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Currently, as noted before, Social Security taxes collected each year exceed the amount that is paid to Social Security beneficiaries and administration expenses. Since income exceeds outgo, this means the SS program is incurring annual surpluses. In calendar year 1998 for example, Social Security taxes were 440 B$, while payments to beneficiaries and administration expenses came to a total of 382 B$. (See the table of more detailed operations of the OASDI (SS) Trust Funds in non80 for these figures). The difference, 440 - 382 = 58 B$ is the real net cash flow into the Treasury due to the SS program. In addition, the SSTF was credited with 49 B$ in interest. Thus, 58 B$ plus 49 B$ = 107 B$ is the annual Social Security surplus for calendar year 1998.
For the past several decades, the Social Security surplus (excess of SS taxes over spending on current retirees) -- which was supposed to be saved for the expected large future retiree population -- has instead been loaned to the Treasury general fund in exchange for some "Special Issue Treasury obligations". Some accurately call these obligations "IOUs" because they are nothing more than IOUs that say in effect, "I, the Treasury general fund, owe you, the SSTF ___ dollars".
(I've run across two official government documents -- a Congressional Research Service (CRS) document and a Congressional Budget Office (CBO) document -- that describes them as IOUs. See section non122 for these quotes. And I've seen plenty of quotes from government officials, politicians, media, and others that call them IOUs. See section non129.)
The Treasury then spends all of this money on current general federal programs. As this has been the practice since the program began, this means that all of the money in the SSTF has been loaned to the general fund and spent on general federal programs. So the SSTF does not have any money or funds or assets, other than $762.5 Billion in IOUs (as of calendar year end 1998).
Under current law, and even with qualified unified budget surpluses, this practice will continue in the future. However, I'm happy to note: now that we have qualified unified budget surpluses, some of the Social Security surpluses are being used to reduce the publicly - held federal debt. It will continue to be true that the SSTF will have no real assets. But at least the publicly - held federal debt is being reduced.
In determining the financial health of the SS system, the SS Trustees assume that the Treasury general fund will pay back the SSTF all the principal and interest, and does not concern itself with how the general fund will find the money. In other words, the Trustees' report on the financial health of the Social Security system completely neglects the problem of how the general fund will raise the trillions of dollars necessary to pay back the money it borrowed from the SSTF in the past, and is expected to borrow in the next 14 years. See section non123 for the SS Trustees' statement.
Given that the general fund will somehow pay the money back to the Social Security program, and given the Trustees' Intermediate forecast -- then the Social Security program is only 2.07 percentage points short of being "solvent" through 2075 (non22). From the SSA's point of view, that is correct. But from the general taxpayer's point of view, this is ignoring one critical piece of information: where will the general fund get the money to pay back the SSTF?
Between 2014 and 2034 it is projected that the SSTF will need to redeem $7.8 Trillion worth of its bonds in order to pay benefits (section non86). The SSTF will present these bonds to the general fund for redemption. The general fund will need to come up with $7.8 Trillion of real money somehow. The only way it can do that is by measures such as raising income taxes, or cutting federal spending in other areas. Or most likely, raise the cash by selling bonds to the public -- which is taxation on a deferred basis -- and thereby continue to pass on this debt to our descendants.
The $7.8 Trillion burden on the general taxpayer to redeem these bonds is only alluded to in the Trustee's report (in terms of the general fund rather than the taxpayer, and the amount is not mentioned as that might wake up the media), and it is very rarely mentioned in media discussions of the Social Security program.
The $7.8 trillion is a huge number, but as the Introduction mentioned, it is spread over 21 years with the largest portions occuring in the last years of the period.
The $7.8 trillion over the 2014-2034 period is equivalent to a lump sum of $1.5 trillion in the year 2000 (using an interest rate of 6.3% (non253)). If that amount is amortized over the 34 year period 2000-2034, then it comes to $108 Billion / year.
That's not so bad relative to a $2000 Billion federal budget (non136) (revenues are expected to first exceed $2000 Billion in 2002, and spending is first expected to exceed $2000 Billion in 2005, per the CBO's January 1999 forecast, Summary Table 3 p. xviii {18} in E&B0199.pdf). And the $108 Billion / year stays flat (that's what amoritization means), so the $108 Billion / year will be smaller and smaller relative to the budget and the GDP in the future, both of which will continue to grow (due to inflation, population increase, and productivity).
While $1.5 Trillion (in year 2000 dollars) is not a disaster, it is an issue and an amount that is almost always never brought out in media discussions of Social Security. And, as will be discussed shortly (in section non69), Medicare taxes (in some form or another) will also have to increase.
