Social Security Financing

SOCIAL SECURITY FINANCING ISSUE BRIEF NUMBER IB82126 AUTHOR: David Koitz Specialist, Education and Public Welfare Division Geoffrey Kollrnan Education and Public Welfare Divison Nancy Miller 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 0131 CRS- 1 ISSUE DEFINITION 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. Cash Benefits 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 -- CRS- 2 IB82126 UPDATE-01/25/83 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 (for instance, no 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 ) . Eligibility. 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 jobs 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 levels. - - 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 ) . a worker's Benefit computations. 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 earnings record. 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 Benefits 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 ) . Financing Structure Pay-as-you-go concept. 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 pension contributions). 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 . Taxation: 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 peripherally.) 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 $35,700 i n 1983. (The t a x r a t e i s 9.35% f o r t h e self-employed.) --The --The t a x r a t e i s s c h e d u l e d t o r i s e i n t h r e e s t e p s T h e maximum e a r n i n g s s u b j e c t t o t h e t o 7.65% i n 1990. t a x w i l l r i s e e a c h y e a r a t t h e same r a t e t h a t a v e r a g e CRS- 3 e a r n i n g s r i s e i n t h e economy. --Distribution o f t a x r e c e i p t s among t h e p r o g r a m s (1982): OAS I 68% T r u s t Funds E a c h p r o g r a m h a s i t s own t r u s t f u n d , w h o s e e n t i r e a s s e t s a r e i n v e s t e d i n government s e c u r i t i e s . The t r u s t f u n d s s e r v e o n l y a c o n t i n g e n c y p u r p o s e e l a severe recession). i n t h e event t h a t adverse circumsta,nces a r i s e P r e s e n t l y , t h e c o m b i n e d r e s e r v e s o f t h e OASI, D I a n d H I f u n d s r e p r e s e n t l e s s t h a n 2 months w o r t h o f assets ( s l i g h t l y more t h a n o n e month f o r j u s t O A S I a n d DI). The s y s t e m c a n n o t f u n c t i o n w i t h l e s s t h a n o n e m o n t h ' s w o r t h o f benefit payment i n r e s e r v e . U.S. CRS- 4 Indicators of Social Security's Growth a n d R e l a t i v e I m p o r t a n c e 1960 1980 (OASI a n d D I o n l y ) ... 1 2 . 6 % .............. 2 . 3 3 % Tax r a t e s ............................ 3.0% Taxes p a i d b y w o r k e r w i t h a v e r a g e e a r n i n g s ..........................$ 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 Federal budget GNP 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 income 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 Total population ............... ............................ ...................... .................. .................. 20.6% 4.79% 5.08% $635.68 115 million 35 m i l l i o n 3.3 t o 1 33.3% 51.1% 2.8% 5.6% 21.5 35.2 22.4 9.5 15.7 13.0 CRS- 5 THE FINANCING ISSUE History Financing shortfalls first appeared in the 1973 Trustees' report, and grew substantially worse with each succeeding report. Both near- and long-term problems emerged 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 reserves 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 economic conditions. -- 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 CRS- 6 IB82126 UPDATE-01/25/83 crisis. 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. Borrowings from 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 legislation). 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. The cash 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 dollars). 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). CRS- 7 Public's Perception -- 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 Recent benefit. Skepticism i s most notable among workers under age 45. examples : 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 security voluntary). 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). OPTIONS 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 headings: 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. Conventional Ideas , These are the most frequently discussed types of solvency measures. They 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 --expana coverage. 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. CRS- 8 IB82126 UPDATE-01/25/83 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 security taxes). New revenues (1984-1989) .......... $135 earnings ......80-85 --move 1990 increase up to 1984 billion --have no limit on taxable billion Arguments for: This is the traditional approach of addressing social security's financial needs. Raising taxes consistently shows u p a s the favorite in public opinions polls when pitted against benefit reductions. It 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 package. 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. Arguments against: 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. It further would antagonize many workers who won't see the trade-off against 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. Using general 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). Yet another 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. CRS- 9 New income to system (1983 to 1989) -- reallocate one-half of HI tax rate to OASI, reimburse HI out of general revenues $177 billion -- increase excise tax on alcohol and tobacco... ........ 1 4 billion . Arguments for: 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. Arguments against: 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-$200 billion deficit next year alone). They argue that "fiscal discipline1* (paying for benefit improvement with tax proceeds) would be lost and little or no "brakew would exist to ward off excessive expansions of benefits. Others argue that using general revenues would lead ultimately t o measuring "needw a s a condition for benefits, by forcing social security to compete against other government programs for scarce resources. They also argue that any movement away from using the social security tax would weaken the worker's support for social security (by causing him to view i t a s less of a system that he paid for directly). 