him or 
her and his or her family are reduced by the amount, if any, 
that the total monthly benefits payable under the two or more 
programs exceed 80 percent of average current earnings before 
he became disabled. Needs-tested benefits, Veterans' 
Administration disability benefits, and benefits based on 
public employment covered by Social Security are not subject to 
the provision. A worker's average current earnings for this 
purpose are the larger of (a) the average monthly earnings used 
for computing Social Security benefits, or (b) the average 
monthly earnings in employment or self-employment covered by 
Social Security during the 5 consecutive years of highest 
covered earnings after 1950, or (c) the average monthly 
earnings during the calendar year of highest covered earnings 
during a period consisting of the year in which disability 
began and the preceding 5 years without regard to the 
limitations which specify a maximum amount of earnings 
creditable for Social Security benefits. The combined payments 
after the reduction are never less than the total amount of the 
DI benefits payable before the reduction. In addition, the 
Social Security benefit after the reduction is increased by the 
full amount of the cost-of-living increase as applied to the 
unreduced benefit. Every 3 years the original amount of 
benefits subject to reduction is redetermined to reflect 
changes in average wage levels. If increases in average 
national wages would result in a higher benefit than that 
payable based on the original computation, the benefit is 
increased effective January of the redetermination year.

     TABLE 1-14a.--AMOUNTS EXEMPT FROM THE EARNINGS LIMIT, 1975-2002    
------------------------------------------------------------------------
                                                                 Age 65 
                       Year                         Under age   and over
                                                        65        \2\   
------------------------------------------------------------------------
1975..............................................     $2,520     $2,520
1976..............................................      2,760      2,760
1977..............................................      3,000      3,000
1978..............................................      3,240      4,000
1979..............................................      3,480      4,500
1980..............................................      3,720      5,000
1981..............................................      4,080      5,500
1982..............................................      4,440      6,000
1983..............................................      4,920      6,600
1984..............................................      5,160      6,960
1985..............................................      5,400      7,320
1986..............................................      5,760      7,800
1987..............................................      6,000      8,160
1988..............................................      6,120      8,400
1989..............................................      6,480      8,880
1990..............................................      6,840      9,360
1991..............................................      7,080      9,720
1992..............................................      7,440     10,200
1993..............................................      7,680     10,560
1994..............................................      8,040     11,160
1995..............................................      8,160     11,280
1996..............................................      8,280  \3\ 12,50
                                                                       0
1997..............................................  \1\ 8,640  \3\ 13,50
                                                                       0
1998..............................................  \1\ 9,000  \3\ 14,50
                                                                       0
1999..............................................  \1\ 9,360  \3\ 15,50
                                                                       0
2000..............................................  \1\ 9,720  \3\ 17,00
                                                                       0
2001..............................................  \1\ 10,08           
                                                            0  \3\ 25,00
                                                                       0
2002..............................................  \1\ 10,56           
                                                            0  \3\ 30,00
                                                                       0
------------------------------------------------------------------------
\1\ Based on economic assumptions in the 1996 Annual Report of the Board
  of Trustees of the Federal Old-Age, Survivors, and Disability         
  Insurance Trust Funds.                                                
\2\ From 1955 to 1982, earnings limits did not apply at ages 72 and     
  over; beginning in 1983, they do not apply at ages 70 and over.       
\3\ Public Law 104-121.                                                 
                                                                        
Source: Office of the Actuary, Social Security Administration.          

    The offset begins in the month during which concurrent 
entitlement begins under a Federal or State law. However, the 
offset will not be made if the State workers' compensation law 
provides for an offset against Social Security disability 
benefits.
Offsets for receipt of pension from noncovered employment
    Government pension offset.--Social Security benefits 
payable to spouses of retired, disabled, or deceased workers 
are generally reduced to take account of any public pension the 
spouse receives as a result of work in a government job 
(Federal, State, or local) not covered by Social Security. The 
amount of the reduction is equal to two-thirds of the 
government pension. This provision is intended to place spouses 
who worked in jobs not covered by Social Security in the same 
position as other workers by imposing on them the equivalent of 
the Social Security ``dual entitlement'' rule, which imposes a 
dollar-for-dollar offset of spouses' benefits (discussed 
earlier). Two-thirds of the government pension represents a 
surrogate of the Social Security worker's benefit that would be 
subtracted from any Social Security spousal benefit. The offset 
does not apply to workers whose government job is covered by 
Social Security on the last day of the person's employment.

           TABLE 1-15.--RETIRED WORKERS WITH EARNINGS IN 1993           
------------------------------------------------------------------------
               Total earnings                  Ages 62-64    Ages 65-69 
------------------------------------------------------------------------
$1-4,999....................................       501,800       919,100
5,000-9,999.................................       344,000       568,600
10,000-14,999...............................       106,000       285,300
15,000-19,999...............................        55,800       126,000
20,000-24,999...............................        32,700        93,500
25,000-29,999...............................        20,000        68,500
30,000-34,999...............................        14,900        54,300
35,000-39,999...............................         9,300        37,300
40,000-44,999...............................         7,300        34,000
45,000-49,999...............................         4,600        22,300
50,000-54,999...............................         3,000        16,900
55,000-59,999...............................         2,700        19,900
60,000-64,999...............................         2,600        12,900
65,000-69,999...............................         1,000         9,600
70,000-74,999...............................           900         8,800
75,000-79,999...............................         1,000         5,800
80,000-84,999...............................           300         5,300
85,000-89,999...............................           400         6,500
90,000-94,999...............................           800         4,400
95,000-99,999...............................           300        10,100
100,000 +...................................         4,000        30,700
                                             ---------------------------
      Total.................................     1,113,400     2,339,800
------------------------------------------------------------------------
Source: Social Security Administration.                                 

    Generally, Federal workers hired before 1984 are part of 
the Civil Service Retirement System (CSRS) and are not covered 
by Social Security. Federal workers hired after 1983 are 
covered by the Federal Employee's Retirement System Act of 1986 
(FERS), which includes coverage by Social Security. Employees 
covered by the CSRS were given the opportunity in 1987, to join 
FERS and thereby obtain Social Security coverage.
    Windfall elimination provision.--Under the so-called 
``windfall elimination'' provision of the Social Security 
amendments of 1983, a different benefit formula reduces the 
Social Security benefits of most workers who also have pensions 
from work that was not covered by Social Security (e.g., work 
under the Federal Civil Service Retirement System). The regular 
benefit formula (see earlier discussion) is weighted, in order 
to help workers who spend their work careers in low-paying 
jobs, by providing them with a benefit that replaces a higher 
proportion of their earnings than the benefit that is provided 
for workers with high earnings. However, the formula cannot 
differentiate between those who worked in low-paid jobs 
throughout their careers and other workers who appeared to have 
been low paid because they worked many years in jobs not 
covered by Social Security (these noncovered earnings are shown 
as zeros for Social Security benefit purposes). Thus, before 
the law was changed, workers who were employed for only a 
portion of their careers in jobs covered by Social Security 
also received the advantage of the ``weighted'' formula, 
because their few years of covered earnings were averaged over 
their entire working career to determine the average covered 
earnings on which their Social Security benefits were based. 
This was the case even if their noncovered earnings were high.
    The windfall benefit formula is intended to remove this 
advantage for these workers. It does so by substituting 40 
percent for the 90 percent factor in the first bracket of the 
benefit formula (see discussion in earlier section on ``Benefit 
Formula''). (The second and third factors remain the same.) The 
resulting reduction in the worker's Social Security benefit is 
limited to one-half the amount of the noncovered pension. The 
new law was phased in over a 5-year period and affects those 
first eligible for both Social Security benefits and noncovered 
pensions after 1985.
    Workers who have 30 years or more of substantial Social 
Security coverage are fully exempt from this provision. For 
workers who have 21-29 years of coverage, the percentage in the 
first bracket in the formula increases by 5 percentage points 
for each year over 20, as shown in table 1-16.

                  Suspension of Benefits to Prisoners

    In 1980, legislation was enacted barring payment of 
disability benefits to prisoners who committed felonies (Public 
Law 96-473). In 1983, the prohibition was broadened to include 
retirement and survivor benefits (Public Law 98-21); and in 
1994, payment of benefits was barred to those in public 
institutions who committed serious crimes, but who were found 
incompetent to stand trial, or not guilty by reason of insanity 
(Public Law 103-387). Only benefits to the prisoner are barred; 
benefits to a prisoner's eligible spouse and/or children are 
payable.

                       COST-OF-LIVING ADJUSTMENTS

    Monthly cash benefits were increased on an ad hoc basis 10 
times before the first automatic cost-of-living adjustment 
(COLA) was implemented as a result of the Social Security 
amendments of 1972. Beginning in 1975, benefits have been 
automatically adjusted to keep pace with inflation. Since 1975, 
there have been increases annually except during calendar year 
1983, when the adjustment was delayed 6 months (see table 1-1).

              TABLE 1-16.--WINDFALL BENEFIT FORMULA FACTORS             
------------------------------------------------------------------------
                                                                 First  
                                                               factor in
              Years of Social Security coverage                 formula 
                                                               (percent)
------------------------------------------------------------------------
20 or fewer..................................................      40   
21...........................................................      45   
22...........................................................      50   
23...........................................................      55   
24...........................................................      60   
25...........................................................      65   
26...........................................................      70   
27...........................................................      75   
28...........................................................      80   
29...........................................................      85   
30 or more...................................................      90   
------------------------------------------------------------------------
Source: Social Security Administration.                                 

    Social Security beneficiaries receive a COLA in January of 
each year if there is a measurable annual increase in prices 
(0.1 percent). The Consumer Price Index for Wage Earners and 
Clerical Workers (CPI-W), updated monthly by the Bureau of 
Labor Statistics (BLS), is the measure used to compute the 
increase. The average CPI-W for the third calendar quarter of 
one year is compared to the average CPI-W for the third 
calendar quarter of the next year, and the resulting percentage 
increase represents the COLA that will become effective for the 
following December. The increase actually becomes effective for 
Social Security checks payable beginning in January, since 
Social Security checks always reflect the benefits due for the 
preceding month.
    A COLA of 2.6 percent beginning with checks payable in 
January 1996 was triggered by the rise in the CPI-W from the 
third quarter of 1994 to the third quarter of 1995. As in all 
years since 1975, this COLA, in turn, triggered identical 
percentage increases in Supplemental Security Income (SSI), 
veterans' pensions, and railroad retirement benefits, and 
caused other changes in the Social Security and Medicare 
Programs. Although COLAs under the Federal Civil Service 
Retirement System (CSRS) and the Federal Military Retirement 
Program are not triggered by the Social Security COLA, these 
programs use the same measuring period and formula for 
computing their COLAs.
Determination of the COLA
    The 2.6 percent COLA for January 1996 became known on 
October 13, 1995, when the BLS announced the CPI-W figure for 
September 1995. With release of the September index, the two 
July-September sets of CPI-W figures needed to compute the 
COLA--one for 1994 and another for 1995--became available.
    Table 1-17 shows how the January 1996 COLA was computed 
under procedures set forth in the law. \3\ Table 1-18 shows the 
comparison between average wage increases and changes in the 
CPI from 1965 to 1995.
---------------------------------------------------------------------------
    \3\ Under section 215(i) of the Social Security Act.

   TABLE 1-17.--COMPUTATION OF THE SOCIAL SECURITY COLA, JANUARY 1996   
------------------------------------------------------------------------
                                                   CPI-W index points   
                     Month                     -------------------------
                                                    1994         1995   
------------------------------------------------------------------------
July..........................................        145.8        149.9
August........................................        146.5        150.2
September.....................................        146.9        150.6
    3-month average...........................        146.4        150.2
------------------------------------------------------------------------
Note.--The reference base period for the CPI-W is 1982-84, i.e., the    
  period when the index equalled 100.                                   
                                                                        
Source: Bureau of Labor Statistics.                                     

Increase in CPI index points from the third quarter of 1994 to 
the third quarter of 1995:

                          150.2 - 146.4 = 3.8

Percent increase in average CPI for the 2 quarters:

                      3.8  146.4 = 2.596%

COLA = 2.6%.

By law, the change must be rounded to the nearest tenth of a 
percent.

                          TAXATION OF BENEFITS

    Beneficiaries with income (defined as adjusted gross income 
plus tax-exempt bond interest plus one-half of Social Security 
benefits) above certain thresholds are required to include a 
portion of their Social Security benefits (and railroad 
retirement tier 1 benefits) in their federally taxable income. 
The Social Security Amendments of 1983 required beneficiaries 
with income of more than $25,000 if single, and $32,000 if 
married, to include up to 50 percent of their benefits in their 
taxable income, beginning in 1984. Revenues from this provision 
are credited to the OASDI Trust Funds. The Omnibus Budget 
Reconciliation Act of 1993 required beneficiaries with incomes 
of more than $34,000 if single, and $44,000 if married, to 
include up to 85 percent of their benefits in their taxable 
income, beginning in 1994. Revenues from this provision are 
credited to the Medicare HI Trust Fund.

  TABLE 1-18.--HISTORICAL COMPARISON OF AVERAGE WAGE INCREASES TO BENEFIT INCREASES AND CHANGES IN CPI, 1965-95 
                                                  [In percent]                                                  
----------------------------------------------------------------------------------------------------------------
                                                    Increase in wages   Increase in CPI \2\      Increase in    
                                                           \1\         ---------------------     benefits \3\   
                                                  ---------------------                     --------------------
                  Calendar year                             Cumulative    Over   Cumulative           Cumulative
                                                     Over    from each   prior    from each    Over    from each
                                                    prior     year to     year     year to    prior     year to 
                                                     year      1995                 1995       year      1995   
----------------------------------------------------------------------------------------------------------------
1965.............................................      1.8       429.6      1.6       372.6      7.0       472.5
1966.............................................      6.0       399.6      3.2       358.1      0.0       472.5
1967.............................................      5.6       373.3      2.8       345.8      0.0       472.5
1968.............................................      6.9       342.8      4.2       328.0     13.0       406.6
1969.............................................      5.8       318.6      5.4       306.0      0.0       406.6
1970.............................................      5.0       298.8      5.7       284.1     15.0       340.6
1971.............................................      5.0       279.8      4.4       268.1     10.0       300.5
1972.............................................      9.8       245.9      3.4       255.8     20.0       233.8
1973.............................................      6.3       225.5      6.2       235.1      0.0       233.8
1974.............................................      5.9       207.2     11.0       202.0     11.0       200.7
1975.............................................      7.5       185.9      9.1       176.9      8.0       178.4
1976.............................................      6.9       167.4      5.7       161.9      6.4       161.7
1977.............................................      6.0       152.3      6.5       146.0      5.9       147.1
1978.............................................      7.9       133.7      7.7       128.4      6.5       132.0
1979.............................................      8.7       114.9     11.4       104.9      9.9       111.1
1980.............................................      9.0        97.2     13.4        80.7     14.3        84.7
1981.............................................     10.1        79.1     10.3        63.9     11.2        66.1
1982.............................................      5.5        69.8      6.0        54.6      7.4        54.6
1983.............................................      4.9        61.9      3.0        50.1  \4\ 3.5        49.4
1984.............................................      5.9        52.9      3.5        45.0      3.5        44.4
1985.............................................      4.3        46.7      3.5        40.1      3.1        40.0
1986.............................................      3.0        42.4      1.6        37.9      1.3        38.2
1987.............................................      6.4        33.9      3.6        33.2      4.2        32.7
1988.............................................      4.9        27.6      4.0        28.0      4.0        27.6
1989.............................................      4.0        22.8      4.8        22.2      4.7        21.8
1990.............................................      4.6        17.3      5.2        16.1      5.4        15.6
1991.............................................      3.7        13.1      4.1        11.5      3.7        11.5
1992.............................................      5.2         7.6      2.9         8.4      3.0         8.2
1993.............................................      0.9         6.7      2.8         5.4      2.6         5.5
1994.............................................      2.7         3.9      2.5         2.9      2.8         2.6
1995.............................................  \5\ 3.9          NA  \6\ 2.9          NA      2.6          NA
----------------------------------------------------------------------------------------------------------------
\1\ Average annual wages used to index earnings records.                                                        
\2\ Increase in annual average CPI-W.                                                                           
\3\ Legislated benefit increases through 1975 and increases based on CPI thereafter. After 1975, the CPI and    
  benefit increases are different because they reflect the change in prices measured over different periods of  
  time.                                                                                                         
\4\ As a result of the Social Security amendments of 1983, COLAs are provided on a calendar year basis, with the
  benefit increase payable in January rather than July. The July 1983 COLA was delayed to January 1984. This    
  delay and a change in the computation period led to the last 6 months of 1983 not being accounted for in any  
  COLA increase--a period during which the CPI increased 2.4 percent.                                           
\5\ Preliminary.                                                                                                
\6\ Effective December 1995, payable January 3, 1996.                                                           
                                                                                                                
NA--Not available.                                                                                              
                                                                                                                
Source: Office of the Actuary, Social Security Administration.                                                  

    The following worksheet shows the steps involved in 
determining how much of a beneficiary's Social Security 
benefits are taxable.

   Worksheet for Determining the Taxable Portion of Social Security 
                                Benefits

    1. Enter yearly Social Security benefits
                                                   ________________
    2. Multiply line 1 by 0.50
                                                   ________________
    3. Enter adjusted gross income plus tax-free interest
                                                   ________________
    4. Add line 2 and line 3
                                                   ________________
    5. Enter: $25,000 if single or head of household; $32,000 
if married filing jointly; $0 if married filing separately
                                                   ________________
    6. Subtract line 5 from line 4
                                                   ________________
    (If result on line 6 is zero or a negative number, stop; no 
benefits are taxable.)


    7. Divide line 6 by 2
                                                   ________________
    8. Enter smaller of amounts on line 2 or line 7
                                                   ________________
    9. Enter amount on line 4
                                                   ________________
    10. Enter: $34,000 if single or head of household; $44,000 
if married filing jointly; $0 if married filing separately
                                                   ________________
    11. Subtract line 10 from line 9
                                                   ________________
    (If result on line 11 is zero or a negative number, stop; 
amount on line 8 is amount of benefits taxable.)


    12. Multiply line 11 by 0.85
                                                   ________________
    13. Enter smallest of: amount on line 8; $4,500 if single 
or head of household; $6,000 if married filing jointly; $0 if 
married filing separately
                                                   ________________
    14. Add amounts on line 12 and line 13
                                                   ________________
    15. Multiply line 1 by 0.85
                                                   ________________
    16. Enter smaller of amounts on line 14 or line 15
                                                   ________________
    (The amount on line 16 is the total amount of benefits 
taxable.)

    Source: Congressional Research Service.
    Examples of results of applying worksheet (1996):


                                                                                                                
----------------------------------------------------------------------------------------------------------------
                                                             Single     Single    Married    Married    Married 
----------------------------------------------------------------------------------------------------------------
Total income (including Social Security).................    $27,000    $35,000    $38,000    $50,000    $80,000
Social Security benefits.................................     12,000      7,000     12,000     12,000     18,000
Amount of benefits taxable...............................          0      3,250          0      6,000     15,300
Percent of benefits taxable..............................          0         46          0         50         85
Income tax liability on all benefits taxable.............          0        488          0        900      4,284
----------------------------------------------------------------------------------------------------------------

    For calendar year 1997 (see table 1-19), CBO projects that 
25 percent of Social Security beneficiaries will be affected by 
the taxation of benefits (see table 1-19). Table 1-20 shows 
amounts credited to trust funds from taxation of benefits.
                  DETERMINATION OF DISABILITY BENEFITS
                      Determination of Disability
    Disability determinations are generally made by State 
agencies, which are 100 percent federally funded. These 
agencies agree to make such determinations and in doing so to 
substantially comply with the regulations of the Commissioner, 
which specify performance standards and administrative 
requirements and procedures to be followed in performing the 
disability determination function.
    The law authorizes the Commissioner to terminate State 
administration and assume responsibility for making disability 
determinations when a State Disability Determination Service 
(DDS) is substantially failing to make determinations 
consistent with regulations. The law also allows for 
termination by the State.
                   Application of Law and Regulations
    Claims are adjudicated on a sequential basis. The first 
step is to determine whether the individual is engaging in 
substantial gainful activity (SGA). Under current regulations, 
if a person is earning more than $500 a month (net of 
impairment-related work expenses), she ordinarily will be 
considered to be engaging in SGA. By law, SGA is $960 a month 
for disabled blind individuals in 1996. If it is determined 
that the individual is engaging in SGA, a decision is made that 
he is not disabled without considering medical factors. If an 
individual is found not to be engaging in SGA, the severity and 
duration of the impairment are explored. If the impairment is 
determined to be ``not severe'' (i.e., it does not 
significantly limit the individual's capacity to perform work), 
the individual's disability claim is denied. If the impairment 
is ``severe,'' a determination is made as to whether the 
impairment ``meets'' or ``equals'' the medical listings 
published in regulations by SSA, \4\ and whether it will last 
for 12 months. If the impairment neither ``meets'' nor 
``equals'' the listing (which would result in an allowance), 
but meets the 12-month duration rule, the individual's residual 
functional capacity (what an individual still can do despite 
his or her limitations), and the physical and mental demands of 
his or her past relevant work, must be evaluated. If the 
impairment does not prevent the individual from meeting the 
demands of his past relevant work, then benefits are denied. If 
it does, then it must be determined if the impairment prevents 
other work.
---------------------------------------------------------------------------
    \4\ The Listing of Impairments contains over 100 examples of 
medical conditions that would ordinarily prevent an individual from 
engaging in substantial gainful activity. Each listing describes a 
degree of severity such that an individual who is not working, and has 
such an impairment, is considered unable to work by reason of the 
medical impairment. The listing describes specific medically acceptable 
clinical and laboratory findings and signs which establish the severity 
of the impairments. An impairment or combination of impairments is said 
to ``equal the listings'' if the medical findings for the impairment 
are at least equivalent in severity and duration to the listed findings 
of a listed impairment.
---------------------------------------------------------------------------
    At this stage in the adjudication process, because of a 
judicial opinion and subsequent administrative and legislative 
ratification, the burden of proof switches to the government to 
show that the individual can, considering his impairment, age, 
education, and work experience, engage in some other kind of 
substantial gainful activity that exists in the national 
economy. Such work does not have to exist in the immediate area 
in which he lives, and a specific job vacancy does not have to 
be available to him. Work in the national economy is defined in 
statute as work which exists in significant numbers either in 
the region where such individual lives or in several regions of 
the country.
    SSA has developed a vocational ``grid'' designed to reduce 
the subjectivity and lack of uniformity in applying the 
vocational factor. The grid regulations embody in a formula 
certain worker characteristics such as age, education, and past 
work experience, in relation to the individual's residual 
functional capacity to perform work-related physical and mental 
activities. If the applicant has a particular level of residual 
work capability--characterized by the terms sedentary, light, 
medium, heavy and very heavy--an automatic finding of 
``disabled'' or ``not disabled'' is required when such 
capability is applied to various combinations of age, 
education, and work experience.

                 Federal Review of State Determinations

    The law requires that the Commissioner review 50 percent of 
the disability allowances and a sufficient number of other 
determinations to ensure a high degree of accuracy. The 
Commissioner may also, on his or her own motion, review any 
determination by a DDS.

      Periodic Review of Individuals Receiving Disability Benefits

    The 1980 disability amendments required that, at least once 
every 3 years, the Social Security Administration reexamine 
every individual on the rolls who is determined to be 
nonpermanently disabled. Where there is a finding of permanent 
disability, the Commissioner may reexamine at such times as is 
determined to be appropriate. These reviews are in addition to 
the administrative eligibility review procedures existing 
before the 1980 amendments.

                          TABLE 1-19.--EFFECT OF TAXING SOCIAL SECURITY BENEFITS BY INCOME CLASS, PROJECTED CALENDAR YEAR 1997                          
                                                 [Numbers of persons in thousands; dollars in billions]                                                 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                          Persons age 65 and over                        All recipients                 Aggregate                       
                                  ------------------------------------------------------------------------------------- amount of  Aggregate  Taxes as a
  Level of individual or couple                 Number        Percent     Number of Social     Number        Percent      Social   amount of  percent of
            income \1\              Number    affected by   affected by       Security       affected by   affected by   Security   taxes on   benefits 
                                             taxation \2\  taxation \2\  beneficiaries \3\  taxation \3\  taxation \3\   benefits   benefits            
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than $10,000................     7,062           0            0            10,049                0           0        57,246          0         0  
$10,000-$15,000..................     4,392           0            0             6,043                0           0        47,906          0         0  
$15,000-$20,000..................     3,762           0            0             4,828                0           0        39,179          0         0  
$20,000-$25,000..................     3,100           0            0             3,936                0           0        34,402          0         0  
$25,000-$30,000..................     2,805          69            2.5           3,644              146           4.0      31,748         12         0  
$30,000-$40,000..................     4,315         988           22.9           5,518            1,466          26.6      48,676        410         0.8
$40,000-$50,000..................     2,730       2,167           79.4           3,405            2,886          84.8      30,864      1,338         4.3
$50,000-$100,000.................     4,171       3,771           90.4           5,124            5,016          97.9      48,128      7,084        14.7
Over $100,000....................     1,553       1,192           76.8           1,508            1,350          89.5      15,492      3,474        22.4
                                  ----------------------------------------------------------------------------------------------------------------------
    All..........................    33,890       8,187           24.2          44,055           10,864          24.7     353,641     12,318         3.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Cash income (based on income of tax filing unit) plus capital gains realizations.                                                                   
\2\ Some elderly individuals do not receive Social Security benefits and are therefore not affected by taxation of benefits.                            
\3\ Includes beneficiaries under and over age 65.                                                                                                       
                                                                                                                                                        
Note.--Aggregate benefits and revenues are understated by about 10 percent because of benefits paid abroad, deaths of recipients before March interview,
  and exclusion of institutionalized beneficiaries. The number of beneficiaries is also understated.                                                    
                                                                                                                                                        
Source: Congressional Budget Office simulations based on data from the Current Population Survey.                                                       


TABLE 1-20.--TAXATION OF OASDI BENEFITS BY TRUST FUNDS CREDITED AND AS A PERCENT OF TOTAL BENEFIT PAYMENTS, 1984-
                                                      2001                                                      
                                              [Dollars in millions]                                             
----------------------------------------------------------------------------------------------------------------
                                                            Taxes credited to trust     Taxes credited to trust 
                                                           funds from the taxation of  funds as percent of OASDI
                                                 Total           OASDI benefits                 benefits        
                 Fiscal year                     OASDI   -------------------------------------------------------
                                                benefits            Hospital                    Hospital        
                                                           OASDI   insurance   Total    OASDI  insurance   Total
----------------------------------------------------------------------------------------------------------------
Past experience:                                                                                                
    1984.....................................   $173,603   $2,275  .........   $2,275     1.3  .........     1.3
    1985.....................................    183,959    3,368  .........    3,368     1.8  .........     1.8
    1986.....................................    193,869    3,558  .........    3,558     1.8  .........     1.8
    1987.....................................    202,430    3,307  .........    3,307     1.6  .........     1.6
    1988.....................................    213,907    3,390  .........    3,390     1.6  .........     1.6
    1989.....................................    227,150    3,772  .........    3,772     1.7  .........     1.7
    1990.....................................    243,275    3,081  .........    3,081     1.3  .........     1.3
    1991.....................................    263,104    5,921  .........    5,921     2.3  .........     2.3
    1992.....................................    281,650    6,237  .........    6,237     2.2  .........     2.2
    1993.....................................    298,176    6,161  .........    6,161     2.1  .........     2.1
    1994.....................................    313,129    5,656    $1,625     7,281     1.8       0.5      2.3
    1995.....................................    328,841    5,449     3,883     9,332     1.7       1.2      2.8
Projected: \1\                                                                                                  
    1996.....................................    343,778    6,159     3,976    10,135     1.8       1.2      2.9
    1997.....................................    361,123    7,195     4,331    11,526     2.0       1.2      3.2
    1998.....................................    379,488    7,694     4,623    12,317     2.0       1.2      3.2
    1999.....................................    399,288    8,242     4,926    13,168     2.1       1.2      3.3
    2000.....................................    420,885    8,837     5,259    14,096     2.1       1.2      3.3
    2001.....................................    444,329    9,500     5,626    15,126     2.1       1.3      3.4
----------------------------------------------------------------------------------------------------------------
\1\ Based on intermediate assumptions in the 1996 Annual Reports of the Board of Trustees of the Federal Old-Age
  and Survivors Insurance and Disability Insurance Trust Funds and the Hospital Insurance Trust Fund.           
                                                                                                                
Note.--Tax amounts are the amounts collected through the Federal income tax system (including adjustments for   
  actual experience in prior years) plus, for OASDI only, taxes withheld from the OASDI benefits of certain     
  nonresident aliens.                                                                                           
                                                                                                                
Source: Office of the Actuary, Social Security Administration.                                                  

                      Medical Improvement Standard

    The 1984 Disability Benefits Reform Act amended the law to 
require that in continuing eligibility review cases, benefits 
may be terminated only if the Commissioner finds that there has 
been medical improvement in the person's condition and that the 
individual is now able to engage in substantial gainful 
activity. There are several exceptions to this standard, which 
are described in greater detail in the ``Recent Legislation'' 
section of this chapter.