Each and every year from fiscal year 1970 through fiscal year 1997, the national budget (the unified budget that everyone quotes and that includes Social Security and Medicare) has run a deficit. (See the sections on the U.S budget (non136) and the national debt (non159). We had a surplus in 1969. There were no other surpluses until the 1998 surplus).
In the 1970-1997 deficit years, the annual Social Security surpluses were less than the deficits in the rest of the budget. Thus, when the SSTF loaned the annual Social Security surpluses to the general fund, the general fund spent it all. Even then, the Treasury had to sell bonds to the public in order to finance the remaining deficit.
In Fiscal Year 1998 (October 1, 1997 to September 30, 1998), we had our first qualified unified budget surplus since 1969. (A qualified unified budget surplus means that including the SS surplus, the budget had a surplus. But the "rest-of-government" budget, that is, the budget excluding SS, had a deficit). As before, all of the SS surplus is loaned to the general fund. But this time, the general fund used some of it (the amount needed to close the "rest-of-government" deficit) to pay for general federal programs; and the general fund used the rest of it to pay down the publicly - held federal debt.
In a future year -- when we have an unqualified unified budget surplus (when both SS has a surplus and the "rest-of-government" has a surplus) -- then all of the SS surplus will be used to pay down the publicly - held federal debt. Unless the law is changed.
This seems like a real good use of the SS surplus. See the Summary - Conclusion section, non44, which has some reasons why reducing the publicly-held debt is a good thing.
Now, peering into the future, and using the Intermediate Scenario from the March 1999 Social Security Trustee's Reports (TR99), and expressing all numbers as a percent of payroll
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Table T69.1 Cost Rates Expressed As % Of Payroll ------------------------------------ Cal. SocSec ------Medicare----- SocSec+ Year (OASDI) HI SMI Total Medicare 1999 10.80 3.10 1.95 5.05 15.85 % 2040 18.18 5.79 5.37 11.16 29.34 % 2050 18.28 6.06 5.32 11.38 29.66 % 2070 19.63 6.78 5.95 12.73 32.36 %
In the above table, Medicare = HI + SMI. Also, OASDI is synonymous with Social Security.
All of the above numbers come from, or were derived from, the March 1999 OASDI Trustees report and the March 1999 SMI Trustees report. See "Table T30.1 Footnotes", non31 for more details about where these numbers came from.
What it shows is that, according to the Trustee's Intermediate projection, Social Security + Medicare costs are expected to nearly double between 1999 and 2040, from 15.85% of payroll to 29.34% of payroll. And to continue to increase after 2040.
Payroll taxes that high (coupled with high federal and state income tax rates), besides being burdensome, may be beyond the point of efficient tax collection. In European countries with very high payroll tax rates, a lot of work is done "off the books". (By all accounts that I've read, there is much more tax evasion in Europe than the U.S.). Not to mention the general drag on economic growth that very high taxes cause.
See also summary section non30 that, besides having the above table forecasting cost rates as a percent of payroll, also has cost rates as a percent of GDP.
Some "no - big - problem" people argue that it is just doom - and - gloomer hype to talk about payroll taxes having to double in the next few decades. (Or some equivalent of other tax increases and benefit cuts). See the Cost rates forecasts in section non69. But one can counter that argument by pointing out the past history of enormous SS and Medicare tax increases. No doubt someone 30 or more years ago would have found today's rates unbelievable.
Social Security payroll tax rates (combined employer + employee) have steadily increased from 3.00% in 1950 to 12.40% now -- which is a factor of 4.1 increase. Also, the "maximum SS-taxable wage" has gone up from $3,000 in 1950 to $72,600 now ( 1999 ) -- which is a factor of 24.2 increase.
(The maximum SS-taxable wage is the maximum wage subject to SS taxes. For example, in 1999, when the maximum SS-taxable wage was $72,600, then all wages and salaries up to $72,600 were taxed at a rate of 12.40% (combined employer and employee rate). Any amount over $72,600 was not taxed at all).
Putting those two together, someone earning the maximum (or more), $3000, in 1950, paid $3000 * 3.00% = $90 in SS payroll taxes. Whereas someone earning the maximum (or more), $72,600, in 1999, paid $72,600 * 12.40% = $9,002 in SS payroll taxes. Thus, for the maximum (or more) earner, SS payroll taxes have gone up a bit more than a factor of 100. The average wage in the same period has gone up only a little more than 11.5 fold in the same period. Thus, the real (wage inflation - adjusted) SS payroll tax burden on the maximum (or more) wage earner has gone up 8.7 fold during that period (100 / 11.5 = 8.7). (For the Average Wage Index, see Table II.E1 on page 65 {81} of the Social Security Trustees March 1999 report (TR99)).
