SOCIAL SECURITY FINANCING
ISSUE BRIEF NUMBER IB82126
Specialist, Education and Public Welfare Division
Education and Public Welfare Divison
Education and Public Welfare Division
THE LIBRARY OF-CONGRESS
CONGRESSIONAL RESEARCH SERVICE
MAJOR ISSUES SYSTEM
DATE ORIGINATED 12/17/82
DATE UPDATED 01/25/83
FOR ADDITIONAL INFORMATION CALL 287-5700
The Old Age and Survivors Insurance (OASI) program, the largest of the
social security programs, will not have sufficient resources to meet its
benefit payments on time in July 1983. Even if the program were permitted to
continue to borrow from the other social security programs, the financial
shortfall would re-emerge in 1984. Recent projections show that the cash
benefits programs, OASI and Disability Insurance (DI), together would need
$150 to $290 billion in new revenues or benefit cuts to give a reasonable
degree of assurance that they would make it to 1990 without further changes.'
Assuming this short-range problem is met, the program should be solvent until
about 2025, when the effects of the retirement of the baby boom generation
will plunge the system into deficit.
To solve social security's financing problems both in the short and long
term, President Reagan appointed a bipartisan panel, the National Commision
on Social Security Reform. On Jan. 15, 1983, a majority of its members
reached agreement on a compromise solution that will produce $168 billion in
additional revenue and benefit reductions by the end of this decade and
reduce the projected long-range deficit by two-thirds.
Congress is expected to begin consideration of the Commission's and other
possible proposals immediately. The House Ways and Means Committee plans to
have hearings in February, and have a bill before the full House by sometime
in March. Primary jurisdiction in the Senate is in the Finance Committee.
BACKGROUND AND POLICY ANALYSIS
Social Security and Its Relatives
There are two social security programs, OASI and DI, that provide monthly
cash benefits to retirees, the disabled and survivors.
Both are financed
with social security taxes.
Medicare provides nationwide health benefits to many of the same persons
who receive cash benefits through its two programs: Hospital Insurance (HI)
financed with social security taxes, and Supplementary Medical Insurance
(SMI).financed by General revenues and by premiums from participants.
Medicaid, Aid to Families with Dependent Children (AFDC), and Supplemental
Security Income (SSI) provide various simiiar forms of cash and health
benefits, but they are means-tested and financed entirely by general revenues
and State and local funds.
Social insurance concept. Social security is not ninsurance" in any sense
recognizable by the business community or private actuaries. However, it is
often viewed as a very broad type of "social insurancen under which the
pools resources t o
u g r o u p , w i n t h i s c a s e 90% of t h e workers of t h e n a t i o n ,
meet t h e wide v a r i e t y of i n d i v i d u a l and f a m i l y circumstances a r i s i n g from t h e
l o s s of a w o r k e r ' s e a r n i n g s due t o r e t i r e m e n t , death o r d i s a b i l i t y .
A s such,
i t h a s w h a t some r e f e r t o as a m i x t u r e o f
insurance and welfare features.
and b e n e f i t s
While w o r k . i n c o v e r e d employment i s r e q u i r e d f o r e l i g i b i l i t y ,
a r e computed u s i n g o n e ' s e a r n i n g s h i s t o r y , t h e v a r i o u s forms of b e n e f i t s a r e
n o t d i r e c t l y r e l a t e d t o t h e amount of o n e ' s t a x payments
a d d e d premium i s r e q u i r e d f o r s p o u s e ' s b e n e f i t s o r s u r v i v o r p r o t e c t i o n ) .
Cash b e n e f i t s a r e p a y a b l e t o " i n s u r e d workersN i . . , t h o s e
time i n
c o v e r e d by s o c i a l
who h a v e w o r k e d a s u f f i c i e n t a m o u n t o f
s e c u r i t y ) and t o t h e i r spouses and children.
--Full r e t i r e m e n t b e n e f i t s are payable a t age 65,
b u t b e n e f i t s c a n b e g i n as e a r l y as a g e 62 a t r e d u c e d
- - D i s a b i l i t y b e n e f i t s are p a y a b l e i f a worker h a s had
r e l a t i v e l y recent attachment t o t h e workforce and
h i s impairment i s s o severe t h a t it precludes him
from doing s u b s t a n t i v e work.
--Widowsv a n d w i d 0 w e r . s ' b e n e f i t s c a n b e g i n a t a g e
60 (earlier i f t h e s u r v i v i n g spouse i s disabled
o r c a r i n g f o r t h e deceased w o r k e r ' s c h i l d r e n ) .
B e n e f i t s a r e c a l c u l a t e d u s i n g much o f
However, t h e b e n e f i t f o r m u l a i s t i l t e d t o p r o v i d e h i g h e r
r e t u r n s o n t a x e s t o w o r k e r s who h a v e h a d r e l a t i v e l y l o w e a r n i n g s .
are n o t means-tested, b u t , i f a r e c i p i e n t works and h a s e a r n i n g s above a
c e r t a i n level, benefits a r e f u l l y o r p a r t i a l l y withheld
( t h i s i s sometimes
r e f e r r e d t o as t h e " r e t i r e m e n t o r e a r n i n g s t e s t w ) .
S o c i a l s e c u r i t y t a x e s d o n o t b u i l d up i n a " f u n d w
(as d o p r i v a t e
f o r a n i n d i v i d u a l o r g r o u p t o meet t h e i r e v e n t u a l b e n e f i t s
T a x e s a r e s e t i n t h e l a w i n a way t h a t p r o d u c e s o n l y
Current workers support c u r r e n t
e n o u g h r e v e n u e s t o meet c u r r e n t o b l i g a t i o n s .
b e n e f i c i a r i e s ; f u t u r e w o r k e r s w i l l e v e n t u a l l y s u p p o r t t o d a y ' s w o r k e r s when
t h e y become b e n e f i c i a r i e s .
