[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]


[1998 Green Book] SECTION 1. SOCIAL SECURITY: THE OLD-AGE, SURVIVORS, AND DISABILITY INSURANCE (OASDI) PROGRAMS

                                CONTENTS

Basic 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
Social Security Benefits for Noncitizens
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 in the Disability Determination Services
Characteristics of Recipients
  Old-Age, Survivors, and Disability Insurance
  Disability Insurance
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 103d Congress
  Changes in the 104th Congress
  Changes in the 105th 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

                   BASIC 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 for 1998:

Social Security (OASDI)....................................      $68,400
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, each..............   $4,241  No limit                
Self-employed........................    8,482  No limit                
------------------------------------------------------------------------

OASDI workers covered.--1997 (est.)--145.9 million.
Average wage level.--1997 (est.)--$26,732
Earnings required in 1998 for a quarter of coverage.--$700; ($2,800 for 
        four).
Earnings limit exempt amounts in 1998:
$14,500 for beneficiaries age 65-69; \2\ ($1 for $3 withholding 
rate).
---------------------------------------------------------------------------
    \2\ Will gradually increase to $30,000 in the year 2002.
---------------------------------------------------------------------------
$9,120 for beneficiaries under age 65; ($1 for $2 withholding 
rate).
Medicare (SMI) premium.--$43.80/month.
Number of OASDI beneficiaries (12/96) (in millions):

Total OASDI beneficiaries..................................       43.7  
    OASI beneficiaries.....................................       37.5  
        Retired workers....................................       26.9  
        Families and survivors.............................       10.8  
    DI beneficiaries.......................................        6.0  
        Disabled workers...................................        4.4  
        Family members.....................................        1.7  
                                                                        

Average monthly benefits (12/96):

Retired worker.............................................       $745  
Retired worker and aged spouse.............................      1,256  
Disabled worker............................................        704  
Disabled worker, spouse and children.......................      1,172  
Aged widow(er).............................................        707  
Widowed mother/father and two children.....................      1,421  
                                                                        

              BASIC SOCIAL SECURITY INFORMATION--Continued

                                                                        
           Monthly benefits for 1997 retirees              At 62   At 65
Low earner (45% of average wages).......................    $448    $565
Average earner..........................................     738     933
Maximum earner..........................................   1,049   1,326
------------------------------------------------------------------------

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 1998).--2.1%.
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%.....................  $34,001 +........  Individual.          
                                $44,001 +........  Joint.               
------------------------------------------------------------------------

Substantial gainful activity in 1998:
$500/month disabled/nonblind;
$1,050/month blind.
OASDI Trust Fund operations (in billions of dollars):

                                                                        
                                        OASDI Trust Fund operations     
                                 ---------------------------------------
          Calendar year                                  Net            
                                   Income     Outgo   increase   Balance
1996............................    $424.5    $353.6     $70.9    $567.0
1997 (est.).....................     451.3     370.8      80.5     647.4
------------------------------------------------------------------------

Fiscal year 1996 OASDI outlays.--$350 billion--22.4% of total U.S. 
        budget of $1.56 trillion.
For SSA information, call: 1-800-SSA-1213.
SSA On Line.--http://www.ssa.gov/SSA----Home.html

Source: Social Security Administration and Board of Trustees 
(1997).

                                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 Medicare 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 described in section 2.)

                      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 is 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 ($68,400 in 1998 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, respectively. 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 
each year to keep pace with inflation, except during calendar 
year 1983, when the adjustment was delayed 6 months (see table 
1-1).

               SOCIAL SECURITY COVERAGE OF THE WORK FORCE

    In 1937, approximately 33 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 1997, of a total work force of approximately 151.9 
million workers, about 145.3 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 14.1 
million workers were self-employed in 1997. In 1996, an 
estimated 86 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 FROM THE BEGINNING OF THE
                      PROGRAM THROUGH JANUARY 1998                      
                              [In percent]                              
------------------------------------------------------------------------
                                                              Amount of 
                     Date increase paid                        increase 
------------------------------------------------------------------------
January 1998...............................................          2.1
January 1997...............................................          2.9
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, 1939-96                    
                                              [Numbers in millions]                                             
----------------------------------------------------------------------------------------------------------------
                                                                           OASDI coverage     OASDI and HI-only 
                                                          Paid civilian --------------------       coverage     
                          Year                            employees \1\                     --------------------
                                                                          Number    Percent    Number    Percent
----------------------------------------------------------------------------------------------------------------
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       104.3      94.6      106.7      96.8
1987....................................................        113.3       107.5      94.9      110.0      97.1
1988....................................................        115.6       109.8      95.0      112.4      97.2
1989....................................................        117.4       111.7      95.2      114.3      97.4
1990....................................................        117.0       112.2      95.2      114.9      97.5
1991....................................................        117.1       111.6      95.3      114.2      97.5
1992....................................................        118.7       113.2      95.4      115.7      97.5
1993....................................................        121.3       115.9      95.5      118.4      97.6
1994....................................................        124.6       119.3      95.7      121.8      97.7
1995....................................................        125.0       119.8      95.8      122.3      97.8
1996....................................................        127.7       122.6      96.0      125.1      97.9
----------------------------------------------------------------------------------------------------------------
\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 the Chief Actuary, Social Security Administration.                                            


                            TABLE 1-3.--EARNINGS COVERED BY OASDI SYSTEM, 1950-96 \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      49.9      533.5       84.4     415.6         77.9
1975.................................     940.1     717.2      70.4      787.6       83.8     664.7         84.4
1976.................................    1037.2     797.2      76.8      874.0       84.3     737.7         84.4
1977.................................    1140.4     879.5      80.8      960.3       84.2     816.6         85.0
1978.................................    1288.6     999.0      94.0     1093.0       84.8     915.3         83.7
1979.................................    1437.1    1122.0     100.6     1222.6       85.1    1073.8         87.8
1980.................................    1548.4    1230.9      97.9     1328.8       85.8    1178.3         88.7
1981.................................    1696.5    1352.0      98.7     1450.7       85.5    1295.0         89.3
1982.................................    1763.8    1422.2      98.6     1520.8       86.2    1365.5         89.8
1983.................................    1867.0    1500.9     109.9     1610.8       86.3    1455.0         90.3
1984.................................    2093.0    1667.1     128.2     1795.3       85.8    1610.0         89.7
1985.................................    2253.3    1799.6     141.8     1941.4       86.2    1726.2         88.9
1986.................................    2384.3    1922.5     158.6     2081.1       87.3    1845.5         88.7
1987.................................    2565.6    2057.2     177.9     2235.1       87.1    1960.1         87.7
1988.................................    2776.5    2232.6     199.7     2432.3       87.6    2092.2         86.0
1989.................................    2943.1    2362.5     210.9     2573.4       87.4    2237.7         87.0
1990.................................    3118.5    2509.9     193.8     2703.7       86.7    2358.4         87.2
1991.................................    3190.5    2565.4     195.5     2760.9       86.5    2422.1         87.7
1992.................................    3395.9    2710.5     205.8     2916.3       85.9    2532.3         86.8
1993 \2\.............................    3510.7    2821.4     212.0     3033.4       86.4    2649.0         87.3
1994 \2\.............................    3692.7    2954.0     221.5     3175.5       86.0    2782.7         87.6
1995 \2\.............................    3908.9    3139.8     234.9     3374.7       86.3    2924.0         86.6
1996 \2\.............................    4147.9    3328.3     254.2     3582.5       86.4    3082.8         86.1
----------------------------------------------------------------------------------------------------------------
\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: Office of the Actuary, Social Security Administration.                                                  

    While coverage is compulsory for most types of employment, 
approximately 6.6 million workers did not have any coverage 
under Social Security in 1996. 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 1992, 75 percent of State and local government workers (15.5 
million out of 20.6 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, 1996          
------------------------------------------------------------------------
                                      Total      Noncovered    Percent  
                                    (millions)   (millions)    covered  
------------------------------------------------------------------------
Workers \1\......................        150.3          6.6         95.6
Jobs: \2\                                                               
    State and local government                                          
     \3\.........................         22.3          5.5         75.3
    Federal civilian.............          4.0          1.3         67.5
    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.                                 


TABLE 1-5.--ESTIMATED SOCIAL SECURITY COVERAGE OF WORKERS WITH STATE AND
                    LOCAL GOVERNMENT EMPLOYMENT, 1992                   
            [Based on 1-percent sample; numbers in thousands]           
------------------------------------------------------------------------
                                       All workers   Covered    Percent 
                State                      \1\       workers    covered 
------------------------------------------------------------------------
Alabama..............................         360         324         90
Alaska...............................          82          34         41
Arizona..............................         340         324         95
Arkansas.............................         191         172         90
California...........................       2,198       1,069         49
                                                                        
Colorado.............................         330         122         37
Connecticut..........................         255         174         68
Delaware.............................          65          60         92
Florida..............................       1,003         927         92
Georgia..............................         580         461         79
                                                                        
Hawaii...............................         107          88         82
Idaho................................         113         108         96
Illinois.............................         985         515         52
Indiana..............................         436         378         87
Iowa.................................         270         242         90
                                                                        
Kansas...............................         257         233         91
Kentucky.............................         325         241         74
Louisiana............................         396         114         29
Maine................................         110          51         46
Maryland.............................         396         357         90
                                                                        
Massachusetts........................         325          46         14
Michigan.............................         790         674         85
Minnesota............................         422         658        156
Mississippi..........................         222         202         91
Missouri.............................         385         313         81
                                                                        
Montana..............................          93          77         83
Nebraska.............................         165         152         92
Nevada...............................          93          32         34
New Hampshire........................          88          74         84
New Jersey...........................         591         556         94
                                                                        
New Mexico...........................         175         145         83
New York.............................       1,673       1,553         93
North Carolina.......................         579         532         92
North Dakota.........................          70          61         87
Ohio.................................         800          61          8
                                                                        
Oklahoma.............................         267         250         94
Oregon...............................         264         246         93
Pennsylvania.........................         740         690         93
Rhode Island.........................          74          61         82
South Carolina.......................         310         280         90
                                                                        
South Dakota.........................          75          72         96
Tennessee............................         409         353         86
Texas................................       1,355         793         59
Utah.................................         165         147         89
Vermont..............................          52          50         96
                                                                        
Virginia.............................         518         471         91
Washington...........................         437         374         86
West Virginia........................         154         145         94
Wisconsin............................         464         399         86
Wyoming..............................          66          56         85
                                      ----------------------------------
      Total..........................      20,620      15,518         75
------------------------------------------------------------------------
\1\ Includes seasonal and part-time workers for whom State and local    
  government employment was not the major job.                          
                                                                        
Source: Office of Research and Statistics, Social Security              
  Administration.                                                       

    While the most recent year for which actual data are 
available is 1992, the Social Security Administration estimates 
that in 1996, 22.3 million individuals will work at some time 
during the year for a State or local government, and the wages 
of 75 percent of these individuals will be covered by Social 
Security.

                                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, or received $100 in self-
employment income. A worker could also receive a calendar 
quarter for each multiple of $100 in annual agricultural 
earnings, up to a maximum of 4 quarters of coverage per year. 
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 
1998 the amount of earnings needed for a quarter of coverage is 
$700. Table 1-6 shows amounts needed since 1978.
    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 
coverage 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.

    TABLE 1-6.--AMOUNT OF COVERED WAGES NEEDED TO EARN ONE QUARTER OF   
                           COVERAGE, 1978-2002                          
                                                                        
                                                                        
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.......................................................          670
1998.......................................................          700
1999.......................................................      \1\ 720
2000.......................................................      \1\ 750
2001.......................................................      \1\ 780
2002.......................................................      \1\ 810
------------------------------------------------------------------------
\1\ Based on economic assumptions in the 1997 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.          

                               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 below in the 
section on ``Determination of Disability Benefits.''
    The Commissioner \3\ has specific regulatory authority to 
prescribe the criteria for determining at what level earnings 
from employment demonstrate an individual's ability to engage 
in substantial gainful activity (SGA). 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.
---------------------------------------------------------------------------
    \3\ As used in this section, ``Commissioner'' is the Commissioner 
of Social Security.

               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) \4\ 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 3-24 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.
---------------------------------------------------------------------------
    \4\ Only one TWP is allowed in any one period of disability. 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, both disability 
and Medicare benefits are terminated after 3 months, 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 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) a 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) a 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 (1) age 60 or older or (2) 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 the individual's entitlement to 
benefits as a widowed mother or father.
Child's benefit
    A monthly benefit is payable to a dependent, unmarried 
biological or adopted child, stepchild, and grandchild, of a 
retired, disabled, or deceased worker who was fully or 
currently insured at death. Dependency is deemed for the 
insured's biological children and most adopted children. The 
child 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.
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. 
In the case of a surviving divorced mother or father, the child 
must also be the applicant's natural or legally adopted child. 
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 of a 
deceased fully-insured worker who is age 62 or over, and has 
not married since the worker's death. The parent must have been 
receiving at least one-half of her support from the worker at 
the time of the worker's death or, if the worker had a period 
of disability which continued until death, at the beginning of 
the period of disability. Proof of support must be filed within 
2 years after the worker's death or the month in which the 
worker filed for disability.
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 1-8 for 1996 OASDI beneficiary statistics; table 
1-9 for OASDI benefits paid 1940-96; table 1-10 for monthly 
benefit amounts for selected families; and the ``Benefit 
Computation'' section for further information on AIME.]

                          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.