                            Medical Evidence

    An individual is not considered to be under a disability 
unless he furnishes such medical and other evidence as the 
Commissioner may require.
    Under the law, the Commissioner will generally reimburse 
physicians or hospitals for supplying medical evidence in 
support of claims for DI benefits. The Commissioner also pays 
for medical examinations that are needed to adjudicate the 
claim.

                   Attorneys' Fees and Representation

    Attorneys and other individuals who represent disability 
applicants in any proceeding before SSA, and who wish to charge 
a fee for their services, must have the fee authorized by SSA.
    SSA approves a fee agreement filed before the date of the 
favorable decision and signed jointly by the applicant and the 
representative, if the agreed-upon fee does not exceed the 
lesser of 25 percent of past-due benefits or $4,000.
    Under both the fee petition and fee arrangement process, 
SSA withholds 25 percent of the past-due benefits of an 
applicant represented by an attorney and certifies direct 
payment of the authorized fee to the attorney.
    A court that renders a favorable decision for Social 
Security benefits is permitted to set a reasonable fee for the 
attorney who represented the applicant before the court. The 
fee cannot exceed 25 percent of the past-due benefits that 
result from the court's decision.

                       VOCATIONAL REHABILITATION

    The Social Security Act requires that persons applying for 
a determination of disability be promptly referred to State 
vocational rehabilitation (VR) agencies for necessary 
rehabilitation services. The act provides for withholding of 
benefits for refusal, without good cause, to accept 
rehabilitation services available under a State plan approved 
under the Vocational Rehabilitation Act.
    Public Law 97-35 eliminated reimbursement from the DI Trust 
Funds to the State vocational rehabilitation agencies for 
rehabilitation services except in cases where the services 
result in the beneficiary's performance of substantial gainful 
activity (SGA) for a continuous period of at least 9 months. 
Such a 9-month period could begin while the individual is under 
a vocational rehabilitation program and may also coincide with 
the trial work period or the individual's waiting period for 
benefits. The services must be performed under a State plan for 
vocational rehabilitation services under title I of the 
Rehabilitation Act. In the case of any State that is unwilling 
to participate or does not have a plan that meets the 
requirements of the Vocational Rehabilitation Act, the 
Commissioner of Social Security may provide such services by 
agreement or contract with other public or private agencies, 
organizations, institutions or individuals. The determination 
that the vocational rehabilitation services contributed to the 
successful return of the individual to SGA, and the 
determination of the amount of costs to be reimbursed, are made 
by the Commissioner. Payments under this provision can be made 
in advance or by reimbursement, with necessary adjustments for 
overpayments or underpayments.
    Using the rulemaking process, SSA gained significant new 
authority when regulations were published in the Federal 
Register on March 15, 1994. The regulations expanded the use of 
private vocational rehabilitation providers and public non-
State VR providers when a State VR agency declines to provide 
services for an individual referred to it.

                DISABILITY CLAIMS AND APPEALS STRUCTURE

    The Social Security appeals and case review process is a 
complex multilayered structure that is inextricably linked with 
the disability determination process. The application for 
disability benefits is made at the Social Security district 
office where the applicant is interviewed and the sources of 
medical evidence are recorded. After determining whether the 
applicant meets the insured status requirements, the SSA 
district office then sends the case to the State Disability 
Determination Service (DDS), which makes the initial 
determination of disability. If an applicant or beneficiary is 
dissatisfied with an initial denial or termination of 
disability benefits by the DDS, she can request a 
reconsideration within 60 days of receipt of the notice of 
denial. The reconsideration on the disability claim is also 
carried out by the DDS, but by personnel other than those who 
made the initial determination.
    If upon reconsideration the applicant is again denied 
benefits, the applicant will be given a hearing before an 
administrative law judge (ALJ) in SSA's Office of Hearings and 
Appeals (OHA), providing he files a request for hearing within 
60 days of receipt of the notice of denial. If the claim is 
denied by the ALJ, the applicant has 60 days to request review 
by the Appeals Council. The Appeals Council is a 15-member body 
located in the OHA. The Appeals Council may also, on its own 
motion, review a decision within 60 days of the ALJ's decision. 
The 1980 disability amendments required a review of a 
percentage of ALJ hearing decisions, and this review is being 
conducted by the Appeals Council.
    The Appeals Council may review, affirm, modify or reverse 
the decision of the ALJ, or it may remand it to the ALJ for 
further development. The applicant is notified in writing of 
the final action of the Appeals Council, and is informed of his 
right to obtain further review by commencing a civil action 
within 60 days in a U.S. District Court.
    Under current law, as amended by the 1984 Disability 
Benefits Reform Act, DI beneficiaries whose benefits have been 
terminated because of recovery or improvement in the medical 
condition that was the basis for the disability can elect to 
continue to receive disability and Medicare benefits through 
the hearing stage of the appeals process, subject to recovery.
    Chart 1-1 shows the number of cases allowed and appealed at 
various levels of appeal for application decisions and 
continuing disability reviews (CDRs) processed by State 
agencies. Table 1-21 presents information for fiscal years 1979 
through 1995 on the number of cases that were reviewed and 
reversed at the ALJ level. Table 1-22 presents information on 
the number of title II DI continuing disability reviews that 
were conducted in fiscal years 1977-95. Due to an unprecedented 
increase in initial claims, the number of CDRs processed 
declined sharply in the early 1990s. National implementation of 
a new CDR process in 1993 enabled SSA to increase the number of 
CDRs being conducted significantly.

   CHART 1-1. DISABILITY DETERMINATIONS AND APPEALS, FISCAL YEAR 1995

   TITLE II, TITLE XVI AND CONCURRENT TITLE II AND XVI DECISIONS FOR 
   DISABILITY CLAIMS BY WORKERS, WIDOWS, WIDOWERS AND DISABLED ADULT 
                              CHILDREN \1\


    \1\ The data relate to workloads processed (but not 
necessarily received) in fiscal year 1995, i.e., the case 
processed at each adjudicatory level may include cases received 
at one or more of the lower adjudicatory levels prior to fiscal 
year 1995. The data include determinations on initial 
applications as well as continuing disability reviews (both 
periodic reviews and medical diary cases).
    \2\ Includes non-State CDR mailer continuations. Also 
includes 12,800 CDRs where there was ``no decision.'' The 
continuance and termination rates are computed without the ``no 
decision'' cases.
    \3\ Many ALJ dispositions and AC decisions are based on DDS 
determinations from a previous year. Therefore, a percent 
appealed is not provided.
    \4\ Preliminary data.
    \5\ Includes ALJ decisions not appealed further by the 
claimant but reviewed by the Appeals Council on ``own motion'' 
authority.
    \6\ Includes affirmations, denials and dismissals of 
requests for review, own motion reopening cases.

    Source: Social Security Administration.

    Public Law 104-121 authorized significant additional 
administrative funding exempt from the discretionary spending 
cap, and above the annual $200 million currently authorized, to 
enable SSA to clear its CDR backlog of roughly 3.4 million 
cases more quickly. Total fiscal year authorizations are: 1996, 
$260 million; 1997, $360 million; 1998, $570 million; and 1999-
2002, $720 million.

  TABLE 1-21.--ADMINISTRATIVE LAW JUDGE DISABILITY INSURANCE \1\ FAVORABLE DECISION RATES, INITIAL DENIALS AND  
                                     TERMINATIONS, \2\ FISCAL YEARS 1979-95                                     
----------------------------------------------------------------------------------------------------------------
                                                                                                        Percent 
                      Fiscal year                        Dismissed  Unfavorable  Favorable    Total    favorable
----------------------------------------------------------------------------------------------------------------
Initial denials:                                                                                                
    1979...............................................      6,332      31,485      48,934     86,751       56.4
    1980...............................................      7,093      31,703      56,733     95,529       59.4
    1981...............................................     15,141      59,930      98,129    173,200       56.7
    1982...............................................     15,403      67,481      91,865    174,749       52.6
    1983...............................................     14,334      65,626      79,427    159,387       49.8
    1984...............................................     15,075      63,381      88,301    166,757       53.0
    1985...............................................     14,806      61,161      92,118    168,085       54.8
    1986...............................................     28,792      44,223      78,737    151,752       51.9
    1987...............................................     15,271      58,412      98,180    171,863       57.1
    1988...............................................     18,213      58,788     111,748    188,749       59.2
    1989...............................................     19,695      54,284     122,070    196,049       62.3
    1990...............................................     19,297      45,264     127,707    192,268       66.4
    1991 \3\...........................................     19,880      44,594     144,945    209,419       69.2
    1992 \3\...........................................     19,665      48,407     166,661    234,733       71.0
    1993 \3\...........................................     20,190      47,579     171,508    239,277       71.7
    1994 \4\...........................................     23,576      49,110     189,373    262,059       72.3
    1995...............................................     44,234      65,415     220,558    330,207       66.8
Terminations:                                                                                                   
    1979...............................................      1,401       4,078       8,052     13,531       59.5
    1980...............................................      1,431       4,197       9,909     15,537       63.8
    1981...............................................      2,623       6,945      16,685     26,253       63.6
    1982...............................................      4,670      17,502      37,306     59,478       62.7
    1983...............................................      9,247      37,284      73,821    120,352       61.3
    1984...............................................     25,681      22,590      56,327    104,598       53.9
    1985...............................................      4,176       2,415       3,126      9,717       32.2
    1986...............................................      1,095       2,129       2,014      5,238       38.4
    1987...............................................        812       1,954       2,014      4,780       42.1
    1988...............................................      1,031       2,807       3,426      7,264       47.2
    1989...............................................      1,220       3,482       4,882      9,584       50.9
    1990...............................................      1,166       2,940       4,695      8,801       53.3
    1991 \3\...........................................      1,007       2,140       3,935      7,082       55.6
    1992 \3\...........................................        812       1,642       2,812      5,266       53.4
    1993 \3\...........................................        720       1,281       2,079      4,080       51.0
    1994 \4\...........................................        656       1,082       1,540      3,278       47.0
    1995...............................................        821       1,173       1,807      3,801       47.5
----------------------------------------------------------------------------------------------------------------
\1\ Includes title II and concurrent title II/title XVI disability cases and concurrent title II/title XVI aged 
  cases.                                                                                                        
\2\ Includes all termination cases regardless of the basis for termination.                                     
\3\ Final data.                                                                                                 
\4\ Revised February 1996.                                                                                      
                                                                                                                
Source: Office of Hearings and Appeals, Social Security Administration.                                         


       TABLE 1-22.--CONTINUING DISABILITY REVIEW (CDR) CESSATIONS AND CONTINUATIONS, FISCAL YEARS 1977-95       
----------------------------------------------------------------------------------------------------------------
                                          Cessations       Continuations                 Total cases            
                                     ---------------------------------------------------------------------------
                                                                              Cessations      Total             
                                       Number   Percent   Number   Percent       and         disabled    Percent
                                                                            continuations    persons    reviewed
----------------------------------------------------------------------------------------------------------------
1977................................    41,475    38.7     65,745    61.3       107,220    \1\ 3,322,2          
                                                                                                    30       3.2
1978................................    38,847    46.4     44,804    53.6        83,651      3,447,767       2.4
1979................................    45,216    48.1     48,868    51.9        94,084      3,457,837       2.7
1980................................    44,273    46.8     50,227    53.2        94,550      3,454,010       2.7
1981................................    80,956    47.9     87,966    52.1       168,922      3,413,602       4.9
1982................................   179,857    44.8    221,325    55.2       401,182      3,263,354      12.3
1983................................   182,074    41.7    254,424    58.3       436,498      3,226,888      13.5
1984 \2\............................    31,927    24.6     97,752    75.4       129,679      3,249,367       4.0
1985 \2\............................       475    14.6      2,785    85.4         3,260      3,332,870       0.1
1986................................     2,554     5.6     42,805    94.4        45,359      3,261,768       1.4
1987................................    20,343    12.4    143,712    87.6       164,055      3,433,524       4.8
1988................................    33,565    11.5    257,377    88.5       290,942      3,492,762       8.3
1989................................    24,102     9.2    237,722    90.8       261,824      3,559,840       7.4
1990 \3\............................    15,154    10.5    129,026    89.5       144,180      3,678,509       3.9
1991 \4\............................     5,697    12.5     39,749    87.5        45,446      3,866,645       1.2
1992................................     6,923    15.0     39,291    85.0        46,214      4,165,133       1.1
1993 \5\............................     4,886     9.9     44,316    90.1        49,202      4,457,500       1.1
1994 \5\............................    13,940    14.1     85,189    85.9        99,129      4,729,948       2.1
1995 \5\............................    31,694    16.1    164,281    83.9       196,575      4,980,462       4.0
----------------------------------------------------------------------------------------------------------------
\1\ In current pay at end of fiscal year.                                                                       
\2\ The decline in the number of reviews in 1984 and 1985 was due to the national moratorium on reviews pending 
  enactment and implementation of new legislation that revised criteria for CDRs (legislation enacted in fiscal 
  year 1984; regulations promulgated late fiscal year 1985).                                                    
\3\ The decline in CDR processing in 1990 was due to the unanticipated demands of processing approximately      
  40,000 class action court cases.                                                                              
\4\ The continued decline in CDR processing is due to the increase in the initial claims workloads.             
\5\ Includes non-State CDR mailer continuations.                                                                
                                                                                                                
Source: Office of Disability, Social Security Administration.                                                   

              CHANGES IN ENROLLMENT AND APPLICANT BACKLOGS

            Disability Insurance (DI) Awards and Recipients

    Over the past 18 years, the DI Program experienced a period 
of declining enrollment followed by a rebound in growth. The 
number of DI beneficiaries (disabled workers and their 
dependents) receiving benefits peaked at 4.9 million in May 
1978. The beneficiary population then declined sharply to 3.8 
million in July 1984. Thereafter, the number of beneficiaries 
rose steadily, reaching 5.9 million in December 1995.
    Similarly, the number of new DI benefit awards declined 
from 592,000 in 1975 to approximately 299,000 in 1982. As shown 
in table 1-23, awards then rose almost steadily, reaching 
646,000 in 1995. (The large 1992 increase is partially 
attributable to SSA's short-term measures for dealing with 
increased DI applications. Increasing the volume of 
applications processed resulted in increases in both awards and 
denials.)

  TABLE 1-23.--DISABLED WORKERS' APPLICATIONS, AWARDS, RATIO OF AWARDS TO APPLICATIONS, AND INSURED WORKERS FOR 
                                             SELECTED YEARS, 1960-95                                            
----------------------------------------------------------------------------------------------------------------
                                                     Number of                      Awards as a     Awards per  
                                                   applications    Total awards     percent of     1,000 insured
                                                  (in thousands)                   applications       workers   
----------------------------------------------------------------------------------------------------------------
1960............................................           418.6         207,805              50             4.5
1965............................................           532.9         253,499              48             4.7
1970............................................           868.2         350,384              40             4.8
1971............................................           924.4         415,897              45             5.6
1972............................................           947.8         455,438              48             6.0
1973............................................         1,066.9         491,616              46             6.3
1974............................................         1,330.2         535,977              40             6.7
1975............................................         1,285.3         592,049              46             7.1
1976............................................         1,232.2         551,460              45             6.5
1977............................................         1,235.2         568,874              46             6.5
1978............................................         1,184.7         464,415              39             5.2
1979............................................         1,187.8         416,713              35             4.4
1980............................................         1,262.3         396,559              31             4.0
1981............................................         1,161.3         345,254              30             3.4
1982............................................         1,020.0         298,531              29             2.9
1983............................................         1,017.7         311,491              31             3.0
1984............................................         1,035.7         357,141              34             3.4
1985............................................         1,066.2         377,371              35             3.5
1986............................................         1,118.4         416,865              37             3.8
1987............................................         1,108.9         415,848              37             3.7
1988............................................         1,017.9         409,490              40             3.6
1989............................................           984.9         425,582              43             3.7
1990............................................         1,067.7         467,977              44             4.0
1991............................................         1,208.7         536,434              44             4.5
1992............................................         1,335.1         636,637              48             5.2
1993............................................         1,425.8         635,238              45             5.2
1994............................................         1,443.8         631,870              44             5.1
1995............................................         1,338.1         645,832              48             5.1
----------------------------------------------------------------------------------------------------------------
Source: Office of the Actuary, Social Security Administration.                                                  

    The incidence of disability (number of awards per 1,000 
insured workers) fell from an all-time high of 7.1 in 1975 to 
an all-time low of 2.9 in 1982. In 1995, the rate was 5.1 
percent (see table 1-23).
    Table 1-24 shows the number of DI beneficiaries for 
selected fiscal years.

                    Pending Claims and Waiting Times

    In recent years, the combination of increasing workloads 
and reduced staff left the State Disability Determination 
Services unable to keep pace with their workloads. \5\ As shown 
in table 1-25, pending cases rose sharply between 1988 and 
1992. During that time, applications pending at the DDSs rose 
from 323,000 to 725,000, causing applicants to wait 50 percent 
longer, or 3 months instead of 2, for an eligibility decision. 
However, by the end of 1995, applications pending had dropped 
to 590,000, with applicants' waiting time reduced to about 2 
months. Additional budgetary resources were directed 
specifically to disability case processing in fiscal years 1994 
and 1995. These targeted resources have assisted SSA in efforts 
to hold down the growth in pending disability work. Table 1-25 
shows actual disability cases pending and applicant waiting 
times since fiscal year 1988.
---------------------------------------------------------------------------
    \5\ Between 1984 and 1990, DDS staff was cut by 19 percent--from 
14,500 to 11,800.

              TABLE 1-24.--NUMBER OF DISABILITY INSURANCE BENEFICIARIES FOR SELECTED YEARS, 1960-95             
                                       [Current payment status, December]                                       
----------------------------------------------------------------------------------------------------------------
                                                              Disabled                                          
                                                               workers       Spouses      Children      Total   
----------------------------------------------------------------------------------------------------------------
Year:                                                                                                           
  1960...................................................         455,371       76,599      155,481      687,451
  1965...................................................         988,074      193,362      557,615    1,739,051
  1970...................................................       1,492,948      283,447      888,600    2,664,995
  1975...................................................       2,488,774      452,922    1,410,504    4,352,200
  1980...................................................       2,861,253      462,204    1,358,715    4,682,172
  1981...................................................       2,776,519      428,212    1,251,543    4,456,274
  1982...................................................       2,603,713      365,883    1,003,869    3,973,465
  1983...................................................       2,568,966      308,060      935,904    3,812,930
  1984...................................................       2,596,535      303,984      921,285    3,821,804
  1985...................................................       2,656,500      305,528      945,141    3,907,169
  1986...................................................       2,727,386      300,592      965,301    3,993,279
  1987...................................................       2,785,885      290,895      967,944    4,044,724
  1988...................................................       2,830,284      280,821      963,195    4,074,300
  1989...................................................       2,895,364      271,488      961,975    4,128,827
  1990...................................................       3,011,294      265,890      988,797    4,265,981
  1991...................................................       3,194,938      266,219    1,051,883    4,513,040
  1992...................................................       3,467,783      270,674    1,151,239    4,889,696
  1993...................................................       3,725,966      272,759    1,254,841    5,253,566
  1994...................................................       3,962,954      271,054    1,349,511    5,583,519
  1995...................................................       4,185,263      263,539    1,408,854    5,857,656
----------------------------------------------------------------------------------------------------------------
Source: Office of Research and Statistics, Social Security Administration.                                      

                     CHARACTERISTICS OF RECIPIENTS

                                 OASDI

    Table 1-26 provides detailed information on the number of 
OASDI beneficiaries in various categories, and the average 
amount of monthly benefits by type of beneficiary for both new 
awards and all beneficiaries currently receiving payments.

                                   DI

    Tables 1-27 and 1-28 present data on the demographic, 
social, and medical characteristics of the disabled population 
over time. For instance, table 1-27 shows the increase in the 
receipt of benefits by women, which reflects larger societal 
trends in female work force participation. Table 1-27 also 
indicates the higher levels of educational attainment that 
characterize the present disabled population in comparison to 
that of 1970.

    TABLE 1-25.--DISABILITY CASES PENDING AND WAITING TIMES, 1988-95    
      [Cases pending and weeks of work on hand at State Disability      
                     Determination Services (DDSs)]                     
------------------------------------------------------------------------
                                         Total claims                   
                Year                   pending at end of   Weeks of work
                                             year           on hand \1\ 
------------------------------------------------------------------------
1988................................             323,000             8.4
1989................................             479,000            10.0
1990................................             538,000            11.3
1991................................             693,000            14.3
1992................................             725,000            12.1
1993................................             712,000            10.9
1994................................             729,000            10.3
1995................................             590,000             8.4
------------------------------------------------------------------------
\1\ The number of weeks of work pending in DDSs provides the best       
  approximation of the amount of time an applicant must wait for an     
  eligibility decision.                                                 
                                                                        
Source: National Council of Disability Determination Directors.         


    TABLE 1-26.--NUMBER OF PERSONS RECEIVING VARIOUS TYPES OF OASDI BENEFITS BY AGE, SEX, AND AVERAGE MONTHLY   
                                         BENEFIT AMOUNTS, DECEMBER 1995                                         
                                         [Based on a 10-percent sample]                                         
----------------------------------------------------------------------------------------------------------------
                                                                               Percent  of   Average  Percentage
                         Beneficiaries                              Number        total      monthly   of total 
                                                                 (thousands)  beneficiaries  benefit   benefits 
----------------------------------------------------------------------------------------------------------------
Retired workers................................................       26,763        61.5        $720        68.2
    Retired men................................................       13,914        32.1         810        40.0
    Retired women..............................................       12,759        29.4         621        28.2
                                                                                                                
Disabled workers...............................................        4,185         9.6         682        10.1
    Disabled men...............................................        2,568         5.9         762         6.9
    Disabled women.............................................        1,617         3.7         555         3.2
                                                                                                                
Spouses of retired workers.....................................        3,026         7.0         370         4.0
    Wives of retired workers...................................        2,996         6.9         372         4.0
    Wives with entitled children...............................           79         0.2         257         0.1
    Wives age 62 and over without entitled children............        2,918         6.7         375         3.9
    Husbands of retired workers................................           30         0.1         221       (\1\)
                                                                                                                
Spouses of disabled workers....................................          264         0.6         164         0.2
    Wives of disabled workers..................................          256         0.6         165         0.1
    Wives with entitled children...............................          202         0.5         143         0.1
    Wives age 62 and over without entitled children............           54         0.1         247       (\1\)
    Husbands of disabled workers...............................            8       (\1\)         117       (\1\)
                                                                                                                
Children.......................................................        3,734         8.6         344         4.6
    Children of retired workers................................          442         1.0         322         0.5
        Minor children (age 0-17)..............................          242         0.6         287         0.2
        Student children (age 18 and 19).......................           11       (\1\)         360       (\1\)
        Disabled children (age 18 and over)....................          189         0.4         364         0.2
    Children of deceased workers...............................        1,884         4.3         469         3.1
        Minor children (age 0-17)..............................        1,386         3.2         460         2.3
        Student children (age 18 and 19).......................           51         0.1         547         0.1
        Disabled children (age 18 and over)....................          446         1.0         487         0.8
    Children of disabled workers...............................        1,409         3.2         183         0.9
        Minor children (age 0-17)..............................        1,329         3.1         178         0.8
        Student children (age 18 and 19).......................           29         0.1         284       (\1\)
        Disabled children (age 18 and over)....................           51         0.1         270       (\1\)
                                                                                                                
Widowed mothers and fathers....................................          275         0.6         478         0.5
    Widowed mothers............................................          260         0.6         485         0.4
    Widowed fathers............................................           15       (\1\)         351       (\1\)
                                                                                                                
Widows and widowers (nondisabled)..............................        5,052        11.6         680        12.2
    Widows (nondisabled).......................................        5,015        11.6         681        12.1
    Widowers (nondisabled).....................................           38         0.1         500         0.1
                                                                                                                
Widows and widowers (disabled).................................          173         0.4         458         0.3
    Widows (disabled)..........................................          169         0.4         461         0.3
    Widowers (disabled)........................................            4       (\1\)         308       (\1\)
                                                                                                                
Parents total..................................................            4       (\1\)         591       (\1\)
                                                                                                                
Special age 72 (primary).......................................            1       (\1\)         192       (\1\)
                                                                                                                
      Total OASI beneficiaries.................................       37,530        86.5         666        88.8
      Total DI beneficiaries...................................        5,858        13.5         539        11.2
      Total OASDI beneficiaries................................       43,387       100.0         649       100.0
----------------------------------------------------------------------------------------------------------------
\1\ Less than 0.1 percent.                                                                                      
                                                                                                                
Note.--Columns may not add due to rounding.                                                                     
                                                                                                                
Source: Office of Research and Statistics, Social Security Administration.                                      