OASI, D I a n d H I a r e f u n d e d a l . m o s t e n t i r e l y w i t h s o c i a l s e c u r i t y
tax p r o c e e d s .
SMI r e c e i v e s t h r e e - f o u r t h s o f
i t s income from t h e G e n e r a l
Fund, o n e - f o u r t h f r o m premiums p a i d by r e c i p i e n t s .
( B e c a u s e SMI i s n o t
financed with s o c i a l security taxes, unlike H I it usually i s not considered
i n discussions of s o c i a l s e c u r i t y financing.
Even H I i s o f t e n t a k e n u p o n l y
o v e r a l l t a x r a t e i s 6.7% p a i d by employee
and employer each (13.4% combined) on e a r n i n g s
up t o $35,700 i n 1983.
(The t a x r a t e i s 9.35% f o r
t h e self-employed.)
--The t a x r a t e i s s c h e d u l e d t o r i s e i n t h r e e s t e p s
T h e maximum e a r n i n g s s u b j e c t t o t h e
t o 7.65% i n 1990.
t a x w i l l r i s e e a c h y e a r a t t h e same r a t e t h a t a v e r a g e
e a r n i n g s r i s e i n t h e economy.
o f t a x r e c e i p t s among t h e p r o g r a m s
T r u s t Funds
E a c h p r o g r a m h a s i t s own t r u s t f u n d , w h o s e e n t i r e a s s e t s a r e i n v e s t e d i n
government s e c u r i t i e s .
The t r u s t f u n d s s e r v e o n l y a c o n t i n g e n c y p u r p o s e
l a severe recession).
i n t h e event t h a t adverse circumsta,nces a r i s e
P r e s e n t l y , t h e c o m b i n e d r e s e r v e s o f t h e OASI, D I a n d H I f u n d s r e p r e s e n t l e s s
t h a n 2 months w o r t h o f assets ( s l i g h t l y more t h a n o n e month f o r j u s t O A S I a n d
The s y s t e m c a n n o t f u n c t i o n w i t h l e s s t h a n o n e m o n t h ' s w o r t h o f
payment i n r e s e r v e .
Growth a n d R e l a t i v e I m p o r t a n c e
(OASI a n d D I o n l y )
... 1 2 . 6 %
.............. 2 . 3 3 %
Tax r a t e s ............................
Taxes p a i d b y w o r k e r w i t h a v e r a g e
e a r n i n g s ..........................$ 1 2 0 . 2 1
C o v e r e d w o r k e r s ...................... 7 3 m i l l i o n
B e n e f i c i a r i e s ......................... 1 4 m i l l i o n
W o r k e r t o b e n e f i c i a r y r a t i o s ......... 5 . 1 t o 1
E x p e n d i t u r e as % o f
E x p e n d i t u r e as % o f
E a r n i n g s r e p l a c e m e n t f o r new r e t i r e e s
( b e n e f i t s as a % o f f i n a l e a r n i n g s
f o r average earner)
S o c i a l s e c u r i t y as % o f p e r s o n a l
P o v e r t y t r e n d s (% i n p o v e r t y ) 1 9 5 9
a n d 1980
Age 55 t o 6 4
Age 6 5 a n d o l d e r
35 m i l l i o n
3.3 t o 1
THE FINANCING ISSUE
Financing shortfalls first appeared in the 1973 Trustees' report, and grew
substantially worse with each succeeding report. Both near- and long-term
the near-term one was caused by adverse economic
conditions, the long-term one by a technical flaw in the benefit formula and
more pessimistic demographic trends. The OASI and DI trust funds would have
been exhausted in the early 1980s if legislation had not been enacted in 1977
raising taxes and curtailing future benefit growth.
The legislation also
corrected the technical flaw in the formula and substantially reduced the
long-run deficit (estimated then to equal 40% of the program's cost).
Even though significant increases in social security taxes were enacted in
1977, the major increases were not scheduled to take effect until 1981 and
later. In the meantime, the performance of the economy was much worse than
expected. It is this fact that has caused continuing decline in the OASI
in fact, the estimates of future beneficiaries made in 1977
turned out to be somewhat on the high side (specifically in the DI program),
but not enough to offset the drain on the system caused by the adverse
High unemployment, of course, reduces income because fewer workers are
contributing to the system. It has been estimated that each one percent
increase in unemployment reduces income, depending on residual effects, by $2
to $4 billion a year.
However, it . i s generally agreed that the most
important economic factor affecting social security financing is the growth
in real wages
i.e., the excess of the increase in wages over the increase
in prices. When wages do not keep up with prices, increases in social
security tax revenue do not keep pace with the increase in expenditures
arising from the automatic adjustment of benefits to increases in prices.
For example, in June 1980, beneficiaries received a 14.3% automatic cost of
living increase, while the increase in average wages during the year ending
June 1980 was only about 8.7%. The economic forecast underlying the 1977
amendments assumed that real-wage growth would average over 2% during 1977
through 1981; in fact wages grew more slowly than prices during most of that
period. That is the crux uf the short-range financing problem.
As the forecasts of the condition of the OASI trust funds have worsened
over the past several years, stopgap measures have been enacted to buy time
for the Congress to assess the significance of the problem.