             TABLE 1-8.--OASDI BENEFICIARIES IN CURRENT PAYMENT STATUS AND NEW AWARDS, DECEMBER 1996            
----------------------------------------------------------------------------------------------------------------
                                                        Number in                                               
                                                         current    Percent of   Average    Number of           
                                                         payment   beneficiary   monthly   new awards   Average 
                                                           (in      population   benefit       (in     new award
                                                       thousands)                          thousands)           
----------------------------------------------------------------------------------------------------------------
Retired workers......................................      26,898        61.5        $745       1,581       $713
Wives and husbands of retired workers................       2,970         6.8         384         244        347
Children of retired workers..........................         443         1.0         337          99        312
Disabled workers.....................................       4,386        10.0         704         624        714
Wives and husbands of disabled workers...............         224         0.5         171          58        182
Children of disabled workers.........................       1,463         3.3         194         397        186
Widowed mothers and fathers..........................         242         0.6         515          49        498
Surviving children...................................       1,898         4.3         487         302        483
Widows and widowers..................................       5,028        11.5         707         409        689
Disabled widow(er)s..................................         182         0.4         471          29        463
Parents..............................................           4       (\1\)         614       (\2\)        602
Special age-72.......................................           1       (\1\)         197       (\2\)        156
                                                      ----------------------------------------------------------
      Totals and averages............................      43,737       100.0        $673       3,793       $591
----------------------------------------------------------------------------------------------------------------
\1\ Less than 0.05 percent.                                                                                     
\2\ Fewer than 500.                                                                                             
                                                                                                                
Source: Office of Research and Statistics, Social Security Administration.                                      


                TABLE 1-9.--OASDI BENEFITS PAID, 1940-96                
                        [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
1996 \1\...............................    347,088    302,914     44,174
------------------------------------------------------------------------
\1\ Unnegotiated checks not deducted.                                   
                                                                        
Source: Office of Research and Statistics, Social Security              
  Administration.                                                       


 TABLE 1-10.--MONTHLY BENEFIT AMOUNTS FOR SELECTED BENEFICIARY FAMILIES 
 WITH FIRST ELIGIBILITY IN 1996, FOR SELECTED WAGE LEVELS, DECEMBER 1996
------------------------------------------------------------------------
                                      Workers 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..    $983.00  $1,981.00    $3,657.00 
  Primary insurance amount..........     584.40     913.00     1,286.10 
  Maximum family benefit............     887.90   1,666.10     2,249.70 
  Monthly benefit amount:                                               
    Retired worker claiming benefits                                    
     at age 62: \4\                                                     
      Worker alone..................     467.00     730.00     1,028.00 
      Worker with spouse claiming                                       
       benefits at--                                                    
        Age 65 or older.............     759.00   1,186.00     1,671.00 
        Age 62 \4\..................     686.00   1,072.00     1,510.00 
Survivor families: \5\                                                  
  Average indexed monthly earnings..     882.00   1,985.00     4,793.00 
  Primary insurance amount..........     551.20     914.30     1,461.40 
  Maximum family benefit............     826.80   1,668.00     2,556.50 
  Monthly benefit amount:...........                                    
    Survivors of worker deceased at                                     
 age 40: \5\                                                            
      One surviving child...........     413.00     685.00     1,096.00 
      Widowed mother or father and                                      
       one child....................     826.00   1,370.00     2,192.00 
      Widowed mother or father and                                      
       two children.................     825.00   1,668.00     2,556.00 
Disabled worker families: \6\                                           
  Average monthly indexed earnings..     938.00   1,982.00     4,273.00 
  Primary insurance amount..........     569.60     913.40     1,381.20 
  Maximum family benefit \7\........     820.40   1,370.10     2,071.70 
  Monthly benefit amount:                                               
    Disabled worker age 50: \6\                                         
      Worker alone..................     569.00     913.00     1,381.00 
      Worker, spouse, and one child.     819.00   1,369.00     2,071.00 
------------------------------------------------------------------------
\1\ The annual wage was calculated by multiplying the Federal minimum   
  hourly wage of $4.25 in effect during the period January to September 
  by 1,560 and adding to it the product of $4.75--the minimum for the   
  period October to December. The minimum was raised to $5.15 effective 
  September 1997 as legislated by Public Law 104-188.                   
\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 a        
  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.                                 

    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 1-11 shows the schedule of increases in 
the full retirement age and delayed retirement credits for 
workers.

                        Trends in Retirement Age

    Table 1-12 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 1-13 shows the 
percentage of retired workers electing reduced benefits since 
they first became available.

                          Trends in Longevity

    Table 1-14 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 are eligible for a ``Special Minimum 
Benefit'' (see below), the basic benefit or 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.
    There are two 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. The law 
provides for up to 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.

  TABLE 1-11.--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).                                                                                                                              


 TABLE 1-12.--PERCENTAGE OF WORKERS ELECTING SOCIAL SECURITY RETIREMENT BENEFITS AT VARIOUS AGES, SELECTED YEARS
                                                   1940-95 \1\                                                  
----------------------------------------------------------------------------------------------------------------
                                                                              Ages 63-            Ages   Average
                                Year                                  Age 62     64     Age 65    66+      age  
----------------------------------------------------------------------------------------------------------------
1940...............................................................    (\2\)    (\2\)      8.3     91.7     68.7
1945...............................................................    (\2\)    (\2\)     17.9     82.1     70.0
1950...............................................................    (\2\)    (\2\)     23.1     76.9     68.5
1955...............................................................    (\2\)    (\2\)     41.2     58.8     68.2
1960...............................................................     10.0      7.9     35.3     46.7     66.2
1965...............................................................     23.0     17.7     23.4     35.9     65.9
1970...............................................................     27.8     23.2     36.9     12.1     64.2
1975...............................................................     35.7     24.5     31.1      8.7     63.9
1980...............................................................     40.5     22.2     30.7      6.6     63.7
1985...............................................................     57.2     21.1     17.7      4.0     63.6
1990...............................................................     56.6     20.2     16.6      6.7     63.6
1995...............................................................     58.3     19.5     16.3      6.0     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.                                      


 TABLE 1-13.--NUMBER OF SOCIAL SECURITY RETIRED WORKER NEW BENEFIT AWARDS AND PERCENT RECEIVING REDUCED BENEFITS
                        BECAUSE OF ENTITLEMENT BEFORE AGE 65, SELECTED YEARS 1956-96 \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
1996......................................................      1.6       72      0.9       69      0.7       75
----------------------------------------------------------------------------------------------------------------
\1\ As of December of given year; 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 1-14.--FERTILITY, DEATH RATE AND LIFE EXPECTANCY ASSUMPTIONS, SELECTED YEARS 1940-2075          
----------------------------------------------------------------------------------------------------------------
                                                                  Age-sex-     Life expectancy   Life expectancy
                                                       Total      adjusted      \3\ at birth      \3\ at age 65 
                                                     fertility   death rate                                     
                   Calendar year                      rate \1\    \2\ (per   -----------------------------------
                                                        (per      100,000)                                      
                                                       woman)                   Male    Female    Male    Female
----------------------------------------------------------------------------------------------------------------
Actual:                                                                                                         
    1940...........................................      2.23        1,672.6     61.4     65.7     11.9     13.4
    1945...........................................      2.42        1,488.6     62.9     68.4     12.6     14.4
    1950...........................................      3.03        1,339.9     65.6     71.1     12.8     15.1
    1955...........................................      3.50        1,243.0     66.7     72.8     13.1     15.6
    1960...........................................      3.61        1,237.9     66.7     73.2     12.9     15.9
    1965...........................................      2.88        1,210.8     66.8     73.8     12.9     16.3
    1970...........................................      2.43        1,138.4     67.1     74.9     13.1     17.1
    1975...........................................      1.77        1,020.9     68.7     76.6     13.7     18.0
    1976...........................................      1.74        1,010.1     69.1     76.8     13.7     18.1
    1977...........................................      1.79          981.8     69.4     77.2     13.9     18.3
    1978...........................................      1.76          976.3     69.6     77.2     13.9     18.3
    1979...........................................      1.82          944.8     70.0     77.7     14.2     18.6
    1980...........................................      1.85          961.1     69.9     77.5     14.0     18.4
    1981...........................................      1.83          934.5     70.4     77.8     14.2     18.6
    1982...........................................      1.83          906.4     70.8     78.2     14.5     18.8
    1983...........................................      1.81          916.0     70.9     78.1     14.3     18.6
    1984...........................................      1.80          909.2     71.1     78.2     14.4     18.7
    1985...........................................      1.84          912.3     71.1     78.2     14.4     18.6
    1986...........................................      1.84          904.8     71.1     78.3     14.5     18.7
    1987...........................................      1.87          895.6     71.3     78.4     14.6     18.7
    1988...........................................      1.93          906.0     71.2     78.3     14.6     18.7
    1989...........................................      2.01          882.4     71.5     78.6     14.8     18.9
    1990...........................................      2.07          865.9     71.8     78.9     15.0     19.0
    1991...........................................      2.07          854.8     71.9     79.0     15.1     19.1
    1992...........................................      2.06          843.6     72.2     79.2     15.2     19.2
    1993...........................................      2.04          863.4     72.0     78.9     15.1     19.0
    1994...........................................      2.04          852.2     72.2     79.0     15.3     19.0
Estimated:                                                                                                      
    1995...........................................      2.02          838.4     72.6     79.0     15.6     19.0
    1996...........................................      2.01          832.0     72.6     79.3     15.5     19.2
Projected:                                                                                                      
    1997...........................................      2.01          824.9     72.8     79.4     15.6     19.2
    2000...........................................      2.00          804.7     73.2     79.7     15.8     19.3
    2005...........................................      1.97          771.7     74.1     80.1     16.0     19.5
    2010...........................................      1.95          746.7     74.7     80.5     16.2     19.6
    2015...........................................      1.93          725.0     75.1     80.8     16.4     19.8
    2020...........................................      1.90          704.0     75.5     81.1     16.6     20.0
    2025...........................................      1.90          684.0     75.8     81.5     16.8     20.2
    2030...........................................      1.90          665.0     76.2     81.8     17.0     20.4
    2035...........................................      1.90          646.9     76.5     82.1     17.3     20.7
    2040...........................................      1.90          629.7     76.8     82.4     17.5     20.9
    2045...........................................      1.90          613.4     77.2     82.7     17.7     21.1
    2050...........................................      1.90          597.8     77.5     82.9     17.8     21.3
    2055...........................................      1.90          582.9     77.8     83.2     18.0     21.5
    2060...........................................      1.90          568.7     78.1     83.5     18.2     21.7
    2065...........................................      1.90          555.2     78.4     83.7     18.4     21.9
    2070...........................................      1.90          542.2     78.6     84.0     18.6     22.1
    2075...........................................      1.90          529.8     78.9     84.3     18.8     22.3
----------------------------------------------------------------------------------------------------------------
\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 that year's age-specific birth rates throughout her life, and if she were  
  to survive the entire childbearing period.                                                                    
\2\ The age-sex-adjusted death rate for any year is the crude rate that would occur in the total population     
  (enumerated as of April 1, 1990), if that population were to experience that year's age-sex-specific death    
  rates.                                                                                                        
\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 that year's age-sex-specific death rates throughout the remainder of his life.      
                                                                                                                
Source: Board of Trustees (1997; intermediate assumptions).                                                     

    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 1-15 for three hypothetical workers 
retiring in 1997 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). The indexing factor for 1960 
is based on average wages when the individual turned 60 
($24,705.66), 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 $1,628,473 (see table 
1-15). Dividing total indexed earnings by the number of months 
in the computation period (35 years  12 months = 420 
months) results in average indexed monthly earnings (AIME) of 
$3,877. The corresponding AIMEs for the average and low earners 
are $2,061 and $927, respectively. Low earners are defined as 
earning 45 percent of the average wage.

                     TABLE 1-15.--EARNINGS HISTORIES FOR HYPOTHETICAL WORKERS AGE 62 IN 1997                    
                                           [Rounded to nearest dollar]                                          
----------------------------------------------------------------------------------------------------------------
                                        Nominal earnings                               Indexed earnings         
            Year             ------------------------------------- Indexing ------------------------------------
                               Low \1\   Average \2\  Maximum \3\   factor    Low \1\   Average \2\  Maximum \3\
----------------------------------------------------------------------------------------------------------------
1957........................     $1,639      $3,642      $4,200      6.7841  \4\ $11,1                          
                                                                                    18  \4\ $24,706     $28,493 
1958........................      1,653       3,674       4,200      6.7248  \4\ 11,11                          
                                                                                     8  \4\ 24,706   \4\ 28,244 
1959........................      1,735       3,856       4,800      6.4074  \4\ 11,11                          
                                                                                     8  \4\ 24,706       30,756 
1960........................      1,803       4,007       4,800      6.1654  \4\ 11,11                          
                                                                                     8  \4\ 24,706       29,594 
1961........................      1,839       4,087       4,800      6.0453  \4\ 11,11                          
                                                                                     8  \4\ 24,706       29,017 
1962........................      1,931       4,291       4,800      5.7570     11,118      24,706   \4\ 27,634 
1963........................      1,978       4,397       4,800      5.6192     11,118      24,706   \4\ 26,972 
1964........................      2,059       4,576       4,800      5.3986     11,118      24,706   \4\ 25,913 
1965........................      2,096       4,659       4,800      5.3031     11,118      24,706   \4\ 25,455 
1966........................      2,222       4,938       6,600      5.0028     11,118      24,706       33,019 
1967........................      2,346       5,213       6,600      4.7388     11,118      24,706       31,276 
1968........................      2,507       5,572       7,800      4.4341     11,118      24,706       34,586 
1969........................      2,652       5,894       7,800      4.1918     11,118      24,706       32,696 
1970........................      2,784       6,186       7,800      3.9936     11,118      24,706       31,150 
1971........................      2,924       6,497       7,800      3.8026     11,118      24,706       29,660 
1972........................      3,210       7,134       9,000      3.4632     11,118      24,706       31,169 
1973........................      3,411       7,580      10,800      3.2593     11,118      24,706       35,200 
1974........................      3,614       8,031      13,200      3.0764     11,118      24,706       40,608 
1975........................      3,884       8,631      14,100      2.8625     11,118      24,706       40,361 
1976........................      4,152       9,226      15,300      2.6777     11,118      24,706       40,969 
1977........................      4,401       9,779      16,500      2.5263     11,118      24,706       41,684 
1978........................      4,750      10,556      17,700      2.3404     11,118      24,706       41,426 
1979........................      5,166      11,479      22,900      2.1522     11,118      24,706       49,285 
1980........................      5,631      12,513      25,900      1.9743     11,118      24,706       51,135 
1981........................      6,198      13,773      29,700      1.7938     11,118      24,706       53,275 
1982........................      6,539      14,531      32,400      1.7002     11,118      24,706       55,085 
1983........................      6,858      15,239      35,700      1.6212     11,118      24,706       57,876 
1984........................      7,261      16,135      37,800      1.5312     11,118      24,706       57,879 
1985........................      7,570      16,823      39,600      1.4686     11,118      24,706       58,157 
1986........................      7,795      17,322      42,000      1.4263     11,118      24,706       59,904 
1987........................      8,292      18,427      43,800      1.3408     11,118      24,706       58,726 
1988........................      8,700      19,334      45,000      1.2778     11,118      24,706       57,502 
1989........................      9,045      20,100      48,000      1.2292     11,118      24,706       59,000 
1990........................      9,463      21,028      51,300      1.1749     11,118      24,706       60,272 
1991........................      9,815      21,812      53,400      1.1327     11,118      24,706       60,485 
1992........................     10,321      22,935      55,500      1.0772     11,118      24,706       59,784 
1993........................     10,410      23,133      57,600      1.0680     11,118      24,706       61,517 
1994........................     10,689      23,754      60,600      1.0401     11,118      24,706       63,029 
1995........................     11,118      24,706      61,200      1.0000     11,118      24,706       61,200 
1996........................  \5\ 11,57                                                                         
                                      6  \5\ 25,724      62,700      1.0000  \5\ 11,57                          
                                                                                     6  \5\ 25,724       62,700 
----------------------------------------------------------------------------------------------------------------
\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.                                                  