 TABLE 1-27.--PERCENT DISTRIBUTION BY AGE, SEX AND EDUCATION OF TITLE II DISABLED WORKER BENEFICIARIES ALLOWED BENEFITS IN SELECTED CALENDAR YEARS 1970-95, COMPARED WITH ADULT U.S. POPULATION 
                                                                                             IN 1990                                                                                            
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Year allowed benefits                                                            
                         Characteristics                         ----------------------------------------------------------------------------------------------------------------   Adult U.S.  
                                                                   1970    1975    1979    1982    1985    1987    1988    1989    1990    1991    1992    1993    1994    1995   population \1\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Age:                                                                                                                                                                                            
  Under 35......................................................     9.0    11.0    13.6    14.4    16.8    17.1    15.2    16.2    15.7    15.7    16.8    16.2    14.7    13.3           46   
  35-44.........................................................    11.0    10.0    11.5    12.3    15.0    16.0    16.5    17.9    18.7    19.6    20.4    20.9    20.7    20.4           24   
  45-54.........................................................    26.0    26.0    27.2    26.5    25.7    22.9    23.3    24.7    24.7    25.1    25.6    26.8    27.7    28.3           16   
  55-59.........................................................    24.0    23.0    27.0    27.2    23.9    20.8    20.6    20.4    19.9    19.5    18.5    18.6    19.2    19.9            7   
  60 and over...................................................    30.0    30.0    20.6    19.6    18.7    23.2    24.4    20.9    21.0    20.1    18.7    17.6    17.8    18.0            7   
  Median age (years)............................................    56.0    55.6    53.4    53.1    51.7    53.0    53.3    52.1    51.9    51.4    50.5    50.3    50.8    51.3         32.9   
Sex:                                                                                                                                                                                            
  Male..........................................................      74      68      69      70      67      66      66      64      64      64      63      62      60    58.4           49   
  Female........................................................      26      32      31      30      33      34      34      36      36      36      37      38      40    41.4           51   
Education (years of school completed):                                                                                                                                                          
  No schooling \2\..............................................       2       1       1       1       2       1       1       1       1       1       1       1       1      NA            1   
  Elementary school (1-8).......................................      44      37      29      26      23      18      18      17      16      16      12      11      12      NA            9   
  High school...................................................      46      52      55      56      59      57      59      60      62      62      50      45      55      NA           45   
    9-11........................................................      23      24      23      22      22      19      20      19      19      19      15      14      16      NA           11   
    12..........................................................      23      28      32      34      37      38      39      41      43      43      35      31      39      NA           34   
  Some college..................................................       9      10      12      14      14      16      15      17      17      17      14      12      16      NA           45   
  Unknown.......................................................       0       0       3       3       2       8       7       5       5       5      23      31      16      NA            0   
                                                                 -------------------------------------------------------------------------------------------------------------------------------
      Total percent.............................................   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0        100.0   
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Derived from 1990 census. Figures for age based on population aged 18-64. Figures for education based on persons aged 25 and over.                                                          
\2\ Also includes special schools for handicapped.                                                                                                                                              
                                                                                                                                                                                                
NA--Not available.                                                                                                                                                                              
                                                                                                                                                                                                
Source: Office of Disability, Social Security Administration.                                                                                                                                   


 TABLE 1-28.--PERCENT DISTRIBUTION BY DISABLING CONDITION OF TITLE II DISABLED WORKER BENEFICIARIES ALLOWED BENEFITS IN SELECTED CALENDAR YEARS 1970-95 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Year allowed benefits                                     
           Disabling condition and mobility            -------------------------------------------------------------------------------------------------
                                                         1970   1975   1979   1982   1985   1987   1988   1989   1990   1991   1992   1993   1994   1995
--------------------------------------------------------------------------------------------------------------------------------------------------------
Disabling condition:                                                                                                                                    
  Infective and parasitic diseases \1\................      3      1      1      1      1      1      0      1      6      6      7      7      6      6
  Neoplasms...........................................     10     10     14     17     15     12     16     18     17     16     13     15     16     16
  Allergic, endocrine system, metabolic and                                                                                                             
   nutritional diseases...............................      4      3      3      4      5      5      3      3      3      4      5      5      5      5
  Mental, psychoneurotic and personality disorders....     11     11     11     11     18     23     22     22     23     24     25     26     24     22
  Diseases of the nervous system and sense organs.....      6      7      8      9      8      8      8      9      9      8      8      7      8      8
  Circulatory system..................................     31     32     28     25     19     17     18     17     16     15     14     15     14     14
  Respiratory system..................................      7      7      6      7      5      5      5      5      5      5      4      5      5      5
  Digestive system....................................      3      3      2      2      2      1      2      2      2      2      2      2      2      2
  Skeletal musculo....................................     15     17     17     16     13     14     14     11     12     13     13     12     12     12
  Accidents, poisonings and violence..................      8      6      6      6      4      5      5      4      4      4      4      3      3      3
  Other/unknown.......................................      2      3      3      2     11      9      7      9      5      5      5      5      6      6
                                                       -------------------------------------------------------------------------------------------------
      Total percent \2\...............................    100    100    100    100    100    100    100    100    100    100    100    100    100    100
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Beginning in 1990, AIDS/HIV cases are included in this category.                                                                                    
\2\ Due to rounding, may not add to 100 percent.                                                                                                        
                                                                                                                                                        
Source: Office of Disability, Social Security Administration.                                                                                           

                       SOCIAL SECURITY FINANCING

                              Current Law

    Financing for Social Security--Old Age, Survivors, and 
Disability Insurance (OASDI)--and the Hospital Insurance (HI) 
part of Medicare--is provided primarily by taxes levied on 
wages and net self-employment income. These taxes often are 
referred to as FICA and SECA taxes (Federal Insurance 
Contributions Act and Self-Employment Contributions Act, 
respectively). More than 95 percent of the work force, or an 
estimated 145.3 million workers in 1996 (of whom 3.2 million 
pay only HI taxes), is required to pay FICA or SECA. The FICA 
tax is paid equally by both employees and employers; the SECA 
tax is paid by the self-employed.
    Both taxes have three components: One each for OASI, DI, 
and HI. The FICA tax was first levied in 1937 at a rate of 1 
percent each for the employee and employer on earnings up to 
$3,000 a year. In 1996, the rate is 7.65 percent of which 6.2 
percent goes to OASDI and 1.45 percent goes to HI. The SECA 
rate for the self-employed is 12.4 percent for OASDI and 2.9 
percent for HI. The OASDI rate is levied on earnings up to 
$62,700. (This level rises annually at the same rate as average 
wages in the economy.) For the HI portion, all earnings are 
taxable. The three programs also receive interest income on 
securities recorded to its trust funds, income taxes levied on 
Social Security benefits, and income from various other minor 
sources.
    Most income to the system goes out directly to meet current 
benefit obligations. Any funds collected in excess of the 
amount needed to make benefit payments are credited to the OASI 
and DI Trust Funds as reserves, in the form of government 
securities. These reserves serve as a cushion against temporary 
shortfalls in revenues or large increases in outlays due to 
economic fluctuations. The trust funds also are credited with 
interest income. Social Security benefit outlays are drawn 
against the trust funds and are made under a permanent 
appropriation provided for in the Social Security Act. 
Administrative expenses also are charged against the trust 
funds, but are subject to an annual limitation set by 
appropriations acts.
    Before 1984, self-employed workers paid a tax rate which 
was less than the combined employee-employer rate. Effective in 
1984, self-employed workers began to pay Social Security taxes 
that were equivalent to the combined employer-employee rate and 
to receive a partial credit against that tax through 1989. 
Effective in 1990 and thereafter, the credit was replaced with 
a system designed to achieve parity between employees and the 
self-employed. Under this system:
  --The base of the self-employment tax is adjusted downward to 
        reflect the fact that employees do not pay FICA tax on 
        the value of the employer's FICA tax. The base is 
        equivalent to net earnings from self-employment (up to 
        the taxable wage base), less 7.65 percent, and
  --A deduction is allowed for income tax purposes for half of 
        SECA liability, to allow for the fact that employees do 
        not pay income tax on the value of the employer's FICA 
        tax.
    Tables 1-29, 1-30, 1-31 and 1-32 show FICA and SECA tax 
rates (in percent), taxes (in dollars), and taxable earnings 
bases, both past and future. Table 1-32a shows categories of 
workers exempt from FICA and SECA taxes.

                         TABLE 1-29.--FICA AND SECA TAX RATES, SELECTED YEARS 1937-2000                         
                                                  [In percent]                                                  
----------------------------------------------------------------------------------------------------------------
                                                                  Rate paid by employee and                     
                                                                          employer             Self-    Maximum 
                      Calendar year                        OASI ---------------------------- employed   taxable 
                                                                   DI   OASDI    HI   Total    rate     earnings
----------------------------------------------------------------------------------------------------------------
1937....................................................   1.0   .....  .....  .....   1.0   ........     $3,000
1950....................................................   1.5   .....  .....  .....   3.0   ........      3,000
1960....................................................   3.0    0.25   2.75  .....   3.0        4.5      4,800
1970....................................................   3.65   0.55   4.20   0.60   4.8        6.9      7,800
1980....................................................   4.52   0.56   5.08   1.05   6.13       8.1     25,900
1990....................................................   5.60   0.60   6.20   1.45   7.65      15.3     51,300
1995....................................................   5.26   0.94   6.20   1.45   7.65      15.3  \1\ 61,20
                                                                                                               0
1996....................................................   5.26   0.94   6.20   1.45   7.65      15.3  \1\ 62,70
                                                                                                               0
1997-99.................................................   5.26   0.85   6.20   1.45   7.65      15.3      (\2\)
2000....................................................   5.30   0.90   6.20   1.45   7.65      15.3      (\2\)
----------------------------------------------------------------------------------------------------------------
\1\ OASDI; no limit (HI).                                                                                       
\2\ Not yet determined for OASDI; no limit (HI).                                                                
                                                                                                                
Note.--Until 1991 the maximum taxable earnings for HI were the same as for OASDI. In 1991, 1992, and 1993       
  maximum taxable earnings were $125,000, $130,200, and $135,000 respectively, with no limit after 1993. Only   
  92.35 percent net self-employment earnings are taxable and half of the SECA taxes so computed is deductible   
  for income tax purposes.                                                                                      
                                                                                                                
Source: Congressional Research Service.                                                                         


        TABLE 1-30.--FICA AND SECA TAXES, SELECTED YEARS 1950-96        
------------------------------------------------------------------------
                                            Annual tax payments         
                                 ---------------------------------------
                                  Average earner \1\    High earner \1\ 
                                 ---------------------------------------
                                  FICA \1\  SECA \2\  FICA \1\  SECA \2\
------------------------------------------------------------------------
1950............................       $38  ........       $45  ........
1960............................       120      $180       144      $216
1970............................       297       427       374       538
1980............................       767     1,014     1,588     2,098
1995............................     1,887     2,998     6,694    10,615
Cumulative 1951-95 \3\..........    99,656   143,815   190,332   285,164
1996............................     1,963     3,118     6,787    10,768
------------------------------------------------------------------------
\1\ Employee share only for FICA column. Average earner means someone   
  who earned average wages throughout his or her working years (average 
  wages are estimated for 1995 and 1996). For years before 1994, high   
  earner means someone who earned at least the maximum wage level       
  subject to OASDI and HI taxes. For 1994, 1995, and 1996, it is assumed
  to be someone who earns $200,000 a year.                              
\2\ For 1995 and 1996, figures in table are net of income tax deduction 
  equal to one half of SECA taxes.                                      
\3\ Includes interest compounded at rates of long-term Treasury issues. 
  Encompasses a hypothetical 44-year career that began at age 21 and    
  ended at age 65.                                                      
                                                                        
Source: Congressional Research Service.                                 


                      TABLE 1-31.--PAYROLL TAX RATES FOR EMPLOYEES AND EMPLOYERS, 1937-2000                     
----------------------------------------------------------------------------------------------------------------
                                                                         Tax rates (percent) for employer and   
                                                             OASDI                  employee, each              
                      Calendar years                       wage base -------------------------------------------
                                                              \1\       Total       OASI        DI         HI   
----------------------------------------------------------------------------------------------------------------
1937-49..................................................     $3,000      1.000      1.000  .........  .........
1950.....................................................      3,000      1.500      1.500  .........  .........
1951-53..................................................      3,600      1.500      1.500  .........  .........
1954.....................................................      3,600      2.000      2.000  .........  .........
1955-56..................................................      4,200      2.000      2.000  .........  .........
1957-58..................................................      4,200      2.250      2.000      0.250  .........
1959.....................................................      4,800      2.500      2.250      0.250  .........
1960-61..................................................      4,800      3.000      2.750      0.250  .........
1962.....................................................      4,800      3.125      2.875      0.250  .........
1963-65..................................................      4,800      3.625      3.375      0.250  .........
1966.....................................................      6,600      4.200      3.500      0.350      0.350
1967.....................................................      6,600      4.400      3.550      0.350      0.500
1968.....................................................      7,800      4.400      3.325      0.475      0.600
1969.....................................................      7,800      4.800      3.725      0.475      0.600
1970.....................................................      7,800      4.800      3.650      0.550      0.600
1971.....................................................      7,800      5.200      4.050      0.550      0.600
1972.....................................................      9,000      5.200      4.050      0.550      0.600
1973.....................................................     10,800      5.850      4.300      0.550      1.000
1974.....................................................     13,200      5.850      4.375      0.575      0.900
1975.....................................................     14,100      5.850      4.375      0.575      0.900
1976.....................................................     15,300      5.850      4.375      0.575      0.900
1977.....................................................     16,500      5.850      4.375      0.575      0.900
1978.....................................................     17,700      6.050      4.275      0.775      1.000
1979.....................................................     22,900      6.130      4.330      0.750      1.050
1980.....................................................     25,900      6.130      4.520      0.560      1.050
1981.....................................................     29,700      6.650      4.700      0.650      1.300
1982.....................................................     32,400      6.700      4.575      0.825      1.300
1983.....................................................     35,700      6.700      4.775      0.625      1.300
1984.....................................................     37,800      7.000      5.200      0.500      1.300
1985.....................................................     39,600      7.050      5.200      0.500      1.350
1986.....................................................     42,000      7.150      5.200      0.500      1.450
1987.....................................................     43,800      7.150      5.200      0.500      1.450
1988.....................................................     45,000      7.510      5.530      0.530      1.450
1989.....................................................     48,000      7.510      5.530      0.530      1.450
1990.....................................................     51,300      7.650      5.600      0.600      1.450
1991.....................................................     53,400      7.650      5.600      0.600      1.450
1992.....................................................     55,500      7.650      5.600      0.600      1.450
1993.....................................................     57,600      7.650      5.600      0.600      1.450
1994.....................................................     60,600      7.650      5.260      0.940      1.450
1995.....................................................     61,200      7.650      5.260      0.940      1.450
1996.....................................................     62,700      7.650      5.260      0.940      1.450
1997-99..................................................      (\2\)      7.650      5.350      0.850      1.450
2000-....................................................      (\2\)      7.650      5.300      0.900     1.450 
----------------------------------------------------------------------------------------------------------------
\1\ The maximum amount of taxable earnings for the HI Program is the same as that for the OASDI Program for 1966-
  90; $125,000, $130,200, and $135,000 for 1991-93, respectively; no limit after 1993.                          
\2\ Increases automatically with increases in the average wage index. The CBO estimates that the OASDI wage base
  will be $63,900 in 1997; $66,900 in 1998; and $72,000 in 1999.                                                
                                                                                                                
Source: Office of the Actuary, Social Security Administration.                                                  


                      TABLE 1-32.--TAX RATES FOR SELF-EMPLOYED INDIVIDUALS, 1980 AND AFTER                      
----------------------------------------------------------------------------------------------------------------
                                                                                   OASDI                 OASDHI 
                      Calendar year                           OASI        DI      combined      HI      combined
----------------------------------------------------------------------------------------------------------------
1980.....................................................     6.2725     0.7775       7.05       1.05       8.10
1981.....................................................     7.0250     0.9750       8.00       1.30       9.30
1982.....................................................     6.8125     1.2375       8.05       1.30       9.35
1983.....................................................     7.1125     0.9375       8.05       1.30       9.35
1984.....................................................    10.4000     1.0000      11.40       2.60  \1\ 14.00
1985.....................................................    10.4000     1.0000      11.40       2.70  \1\ 14.10
1986-87..................................................    10.4000     1.0000      11.40       2.90  \1\ 14.30
1988-89..................................................    11.0600     1.0600      12.12       2.90  \1\ 15.02
1990-93..................................................    11.2000     1.2000      12.40       2.90      15.30
1994-96..................................................    10.5200     1.8800      12.40       2.90      15.30
1997-99..................................................    10.7000     1.7000      12.40       2.90      15.30
2000-....................................................    10.6000     1.8000      12.40       2.90      15.30
----------------------------------------------------------------------------------------------------------------
\1\ Tax credits for the self-employed equaled 2.7 percent in 1984, 2.3 percent in 1985, and 2.0 percent in 1986-
  89. The tax rate shown is not reduced for these credits. See text for explanation of change in tax treatment  
  of the self-employed.                                                                                         
                                                                                                                
Source: Congressional Research Service.                                                                         


          TABLE 1-32a.--WORKERS EXEMPT FROM FICA AND SECA TAXES         
------------------------------------------------------------------------
                                                                        
-------------------------------------------------------------------------
State and local government workers participating in alternative         
 retirement systems (HI tax is mandatory for state and local government 
 workers hired since April 1, 1986).                                    
Election workers earning $1,000 or less a year (beginning in 1995).     
Ministers who choose not to be covered, and certain religious sects.    
Federal workers hired before 1984 (the HI portion is mandatory for all  
 Federal workers). \1\                                                  
College students working at their academic institutions.                
Household workers earning less than $1,000 a year (effective in 1994),  
 or for those under age 18 for whom household work is not their         
 principal occupation.                                                  
Self-employed workers with annual net earnings below $400.              
------------------------------------------------------------------------
\1\ Elected office holders, political appointees, and judges are        
  mandatorily covered by both OASDI and HI regardless of when their     
  service began.                                                        
                                                                        
Source: Congressional Research Service.                                 

                      Status of OASDI Trust Funds

Summary
    Social Security's financial condition is assessed annually 
by its Board of Trustees, comprised of the Secretaries of 
Treasury (Managing Trustee), Labor, and Health and Human 
Services, the Commissioner of Social Security, and two 
representatives of the public. Their 1996 report was released 
on June 5, 1996. The Congressional Budget Office (CBO) also 
makes Social Security projections, the latest of which were 
released on May 23, 1996. The Trustees' projections cover a 
period extending 75 years into the future, whereas CBO's 
projections are only for the next 10 years. For this near-term 
period, both the Trustees and CBO show that through the 
remainder of this decade, and for some period into the next 
century, the favorable demographic pattern of a large baby boom 
generation at peak earning years, combined with the retirement 
of the relatively small generation born during the Depression, 
should ensure large trust fund reserves. Under CBO's 
assumptions, the annual excess of income over outlays will 
reach $127 billion by fiscal year 2005 and the reserve balance 
of the trust funds will represent 2.6 years' worth of outgo. 
Under the Trustees' ``intermediate'' (or moderate) set of 
assumptions, the annual excess of income over outlays will 
reach $115 billion by fiscal year 2005, and the reserve balance 
of the trust funds will represent 2.2 years' worth of outgo.
    Table 1-33 shows both historical and estimated operations 
of the OASI and DI Trust Funds in the short run.
    For the long run, the projections are more troubling. For a 
number of years, the Trustees' reports have projected long-
range financing problems for the system. Although their latest 
report continues to show a near-term buildup of ``trust fund'' 
reserves, their ``intermediate'' forecast for the next 75 years 
shows that, on average, Social Security expenditures will be 
16.4 percent more than its income. The trust fund buildup would 
peak at $2.9 trillion in nominal dollars in 2018, and then be 
drawn down as the post-World War II baby boomers retire (see 
chart 1-2). The Trustees estimate that by 2015 the DI Trust 
Fund would be exhausted, and by 2031 the OASI Trust Fund would 
be exhausted as shown in table 1-34. On a combined basis the 
two trust funds would be exhausted in 2029. The term 
``exhausted'' is commonly used to indicate that trust fund 
reserves plus payroll taxes and other revenues would be 
insufficient to pay all benefits when they are due.
Background
    The Social Security taxes people pay flow into the Federal 
Treasury, with each program's share credited to separate trust 
funds (one for OASI, another for DI). The crediting occurs 
through the posting of interest-bearing Federal securities (the 
interest rate is the same as the average rate prevailing on 
outstanding Federal bonds with a maturity of 4 years or 
longer). When the government receives the money, it records new 
securities to the appropriate fund; when it makes payments, it 
writes some off. These securities represent obligations that 
the government has issued to itself. In effect, they are not 
assets for the government, but claims against it. Their primary 
role is to be reserve ``spending authority.'' As long as a 
trust fund has a balance, the Treasury Department is authorized 
to make payments owed against it from the Treasury; the fund 
itself does not contain actual cash resources to do so.
    For more than three decades after Social Security taxes 
were first levied in 1937, the system's income routinely 
exceeded its outgo, and its trust funds grew. However, the 
situation changed in the early 1970s. Enactment of major 
benefit increases in the 1968-72 period was followed by higher 
inflation and leaner economic conditions than had been 
expected. Prices rose faster than wages, the post-World War II 
baby boom ended precipitously (leading to a large cut in 
projected birth rates), and Congress adopted faulty benefit 
rules in 1972 that overcompensated new Social Security retirees 
for inflation. These factors combined to sour the outlook for 
Social Security and it remained poor through the mid-1980s.

  TABLE 1-33.--OPERATIONS OF THE OASDI TRUST FUNDS DURING SELECTED FISCAL YEARS 1960-95 AND ESTIMATED FUTURE OPERATIONS DURING FISCAL YEARS 1996-2005, ON THE BASIS OF THE INTERMEDIATE SET OF  
                                                                                           ASSUMPTIONS                                                                                          
                                                                                    [In millions of dollars]                                                                                    
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Income                                                  Expenditures                            Assets       
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Income     Payments                                                           Transfers                      
                  Fiscal year \1\                                                   from      from the                                                              to         Net     Amount at
                                                       Total   Net contributions  taxation  general fund  Net interest    Total      Benefit    Administrative   Railroad   increase    end of  
                                                                      \2\            of        of the          \4\                payments \6\     expenses     Retirement   during     period  
                                                                                  benefits  Treasury \3\                                                          Program     year              
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Historical data:                                                                                                                                                                                
    1960...........................................    11,394         10,830      ........  ............         564      11,606      10,798           234            574       -212      22,996
    1965...........................................    17,681         17,032      ........  ............         648      17,456      16,618           379            459        224      22,187
    1970...........................................    36,127         34,096      ........         458         1,572      30,275      29,063           623            589      5,851      37,720
    1975...........................................    66,677         63,374      ........         499         2,804      64,658      62,547         1,101          1,010      2,018      48,138
    1980...........................................   117,427        114,413      ........         675         2,339     118,548     115,624         1,494          1,430     -1,121      32,246
    1985...........................................   197,865        192,181         3,368         105         2,211     188,504     183,959         2,192          2,353   \7\ 7,53            
                                                                                                                                                                                   8      39,750
    1986...........................................   215,461        205,146         3,558       3,310         3,447     198,730     193,869         2,209          2,653   \7\ 6,11            
                                                                                                                                                                                   7      45,867
    1987...........................................   226,893        218,878         3,307          69         4,638     207,323     202,430         2,279          2,614     19,570      65,437
    1988...........................................   258,090        248,145         3,390          55         6,500     219,290     213,907         2,532          2,851     38,800     104,237
    1989...........................................   284,936        270,811         3,772          43        10,310     232,491     227,150         2,407          2,934     52,445     156,682
    1990...........................................   306,822        288,797         3,081          34        14,909     248,605     243,275         2,280          3,049     58,217     214,900
    1991...........................................   322,611        299,794         5,921      -2,864        19,759     269,096     263,104         2,535          3,457     53,515     268,415
    1992...........................................   338,270        308,377         6,237          19        23,637     287,524     281,650         2,668          3,206     50,746     319,161
    1993...........................................   351,354        318,391         6,161          14        26,788     304,566     298,176         2,955          3,435     46,788     365,949
    1994...........................................   376,307        341,438         5,656          10        29,203     319,551     313,129         2,896          3,526     56,757     422,706
    1995...........................................   396,276        357,516         5,449           7        33,304     335,830     328,841         2,870          4,120     60,446     483,152
Estimates:                                                                                                                                                                                      
    1996...........................................   416,220        373,897         6,159        -327        36,491     350,453     343,778         3,119          3,556     65,766     548,918
    1997...........................................   437,852        390,169         7,195           3        40,485     368,446     361,123         3,484          3,838     69,407     618,325
    1998...........................................   460,545        408,185         7,694           2        44,664     386,552     379,488         3,180          3,884     73,993     692,318
    1999...........................................   486,582        429,177         8,242           2        49,162     406,623     399,288         3,373          3,962     79,959     772,277
    2000...........................................   513,841        451,064         8,837           1        53,939     428,449     420,885         3,506          4,057     85,393     857,670
    2001...........................................   540,892        472,145         9,500         170        59,078     452,110     444,329         3,636          4,145     88,782     946,452
    2002...........................................   571,743        496,973        10,228       (\5\)        64,541     477,922     469,910         3,778          4,234     93,821   1,040,273
    2003...........................................   604,793        523,434        11,019       (\5\)        70,340     505,812     497,531         3,934          4,347     98,981   1,139,254
    2004...........................................   639,417        551,086        11,887       (\5\)        76,444     536,128     527,554         4,102          4,472    103,289   1,242,543
    2005...........................................   683,612        587,871        12,836       (\5\)        82,905     568,700     559,820         4,280          4,600    114,912   1,357,455
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Under the Congressional Budget Act of 1974 (Public Law 93-344) fiscal years 1977 and later consist of the 12 months ending on September 30 of each year. Fiscal years prior to 1977         
  consisted of the 12 months ending on June 30 of each year.                                                                                                                                    
\2\ Beginning in 1983, includes transfers from general fund of Treasury representing contributions that would have been paid on deemed wage credits for military service in 1957 and later, if  
  such credits were considered to be covered wages.                                                                                                                                             
\3\ Includes payments (1) in 1947-52 and in 1967 and later, for costs of noncontributory wage credits for military service performed before 1957; (2) in 1972-83, for costs of deemed wage      
  credits for military service performed after 1956; and (3) in 1969 and later, for costs of benefits to certain uninsured persons who attained age 72 before 1968.                             
\4\ Net interest includes net profits or losses on marketable investments. Beginning in 1967, administrative expenses are charged currently to the trust funds on an estimated basis, with a    
  final adjustment, including interest made in the following fiscal year. The amounts of these interest adjustments are included in net interest. For years prior to 1967, a description of the 
  method of accounting for administrative expenses is contained in the 1970 Annual Report. Beginning in October 1973, the figures shown include relatively small amounts of gifts to the funds. 
  Net interest for 1983-86 reflects payments from a borrowing trust fund to a lending trust fund for interest on amounts owed under the interfund borrowing provisions. During 1983-91, interest
  paid from the trust funds to the general fund on advance tax transfers is reflected. The amounts shown for 1985 and 1986 include interest adjustments of $91.3 million and $11.5 million,     
  respectively, on unnegotiated checks issued before April 1985.                                                                                                                                
\5\ Less than $500,000.                                                                                                                                                                         
\6\ Beginning in 1967, includes payments for vocational rehabilitation services furnished to disabled persons receiving benefits because of their disabilities. Beginning in 1983, amounts are  
  reduced by amount of reimbursement for unnegotiated benefit checks.                                                                                                                           
\7\ Reflects offset for repayment from the OASI Trust Fund of amounts borrowed from the HI Trust Fund in 1982. The amount repaid in 1985 was $1,824 million; in 1986, the amount was $10,613    
  million.                                                                                                                                                                                      
                                                                                                                                                                                                
Note.--Totals do not necessarily equal the sums of rounded components.                                                                                                                          
                                                                                                                                                                                                
Source: Board of Trustees (1996).                                                                                                                                                               

 CHART 1-2. OASDI TRUST FUND RESERVES AT END OF SELECTED CALENDAR YEARS


    Note._In nominal dollars.