In 1980 revenues
were reallocated from the DI program to the OASI program, but only for
calendar years 1980 and 1981. In 1981 various relatively minor categories of
benefits were cut by the Omnibus Budget Reconciliation Act, and at the end of
the year authority was given for the trust funds to borrow from one another,
but only until the end of 1982. The borrowing could not exceed the amount
needea to assure benefit payments beyond June 1983.
In May 1981 the President presented a package, consisting almost entirely
of benefit reductions, that would solve social security's financing prob1e.m.
After considerable adverse reaction from the public and Congress, the
President withdrew the package and called for the creation of a bipartisan
commission to come up with substantive solutions to social security's fiscal
The study group, called the National Commission on Social Security
In fact, the
Reform, would report its recommendations by the end of 1982.
Commission could not agree on a set of recommendations by the scheduled date,
but did arrive a t a concensus agreement on a compromise package of proposals
on Jan. 1 5 , 1983. The package consisted of a combination of tax increases
and benefit cuts, and are described in more detail later under the section
that discusses options.
Short-Term Problem (1983 to 1990)
The OASI program is the only program in immediate trouble among the three
financed by the social security tax, but the size of the OASI problem greatly
exceeds the favorable situations of the DI and HI programs.
the DI and HI funds made in December 1982 will keep OASI payments flowing
only until June 1983 (the July payment won't be made on time without remedial
Even if extended, interfund borrowing could not prevent all
three funds from becoming exhausted by mid to late 1984.
The National Commission on Social Security Reform estimated that $150 to
revenues or benefit cuts would be needed to give
reasonable assurance that the system will be adequately financed until 1990.
This assumes sluggish economic performance and minimal trust fund build-up.
$200 billion in new
Intermediate Future Problem (Next 25 Years)
Under the Social Security Trustees' 11-B projections, the OASI situation
i s predicted to improve in the early 1990s, even without legislation, because
of the 1990 tax increase and a favorable demographic situation.
benefit programs are projected
to recover from the 1980s' problems and
actually build up fairly large reserves
($700 billion by
2015 in 1 9 8 2
However, financing problems in the HI program beginning in the late 1980s
are projected to grow and exceed the favorable situations for the two cash
benefits-programs. Thus, on a combined basis, all three funds would become
inadequately financed in 1984 and not regain a favorable status during the
next 25 years.
Long-Run Problem (Next 75 Years)
T h e retirement of the baby-boom generation in the first quarter of the
next century is projected to erode the favorable OASDI situation (putting the
HI problem aside), and by 2025 to 2030, financial problems would re-emerge
(once again under the Intermediate 11-B forecast).
In contrast to the more
than three workers to finance each beneficiary which exists today and is
projected to last throughout the next 25 years, there would be only two
workers for each beneficiary by 2030.
T h e financial shortfall for this later period is projected t o equal about
26% of the cost of the program.
The OASDI portion of the tax rate would have
t o rise from about 11% today for employee and employer combined to 17% by
.2030. (HI estimates a r e not usually made beyond a 25-year period, and even
the 25-year forecast often i s not considered very meaningful).
The "Imagew Problem
Repeated adverse financial reports over the past decade have created a
significant degree of public pessimism about the longevity of the social
security system. Public opinion polls of the past 5 or 6 years have
Consistently shown that substantial "doubts" exist that social security will
survive, or that if it does, that it will provide much of a retirement
Skepticism i s most notable among workers under age 45.
LA Times, Nov. 1982 Poll:
--By 3 to 2, persons age 18-45 believed system "is
in serious danger of going brokew (one-half of this
group did not expect to receive social security
benefits at all; one-half also favored making social
Gallup (U.S. Chamber of Commerce) Poll, spring 1982:
--By 6 to 1 , workers who were interviewed felt the
system had "major financial problemsn (63% believed they
would get no benefits when they retired).
Policy options for improving social security's financial condition have
taken a wide variety of forms ranging from small, token changes to a complete
overhaul of how workers plan and provide for the risks of retirement, death
or disability. For discussion purposes, they are presented under two general
conventional and unconventional proposals.
These are generic
options that are among the standard "bill of farew usually mentioned as ways
of solving social security's financing dilemma.
At the end of this section,
the specific financing recommendations of the National Commission on Social
Security Reform are described.
These are the most frequently discussed types of solvency measures.
are labeled wconventionalw here because generally they are not intended to
alter the pay-as-you-go or social welfare features of the pr.ograrn. They are
grouped into four categories:
--raise social security taxes
--find new sources of revenue
--Constrain social security benefits
It is very likely that any financing package emerging from the 98th Congress
will not rely on any one of these approaches alone to address the problem,
but will in fact be a "mixn of them with the major issue being "how muchw of
one or another is to be used.
1. Raise social security taxes.
This approach typically calls for
accelerating tax rate increases already scheduled in the law (i.e., moving up
the 1985, 1986 or 1990 increases).
Alternatives would raise the tax rate for
the self-employed up to the combined employee/employer level, or raise the
maximum amount of earnings subject to the tax.
Yet another approach would
raise taxes only for the employer.
In addition, tax increase proposals
frequently include provisions giving the employee an income tax deduction for
part or all of his social security taxes to lessen the net increase h e will
actually feel (the employer already gets a business deduction for his social
--move 1990 increase up to 1984
--have no limit on taxable
Arguments for: This is the traditional approach of addressing
security's financial needs.
Raising taxes consistently shows u p a s the
favorite in public opinions polls when pitted against benefit reductions.
also addresses the program's financial problems without disrupting the plans
of those approaching retirement, and it dampens further erosion of public
confidence about the long-run survival of the social security benefit
Proponents further point out that a tax increase can be spread more
thinly among workers than a benefit cut of comparable size among recipients,
since there are three times as many workers a s recipients.