                            Benefit Formula

    The primary insurance amount (PIA) is determined by 
applying the primary benefit formula to the AIME. For a worker 
becoming eligible in 1997, the PIA is determined as follows:


------------------------------------------------------------------------
                                                           Example of   
                                     Average indexed       worker with  
              Factor                 monthly earnings   monthly earnings
                                                            of $3,500   
------------------------------------------------------------------------
90 percent.......................  first $455, plus...           $409.50
32 percent.......................  $455 through                   731.52
                                    $2,741, plus.                       
15 percent.......................  over $2,741........            113.85
                                  --------------------------------------
      Total......................  ...................          1,254.87
------------------------------------------------------------------------


    Applying this formula to the AIMEs of the three 
hypothetical workers results in PIAs of $560.50 for the low-
wage worker, $923.40 for the average-wage worker, and $1,311.40 
for the maximum-wage worker. (For the low-wage worker, the 1997 
special minimum benefit (see below) PIA of $548.30 is less than 
AIME-based PIA of $560.50, and therefore is not used to 
determine his or her benefits.) The numbers $455 and $2,741 are 
often referred to as ``bend points'' of the PIA formula. These 
points 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 $560.50, $923.40, 
and $1,311.40 would be in effect for January through November 
1997, and will be increased by the cost-of-living adjustment 
effective beginning December 1997.
    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 1-16 
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.

   TABLE 1-16.--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.                                 

                           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 1-17 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) 
average earnings in the economy (average earner); and (3) the 
Social Security maximum taxable earnings base (maximum earner).

                    TABLE 1-17.--SOCIAL SECURITY REPLACEMENT RATES, SELECTED YEARS 1940-2040                    
                                                  [In percent]                                                  
----------------------------------------------------------------------------------------------------------------
                                                                    Year of          Replacement rates \1\      
                                                                   attaining -----------------------------------
                          Year of birth                              age 65   Low earner    Average     Maximum 
                                                                      \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        57.8        43.0        25.4 
1945.............................................................      2010        53.1        39.5        25.4 
1955.............................................................      2020        52.5        39.0        25.8 
1965.............................................................      2030        49.4        36.7        24.2 
1975.............................................................      2040        49.4        36.7       24.2  
----------------------------------------------------------------------------------------------------------------
\1\ Total monthly benefits payable for year of entitlement at age 65 expressed as percent of earnings in        
  previous year for workers with steady career earnings. Projections for 1997 and later are based on the        
  intermediate II assumptions of the 1997 OASDI Trustees' Report.                                               
\2\ The age for full (unreduced) retirement benefits will rise from 65 starting with workers born in 1938 and   
  will ultimately reach 67 for workers born in 1960 and later. The lower rates projected for 1945 and later in  
  the table reflect the increased actuarial reduction applied to the benefits of workers retiring at age 65.    
\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.                                                  

                     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 the latter case, 
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, workers first receive the 
benefit based on their work record. The dependent benefit is 
then payable only to the extent that 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

    Actuarial reduction is the reduction imposed on early 
retirement benefits. If the recipient lives a normal lifespan, 
the actuarial reduction leads to approximately the same total 
lifetime benefits as would be paid if the person chose to begin 
collecting benefits at the full retirement age. It applies to: 
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.
Retired workers
    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 1-11).
Spouses
    The 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
    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 1996 
indicate that 72 percent of all such benefits were actuarially 
reduced (69 percent of those payable to men, and 75 percent to 
women). Table 1-13 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 
1-11).

                         Maximum Family Benefit

Old-age and survivors 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 1997, the total amount of benefits payable is limited 
to:

  150 percent of the first $581 of PIA, plus;
  272 percent of PIA from $581 through $839, plus;
  134 percent of PIA from $839 through $1,094, plus;
  175 percent of PIA over $1,094.

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 1998, 
recipients under age 65 may earn up to $9,120 a year in wages 
or self-employment income without having their benefits 
affected. Those aged 65-69 can earn up to $14,500 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 aged 70 or older, 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 rises 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 3 percent of 
all recipients. Of recipients age 65-69, about 9 percent 
(860,000) were affected, and an additional 110,000 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 1998...................................     $10,120 
        Exempt amount for under age 65.....................       9,120 
                                                            ------------
        Excess over exempt amount..........................       1,000 
        Benefit reduction = 50 percent of excess...........         500 
        Benefits John will receive in 1998.................       3,500 
    2. Ida--Age 67 with $4,000 in annual benefits before                
     the earnings limit is applied:                                     
        Earnings in 1998...................................      15,100 
        Exempt amount for 65 and older.....................      14,500 
                                                            ------------
        Excess over exempt amount..........................         600 
        Benefit reduction = 33\1/3\ percent of excess......         200 
        Benefits Ida will receive in 1998..................       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.
    During congressional consideration of major Social Security 
legislation in 1977, there was 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).
    Before 1997, recipients under age 70 who earned more than 
the limits were required to file a report of their earnings to 
SSA by April 15 of each year. Because W-2s and self-employment 
income are now being recorded more rapidly, under new rules 
most recipients need not file annual reports of earnings.
    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 1-18 shows amounts exempt from the earnings limit 
since 1975.

         TABLE 1-18.--RETIREMENT TEST EXEMPT AMOUNTS, 1975-2002         
------------------------------------------------------------------------
                                                                 Age 65 
                       Year                         Under age   and over
                                                        65        \1\   
------------------------------------------------------------------------
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     12,500
1997..............................................      8,640     13,500
1998..............................................      9,120     14,500
1999..............................................  \2\ 9,360     15,500
2000..............................................  \2\ 9,720     17,000
2001..............................................  \2\ 10,08           
                                                            0     25,000
2002..............................................  \2\ 10,44           
                                                            0     30,000
------------------------------------------------------------------------
\1\ In 1955-82, retirement earnings test did not apply at ages 72 and   
  over; beginning in 1983, it does not apply at ages 70 and over.       
  Amounts for 1978-82 specified by Public Law 95-216; for 1996-2002,    
  Public Law 104-121.                                                   
\2\ Based on economic assumptions in the 1997 Annual Report of the Board
  of Trustees of the Federal Old-Age and Survivors Insurance and        
  Disability Insurance Trust Funds.                                     
                                                                        
Source: Office of the Chief Actuary, Social Security Administration.    

Earnings of retired workers
    Of 9.5 million recipients entitled to retired worker 
benefits who were under the age of 70 in 1994, about 3.5 
million had earnings from work. Table 1-19 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 the 
worker 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 
the worker became disabled. Needs-tested benefits, Veterans 
Administration disability benefits, and benefits based on 
public employment covered by Social Security are not subject to 
the reduction. A worker's average current earnings for this 
purpose are the larger of: (1) the average monthly earnings 
used for computing Social Security benefits; or (2) 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 (3) 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 in January of the redetermination year.

           TABLE 1-19.--RETIRED WORKERS WITH EARNINGS IN 1994           
------------------------------------------------------------------------
               Total earnings                  Ages 62-64    Ages 65-69 
------------------------------------------------------------------------
$1-4,999....................................       501,200       977,300
5,000-9,999.................................       346,800       537,300
10,000-14,999...............................       111,600       305,300
15,000-19,999...............................        52,800       123,000
20,000-24,999...............................        32,300        87,600
25,000-29,999...............................        20,500        71,000
30,000-34,999...............................        16,300        54,500
35,000-39,999...............................         9,100        40,100
40,000-44,999...............................         9,400        31,700
45,000-49,999...............................         5,600        25,200
50,000-54,999...............................         3,600        20,100
55,000-59,999...............................         3,300        15,100
60,000-64,999...............................         3,500        35,800
65,000-69,999...............................         1,000         7,500
70,000-74,999...............................         2,100         6,300
75,000-79,999...............................         1,100         5,700
80,000-84,999...............................         1,000         4,500
85,000-89,999...............................           400         3,700
90,000-94,999...............................           800         3,100
95,000-99,999...............................           200         3,200
100,000 +...................................         2,900        29,300
                                             ---------------------------
      Total.................................     1,125,500     2,387,300
------------------------------------------------------------------------
Source: Social Security Administration; 1994 Continuous Work History    
  Sample (CWHS).                                                        

    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.
    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 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 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 1-20.

              TABLE 1-20.--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.                                 

                  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 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).
    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 2.1 percent beginning with checks payable in 
January 1998 was triggered by the rise in the CPI-W from the 
third quarter of 1996 to the third quarter of 1997. 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 Program. Although 
COLAs under the Federal Civil Service Retirement System 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 2.1 percent COLA for January 1998 became known on 
October 16, 1997, when the BLS announced the CPI-W figure for 
September 1997. With release of the September index, the two 
July-September sets of CPI-W figures needed to compute the 1998 
COLA--one for 1996 and another for 1997--became available.
    Table 1-21 shows how the January 1998 COLA was computed 
under procedures set forth in the law. \5\ Table 1-22 shows the 
comparison between average wage increases and changes in the 
CPI from 1965 to 1997.
---------------------------------------------------------------------------
    \5\ Under section 215(i) of the Social Security Act.

   TABLE 1-21.--COMPUTATION OF THE SOCIAL SECURITY COLA, JANUARY 1998   
------------------------------------------------------------------------
                                                   CPI-W index points   
                     Month                     -------------------------
                                                    1996         1997   
------------------------------------------------------------------------
July..........................................        154.3        157.5
August........................................        154.5        157.8
September.....................................        155.1        158.3
    3-month average...........................        154.6        157.9
------------------------------------------------------------------------
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.                                     

    Based on the third quarter index points shown in table 1-
21, there are three steps to calculating the annual Social 
Security COLA. First, the annual increase in CPI index points 
from the third quarter of 1996 to the third quarter of 1997 is 
calculated (157.9 - 154.6 = 3.3). Second, the rate of increase 
is converted into a percentage by dividing the increase in 
index points by the base year level (3.3/154.6 = 2.135). 
Finally, the resulting figure (2.135) is rounded to the nearest 
tenth of a percent, making the 1998 COLA 2.1 percent.

  TABLE 1-22.--HISTORICAL COMPARISON OF AVERAGE WAGE INCREASES TO BENEFIT INCREASES AND CHANGES IN CPI, 1965-97 
                                                  [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      1997                 1997       year      1997   
----------------------------------------------------------------------------------------------------------------
1965.............................................      1.8       476.1      1.6       397.2      7.0       501.5
1966.............................................      6.0       443.5      3.2       382.0      0.0       501.5
1967.............................................      5.6       414.8      2.8       369.0      0.0       501.5
1968.............................................      6.9       381.7      4.2       350.3     13.0       432.3
1969.............................................      5.8       355.4      5.4       327.1      0.0       432.3
1970.............................................      5.0       333.8      5.7       304.1     15.0       362.9
1971.............................................      5.0       313.1      4.4       287.2     10.0       320.8
1972.............................................      9.8       276.2      3.4       274.3     20.0       250.6
1973.............................................      6.3       254.1      6.2       252.6      0.0       250.6
1974.............................................      5.9       234.2     11.0       217.7     11.0       215.9
1975.............................................      7.5       211.0      9.1       101.3      8.0       192.5
1976.............................................      6.9       190.9      5.7       175.5      6.4       174.9
1977.............................................      6.0       174.4      6.5       158.8      5.9       159.6
1978.............................................      7.9       154.3      7.7       140.2      6.5       143.7
1979.............................................      8.7       133.8     11.4       115.6      9.9       121.8
1980.............................................      9.0       114.5     13.4        90.1     14.3        94.0
1981.............................................     10.1        94.9     10.3        72.4     11.2        74.5
1982.............................................      5.5        84.7      6.0        62.6      7.4        62.5
1983.............................................      4.9        76.1      3.0        57.9  \4\ 3.5        57.0
1984.............................................      5.9        66.3      3.5        52.6      3.5        51.7
1985.............................................      4.3        59.5      3.5        47.4      3.1        47.1
1986.............................................      3.0        54.9      1.6        45.1      1.3        45.2
1987.............................................      6.4        45.7      3.6        40.1      4.2        39.4
1988.............................................      4.9        38.8      4.0        34.7      4.0        34.0
1989.............................................      4.0        33.5      4.8        28.5      4.7        28.0
1990.............................................      4.6        27.6      5.2        22.2      5.4        21.4
1991.............................................      3.7        23.0      4.1        17.3      3.7        17.1
1992.............................................      5.2        17.0      2.9        14.0      3.0        13.7
1993.............................................      0.9        16.0      2.8        10.9      2.6        10.8
1994.............................................      2.7        13.0      2.5         8.2      2.8         7.8
1995.............................................      4.0         8.6      2.9         5.2      2.6         5.1
1996.............................................      4.9         3.6      2.9         2.3      2.9         2.1
1997.............................................  \5\ 3.6  ..........      2.3  ..........  \6\ 2.1  ..........
----------------------------------------------------------------------------------------------------------------
\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 6 months of 1983 (first quarter-third quarter) not being  
  accounted for in any COLA increase--a period in which the CPI increased 2.4 percent.                          
\5\ Preliminary.                                                                                                
\6\ Effective December 1997, payable in January 1998.                                                           
                                                                                                                
Source: Office of the Chief Actuary, Social Security Administration.                                            

                          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.
    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 (1997):


                                                                                                                
----------------------------------------------------------------------------------------------------------------
                                                             Single     Single    Married    Married    Married 
----------------------------------------------------------------------------------------------------------------
Total income (including Social Security).................    $31,000    $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 1998 (see table 1-23), CBO projects that 
26 percent of Social Security beneficiaries will be affected by 
the taxation of benefits (see table 1-23). Table 1-24 shows 
amounts credited to trust funds from taxation of benefits.