    Source: Board of Trustees (1996), intermediate assumptions, 
and Office of the Actuary, Social Security Administration.

  TABLE 1-34.--MAXIMUM TRUST FUND RATIOS AND YEAR OF EXHAUSTION FOR THE 
     OASI, DI AND COMBINED TRUST FUNDS UNDER ALTERNATIVE ASSUMPTIONS    
------------------------------------------------------------------------
                Assumption                    OASI       DI     Combined
------------------------------------------------------------------------
Alternative I (optimistic):                                             
    Maximum trust fund ratio (percent)....       487      1390       479
    Year attained.........................      2017      2070      2018
    Year of exhaustion....................  ........  ........  ........
Alternative II (moderate):                                              
    Maximum trust fund ratio (percent)....       284       136       245
    Year attained.........................      2012      2002      2011
    Year of exhaustion....................      2031      2015      2029
Alternative III (pessimistic):                                          
    Maximum trust fund ratio (percent)....       172       103       159
    Year attained.........................      2001      1998      2000
    Year of exhaustion....................      2020      2005      2016
------------------------------------------------------------------------
Source: Board of Trustees (1996).                                       

     Before 1971, the balances of the trust funds had never 
fallen below 1 year's worth of outgo. Beginning in 1973, the 
program's income lagged its outgo, and its trust funds declined 
rapidly. Congress had to step in five times to keep them from 
being exhausted. 
Although major changes enacted in 1977 greatly reduced the 
program's longrun deficit, they did not eliminate it, and the 
shortrun changes made by the legislation were not large enough 
to enable the program to withstand back-to-back recessions in 
1980 and 1982. A disability bill in 1980 and temporary fixes in 
1980 and 1981 were followed by another major reform package in 
1983.
    The 1983 changes, along with better economic conditions, 
helped to alter the picture. Income began to exceed outgo in 
1983 and the trust funds grew substantially. Cumulatively, the 
changes were projected to yield $96 billion in surplus income 
by 1990, and to raise the trust funds' balances to $123 
billion. The funds actually were credited with $200 billion in 
surplus income by 1990, and their balances reached $225 billion 
by the end of that year. Under the Trustees' 1996 
``intermediate'' forecast (the one cited as their ``best 
estimate''), surplus income of $656 billion is projected for 
the 1991-2000 period, and the trust funds' balances would rise 
to $881 billion by the beginning of 2001. This would be 
equivalent to 192 percent of annual expenditures (or 1.9 years' 
worth).
    The longer range picture for Social Security has been 
worsening gradually since 1983. By raising Social Security's 
age for full benefits from 65 to 67, subjecting benefits to 
income taxes, and making new Federal and nonprofit workers join 
the system, Congress had attempted in 1983 to eliminate the 
longrun problem. In fact, projections made then showed that it 
had, at least on average, for the following 75 years. However, 
the average condition of the two trust funds did not represent 
their condition over the entire period. The funds were not 
shown to be insolvent at any point, but their expenditures were 
expected to exceed their income in 2025 and to remain higher 
thereafter. Simply stated, 40 years of surpluses were to be 
followed by an indefinite period of deficits. With each passing 
year since 1983, the Trustees' 75-year averaging period has 
picked up 1 deficit year at the back end and dropped a surplus 
year from the front end. This, by itself, would cause the 
average condition to worsen. However, in recent reports 
assumptions about birth rates, economic growth, and wages have 
been lowered, causing further deterioration in the outlook. A 
small long-range deficit appeared in the 1984 report and the 
gap has grown larger (with the point of insolvency coming 
closer) in subsequent reports.
The Trustees' June 1996 long-range forecast
    The 1996 report showed an average 75-year deficit equal to 
16 percent of program income and projected that the trust funds 
(viewed on a combined basis) will become insolvent in 2029. 
These long-range projections assume that GDP will rise annually 
at rates ranging from 2.2 percent in 1996 to 1.2 percent in 
2050, wages will rise at an ultimate rate of 5 percent per 
year, the cost of living will go up at a 4 percent rate, 
unemployment will average 6 percent, and that Social Security 
benefits will fall in relative terms as the age at which full 
benefits are payable rises from 65 to 67 over the first few 
decades of the next century. The higher age for full benefits 
will mean that people retiring in the future at age 67 or 
younger will get less than under the previous age rules. These 
assumptions by themselves would seem to bode well for the 
system; however, looming demographic shifts are projected to 
overwhelm them.
    During the next two decades, the 76 million baby boomers 
born between 1946 and 1964 will be in their prime productive 
years, and the baby trough generation of the 1930s Depression 
will be in retirement. Together, these factors will lead to a 
stable ratio of workers to recipients. However, as the baby 
boomers begin retiring around 2010, this ratio will erode 
quickly. By 2025, most of the surviving baby boomers will be 65 
and older. The number of people 65 and older will have nearly 
doubled, growing from 34 million today to 61 million then. The 
number of workers will have grown from 142 million to 163 
million, or by only 15 percent. Consequently, the ratio of 
workers to recipients will have fallen from 3.2 to 1 today to 
2.2 to 1 in 2025 and 2 to 1 in 2030. Projected worker/
beneficiary ratios and dependency rates are shown in table 1-
35.

     TABLE 1-35.--COVERED WORK FORCE--NUMBER OF BENEFICIARIES AND DEPENDENCY RATES, SELECTED YEARS 1960-2040    
----------------------------------------------------------------------------------------------------------------
                         Work force measure                            1960     1980     2000     2020     2040 
----------------------------------------------------------------------------------------------------------------
Total population (in millions).....................................      190      235      285      327      353
Covered workers....................................................       73      112      146      162      168
Beneficiaries (OASDI)..............................................       14       35       46       68       85
Aged dependency ratio \1\..........................................    0.173    0.195    0.210    0.275    0.368
Total dependency ratio \2\.........................................    0.904    0.749    0.695    0.700    0.789
Worker/beneficiary ratio...........................................      5.1      3.2      3.2      2.4      2.0
----------------------------------------------------------------------------------------------------------------
\1\ Ratio of persons aged 65 and over to the number of persons aged 20-64.                                      
\2\ Ratio of non-working-age to working-age population--population under 20 plus population 65 and over divided 
  by population 20-64.                                                                                          
                                                                                                                
Source: Board of Trustees (1996), intermediate assumptions.                                                     

    Under this forecast, the trust funds (on a combined basis) 
would be credited with surplus income until 2018 or so, 
bringing their balances to a level of $2.9 trillion. They would 
decline thereafter and would be depleted by 2029. However, tax 
receipts begin lagging outgo much sooner, in 2012. At that 
point, the program would have to rely on the interest credited 
to its trust funds for part of its income. Repayment of this 
interest would have to be funded from general revenue. 
Beginning in 2019, the principal on the trust funds would begin 
to be drawn down. By 2025, $1 out of every $5 of the program's 
outgo would be dependent upon general fund expenditures for 
interest payments and the redemption of the government bonds 
credited to the trust funds. The government has never defaulted 
on the securities it posts to its trust funds, but the 
magnitude of these potential claims has prompted many observers 
to ask where the government will find the money to cover them, 
given the large deficits it is running today. Unless economic 
and demographic conditions are better than currently assumed, 
the government will have three basic options: raise other 
taxes, curtail other spending, or borrow money from the 
financial markets. There is nothing now in the law that will 
dictate or determine what the government actually will (or can) 
do then.
    Economists argue that if the surplus taxes projected for 
the next 16 years were to cause the government to borrow less 
from financial markets, more money would be available for 
investment, which could lead to greater economic growth. If 
this happened, extracting resources from the economy in the 
future to honor Social Security claims may be less burdensome. 
Said another way, if one accepts the premise that reductions in 
Federal borrowing today will increase the amount of resources 
available for investment, then surplus Social Security taxes 
today could help build a higher economic base in the future 
from which to draw the needed resources.
    However, surplus Social Security taxes do not necessarily 
reduce government borrowing from the markets. Reductions in 
borrowing occur when the government reduces its overall 
deficit, not when one of its programs generates surplus taxes. 
Even if economic growth were enhanced in the coming decades by 
less government borrowing, Social Security's problems would not 
necessarily be resolved. Enhanced economic growth could improve 
actuarial balance somewhat if it also improves worker 
productivity, but not proportionately so, since higher 
productivity would likely result in higher wages, which in turn 
would lead to larger benefits (see table 1-36). Further, as 
their numbers swell, the baby boomers and subsequent retirees 
will raise financial demands on all retirement systems, not 
only Social Security. The goods and services to be consumed by 
society cannot be stockpiled in advance, and the economy will 
have to adjust. Whether this adjustment would be mild or severe 
is mostly conjecture.

  TABLE 1-36.--ESTIMATED OASDI INCOME RATES, COST RATES, AND ACTUARIAL  
                              BALANCES \1\                              
                  [As a percentage of taxable payroll]                  
------------------------------------------------------------------------
                                         Ultimate percentage increase in
                                                  wages--CPI \2\        
            Valuation period            --------------------------------
                                          4.5-4.0    5.0-4.0    5.5-4.0 
------------------------------------------------------------------------
Summarized income rate:                                                 
    25-year: 1996-2020.................      13.59      13.54      13.49
    50-year: 1996-2045.................      13.41      13.35      13.29
    75-year: 1996-2070.................      13.40      13.33      13.26
Summarized cost rate:                                                   
    25-year: 1996-2020.................      13.58      13.18      12.78
    50-year: 1996-2045.................      15.32      14.74      14.17
    75-year: 1996-2070.................      16.14      15.52      14.90
Balance:                                                                
    25-year: 1996-2020.................       +.01       +.36       +.71
    50-year: 1996-2045.................      -1.91      -1.39      -0.87
    75-year: 1996-2070.................      -2.75      -2.19      -1.63
------------------------------------------------------------------------
\1\ Based on intermediate estimates with various real-wage assumptions. 
\2\ The first value in each pair is the assumed ultimate annual         
  percentage increase in average wages in covered employment. The second
  value is the assumed ultimate annual percentage increase in the       
  Consumer Price Index. The difference between the two values is the    
  real-wage differential.                                               
                                                                        
Source: Board of Trustees (1996).                                       

    The 1996 report projects that Social Security will generate 
sufficient tax receipts to cover its commitments during the 
next 16 years. The long-range outlook, however, leaves little 
to be sanguine about. The program has a growing 75-year average 
deficit. The HI Trust Fund's problems are more imminent, as 
insolvency is projected for 2001. Resources could be 
reallocated to HI from Social Security; however, this would 
only move Social Security's problems closer. If Social Security 
and HI are considered together, their combined expenditures are 
expected to be higher than their tax receipts beginning in 1999 
and to remain higher thereafter. Their outgo as a percent of 
the Nation's payrolls would rise from 15.2 percent today to 
23.8 percent in 2025, a level that contrasts sharply with a 
combined tax rate that is set now in the law at 15.3 percent. 
As a percent of GDP, Social Security and HI outgo would rise 
from about 6.4 percent today to 9.7 percent in 2025 (see table 
1-37). Including supplemental medical insurance (SMI) 
expenditures would raise it from 7 to 13 percent. In contrast, 
the tax receipts and premiums collected to support these 
programs are projected to hover in the range of 7 to 8 percent 
of GDP throughout the period.
    These projections are not based on pessimistic economic 
assumptions. A modest but sustained rise in GDP and moderate 
inflation and unemployment are assumed as shown in table 1-38. 
In large part, the projections hinge on demographic factors 
that are in place today--the post-World War II baby boom, the 
subsequent birth dearth, and the general aging of society. 
These projections suggest that to restore longrun solvency, 
income needs to be raised or expenditures cut. Beyond possible 
changes to the programs themselves, important unknowns that can 
alter the outlook include whether an effective means can be 
found to rein in the spiraling cost of medical care generally, 
and whether future technological advances will propel 
productivity. Also unknown and little understood is the effect 
of potential shifts in society's wants and needs, from raising 
families, buying houses, and educating children to meeting the 
health and service demands of an older population. Will the 
higher future costs of Social Security and Medicare place a 
large strain on the economy or merely reflect a shift of the 
Nation's consumption priorities?

             How the Status of the Trust Funds is Measured

    In the short range, the financial soundness of each of the 
trust funds can be assessed by considering the size of the 
trust fund balance, in absolute terms and as a percentage of 
the annual expenditures, and whether the balance is growing or 
declining. In the long range, the traditional measure of 
financial soundness has been the actuarial balance of the 
system. The actuarial balance is defined as the difference 
between the total summarized income rate and the total 
summarized cost rate.
    Because the Social Security Program has been designed as a 
contributory system in which those who pay the taxes supporting 
it are considered to be earning the right to future benefits, 
Congress has traditionally required long-range estimates of the 
program's actuarial balance and has set future tax rates with a 
view to assuring that the income of the program will be 
sufficient to cover its outgo. Under current procedures, the 
long-range actuarial analysis of the cash benefits program 
covers a 75-year period, which would generally be long enough 
to cover the anticipated retirement years of those currently in 
the work force.

  TABLE 1-37.--ESTIMATED COST OF OASDI AND HI SYSTEMS, SELECTED CALENDAR
                            YEARS  1996-2070                            
                 [As percent of gross domestic product]                 
------------------------------------------------------------------------
           Calendar year              OASDI        HI     OASDI  and  HI
------------------------------------------------------------------------
Annual cost rates:                                                      
    1996..........................       4.68       1.71            6.39
    1997..........................       4.68       1.78            6.46
    1998..........................       4.68       1.85            6.53
    1999..........................       4.69       1.91            6.60
    2000..........................       4.70       1.97            6.68
    2001..........................       4.71       2.03            6.74
    2002..........................       4.72       2.07            6.79
    2003..........................       4.72       2.12            6.83
    2004..........................       4.73       2.16            6.88
    2005..........................       4.73       2.20            6.93
    2010..........................       4.85       2.41            7.26
    2015..........................       5.22       2.73            7.95
    2020..........................       5.73       3.13            8.86
    2025..........................       6.15       3.52            9.67
    2030..........................       6.42       3.92           10.34
    2035..........................       6.47       4.22           10.69
    2040..........................       6.37       4.40           10.78
    2045..........................       6.32       4.52           10.84
    2050..........................       6.33       4.59           10.92
    2055..........................       6.42       4.65           11.07
    2060..........................       6.50       4.75           11.25
    2065..........................       6.53       4.89           11.42
    2070..........................       6.56       5.04           11.59
Summarized cost rates:                                                  
    1996-2020.....................       5.16       2.46            7.62
    1996-2045.....................       5.66       3.14            8.80
    1996-2070.....................       5.85       3.55            9.40
------------------------------------------------------------------------
Note.--Summarized rates are calculated on the present value basis       
  including the value of the trust funds in the first year and the cost 
  of reaching and maintaining a target trust fund level of 1 year's     
  expenditures by the last year. Totals do not necessarily equal the sum
  of rounded components.                                                
                                                                        
Source: Board of Trustees (1996), intermediate assumptions.             

    The long-range status of the trust funds is ordinarily 
expressed in terms of ``percent of taxable payroll'' rather 
than in dollar amounts. This permits a direct comparison 
between the tax rate actually in the law and the cost of the 
program. For example, if the program is projected to have a 
deficit of ``2 percent of taxable payroll,'' this means that 
the OASDI tax rates now in the law would have to be increased 
by 1 percentage point each for employee and employer, in order 
to pay for the benefits due under present law. Alternatively, 
the program could be brought back into balance by an equivalent 
reduction in benefit outgo or by a combination of revenue 
increases and outgo reductions. If the program is projected to 
have a deficit of 2 percent of taxable payroll, and 
expenditures are projected to be 10 percent of taxable payroll, 
then, under the given set of assumptions, 20 percent (2 divided 
by 10) of expenditures could not be met with that tax schedule. 
In 1996, the total taxable payroll is estimated to be $3.05 
trillion so that, in 1996 terms, 2 percent of payroll 
represented about $61 billion.

                                                  TABLE 1-38.--SELECTED ECONOMIC ASSUMPTIONS, 1960-2070                                                 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Average annual percentage change                                                       
                                                                               in--                                   Average      Average      Average 
                                                                ----------------------------------     Real-wage       annual      annual       annual  
                         Calendar year                                       Average               differential \3\   interest  unemployment  percentage
                                                                   Real    annual wage   Consumer      (percent)      rate \4\    rate \5\     increase 
                                                                 GDP \1\   in covered     Price                      (percent)    (percent)    in labor 
                                                                           employment   Index \2\                                              force \6\
--------------------------------------------------------------------------------------------------------------------------------------------------------
1960-64........................................................      4.6           3.4       1.2            2.2           3.7          5.7          1.3 
1965-69........................................................      4.2           6.1       3.9            2.2           5.2          3.8          2.1 
1970-74........................................................      3.5           6.6       6.2            0.4           6.7          5.4          2.3 
1975...........................................................     -0.6           6.7       9.1           -2.4           7.4          8.5          1.9 
1976...........................................................      5.6           8.5       5.7            2.8           7.1          7.7          2.4 
1977...........................................................      4.9           6.8       6.5            0.3           7.1          7.1          2.9 
1978...........................................................      5.0           8.9       7.7            1.2           8.2          6.1          3.2 
1979...........................................................      2.9          10.1      11.4           -1.3           9.1          5.8          2.6 
1980...........................................................     -0.3           9.4      13.4           -4.0          11.0          7.1          1.9 
1981...........................................................      2.5           9.7      10.3           -0.6          13.3          7.6          1.6 
1982...........................................................     -2.1           6.4       6.0            0.4          12.8          9.7          1.4 
1983...........................................................      4.0           5.0       3.0            2.0          11.0          9.6          1.2 
1984...........................................................      6.8           7.3       3.5            3.8          12.4          7.5          1.8 
1985...........................................................      3.7           4.7       3.5            1.2          10.8          7.2          1.7 
1986...........................................................      3.0           4.6       1.6            3.0           8.0          7.0          2.0 
1987...........................................................      2.9           4.6       3.6            1.0           8.4          6.2          1.7 
1988...........................................................      3.8           5.3       4.0            1.3           8.8          5.5          1.4 
1989...........................................................      3.4           3.9       4.8           -0.9           8.7          5.3          1.8 
1990...........................................................      1.3           5.1       5.2           -0.1           8.6          5.5          0.7 
1991...........................................................     -1.0           3.0       4.1           -1.1           8.0          6.7          0.4 
1992...........................................................      2.7       \7\ 4.9       2.9            2.0           7.1          7.4          1.2 
1993...........................................................      2.2       \7\ 2.3       2.8           -0.5           6.1          6.8          0.7 
1994...........................................................      3.5       \7\ 2.5       2.5            0.0           7.1          6.1          2.3 
1995...........................................................  \7\ 2.1       \7\ 4.1       2.9            1.2           6.9          5.6          0.9 
1996...........................................................      2.1           4.1       2.7            1.3           6.4          5.7          0.9 
1997...........................................................      2.2           4.3       3.2            1.1           6.5          5.8          1.0 
1998...........................................................      2.0           4.0       3.2            0.8           6.5          5.8          1.0 
1999...........................................................      2.0           4.2       3.4            0.8           6.5          5.9          0.9 
2000...........................................................      2.0           4.3       3.5            0.8           6.5          6.0          0.9 
2001...........................................................      2.0           4.4       3.6            0.7           6.5          6.0          0.9 
2002...........................................................      2.0           4.6       3.9            0.7           6.5          6.0          0.9 
2003...........................................................      2.0           4.9       4.0            0.9           6.5          6.0          0.8 
2004...........................................................      2.0           5.0       4.0            1.1           6.5          6.0          0.8 
2005...........................................................      2.0           5.1       4.0            1.1           6.4          6.0          0.8 
2010...........................................................      1.8           5.0       4.0            1.0           6.3          6.0          0.6 
2020...........................................................      1.3           5.1       4.0            1.1           6.3          6.0          0.2 
2030...........................................................      1.4           5.0       4.0            1.0           6.3          6.0          0.2 
2040...........................................................      1.4           5.0       4.0            1.0           6.3          6.0          0.2 
2050...........................................................      1.2           5.0       4.0            1.0           6.3          6.0          0.0 
2060...........................................................      1.3           5.0       4.0            1.0           6.3          6.0          0.1 
2070...........................................................      1.2           5.0       4.0            1.0           6.3          6.0          0.1 
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The real GDP is the value of total output of goods and services, expressed in 1992 dollars.                                                         
\2\ The Consumer Price Index is the annual average value for the calendar year of the Consumer Price Index for Urban Wage Earners and Clerical Workers  
  (CPI-W).                                                                                                                                              
\3\ The real-wage differential is the difference between the percentage increases, before rounding, in (1) the average annual wage in covered           
  employment, and (2) the average annual Consumer Price Index.                                                                                          
\4\ The average annual interest rate is the average of the nominal interest rates, which, in practice, are compounded semiannually, for special public- 
  debt obligations issuable to the trust funds in each of the 12 months of the year.                                                                    
\5\ Through 2005, the rates shown are unadjusted civilian unemployment rates. After 2005, the rates are total rates (including military personnel),     
  adjusted by age and sex based on the average labor force for 1994.                                                                                    
\6\ Labor force is the total for the United States (including military personnel) and reflects the average of the monthly numbers of persons in the     
  labor force for each year.                                                                                                                            
\7\ Preliminary. Wages in covered employment are considered preliminary for several years primarily due to uncertainty associated with estimates of     
  amounts above the benefit and contribution base.                                                                                                      
                                                                                                                                                        
Source: Board of Trustees (1996), intermediate assumptions.                                                                                             

    Long-range projections are affected by three basic types of 
factors: (1) demographic factors, such as rates of fertility, 
life expectancy, and labor force participation, which determine 
how many workers there will be in society in relation to 
nonworking beneficiaries; (2) economic factors such as 
unemployment, productivity, and inflation; and (3) factors 
specifically related to the Social Security Program, such as 
benefit levels, total number of covered workers, and percent of 
eligible workers drawing early retirement benefits. The 
actuaries at SSA employ three sets of alternative economic and 
demographic assumptions. Alternative I is based on optimistic 
assumptions; alternative II, based on ``intermediate'' 
assumptions, is considered their ``best guess'' forecast, and 
is the most frequently cited; and alternative III is based on 
pessimistic assumptions. In general, alternative II is 
considered the most balanced estimate of long-term solvency. It 
is clear that underlying factors cannot be predicted with any 
certainty as far into the future as 75 years, and that long-
range projections should not be taken as absolute predictions 
of deficits or surpluses in the funds.
    Beginning with the 1988 Trustees' Report, the Social 
Security Trustees used an alternative method of determining 
actuarial balance. Under the ``present value'' method, interest 
earnings on the fund are more fully recognized. Calculations 
were based on the present value of future income, outgo, and 
taxable payroll by discounting the future annual amounts at an 
assumed rate of interest.
    Traditionally, the Trustees based their conclusion about 
the long-range actuarial condition of the program on the 
``closeness'' of the income and cost rates when averaged over a 
75-year period. If the income rate was between 95 and 105 
percent of the cost rate over this projection period, the 
system was said to be in close actuarial balance. The 1991 
Trustees' Report incorporated a more refined measure of 
actuarial soundness ``designed to reveal problems occurring at 
any time during the'' 75-year measuring period. The 5-percent 
``tolerance'' (i.e., the amount of acceptable actuarial 
deficit) was retained in measuring the program's actuarial 
soundness for the 75-year period as a whole, but less tolerance 
is now permitted for shorter periods of valuation.
    The spread between income and outgo is evaluated throughout 
the measuring period in reaching a conclusion of whether close 
actuarial balance exists, with the amount of acceptable 
deviation gradually declining from 5 percent for the full 75-
year period to 0 (or no acceptable deviation) for the first 10-
year segment of the measuring period.
    To meet the short-range test of financial adequacy, the 
reserve balance at the end of the first 10-year segment must be 
at or higher than 100 percent of annual expenditures, a 
condition that is consistent with the 10-year segment of the 
long-range test of close actuarial balance. It also must be 
expected to reach that level within the first 5 years and then 
remain there. Under this revised limit, if income were at least 
95 percent of the cost level for the 75-year period as a whole, 
the trust funds still could be deemed to be out of close 
actuarial balance if income and outgo were too small, compared 
to cost, for shorter segments of the measuring period.
    Under these measures, the Trustees concluded in their 1996 
report, as they did in their five previous reports, that OASDI 
is not in close actuarial balance over the long run. In the 
long run, income and expenditures are generally expressed as a 
percentage of the total amount of earnings subject to taxation 
under the OASDI Program. Summarized income and cost rates over 
the 75-year long-range period are determined through present-
value calculations and by taking into account actual beginning 
fund balances and targeted ending fund balances (or reserves) 
of 100 percent of annual expenditures.
    Overall, for the period 1996-2070, the difference between 
the summarized income and cost rates for the OASDI Program is a 
deficit of 2.19 percent of taxable payroll based on the 
intermediate assumptions. Therefore, on a combined basis, the 
OASDI Program is not in close actuarial balance over the next 
75 years. In addition, the individual OASI and DI Trust Funds 
are not in close actuarial balance.
    Income from OASDI payroll taxes represents 12.4 percent of 
taxable payroll. Since the tax rate is not scheduled to change 
in the future under present law, OASDI payroll tax income as a 
percentage of taxable payroll remains constant at 12.4 percent. 
Adding the OASDI income from the income taxation of benefits to 
the income from payroll taxes yields a total ``income rate'' of 
12.63 percent. This rate is estimated to increase gradually to 
13.32 percent of taxable payroll by the end of the 75-year 
projection period based on the intermediate assumptions. The 
growth is attributable, in part, to increasing proportions in 
both the number of beneficiaries and the amount of their 
benefits subject to taxation in the future. These proportions 
will increase because the income thresholds, above which 
benefits are taxable, are fixed dollar amounts, and, as time 
goes by, the incomes of more people will exceed them due to the 
expected rise in wages and prices.
    OASDI expenditures for benefit payments and administrative 
expenses currently represent about 11.64 percent of taxable 
payroll. This ``cost rate'' is estimated to remain below the 
corresponding income rate for the next 15 years, based on the 
intermediate assumptions. With the retirement of the 76 million 
members of the ``baby boom'' generation starting in about 2010, 
OASDI costs will increase rapidly relative to the taxable 
earnings of workers. By the end of the 75-year projection 
period, the OASDI cost rate is estimated to reach 18.8 percent 
under the intermediate assumptions, resulting in an annual 
deficit of 5.5 percent, as shown in table 1-39. Table 1-40 
shows estimated trust fund assets, and table 1-41 shows 
estimated trust fund operations, both over the long run.