3. Cutti'ng social security benefits. Typically this calls for constraining the growth of future benefits. It usually doesn't involve reducing benefits for current recipients, and future benefit. levels very likely would rise above today's levels (but not a s high as if they were not altered). Among the benefit reductions most frequently discussed a r e reducing o r delaying cost-of-living adjustments (COLA's), raising the age of eligibility for retirement benefits or the age a t which full benefits can b e received, and altering the benefit formula t o produce lower across-the-board "initial benefitsw for future recipients. Savings (1983-1989) -- reduce COLA by 2 percentage points...$l03 -- delay COLA for 3 months.. -- to $113 billion ............$23-$35 a g e and -benefit formula changes are viewed mostly a s long-run measures, with little or no savings in short run billion 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 near-term 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 increases. 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 full 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 with inflation). 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 the size without 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 of 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 (being an 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 ) , and a 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 in 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 the 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. Although no many a r g u e t h a t social security 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 moral commitment. They a r g u e t h a t social security 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 have not shown 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 reducing 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 income. 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 . Finally, 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. -- 4. Expanding coverage. 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 to 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, i.e., t h o s e w i t h less than 5 years of service). 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 (1983-1989) -- cover a l l Federal, S t a t e and l o c a l , and nonprofit workers -- ...............$117 cover new Federal, State and local and nonprofit hires .................$ billion 35 billion - - cover new Federal hires and all nonprofits ..........................$ 21 billion 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., his noncovered work). 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). They view themselves as being "under attackw (for being part of the "bloated bureaucracyu) and are fearful of further measures to alter their 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. Unconventional Ideas 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 the income 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 and 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). Some want 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 social security). 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 benefits. They wouldn't rely on the wwillingness" of future workers to accept taxation. 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 related needs. Finally, they argue that redirecting money to the private sector would increase "investmentw resources in the economy, thereby stimulating capital formulation, and creating strong economic growth. Arguments against: 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 (the group 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 selection). 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 years. 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 2. 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 . While 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 It i s not a means-tested 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 . benefit. 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 from working. 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 one's average ( 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 earnings) -- . 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 an "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 level. 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 , he 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 . would be financed 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 the larger a 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 . Thus, a minimum 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 survivors. 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 weaknesses of "pay-as-you-gon 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 tier. 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 It is also 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 be 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 remain unchanged. The resulting tax schedule would be: Year 1983 1984 1985 1986 1987 1988-89 1990 and after Employer and Employee Rate (each) OASDI OASDI-HI Present Law Proposal Present Law Proposal 5.4% 5.4 5.7 5.7 5-7 5.7 6.2 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% of 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 year. 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 basis. 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 nonprofit organizations. This proposal would produce $20 billion in 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, employer-employee rates. One-half of the OASDI taxes paid by self-employed persons would be tax deductib1.e. This 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 -- be made from the 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 would be prohibited. 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 enactment. 