A significant tax increase might hurt the Nation's
recovery from the current recession, by increasing business costs and
It also would raise the cost of labor
reducing a worker's disposable income.
a t a time when unemployment is a t its highest level since the Depression.
further would antagonize many workers who won't
see the trade-off
benefit reductions when the larger tax deduction is taken from their pay,
particularly younger workers who think they will not get benefits anyway or
that they will get l*poorn rates of return (their belief being that they are
throwing money away on a "badw system).
2. Find new sources of revenue. This approach calls for coming u p with
new sources of income to supplement the social security tax.
revenues is the most commonly discussed alternative, having been a highly
visible option since the inception of the program (only the SHI program uses
them in any significant way now).
Others call for increasing excise taxes on
such things as alcohol and tobacco products (with earmarking of such revenues
for the DI and HI programs because of the connection of the consumption of
these products with health problems) or on gasoline
(which would address
jointly the social security and energy conservation issues).
approach would be to subject part or all of a recipient's benefits to the
income tax as i s the case for unemployment insurance, private pensions and
other retirement-type benefits.
New income to system
(1983 to 1989)
reallocate one-half of HI tax rate to OASI,
reimburse HI out of general revenues
increase excise tax on alcohol and tobacco...
1 4 billion
Many people feel that the social security tax i s a "badw
The use of
tax -- i t raises labor costs and is considered regressive.
general revenues i s thought to be less regressive (i-e., to the extent that a
tax increase u'ltimat.ely arose, it would be with the more progressive income
tax), and would not necessarily impose a new tax increase on the economy a t a
time when i t is attempting to pull out of a bad recession.
It further avoids
imposing benefit cuts o n people who now are living o n their social security
benefits or counting on them in the near future.
Selective excise tax increases would raise revenues while possibly
discouraging consumption of goods thought by many
to be harmful to the
individual, or in the case of oil products, to the economy.
Critics feel that using general revenues simply would
transfer the problem from one "troubledn fund to another (since the General
Fund also is running a n enormous $150-$200 billion deficit next year alone).
They argue that "fiscal discipline1* (paying for benefit improvement with tax
proceeds) would be lost and little or no "brakew would exist to ward off
excessive expansions of benefits.
Others argue that using general revenues
would lead ultimately t o measuring "needw a s a condition for benefits, by
forcing social security to compete against other government programs for
They also argue that any movement away from using the
social security tax would weaken the worker's support for social security (by
causing him to view i t a s less of a system that he paid for directly).
Cutti'ng social security benefits.
constraining the growth of future benefits.
It usually doesn't
reducing benefits for current recipients, and future benefit. levels very
likely would rise above today's levels (but not a s high as if they were not
Among the benefit reductions most frequently discussed a r e
reducing o r delaying cost-of-living adjustments (COLA's), raising the age of
eligibility for retirement benefits or the age a t which full benefits can b e
received, and altering the benefit formula t o produce lower across-the-board
"initial benefitsw for future recipients.
reduce COLA by 2 percentage points...$l03
delay COLA for 3 months..
to $113 billion
a g e and -benefit formula changes are
viewed mostly a s long-run measures,
with little or no savings in short run
A r g u m e n t s for:
Many a n a l y s t s b e l i e v e t h a t t h e p r o g r a m ' s
overly generous automatic b e n e f i t
f i n a n c i n g .problem i s t h e c o n s e q u e n c e of
They a r g u e t h a t i n r e c e n t y e a r s r e c i p i e n t s h a v e f a r e d b e t t e r t h a n
t h e w o r k e r s whose t a x e s s u p p o r t t h e program ( r e c i p i e n t s h a v e r e c e i v e d
i n f l a t i o n a d j u s t m e n t s of t h e i r b e n e f i t s w h i l e w o r k e r s ' wages have n o t k e p t up
They a r g u e t h a t t e m p o r a r i l y d e l a y i n g o r r e d u c i n g
o f b e n e f i t i n c r e a s e s would s a v e s u b s t a n t i a l sums i n t h e n e a r - t e r m
g r e a t l y harming any s i n g l e subgroup of r e c i p i e n t s .
t h a t people l i k e l y
R a i s i n g t h e r e t i r e m e n t age i s j u s t i f i e d on t h e b a s i s
w i l l l i v e longer i n t h e f u t u r e and receive b e n e f i t s
for longer periods
t h e i r l i v e s t h a n c u r r e n t r e c i p i e n t s do.
C o n s t r a i n i n g t h e growth of t h e b e n e f i t f o r m u l a i n t h e f u t u r e o f t e n i s
j u s t i f i e d on t h e b a s i s t h a t r e p l a c e m e n t r a t e s ( b e n e f i t s a s a p e r c e n t o f p r i o r
e a r n i n g s ) were n o t d e l i b e r a t e l y p e r m i t t e d
t o rise after 1972
unintended a b e r r a t i o n of p r o v i d i n g a u t o m a t i c i n f . l a t i o n a d j u s t m e n t s ) ,
g r a d u a l r e t u r n t o 1 9 7 2 r e p l a c e m e n t l e v e l s w o u l d g o a l o n g way t o w a r d r e d u c i n g
t h e program's long-run problem.
Furthermore, b e n e f i t s could s t i l l rise
" r e a l H terms e v e n i f r e p l a c e m e n t r a t e s were r e d u c e d .