               Nature of the Social Security Trust Funds

    Contrary to popular belief, Social Security taxes are not 
deposited into the Social Security Trust Funds. They flow each 
day into thousands of depository accounts maintained by the 
government with financial institutions across the country. 
Along with many other forms of revenues, these Social Security 
taxes become part of the government's operating cash pool, or 
what is more commonly referred to as the U.S. Treasury. In 
effect, once these taxes are received, they become 
indistinguishable from other moneys the government takes in. 
They are accounted for separately through the issuance of 
Federal securities to the Social Security Trust Funds--which 
basically involves a series of bookkeeping entries by the 
Treasury Department--but the trust funds themselves do not 
receive or hold money. They are simply accounts. Similarly, 
benefits are not paid from the trust funds, but from the 
Treasury. As the checks are paid, securities of an equivalent 
value are removed from the trust fund accounts.
    When more Social Security taxes are received than are 
spent, the money does not sit idle in the Treasury, but is used 
to finance other operations of the government. The surplus is 
then reflected in a higher balance of securities being posted 
to the trust funds. Simply put, these balances, like those of a 
bank account, represent a promise that, if needed to pay Social 
Security benefits, the government will obtain resources in the 
future equal to the value of the securities.

                                  TABLE 1-39.--ESTIMATED INCOME RATES AND COST RATES, SELECTED CALENDAR YEARS 1996-2070                                 
                                                          [As a percentage of taxable payroll]                                                          
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             OASI                                 DI                               Combined             
                                             -----------------------------------------------------------------------------------------------------------
                Calendar year                   Income                              Income                              Income                          
                                                 rate      Cost rate    Balance      rate      Cost rate    Balance      rate      Cost rate    Balance 
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996........................................       10.73       10.15        0.58        1.89        1.49        0.40       12.63       11.64        0.98
1997........................................       10.92       10.15        0.77        1.71        1.54        0.17       12.63       11.69        0.94
1998........................................       10.92       10.13        0.79        1.71        1.58        0.13       12.63       11.72        0.92
1999........................................       10.93       10.14        0.78        1.71        1.63        0.08       12.64       11.77        0.87
2000........................................       10.83       10.15        0.68        1.81        1.68        0.13       12.65       11.84        0.81
2001........................................       10.84       10.16        0.68        1.82        1.73        0.09       12.65       11.89        0.76
2002........................................       10.84       10.16        0.68        1.82        1.77        0.04       12.66       11.93        0.72
2003........................................       10.84       10.15        0.69        1.82        1.82       -0.01       12.66       11.97        0.69
2004........................................       10.85       10.15        0.70        1.82        1.88       -0.06       12.67       12.03        0.64
2005........................................       10.85       10.14        0.71        1.82        1.93       -0.11       12.67       12.07        0.61
2010........................................       10.92       10.34        0.58        1.82        2.11       -0.29       12.74       12.46        0.29
2015........................................       11.01       11.32       -0.31        1.83        2.17       -0.34       12.84       13.50       -0.66
2020........................................       11.11       12.73       -1.62        1.83        2.22       -0.39       12.94       14.95       -2.02
2025........................................       11.19       13.92       -2.72        1.83        2.29       -0.45       13.03       16.20       -3.17
2030........................................       11.27       14.80       -3.53        1.84        2.29       -0.45       13.10       17.08       -3.98
2035........................................       11.31       15.14       -3.83        1.84        2.24       -0.40       13.15       17.38       -4.23
2040........................................       11.33       15.05       -3.71        1.84        2.25       -0.41       13.17       17.29       -4.12
2045........................................       11.35       14.96       -3.61        1.84        2.35       -0.51       13.19       17.31       -4.12
2050........................................       11.37       15.10       -3.73        1.84        2.41       -0.57       13.21       17.51       -4.30
2055........................................       11.40       15.47       -4.07        1.85        2.45       -0.61       13.25       17.92       -4.67
2060........................................       11.43       15.88       -4.44        1.85        2.43       -0.59       13.28       18.31       -5.03
2065........................................       11.46       16.17       -4.71        1.85        2.43       -0.58       13.30       18.59       -5.29
2070........................................       11.47       16.39       -4.91        1.85        2.44       -0.60       13.32       18.83       -5.51
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--Totals do not necessarily equal the sums of rounded components.                                                                                  
                                                                                                                                                        
Source: Board of Trustees (1996), intermediate assumptions.                                                                                             


 TABLE 1-40.--ESTIMATED TRUST FUND ASSETS, SELECTED CALENDAR YEARS 1996-
                                  2070                                  
                [As a percentage of annual expenditures]                
------------------------------------------------------------------------
       Beginning of calendar year           OASI        DI       OASDI  
------------------------------------------------------------------------
1996...................................        148         83        140
1997...................................        159        108        152
1998...................................        170        118        163
1999...................................        182        124        174
2000...................................        193        127        183
2001...................................        202        133        192
2002...................................        212        136        201
2003...................................        221        136        208
2004...................................        230        133        215
2005...................................        239        127        221
2010...................................        278         76        244
2015...................................        276          9        232
2020...................................        226          0        181
2025...................................        143          0         98
2030...................................         37          0          0
2035...................................          0          0          0
2040...................................          0          0          0
2045...................................          0          0          0
2050...................................          0          0          0
2055...................................          0          0          0
2060...................................          0          0          0
2065...................................          0          0          0
2070...................................          0          0          0
Trust fund is estimated to become                                       
 exhausted in..........................       2031       2015       2029
------------------------------------------------------------------------
Note.--The assets for the combined funds for years after a component    
  fund has been exhausted are shown for illustrative purposes only since
  no legal authority currently exists for interfund borrowing between   
  OASI and DI.                                                          
                                                                        
Source: Board of Trustees (1996), intermediate assumptions.             

Are the Federal securities issued to the trust funds the same sort of 
        financial assets that individuals and other entities buy?
    Yes. They earn interest at market rates, have specific 
maturity dates, and by law represent ``obligations'' of the 
U.S. Government. But what confuses people is that they often 
see these securities as assets for the government. When an 
individual buys a government bond, he has established a 
financial claim against the government. When the government 
issues a security to one of its own accounts, it hasn't 
purchased anything or established a claim against some other 
person or entity. It is simply creating an IOU from one of its 
accounts to another. Hence, the building up of Federal 
securities in a Federal trust fund--like that of Social 
Security--is not a means in and of itself for the government to 
accumulate assets. It certainly has established claims against 
the government for the Social Security system, but the Social 
Security system is part of the government. Those claims are not 
resources the government has at its disposal to pay future 
Social Security benefits.

  TABLE 1-41.--ESTIMATED OPERATIONS OF THE COMBINED OASI AND DI TRUST FUNDS, SELECTED CALENDAR YEARS 1996-2070  
                                      [Constant 1996 dollars, in billions]                                      
----------------------------------------------------------------------------------------------------------------
                                                             Income                                    Assets at
                      Calendar year                        excluding   Interest    Total      Outgo      end of 
                                                            interest    income     income                 year  
----------------------------------------------------------------------------------------------------------------
1996.....................................................      386.5       38.4      424.9      354.6      566.4
1997.....................................................      389.2       41.2      430.4      361.0      617.9
1998.....................................................      395.3       44.0      439.3      367.2      670.7
1999.....................................................      400.3       46.7      447.0      373.6      722.0
2000.....................................................      406.1       49.5      455.7      380.6      772.8
2001.....................................................      412.0       52.3      464.3      387.7      822.2
2002.....................................................      417.6       54.9      472.5      394.5      869.3
2003.....................................................      423.8       57.4      481.2      401.6      915.3
2004.....................................................      430.2       59.9      490.2      409.5      961.0
2005.....................................................      437.9       62.5      500.4      417.7    1,006.6
2010.....................................................      478.1       72.8      550.9      468.1    1,223.8
2015.....................................................      516.6       79.2      595.8      543.8    1,315.5
2020.....................................................      552.0       70.1      622.1      638.9    1,137.0
2025.....................................................      587.3       40.2      627.5      731.5      613.9
2030.....................................................        0.0        0.0        0.0        0.0        0.0
2035.....................................................        0.0        0.0        0.0        0.0        0.0
2040.....................................................        0.0        0.0        0.0        0.0        0.0
2045.....................................................        0.0        0.0        0.0        0.0        0.0
2050.....................................................        0.0        0.0        0.0        0.0        0.0
2055.....................................................        0.0        0.0        0.0        0.0        0.0
2060.....................................................        0.0        0.0        0.0        0.0        0.0
2065.....................................................        0.0        0.0        0.0        0.0        0.0
2070.....................................................        0.0        0.0        0.0        0.0        0.0
----------------------------------------------------------------------------------------------------------------
Note.--Figures are not shown for years after which the combined OASI and DI Trust Funds are estimated to be     
  exhausted. Adjustment from current to constant dollars is by the CPI. Totals do not necessarily equal the sum 
  of rounded components.                                                                                        
                                                                                                                
Source: Board of Trustees (1996), intermediate assumptions.                                                     

What then is the purpose of the trust funds?
    Generally speaking, the Federal securities issued to any 
Federal trust fund represent ``permission to spend.'' As long 
as a trust fund has a balance of securities posted to it, the 
Treasury Department has legal authority to keep issuing checks 
for the program. In a sense, the mechanics of a Federal trust 
fund are similar to those of a bank account. The bank takes in 
a depositor's money, credits the amount to the depositor's 
account, and then loans it out. As long as the account shows a 
balance, the depositor can write checks that the bank must 
honor. In Social Security's case, its taxes flow into the 
Treasury, and its trust funds are credited with Federal 
securities. The government then uses the money to meet whatever 
expenses are pending at the time. The fact that this money is 
not set aside for Social Security purposes does not dismiss the 
government's responsibility to honor the trust funds' account 
balances. As long as they have balances, the Treasury 
Department must continue to issue Social Security checks. The 
key point is that the trust funds themselves do not hold 
financial resources to pay benefits. Rather, they provide 
authority for the Treasury Department to use whatever money it 
has on hand to pay them.
    The significance of having trust funds for Social Security 
is that they represent a long-term commitment of the government 
to the program. While the funds do not hold ``resources'' that 
the government can call on to pay Social Security benefits, the 
balances of Federal securities posted to them represent and 
have served as financial claims against the government--claims 
on which the Treasury has never defaulted, nor used directly as 
a basis to finance anything but Social Security expenditures.
Is this trust fund arrangement really different from that used by other 
        programs of the government? Doesn't the Treasury Department 
        maintain accounts for them as well?
    The Treasury Department maintains accounts for all 
government programs. The difference is that many other 
programs, particularly those not accounted for through trust 
funds, get their operating balances--i.e., their permission to 
spend--through the annual appropriations process. Congress must 
pass legislation (an appropriations act) each year giving the 
Treasury Department permission to expend funds for them. In 
technical jargon, this permission to spend is referred to as 
``budget authority.'' For many programs accounted for through 
trust funds, annual appropriations are not needed. As long as 
their trust fund accounts show a balance of Federal securities, 
the Treasury Department has ``budget authority'' to expend 
funds for them.
    Another difference is that a trust fund account earns 
interest, since it is comprised of Federal securities. In the 
case of the Social Security Trust Funds, the interest is equal 
to the prevailing average rate on outstanding Federal 
securities with a maturity of 4 years or longer. This interest 
is credited to the trust funds twice a year (on June 30 and 
December 31) by issuing more securities to them. So in effect, 
a trust fund account can automatically build future ``budget 
authority'' for the program, but other accounts, dependent on 
annual appropriations, cannot.
Does taking Social Security out of the Federal budget change where the 
        surplus taxes go?
    Legislation enacted in 1990 (the Budget Enforcement Act, 
included in Public Law 101-508) removed Social Security taxes 
and benefits from the budget and from calculations of the 
budget deficit. In large part this was done to prevent Social 
Security from masking the size of the deficit and to protect it 
from budgetary cuts. It was based on the supposition that 
Congress would act differently in trying to achieve deficit-
reduction targets if Social Security surpluses were not counted 
in reaching the budget totals; i.e., that Congress would ignore 
Social Security in devising the Nation's overall fiscal 
policies. It was not done to change where Social Security taxes 
go. The Federal budget is not a cash management account--it is 
simply a statement or summary of what policymakers want the 
government's financial flows to be during any given time 
period. Whether this summary is presented in a unified or 
fragmented form will not in and of itself change how much money 
is received and spent by the government, and it will not alter 
where Federal tax receipts of any sort go. Social Security 
taxes will go into the Treasury regardless of whether the 
program is counted in reaching budget totals. Social Security 
taxes will go elsewhere only if Congress decides they will go 
elsewhere.
Are surplus Social Security taxes giving the government more money to 
        spend?
    The fact that surplus Social Security taxes are used by the 
government to meet other financial commitments does not 
necessarily mean that the government has more money to spend 
than it would have if these receipts were not available. 
Decisions about Social Security funds and the finances of the 
rest of the government have never been made in isolation of one 
another, and those decisions have had overlapping influences. 
Past increases in Social Security taxes may have made it more 
difficult for Congress to raise other forms of taxes. For 
instance, Social Security taxes were raised in 1977 to shore up 
the program's financing, but the following year Congress 
enacted reductions in income taxes to offset the impact of 
these hikes. Similarly, the earned income credit (EIC), which 
reduces income taxes or permits a refundable credit to be paid 
to low-income workers with children, is intended in part to 
offset the Social Security tax bite. Hence, other taxes might 
have taken the place of the surplus Social Security taxes if 
Social Security tax rates were lower than they are now. 
Therefore, whether these surplus taxes are allowing the 
government to spend more is a matter of conjecture.
Are surplus Social Security taxes allowing the government to borrow 
        less from the public?
    Today, the government is spending more overall than it is 
taking in through taxes, and it covers the shortfall by 
borrowing money. No single activity of the government 
determines the size of this shortfall. To say surplus Social 
Security taxes are reducing the amount that must be borrowed 
assumes that all other spending and taxation decisions have 
been made without any regard for Social Security's income and 
outgo, and vice versa. If increases in Social Security taxes 
over the past decade have caused other taxes to be reduced or 
kept them from rising, such increases may have added little to 
the government's total revenues. By the same token, when Social 
Security taxes are smaller than the program's spending--as they 
were for all but five fiscal years after 1957 and through 
1984--it is not clear that this shortfall causes the government 
to borrow more than it would otherwise. Government borrowing 
from the public is not clearly linked to any particular aspect 
of what the government does. It borrows as it needs to, for 
whatever obligations it has to meet. Therefore, whether surplus 
Social Security taxes are currently allowing the government to 
borrow less from the public than it otherwise would is also a 
matter of conjecture.
Isn't there some way to actually save the Social Security surpluses?
     Perceiving that surplus Social Security taxes simply give 
the government more money to spend, people sometimes ask why 
they can't be invested in stocks or bonds. They believe that 
this would really save the money for the future.
    Actually, the surplus Social Security taxes being collected 
today are not the means through which much of the future cost 
of the system will be met. Most of today's taxes are used to 
cover payments to today's retirees. In 1996, the system's taxes 
will amount to an estimated $386 billion; its expenditures, 
$355 billion. At their peak in 2010, the balances of the Social 
Security Trust Funds are expected to equal only 2\1/2\ years' 
worth of payments. Thus, the future costs of the system, as is 
the case today, will largely be met through future taxation. 
The promise of future benefits rests primarily on the 
government's ability to levy taxes in the future, not on the 
balances of the trust funds.
    The more immediate concern about investing the surplus 
taxes elsewhere is that doing so would reduce the government's 
revenues. How would the government make up this loss? What 
other taxes would take their place, what spending would be 
cut--or would the government simply borrow more money from the 
financial markets?
    In a sense, the idea of investing surplus Social Security 
taxes in private investments is only half a proposal. If the 
government borrowed money from the financial markets to make up 
the loss, it simply would be putting money into the markets 
with one hand and taking it back with another. On balance, it 
would not have added any new money to the Nation's pool of 
investment resources. If, on the other hand, the government 
were to reduce its spending or raise other taxes, it would not 
have to borrow any new funds (or it would borrow less than the 
full amount of Social Security money it diverted to the 
markets). This presumably would result in a net increase in 
savings in the economy. The bottom line is that it is not 
simply how surplus Social Security taxes are invested that 
determines whether or not real savings is increased. It is the 
steps that fiscal policymakers take to reduce the government's 
overall draw on financial markets that really matter.

                      BUDGETARY TREATMENT OF OASDI

    Social Security and other Federal programs that operate 
through trust funds were counted officially in the budget 
beginning in fiscal year 1969. This was done administratively 
by President Johnson. At the time Congress did not have a 
budgetmaking process. In 1974, with passage of the 
Congressional Budget and Impoundment Control Act (Public Law 
93-344), Congress adopted procedures for setting budget goals 
through passage of annual budget resolutions. Like the budgets 
prepared by the President, these resolutions were to reflect a 
``unified'' budget that included trust fund programs such as 
Social Security.
    Beginning in the late 1970s, financial problems confronting 
Social Security and concern over its growing costs led to 
enactment of a number of benefit changes in 1977, 1980, 1981, 
and 1983. However, because the Federal budget deficit remained 
large, interest in curbing Social Security spending continued. 
This consideration of Social Security constraints led to 
concerns that changes in Social Security were being proposed 
for budgetary purposes rather than programmatic ones. In 
response, measures were enacted in 1983, 1985, and 1987 making 
the program a more distinct part of the budget and permitting 
floor objections (points of order) to be raised against budget 
bills containing Social Security changes.
    Later in the decade, when Social Security surpluses 
emerged, critics argued that the program was masking the size 
of the budget deficits. In response, Congress in 1990 excluded 
it from calculations of the budget and largely exempted it from 
procedures for controlling spending (Omnibus Budget 
Reconciliation Act of 1990, Public Law 101-508). By these 
actions, however, Congress excluded Social Security from 
procedural constraints designed to discourage measures that 
would increase the deficits. Concerned that this would 
encourage Social Security spending increases and tax cuts that 
could weaken Social Security's financial condition, Congress 
also included provisions permitting floor objections to be 
raised against bills that would erode the balances of the 
Social Security Trust Funds. A more detailed explanation of 
budget and procedural rules affecting Social Security follows.
    Table 1-42 shows projected budget deficits with and without 
Social Security.

TABLE 1-42.--PROJECTED BUDGET DEFICITS WITH AND WITHOUT SOCIAL SECURITY,
                                1996-2006                               
                [By fiscal year, in billions of dollars]                
------------------------------------------------------------------------
                                                               Without  
                     Year                       With Social     Social  
                                                  Security     Security 
------------------------------------------------------------------------
1996..........................................         $144         $208
1997..........................................          171          243
1998..........................................          194          270
1999..........................................          219          303
2000..........................................          244          336
2001..........................................          259          356
2002..........................................          285          389
2003..........................................          311          421
2004..........................................          342          459
2005..........................................          376          503
2006..........................................          403          540
------------------------------------------------------------------------
Source: Congressional Budget Office, May 1996 baseline projections.     

           Current Budget Rules Pertaining to Social Security

    Two key elements of the budget process are explicit dollar 
limits on discretionary spending (mostly for programs requiring 
annual appropriations) and a ``pay-as-you-go'' rule that 
requires that increases in direct spending (mostly for 
entitlement programs) and/or cuts in revenues must be offset by 
other changes so as not to increase the deficit. Originally 
written to cover the period from fiscal years 1991 to 1995, 
these budget rules will now apply through fiscal year 1998 (as 
a result of provisions in the Omnibus Budget Reconciliation Act 
of 1993--Public Law 103-66). If the explicit spending limits or 
``pay-as-you-go'' rules are violated during this period, the 
President may be required to sequester funds (i.e., cut 
spending). By law, Social Security is not to be included in 
these calculations and is exempt from any potential 
sequestration, with the exception of administrative expenses 
(which are counted as discretionary spending). Table 1-43 shows 
total OASDI administrative expenses, and administrative 
expenses as a percentage of benefit payments. The law further 
permits floor objections to be raised against budget bills (so-
called ``reconciliation'' bills) that contain Social Security 
measures.

   TABLE 1-43.--OASDI ADMINISTRATIVE EXPENSES IN BILLIONS OF DOLLARS AND AS A PERCENTAGE OF BENEFIT PAYMENTS,   
                                              FISCAL YEARS 1989-95                                              
----------------------------------------------------------------------------------------------------------------
                                                       Total                                                    
                                                  administrative       OASI             DI             Total    
                   Fiscal year                     expenses (in   administrative  administrative  administrative
                                                    billions of    expenses \1\    expenses \1\    expenses \1\ 
                                                     dollars)                                                   
----------------------------------------------------------------------------------------------------------------
1989............................................        $2.407             0.8             3.3             1.1  
1990............................................         2.280             0.7             3.0             0.9  
1991............................................         2.535             0.7             2.9             1.0  
1992............................................         2.668             0.7             2.8             0.9  
1993............................................         2.955             0.8             2.8             1.0  
1994............................................         2.896             0.7             2.8             0.9  
1995............................................         2.870             0.6             2.7             0.9  
----------------------------------------------------------------------------------------------------------------
\1\ As a percentage of OASI, DI and total benefit payments.                                                     
                                                                                                                
Source: Office of the Actuary, Social Security Administration.                                                  

Current House and Senate Procedural Rules to Protect Social Security's 
                          Financial Condition

    Under the budget rules that existed before 1991, Social 
Security was included in calculations of the budget deficit. 
This had the effect of potentially thwarting attempts to expand 
its benefits or cut its taxes if they were not accompanied by 
measures to offset the cost or revenue loss. Floor objections 
could be raised against such actions if they violated the 
budget totals or allocations. If enacted, other programs were 
potentially threatened with sequestration because the deficit 
would be made larger. The old process imposed the same fiscal 
discipline on Social Security as applied to other programs. 
Since Social Security is now exempt from the budget limits 
(excepting its administrative expenses), these fiscal 
constraints no longer apply. In their place are rules intended 
to make it difficult to bring up measures for a vote that would 
weaken the program's financial condition. These procedural 
rules are sometimes referred to as the Social Security 
``firewall'' provisions.
    In the House, a floor objection can be raised against a 
bill that proposes more than $250 million in Social Security 
spending increases or tax cuts over 5 years (counting the 
fiscal year it becomes effective and the following 4 years) 
unless the bill also contains offsetting changes to bring the 
net impact within the $250 million limit. Costs of prior 
legislation that fall within the 5-year period must be counted. 
An objection also can be raised against a measure that would 
increase long-range (75-year) average costs or reduce long-
range revenues by at least 0.02 percent of taxable payroll 
(i.e., national earnings subject to Social Security taxes).
    In the Senate, budget resolutions must include separate 
amounts for Social Security income and outgo for the first year 
and 5-year period covered by the resolution (i.e., separate 
from the budget totals). These amounts cannot cause the 
balances of the Social Security Trust Funds to be lower than 
projected under current law. Measures that would do so could 
draw an objection, which can be overridden only by a vote of 
three-fifths of the Senate. Once the resolution is enacted, 
subsequent measures that on balance would cause Social Security 
outlay increases or revenue reductions could draw an objection, 
which again can be overridden only when three-fifths of the 
Senate votes to do so.

             Budgetary Treatment of Administrative Expenses

    The costs of administering the Social Security Retirement 
and Disability Programs are financed from the Social Security 
Trust Funds, subject to annual appropriations. Traditionally 
these costs are low, comprising between 1 and 2 percent of 
annual benefit payments (see table 1-43). During fiscal year 
1995, they amounted to $2.9 billion.
    These trust-fund-financed administrative funds comprised 46 
percent of the Social Security Administration's fiscal year 
1995 administrative budget. The agency received another 14 
percent from the Medicare Trust Funds, as well as 40 percent 
from general revenues for administration of the Supplemental 
Security Income Program. This brought SSA's total 1995 
administrative budget to $5.1 billion (excluding the special 
appropriations for disability processing and automation 
investments).
    Social Security benefit payments were taken off budget as 
provided by the Budget Enforcement Act (BEA) of 1990. The BEA 
specifically exempts certain programs from the discretionary 
spending cap, but not SSA's administrative expenses.

                          LEGISLATIVE HISTORY

                      Changes in the 95th Congress

    The 95th Congress had to resolve major problems in the 
financing of the Social Security Program. The 1977 amendments 
(Public Law 95-216) increased future revenues by raising tax 
rates and the earnings base, but more significantly, they 
changed the benefit formula that was raising initial benefits 
too rapidly. For individuals who became eligible after 1978, 
benefits were to be determined by a formula designed to give a 
stable relationship between one's benefit and preretirement 
career earnings. This would be accomplished by indexing both 
the formula for determining initial benefits and a person's 
earnings to reflect changing wage levels. The change in the 
computation rules was called ``decoupling,'' which, according 
to some, resulted in a so-called benefit ``notch.'' The 
following is a summary of the major provisions of the law.
Change in benefit formula
    For those reaching age 62, becoming disabled, or dying in 
1979 or later, initial benefits would be computed using a 
formula that would be indexed to the growth in average wages 
over the years, so that they would generally maintain pace with 
the standard of living. To ease transition to the new rules, 
those attaining age 62 in 1979-83 could have their benefits 
computed under the old rules, with some limitations, if they 
were higher than benefits computed under the new rules.
Increases in payroll tax rates
    Raised OASDI tax rates slightly in 1979 and 1980, and more 
significantly in 1981 and later. The ultimate OASDHI tax rate 
would be 7.65 percent each on employees and employers in 1990. 
(Formerly, the rate in 1990 was 6.45 percent, and the ultimate 
rate, 7.45 percent in 2011.)
Increases in the earnings base
    On an ad hoc basis, the base was raised to $22,900 in 1979, 
$25,900 in 1980, and $29,700 in 1981. After 1981, the base 
would be adjusted automatically to keep up with increases in 
average wages as under the prior law.
Increases in the delayed retirement credit (DRC)
    Raised the DRC to 3 percent a year for workers reaching age 
62 after 1978 (those subject to the new way of computing 
benefits).
Earnings limit changes
    Lowered from 72 to 70 the age at which the earnings limit 
no longer applies, effective in 1982. Also increased, on an ad 
hoc basis for 5 years, the annual exempt amount in the earnings 
limit for those age 65 and over. (The amount for those under 
age 65 was not changed but left to continue to be indexed to 
wage growth.) After 1982, the annual exempt amount for those 
over age 65 would again rise automatically with wage growth.
Government pension offset
    Reduced a spouse's and surviving spouse's benefits dollar 
for dollar by the amount of the government pension derived from 
his or her own work not covered by Social Security. (Later 
modified to a two-thirds offset by Public Law 98-21.)
Change in quarter-of-coverage measure
    Beginning in 1978, a worker would receive one quarter of 
coverage (up to four per year) for each $250 of annual wages 
(instead of for $50 or more earned per calendar quarter). The 
$250 figure would be increased automatically in future years to 
take account of increases in average wages.
Divorced spouses
    Reduced the duration-of-marriage requirement for divorced 
spouses and surviving divorced spouses from 20 to 10 years.
Freeze in minimum benefit
    ``Froze'' initial minimum benefit levels--at $122--so they 
would not rise in future years (although COLAs would be given 
beneficiaries once they were on the rolls).