                SOCIAL SECURITY BENEFITS FOR NONCITIZENS

    Provisions in the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996 and the Immigration 
Responsibility Act of 1996 affect the way Social Security 
benefits are paid to aliens in the United States. Effective 
December 1, 1996, persons applying for title II monthly 
benefits in the United States must provide evidence that they 
are U.S. citizens, nationals, or aliens who are lawfully 
present in the United States in order to get Social Security 
benefits.
    To be considered a lawfully present alien in the United 
States, the beneficiary must be an alien:
  --lawfully admitted for permanent residence;
  --admitted as a refugee under section 207 of the Immigration 
        and Nationality Act (INA);
  --granted asylum under section 208 of the INA;
  --granted conditional entry as a refugee under section 
        203(a)(7) of the INA prior to April 1, 1980;
  --who has submitted application for political asylum under 
        section 208 of the INA; or
  --who belongs to any class of aliens permitted to reside in 
        the United States for humanitarian or other reasons.

                          TABLE 1-23.--PROJECTED EFFECT OF TAXING SOCIAL SECURITY BENEFITS BY INCOME CLASS, CALENDAR YEAR 1998                          
                                                 [Numbers of persons in thousands; dollars in millions]                                                 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                          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................     6,196           0            0             7,852                0           0       $46,246          0         0  
$10,000-$15,000..................     4,132           0            0             5,189                0           0        42,291          0         0  
$15,000-$20,000..................     3,786           0            0             4,472                0           0        38,149          0         0  
$20,000-$25,000..................     3,150           0            0             3,621                0           0        31,525          0         0  
$25,000-$30,000..................     2,862         118            4.1           3,247              147           4.5      27,691        $16         0.1
$30,000-$40,000..................     4,185       1,017           24.3           4,928            1,315          26.7      42,577        395         0.9
$40,000-$50,000..................     2,611       1,982           75.9           3,098            2,529          81.6      28,214      1,157         4.1
$50,000-$100,000.................     3,922       3,533           90.1           4,606            4,450          96.6      46,000      6,155        13.4
Over $100,000....................     1,527       1,304           85.4           1,475            1,447          98.1      17,524      4,104        23.4
                                  ----------------------------------------------------------------------------------------------------------------------
    All..........................    32,372       7,959           24.6          38,488            9,894          25.7     320,216     11,834         3.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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 thus are 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 also is understated.                                                    
                                                                                                                                                        
Source: Congressional Budget Office simulations based on data from the Current Population Survey.                                                       


     TABLE 1-24.--TAXATION OF OASDI BENEFITS BY TRUST FUNDS CREDITED AND AS A PERCENT OF TOTAL OASDI BENEFIT    
                                               PAYMENTS, 1984-2002                                              
                                              [Dollars in millions]                                             
----------------------------------------------------------------------------------------------------------------
                                                                Taxes credited to trust      Taxes credited to  
                                                      Total     funds from the taxation   trust funds as percent
                    Fiscal year                       OASDI        of OASDI benefits         of OASDI benefits  
                                                     benefits --------------------------------------------------
                                                                OASDI      HI     Total    OASDI    HI     Total
----------------------------------------------------------------------------------------------------------------
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
1996..............................................    343,235    6,155    4,039   10,194     1.8     1.2     3.0
1997 \1\..........................................    359,232    7,198    4,001   11,199     2.0     1.1     3.1
1998 \1\..........................................    376,907    7,632    4,328   11,960     2.0     1.1     3.2
1999 \1\..........................................    396,628    8,166    4,591   12,757     2.1     1.2     3.2
2000 \1\..........................................    417,393    8,773    4,975   13,748     2.1     1.2     3.3
2001 \1\..........................................    440,311    9,437    5,368   14,805     2.1     1.2     3.4
2002 \1\..........................................    465,390   10,175    5,802   15,977     2.2     1.2     3.4
----------------------------------------------------------------------------------------------------------------
\1\ Projected; based on intermediate assumptions in the 1997 Annual Report of the Board of Trustees of the      
  Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.                                 
                                                                                                                
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 Chief Actuary, Social Security Administration.                                            

                  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, 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 determined on a sequential basis. The first step 
is to determine whether the individual is engaging in 
substantial gainful activity (SGA). Under current regulations, 
in most cases if a person is earning more than $500 a month 
(net of impairment-related work expenses), he will be 
considered to be engaging in SGA. In the case of blind 
individuals, SGA is $1,000 a month in 1997 ($1,050 in 1998). 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, \6\ 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 limitations) and the physical and 
mental demands of his 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 whether the impairment 
prevents other work.
---------------------------------------------------------------------------
    \6\ 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 findings of a 
listed impairment.
---------------------------------------------------------------------------
    At this stage in the adjudication process, because of a 
court decision 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 Commissioner must 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 initiative, 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 are 
determined to be appropriate. These reviews are in addition to 
the administrative eligibility review procedures existing 
before the 1980 amendments.

                      Medical Improvement Standard

    The 1984 Disability Benefits Reform Act required 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 she furnishes such medical and other evidence as the 
Commissioner may require. 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

    A claimant may be represented by an attorney or any other 
qualified person in proceedings before SSA. A person who has 
been suspended or disqualified by SSA from representing Social 
Security claimants or who is otherwise prohibited by law from 
acting as a representative may not represent claimants.
    The claimant must appoint a representative in writing over 
his own signature and file the written appointment with SSA. If 
the representative is not an attorney, he also must submit a 
written acceptance of appointment to SSA.
    The appointed representative may obtain the same 
information about the claimant that would be available to the 
claimant. The representative may also submit evidence, make 
statements about facts and law, and make any request or give 
any notice concerning the proceedings. She may not sign an 
application on behalf of a claimant for rights or benefits, or 
testify on the claimant's behalf in any administrative 
proceeding.
    The amount of any fee that an attorney or other person may 
charge and collect from the claimant for services performed as 
a representative in proceedings before SSA must be authorized 
by SSA. SSA has two methods of authorizing fees for 
representation: Fee petition and fee agreement.
    Under the fee petition process, the representative must 
file a fee petition with SSA after completing his services on a 
claim and send a copy of the fee petition to the claimant. All 
Social Security offices have forms available that list the 
information required to petition for a fee. The representative 
should submit the petition for a fee for services rendered as 
soon as possible after all proceedings are complete.
    SSA determines the amount of the fee authorized under the 
fee petition process based on several factors, including, but 
not limited to, the extent and type of services the 
representative performed, the complexity of the case, and the 
amount of time the representative spent on the case. SSA 
notifies both the claimant and representative of the fee 
authorized and gives a complete explanation of how the amount 
of the fee was determined. The claimant or representative, or 
both, may request a review of the fee determined under a fee 
petition within 30 days after receipt of the notice.
    Under the fee agreement process, the claimant and 
representative must file a written agreement with SSA before 
the date SSA makes a favorable determination or decision on the 
claim. SSA usually will approve the fee agreement if (1) it is 
signed by both the claimant and representative; (2) the fee 
specified in the agreement does not exceed the lesser of 25 
percent of the past-due benefits or $4,000; (3) SSA's 
determination or decision in the claim is fully or partially 
favorable; and (4) the claim results in past-due benefits. The 
claimant, the claimant's representative, or the SSA agent 
determining the fee, may request a review of the fee within 15 
days after receipt of the notice.
    If the claimant is represented by an attorney and the claim 
is for Social Security benefits, SSA withholds 25 percent of 
past-due benefits owed the claimant and any auxiliary 
beneficiary or beneficiaries, and certifies for direct payment 
to the attorney the lesser of the amount of the authorized fee 
or 25 percent of past-due benefits.
    SSA assumes no responsibility for payment of any authorized 
fee if the representative is not an attorney or if the claim is 
for payments under title XVI of the act (Supplemental Security 
Income).
    A Federal court that renders a judgment favorable to a 
Social Security claimant may allow as part of its judgment a 
reasonable fee to an attorney who represented the claimant in 
court. The fee allowed by the court cannot exceed 25 percent of 
the past-due benefits resulting from the favorable judgment. 
SSA may certify the amount of the fee allowed by the court for 
payment directly to the attorney out of the title II past-due 
benefits.

                       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 in which 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 administrative rulemaking process available under 
current law, SSA issued new regulations in the Federal Register 
on March 15, 1994 on the use of alternative rehabilitation 
providers. The regulations expanded the use of private 
vocational rehabilitation providers and public non-State VR 
providers by allowing SSA to refer beneficiaries to such 
providers if SSA does not receive notification within a 
specified period of time that the State VR agency has accepted 
a beneficiary for services or extended evaluation.

                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. 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), provided he or she 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 24-
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 the 
appeals council to review a percentage of ALJ hearing 
decisions.
    The appeals council may review, affirm, modify, or reverse 
the decision of the ALJ, or 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 will have the 
opportunity to receive a hearing at the reconsideration stage 
and can elect to continue to receive disability and Medicare 
benefits through the ALJ 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 1-25 presents information for fiscal years 
1979-96 on the number of cases that were reviewed and reversed 
at the ALJ level. Table 1-26 presents information on the number 
of continuing disability reviews that were conducted in fiscal 
years 1977-96 on DI cases. 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 has since enabled the Social Security 
Administration to increase the number of CDRs significantly.
    Public Law 104-121 authorized significant additional 
administrative funding exempt from the discretionary spending 
cap, and above the annual $200 million previously authorized, 
to enable SSA to clear its CDR backlog of roughly 3.4 million 
cases more quickly. Total fiscal year authorizations for CDRs 
are: 1996, $260 million; 1997, $360 million; 1998, $570 
million; and 1999-2002, $720 million each year.

              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 first peaked at 4.9 million in 
May 1978. The beneficiary population then declined sharply to 
3.8 million by July 1984. Thereafter, the number of 
beneficiaries rose steadily, reaching 6.1 million in December 
1996 (table 1-28).
    Similarly, the number of new DI benefit awards declined 
from 592,000 in 1975 to approximately 299,000 in 1982. As shown 
in table 1-27, awards then rose almost steadily, reaching 
646,000 in 1995 before declining by 1997 to 587,000. (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.)

   CHART 1-1. DISABILITY DETERMINATIONS AND APPEALS, FISCAL YEAR 1996

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





    \1\ The data relate to workloads processed (but not 
necessarily received) in fiscal year 1996, 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 1996. 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 16,189 CDRs where there was ``no decision.'' The 
continuance and termination rates are computed without the ``no 
decision'' cases.
    \3\ Many ALJ dispositions and appeals council (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, and own motion reopening cases.

    Source: Social Security Administration.

TABLE 1-25.--ADMINISTRATIVE LAW JUDGE DISABILITY INSURANCE \1\ DECISION RATES, INITIAL DENIALS AND TERMINATIONS,
                                            \2\ FISCAL YEARS 1979-96                                            
----------------------------------------------------------------------------------------------------------------
                                                                                                        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...............................................     19,880      44,594     144,945    209,419       69.2
    1992...............................................     19,665      48,407     166,661    234,733       71.0
    1993...............................................     20,190      47,579     171,508    239,277       71.7
    1994...............................................     23,576      49,110     189,373    262,059       72.3
    1995...............................................     44,234      65,415     220,558    330,207       66.8
    1996...............................................     33,367      89,817     237,131    360,315       65.8
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...............................................      1,007       2,140       3,935      7,082       55.6
    1992...............................................        812       1,642       2,812      5,266       53.4
    1993...............................................        720       1,281       2,079      4,080       51.0
    1994...............................................        656       1,082       1,540      3,278       47.0
    1995...............................................        821       1,173       1,807      3,801       47.5
    1996...............................................      1,172       2,275       2,488      5,935       41.9
----------------------------------------------------------------------------------------------------------------
\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 of termination.                                      
                                                                                                                
Source: Office of Hearings and Appeals, Social Security Administration.                                         


                           TABLE 1-26.--CONTINUING DISABILITY REVIEW (CDR) CESSATIONS AND CONTINUATIONS, FISCAL YEARS 1977-96                           
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Cessations           Continuations                     Total cases              
                                                                 ---------------------------------------------------------------------------------------
                           Fiscal year                                                                            Cessations      Total                 
                                                                   Number   Percent \1\   Number   Percent \2\       and         disabled      Percent  
                                                                                                                continuations  persons \3\  reviewed \4\
--------------------------------------------------------------------------------------------------------------------------------------------------------
1977............................................................    41,475      38.7       65,745      61.3         107,220      3,322,230         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 \5\........................................................    31,927      24.6       97,752      75.4         129,679      3,249,367         4.0  
1985 \5\........................................................       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 \6\........................................................    15,154      10.5      129,026      89.5         144,180      3,678,509         3.9  
1991 \7\........................................................     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 \8\........................................................     4,886       9.9       44,316      90.1          49,202      4,457,500         1.1  
1994 \8\........................................................    13,940      14.1       85,189      85.9          99,129      4,729,948         2.1  
1995 \8\........................................................    31,694      16.1      164,281      83.9         196,575      4,980,462         4.0  
1996............................................................    35,452      10.0      311,041      90.0         346,493      5,216,126         6.6  
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Percent of cessations = number of cessations  (number of cessations + number of continuances)  100.                                
\2\ Percent of continuances = number of continuances  (number of cessations + number of continuances)  100.                            
\3\ In current pay at end of fiscal year.                                                                                                               
\4\ Percent of total disabled persons reviewed = (number of cessations + number of continuances)  total disabled persons  100.         
\5\ 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).                  
\6\ The decline in CDR processing in 1990 was due to the unanticipated demands of processing approximately 40,000 class action court cases.             
\7\ The continued decline in CDR processing was due to the increase in the initial claims workloads.                                                    
\8\ Includes non-State CDR mailer continuations.                                                                                                        
                                                                                                                                                        
Source: Office of Disability, 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 1996, the rate was 4.9 
percent (see table 1-27).
    Table 1-28 shows the number of DI beneficiaries for 
selected fiscal years.

