PART 2, p1, DISCUSSION, U.S. Federal Budget, Social Security and Medicare Funding (fb-30.html)

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Table Of Contents For Part 2, Discussion

[A] Explanation of The Social Security Annual Surplus (52)

[B] The Basic Demographic Problem (53)

[B1] The Huge Baby Boomer Population Will Begin To Reach Age 65 in 2010 (54)

[B2] Covered Workers Per Social Security Beneficiary (55)

[B3] The Number Of Beneficiaries A Worker Will Have To Support Will Increase 70% Between Now and 2040 - from 0.294 Beneficiaries To 0.500 Beneficiaries (56)

[B4] The Total Dependents Counter-argument: No More Elderly + Children In Future Than In 1960s (57)

[B5] In 1983 Congress Raised SS Taxes To Save For Boomers' Retirements (58)

[C] SS Trust Fund Operation (Basic), 1985 - 2075 (59)

[C1] SSTF Increases From $42 B in 1985 to $762 B in 1998 to a peak of $4456 B in 2021. Then Declines to Zero In 2034 (60)

[C2] After the SSTF Is "Insolvent", Present SS Tax Rates Will Still Finance 67 to 72% Of Promised Benefits For Decades Beyond (61)

[C3] Table Of SSTF Operations, 1985 - 2075, in Billions Of Dollars (62)

[C4] Currently, and Until 2014, Social Security Is Running An Operating Surplus (63)

[C5] The Social Security Surpluses Are Loaned To the Treasury General Fund In Exchange For Intergovernmental IOUs (64)

[C6] The General Fund Spends The Money. Lately, Most Is Being Used For Debt Reduction (65)

[C7] If The General Fund Pays Back The $7.8 Trillion, Then Social Security Is Only 2.07 Percent Of Payroll Short Of Being Solvent For 75 Years (66)

[E] Good News: When There Is A Budget Surpluses, The Money The General Fund Borrows From the SSTF is Used To Pay Down The Publicly - Held Debt (68)

[F] Social Security and Medicare Cost (as % of payroll) to nearly double by 2040 (69)

[G] History: Payroll tax rate has gone way up, so has maximum salary taxed (70)

[H] Social Security Payroll Tax Explained, And What A 2.07 Percentage Point Increase Means (71)

[I] Solving Social Security Only Requires 2.07% additional taxes - NOT! (72)

[J] Real After Tax Pay Will Increase (Per Intermediate Projection) (73)

[J1] Even Assuming The Employee Absorbs The Entire Payroll Tax Increase, The Employee's Real Take-Home Pay Will Increase 26% Between 1999 And 2040, And Another 27% Between 2040 And 2070 (74)

[J2] The Detailed Math Behind The Above Conclusion (75)

[L] OASDI (Social Security) Operation, in Detail, 1985 - 2075 (77)

[L1] The SSTF and General Fund Are Both Treasury Department Accounts. Federal Government Transactions, Internal Transactions, and SSTF Transactions (78)

[L2] The Column Headings Of The SSTF Table (79)

[L3] Table - Operation of the Social Security Trust Fund and the Social Security Program (80)

[L4] 1998 In Detail (81)

[L5] SS Operating Surplus Peaks in 2001, Becomes Deficit In 2014. SSTF "Assets" (Including Interest) Peak In 2021, Become Zero In 2034 (82)

[L6] The SSTF Assets Are General Fund Liabilities, And Thus Are Not A Resource For The U.S. Government To Draw Upon To Pay Beneficiaries (83)

[L7] SS Becomes A Problem For The General Taxpayer In 2014 When SS Begins to Run An Operating Deficit (84)

[L8] The Real SS Operating Surplus Declines After 1999 (85)

[L9] Where the $7809 figure comes from (86)

[M1] I'm Entitled To At Least What I Paid Into The System All These Years, Plus Interest? (88)

[M1.A] Social Security Taxes Have All Been Spent On The Current Elderly and Current General Federal Programs, Nothing Has Been Saved Or Invested (89)

[M1.B] The SS Surpluses Were Not Saved, Rather They Were Used To Reduce Our Income Taxes (90)

[M1.C] Yes, Our Elderly Deserve To Be Taken Care Of, As They Have Taken Care Of Their Elders. But They Aren't Necessarily Entitled to Get Back Their SS Taxes Plus Interest (91)

[M1.D] Previous Generations Paid Much Lower SS And Medicare Tax Rates (92)

[M2] Federal Taxes Are Too High, But Don't Cut My SS and Medicare (93)

[N] What About Privatizing, Or Investing Some SS Revenues In The Stock and Bond Markets? (94)

[N1] Social Security is Earning Very Small Returns, or Even Negative Returns? (95)

[N1.A] Senator Rod Grams: The SS System Is Broken, Some Are Receiving Negative Returns (96)

[N1.B] The "Return" That the SS Program Is "Earning" (97)

[N1.C] SS is More Than A Retirement Program. It is Also a Disability Program (98)

[N1.D] Current SS taxes pay benefits to Current Retirees and Disabled (99)