                      Changes in the 96th Congress

    Public Law 96-265, the Social Security disability 
amendments of 1980, made substantial changes to the disability 
programs. Major provisions were:
Periodic review of disability determinations
    Required that, unless a finding has been made that a 
recipient's disability is permanent, the case will be reviewed 
every 3 years to determine if the recipient is still disabled.
Family benefit cap
    Limited family benefits in disability cases to the lesser 
of 85 percent of the average indexed monthly earnings (AIME) or 
150 percent of the primary insurance amount (PIA), but no less 
than 100 percent of the PIA.
Variable dropout years
    In the computation of benefits for workers disabled before 
age 47, the dropout years were reduced from 5 years to a range 
of from 1 to 4 years, depending on the worker's age and child 
care dropout years.
Automatic reentitlement to benefits
    Medically disabled recipients who return to work would be 
automatically reentitled to benefits if they stopped performing 
substantial gainful activity (SGA) within 15 months following 
the end of the trial work period (TWP).
Extension of Medicare coverage
    Provided continued Medicare coverage for up to 24 months 
after the entitlement to disability benefits ends for medically 
disabled recipients who return to work.
Work expense deductions
    Allowed deductions in DI cases of the cost of impairment-
related services and devices and attendant care costs from 
earnings in determining SGA, if they are necessary for the 
recipient to work and the recipient pays for them.
Administration of the DI Program
    Gave the Federal Government the authority to set standards 
for Disability Determinations Services (DDS) performance and 
the option of taking over the State disability determination 
process. Also required the SSA to review DDS allowances before 
they go into effect.
      
    Also in 1980, Public Law 96-473 modified the earnings limit 
to allow a ``grace year'' in which the monthly earnings limit 
could be used rather than the yearly one, so that dependents 
could use the monthly earnings limit in their last year of 
entitlement and retirees would not be penalized for earnings 
before their retired. In addition, in order to shore up 
financing of the OASI Program, Public Law 96-403 reallocated 
part of the DI tax to OASI, and denied DI benefits to prisoners 
incarcerated upon conviction of a felony.

                      Changes in the 97th Congress

    The 97th Congress made numerous changes in the OASDI 
Program. The major changes were included in the Omnibus Budget 
Reconciliation Act of 1981 (Public Law 97-35). Table 1-44 lists 
these changes.

TABLE 1-44.--ESTIMATES FOR LEGISLATIVE CHANGES MADE IN OASDI DURING 1981
    (PUBLIC LAW 97-35) (JANUARY 1982 ESTIMATES), FISCAL YEARS 1982-84   
                        [In millions of dollars]                        
------------------------------------------------------------------------
                                                     Fiscal year        
                                           -----------------------------
                                              1982      1983      1984  
------------------------------------------------------------------------
Elimination of minimum benefit for future                               
 beneficiaries............................       -81      -180      -210
Elimination of benefits for postsecondary                               
 students.................................      -567    -1,580    -2,033
Restrictions on payment of lump-sum death                               
 benefits.................................      -200      -210      -215
Modification of month of initial                                        
 entitlement for certain workers and their                              
 dependents...............................      -190      -220      -240
Temporary extension of earnings limitation                              
 to include all persons aged less than 72.      -380      -120         0
Termination of mother's and father's                                    
 benefits when youngest child attains age                               
 16.......................................       -30       -88      -496
Modification of rounding rules............       -79      -272      -314
Cost reimbursement for provision of                                     
 earnings information.....................        -1        -2        -5
Revision of reimbursements for vocational                               
 rehabilitation services..................       -87       -86       -73
Modification of worker's compensation                                   
 offset to: (1) apply offset to certain                                 
 other public disability benefits-megacap;                              
 (2) apply offset to benefits of workers                                
 aged 62-64; and (3) begin offset in first                              
 month of dual-benefit payment............       -87      -122      -156
Extension of coverage to first 6 months of                              
 sick pay (revenue increase)..............      -534      -762      -828
                                           -----------------------------
    Total OASDI...........................    -2,236    -3,642    -4,570
------------------------------------------------------------------------
Source: Congressional Budget Office.                                    

                      Changes in the 98th Congress

    The 98th Congress made extensive changes in OASDI Programs 
in the Social Security amendments of 1983 (Public Law 98-21), 
enacted to restore the financial status of the Social Security 
Trust Funds. Table 1-45 outlines the estimated outlay and 
revenue effects of the 1983 amendments under the intermediate 
assumptions of the 1983 Trustees' Report. At the time, it was 
estimated that in the period 1983 through 1989, the OASDI and 
HI Trust Funds would receive $166.2 billion and $33.6 billion, 
respectively, in additional financing. Table 1-46 shows the 
estimated long-range effects of the 1983 amendments, under 1983 
assumptions.
      
    Public Law 98-460, the Disability Benefits Reform Act of 
1984, made several substantial changes in the standards for 
review of disability beneficiaries, and in other provisions of 
the program as well. The following is a summary of the law.
Medical improvement standard
    The law established a medical improvement standard under 
which the Secretary (now the Commissioner) may terminate 
disability benefits on the basis that the person is no longer 
disabled only if:
 1. There is substantial evidence demonstrating that (a) there 
        has been medical improvement in the individual's 
        impairment or combination of impairments (other than 
        medical improvement which is not related to the 
        person's ability to work), (b) the individual is now 
        able to engage in substantial gainful activity (SGA);
 2. There is substantial evidence consisting of new medical 
        evidence and a new assessment of residual functional 
        capacity (RFC) that demonstrates that although there is 
        no medical improvement, (a) the person has benefited 
        from advances in medical or vocational therapy or 
        technology related to ability to work, and (b) that she 
        is now able to perform SGA;
 3. There is substantial evidence that although there is no 
        medical improvement (a) the person has benefited from 
        vocational therapy and (b) the beneficiary can now 
        perform SGA;
 4. There is substantial evidence that, based on new or 
        improved diagnostic techniques or evaluations, the 
        person's impairment or combination of impairments is 
        not as disabling as it was considered to be at the time 
        of the prior determination, and that therefore the 
        individual is able to perform SGA;
 5. There is substantial evidence either in the file at the 
        original determination or newly obtained showing that 
        the prior determination was in error;
 6. There is substantial evidence that the original decision 
        was fraudulently obtained; or
 7. If the individual is engaging in SGA (except where he is 
        eligible under section 1619), fails without good cause 
        to cooperate in the review or follow prescribed 
        treatment or cannot be located.
    In making the determination, the Secretary (now the 
Commissioner) was required to consider the evidence in the file 
as well as any additional information concerning the 
applicant's current or prior condition secured by the Secretary 
(now the Commissioner) or provided by the applicant.
    Determinations under this provision had to be made on the 
basis of the weight of the evidence, and on a neutral basis 
with regard to the individual's condition, without any 
inference as to the presence or absence of disability based on 
the previous finding of disability.

  TABLE 1-45.--ESTIMATED CHANGES IN OASDI RECEIPTS AND BENEFIT PAYMENTS RESULTING FROM THE 1983 SOCIAL SECURITY 
                              AMENDMENTS (PUBLIC LAW 98-21), CALENDAR YEARS 1983-89                             
                                            [In billions of dollars]                                            
----------------------------------------------------------------------------------------------------------------
                                                                    Calendar year--                             
                   Provision                   --------------------------------------------------------  Total, 
                                                 1983    1984    1985    1986    1987    1988    1989    1983-89
----------------------------------------------------------------------------------------------------------------
Increase tax rate on covered wages and                                                                          
 salaries.....................................  ......     8.6     0.3  ......  ......    14.5    16.0      39.4
Increase tax rate on covered self-employment                                                                    
 earnings.....................................  ......     1.1     3.1     3.0     3.2     3.7     4.4      18.5
                                               =================================================================
Cover all Federal elected officials and                                                                         
 political appointees.........................  ......   (\1\)   (\1\)   (\1\)   (\1\)   (\1\)   (\1\)       0.1
Cover new Federal employees...................  ......     0.2     0.7     1.2     1.8     2.4     3.1       9.3
Cover all nonprofit employees.................  ......     1.3     1.5     1.8     2.1     2.6     3.0      12.4
                                               -----------------------------------------------------------------
      Total for new coverage..................  ......     1.5     2.2     3.0     3.9     5.0     6.1      21.8
                                               =================================================================
Prohibit State and local government                                                                             
 terminations.................................  ......     0.1      2.     0.4      6.      8.     1.1       3.2
Accelerate collection of State and local taxes  ......     0.6   (\1\)   (\1\)     0.1     0.1     0.1       1.0
Modify general fund financing basis for                                                                         
 noncontributory military service credits.....    18.4    -0.4    -0.4    -0.3    -0.4    -0.4    -0.4      16.1
Provide reimbursements from general fund for                                                                    
 unnegotiated checks..........................     1.3     0.1     0.1     0.1     0.1     0.1     0.1       1.6
Delay benefit increases 6 months..............     3.2     5.2     5.4     5.5     6.2     6.7     7.3      39.4
Continue benefits on remarriage...............  ......   (\2\)   (\2\)   (\2\)   (\2\)   (\2\)   (\2\)      -0.1
Modify indexing of deferred survivors'                                                                          
 benefits.....................................  ......  ......   (\2\)   (\2\)   (\2\)   (\2\)   (\2\)     (\2\)
Raise disabled widow(er)s' benefits to 71.5                                                                     
 percent of PIA...............................  ......    -0.2    -0.2    -0.2    -0.2    -0.3    -0.3      -1.4
Pay divorced spouses whether or not worker has                                                                  
 retired......................................  ......  ......   (\2\)   (\2\)   (\2\)   (\2\)   (\2\)      -0.1
Eliminate ``windfall'' benefits for                                                                             
 individuals receiving pensions from                                                                            
 noncovered employment........................  ......  ......  ......   (\3\)   (\3\)   (\3\)     0.1       0.1
Offset spouses' benefits by two-thirds of                                                                       
 noncovered government pension (public pension                                                                  
 offset)......................................   (\2\)   (\2\)   (\2\)   (\2\)   (\2\)   (\2\)   (\2\)     (\2\)
Expand use of death certificates to stop                                                                        
 benefits.....................................   (\3\)   (\3\)   (\3\)   (\3\)   (\3\)   (\3\)   (\3\)       0.1
Impose 5-year residency requirement for                                                                         
 certain aliens...............................  ......  ......   (\3\)   (\3\)   (\3\)   (\3\)   (\3\)       0.1
Tax one-half of benefits for high-income                                                                        
 beneficiaries................................  ......     2.6     3.2     3.9     4.7     5.6     6.7      26.6
All other changes.............................   (\2\)   (\2\)   (\2\)   (\2\)   (\2\)   (\2\)   (\2\)      -0.1
                                               -----------------------------------------------------------------
      Total for all changes...................    22.8    19.2    13.9    15.3    18.0    35.8    41.2     166.2
----------------------------------------------------------------------------------------------------------------
\1\ New additional taxes of less than $50 million.                                                              
\2\ Additional benefits of less than $50 million.                                                               
\3\ Reduction in benefits of less than $50 million.                                                             
                                                                                                                
Note.--Based on 1983 alternative II-B assumptions. Estimates shown for each provision include the effects of    
  interaction with all preceding provisions. Totals do not always equal the sum of components due to rounding.  
  Positive figures represent additional income or reduction in benefits. Negative figures represent reductions  
  in income or increases in benefits.                                                                           
                                                                                                                
Source: Office of the Actuary, Social Security Administration.                                                  


   TABLE 1-46.--ESTIMATED LONG-RANGE OASDI COST EFFECTS OF THE SOCIAL   
             SECURITY AMENDMENTS OF 1983 (PUBLIC LAW 98-21)             
------------------------------------------------------------------------
                                                 Effect as percent of   
                                                       payroll          
                 Provision                 -----------------------------
                                              OASI       DI       OASDI 
------------------------------------------------------------------------
Present law prior to amendments:                                        
  Average cost rate.......................     13.04      1.34     14.38
  Average tax rate........................     10.13      2.17     12.29
  Actuarial balance.......................     -2.92      +.83     -2.09
Changes included in titles I and III of                                 
 the amendments: \1\                                                    
  Cover new Federal employees.............      +.26      +.02      +.28
  Cover all nonprofit employees...........      +.09      +.01      +.10
  Prohibit State and local terminations...      +.06      +.00      +.06
  Delay benefit increases 6 months........      +.28      +.03      +.30
  Eliminate ``windfall'' benefits.........      +.04      +.00      +.04
  Raise delayed retirement credits........     -0.10  ........     -0.10
  Tax one-half of benefits................      +.56      +.05      +.61
  Accelerate tax rate increase............      +.03  ........      +.03
  Increase tax rate on self-employment....      +.17      +.02      +.19
  Adjust self-employment income...........     -0.02     -0.00     -0.03
  Change DI rate allocation...............      +.81     -0.81  ........
  Continue benefits on remarriage.........     -0.00     -0.00     -0.00
  Pay divorced spouse of nonretired.......     -0.01     -0.00     -0.01
  Modify indexing of survivor's benefits..     -0.05  ........     -0.05
  Raise disabled widow's benefits.........     -0.01  ........     -0.01
  Modify military credits financing.......      +.01      +.00      +.01
  Credit unnegotiated checks..............      +.00      +.00      +.00
  Tax certain salary reduction plans......      +.03      +.00      +.03
  Modify public pension offset............     -0.00     -0.00     -0.00
  Suspend auxiliary benefits for certain                                
   aliens.................................      +.00      +.00      +.00
  Modify earnings limit for those aged 65                               
   and over \2\...........................     -0.01  ........     -0.01
All other provisions of titles I and III..     -0.00     -0.00     -0.00
Subtotal for the effect of the above                                    
 provisions \3\...........................     +2.07     -0.68     +1.38
Remaining deficit after the above                                       
 provisions...............................     -0.85      +.15     -0.71
Additional change relating to long-term                                 
 financing (title II): \4\ Raise normal                                 
 retirement age to 67.....................      +.83     -0.12      +.71
      Total effect of all of the                                        
       provisions \5\.....................     +2.89     -0.80     +2.09
After the amendments:                                                   
  Actuarial balance.......................     -0.03      +.03     -0.00
  Average income rate.....................     11.47      1.42     12.89
  Average cost rate.......................     11.50      1.39    12.89 
------------------------------------------------------------------------
\1\ The values of each of the individual provisions listed from title I 
  and title III represent the effect over present law and do not take   
  into account interaction with other provisions with the exception of  
  the provision relating to the earnings limit.    \2\ Estimates from   
  modifying the earnings limit take into account interaction with the   
  provision raising delayed retirement credits.    \3\ The values in the
  subtotal for all provisions included in title I and title III take    
  into account the estimated interactions among these provisions.    \4\
  The values for each of the provisions of title II take into account   
  interaction with the provisions included in title I and title III.    
  \5\ The values for the total effect of the amendments take into       
  account interactions among all of the provisions.                     
                                                                        
Note.--The above estimates are based on preliminary 1983 Trustees'      
  Report Alternative II-B assumptions. Individual estimates may not add 
  to totals due to rounding and/or interaction among proposals.         
                                                                        
Source: Svahn & Ross (1983).                                            

Effective date
    Applied only with respect to the following categories:
 1. Determinations by the Secretary made after the date of 
        enactment (and Commissioner after March 31, 1995);
 2. Cases pending at any level of the administrative process on 
        the date of enactment;
 3. Cases of individual litigants pending in Federal court on 
        the date the conference report was filed;
 4. Cases of named plaintiffs in pending class action suits;
 5. Cases of unnamed plaintiffs in class action suits certified 
        prior to that date; and
 6. Cases where a request for judicial review was made on a 
        decision of the Secretary made during the 60 days 
        preceding enactment.
    Cases in categories (3), (4), (5), and (6) had to be 
remanded to the Secretary or Commissioner, as appropriate, for 
review under this standard. Individuals in (5) were to be sent 
a notice via certified mail informing them that they had 120 
days after the date of receipt of the notice to request a 
review under the medical improvement standard.
    No class action could be certified after the date the 
conference report was filed, which raised the issue of medical 
improvement with respect to an individual whose benefits were 
terminated prior to that date.
    Persons whose cases were remanded to the Secretary or 
Commissioner were to receive benefits pending the Secretary's 
or Commissioner's decision and appeal of that decision if they 
so elected. If found eligible, any person whose case was 
remanded under this provision was to receive benefits 
retroactive to the date they were last found ineligible.
Evaluation of pain
    The Secretary of HHS was required, in conjunction with the 
National Academy of Sciences, to conduct a study addressing two 
issues: using subjective evidence of pain in determining 
whether a person is under a disability; and the state of the 
art of preventing, reducing, or coping with pain. This study 
was completed and a report was submitted to the House Committee 
on Ways and Means and the Senate Committee on Finance by the 
Social Security Administration in 1986. While making many 
recommendations, it basically supported the existing treatment 
of allegations of pain in disability determinations.
    The provision also established a statutory standard for 
considering pain, which was in effect until December 31, 1986.
Multiple impairments
    In determining whether a person's impairment or impairments 
are of a sufficient medical severity to be the basis of a 
finding of eligibility for benefits, the Secretary (now 
Commissioner) was required to consider the combined effect of 
all of the person's impairments, whether or not any one 
impairment alone would be severe enough to qualify the person 
for benefits. The provision became effective for all 
determinations made on or after 30 days after enactment.
Moratorium on mental impairment reviews
    A moratorium was imposed on reviews of all cases of mental 
impairment disability until the mental impairment criteria in 
the Listing of Impairments were revised to realistically 
evaluate the person's ability to engage in SGA in a competitive 
workplace environment. The moratorium applied to all cases on 
which an administrative or judicial appeal was pending on or 
after June 7, 1983. All persons claiming benefits based on 
mental impairment disability who received an unfavorable 
initial or continuing disability decision after March 1, 1981 
were permitted to reapply for benefits within 12 months of 
enactment. The revised criteria were published in 1985.
Pretermination notice
    The Secretary (now the Commissioner) was required to 
initiate demonstration projects on providing face-to-face 
interviews for (1) pretermination continuing disability cases; 
and (2) all initial denial cases, in lieu of face-to-face 
evidentiary hearings at reconsideration, to be done in at least 
five States with a report due to the House Committee on Ways 
and Means and the Senate Committee on Finance on April 1, 1986. 
The Secretary (now the Commissioner) was also required to 
notify individuals, upon initiating a periodic eligibility 
review, that termination of benefits could be the result of the 
review, and that medical evidence may be provided. Although 
these studies have been completed, the report has not yet been 
submitted to Congress.
Continuation of benefits during appeal
    This provision provided for continuation of disability and 
Medicare benefits during appeal for all continuing disability 
review cases through the decision of the ALJ, at the election 
of the individual. Where the ALJ's decision is adverse to the 
individual, the disability benefits were to be repaid. The 
provision was made permanent for SSI disability recipients, and 
applied to DI beneficiaries through December 1987. (The Omnibus 
Budget Reconciliation Act of 1987 extended the provision for DI 
beneficiaries through December 1988; the 1988 tax technical 
corrections bill extended the provisions through December 1989; 
and the Omnibus Budget Reconciliation Act of 1989 extended them 
through December 1990.)
Qualifications of medical professionals
    This provision required the Secretary (now Commissioner) to 
make every reasonable effort, in cases based on mental 
impairments, to ensure that a qualified psychiatrist or 
psychologist completes the medical portion of the case review 
and of the residual functional capacity assessment before any 
determination is made that an individual is not disabled. The 
Secretary (now Commissioner) was given the authority to 
contract directly for such services if the DDS is unable to do 
so.
Standards for consultative examinations/medical evidence
    The Secretary was required to promulgate regulations 
regarding consultative examinations, including when they should 
be obtained, the type of referral to be made, and the 
procedures for monitoring the referral process. Further, the 
Secretary (now the Commissioner) was required to make every 
effort to obtain necessary medical evidence from the treating 
physician before evaluating medical evidence from any other 
source, and to consider all evidence in the case record and 
development of complete medical history over at least the 
preceding 12-month period.
Administrative procedure and uniform standards
    As required, regulations were published setting forth 
uniform standards for DI and SSI disability determinations 
under section 553 of the Administrative Procedure Act, to be 
binding at all levels of adjudication.
Nonacquiescence
    While the conference agreement dropped both the House and 
Senate provisions relating to the Secretary's acquiescence with 
Court rulings, the intent was not to endorse the practice of 
``nonacquiescence.'' The conferees noted that questions had 
been raised about the constitutional basis of the practice, 
that many of the conferees had strong concerns about the 
practice, and that a policy of nonacquiescence should be 
followed only where steps have been taken or are intended to be 
taken to receive a review of the disputed issue in the Supreme 
Court. The conferees also urged the Secretary to seek a 
resolution of the nonacquiescence issue in the Supreme Court.
    In January 1990, SSA issued regulations relating to its 
adherence with circuit court decisions which are in conflict 
with SSA's policies. Their key provisions are that: (a) SSA 
will apply a circuit court decision that conflicts with SSA 
policy, within the circuit and at all levels of administrative 
adjudication, unless the government decides to appeal the 
decision; and (b) SSA will publish in the Federal Register an 
Acquiescence Ruling explaining how adjudicators should apply 
the circuit court decision. SSA will also publish all other 
Social Security Rulings in the Federal Register.
Payment of costs of rehabilitation services
    The provision permitted reimbursement to State agencies for 
costs of VR services provided to individuals receiving DI 
benefits under section 225(b) of the Social Security Act who 
medically recover while in VR, whether or not the person worked 
at SGA for 9 months, and whether or not the person failed to 
cooperate in the program.
Direction for Quadrennial Social Security Advisory Council
    The provision required the next quadrennial advisory 
council to study the medical and vocational aspects of 
disability using ad hoc panels of experts where appropriate. 
The study was to include an analysis of alternative approaches 
to work evaluation for SSI recipients, the effectiveness of VR 
programs, and other disability program policies, standards, and 
procedures. The Council issued its report in March 1988.
Staff attorneys
    The Secretary was to report, within 120 days of enactment, 
to the House Committee on Ways and Means and the Senate 
Committee on Finance, on the actions taken by the Secretary to 
establish positions which enable staff attorneys to gain the 
qualifying experience and quality of experience necessary to 
compete for ALJ positions. Statement of managers stated that it 
was assumed, given U.S. Office of Personnel Management (OPM) 
actions at the time, that statutory requirements for 
establishing specific positions were not required, and the 
Secretary was urged to take all reasonable steps to see that 
the OPM actions resulted in SSA staff attorneys becoming 
qualified for GS-15 ALJ positions.
SSI benefits for persons working despite impairment
    This provision extended sections 1619 (a) and (b) through 
June 30, 1987, and required the Secretaries of HHS and 
Education to establish training programs for staff personnel in 
SSA district offices and State VR agencies, and disseminate 
information to SSI applicants, recipients, and potentially-
interested public and private organizations. Sections 1619 (a) 
and (b) were made permanent in 1986.
Frequency of continuing eligibility reviews
    The Secretary was required to promulgate regulations 
establishing standards for determining the frequency of 
continuing eligibility reviews. Final regulations were to be 
issued within 6 months and during that period no individual 
could be subjected to more than one periodic review.
Representative payees for Social Security and SSI beneficiaries
    The Secretary (now Commissioner) was required to (1) 
evaluate qualifications of prospective payees prior to or 
within 45 days following certification, (2) establish a system 
of annual accountability monitoring where payments are made to 
someone other than a parent or spouse living in the same 
household with the beneficiary, and (3) report to Congress on 
implementation, and annually on the number of cases of misused 
funds and disposition of such cases.

                      Changes in the 99th Congress

    Several legislative changes were made in the Social 
Security Program in the 99th Congress. The Consolidated Omnibus 
Reconciliation Act of 1985 (Public Law 99-272) included a 
variety of minor and technical legislative changes in Social 
Security. Additionally, Public Law 99-272 contained provisions 
to: (a) exempt wages paid to retired Federal judges performing 
active duty, for purposes of FICA taxation and the Social 
Security earnings limit; and (b) to protect certain Social 
Security beneficiaries who receive overpayments through the 
electronic direct deposit system.
      
    The Emergency Deficit Reduction and Balanced Budget Act of 
1985 (Public Law 99-177) contained a provision to remove the 
receipts and disbursements of the Social Security Trust Funds 
from the unified budget effective in fiscal year 1986, and to 
restrict consideration of legislative changes in Social 
Security as part of the congressional budget process. It also 
contained measures intended to bring the Federal budget into 
balance by fiscal year 1991, and under those measures, Social 
Security income and outgo were to be used in calculating the 
Federal deficit. However, the benefits were made exempt from 
any automatic cuts required to reduce the deficit. Moreover, 
the act contained provisions making it difficult for Social 
Security changes to be brought up in the congressional budget 
process by permitting floor objections, or ``points of order,'' 
against such measures.
      
    The Omnibus Budget Reconciliation Act of 1986 (Public Law 
99-509) included two significant Social Security provisions. 
The first eliminated the requirement that the annual rise in 
the Consumer Price Index must exceed 3 percent in order for a 
cost-of-living adjustment to be paid to Social Security 
beneficiaries. The new law required that a cost-of-living 
adjustment be paid in any year in which there was a measurable 
increase in consumer inflation. Second, Public Law 99-509 
removed from the States the responsibility for collecting and 
depositing with the Federal Government Social Security 
contributions on behalf of their political subdivisions. All 
State and local entities now deposit their Social Security 
contributions directly to the Federal Government on a time 
schedule that parallels the treatment of private employers.

                     Changes in the 100th Congress

    Public Law 100-203, the Budget Reconciliation Act of 1987, 
made a number of changes in coverage.
Armed Services reservists
    FICA taxes were extended to ``inactive duty training'' 
(generally weekend training drill sessions).
Agricultural workers
    Wages paid to an employee who received less than $150 in 
annual cash remuneration from an agricultural employer were 
subject to FICA if the employer paid more than $2,500 in the 
year to all employees, unless the employee: (1) is a hand-
harvest laborer and is paid on a piece-rate basis in an 
operation which has been customarily recognized as having been 
paid on a piece-rate basis in the region of employment; (2) 
commutes daily from his or her permanent residence; and (3) has 
been employed in agriculture less than 13 weeks during the 
preceding calendar year.
Individuals age 18-21
    FICA taxes were extended to services performed by 
individuals between the ages of 18 and 21 who are employed in 
their parent's trade or business.
Spouses
    FICA taxes were extended to services performed by an 
individual in the employ of his or her spouse's trade or 
business.
Tips
    The employer's share of FICA taxes was extended to include 
all cash tips (up to the Social Security wage base).
Phaseout of reduction in windfall benefits
    The phaseout of the reduction of benefits for workers with 
noncovered pensions was changed from 25 through 30 years of 
Social Security coverage to 20 through 30 years.
Treatment of group-term life insurance wages under FICA
    Employer-provided group-term life insurance was included in 
wages for FICA tax purposes if such insurance were includable 
for gross income tax purposes, effective January 1, 1988.
Correction in government pension offset
    Federal employees who switched from the Civil Service 
Retirement System (CSRS) to the Federal Employees' Retirement 
System (FERS) on or after January 1, 1988 were exempted from 
the government pension offset only if they had 5 or more years 
of Federal employment covered by Social Security after December 
31, 1987.
      