So, judging from past history, there is a lot of reason to be concerned. And the above doesn't include Medicare, which went from zero in 1950, to 2.90% of payroll in 1999.
(The 11.5 fold increase in average wages comes from the SS average wage index in 1950, and 1997, which is the last year given. Then I assumed it went up by a very generous 5% a year in the two years from 1997 to 1999).
Table T70.1 is a summary of the OASDI (Social Security) Contribution Base (what I call the maximum SS-taxable wage), the OASDI payroll tax rate, and the Medicare Part A (the Hospital Insurance or HI) payroll tax rate for 1940, 1950, 1960, 1970, 1980, 1990, and 1999. It shows that, for Social Security and Medicare combined, an employee and employer combined paid a 3.00% payroll tax rate in 1950 vs. 15.30% now -- a factor of 5.1 increase in tax rate. Interestingly, the self-employed paid no payroll taxes until 1951, when they began paying a 2.25% payroll tax. Thus, from 1951 to now, for Social Security and Medicare combined, the payroll tax rate for a self-employed person went from 2.25% to 15.30%, a factor 6.8 increase in tax rate.
Medicare Part B is not included in the below, because it is paid for by premiums (about 25% of the total) and general revenues (about 75% of the total).
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Table T70.1
Social Security and Medicare Part A Contribution Rates (in percent),
1940, 1950, 1960, 1970, 1980, 1990, 1999
(The Contribution Rates are much more commonly called the
Payroll Tax Rates)
OASDI = Social Security. HI = Medicare, Part A
OASDIHI = OASDI + HI
Source: Table T70.2 below
Employee + Employer |
OASDI Combined | Self-Employed
Calen- Contri- ---------------------- | ----------------------
dar bution OASDI HI OASDIHI | OASDI HI OASDIHI
Years Base,$ % % % | % % %
------ ------ ----- ------ ------- | ------ ------ -------
1940 3,000 2.000 - 2.000 | - - -
1950 3,600 3.000 - 3.000 | - - -
1960 4,800 6.000 - 6.000 | 4.500 - 4.500
1970 7,800 8.400 1.200 9.600 | 6.300 0.600 6.900
1980 25,900 10.160 2.100 12.260 | 7.050 1.050 8.100
1990 51,300 12.400 2.900 15.300 | 12.400 2.900 15.300
1999 72,600 12.400 2.900 15.300 | 12.400 2.900 15.300
The "OASDI Contribution Base" is the maximum SS-taxable wage
Tables T70.2 and T70.3 below present more details, and for all years since Social Security payroll taxes began in 1937.
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Table T70.2
Social Security Contribution And Benefit Base and
Contribution Rates, 1937 - 2000 and beyond
(The Conribution Base is also known as the "Maximum
SS-Taxable Wage". The Contribution Rates are much more
commonly called the Payroll Tax Rates
Contribution Rates, %
-------------------------
Cont- Employee
ri- and Employer
Calendar bution ---------------- Self-
Years Base,$ Each Combined Employed
-------- ------ ----- -------- --------
1937-49 3,000 1.000 2.000 -
1950 3,000 1.500 3.000 -
1951-53 3,600 1.500 3.000 2.2500
1954 3,600 2.000 4.000 3.0000
1955-56 4,200 2.000 4.000 3.0000
1957-58 4,200 2.250 4.500 3.3750
1959 4,800 2.500 5.000 3.7500
1960-61 4,800 3.000 6.000 4.5000
1962 4,800 3.125 6.250 4.7000
1963-65 4,800 3.625 7.250 5.4000
1966 6,600 3.850 7.700 5.8000
1967 6,600 3.900 7.800 5.9000
1968 7,800 3.800 7.600 5.8000
1969 7,800 4.200 8.400 6.3000
1970 7,800 4.200 8.400 6.3000
1971 7,800 4.600 9.200 6.9000
1972 9,000 4.600 9.200 6.9000
1973 10,800 4.850 9.700 7.0000
1974 13,200 4.950 9.900 7.0000
1975 14,100 4.950 9.900 7.0000
1976 15,300 4.950 9.900 7.0000
1977 16,500 4.950 9.900 7.0000
1978 17,700 5.050 10.100 7.1000
1979 22,900 5.080 10.160 7.0500
1980 25,900 5.080 10.160 7.0500
1981 29,700 5.350 10.700 8.0000
1982 32,400 5.400 10.800 8.0500
1983 35,700 5.400 10.800 8.0500
1984 37,800 5.700 11.400 11.4000
1985 39,600 5.700 11.400 11.4000
1986 42,000 5.700 11.400 11.4000
1987 43,800 5.700 11.400 11.4000
1988 45,000 6.060 12.120 12.1200
1989 48,000 6.060 12.120 12.1200
1990 51,300 6.200 12.400 12.4000
1991 53,400 6.200 12.400 12.4000
1992 55,500 6.200 12.400 12.4000
1993 57,600 6.200 12.400 12.4000
1994 60,600 6.200 12.400 12.4000
1995 61,200 6.200 12.400 12.4000
1996 62,700 6.200 12.400 12.4000
1997 65,400 6.200 12.400 12.4000
1998 68,400 6.200 12.400 12.4000
1999 72,600 6.200 12.400 12.4000
2000 and
later {2} 6.200 12.400 12.4000
Source: Social Security Trustees' Report, March 1999 (TR99), Table II.B1 p. 33 {49}.