 TABLE 1-27.--DISABLED WORKERS' APPLICATIONS, AWARDS, AWARDS AS A PERCENT OF APPLICATIONS, AND AWARDS PER 1,000 
                                   INSURED WORKERS FOR SELECTED YEARS, 1960-97                                  
                             [Number of applications and total awards in thousands]                             
----------------------------------------------------------------------------------------------------------------
                                                                                    Awards as a     Awards per  
                                                     Number of     Total awards     percent of     1,000 insured
                                                   applications                    applications       workers   
----------------------------------------------------------------------------------------------------------------
1960............................................           418.6           207.8            49.6             4.5
1965............................................           532.9           253.5            47.9             4.7
1970............................................           868.2           350.4            40.3             4.8
1971............................................           924.4           415.9            45.0             5.6
1972............................................           947.8           455.4            48.1             6.0
1973............................................         1,066.9           491.6            46.1             6.3
1974............................................         1,330.2           536.0            40.3             6.7
1975............................................         1,285.3           592.0            46.1             7.1
1976............................................         1,232.2           551.5            44.8             6.5
1977............................................         1,235.2           568.9            46.1             6.5
1978............................................         1,184.7           464.4            39.2             5.2
1979............................................         1,187.8           416.7            35.1             4.4
1980............................................         1,262.3           396.6            31.4             4.0
1981............................................         1,161.3           345.3            30.3             3.4
1982............................................         1,020.0           298.5            29.1             2.9
1983............................................         1,017.7           311.5            30.6             3.0
1984............................................         1,035.7           357.1            34.9             3.4
1985............................................         1,066.2           377.4            35.4             3.5
1986............................................         1,118.4           416.9            37.3             3.8
1987............................................         1,108.9           415.8            37.5             3.7
1988............................................         1,017.9           409.5            40.2             3.6
1989............................................           984.9           425.6            43.2             3.7
1990............................................         1,067.7           468.0            43.8             4.0
1994............................................         1,208.7           536.4            44.4             4.5
1992............................................         1,335.1           636.6            47.8             5.2
1993............................................         1,425.8           635.2            44.6             5.2
1994............................................         1,443.8           631.9            43.8             5.1
1995............................................         1,338.1           645.8            48.3             5.1
1996............................................         1,279.2           624.3            48.8             4.9
1997............................................         1,180.2           587.4            49.8             4.5
----------------------------------------------------------------------------------------------------------------
Source: Office of the Chief Actuary, Social Security Administration.                                            

        Pending Claims in the Disability Determination Services

    Until fiscal year 1991, State disability determination 
services workloads remained relatively constant at about 2.5 
million cases per year. In fiscal year 1991, claims began to 
increase significantly each year to a level of over 3.7 million 
in fiscal year 1996. During the period of fiscal years 1988-94, 
pending cases also increased as the ability to hire and train 
staff did not keep pace with the increases in claims. However, 
in fiscal year 1995 pending cases were significantly reduced to 
590,000 due largely to increased productivity in the States and 
the additional budgetary resources directed to disability case 
processing which enabled an aggressive hiring effort in the 
States. In fiscal year 1996, pending cases again increased 
significantly. The major cause of this increase was that 
Congress increased SSA's workload by requiring additional drug 
addiction and alcoholism reviews. This workload has now been 
completed but pending cases have risen again due to workloads 
mandated by welfare reform legislation. Table 1-29 shows 
disability cases pending and the weeks of work on hand in the 
States at the end of each fiscal year from 1988 through 1996.

              TABLE 1-28.--NUMBER OF DISABILITY INSURANCE BENEFICIARIES FOR SELECTED YEARS, 1960-96             
                                     [Current payment status as of December]                                    
----------------------------------------------------------------------------------------------------------------
                                                              Disabled                                          
                           Year                                workers       Spouses      Children      Total   
----------------------------------------------------------------------------------------------------------------
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
1996.....................................................       4,385,623      223,854    1,462,557    6,072,034
----------------------------------------------------------------------------------------------------------------
Source: Office of Research and Statistics, Social Security Administration.                                      

                     CHARACTERISTICS OF RECIPIENTS

              Old-Age, Survivors, and Disability Insurance

    Table 1-30 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.

                          Disability Insurance

    Tables 1-31 and 1-32 present data on the demographic, 
social, and medical characteristics of the disabled population 
over time. For instance, table 1-31 shows the increase in the 
receipt of benefits by women, which reflects larger societal 
trends in female work force participation. Table 1-31 also 
indicates the higher levels of educational attainment that 
characterize the present disabled population in comparison to 
that of 1970.

    TABLE 1-29.--DISABILITY CASES PENDING AND WAITING TIMES, 1988-96    
      [Cases pending and weeks of work on hand at State disability      
                         determination services]                        
------------------------------------------------------------------------
                                          Total cases                   
             Fiscal year               pending at end of   Weeks of work
                                             year             on hand   
------------------------------------------------------------------------
1988................................             407,000             8.4
1989................................             479,000             9.8
1990................................             538,000            11.1
1991................................             693,000            13.3
1992................................             725,000            12.0
1993................................             717,000            10.7
1994................................             721,000            10.4
1995................................             590,000             8.4
1996................................             702,000             9.8
------------------------------------------------------------------------
Source: National Council of Disability Determination Directors.         


  TABLE 1-30.--NUMBER AND PERCENTAGE OF OASDI RECIPIENTS AND AVERAGE BENEFITS BY AGE, SEX, AND MARITAL STATUS,  
                                                  DECEMBER 1996                                                 
                                         [Based on a 10-percent sample]                                         
----------------------------------------------------------------------------------------------------------------
                                                                                Percent  of   Average   Percent 
                          Beneficiaries                              Number        total      monthly   of total
                                                                  (thousands)  beneficiaries  benefit   benefits
----------------------------------------------------------------------------------------------------------------
Retired workers.................................................       26,898        61.5        $745       68.1
    Retired men.................................................       14,011        32.0         838       39.9
    Retired women...............................................       12,887        29.5         644       28.2
Disabled workers................................................        4,386        10.0         704       10.5
    Disabled men................................................        2,644         6.0         788        7.1
    Disabled women..............................................        1,741         4.0         577        3.4
Spouses of retired workers......................................        2,970         6.8         384        3.9
    Wives of retired workers....................................        2,941         6.7         385        3.8
    Wives with entitled children................................           68         0.2         277        0.1
    Wives age 62 and over without entitled children.............        2,872         6.6         388        3.8
    Husbands of retired workers.................................           30         0.1         226      (\1\)
Spouses of disabled workers.....................................          224         0.5         171        0.1
    Wives of disabled workers...................................          218         0.5         173        0.1
    Wives with entitled children................................          167         0.4         147        0.1
    Wives age 62 and over without entitled children.............           52         0.1         256      (\1\)
    Husbands of disabled workers................................            5       (\1\)         125      (\1\)
Children........................................................        3,803         8.7         357        4.6
    Children of retired workers.................................          443         1.0         337        0.5
        Minor children (age 0-17)...............................          242         0.6         303        0.2
        Student children (age 18 and 19)........................           11       (\1\)         375      (\1\)
        Disabled children (age 18 and over).....................          190         0.4         378        0.2
    Children of deceased workers................................        1,898         4.3         487        3.1
        Minor children (age 0-17)...............................        1,391         3.2         478        2.3
        Student children (age 18 and 19)........................           52         0.1         561        0.1
        Disabled children (age 18 and over).....................          454         1.0         506        0.8
    Children of disabled workers................................        1,463         3.3         194        1.0
        Minor children (age 0-17)...............................        1,377         3.1         188        0.9
        Student children (age 18 and 19)........................           33         0.1         295      (\1\)
        Disabled children (age 18 and over).....................           53         0.1         282        0.1
Widowed mothers and fathers.....................................          242         0.6         515        0.4
    Widowed mothers.............................................          231         0.5         520        0.4
    Widowed fathers.............................................           11       (\1\)         416      (\1\)
Widows and widowers (nondisabled)...............................        5,028        11.5         707       12.1
    Widows (nondisabled)........................................        4,990        11.4         708       12.0
    Widowers (nondisabled)......................................           38         0.1         521        0.1
Widows and widowers (disabled)..................................          182         0.4         471        0.3
    Widows (disabled)...........................................          178         0.4         474        0.3
    Widowers (disabled).........................................            4       (\1\)         318      (\1\)
Parents total...................................................            4       (\1\)         614      (\1\)
Special age 72 (primary)........................................            1       (\1\)         197      (\1\)
                                                                 -----------------------------------------------
      Total OASI beneficiaries..................................       37,665        86.1         691       88.4
      Total DI beneficiaries....................................        6,072        13.9         561       11.6
      Total OASDI beneficiaries.................................       43,737       100.0         673      100.0
----------------------------------------------------------------------------------------------------------------
\1\ Less than 0.5 percent.                                                                                      
                                                                                                                
Note.--Columns may not add due to rounding.                                                                     
                                                                                                                
Source: Office of Research, Evaluation, and Statistics, Social Security Administration.                         


 TABLE 1-31.--PERCENT DISTRIBUTION BY AGE, SEX AND EDUCATION OF TITLE II DISABLED WORKER BENEFICIARIES GRANTED BENEFITS IN SELECTED CALENDAR YEARS 1970-96, COMPARED WITH ADULT U.S. POPULATION 
                                                                                             IN 1990                                                                                            
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Year granted benefits                                                            
                         Characteristics                         ----------------------------------------------------------------------------------------------------------------   Adult U.S.  
                                                                   1970    1975    1979    1982    1985    1988    1989    1990    1991    1992    1993    1994    1995    1996   population \1\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Age:                                                                                                                                                                                            
  Under 35......................................................     9.0    11.0    13.6    14.4    16.8    15.2    16.2    15.7    15.7    16.8    16.2    14.7    13.3    12.3         45.6   
  35-44.........................................................    11.0    10.0    11.5    12.3    15.0    16.5    17.9    18.7    19.6    20.4    20.9    20.7    20.4    20.4         24.4   
  45-54.........................................................    26.0    26.0    27.2    26.5    25.7    23.3    24.7    24.7    25.1    25.6    26.8    27.7    28.3    29.7         16.3   
  55-59.........................................................    24.0    23.0    27.0    27.2    23.9    20.6    20.4    19.9    19.5    18.5    18.6    19.2    19.9    20.0          6.8   
  60 and over...................................................    30.0    30.0    20.6    19.6    18.7    24.4    20.9    21.0    20.1    18.7    17.6    17.8    18.0    17.4          6.9   
  Median age (years)............................................    56.0    55.6    53.4    53.1    51.7    53.3    52.1    51.9    51.4    50.5    50.3    50.8    51.3    51.3         32.9   
Sex:                                                                                                                                                                                            
  Male..........................................................      74      68      69      70      67      66      64      64      64      63      62      60    58.4    56.7         49.5   
  Female........................................................      26      32      31      30      33      34      36      36      36      37      38      40    41.4    43.2         50.5   
Education (years of school completed):                                                                                                                                                          
  No schooling \2\..............................................       2       1       1       1       2       1       1       1       1       1       1       1      NA       1            1   
  Elementary school (1-8).......................................      44      37      29      26      23      18      17      16      16      12      11      12      NA      10            9   
  Some high school..............................................      46      52      55      56      59      59      60      62      62      50      45      55      NA      58           45   
    9-11........................................................      23      24      23      22      22      20      19      19      19      15      14      16      NA      16           11   
    12..........................................................      23      28      32      34      37      39      41      43      43      35      31      39      NA      42           34   
  Some college..................................................       9      10      12      14      14      15      17      17      17      14      12      16      NA       3           45   
  Unknown.......................................................       0       0       3       3       2       7       5       5       5      23      31      16      NA      28            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 1-32.--PERCENT DISTRIBUTION BY DISABLING CONDITION OF TITLE II DISABLED WORKER BENEFICIARIES GRANTED BENEFITS IN SELECTED CALENDAR YEARS, 1970-96
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Year granted benefits                                     
                  Disabling condition                  -------------------------------------------------------------------------------------------------
                                                         1970   1975   1979   1982   1985   1988   1989   1990   1991   1992   1993   1994   1995   1996
--------------------------------------------------------------------------------------------------------------------------------------------------------
Infective and parasitic diseases \1\..................      3      1      1      1      1      0      1      6      6      7      7      6      6      5
Neoplasms.............................................     10     10     14     17     15     16     18     17     16     13     15     16     16     17
Allergic, endocrine system, metabolic and nutritional                                                                                                   
 diseases.............................................      4      3      3      4      5      3      3      3      4      5      5      5      5      5
Mental, psychoneurotic and personality disorders......     11     11     11     11     18     22     22     23     24     25     26     24     22     22
Diseases of the nervous system and sense organs.......      6      7      8      9      8      8      9      9      8      8      7      8      8      8
Circulatory system....................................     31     32     28     25     19     18     17     16     15     14     15     14     14     14
Respiratory system....................................      7      7      6      7      5      5      5      5      5      4      5      5      5      5
Digestive system......................................      3      3      2      2      2      2      2      2      2      2      2      2      2      2
Musculoskeletal.......................................     15     17     17     16     13     14     11     12     13     13     12     12     12     12
Accidents, poisonings and violence....................      8      6      6      6      4      5      4      4      4      4      3      3      3      4
Other/unknown.........................................      2      3      3      2     11      7      9      5      5      5      5      6      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\ May not add to 100 percent due to rounding.                                                                                                         
                                                                                                                                                        
Source: Office of Disability, Social Security Administration.                                                                                           

                       SOCIAL SECURITY FINANCING

                              Current Law

    Financing for OASDI Programs, as well as for 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 147.9 million workers in 1997 (of whom 3.3 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: 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 1998, 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 $68,400 (up from $65,400 
in 1997); the earnings 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 1-33, 1-34, 1-35 and 1-36 show FICA and SECA tax 
rates (in percent), taxes (in dollars), and taxable earnings 
bases, both past and future. Table 1-37 shows categories of 
workers exempt from FICA and SECA taxes.