    Public Law 100-203 also made changes to the DI Program:
Continuation of benefits during appeal
    The existing provision for continued payment of disability 
benefits during the administrative appeal process was extended 
through 1988.
Lengthening of the extended period of eligibility for disability 
        benefits
    The extended period of eligibility during which a 
disability beneficiary who returns to work may become 
automatically reentitled to benefits, was lengthened from the 
current 15 months to 36 months. Medicare eligibility is not 
continued beyond the period provided under current law.
Payment of attorneys' fees
    The administrative policy which permits ALJs to authorize 
attorneys' fees of up to $3,000 without approval by an SSA 
regional office was reinstated.
      
    Public Law 100-647, the Technical and Miscellaneous Revenue 
Act of 1988, further modified the DI Program:
Continuation of benefits during appeal
    The existing provision for continued payment of benefits 
was again extended, through 1989.
Interim benefits in cases of delayed final decisions
    Interim benefits will be paid to individuals who have 
received a favorable decision from an administrative law judge 
but whose cases are under review by the Appeals Council and the 
Council has not rendered a decision within 110 days. These 
interim payments are not subject to recovery as overpayments if 
the final determination is unfavorable.

                     Changes in the 101st Congress

    Public Law 101-239, the Omnibus Budget Reconciliation Act 
of 1989, made various changes to OASDI:
Continuation of benefits during appeal
    The existing provision for continued payment of disability 
benefits during administrative appeal was extended through 
1990.
Extension of Disability Insurance Program demonstration authority
    The authority of the Secretary (now the Commissioner) to 
waive compliance with the benefit requirements of titles II and 
XVIII for the purpose of conducting work incentive 
demonstration projects was extended for 3 years, through June 
9, 1993.
Representation of applicants
    Effective June 1, 1991, the Secretary (now the 
Commissioner) would be required to maintain an electronically 
retrievable list of applicants' legal representatives.
      
    Public Law 101-508, the Omnibus Budget Reconciliation Act 
of 1990, made additional OASDI changes:
Continuation of disability benefits during appeal
    The provision permitting disability insurance beneficiaries 
to elect to have their benefits continued during administrative 
appeal was made permanent.
Payment of benefits to a child adopted after a parent's entitlement to 
        retirement or disability benefits or adopted by a surviving 
        spouse
    A child adopted after a worker became entitled to 
retirement or disability benefits was made eligible for child's 
insurance benefits regardless of whether she was living with 
and dependent on the worker prior to the worker's entitlement.
    A child adopted by the surviving spouse of a deceased 
worker was made eligible for benefits regardless of whether he 
had been receiving support from anyone other than the worker 
and the worker's spouse, as long as the child either lived with 
the worker or received one-half support from the worker in the 
year preceding the worker's death.
Repeal of carryover reduction in retirement or disability insurance 
        benefits due to receipt of widow(er)'s benefits before age 62
    The carryover reduction applied to retirement or disability 
benefits received by widow(er)s who collected widow(er)'s 
benefits before age 62 was eliminated.
Improvements in Social Security Administration services and beneficiary 
        protections
    A number of improvements were made in SSA procedures 
regarding correction of earnings records; standards applicable 
in determinations of fault, good faith and good cause; same-day 
interviews on time-sensitive matters; notices sent to blind 
Social Security beneficiaries; legal representatives of 
applicants; and the avenues of recourse open to potential 
applicants who lose benefits because SSA provides them with 
inaccurate or incomplete information. In addition, SSA was 
required to issue a report on options for increasing its use of 
foreign language notices. Conforming changes were also made in 
the SSI Program as applicable.
Earnings and benefit statements
    SSA was required, upon request, to provide individuals with 
a statement of their earnings and contributions and an estimate 
of their future benefits. Beginning in 1995, these statements 
will be provided to all individuals who attain age 60. 
Beginning in October 1999, these statements will be provided 
annually to all workers over age 24 covered under Social 
Security.
Inclusion of certain deferred compensation in the calculation of 
        average wages under the Social Security Act
    Contributions to deferred compensation plans, including 
amounts deferred in 401(k) plans, were included in the 
determination of average wages for Social Security purposes.
Treatment of refunds by employers under the Medicare Catastrophic 
        Coverage Act of 1988 for FICA and other purposes
    Refunds provided to individuals by employers under the 
maintenance-of-effort provision of the Medicare Catastrophic 
Coverage Act of 1988 were excluded from wages for FICA, FUTA, 
and railroad retirement and railroad unemployment insurance tax 
purposes. In addition, the Secretary of the Treasury was given 
authority to prescribe the manner in which the refunds were to 
be reported.
Extension of Social Security coverage exemption for members of certain 
        religious faiths
    The exemption from Social Security coverage for workers who 
are members of certain religious groups was extended to: (a) 
qualifying employees of partnerships in which each partner 
holds a religious exemption from Social Security coverage, and 
(b) qualifying employees of churches and church-controlled 
nonprofit organizations who would otherwise be covered as self-
employed for purposes of Social Security taxation.
Prohibition against termination of coverage of U.S. citizens and 
        residents employed abroad by a foreign affiliate of an American 
        employer
    American employers were prohibited from terminating the 
Social Security coverage of U.S. citizens and residents 
employed abroad in their foreign affiliates.
Extension of Disability Insurance Program demonstration project 
        authority
    The authority of the Secretary of HHS [now the 
Commissioner] to conduct work incentive demonstration projects 
was extended through June 9, 1996.
Inclusion of employer cost of group-term life insurance in compensation 
        under the Railroad Retirement Tax Act
    Employer-paid premiums for group-term life insurance 
coverage in excess of $50,000 were made subject to the railroad 
retirement payroll tax, bringing the treatment of such premiums 
into conformity with their treatment under the Social Security 
Act.
Inclusion of deferred compensation arrangements, including 401(k) 
        plans, in compensation under the Railroad Retirement Tax Act
    Contributions to 401(k) deferred compensation plans were 
made subject to the railroad retirement payroll tax, bringing 
the treatment of such contributions into conformity with their 
treatment under the Social Security Act.
Codification of the Rowan decision with respect to railroad retirement
    Except for meals and lodging provided for the convenience 
of the employer, it was stipulated that nothing in Internal 
Revenue Service (IRS) regulations defining wages for purposes 
of the income tax is to be construed as requiring a similar 
definition for purposes of the railroad retirement payroll tax, 
thus conforming the Railroad Retirement Tax Act to the Social 
Security Act.
Extension of general fund transfers to Railroad Retirement Tier II 
        Trust Fund
    The transfer of proceeds from the income taxation of 
railroad retirement Tier II benefits from the general fund of 
the Treasury to the Railroad Retirement Trust Fund was extended 
to October 1, 1992.
Social Security coverage of State and local employees not covered by a 
        public retirement system
    Employees of State and local governments (excluding 
students who are employed by public schools, colleges, or 
universities) who are not covered by a public retirement system 
were covered by Social Security and Medicare (i.e., Old-Age, 
Survivors, and Disability Insurance (OASDI) and Hospital 
Insurance (HI); effective after July 1, 1991.
Budgetary treatment of Social Security Trust Funds
    The Social Security Trust Funds (OASDI Trust Funds) were 
removed from the calculation of the deficit under the Gramm-
Rudman-Hollings law beginning with fiscal year 1991, thereby 
taking Social Security ``off budget.'' The trust funds were 
protected against legislation which would reduce trust fund 
balances, in both the House and Senate, by the establishment of 
floor objections, or ``points of order,'' against such 
legislation.
Improvement of the definition of disability applied to disabled 
        widow(er)s
    The stricter definition of disability that was previously 
applied only to widow(er)s was repealed, and they were made 
subject to the same definition of disability as already applied 
to disabled workers.
Improvements in the OASDI and Supplemental Security Income (SSI) 
        representative payee system
    The representative payee system was improved by: (a) 
requiring the Secretary of Health and Human Services (now the 
Commissioner) to conduct a more extensive investigation of the 
representative payee applicant; (b) providing stricter 
standards in determining the fitness of the representative 
payee applicant to manage benefit payments on behalf of the 
beneficiary; and (c) directing the Social Security 
Administration to make recommendations regarding the 
application of stricter accounting procedures to certain high-
risk representative payees.
    In addition, certain community-based nonprofit social 
service agencies providing representative payee services of 
last resort were allowed to collect a fee from an individual's 
Social Security or SSI benefit for expenses incurred in 
providing such services.
Streamlining of the attorney fee payment process
    The process by which SSA reviews and approves any fee 
charged by an attorney representing an applicant before the 
agency was reformed. The existing fee petition process was 
generally replaced by a streamlined procedure under which fees 
are paid up to a limit of 25 percent of past-due benefits not 
to exceed $4,000, unless the attorney, applicant, or 
administrative law judge objects. The fee petition was retained 
in cases for which the fee requested exceeds the limits, or if 
the determination made on the claim is not favorable.
Restoration of telephone access to the local offices of SSA
    SSA was required to reestablish telephone access to its 
local offices at the level generally available on September 30, 
1989, the day before it established a national 800 number and 
cut off access to local offices serving 40 percent of the 
population.
Creation of a rolling 5-year trial work period for all disabled 
        beneficiaries
    Effective January 1, 1992, the trial work period was 
liberalized so that a disabled beneficiary would exhaust this 
period only after completing 9 trial work months in any rolling 
60-month period. In addition, beneficiaries would receive a new 
trial work period for each period of eligibility.
Continuation of benefits on account of participation in a non-State 
        vocational rehabilitation program
    Beneficiaries who medically recover while participating in 
an approved non-State vocational rehabilitation program were 
granted the same benefit continuation rights as those who 
medically recover while participating in a State-sponsored 
program.
Elimination of advance tax transfer
    The Social Security Trust Funds were credited with tax 
receipts as they were collected throughout the month, rather 
than in advance (at the first of the month), as under previous 
law. However, the advance tax-transfer mechanism (enacted to 
help meet the Social Security funding emergency that existed 
prior to the 1983 amendments) was retained as a contingency to 
be used if the trust funds drop to such a low level that it is 
needed in order to pay current benefits.
Repeal of retroactive benefits for certain categories of individuals
    Retroactive benefits were eliminated for two categories of 
individuals eligible for reduced benefits: (a) those with 
dependents entitled to unreduced benefits, and (b) those with 
preretirement earnings over the amount allowed under the 
retirement limit who had used the retroactive benefits to 
charge off their excess earnings.
Consolidation of old computation methods
    A number of little-used, pre-1968 benefit computation 
formulas were eliminated.
Suspension of dependents' benefits when a disabled worker is in an 
        extended period of eligibility
    Current SSA practice regarding the nonpayment of benefits 
to a disabled worker's dependents when that worker is in an 
extended period of eligibility and is not receiving monthly 
Social Security benefits was codified.
Payment of benefits to a deemed spouse and a legal spouse
    Eligibility requirements for payment of benefits to a 
``deemed spouse''--a spouse whose marriage is found to be 
invalid--were changed so that the entitlement of the worker's 
legal spouse would no longer terminate payment of benefits to a 
deemed spouse.
Creation of a vocational rehabilitation demonstration project
    SSA was required to carry out a demonstration project 
testing the advantages and disadvantages of permitting disabled 
Social Security beneficiaries to select a qualified vocational 
rehabilitation provider, either public or private, from which 
to receive services aimed at enabling them to obtain work and 
leave the disability rolls.
Use of Social Security number by certain legalized aliens
    Certain aliens who were granted amnesty under the 
provisions of the Immigration Reform and Control Act of 1986 
were exempted from criminal penalties for fraudulent use of a 
Social Security card. The exemption did not apply to those 
individuals who sold Social Security cards, possessed cards 
with intent to sell, or counterfeited or possessed 
counterfeited cards with the intent to sell.
Reduction in amount of wages needed to earn a year of coverage toward 
        the special minimum benefit
    Effective in 1991, the amount of earnings needed to earn a 
year of coverage toward the special minimum benefit (designed 
to assist long-term, low-wage workers) was reduced from 25 
percent of the ``old law'' contribution and benefit base 
($10,725 in 1993), to 15 percent of the base ($6,435 in 1993).
Charging of earnings of corporate directors
    A provision of previous law that treated a corporate 
director's earnings as taxable when the services to which they 
are attributable were performed was repealed. A director's 
earnings continue to be treated as received when the services 
are performed for purposes of the Social Security earnings 
limit.
Collection of employee Social Security tax on group-term life insurance
    In cases where an employer continues to provide taxable 
group-term life insurance to an individual who has left his 
employment, the former employee was required to pay the 
employee portion of the Social Security tax directly.
Waiver of the 2-year waiting period for certain divorced spouses
    The 2-year waiting period for independent entitlement to 
divorced spouse benefits was waived in cases where the worker 
was entitled to benefits prior to the divorce.
Preeffectuation review of favorable decisions by the Social Security 
        Administration
    The percentage of favorable decisions made by State 
disability determination services that must be reviewed by SSA 
was reduced from 65 percent of all such decisions to 50 percent 
of allowances and as many continuances as are required to 
maintain a high level of accuracy in such decisions. The 
reviews are to be targeted on those cases most likely to 
contain errors.
Recovery of overpayments from former Social Security beneficiaries 
        through tax refund offset
    SSA was permitted to recover overpayments from former 
beneficiaries through arrangements with the Internal Revenue 
Service (IRS) to offset the former beneficiary's tax refund.

                      Changes in the 102d Congress

    No amendments to title II of the Social Security Act were 
made during the 102d Congress.

                      Changes in the 103d Congress

    The Omnibus Budget Reconciliation Act of 1993 (Public Law 
103-66) made the following tax changes relating to Social 
Security and Medicare:
Increased taxation of benefits
    Made up to 85 percent of Social Security benefits subject 
to the income tax for recipients whose income plus one-half of 
their benefits exceed $34,000 (single) and $44,000 (couple).
Eliminated maximum taxable earnings base for HI
    Subjected all earnings to the HI tax, effective in 1994.
      
    The Social Security Administrative Reform Act of 1994 
(Public Law 103-296) made significant administrative and 
program changes:
Independent agency
    Established the Social Security Administration as an 
independent agency, effective March 31, 1995.
Substance abusers
    Restricted DI and SSI benefits payable to drug addicts and 
alcoholics by creating sanctions for failing to get treatment, 
limiting their enrollment to 3 years, and requiring that those 
receiving DI benefits have a representative payee (formerly 
required only of SSI recipients).
      
    The Social Security Domestic Reform Act of 1994 (Public Law 
103-387):
Domestic workers
    Raised the threshold for Social Security coverage of 
household employees from remuneration of $50 in wages a quarter 
to $1,000 a year.
Disability Insurance Trust Fund financing
    Reallocated a percentage of taxes from the OASI fund to the 
DI fund (see table 1-31).
Barred benefit payments to the criminally insane
    Extended the prohibition against benefit payments to 
prisoners to those in public institutions who committed serious 
crimes but are found not guilty by reason of insanity, or 
incompetent to stand trial.

                     Changes in the 104th Congress

    Summary of major provisions of the ``Senior Citizens' Right 
To Work Act of 1996'' (Incorporated into Public Law 104-121, 
the Contract With America Advancement Act of 1996):
Increase in the Social Security earnings limit
    Gradually raised the earnings limit for those between age 
65 and 70 to $30,000 by the year 2002, phased in over 7 years 
as follows:

------------------------------------------------------------------------
                     Year                         Old law      New law  
------------------------------------------------------------------------
1996..........................................      $11,520      $12,500
1997..........................................      $11,880      $13,500
1998..........................................      $12,240      $14,500
1999..........................................      $12,720      $15,500
2000..........................................      $13,200      $17,000
2001..........................................      $13,800      $25,000
2002..........................................      $14,400      $30,000
------------------------------------------------------------------------

    Senior citizens between full retirement age (currently age 
65) and 70 who earn over the given earnings limit continue to 
lose $1 in benefits for every $3 earned over the limit. After 
2002, the annual exempt amounts are indexed to growth in 
average wages. The substantial gainful activity (SGA) amount 
applicable to individuals under 65 who are eligible for 
disability benefits on the basis of blindness is no longer 
linked to the earnings limit amount for those now age 65 to 69. 
As under current law, this SGA amount continues to be wage-
indexed in the future, and is projected to rise to $14,400 by 
2002.
Establishment of a continuing disability review (CDRs) authorization
    An authorization to provide additional administrative 
funding to enable the Social Security Administration to 
increase CDRs is created. Amounts spent for CDRs above the 
already assumed base funding levels are not subject to the 
discretionary spending caps through fiscal year 2002. SSA must 
report annually on CDR expenditures and savings to the Social 
Security, Supplemental Security Income, Medicaid and Medicare 
Programs.
Entitlement of stepchildren to child's benefits based on actual 
        dependency on stepparent support
    Benefits are payable to a stepchild only if it is 
established that the stepchild is dependent upon the stepparent 
for at least one-half of his or her financial support. In 
addition, benefits to the stepchild are terminated if the 
stepchild's natural parent and stepparent are divorced. The 
dependency requirement is effective for stepchildren who become 
entitled or reentitled to benefits 3 months after the month of 
enactment. In cases of a subsequent divorce, benefits to 
stepchildren terminate 1 month after the divorce becomes final. 
Stepparents are required to notify SSA of the divorce. In 
addition, SSA is required to notify annually those potentially 
affected by this provision.
Denial of benefits based on disability to drug addicts and alcoholics
    An individual is not considered disabled for purposes of 
entitlement to cash Social Security and Supplemental Security 
Income disability benefits if drug addiction or alcoholism is 
the contributing factor material to his or her disability. 
Individuals with drug addiction or alcoholism who have another 
severe disabling condition (such as AIDS, cancer, cirrhosis) 
can qualify for benefits based on that disabling condition.
    If a person qualifying for benefits based on another 
disability is also determined to be an alcoholic or drug addict 
incapable of managing his or her benefits, a representative 
payee will be appointed to receive and manage the individual's 
checks. Recipients who are unable to manage their own benefits 
as a result of alcoholism or drug addiction will be referred to 
the appropriate State agency for substance abuse treatment 
services. For each of two years beginning with fiscal year 
1997, $50 million is authorized to fund additional drug 
(including alcohol) treatment programs and services. 
Individuals entitled to benefits before the month of enactment 
continue to be eligible for benefits until January 1, 1997.
Benefit and contribution statement pilot
    Requires the Commissioner of Social Security to conduct a 
2-year pilot study, beginning in 1996, of the efficacy of 
providing individual benefit and contribution information to 
recipients of Old-Age and Survivor Insurance benefits.
Protection of Social Security and Medicare Trust Funds
    Codifies Congress' understanding of present law that the 
Secretary of the Treasury and other Federal officials are not 
authorized to use Social Security and Medicare funds for debt 
management purposes.

                                APPENDIX

    Relationship of Taxes to Benefits For Social Security Retirees: 
 Illustrations of the Amount of Time it Takes to Recover the Value of 
                       Taxes Paid, Plus Interest

    The issue of the relative value of Social Security 
benefits, compared to the value of the payroll taxes paid to 
acquire those benefits, is often brought up in discussions of 
the nature of the program. This comparison is complex and 
involves many judgments, and is not easily answered with 
general aggregate numbers. In addition to all the technical 
factors that must be addressed, the nature of the Social 
Security law complicates such computations. Not only do 
analysts disagree on the proper techniques to use in making 
calculations, there are often fundamental disagreements 
involving subjective factors: what work patterns to use; what 
part of the Social Security tax to count; whether or not to 
include the employer's share of the tax; and what rate of 
interest to use.
    This analysis seeks to avoid judgmental conclusions by 
providing a range of illustrations that vary these subjective 
factors. It does not evaluate the ``moneysworth'' of Social 
Security, nor does it provide an ``actuarial analysis'' of how 
whole age cohorts fare. Rather, it simply presents 
illustrations of the amount of time it takes, and is projected 
to take, to recover the value of taxes paid plus interest (see 
table 1-50). The illustrations represent a range of possible 
payback times, depending on variations in the assumptions used. 
In this way, no judgments need be made--the use of the 
illustrations is the reader's choice.
    Many things complicate any determination of the 
relationship of benefits to taxes for future retirees. For 
example, although Social Security tax rates and benefit 
formulas are set by law, they are not immutable. Since Congress 
has modified taxes and benefits many times since the beginning 
of the program, it is clearly inconsistent with the program's 
history to calculate taxes and benefits into the future on the 
assumption that these key elements will not change. There is 
little doubt they eventually will be altered, as it is 
projected that demographic phenomena will cause the program's 
projected outgo to outstrip its resources significantly in 33 
years. Higher taxes or benefit cuts would be necessary, at that 
point or before, if the self-supporting character of the 
program is to be continued. These changes obviously would 
affect the relationship of taxes to benefits. However, the 
nature of future changes is unknown, whereas current law is a 
given. Therefore, in order to assess the relationship of future 
taxes and benefits, this analysis uses calculations that are 
useful in presenting possible outcomes of policies currently 
incorporated in the law.
    Calculations of the relationship of benefits to taxes for 
future retirees involve many key factors. The rate of Social 
Security taxation is set by law. The portion of the tax that 
provides cash benefits (Old-Age, Survivors and Disability 
Insurance, or OASDI) to employees is 6.2 percent. However, the 
Old-Age and Survivors Insurance portion of the tax, from which 
retirement benefits are paid, currently 5.26 percent, is 
scheduled to rise to 5.35 percent in 1997 and drop to 5.3 
percent in 2000 and remain level thereafter. The tax rate 
applies to earnings up to a maximum amount. The ``maximum 
taxable earnings'' is $62,700 in 1996, but will rise in the 
future, as prescribed by law, at the same rate as average wages 
in the economy. Therefore, the amount of Social Security taxes 
an employee will pay under current law is a direct function of 
his or her earnings. If one knows the amounts of an individual 
employee's earnings, and what the maximum taxable earnings are 
each year, the amount of tax paid is easily calculated.
    Future initial benefit amounts are also in part a function 
of one's earnings. They are computed at first eligibility (age 
62 for retirement) by a method that indexes both earnings over 
the worker's career and the benefit formula to changes in 
average wages in the economy. After age 62, benefits rise in 
tandem with the cost of living. As these factors are unknown, 
future benefit amounts cannot be predicted with certainty.
    Further complicating the issue is the nature of the 
program. As a ``social insurance'' program, Social Security has 
both social and insurance goals. The social-goal features 
provide a design that deliberately gives a better return on 
taxes to some workers than to others. For example, the basic 
formula for calculating Social Security benefits is tilted to 
replace a higher proportion of earnings for low-paid workers. 
Also, a complex array of dependents' benefits is available at 
no additional cost for workers with families.
    As with insurance, the exact relationship of Social 
Security benefits received to total taxes paid cannot be 
predicted for each and every worker. For example, workers who 
die before or shortly after retirement and leave no survivors 
may collect only a few dollars in benefits or perhaps none at 
all. Other workers may collect Social Security benefits for 
many years after retirement and receive benefits substantially 
greater than the value of their Social Security taxes. Workers 
who become disabled or die at an early age might have paid 
relatively little in Social Security taxes, but they or their 
families may receive benefits for many years, recovering the 
value of the worker's taxes many times.
    Also, there really is no ``typical'' Social Security 
beneficiary with a ``typical'' work history. An ``average'' 
benefit can be the result of many different work histories and 
thus be based on different amounts of taxes paid. For example, 
because the benefit formula does not require that all earnings 
be used in the benefit computation, workers with gaps in their 
earnings history may receive the same benefits as other 
workers, but pay less in total taxes.
    Nevertheless, models can produce projections of future 
benefits, based on assumptions about wage and price growth, for 
workers with designated work histories and characteristics. 
This analysis makes such projections using several common 
assumptions about illustrative workers. It assumes that each 
worker retires at age 65 in January of the designated year 
after having worked full time in employment covered by Social 
Security beginning at age 21. Similarly, all the illustrations 
reflect three lifetime earnings patterns--workers who always 
earned either (1) the Federal minimum wage; (2) a wage equal to 
Social Security's ``average wage series''; and (3) a wage equal 
to the maximum amount creditable under Social Security.
    These work histories and characteristics are necessarily 
arbitrary. Many variations could be constructed that would 
alter the payback times. However, by comparing similar examples 
of workers in what may be considered illustrative situations 
one may make a number of observations without having to resolve 
all the judgmental questions concerning what constitutes a 
typical worker or having to provide a voluminous array of 
illustrations.
    The model uses the alternative II assumptions of the 1996 
Social Security Trustees' report to forecast wage and price 
growth. Under these assumptions, wages grow for most of the 
projected period by 5.0 percent a year, prices by 4.0 percent.
    Although using common assumptions and focusing on certain 
examples allows comparisons across generations, there are other 
factors that can be varied depending on one's view of the 
Social Security system. Among these is whether to count the 
employer's share of the payroll tax. There is some disagreement 
concerning who really bears the burden of the Social Security 
tax paid by employers. Some say that employees pay for it in 
the form of foregone wages. Others maintain that employers are 
actually paying for income maintenance protection that they 
would have to pay for anyway in one form or another in the 
absence of the Social Security Program, and that they absorb 
part of it and pass the rest along to the general public in the 
form of higher prices. This analysis does not attempt to 
resolve this debate, but rather presents examples using both 
assumptions.
    Another variable subject to the reader's choice is the 
proportion of the Social Security tax to apply to retirement 
benefits. The payroll tax consists of three elements--Old-Age 
and Survivors Insurance (OASI), Disability Insurance (DI), and 
Hospital Insurance (HI). Because the DI and HI Programs have 
earmarked taxes, their own trust funds, and designated tax 
rates specified in the law, they are clearly and easily 
excludable from computations of taxes that pay for retirement 
benefits. OASI taxes pay for survivor as well as retirement 
benefits, and it would be inconsistent to include taxes that 
pay for survivor benefits on the tax side, but not include the 
value of survivor benefits on the benefit side, in computing 
payback times. However, there is no separate allocation of 
taxes in the law for survivor or old-age benefits. It is 
possible to derive hypothetical year-by-year tax allocations 
for old-age benefits by assuming that such taxes would be in 
the same proportion to OASI tax rates as old-age benefits are 
to OASI benefits for each year. The Social Security 
Administration's actuaries have year-by-year projections of 
these benefits and this analysis uses them to compute taxes 
attributable solely to old-age benefits.
    A problem with this approach is that the survivor portion 
of the tax cannot so easily be assigned to a benefit. While the 
DI and HI taxes protect against risks that really do not 
involve an element of choice--all workers possibly can become 
too disabled to work or suffer illness in old age--there is an 
element of choice in whether a worker has dependents. 
Nevertheless, the worker still must pay the full OASI tax. An 
unmarried childless worker can maintain that it is inaccurate 
to say that only the old-age portion of the OASI tax should be 
used to compute the payback times of his or her retirement 
benefit when she is forced to pay a tax (the survivor portion 
of the OASI tax) for which he can derive no benefit. Also, it 
can be asserted that this approach understates the value of the 
accumulated taxes because it does not take account of the 
subsidy provided by workers who die before reaching retirement. 
However, such a subsidy is theoretical, whereas the 
illustrations refer to individuals who in fact have survived to 
retirement age and use the tax they actually would have paid. 
Also, because Social Security taxes are adjusted periodically 
to take account of current and projected program experience, it 
can reasonably be assumed that any subsidy effect is reflected 
in the rate of the OASI tax. Again, this analysis does not 
resolve this argument of whether or not to count the survivor 
portion of the OASI tax. It simply shows both ways of computing 
the relationship of benefits to taxes.
    Also, any calculation of such a relationship is heavily 
dependent upon the interest rate assumptions used. The value of 
taxes over time is equivalent to their worth if invested. 
However, the amount of interest is not easily determinable. 
Were the value of taxes paid invested wisely (or luckily), its 
total real worth theoretically could be many times its nominal 
value. On the other hand, it is possible that the principal 
could be virtually wiped out by poor investment choices. To 
obtain a middle ground, consisting of a reasonable and safe 
investment history, one could assume that the Social Security 
contributions were always placed in U.S. Government 
obligations. Excess Social Security taxes have always been 
invested in U.S. Government securities, so, to provide 
illustrations, this paper uses the effective interest rates 
earned by the Social Security trust funds over the years and 
those projected for the future. Under the alternative II 
assumptions, average annual interest rates are projected 
ultimately to be 6.3 percent, a ``real'' interest rate of 2.3 
percent (i.e., 2.3 percent above inflation). The interest is 
assumed to be tax free.
    The cumulative value of taxes plus interest at the 3 
different earnings levels  for  workers  retiring  in  1996  
are  shown  in  tables 1-47, 1-48, and 1-49.