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Table T70.3
Social Security and Medicare Part A Contribution Rates,
1937 - 2000 and beyond
(The Contribution Rates are much more commonly called the
Payroll Tax Rates)
OASDI = Social Security. HI = Medicare, Part A
OASDIHI = OASDI + HI
Employee + Employer |
Combined | Self-Employed
Calendar ---------------------- | ----------------------
Years OASDI HI OASDIHI | OASDI HI OASDIHI
% % % | % % %
-------- ----- ------ ------- | ------- ------ -------
1937-49 2.000 - 2.000 | - - -
1950 3.000 - 3.000 | - - -
1951-53 3.000 - 3.000 | 2.250 - 2.250
1954 4.000 - 4.000 | 3.000 - 3.000
1955-56 4.000 - 4.000 | 3.000 - 3.000
1957-58 4.500 - 4.500 | 3.375 - 3.375
1959 5.000 - 5.000 | 3.750 - 3.750
1960-61 6.000 - 6.000 | 4.500 - 4.500
1962 6.250 - 6.250 | 4.700 - 4.700
1963-65 7.250 - 7.250 | 5.400 - 5.400
1966 7.700 0.700 8.400 | 5.800 0.350 6.150
1967 7.800 1.000 8.800 | 5.900 0.500 6.400
1968 7.600 1.200 8.800 | 5.800 0.600 6.400
1969 8.400 1.200 9.600 | 6.300 0.600 6.900
1970 8.400 1.200 9.600 | 6.300 0.600 6.900
1971 9.200 1.200 10.400 | 6.900 0.600 7.500
1972 9.200 1.200 10.400 | 6.900 0.600 7.500
1973 9.700 2.000 11.700 | 7.000 1.000 8.000
1974 9.900 1.800 11.700 | 7.000 0.900 7.900
1975 9.900 1.800 11.700 | 7.000 0.900 7.900
1976 9.900 1.800 11.700 | 7.000 0.900 7.900
1977 9.900 1.800 11.700 | 7.000 0.900 7.900
1978 10.100 2.000 12.100 | 7.100 1.000 8.100
1979 10.160 2.100 12.260 | 7.050 1.050 8.100
1980 10.160 2.100 12.260 | 7.050 1.050 8.100
1981 10.700 2.600 13.300 | 8.000 1.300 9.300
1982 10.800 2.600 13.400 | 8.050 1.300 9.350
1983 10.800 2.600 13.400 | 8.050 1.300 9.350
1984 11.400 2.600 14.000 | 11.400 2.600 14.000
1985 11.400 2.700 14.100 | 11.400 2.700 14.100
1986 11.400 2.900 14.300 | 11.400 2.900 14.300
1987 11.400 2.900 14.300 | 11.400 2.900 14.300
1988 12.120 2.900 15.020 | 12.120 2.900 15.020
1989 12.120 2.900 15.020 | 12.120 2.900 15.020
1990 12.400 2.900 15.300 | 12.400 2.900 15.300
1991 12.400 2.900 15.300 | 12.400 2.900 15.300
1992 12.400 2.900 15.300 | 12.400 2.900 15.300
1993 12.400 2.900 15.300 | 12.400 2.900 15.300
1994 12.400 2.900 15.300 | 12.400 2.900 15.300
1995 12.400 2.900 15.300 | 12.400 2.900 15.300
1996 12.400 2.900 15.300 | 12.400 2.900 15.300
1997 12.400 2.900 15.300 | 12.400 2.900 15.300
1998 12.400 2.900 15.300 | 12.400 2.900 15.300
1999 12.400 2.900 15.300 | 12.400 2.900 15.300
2000 and |
later 12.400 2.900 15.300 | 12.400 2.900 15.300
Source: Social Security Trustees' Report, March 1999 (TR99), Table II.B1 p. 33 {49}, and Table III.A1 p. 168 {184}
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