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. which have minor effects, are Proposal Short-Term Savings, 1983-89 (billions) Long-Range Savings (percentage 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 benefits 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 -.l 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 exceeds 32% 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 taxable payroll. 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 01/15/83 -- 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. 09/03/82 -- President signed into law the Tax Equity and Fiscal Responsibility Act of 1982 (H.R. 4961), including significant changes in the Medicare program. 08/19/82 -- House and Senate passed conference agreement on H.R. 4961. 12/29/81 -- 12/16/81 -- 12/15/81 -- 10/15/81 -- 09/24/81 -- 08/13/81 -- 07/31/81 -- 05/12/81 -- 03/27/81 - 02/17/81 -- 10/09/80 -- 09/25/80 -- 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. of 412-10. Senate passed conference agreement on H.R. of 96-0. 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 problems. -- 04/07/81 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. 96-403 7670 and sent bill to President for signing. 09/16/80 -- Senate Finance Committ.ees approved H . R . 7670 and H.R. with amendments, including tax reallocation measures previously passed by Senate in S. 2885. 08/21/80 -- Senate Finance Committee ordered reported H . R . 5829, providing for $39 billion in income tax reductions for 1981. 07/21/80 -- 07/01/80 -- 06/30/80 -- 06/25/80 -- 06/19/80 -- 03/17/80 -- 02/22/80 -- 12/19/79 -- 11/08/79 -- 11/01/79 -- 09/28/79 -- 08/01/79 -- 01/24/79 -- House passed H.R. 5295, 7670. Full House Ways and Means Committee approved H.R. 7670. 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. 3919 with Subcommittee o n Social Security of House Committee on Ways and Means began 5 days of hearings on social security financing. 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. ADDITIONAL REFERENCE SOURCES Aaron, Henry J. Social security can be saved. Nov.-Dec. 1981: 4-9. Challenge, v. 24, Anderson, Harry, and Mary Hager. The crisis in social security. Newsweek, v. 97, June 1 , 1981: 25-27. Bartlett, Dwight K., 111. Current developments in social security financing. Social security bulletin, v. 43, Sept. 1980: 10-20. Bethell, Tom. Social security: permit for idleness? Journal of the Institute for Socioeconomic Studies, v. 6, autumn 1981: 40-50. Campbell, Colin D. The 1977 amendments to the Social Security Act. Washington, American Enterprise Institute for Public Policy Research c1978 29 p. (American Enterprise Institute for Public Policy Research. Special analysis no. 78-2) Clark, Timothy B. Saving social security -- Reagan and Congress face some unpleasant choices. National journal, v. 13, June 13., 1981: 1052-1057. ----- Time running out on moves to ensure social security's financial solvency. National journal, v. 14, Oct. 9 , 1982: 1704-1709. Conte, Christopher R. Financing squeeze forces new assessment of social security. Congressional quarterly weekly report, v. 37, Mar. 17, 1979: 442-449. Controversy over financing social security: Congressional digest, v . 60, Aug.-Sept. pro & con. 1981: 193-224. Cox, Steven R., and Philip R. Wooten. The long run problem of financing the social security system. American journal of economics and sociology, v. 37, Oct. 1978: 397-411. Ehrbar, A.F. How to save social security. Aug. 25, 1980: 34-39. Fortune, v. 102, Fessler, Pamela. Social security returns from political limbo. Congressional quarterly weekly report, v. 40, Oct. 9, 1982: 2615-2619. Financing social security. Washington, American Enterprise Institute for Public Policy Research 1979 352 p. (American Enterprise Institute for Public Policy Research. AEI symposia 78H) Ginzberg, Eli. The social security system. v-. 246, Jan. 1982: 51-57. Scientific American, Haneberg, Ronald L. Whither goest the social security system? Pension world, v. 16, Oct. 1980: 48-50, 53-54, 67.. Keyfritz, Nathan. Why social security is in trouble. interest, no. 58, winter 1980: 102-119. Public Koitz, David. The indexing of social security. In U.S. Library of Congress. Congressional Research Service. Indexation of Federal programs. Prepared for the Committee on the Budget United States Senate. Washington, U.S. Govt. Print. Off., 1981. p. 131-192. At head of title: 97th Congress, 1st session. Kuttner, Bob. The social security hysteria. Dec. 27, 1982: 17-21. New republic, v.187, Levy, Mickey D. Achieving financial solvency in social security. .Washington, American Enterprise Institute for Public Policy (American Enterprise Institute for Research 1981 61 p. Public Policy Research. Special analysis no. 81-6) Munnell, Alicia H. Possible responses to social security's long-run deficits. Federal Reserve Bank of Boston New England economic review, Jan.-Feb. 1982: 25-34. National Commission on Social Security: recommendations. security bulletin, v. 4 4 , Hay 1981: 3-14. Social -- fundamental economic problems O'Neill, June A. Social security and alternative financing methods. National tax journal, v. 33, Sept. 1980: 359-369. 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. review, Dec. 1 6 , 1982: 50-57. ----- Social security: 1982: 34-38. the coming crash. New York New York review, Dec. 2 , Ricardo-Campbell, Rita. Financing social security: short-term and long-term proposals. National journal, v. 1 2 , Nov. 1 5 , 1980: 1958-1961. Robertson, A. Haeworth. A debate on social security. board, v. 1 7 , June 1980: 32-45, 48. ----- Financial status of Social Security Program after the Social Security Amendments of 1977. Social security bulletin, v. 4 1 , Mar. 1978: 21-30. Schweiker, Richard S. The future of social security. research, v. 6 4 , Aug. 1981: 11-15, 17. Social security financing. May 1980: 18-29. U.S. Across the COnsUmers' Social security bulletin, v. 43, Congressional Budget Office. Financing social security: issues and options for the long run. Washington, For sale by the Supt. of Docs., U.S. ----U.S. Govt. Print. Off., 1982. 1 1 2 p. Paying for social security: funding options for the near future. Washington, 1981. 4 7 p. National Commission on Social Security. Social security in America's future: final report of the National Commission on Social Security, March 1981. Washington, 1981 4 1 4 p.