                       Illustrative Payback Times

    Table 1-50 shows past and projected payback times for 
workers retiring in various years from 1940 to 2025. In these 
illustrations, benefits are for the worker alone. However, the 
value of the benefit could be higher if the worker had 
dependents who were eligible for benefits. For example, if 
these workers had spouses who also were the full retirement age 
and were not entitled to a Social Security benefit on their own 
account, then the value of the monthly benefit would increase 
by 50 percent. This would shorten the payback times 
considerably.

    TABLE 1-47.--SOCIAL SECURITY TAXES PAID BY A WAGE EARNER WHO HAS ALWAYS EARNED THE MINIMUM WAGE, 1952-95    
----------------------------------------------------------------------------------------------------------------
                                                         Tax rates                 Taxes paid         Effective 
           Calendar year              Earnings  ----------------------------------------------------   interest 
                                                     OASI     Old-Age \1\      OASI       Old-Age      rate \2\ 
----------------------------------------------------------------------------------------------------------------
1952..............................       $1,560        1.500        1.052       $23.40       $16.41        2.240
1953..............................        1,560        1.500        1.085        23.40        16.93        2.310
1954..............................        1,560        2.000        1.470        31.20        22.94        2.296
1955..............................        1,560        2.000        1.509        31.20        23.54        2.198
1956..............................        1,993        2.000        1.526        39.86        30.42        2.401
1957..............................        2,080        2.000        1.548        41.60        32.21        2.492
1958..............................        2,080        2.000        1.555        41.60        32.34        2.516
1959..............................        2,080        2.250        1.739        46.80        36.17        2.578
1960..............................        2,080        2.750        2.111        57.20        43.91        2.598
1961..............................        2,184        2.750        2.094        60.06        45.73        2.755
1962..............................        2,392        2.875        2.187        68.77        52.32        2.825
1963..............................        2,461        3.375        2.563        83.06        63.07        2.923
1964..............................        2,600        3.375        2.553        87.75        66.37        3.084
1965..............................        2,600        3.375        2.529        87.75        65.76        3.184
1966..............................        2,600        3.500        2.568        91.00        66.78        3.483
1967..............................        2,886        3.550        2.604       102.45        75.14        3.753
1968..............................        3,293        3.325        2.415       109.49        79.52        3.950
1969..............................        3,328        3.725        2.710       123.97        90.20        4.437
1970..............................        3,328        3.650        2.661       121.47        88.55        5.074
1971..............................        3,328        4.050        2.961       134.78        98.54        5.286
1972..............................        3,328        4.050        2.973       134.78        98.94        5.406
1973..............................        3,328        4.300        3.101       143.10       103.19        5.754
1974..............................        3,883        4.375        3.168       169.88       123.03        6.218
1975..............................        4,368        4.375        3.184       191.10       139.06        6.593
1976..............................        4,784        4.375        3.201       209.30       153.12        6.731
1977..............................        4,784        4.375        3.213       209.30       153.70        6.958
1978..............................        5,512        4.275        3.153       235.64       173.80        7.199
1979..............................        6,032        4.330        3.206       261.19       193.36        7.524
1980..............................        6,448        4.520        3.355       291.45       216.33        8.568
1981..............................        6,968        4.700        3.514       327.50       244.87        9.947
1982..............................        6,968        4.575        3.460       318.79       241.07       11.178
1983..............................        6,968        4.775        3.645       332.72       253.96       10.768
1984..............................        6,968    \3\ 4.926    \3\ 3.776       343.24       263.12       11.601
1985..............................        6,968        5.200        3.993       362.34       278.25       11.213
1986..............................        6,968        5.200        3.997       362.34       278.52       11.091
1987..............................        6,968        5.200        4.002       362.34       278.83       10.063
1988..............................        6,968        5.530        4.257       385.33       296.64        9.773
1989..............................        6,968        5.530        4.264       385.33       297.08        9.555
1990..............................        7,670        5.600        4.320       429.52       331.37        9.305
1991..............................        8,606        5.600        4.321       481.94       371.91        9.082
1992..............................        8,840        5.600        4.320       495.04       381.92        8.737
1993..............................        8,840        5.600        4.315       495.04       381.47        8.318
1994..............................        8,840        5.260        4.047       464.98       357.79        8.000
1995..............................        8,840        5.260        4.048       464.98       357.83        7.958
                                   -----------------------------------------------------------------------------
Total taxes paid 1952-95:                                                                                       
    Accumulated without interest..  ...........  ...........  ...........     9,264.00     7,016.01             
    Accumulated with interest.....  ...........  ...........  ...........    36,737.56    27,502.36             
----------------------------------------------------------------------------------------------------------------
\1\ Old-Age tax rates were derived by applying the ratio of Old-Age benefits/total OASI benefits to the OASI tax
  rates.                                                                                                        
\2\ Interest rates for 1952-94 are from the Office of the Actuary of SSA. The rate for 1995 is an estimate.     
\3\ In 1984, employees received a tax credit of 0.3 percent against OASDI taxes. The OASI and Old-Age tax rates 
  reflect a proportional allocation of the tax credit.                                                          
                                                                                                                
Note.--Initial benefit amount upon retirement in January 1996 at age 65: $574.00 worker only; $861.00 worker and
  spouse (both age 65).                                                                                         
                                                                                                                
Source: Kollmann (1996a).                                                                                       


           TABLE 1-48.--SOCIAL SECURITY TAXES PAID BY A WAGE EARNER WITH AVERAGE EARNINGS, 1952-95 \1\          
----------------------------------------------------------------------------------------------------------------
                                                   Tax rates (in percent)          Taxes paid         Effective 
                                                ----------------------------------------------------   interest 
           Calendar year              Earnings                                                         rate \3\ 
                                                     OASI     Old-Age \2\      OASI       Old-Age        (in    
                                                                                                       percent) 
----------------------------------------------------------------------------------------------------------------
1952..............................    $2,973.32        1.500        1.052       $44.60       $31.28        2.240
1953..............................     3,139.44        1.500        1.085        47.09        34.07        2.310
1954..............................     3,155.64        2.000        1.470        63.11        46.40        2.296
1955..............................     3,301.44        2.000        1.509        66.03        49.81        2.198
1956..............................     3,532.36        2.000        1.526        70.65        53.91        2.401
1957..............................     3,641.72        2.000        1.548        72.83        56.39        2.492
1958..............................     3,673.80        2.000        1.555        73.48        57.13        2.516
1959..............................     3,855.80        2.250        1.739        86.76        67.05        2.578
1960..............................     4,007.12        2.750        2.111       110.20        84.59        2.598
1961..............................     4,086.76        2.750        2.094       112.39        85.57        2.755
1962..............................     4,291.40        2.875        2.187       123.38        93.87        2.825
1963..............................     4,396.64        3.375        2.563       148.39       112.67        2.923
1964..............................     4,576.32        3.375        2.553       154.45       116.83        3.084
1965..............................     4,658.72        3.375        2.529       157.23       117.82        3.184
1966..............................     4,938.36        3.500        2.568       172.84       126.84        3.483
1967..............................     5,213.44        3.550        2.604       185.08       135.74        3.753
1968..............................     5,571.76        3.325        2.415       185.26       134.55        3.950
1969..............................     5,893.76        3.725        2.710       219.54       159.75        4.437
1970..............................     6,186.24        3.650        2.661       225.80       164.61        5.074
1971..............................     6,497.08        4.050        2.961       263.13       192.37        5.286
1972..............................     7,133.80        4.050        2.973       288.92       212.09        5.406
1973..............................     7,580.16        4.300        3.101       325.95       235.04        5.754
1974..............................     8,030.76        4.375        3.168       351.35       254.45        6.218
1975..............................     8,630.92        4.375        3.184       377.60       274.77        6.593
1976..............................     9,226.48        4.375        3.201       403.66       295.30        6.731
1977..............................     9,779.44        4.375        3.213       427.85       314.19        6.958
1978..............................    10,556.03        4.275        3.153       451.27       332.84        7.199
1979..............................    11,479.46        4.330        3.206       497.06       367.99        7.524
1980..............................    12,513.46        4.520        3.355       565.61       419.83        8.568
1981..............................    13,773.10        4.700        3.514       647.34       484.01        9.947
1982..............................    14,531.34        4.575        3.460       664.81       502.73       11.178
1983..............................    15,239.24        4.775        3.645       727.67       555.42       10.768
1984..............................    16,135.07    \4\ 4.926    \4\ 3.776       794.86       609.29       11.601
1985..............................    16,822.51        5.200        3.993       874.77       671.77       11.213
1986..............................    17,321.82        5.200        3.997       900.73       692.38       11.091
1987..............................    18,426.51        5.200        4.002       958.18       737.35       10.063
1988..............................    19,334.04        5.530        4.257     1,069.17       823.09        9.773
1989..............................    20,099.55        5.530        4.264     1,111.51       856.95        9.555
1990..............................    21,027.98        5.600        4.320     1,177.57       908.48        9.305
1991..............................    21,811.60        5.600        4.321     1,221.45       942.58        9.082
1992..............................    22,935.42        5.600        4.320     1,284.38       990.89        8.737
1993..............................    23,132.67        5.600        4.315     1,295.43       998.23        8.318
1994..............................    23,753.53        5.260        4.047     1,249.74       961.39        8.000
1995..............................    24,669.85        5.260        4.048     1,297.63       998.64        7.958
                                   -----------------------------------------------------------------------------
Total taxes paid 1952-95:                                                                                       
    Accumulated without interest..  ...........  ...........  ...........    21,546.43    16,361.16             
    Accumulated with interest.....  ...........  ...........  ...........    76,718.45    57,541.76             
----------------------------------------------------------------------------------------------------------------
\1\ This table uses the average wage series for indexing earnings, for the period 1952 through 1994, developed  
  by SSA in computing benefit amounts. The average wage for 1995 is based on Alternative II assumptions in the  
  1996 report of the Social Security Board of Trustees.                                                         
\2\ Old-Age tax rates were derived by applying the ratio of Old-Age benefits/total OASI benefits to the OASI tax
  rates.                                                                                                        
\3\ Interest rates for 1952-94 are from the Office of the Actuary of SSA. The rate for 1995 is an estimate.     
\4\ In 1984, employees received a tax credit of 0.3 percent against OASDI taxes. The OASI and Old-Age tax rates 
  reflect a proportional allocation of the tax credit.                                                          
                                                                                                                
Note.--Initial benefit amount upon retirement in January 1996 at age 65: $886.00 worker only; $1,329.00 worker  
  and spouse (both age 65).                                                                                     
                                                                                                                
Source: Kollmann (1996a).                                                                                       


         TABLE 1-49.--SOCIAL SECURITY TAXES PAID BY A WAGE EARNER WITH MAXIMUM TAXABLE EARNINGS, 1952-95        
----------------------------------------------------------------------------------------------------------------
                                                   Tax rates (in percent)          Taxes paid         Effective 
                                                ----------------------------------------------------   interest 
           Calendar year              Earnings                                                         rate \2\ 
                                                     OASI     Old-Age \1\      OASI       Old-Age        (in    
                                                                                                       percent) 
----------------------------------------------------------------------------------------------------------------
1952..............................       $3,600        1.500        1.052       $54.00       $37.88        2.240
1953..............................        3,600        1.500        1.085        54.00        39.07        2.310
1954..............................        3,600        2.000        1.470        72.00        52.93        2.296
1955..............................        4,200        2.000        1.509        84.00        63.37        2.198
1956..............................        4,200        2.000        1.526        84.00        64.10        2.401
1957..............................        4,200        2.000        1.548        84.00        65.03        2.492
1958..............................        4,200        2.000        1.555        84.00        65.31        2.516
1959..............................        4,800        2.250        1.739       108.00        83.47        2.578
1960..............................        4,800        2.750        2.111       132.00       101.33        2.598
1961..............................        4,800        2.750        2.094       132.00       100.51        2.755
1962..............................        4,800        2.875        2.187       138.00       105.00        2.825
1963..............................        4,800        3.375        2.563       162.00       123.01        2.923
1964..............................        4,800        3.375        2.553       162.00       122.54        3.084
1965..............................        4,800        3.375        2.529       162.00       121.40        3.184
1966..............................        6,600        3.500        2.568       231.00       169.52        3.483
1967..............................        6,600        3.550        2.604       234.30       171.84        3.753
1968..............................        7,800        3.325        2.415       259.35       188.35        3.950
1969..............................        7,800        3.725        2.710       290.55       211.42        4.437
1970..............................        7,800        3.650        2.661       284.70       207.55        5.074
1971..............................        7,800        4.050        2.961       315.90       230.95        5.286
1972..............................        9,000        4.050        2.973       364.50       267.57        5.406
1973..............................       10,800        4.300        3.101       464.40       334.87        5.754
1974..............................       13,200        4.375        3.168       577.50       418.24        6.218
1975..............................       14,100        4.375        3.184       616.88       448.87        6.593
1976..............................       15,300        4.375        3.201       669.38       489.69        6.731
1977..............................       16,500        4.375        3.213       721.88       530.11        6.958
1978..............................       17,700        4.275        3.153       756.67       558.09        7.199
1979..............................       22,900        4.330        3.206       991.57       734.09        7.524
1980..............................       25,900        4.520        3.355     1,170.68       868.96        8.568
1981..............................       29,700        4.700        3.514     1,395.90     1,043.70        9.947
1982..............................       32,400        4.575        3.460     1,482.30     1,120.92       11.178
1983..............................       35,700        4.775        3.645     1,704.68     1,301.16       10.768
1984..............................   \3\ 37,800    \3\ 4.926    \3\ 3.776     1,862.03     1,427.40       11.601
1985..............................       39,600        5.200        3.993     2,059.20     1,581.35       11.213
1986..............................       42,000        5.200        3.997     2,184.00     1,678.81       11.091
1987..............................       43,800        5.200        4.002     2,277.60     1,752.70       10.063
1988..............................       45,000        5.530        4.257     2,488.50     1,915.74        9.773
1989..............................       48,000        5.530        4.264     2,654.40     2,046.50        9.555
1990..............................       51,300        5.600        4.320     2,872.80     2,216.34        9.305
1991..............................       53,400        5.600        4.321     2,990.40     2,307.66        9.082
1992..............................       55,500        5.600        4.320     3,108.00     2,397.79        8.737
1993..............................       57,600        5.600        4.315     3,225.60     2,487.13        8.318
1994..............................       60,600        5.260        4.047     3,187.56     2,452.70        8.000
1995..............................       61,200        5.260        4.048     3,219.16     2,477.25        7.958
                                   -----------------------------------------------------------------------------
Total taxes paid 1952-95:                                                                                       
    Accumulated without interest..  ...........  ...........  ...........    46,173.45    35,180.65             
    Accumulated with interest.....  ...........  ...........  ...........   136,841.77   103,035.15             
----------------------------------------------------------------------------------------------------------------
\1\ Old-Age tax rates were derived by applying the ratio of Old-Age benefits/total OASI benefits to the OASI tax
  rates.                                                                                                        
\2\ Interest rates for 1952-94 are from the Office of the Actuary of SSA. The rate for 1995 is an estimate.     
\3\ In 1984, employees received a tax credit of 0.3 percent against OASDI taxes. The OASI and Old-Age tax rates 
  reflect a proportional allocation of the tax credit.                                                          
                                                                                                                
Note.--Initial benefit amount upon retirement in January 1996 at age 65: $1,249.00 worker only; $1,873.00 worker
  and spouse (both age 65).                                                                                     
                                                                                                                
Source: Kollmann (1996a).                                                                                       


 TABLE 1-50.--NUMBER OF YEARS TO RECOVER TAXES PLUS INTEREST FOR WORKERS
            RETIRING AT AGE 65, \1\ SELECTED YEARS 1940-2025            
------------------------------------------------------------------------
                                          Minimum    Maximum    Average 
           Year of retirement              earner     earner     earner 
------------------------------------------------------------------------
Illustration 1: Years to recover                                        
 employee's OASI taxes                                                  
1940...................................      (\2\)        0.1        0.2
1960...................................        0.5        0.8        1.0
1980...................................        1.5        2.0        2.1
1996...................................        6.2        8.8       11.6
2005...................................        8.8       12.4       16.6
2015...................................        9.6       13.8       20.0
2025...................................        8.8       13.4       22.0
Illustration 2: Years to recover                                        
 combined employee-employer OASI taxes                                  
1940...................................      (\2\)        0.2        0.4
1960...................................        1.0        1.6        2.0
1980...................................        3.0        3.9        4.4
1996...................................       14.1       20.8       28.8
2005...................................       19.8       29.9       43.7
2015...................................       21.9       34.1       57.7
2025...................................       19.8       32.8       68.1
Illustration 3: Years to recover                                        
 retirement portion of employee's OASI                                  
 taxes                                                                  
1940...................................      (\2\)        0.1        0.2
1960...................................        0.4        0.6        0.7
1980...................................        1.1        1.4        1.6
1996...................................        4.5        6.3        8.3
2005...................................        6.4        9.0       11.9
2015...................................        7.1       10.1       14.4
2025...................................        6.7       10.1       16.2
Illustration 4: Years to recover                                        
 retirement portion of combined                                         
 employee-employer OASI taxes                                           
1940...................................      (\2\)        0.2        0.4
1960...................................        0.7        1.1        1.4
1980...................................        2.2        2.8        3.1
1996...................................        9.9       14.3       19.5
2005...................................       13.9       20.4       28.4
2015...................................       15.4       23.2       35.8
2025...................................       14.6       23.3       42.0
------------------------------------------------------------------------
\1\ Under the alternative II assumptions and taking into account benefit
  increases and continued accrual of interest after retirement but not  
  the taxation of benefits. The retiree is assumed to attain age 65 and 
  retire in January of the designated year.                             
\2\ Less than 0.1 years.                                                
                                                                        
Source: Kollmann (1996b).                                               

    While these illustrations do not purport to address the 
``moneysworth'' questions, i.e., will Social Security be a 
``good deal'' or a ``bad deal,'' they do show the relative 
relationship of payback times of past, current, and future 
beneficiaries. It is readily apparent that past retirees 
recovered the value of their taxes very quickly. Payback times 
have lengthened for workers retiring today, but they are still 
significantly shorter than those projected for future retirees. 
This is ameliorated somewhat by the projection that future 
retirees are expected to live longer, and thus collect benefits 
longer. Table 1-51 shows the life expectancies for people 
turning age 65 in the illustrated years.
    Defenders of Social Security tend to discount the 
phenomenon of lengthening payback times, arguing that the 
program serves social ends that transcend calculations of which 
individuals, or generations, obtain some sort of balance-sheet 
profit or loss. They point out that pay-as-you-go retirement 
systems such as Social Security by their nature often provide 
large returns on the contributions of the initial generations. 
In the early years of such programs, the ratio of workers to 
recipients is very high, allowing tax or contribution rates to 
be low. As the program matures, rates rise to reflect the 
increase in the number of beneficiaries. This is not unique to 
Social Security. Establishing benefit levels for early 
recipients in excess of what contributions would dictate is 
also found in private pension systems.

    TABLE 1-51.--LIFE EXPECTANCY AT AGE 65, SELECTED YEARS 1940-2025    
------------------------------------------------------------------------
                                                   Life expectancy (in  
                                                         years)         
                     Year                      -------------------------
                                                    Male        Female  
------------------------------------------------------------------------
1940..........................................         11.9         13.4
1960..........................................         12.9         15.9
1980..........................................         14.0         18.4
1996..........................................         15.4         19.2
2005..........................................         15.9         19.5
2015..........................................         16.3         19.9
2025..........................................         16.7         20.3
------------------------------------------------------------------------
Note.--The life expectancy for any year is the average number of years  
  of life remaining for a person if that person were to experience the  
  death rates by age observed in or assumed for the selected year.      
  Actual average lifetimes will probably be a little longer than the    
  projected expectancies because of lower mortality rates assumed in    
  future years.                                                         
                                                                        
Source: Board of Trustees (1996).                                       

    Furthermore, proponents of Social Security note that 
providing ``adequate'' benefits to initial Social Security 
recipients that were essentially ``unearned'' in relation to 
their contributions to the system was deliberate social policy. 
Providing a minimum level of protection to the first workers to 
participate in the system was considered more important, in a 
period of economic depression, than concerns about excessive 
rates of return on taxes paid. Besides, the social benefits of 
giving a measure of economic independence for the elderly, and 
later for orphaned children, surviving spouses, and the 
disabled, are believed by many to be immense. For example, 
younger workers are in large part relieved from the financial 
burden of supporting their parents, and the elderly are 
afforded an opportunity to live independently and with dignity.
    Critics of Social Security point to these social welfare 
features as a basic flaw in the program. They argue that by 
combining the goals of social adequacy, which is welfare-
related, with individual equity, which loosely ties benefits to 
taxes paid, the program has become a mishmash that accomplishes 
neither goal well and creates inequities. One inequity they 
cite is that future beneficiaries will on the whole receive 
retirement benefits inferior to those that the equivalence of 
their taxes could purchase in the private sector. Furthermore, 
they say when interest is included, some categories of workers 
will not recoup what they and their employer paid in taxes. 
Often buttressing these arguments are calculations that show 
what individuals could receive if their Social Security taxes 
were invested privately.
    This latter argument is dependent on the interest rate 
assumed on such investment. The ``proper'' interest rate is 
problematic. Those who project high investment returns often 
refer to the historical performance of the stock market, 
showing that a portfolio of broad-based stocks would have 
earned on average substantial rates of return over the years, 
and that this performance can be expected to continue in the 
future. Also, high real interest rates may not seem so unlikely 
given the relationship of nominal interest rates and inflation 
over the past decade.
    Critics of such analysis point out that such investments 
have an element of risk that they believe should be 
unacceptable in providing a national system of retirement 
income, and that if a safe-as-possible mix of investment 
vehicles were used instead, projected rates of return would be 
smaller. They also contend that recent high real interest rates 
are a historical anomaly that will not be sustained in the 
future. The key point for the reader is to be aware of the 
influence exerted by the projected rate of return in these 
sorts of calculations, and the large degree to which the 
argument about the value of Social Security hinges around it.

                               REFERENCES

Ballantyne, H.C. (1984). Present policies and methods regarding 
        the long-term adjustment of benefits. Social Security 
        Bulletin, 47(10), pp. 9-12.
Board of Trustees, Federal Old-Age and Survivors Insurance and 
        Disability Insurance Trust Fund. (1996, June 5). The 
        1996 annual report of the Board of Trustees of the 
        Federal Old-Age and Survivors Insurance and Disability 
        Insurance Trust Funds (House Document 104-228). 
        Washington, DC: U.S. Government Printing Office.
Board of Trustees, Federal Hospital Insurance Trust Fund. 
        (1996, June 1). The 1996 annual report of the Board of 
        Trustees of the Federal Hospital Insurance Trust Fund 
        (House Document 104-227). Washington, DC: U.S. 
        Government Printing Office.
Board of Trustees, Federal Old-Age and Survivors Insurance and 
        Disability Insurance Trust Fund. (1991, May 22). 1991 
        annual report of the Federal Old-Age and Survivors 
        Insurance and Disability Insurance Trust Fund (House 
        Document 102-88). Washington, DC: U.S. Government 
        Printing Office.
Board of Trustees, Federal Old-Age and Survivors Insurance and 
        Disability Insurance Trust Fund. (1988, May 9). The 
        Federal Old-Age and Survivors Insurance and Disability 
        Insurance Trust Funds (House Document 100-192). 
        Washington, DC: U.S. Government Printing Office.
Board of Trustees, Federal Old-Age and Survivors Insurance and 
        Disability Insurance Trust Fund. (1984, April 5). 1984 
        annual report of the Board of Trustees of the Federal 
        Old-Age and Survivors Insurance and Disability 
        Insurance Trust Funds (House Document 98-200). 
        Washington, DC: U.S. Government Printing Office.
Board of Trustees, Federal Old-Age and Survivors Insurance and 
        Disability Insurance Trust Fund. (1983, June 27). 1983 
        annual report Federal Old-Age and Survivors Insurance 
        and Disability Insurance Trust Fund (House Document 98-
        74). Washington, DC: U.S. Government Printing Office.
Committee on Economic Security. (1935). Report to the 
        President. Washington, DC: U.S. Government Printing 
        Office.
Congressional Budget Office. (1996, May). The economic and 
        budget outlook: Fiscal years 1997-2006. Washington, DC: 
        Author.
Kollman, G. (1996a). How long does it take new retirees to 
        recover the value of their Social Security taxes? (94-5 
        EPW). Washington, DC: Congressional Research Service.
Kollman, G. (1996b). Social Security: The relationship of taxes 
        and benefits for past, present, and future retirees 
        (95-149 EPW). Washington, DC: Congressional Research 
        Service.
Social Security Administration. (1995). Annual Statistical 
        Supplement to the Social Security Bulletin, 1995. 
        Washington, DC: Author.
Social Security Administration. (1986). Report of the 
        Commission on the Evaluation of Pain (SSA Pub. 64-031-
        3197). Washington, DC: Author.
Svahn, J.A., & Ross, M. (1983). Social Security amendments of 
        1983: Legislative history. Social Security Bulletin, 
        46(7), pp. 3-48.