C r i t i c s a r g u e t h a t c u t t i n g f u t u r e b e n e f i t s breaks
Arguments a g a i n s t :
s o - c a l l e d " s o c i a l contractv1 between t h e government and workers.
many a r g u e t h a t
c o n t r a c t e x i s t s i n a t r u l y legal sense,
carries a long-term
They a r g u e t h a t
b e n e f i t s a r e s t i l l q u i t e l o w f o r many w o r k e r s , t h a t m o s t o t h e r s o u r c e s o f
income f o r r e c i p i e n t s a r e f i x e d , and t h a t p r i v a t e p e n s i o n s
much t e n d e n c y t o g r o w a n d f i l l t h e g a p b e t w e e n w h a t a r e c i p i e n t n e e d s a n d
what h e r e c e i v e s from s o c i a l s e c u r i t y .
They a l s o a r g u e t h a t
s i n c e s o many
b e n e f i t s w i l l r a i s e t h e p o v e r t y r a t e among t h e e l d e r l y ,
r e c i p i e n t s r e l y on s o c i a l s e c u r i t y f o r m o s t o f t h e i r
They f u r t h e r
contend t h a t r a i s i n g t h e r e t i r e m e n t age w i l l h i t t h e most economically
those i n arduous occupations,
v u l n e r a b l e members o f s o c i e t y t h e h a r d e s t
t h e d i s a b l e d o r i m p a i r e d , t h e unemployed a n d m i n o r i t i e s .
l i k e tax
i n c r e a s e s , t h e y a r g u e t h a t b e n e f i t r e d u c t i o n s w i l l worsen
"expectedw f u t u r e
rates of r e t u r n f o r t h o s e a l r e a d y s k e p t i c a l a b o u t t h e v a l u e of t h e system.
Most F e d e r a l e m p l o y e e s d o n o t p a y i n t o s o c i a l
s e c u r i t y , b u t i n t o t h e i r own c i v i l s e r v i c e p e n s i o n s y s t e m .
S t a t e and l o c a l
government and n o n p r o f i t o r g a n i z a t i o n s have an o p t i o n of . w h e t h e r
p a r t i c i p a t e , w h i c h h a s r e s u l t e d i n some 3 0 % o f S t a t e a n d l o c a l e m p l o y e e s a n d
20% of n o n p r o f i t e m p l o y e e s b e i n g e x c l u d e d .
Proposals t o cover these workers
m a n d a t o r i l y would b r i n g s u b s t a n t i a l r e s o u r c e s i n t o t h e s o c i a l s e c u r i t y
program b o t h i n t h e n e a r and long-term ( a l t h o u g h t h e more o b v i o u s f i n a n c i a l
g a i n w o u l d be i n t h e n e a r - t e r m ) .
They r a n g e from c o v e r i n g a l l w o r k e r s
( i n c l u d i n g t h o s e who h a v e h a d many y e a r s o f s e r v i c e u n d e r a s e p a r a t e S t a f f
p l a n ) t o o n l y new h i r e s ( s o m e t i m e s t h e new h i r e s a p p r o a c h i n c l u d e s t h o s e n o t
y e t vested under c i v i l service,
t h o s e w i t h less than
They a l s o r a n g e from c o v e r i n g o n l y F e d e r a l w o r k e r s t o c o v e r i n g a l l
p r e s e n t l y excluded workers.
New income t o system
cover a l l Federal, S t a t e and l o c a l ,
and nonprofit workers
cover new Federal, State and local
and nonprofit hires
- - cover new Federal hires and all
Arguments for: Since social security has many social welfare features,
advocates argue that these excluded workers do not pay their fair share of
the Nation's social costs by avoiding the portion of such costs built into
the social security system. Advocates also point out that these workers
often get "heavily weightedu benefits intended not for them but for long-term
low wage earners (because in computing benefits, the social security system
does not consider this worker's full eaqnings history, i.e.,
They further point out that social security protection is often
better for younger workers than government staff plans, particularly for
survivor and disability protection.
Arguments against: Critics argue that this question should not be decided
solely on the grounds that social security is having financial troubles.
They argue that government workers have their own systems and are not the
cause of social security's financial woes. They view coverage under social
security as a back door way of cutting their benefit package (by imposing an
earnings test o r reduced benefits for early retirement).
themselves as being "under attackw (for being part of the
bureaucracyu) and are fearful of further
compensation, including fringe benefits.
State and local critics argue that mandatory coverage would be tantamount
to Federal taxation of the States (and therefore unconstitutional) and if
implemented would cause substantial and very complicated restructuring of
many existing staff plans.
Numerous proposals have emerged in recent years raising what many view as
fundamental questions about social security. The current financial problems
confronting the system are used as the stepping off point for promoting a
complete overhaul for how society goes about addressing
requirements of the elderly, the disabled and families of deceased workers.
Their major purpose is to change either how the program distributes its
resources or to turn much of its function over to the private sector.
Typically the arguments are that the program i s grossly inequitable and/or
that its financing is uinherently unstablee' because it is pay-as-you-go
relies on the government's *'witheringu ability to raise taxes.
1. Giving a bigger role to the private sector. These proposals often are
confused with the idea of making social security completely voluntary.
Generally, advocates of giving a larger role to the private sector would
continue to mandate that people put resources aside, while they work, for
their retirement (or for the risks of early death or disability).
to give people a choice between social security and a private sector
alternative. Others would dismantle social security and require people to
set money aside in private plans (savings, IRAs, private pensions, etc.).
Some call for immediately dismantling social security, giving workers bonds
or the like for their existing contributions to the system, and financing
current benefits out of General revenues. others call for a more gradual
phase-out of social security, perhaps accomplished over 3 0 or more years (for
instance, by requiring that young workers pay into a private fund rather than
The primary intent of these proposals is to create a more direct link
between what a worker puts into a plan and what he gets out, and to'have him
put the resources away during his productive years (often referred to a s f u l l
or advance funding) rather than requiring future workers to come u p with the
resources for his benefits.
