[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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Bulletin, 47(10), pp. 9-12.
Board of Trustees, Federal Old-Age and Survivors Insurance and
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Washington, DC: U.S. Government Printing Office.
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Washington, DC: U.S. Government Printing Office.
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Washington, DC: U.S. Government Printing Office.
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annual report Federal Old-Age and Survivors Insurance
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74). Washington, DC: U.S. Government Printing Office.
Committee on Economic Security. (1935). Report to the
President. Washington, DC: U.S. Government Printing
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Congressional Budget Office. (1996, May). The economic and
budget outlook: Fiscal years 1997-2006. Washington, DC:
Author.
Kollman, G. (1996a). How long does it take new retirees to
recover the value of their Social Security taxes? (94-5
EPW). Washington, DC: Congressional Research Service.
Kollman, G. (1997). Social Security: The relationship of taxes
and benefits for past, present, and future retirees
(95-149 EPW). Washington, DC: Congressional Research
Service.
Social Security Administration. (1995). Annual Statistical
Supplement to the Social Security Bulletin, 1995.
Washington, DC: Author.
Social Security Administration. (1986). Report of the
Commission on the Evaluation of Pain (SSA Pub. 64-031-
3197). Washington, DC: Author.
Svahn, J.A., & Ross, M. (1983). Social Security Amendments of
1983: Legislative history. Social Security Bulletin,
46(7), pp. 3-48.