                         TABLE 1-33.--FICA AND SECA TAX RATES, SELECTED YEARS 1937-2000                         
                                                  [In percent]                                                  
----------------------------------------------------------------------------------------------------------------
                                                              Rate paid by employee and                         
                                                                       employer                Self-    Maximum 
                      Calendar year                      ----------------------------------- employed   taxable 
                                                           OASI    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....................................................   5.35   0.85   6.20   1.45   7.65      15.3  \1\ 65,40
                                                                                                               0
1998....................................................   5.35   0.85   6.20   1.45   7.65      15.3     68,400
1999....................................................   5.35   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 1-34.--FICA AND SECA TAX PAYMENTS FOR AVERAGE AND HIGH EARNERS, 
                         SELECTED YEARS 1950-97                         
------------------------------------------------------------------------
                                            Annual tax payments         
                                 ---------------------------------------
          Calendar year           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
1996............................     1,968     3,126     6,787    10,768
Cumulative 1953-96 \3\..........   105,322   157,039   205,699   314,144
1997............................     2,045     3,248     6,955    11,042
------------------------------------------------------------------------
\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 1996 and 1997). For years before 1994, high   
  earner means someone who earned the maximum wage level subject to     
  OASDI and HI taxes. For 1994 onward it is assumed to be someone who   
  earns $200,000 a year.                                                
\2\ 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 1-35.--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.....................................................     65,400      7.650      5.350      0.850      1.450
1998.....................................................     68,400      7.650      5.350      0.850      1.450
1999.....................................................      (\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 was 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.                                           
                                                                                                                
Source: Office of the Actuary, Social Security Administration.                                                  


                      TABLE 1-36.--TAX RATES FOR SELF-EMPLOYED INDIVIDUALS, 1980 AND AFTER                      
----------------------------------------------------------------------------------------------------------------
                                                                                                         Total  
                      Calendar year                           OASI        DI       OASDI        HI       (OASDI 
                                                                                                        and HI) 
----------------------------------------------------------------------------------------------------------------
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 1-37.--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 $1,100 in 1998, or 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 (who is the Managing Trustee), Labor, and Health and 
Human Services, the Commissioner of Social Security, and two 
representatives of the public. The Board of Trustees' 1997 
Report was released on April 24, 1997. The Congressional Budget 
Office (CBO) also makes Social Security projections, the latest 
of which were released on January 7, 1998. 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 the 
Trustees' ``intermediate'' (or moderate) set of assumptions, 
the annual excess of income over outlays will reach $127 
billion by fiscal year 2006, and the reserve balance of the 
trust funds will represent 2.4 years' worth of outgo. [Under 
CBO's most recent assumptions, the annual excess of income over 
outlays will reach $179 billion by fiscal year 2006.]
    Table 1-38 shows both historical and projected operations 
of the combined OASI and DI Trust Funds in the short run 
according to CBO estimates released in January 1998.
    For the long run, the projections are 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 17 
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 1-39. 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
    Social Security taxes 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 

                                     TABLE 1-38.--HISTORICAL AND PROJECTED OPERATIONS OF THE COMBINED OASI AND DI TRUST FUNDS DURING FISCAL YEARS 1994-2008                                     
                                                                                    [In millions of dollars]                                                                                    
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                     1994     1995     1996      1997       1998       1999       2000       2001       2002       2003       2004       2005       2006       2007       2008  
                                    actual   actual   actual  projected  projected  projected  projected  projected  projected  projected  projected  projected  projected  projected  projected
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Combined OASDI Trust Funds:                                                                                                                                                                     
Income:                                                                                                                                                                                         
  Revenues.......................   $335.0   $351.1   $367.5    $392.0     $417.3     $438.2     $457.7      $477.1     $497.8     $520.7     $545.7     $574.4     $601.2     $629.8     $657.9
  Intragovernmental:                                                                                                                                                                            
    Taxes on benefits............      5.7      5.5      6.2       6.9        8.8        9.3        9.3        10.5       11.2       12.1       12.9       13.8       14.9       16.0       17.2
    Federal employer share.......      6.4      6.4      6.3       6.5        7.1        7.7        8.3         8.9        9.6       10.4       11.2       12.1       13.0       13.9       15.0
    Interest.....................     29.2     33.3     36.5      41.2       46.5       52.8       59.0        65.4       72.2       79.5       87.4       96.1      105.5      115.4      126.0
    Other........................      0.0      0.0      0.0       0.0        0.0        0.0        0.0         0.0        0.0        0.0        0.0        0.0        0.0        0.0        0.0
                                  --------------------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal, intragovernmental     41.3     45.2     48.9      54.6       62.5       69.8       77.2        84.8       93.1      101.9      111.6      122.1      133.3      145.3      158.1
                                  --------------------------------------------------------------------------------------------------------------------------------------------------------------
        Total income.............    376.3    396.3    416.4     446.6      479.7      508.1      535.0       561.9      590.9      622.6      657.2      696.5      734.5      775.1      816.0
                                  ==============================================================================================================================================================
Outgo:                                                                                                                                                                                          
  Benefits.......................    313.2    328.9    343.3     358.3      371.8      387.5      404.8       423.9      444.7      467.2      491.5      518.1      547.0      577.6      610.0
  Discretionary administration...      2.7      2.6      2.6       3.0        3.3        3.3        3.4         3.5        3.6        3.8        3.9        4.0        4.2        4.3        4.5
  Treasury administration........      0.2      0.3      0.2       0.3        0.2        0.2        0.2         0.2        0.2        0.2        0.2        0.2        0.2        0.2        0.2
  Railroad transfer..............      3.5      4.1      3.6       3.7        3.8        3.8        3.8         3.7        3.8        3.8        3.8        3.8        3.8        3.9        3.9
  Interest on tax transfers &                                                                                                                                                                   
   interfund loans...............  .......  .......  .......  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........
  Quinquennial...................  .......  .......      0.3  .........  .........  .........  .........        0.6  .........  .........  .........  .........  .........  .........  .........
                                  --------------------------------------------------------------------------------------------------------------------------------------------------------------
        Total outgo..............    319.6    335.8    350.0     365.3      379.1      394.8      412.2       431.8      452.4      475.0      499.4      526.2      555.2      586.1      618.6
                                  ==============================================================================================================================================================
Surplus..........................     56.8     60.5     66.4      81.3      100.6      113.2      122.8       130.0      138.5      147.6      157.8      170.4      179.4      189.0      197.4
Memo:                                                                                                                                                                                           
  OASI surplus...................     60.7     31.6     51.5      67.9       87.1       98.7      105.8       111.4      120.2      130.0      140.8      153.7      163.8      174.7      184.7
  DI surplus.....................     -3.9     28.8     14.9      13.4       13.6       14.6       17.0        18.7       18.3       17.6       17.1       16.7       15.6       14.3       12.7
Balance..........................    422.7    483.2    549.6     630.9      731.5      844.7      967.5     1,097.5    1,236.0    1,383.7    1,541.5    1,711.9    1,891.3    2,080.3    2,277.7
Memo:                                                                                                                                                                                           
  OASI balance...................    416.3    447.9    499.5     567.4      654.5      753.1      858.9       970.3    1,090.5    1,220.5    1,361.3    1,515.0    1,678.8    1,853.5    2,038.2
  DI balance.....................      6.4     35.2     50.1      63.5       77.0       91.6      108.6       127.2      145.5      163.1      180.2      196.8      212.5      226.7      239.4
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.                                                                                                                                                            

              CHART 1-2. SOCIAL SECURITY TRUST FUND ASSETS





    Note._At end of calendar year, constant 1997 dollars, in 
trillions.

    Source: Board of Trustees (1997; intermediate assumptions).




  TABLE 1-39.--MAXIMUM TRUST FUND RATIOS AND YEAR OF EXHAUSTION FOR THE 
             OASDI TRUST FUNDS UNDER ALTERNATIVE ASSUMPTIONS            
------------------------------------------------------------------------
                Assumption                    OASI       DI     Combined
------------------------------------------------------------------------
Alternative I (optimistic):                                             
    Maximum trust fund ratio (percent)....       469      1276       457
    Year attained.........................      2017      2071      2018
    Year of exhaustion....................  ........  ........  ........
Alternative II (intermediate):                                          
    Maximum trust fund ratio (percent)....       306       152       265
    Year attained.........................      2013      2003      2011
    Year of exhaustion....................      2031      2015      2029
Alternative III (pessimistic):                                          
    Maximum trust fund ratio (percent)....       195       115       175
    Year attained.........................      2007      1998      2001
    Year of exhaustion....................      2022      2007      2018
------------------------------------------------------------------------
Source: Board of Trustees (1997).                                       

role is to be reserve ``spending authority.'' As long as a 
trust fund has a positive 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.
     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 the trust funds declined 
rapidly. Congress had to step in five times during the 1970s 
and early 1980s 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 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 Congressional Budget Office 
January 1998 estimate, surplus income of $602 billion is 
projected for the 1994-2000 period, and the trust funds' 
balances would rise to $967 billion by the beginning of 2001. 
These assets would be equivalent to 240 percent of expenditures 
in 2001 (or almost 2\1/2\ years' worth of benefits).
    The longer range picture for Social Security has been 
worsening gradually since 1983. By raising Social Security's 
age for receiving 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 Congress had stemmed the red ink, 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 by 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' April 1997 long-range forecast
    The 1997 report showed an average 75-year deficit equal to 
17 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 2.5 percent in 1996 to 1.3 percent in 
2050, wages will rise at an ultimate rate of 4.4 percent per 
year, the cost of living will go up at a 3.5 percent rate, 
unemployment will average 6 percent, and 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 less than age 
67 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 
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 is predicted to 
rise by 75 percent, growing from 35 million today to 61 million 
in 2025. The number of workers will have grown from 145 million 
to 166 million, or by only 15 percent. Consequently, the ratio 
of workers to recipients will have fallen from 3.3 to 1 today 
to 2.2 to 1 in 2025 and 2.0 to 1 in 2030. Projected worker/
beneficiary ratios and dependency rates are shown in table 1-
40.
    Under this forecast, the trust funds (on a combined basis) 
would be credited with surplus income until 2018 or so, 
bringing their balances to $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. 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. 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.

 TABLE 1-40.--POPULATION, WORK FORCE, AND OASDI BENEFICIARY DATA AND DEPENDENCY RATIOS, SELECTED YEARS 1960-2040
----------------------------------------------------------------------------------------------------------------
                         Work force measure                            1960     1980     2000     2020     2040 
----------------------------------------------------------------------------------------------------------------
Total population (in millions).....................................      190      235      285      328      355
Covered workers (in millions)......................................       73      112      149      166      171
OASDI beneficiaries (in millions)..................................       14       35       46       69       86
Worker/beneficiary ratio...........................................      5.1      3.2      3.3      2.4      2.0
Aged dependency ratio \1\..........................................    0.173    0.195    0.211    0.275    0.369
Total dependency ratio \2\.........................................    0.904    0.749    0.695    0.699    0.789
----------------------------------------------------------------------------------------------------------------
\1\ Ratio of the number of persons aged 65 and over to the number of persons aged 20-64.                        
\2\ Ratio of the number of persons aged 65 and over plus the number of persons aged under 20, to the number of  
  persons aged 20-64.                                                                                           
                                                                                                                
Source: Board of Trustees (1997; intermediate assumptions).                                                     

    Economists argue that if the surplus taxes projected for 
the next 15 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. 
Put 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 because higher 
productivity would likely result in higher wages, which in turn 
would lead to larger benefits (see table 1-41). 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.
    The 1997 Trustees' Report projects that Social Security 
will generate sufficient tax receipts to cover its commitments 
during the next 15 years. The long-range outlook, however, 
leaves little about which to be sanguine. The program has a 
growing 75-year average deficit. The HI Trust Fund's problems 
are more imminent, as insolvency is projected for 2001.\7\ 
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 24 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 9.9 percent in 2025 (see table 1-42). Including supplemental 
medical insurance (SMI) expenditures would raise the Social 
Security and HI outgo from 7 to 13 percent of GDP. In contrast, 
the tax receipts and premiums collected to support these 
programs are projected to hover in the range of 7-8 percent of 
GDP throughout the period.
---------------------------------------------------------------------------
    \7\ As a result of passage of Public Law 105-33, the Balanced 
Budget Act of 1997, the HI Trust Fund is projected to be solvent until 
2006 or 2007. These changes in the law were passed after the 1997 
Trustees' Report was issued.