Arguments for: Advocates believe these approaches would
result in more
adequate funding of retirement and related income needs, because in private
sector plans, resources would be set aside in advance of receipt of t h e
They wouldn't rely on the wwillingness" of future workers to
They picture the current system a s just a massive
"money machine" that
attempts to redistribute resources between those- who work and those who do
not, but that it doesn't direct its benefits to those most in need
since i t
doesn't use a means-test.
They further argue that poverty levels among the
elderly a r e generally no higher than for the rest of the population, being in
the 10% to 15% range, and that the bulk of the workforce does not need a
massive "income redistribution programw to meet its retirement income and
Finally, they argue that redirecting money to the private
sector would increase "investmentw resources in the economy,
stimulating capital formulation, and creating strong economic growth.
critics point o u t that giving people a n option to
choose between social security and a private sector alternative would further
weaken if not destroy social security's financing base.
If a substantial
number of workers opted into a private sector plan, the social security tax
would have to rise for everyone else.
Moreover, the well-to-do
most likely to opt out) would be the ones able to avoid paying for the social
costs built into the system.
Conversely, those with the highest "risksw
would be the ones likely to stay in
(creating what is known a s adverse
With regard to plans t o dismantle social security, critics argue that
there really i s no way to get from here to there without putting an
astronomical burden on the General Fund (in order t o pay for the benefits of
those continuing under the current system).
They also argue that social
security does not inhibit savings and investment, that its mere existence has
made people more aware of the need to set aside resources for their later
Finally, they argue that the poverty rate among the elderly would
rise significantly if social security were dismantled, and many older persons
would have to "suffer the indignities" of going on what they would view a s
"public relief . I 1
Two-tier benefit programs.
The primary objective of these types of
plans i s t o separate the social or welfare features of social security from
its annuity functions.
The financing issue is more or less a secondary one,
although advocates like to point out that expenditures would be reduced under
t w o - t i e r p l a n s s i n c e payments t o t h o s e n o t " i n needw would b e r e d u c e d .
n u m e r o u s t w o - t i e r p l a n s h a v e b e e n p r o p o s e d , t h e y g e n e r a l l y f a l l w i t h i n two
very d i f f e r e n t frameworks.
One h a s a f i r s t t i e r w h i c h p r o v i d e s w h a t m i g h t b e c o n s i d e r e d a " u n i v e r s a l
i s not
b e n e f i t " p a y a b l e t o e v e r y o n e ,at a c e r t a i n a g e .
I t i s e x p e c t e d t h a t t h i s t i e r w o u l d s u b s t a n t i a l l y t a k e t h e p l a c e of
t h e weighted b e n e f i t formula and d e p e n d e n t s b e n e f i t s of t h e c u r r e n t system.
A worker would t h e n supplement t h i s f i r s t t i e r w i t h an " e a r n e d w b e n e f i t
The a m o u n t h e r e c e i v e s w o u l d b e d i r e c t l y p r o p o r t i o n a l t o t h e a m o u n t
t h e t i l t i n t h e c u r r e n t f o r m u l a would be removed
of h i s a v e r a g e e a r n i n g s
( a n d b e n e f i t s w o u l d be c o m p u t e d a s a f l a t p e r c e n t a g e o f
The s e c o n d a p p r o a c h w o u l d s e t a s p e c i f i e d d o l l a r a m o u n t a s t h e a c c e p t e d
A s i n t h e f i r s t a p p r o a c h , a w o r k e r would g e t
"minimum i n c o m e g u a r a n t e e . "
b e n e f i t formula.
" e a r n e d n b e n e f i t f r o m h i s w o r k based o n a f l a t - r a t e
If h i s e a r n e d b e n e f i t w e r e
l e s s than
However, t h e t i e r s would b e ' r e v e r s e d .
t h e w g u a r a n t e e d l e v e l , " he would r e c e i v e a supplement t o b r i n g h i m up t o t h a t
T h e s u p p l e m e n t , h o w e v e r , w o u l d b e b a s e d on h i s " n e e d w a s d e t e r m i n e d
by a means-test.
I f h i s earned b e n e f i t exceeded t h e guarantee l e v e l ,
wouldn' t g e t a supplement.
The w e l f a r e t i e r s o f e i t h e r o f t h e s e p l a n s p r e s u m a b l y
from g e n e r a l r e v e n u e s .
A d v o c a t e s a r g u e t h a t t h e c u r r e n t s y s t e m d o e s n o t address
They a r g u e t h a t i t p r o v i d e s " s o c i a l
t y p e n b e n e f i t s t o p e r s o n s o f s u b s t a n t i a l means ( f o r i n s t a n c e ,
w o r k e r ' s b e n e f i t , t h e l a r g e r w i l l be h i s s p o u s e ' s b e n e f i t .
wage e a r n e r t o d a y i s p a y i n g f o r t h e r e l a t i v e l y l a r g e f a m i l y b e n e f i t s p r o v i d e d
They argue t h a t dividing t h e program's welfare
t o a wealthy r e t i r e d couple).
a n d a n n u i t y f e a t u r e s would l e s s e n o r e l i m i n a t e t h e s e * w a s t e f u l w b e n e f i t s .