[N1.E] Surplus SS Tax Revenues Are Not Being Saved For The Future (100)

[N1.F] Surplus SS Tax Revenues Are Funding Current General Federal Programs, Thus Lowering General Taxes (101)

[N1.G] The Interest the SSTF Earns Is Meaningless (102)

[N1.H] The Big Picture: The SS Program Is In Trouble After 2013 (103)

[N1.I] Boomers Borrowed From The SSTF, Gen Xers Will Have To Pay It Back (104)

[N1.J] In Summary, The Ways The SS Program Differs From A Pre-Funded Retirement Program (105)

[N2] Privatization - All We Have To Do Is Invest The SSTF In Private-Sector Stocks And Bonds? (106)

[O] Some Solutions (107)

[O1] A Review Of The Situation (108)

[O2] Use the Surpluses to Eliminate the Publicly-Held Debt (109)

[O3] Then Invest Any Surpluses in Private Sector, and State and Local Securities (110)

[O3.A] Government Pension Programs Already Invest In The Private Sector Without Allegations Of Political Interference (111)

[O3.B] Other Risks (112)

[O4] Diversification - Some In Private Sector, Some in State and Local Government Bonds (113)

[O5] Transition Slowly Towards A Fully Prefunded Program (114)

[P] Medicare, Medicaid, Healthcare (115)

[P1] Medicare Part A (HI - Hospital Insurance) (116)

[P2] Medicare Part B (SMI - Supplementary Medical Insurance) (117)

[P3] Medicaid (118)

[P4] SS, SSI, Medicare, and Medicaid Costs From 1998 to 2009 (119)

[P5] For More On Medicare, Medicaid, and Senior Health Care (120)

[A] Explanation of The Social Security Annual Surplus (52)

Over the past 15 years, the social security program has been running large annual surpluses. That is, taxes collected each year have exceeded program expenditures each year (expenditures consist of payments to Social Security beneficiaries and administration expenses).

The collecting of large surplus tax revenues is the result of a deliberate policy decision made in 1983, because of concerns about future demographics.  

[B] The Basic Demographic Problem (53)

[B1] The Huge Baby Boomer Population Will Begin To Reach Age 65 in 2010 (54)

To understand why the decision was made to operate the Social Security program with large surpluses, one must understand the problem of demographics, particularly the large size of the baby-boomer generation population (those born between 1946 and 1964). The baby boom generation is about 75 million people.

It was recognized then that the large baby boom generation, which would begin reaching age 65 in about 2010, would cause Social Security outlays to greatly increase. At the same time, the number of working age people paying Social Security taxes is expected to grow at a very slow rate. (See Table T247.1 in section non247 for the past history and future projections of the size of the three population age groups: under 20, 20-64, and 65 and over).

The baby boom generation are all of working - age, and generally in their peak earnings years, or approaching their peak earning years. (In 2000, they are aged 35 to 55). The current (in year 2000) over - 65 population are those born in 1935 and before. That population is relatively small because of the low birth rate of the depression years, and in general the relatively low population of the U.S. before 1935. These two factors result in a large number of workers supporting a small number of seniors. As of 1999, there are about 3.4 covered workers per OASDI (Social Security) beneficiary (non55). (Remember, OASDI is synonymous with Social Security. Also, not all OASDI beneficiaries are seniors -- some are younger disabled).

However, the oldest members of the baby boomer generation begins to reach age 65 in 2010, and thus become eligible for Social Security benefits. Also, even before then, some will be retiring. Even though people retiring before age 65 are not eligible for SS benefits (until they reach 65), they are not paying SS taxes either. So the system begins to suffer a little even before 2010.  

[B2] Covered Workers Per Social Security Beneficiary (55)

As shown in the below table, the number of OASDI (Social Security) covered workers per OASDI beneficiary is projected to decline from 3.4 in 2000 to 3.1 in 2010, 2.1 in 2030, and 1.9 in 2075.

    Year ............. 1950 1960 1980 2000 2020 2040 2060 2075
    Covered Workers 
    Per Beneficiary .. 16.5  5.1  3.2  3.4  2.5  2.0  1.9  1.8

   OASDI (Social Security) Covered Workers Per OASDI Beneficiaries
   Calendar Years 1950-2075
   The Year 2000 And After Are Intermediate Scenario Projections

   Calendar  Covered Workers Per 
   Year      OASDI Beneficiary
   ----      -------------------

   1950      16.5
   1960       5.1  
   1970       3.7  
   1980       3.2  
   1990       3.4  

   2000       3.4  
   2010       3.1  
   2020       2.5  
   2030       2.1  
   2040       2.0  
   2050       2.0  
   2060       1.9  
   2070       1.9  
   2075       1.8 

   Source: Table II.F19.-Comparison of OASDI Covered Workers 
   and Beneficiaries by Alternative, Calendar Years 1945-2075 
   in TR99.
 

These numbers are staggering, once one grasps their implication. In 1950, there were over 16.1 OASDI (Social Security) covered workers supporting each OASDI beneficiary. Now there are 3.4 workers supporting each beneficiary -- a much greater strain on their resources. (That's the major reason why SS taxes have gone up so much). In the future, there will be only about 2 workers supporting each beneficiary.  