    TABLE 1-41.--OASDI INCOME RATE, COST RATE, AND ACTUARIAL BALANCE    
           PROJECTIONS OVER 25-, 50-, AND 75-YEAR PERIODS \1\           
                  [As a percentage of taxable payroll]                  
------------------------------------------------------------------------
                                         Ultimate percentage increase in
                                                    wages \2\           
            Valuation period            --------------------------------
                                            3.9        4.4        4.9   
------------------------------------------------------------------------
Summarized income rate:                                                 
    25-year: 1997-2021.................      13.68      13.62      13.57
    50-year: 1997-2046.................      13.48      13.41      13.34
    75-year: 1997-2071.................      13.45      13.37      13.30
Summarized cost rate:                                                   
    25-year: 1997-2021.................      13.68      13.28      12.89
    50-year: 1997-2046.................      15.43      14.86      14.30
    75-year: 1997-2071.................      16.20      15.60      14.99
Balance:                                                                
    25-year: 1997-2021.................      +0.00      +0.35      +0.68
    50-year: 1997-2046.................      -1.95      -1.45      -0.96
    75-year: 1997-2071.................      -2.75      -2.23      -1.69
------------------------------------------------------------------------
\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 (1997).                                       

    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 1-43. 
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.

 TABLE 1-42.--ESTIMATED COST OF OASDI AND HI PROGRAMS, SELECTED CALENDAR
                             YEARS 1997-2075                            
                 [As percent of gross domestic product]                 
------------------------------------------------------------------------
                                                                 OASDI  
             Calendar year                 OASDI        HI      and  HI 
------------------------------------------------------------------------
Annual cost rates:                                                      
    1997...............................       4.66       1.76       6.41
    1998...............................       4.65       1.81       6.46
    1999...............................       4.65       1.86       6.52
    2000...............................       4.65       1.92       6.57
    2001...............................       4.66       1.97       6.63
    2002...............................       4.67       2.03       6.70
    2003...............................       4.68       2.08       6.76
    2004...............................       4.69       2.13       6.83
    2005...............................       4.71       2.18       6.89
    2006...............................       4.72       2.23       6.95
    2010...............................       4.87       2.43       7.30
    2015...............................       5.27       2.77       8.04
    2020...............................       5.80       3.18       8.99
    2025...............................       6.27       3.61       9.88
    2030...............................       6.57       4.01      10.57
    2035...............................       6.64       4.31      10.95
    2040...............................       6.56       4.49      11.05
    2045...............................       6.50       4.59      11.08
    2050...............................       6.50       4.63      11.13
    2055...............................       6.58       4.67      11.25
    2060...............................       6.64       4.74      11.39
    2065...............................       6.67       4.84      11.51
    2070...............................       6.68       4.96      11.64
    2075...............................       6.69       5.08      11.77
Summarized cost rates:                                                  
    1997-2021..........................       5.20       2.51       7.71
    1997-2046..........................       5.71       3.16       8.88
    1997-2071..........................       5.90       3.50       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 (1997; intermediate assumptions).             


                                          TABLE 1-43.--SELECTED ECONOMIC ASSUMPTIONS, SELECTED YEARS 1960-2075                                          
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 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           -0.5          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           4.9       2.9            2.0           7.1          7.4          1.2 
1993...........................................................      2.3           2.5       2.8           -0.3           6.1          6.8          0.7 
1994...........................................................      3.5           3.0       2.5            0.5           7.1          6.1          2.3 
1995...........................................................      2.0           3.9       2.9            1.0           6.9          5.6          0.9 
1996...........................................................      2.5           4.2       2.9            1.4           6.6          5.4          1.2 
1997...........................................................      2.5           4.0       3.2            0.8           6.6          5.4          1.3 
1998...........................................................      2.0           3.2       3.2            0.0           6.7          5.7          0.9 
1999...........................................................      2.0           4.1       3.2            0.8           6.7          5.8          0.9 
2000...........................................................      2.0           4.3       3.4            0.9           6.7          5.8          1.0 
2001...........................................................      2.0           4.3       3.5            0.8           6.6          5.9          1.1 
2002...........................................................      2.0           4.4       3.5            0.9           6.6          6.0          1.0 
2003...........................................................      2.0           4.5       3.5            1.0           6.6          6.0          0.8 
2004...........................................................      2.0           4.5       3.5            1.0           6.5          6.0          0.9 
2005...........................................................      2.0           4.5       3.5            1.0           6.4          6.0          0.9 
2006...........................................................      2.0           4.5       3.5            0.9           6.3          6.0          0.9 
2010...........................................................      1.8           4.5       3.5            1.0           6.2          6.0          0.7 
2020...........................................................      1.3           4.4       3.5            0.9           6.2          6.0          0.2 
2030...........................................................      1.4           4.4       3.5            0.9           6.2          6.0          0.2 
2040...........................................................      1.4           4.4       3.5            0.9           6.2          6.0          0.2 
2050...........................................................      1.3           4.4       3.5            0.9           6.2          6.0          0.1 
2060...........................................................      1.3           4.4       3.5            0.9           6.2          6.0          0.1 
2070...........................................................      1.3           4.4       3.5            0.9           6.2          6.0          0.1 
2075...........................................................      1.3           4.4       3.5            0.9           6.2          6.0          0.1 
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The real gross domestic product is the gross domestic product, expressed in 1992 dollars.                                                           
\2\ The consumer price index is the value of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), averaged over 12 (or 60)     
  months.                                                                                                                                               
\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 rates for special public-debt obligations issuable to the trust funds.               
\5\ Through 2006, the rates shown are unadjusted civilian unemployment rates. After 2006, the rates are total rates (including military personnel),     
  adjusted by age and sex based on the labor force for 1995, and averaged over 12 (or 60) months.                                                       
\6\ The labor force is the total for the United States (including military personnel), averaged over 12 (or 60) months.                                 
                                                                                                                                                        
Source: Board of Trustees (1997; intermediate assumptions).                                                                                             

             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, as a percentage of the 
annual expenditures, and with reference to 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 
the system 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.
    The long-range status of the trust funds is often 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, the OASDI tax rates now in the law would have 
to be increased by 1 percentage point each for employee and 
employer (a total of 2 percent) in order to pay for the 
benefits due. 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 1997, the total taxable payroll is 
estimated to be $3.23 trillion. Thus, in 1997 terms, 2 percent 
of payroll represented about $65 billion.
    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 
the number of workers 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 is based on 
intermediate assumptions; and alternative III is based on 
pessimistic assumptions. Alternative II is considered the most 
balanced estimate of long-term solvency and is the most 
frequently cited. 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. The reserve balance 
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 1997 
report, as they did in their six 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 1997-2071, the difference between 
the summarized income and cost rates for the OASDI Program is a 
deficit of 2.23 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 
13.34 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 11.49 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. However, 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 2075 the OASDI cost rate is 
estimated to reach 19.42 percent under the intermediate 
assumptions, resulting in an annual deficit of 6.07 percent 
(see table 1-44). Table 1-45 shows estimated trust fund assets; 
table 1-46 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 receives. 
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.

                TABLE 1-44.--ESTIMATED INCOME RATES AND COST RATES, AS A PERCENTAGE OF TAXABLE PAYROLL, SELECTED CALENDAR YEARS 1997-2075               
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             OASI                                 DI                               Combined             
                                             -----------------------------------------------------------------------------------------------------------
                Calendar year                   Income                              Income                              Income                          
                                                 rate      Cost rate    Balance      rate      Cost rate    Balance      rate      Cost rate    Balance 
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997........................................       10.91        9.97        0.94        1.71        1.51        0.20       12.63       11.49        1.14
1998........................................       10.92       10.05        0.86        1.71        1.56        0.15       12.63       11.61        1.02
1999........................................       10.92       10.08        0.84        1.71        1.60        0.11       12.64       11.68        0.95
2000........................................       10.82       10.09        0.74        1.81        1.64        0.18       12.64       11.73        0.91
2001........................................       10.83       10.08        0.75        1.82        1.68        0.13       12.65       11.77        0.88
2002........................................       10.84       10.09        0.75        1.82        1.74        0.08       12.66       11.83        0.83
2003........................................       10.84       10.09        0.76        1.82        1.79        0.03       12.66       11.87        0.79
2004........................................       10.85       10.09        0.77        1.82        1.85       -0.03       12.67       11.93        0.74
2005........................................       10.86       10.07        0.78        1.82        1.90       -0.09       12.67       11.98        0.70
2006........................................       10.86       10.07        0.79        1.82        1.96       -0.14       12.68       12.03        0.65
2010........................................       10.91       10.34        0.57        1.82        2.14       -0.31       12.73       12.48        0.26
2015........................................       10.99       11.38       -0.39        1.83        2.24       -0.41       12.82       13.62       -0.80
2020........................................       11.09       12.84       -1.75        1.83        2.30       -0.47       12.92       15.14       -2.22
2025........................................       11.18       14.13       -2.96        1.83        2.39       -0.56       13.01       16.53       -3.51
2030........................................       11.25       15.07       -3.82        1.84        2.40       -0.56       13.09       17.47       -4.38
2035........................................       11.30       15.49       -4.19        1.84        2.35       -0.51       13.14       17.84       -4.70
2040........................................       11.32       15.42       -4.10        1.84        2.36       -0.52       13.16       17.78       -4.61
2045........................................       11.34       15.32       -3.98        1.84        2.46       -0.62       13.18       17.78       -4.60
2050........................................       11.37       15.45       -4.08        1.84        2.52       -0.68       13.21       17.97       -4.76
2055........................................       11.40       15.80       -4.40        1.85        2.55       -0.71       13.25       18.36       -5.11
2060........................................       11.43       16.20       -4.77        1.85        2.53       -0.68       13.28       18.72       -5.45
2065........................................       11.46       16.46       -5.00        1.85        2.51       -0.67       13.30       18.97       -5.67
2070........................................       11.48       16.65       -5.17        1.85        2.53       -0.69       13.32       19.18       -5.86
2075........................................       11.49       16.85       -5.36        1.85        2.57       -0.72       13.34       19.42       -6.07
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--Totals may not add due to rounding.                                                                                                              
                                                                                                                                                        
Source: Board of Trustees (1997; intermediate assumptions).                                                                                             


 TABLE 1-45.--ESTIMATED TRUST FUND ASSETS, SELECTED CALENDAR YEARS 1997-
                                  2075                                  
                [As a percentage of annual expenditures]                
------------------------------------------------------------------------
       Beginning of calendar year           OASI        DI      Combined
------------------------------------------------------------------------
1997...................................        160        108        153
1998...................................        173        122        166
1999...................................        186        130        178
2000...................................        198        136        189
2001...................................        209        145        200
2002...................................        220        150        209
2003...................................        231        152        219
2004...................................        242        151        228
2005...................................        253        147        236
2006...................................        264        140        244
2010...................................        298         95        264
2015...................................        299         12        252
2020...................................        249          0        198
2025...................................        162          0        110
2030...................................         50          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
2075...................................          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 exists for interfund borrowing between OASI  
  and DI. Totals may not add due to rounding.                           
                                                                        
Source: Board of Trustees (1997; intermediate assumptions).             

    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.
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 the Social Security Trust Fund is not a means in 
and of itself for the government to accumulate assets. Federal 
securities in the trust fund establish 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 1-46.--ESTIMATED OPERATIONS OF THE COMBINED OASI AND DI TRUST FUNDS, SELECTED CALENDAR YEARS 1997-2075  
                                      [Constant 1997 dollars, in billions]                                      
----------------------------------------------------------------------------------------------------------------
                                                             Income                                    Assets at
                      Calendar year                        excluding   Interest    Total      Outgo      end of 
                                                            interest    income     income                 year  
----------------------------------------------------------------------------------------------------------------
1997.....................................................     $407.7      $43.7     $451.3     $370.8     $647.4
1998.....................................................      409.1       47.1      456.2      377.0      706.5
1999.....................................................      414.4       50.4      464.8      384.1      765.1
2000.....................................................      420.4       53.8      474.3      390.9      823.5
2001.....................................................      427.6       57.1      484.8      398.6      882.0
2002.....................................................      434.4       60.5      494.9      406.9      940.3
2003.....................................................      441.3       63.9      505.2      414.9      998.7
2004.....................................................      448.6       67.1      515.7      423.9     1056.7
2005.....................................................      457.2       70.3      527.5      433.0     1115.6
2006.....................................................      464.7       73.3      538.0      442.3     1173.5
2010.....................................................      497.4       81.3      578.7      489.0     1378.5
2015.....................................................      533.1       87.1      620.2      568.1     1484.6
2020.....................................................      565.7       77.2      642.9      665.0     1293.5
2025.....................................................      596.9       44.5      641.3      760.4      717.0
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
2075.....................................................        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 may not add due to rounding.     
                                                                                                                
Source: Board of Trustees (1997; 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 the trust funds 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.
How does the Social Security Trust Fund differ from the financing of 
        other government programs?
    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 both to prevent 
Social Security from masking the size of the deficit and to 
protect it from budgetary cuts. Taking Social Security off 
budget 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. However, removing Social Security from the 
Federal budget does not 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 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, 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 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 collected today 
are not the means through which the future cost of the system 
will be met. Most of today's taxes are used to cover payments 
to today's retirees. In 1997, the system's taxes will amount to 
an estimated $408 billion; its expenditures, $371 billion. At 
their peak in 2011, the balances of the Social Security Trust 
Funds are expected to equal only 2\2/3\ 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 approach 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 real savings is increased. Rather, 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 action was taken 
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.
     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 budget deficits. In response, Congress in 1990 excluded 
Social Security 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 deficits. Concerned that this change 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 1-47 shows projected budget surpluses and deficits 
with and without Social Security.