They f u r t h e r a r g u e t h a t c r e a t i n g w i n d i v i d u a l l y - b a s e d n e a r n e d a n d s u p p l e m e n t a l
b e n e f i t s w o u l d r e m o v e many b e n e f i t i n e q u i t i e s t h a t e x i s t b e t w e e n s i n g l e
workers and c o u p l e s , and between one and two-earner c o u p l e s .
Arguments f o r :
i t s social o r welfare goals effectively.
Critics of t h e s e
a p p r o a c h e s a r g u e t h a t t h e y would
Arguments a g a i n s t :
create greater social stratification.
The c u r r e n t s y s t e m d o e s n o t l a b e l a n y
p o r t i o n o f i t s b e n e f i t s a s w e l f a r e , a n d a v o i d s many o f t h e c o n n o t a t i o n s a n d
images o f w e l f a r e - t y p e p r o g r a m s .
They f e e l t h a t by c r e a t i n g t h i s w e l f a r e
" s t i g m a , " t h e w o r k e r ' s s u p p o r t f o r t h e s y s t e m would b e e r o d e d .
They a l s o
a r g u e t h a t b e n e f i t s w o u l d b e r e d u c e d f o r many " n o n - w e a l t h y v 1 d e p e n d e n t s a n d
They f u r t h e r a r g u e t h a t t h i s t y p e of change would n o t n e c e s s a r i l y
b r i n g about any f u r t h e r f i n a n c i a l s e c u r i t y t o t h e system,
s i n c e i t would
m e r e l y move t h e c o s t s f r o m o n e f u n d t o a n o t h e r , a n d a n y i n h e r e n t
f i n a n c i n g w o u l d c a r r y o v e r t o t h e new " e a r n e d - b e n e f i t n
N a t i o n a l Commission on S o c i a l S e c u r i t y Reform Recommendations
The f o l l o w i n g i s a l i s t o f t h e N a t i o n a l C o m m i s s i o n ' s r e c o m m e n d a t i o n s t h a t
a f f e c t t h e f i n a n c i n g of t h e s o c i a l s e c u r i t y program and t h e i r c o s t e f f e c t s .
I t s h o u l d be n o t e d t h a t t h e s a v i n g s and r e v e n u e s produced a r e
e s t i m a t e s and
c a n v a r y w i d e l y d e p e n d i n g upon what a s s u m p t i o n s a r e u s e d .
n o t e w o r t h y t h a t t h e Commission s p e c i f i c a l l y r e j e c t e d t h e n u n c o n v e n t i o n a l n
approach and chose instead among the "conventional" ideas mentioned above.
(1) The OASDI tax schedule would be accelerated. The 1985 rate would
moved to 1984, the 1985-87 rates would remain as scheduled under present law,
part of the 1990 rate would be moved to 1988, and the rate for 1990 and after
would remain unchanged.
The HI tax rates for all years would
The resulting tax schedule would be:
Employer and Employee Rate (each)
For 1984, a refundable income tax credit would be provided against the
individual's Federal income-tax liability in the amount of the increase in
the employee taxes over what would have been payable under present law.
Revenues under this proposal would be $40 billion in 1984-1989 and +.02%
taxable payroll in the long range.
(2) The automatic cost-of-living adjustments
(COLA) of OASDI benefits,
beginning in 1983, would be delayed 6 months, so that they are payable in
January rather than in July. The increase in the CPI for purposes of the
automatic adjustments for any particular year is currently measured from the
first quarter of the previous year to the first quarter of that particular
This procedure would continue to apply for the adjustment in benefit
amounts for 1983 (payable in early January 1984).
However, for subsequent
years, the comparison would be made on a nthird quarter to third quartern
This proposal would save $40 billion 1983-1984 and .27% of payroll in
the long run.
(3) Mandatory OASDI coverage would be extended, as of Jan. 1 , 1984, to all
newly hired civilian employees of the Federal Government and all employees of
This proposal would produce $20 billion
1984-1989 and a net long-range revenue of +.30% of taxable payroll.
(4) Beginning with 1984, 50% of OASDI benefits would be taxable for
persons with Adjusted Gross Income (exc1udin.g OASDI benefits) of $20,000
(single) o r - $ 2 5 , 0 0 0 (married).
Proceeds from such taxation would be credited
to the OASDI Trust Funds.
This proposal would produce $30 billion in
1984-1989 and +.60% of taxable payroll in the long run.
( 5 ) The OASDI tax rates for
would be equal to the combined
self-employed persons, beginning in 1984,
OASDI taxes paid by self-employed persons would be tax deductib1.e.
proposal would produce $18 billion in 1984-1989 and +.19% of taxable payroll
in the long range.
( 6 ) A lump-sum payment to the OASDI Trust Funds would
General Fund of the Treasury for:
the present value of the estimated additional
benefits arising from the gratuitous military
service wage credits for service before 1957;
the amount of the combined employer-employee
OASDI taxes o n . t h e gratuitous military service
wage credits for service after 1956 and before
1983 (the co'st of which is met, under present
law, when additional benefits derived
therefrom are paid).
In the future, the OASDI
Trust Funds would be reimbursed on a current
basis for such employer-employee taxes on such
wage credits for service after 1982; and
the amount of uncashed OASDI checks issued in the
past (which were charged against the trust funds
a t time of issue), estimated at about $300-400 million.
The effect of these proposals is to add $20 billion to the trust funds in
1983, with a net effect in 1983-1989 of +$18 billion (due to some additional
There i s no long-range effect.
costs in 1984 and 1985).
(7) Withdrawal by State and local government employees
Termination notices now pending would be invalid if the process
of termination, which takes at least 2 years, i s not completed by the date of
This would save $3 billion in 1983-1989 with negligible effect i n
the long run.