[B3] The Number Of Beneficiaries A Worker Will Have To Support Will Increase 70% Between Now and 2040 - from 0.294 Beneficiaries To 0.500 Beneficiaries (56)

Looking at it in inverse: currently, each worker is supporting 0.2941 beneficiaries (1/3.4 = 0.2941). In 2040 and beyond, each worker will be supporting about 0.5000 beneficiaries (1/2.0 = 0.5000). That is an increase from 0.2941 beneficiaries per worker to 0.5000 beneficiaries per worker, which is a 70% increase in the number of beneficiaries per worker ( {0.5000-0.2941}/0.2941 = 0.700 ). In other words, the number of beneficiaries a worker will have to support will grow by 70% over the next 40 years.  

[B4] The Total Dependents Counter-argument: No More Elderly + Children In Future Than In 1960s (57)

I'll mention here that there is a counter-argument that if one considers both children and elderly as dependents, rather than just elderly, then the number of working-age adults per dependent expected in the future is actually a little more than what was experienced in the 1960 - 1975 period. I discuss this counter-argument in section non246.  

[B5] In 1983 Congress Raised SS Taxes To Save For Boomers' Retirements (58)

Anyhow, back in 1983, Congress was looking at similar demographic projections and realized that the boomers' retirements would put a huge strain on the SS system. So, as a way to save in advance for the boomers' retirement, Congress decided to raise SS taxes high enough such that taxes greatly exceeded payments to beneficiaries. The surplus SS revenues were to be put into a Social Security Trust Fund (SSTF) for the future.  

[C] Social Security (OASDI) Trust Fund Operation (Basic), 1985 - 2075 (59)

Table T62.1 below shows the basics of the Social Security Trust Fund (SSTF) operations, starting in 1985. (The SSTF was created in 1937, per Kiplinger's. However, its purpose before 1983 was mostly to act as a short term buffer to ensure that funds were always on hand to pay benefits on time. After 1983 its purpose was also to save additional funds for the coming retirement of the baby-boomer population).

Note: there is a much more detailed look at the OASDI (SS) operation in section non77. But the below table will suffice for this section's discussion.  

[C1] SSTF Increases From $42 B in 1985 to $762 B in 1998 to a peak of $4456 B in 2021. Then Declines to Zero In 2034 (60)

Notice that the SSTF was almost nothing in 1985 (just $42.2 billion) and that it has built up to the considerable sum of $762.5 billion at the end of calendar year 1998. It is projected to increase rapidly, all the way up to a peak value of $4456 billion in 2021 (that's nearly 4.5 TRILLION DOLLARS!). Then, it begins to decline as income falls behind outgo. At the end of calendar year 2033, it is down to a mere $345.8 billion. Note that income falls short of outgo by $766.2 billion in that year. The trust fund goes "broke" or "insolvent" by mid-year 2034.  

[C2] After the SSTF Is "Insolvent", Present SS Tax Rates Will Still Finance 67 to 72% Of Promised Benefits For Decades Beyond (61)

The insolvency of the trust fund does not mean the SS program ends. The 12.40% (combined employer and employee) SS payroll taxes will continue to be collected. In 2035, income is sufficient to pay about 72% of the promised benefits (2342/3247 = 72%). In 2075 income is sufficient to pay about 67% of the promised benefits (13020/19415 = 67%).  

[C3] Table Of SSTF Operations, 1985 - 2075, in Billions Of Dollars (62)

   Table T62.1
   Operations of the OASDI (Social Security) Trust Funds, 
   During Selected Calendar Years 1985-98 and Estimated 
   Future Operations During Calendar Years 1999-2075, 
   on the Basis of the Intermediate Set of Assumptions
   (Recall that the OASDI trust funds is synonymous
   with the Social Security Trust Fund.  It is the sum
   of the OASI trust fund and the DI trust fund)
                In Billions Of $

  Calendar                             Trust 
  Year    Income   Outgo   Difference  Fund Assets
  ------  ------   -----   ----------  -----------
   1985    203.5    190.6      12.9        42.2

   1990    315.4    253.1      62.3       225.3

   1994    381.1    323.0      58.1       436.4

   1998    489.2    382.3     106.9       762.5
   1999    518.3    394.0     124.3       886.8
   2000    538.1    409.1     129.0      1015.8
   2001    564.5    427.1     137.4      1153.3
   2002    591.7    448.2     143.5      1296.9

   2021   1536.9   1500.7      36.2      4456.1

   2033   2191.7   2957.9    -766.2       345.8
   2034   2241.    3101.     -861.          0.
   2035   2342.    3247.     -904.          0.
   2040   2921.    4037.    -1116.          0.
   2070  10539.   15531.    -4993.          0. 
   2075  13020.   19415.    -6395.          0.

Source: Tables II.F12 and III.B3  and III.B4 
from TR99.
Be sure to see section non80 for a
more detailed version of this table.