    TABLE 1-47.--PROJECTED BUDGET SURPLUSES AND DEFICITS \1\ WITH AND   
                   WITHOUT SOCIAL SECURITY, 1997-2008                   
                [By fiscal year, in billions of dollars]                
------------------------------------------------------------------------
                                                               Without  
                     Year                       With Social     Social  
                                                  Security     Security 
------------------------------------------------------------------------
1997..........................................          +$8         -$73
1998..........................................           +9          -92
1999..........................................           +2         -111
2000..........................................           +1         -122
2001..........................................          +13         -116
2002..........................................          +67          -71
2003..........................................          +53          -95
2004..........................................          +70          -88
2005..........................................          +75          -95
2006..........................................         +115          -64
2007..........................................         +130          -59
2008..........................................         +138          -59
------------------------------------------------------------------------
\1\ Surpluses are depicted with +, deficits with -.                     
                                                                        
Source: Congressional Budget Office, March 1998 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 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 1-48 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 1-48.--NET ADMINISTRATIVE EXPENSES AND ADMINISTRATIVE EXPENSES AS A PERCENTAGE OF BENEFIT PAYMENTS, FISCAL
                                                  YEARS 1992-96                                                 
                                              [Dollars in billions]                                             
----------------------------------------------------------------------------------------------------------------
                                                                                   Administrative expenses as a 
                                                                                  percentage of benefit payments
                                                                      Total                 paid from           
                          Fiscal year                            administrative --------------------------------
                                                                    expenses        OASI                        
                                                                                   Trust     DI Trust   Combined
                                                                                  Fund \1\   Fund \1\  funds \1\
----------------------------------------------------------------------------------------------------------------
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
1996...........................................................         2.862          0.6        2.5        0.8
----------------------------------------------------------------------------------------------------------------
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 rule had the effect of potentially thwarting attempts to 
expand Social Security benefits or cut taxes if such attempts 
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 measures 
that raised benefits or cut taxes were 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 (except 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.
    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 are 
subject to 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 are also subject to 
objection, which again can be overridden only by a three-fifths 
vote.

             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, now comprising less than 1 percent of 
annual benefit payments (see table 1-48). During fiscal year 
1996, they amounted to $2.9 billion.
    These trust-fund-financed administrative funds comprised 
about 50 percent of the Social Security Administration's fiscal 
year 1996 administrative budget. The agency received another 16 
percent from the Medicare Trust Funds, as well as 34 percent 
from general revenues for administration of the Supplemental 
Security Income Program. SSA's total 1996 administrative budget 
was $5.3 billion (excluding the special appropriations for 
disability processing, automation investments, funding for 
additional continuing disability reviews, and funding for the 
Office of the Inspector General).
    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

    (For a description of legislative changes made in the 95th-
102d Congresses, refer to the 1996 Green Book.)

                      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 1-35).
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):
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.
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                        Prior 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 new 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 prior law, this SGA amount continues to be wage-
indexed in the future, and is projected to rise to $14,400 by 
2002.
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 March 1996. 
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 2 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 survivors 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.
Personal Responsibility and Work Opportunity Reconciliation Act of 1996 
        (Public Law 104-193)
    Denial of benefits to those unlawfully present in the 
United States.--Prohibits payment of Social Security benefits 
to any noncitizen in the United States who is not lawfully 
present in the United States, unless the payment is made 
pursuant to a totalization agreement or treaty obligation.
Omnibus Consolidated Rescissions and Appropriations Act of 1996 (Public 
        Law 104-134)
    Mandatory electronic funds transfers.--Provides that 
Federal payments, including Social Security and Supplemental 
Security Income benefits payable beginning after July 1996 to 
persons with bank accounts, must be paid by electronic funds 
transfer (EFT). All recurring Federal payments made after 
January 1, 1999 will be made by EFT, except that the Secretary 
of the Treasury may waive the requirement under certain 
circumstances.
    Debt collection.--Provides Social Security Administration 
with permanent debt collection authorities, including 
administrative offset of other Federal benefit payments, offset 
of Federal salaries, reporting of delinquent debt to credit 
bureaus, use of private collection agencies, and assessment of 
late charges.

                     Changes in the 105th Congress

Summary of major provisions of the Revenue Reconciliation Act of 1997 
        (incorporated into Public Law 105-34)
    Expanded SSA records for tax collection.--Provides that, 
for an application for a Social Security number (SSN) for a 
person under age 18, SSA must collect the SSNs of each parent, 
in addition to currently required evidence of age, identity, 
and citizenship, and share this information with the Internal 
Revenue Service for administration of tax benefits based on 
support or residency of a child.
    Exclusion of termination payments made to insurance 
salesmen.--Payments made to a self-employed insurance salesman 
after his agreement to work for the insurance company has 
terminated are excluded from Social Security coverage if: he 
performed no additional work for the company in that taxable 
year; he entered into a covenant not to compete with the 
company; and the amount of the payment was based entirely on 
the policies he sold during the last year of the agreement 
which remain in force and not on his length of service or 
overall earnings from the company.

                                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 
earn 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 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 (answering whether recipients get a good deal from 
their investment), 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 1-52). The illustrations represent a range 
of possible payback times, depending on variations in the 
assumptions used. In this way, no conclusions are made--but the 
illustrations allow readers to make their own judgments.
    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 33 
years from now. 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, currently 
5.35 percent, and from which retirement benefits are paid, is 
scheduled to 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 $65,400 in 1997 but 
will rise in the future 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 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. Benefits 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. Thus, 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.
    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''; or (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.
    Calculations are based on the alternative II (intermediate) 
assumptions of the 1997 Social Security Trustees' Report to 
forecast wage and price growth. Under these assumptions, wages 
grow for most of the projected period by 4.4 percent a year, 
prices by 3.5 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 the 
employer's share of the tax 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 judgment 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--every worker could 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 retirement benefit 
when he 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. 
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 
the argument of whether to count the survivor portion of the 
OASI tax. It simply shows both ways of computing the 
relationship of benefits to taxes.
    Of course, any calculation of such a relationship is 
heavily dependent on 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 its 
total real worth theoretically could be many times its nominal 
value. On the other hand, it is possible that the principal 
could be wiped out by poor investment choices. To obtain a 
middle ground, consisting of a reasonable and safe investment 
history, one could assume that the value of taxes paid was 
always placed in U.S. Government obligations. Excess Social 
Security taxes have always been invested in U.S. Government 
securities, so, to provide illustrations, we use 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 6.2 percent, a ``real'' interest 
rate of 2.7 percent (i.e., 2.7 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  1997  
are  shown  in  tables 1-49, 1-50, and 1-51.

                       Illustrative Payback Times

    Table 1-52 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 

    TABLE 1-49.--SOCIAL SECURITY TAXES PAID BY A WAGE EARNER WHO HAS ALWAYS EARNED THE MINIMUM WAGE, 1953-96    
----------------------------------------------------------------------------------------------------------------
                                                   Tax rates (in percent)          Taxes paid         Effective 
                                                ----------------------------------------------------   interest 
           Calendar year              Earnings                                                         rate \2\ 
                                                     OASI     Old age \1\      OASI       Old age        (in    
                                                                                                       percent) 
----------------------------------------------------------------------------------------------------------------
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        9.573
1990..............................        7,670        5.600        4.320       429.52       331.37        9.324
1991..............................        8,606        5.600        4.321       481.94       371.91        9.090
1992..............................        8,840        5.600        4.320       495.04       381.92        8.745
1993..............................        8,840        5.600        4.315       495.04       381.47        8.322
1994..............................        8,840        5.260        4.050       464.98       357.99        8.040
1995..............................        8,840        5.260        4.046       464.98       357.70        7.859
1996..............................        9,100        5.260        4.045       478.66       368.08        7.615
                                   -----------------------------------------------------------------------------
Total taxes paid 1953-96:                                                                                       
    Accumulated without interest..  ...........  ...........  ...........     9,719.26     7,367.75             
    Accumulated with interest.....  ...........  ...........  ...........    38,363.69    28,751.26             
----------------------------------------------------------------------------------------------------------------
\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 1953-96 are from the SSA Office of the Actuary, and reflect the interest rate earned by  
  the Social Security Trust Funds.                                                                              
\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 1997 at age 65: $603.00 worker only; $904.00 worker and
  spouse (both age 65).                                                                                         
                                                                                                                
Source: Kollmann (1997).                                                                                        


           TABLE 1-50.--SOCIAL SECURITY TAXES PAID BY A WAGE EARNER WITH AVERAGE EARNINGS, 1953-96 \1\          
----------------------------------------------------------------------------------------------------------------
                                                   Tax rates (in percent)          Taxes paid         Effective 
                                                ----------------------------------------------------   interest 
           Calendar year              Earnings                                                         rate \3\ 
                                                     OASI     Old age \2\      OASI       Old age        (in    
                                                                                                       percent) 
----------------------------------------------------------------------------------------------------------------
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        9.573
1990..............................    21,027.98        5.600        4.320     1,177.57       908.48        9.324
1991..............................    21,811.60        5.600        4.321     1,221.45       942.58        9.090
1992..............................    22,935.42        5.600        4.320     1,284.38       990.89        8.745
1993..............................    23,132.67        5.600        4.315     1,295.43       998.23        8.322
1994..............................    23,753.53        5.260        4.050     1,249.44       961.95        8.040
1995..............................    24,705.66        5.260        4.045     1,299.52       999.67        7.859
1996..............................    25,723.87        5.260        4.045     1,353.08     1,040.50        7.615
                                   -----------------------------------------------------------------------------
Total taxes paid 1953-96:                                                                                       
    Accumulated without interest..  ...........  ...........  ...........    22,856.79    17,371.77             
    Accumulated with interest.....  ...........  ...........  ...........    80,694.71    60,595.36             
----------------------------------------------------------------------------------------------------------------
\1\ This table uses the average wage series for indexing earnings, for the period 1953-95, developed by SSA in  
  computing benefit amounts. The average wage for 1996 is based on Alternative II assumptions in the 1997 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 1953-96 are from the SSA Office of the Actuary.                                          
\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 1997 at age 65: $933.00 worker only; $1,399.00 worker  
  and spouse (both age 65).                                                                                     
                                                                                                                
Source: Kollmann (1997).                                                                                        


         TABLE 1-51.--SOCIAL SECURITY TAXES PAID BY A WAGE EARNER WITH MAXIMUM TAXABLE EARNINGS, 1953-96        
----------------------------------------------------------------------------------------------------------------
                                                   Tax rates (in percent)          Taxes paid         Effective 
                                                ----------------------------------------------------   interest 
           Calendar year              Earnings                                                         rate \2\ 
                                                     OASI     Old age \1\      OASI       Old age        (in    
                                                                                                       percent) 
----------------------------------------------------------------------------------------------------------------
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        0.973       364.50       267.57        5.406
1973..............................       10,800        4.300        3.101       464.40       334.87        5.754
1974..............................       13,200        0.375        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        9.573
1990..............................       51,300        5.600        4.320     2,872.80     2,216.34        9.324
1991..............................       53,400        5.600        4.321     2,990.40     2,307.66        9.090
1992..............................       55,500        5.600        4.320     3,108.00     2,397.79        8.745
1993..............................       57,600        5.600        4.315     3,225.60     2,485.57        8.322
1994..............................       60,600        5.260        4.050     3,187.56     2,454.12        8.040
1995..............................       61,200        5.260        4.046     3,219.16     2,476.35        7.859
1996..............................       62,700        5.260        4.045     3,298.02     2,536.14        7.615
                                   -----------------------------------------------------------------------------
Total taxes paid 1953-96:                                                                                       
    Accumulated without interest..  ...........  ...........  ...........    49,417.47    37,679.43             
    Accumulated with interest.....  ...........  ...........  ...........   145,768.34   109,879.77             
----------------------------------------------------------------------------------------------------------------
\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 1953-96 are from the SSA Office of the Actuary.                                          
\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 1997 at age 65: $1,326.00 worker only; $1,989.00 worker
  and spouse (both age 65).                                                                                     
                                                                                                                
Source: Kollmann (1996a).                                                                                       


 TABLE 1-52.--NUMBER OF YEARS TO RECOVER TAXES PLUS INTEREST FOR VARIOUS
        WORKERS RETIRING AT AGE 65, \1\ SELECTED YEARS 1940-2025        
------------------------------------------------------------------------
                                          Minimum    Average    Maximum 
           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
1997...................................        6.0        8.5       11.3
2005...................................        8.4       12.0       16.2
2015...................................        9.7       14.1       20.8
2025...................................        9.6       14.6       24.7
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
1997...................................       13.6       20.2       28.5
2005...................................       19.4       29.7       45.5
2015...................................       22.8       37.0       71.3
2025...................................       22.5       38.8      125.7
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
1997...................................        4.4        6.2        8.1
2005...................................        6.1        8.6       11.5
2015...................................        7.1       10.2       14.7
2025...................................        7.2       10.8       17.7
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
1997...................................        9.6       13.9       19.1
2005...................................       13.5       19.9       28.4
2015...................................       15.9       24.2       39.2
2025...................................       16.2       26.2       52.4
------------------------------------------------------------------------
\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. The current law increase in 
  the retirement age is reflected.                                      
\2\ Less than 0.1 years.                                                
                                                                        
Source: Kollmann (1997).                                                

would increase by 50 percent. This would shorten the payback 
times considerably.
    While these illustrations do not purport to address the 
``moneysworth'' question, they do show the 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 decline 
in value is ameliorated somewhat by the projection that future 
retirees are expected to live longer, and thus collect benefits 
longer. Table 1-53 shows the life expectancies for people 
turning age 65 in the illustrated years.

    TABLE 1-53.--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
1997..........................................         15.6         19.2
2005..........................................         16.0         19.5
2015..........................................         16.4         19.8
2025..........................................         16.8         20.2
------------------------------------------------------------------------
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 (1997).                                       

    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 feature 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.
    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. Thus, some argue 
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, many workers (for example, 
those earning at least average wages; see table 1-52) 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 private investment. Arriving at 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.
    On the other hand, private investments have an element of 
risk that critics 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.

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