The other commission recommendations,
summarized in the following table.
of p a y r o l l )
Eliminate windfall benefits for
p e r s o n s w i t h pensions from
n o n c o v e r e d employment
Continue b e n e f i t s on
remarriage for disabled
widow(er) s and f o r divorced
widow ( e r ) s
I n d e x d e f e r r e d widow ( e r ) ' s
b e n e f i t s b a s e d on w a g e s
( i n s t e a d of CPI)
Permit d i v o r c e d aged spouse t o
r e c e i v e b e n e f i t s when h u s b a n d
is eligible to receive
I n c r e a s e b e n e f i t rate f o r d i s a b l e d
w i d o w ( e r ) s a g e d 50-59 t o 7 1 1 / 2 %
of primary b e n e f i t
R e a l l o c a t e OASDI t a x r a t e
b e t w e e n OASI a n d D I
Allow i n t e r - f u n d b o r r o w i n g from
H I by O A S D I f o r 1983-1987
Base a u t o m a t i c b e n e f i t i n c r e a s e s
i f f u n d r a t i o i s u n d e r 20%,
w i t h catch-up i f fund r a t i o
Increase delayed retirement credit
f r o m 3 % per y e a r t o 8 % , b e g i n n i n g
i n 1 9 9 0 a n d r e a c h i n g 8% i n 2 0 1 0
I n t o t a l , t h e commission's recommendations a r e p r o j e c t e d t o
i n c r e a s e O A S D I t r u s t f u n d a s s e t s b y $ 1 6 8 b i l l i o n by t h e e n d o f t h e
d e c a d e , a n d r e d u c e t h e l o n g - r a n g e d e f i c i t f r o m 1 . 8 % t o .58% o f
A l t e r n a t i v e methods f o r s o l v i n g t h e remaining
l o n g - r a n g e d e f i c i t a r e p r e s e n t e d i n t h e s t a t e m e n t s by t h e
members, b u t n o c o n s e n s u s was r e a c h e d .
CHRONOLOGY OF EVENTS
The National Commission on Social Security Reform agreed
on a compromise package of recommendations to solve
the short- and long-term problems facing social security.
President signed into law the Tax Equity and Fiscal
Responsibility Act of 1982 (H.R. 4961), including
significant changes in the Medicare program.
House and Senate passed conference agreement on
President Reagan signed H.R. 4331 into law (P.L. 97-123),
restoring minimum benefit and authorizing interfund
borrowing for 1 year.
House passed conference agreement on H.R.
Senate passed conference agreement on H.R.
4331, by a vote
4 3 3 1 , by a vote
Senate passed H.R. 4331 with interfund borrowing, tax
reallocation and other measures, by a vote of 95-0.
President Reagan shelved his social security financing
proposals for a while, and called upon Congress t o enact
interfund borrowing while a bipartisan task force
pursues more substantive financial solutions.
President Reagan signed Omnibus Budget bill into law
a s P.L. 97-35.
House and Senate approved conference agreement on
Omnibus Budget Reconciliation Act of 1981 (H.R. 3982)
which includes a number of significant cutbacks i n
the social security program.
House passed H.R. 4 3 3 1
(restoration of minimum benefit).
Reagan Administration announced 14-point plan to
correct social security short and long term financing
Social Security Subcommittee of House Ways
and Means Committee conducted "tentative9* markup sessions on
social. security financing legislation.
Social Security Subcommittee began a series of hearings
on the system's financial problems.
President Carter signed H.R. 7670, creating P , L .
D I to OASI).
(2-year tax reallocation
Senate passed H.R.
7670 and sent bill to President for
Senate Finance Committ.ees approved H . R . 7670 and H.R.
with amendments, including tax reallocation measures
previously passed by Senate in S. 2885.
Senate Finance Committee ordered reported H . R . 5829,
providing for $39 billion in income tax reductions
House passed H.R.
Full House Ways and Means Committee approved
Full Senate approved S. 2885, the FY81 Budget
Reconciliation bill, including Finance Committee
recommendation to reallocate tax rates to the OASI program.
Subcommittee o n Social Security of House Ways and
Means Committee recommends 1980-1981 partial
reallocation of DI rate to OASI program (H.R. 7670).
Senate Finance Committee recommends 1980-81 partial
reallocation of DI rate to OASI program as proof
of budget reconciliation measures.
Subcommittee on Social Security of House Committee
on Ways and Means began 2 days of hearings on
Social Security aspects of President's FY81 Budget.
Senate Finance Committee began two days of hearings on
social security financing.
Senate passed Crude Oil windfall Profits Tax
measure (H.R. 3919) including provision creating
a taxpayers trust fund for possible use in providing
payroll tax relief.
House Ways and Means Committee began 3 days of
hearings on VAT.
Senate Finance Committee reported out H.R.
provision creating Taxpayers Trust Fund.
Subcommittee o n Social Security of House Committee
on Ways and Means began 5 days of hearings on social
House Republican leadership proposed $36 billion
tax relief measure, including-partial rollback
of social security tax increases.
Democratic Caucus voted resolution calling for rollback
of social security taxes i n 1981.
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Social security can be saved.
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Saving social security -- Reagan and Congress
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Possible responses to social security's
Federal Reserve Bank of Boston New England
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fundamental economic problems
O'Neill, June A.
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v. 33, Sept. 1980:
Palmer, John L.
Let's reduce social security payroll taxes now.
Challenge, v. 21, Nov.-Dec. 1978: 46-48.
Peterson, Peter G.
The salvation of social security.
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the coming crash.
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Financing social security:
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Robertson, A. Haeworth.
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Schweiker, Richard S.
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