SOCIAL SECURITY: $967 billion; 24% of Federal Outlays
Social Security Developments:
- July 13, 2017: The Social Security Trustees released their annual report projecting that the Social Security Retirement and Disability Trust Funds will be have insufficient resources to fully cover benefits beginning in 2034.
- FedWeb: The solution is bipartisan action — similar to action taken in 1983 by the National Commission on Social Security Reform including Senators Moynihan (D-NY), Dole (R-KS) and others — to enact changes that gradually slow the growth of benefits and increase payroll tax revenues. The sooner these adjustments are made, the more slowly they can be phased-in. However, if Presidents and Congresses avoid acting until depletion of the Trust Funds is imminent, then more drastic benefit cuts and tax increases will be unavoidable. For examples of the types of bipartisan actions that can be taken, see the Domenici-Rivlin and Simpson-Bowles plans from 2010.
Social Security in a Nutshell:
- Social Security consists of two separate parts: Old Age and Survivors Insurance (OASI) with outlays of $817 billion; and Disability Insurance (DI) with outlays of $150 billion.
- Under OASI, monthly benefits are paid to retired workers, their spouses and dependent children, and survivors of deceased workers (spouses, dependent children and dependent parents). Average monthly benefits for retired workers: $1,348 in 2016. Social Security is the major source of income for most of the elderly. Generally, a worker must have 10 years (40 quarters) of covered employment to be eligible for retirement benefits.
- Retirement Age: The Social Security Amendments of 1983 established a very gradual schedule for increasing the full retirement eligibility age from 65 to 67. People can still elect to take early retirement at age 62 with lower benefits.
CRS: Social Security Retirement Age
- Initial OASI benefits are based on a worker’s past average monthly earnings, indexed to reflect changes in national wage levels (and adjusted upward for low earners). Each subsequent year, benefits are adjusted upward to compensate for consumer price inflation. These annual adjustments are called “cost of living adjustments,” or COLAs. The Social Security benefit formula is progressive, returning a higher percentage of a lower-wage worker’s average monthly earnings. In 1983, Congress made up to 50% of Social Security benefits taxable for higher income beneficiaries; and in 1993, up to 85% was made taxable.
- Social Security Survivors Insurance (SI) is similar to life insurance. When a worker dies, his or her spouse, dependent children, disabled children over 16, dependent parents, and former spouse caring for children may qualify for Social Security survivors benefits.
- Social Security Disability Insurance (SSDI) Disability Insurance provides monthly cash benefits for disabled workers (and their dependents) who have paid into the system, met minimum work requirements, and qualify as unable to engage in “substantial gainful activity” due to a physical or mental impairment. Monthly benefits are paid to disabled workers (who have not yet reached retirement age) and their families. Average monthly benefits for disabled workers: $1,166 in 2016.
- Similar to retirement benefits, initial disability benefits are based on a worker’s past average monthly earnings, indexed to reflect changes in national wage levels and adjusted upward for low earners. SSDI benefits, once approved, continue as long as the individual remains disabled or until he or she reaches the normal retirement age, at which time the benefits automatically convert to retirement benefits. Periodically, SSA conducts “continuing disability reviews” (CDRs) to determine whether the individual is still disabled. Twenty-four months after SSDI coverage begins, the disabled worker is also entitled to Medicare coverage.
- Poverty Reduction: According to the nonpartisan GAO, Poverty Rates for Elderly have Declined Faster than for other Groups
- Payroll Taxes: The Social Security system is sustained by payroll taxes of 12.4%—half paid by employers and half by employees (with self-employed individuals paying roughly the full amount). But payroll taxes are assessed on income only up to a maximum cap: $118,500 in 2016.
CRS: Increasing the Social Security Payroll Tax Base–Options and Effects on Tax Burdens
Key Facts About Social Security:
- Provides monthly cash benefits to retired or disabled workers and their family members and to the family members of deceased workers.
- 97% of Americans ages 60 – 89 either receive Social Security or will receive it.
- 170 million workers are in Social Security-covered employment.
- Payroll Tax: in 2017, employers and employees each pay 6.2% of earnings up to to $127,200.
- Social Security dramatically cuts poverty among seniors; 41% would be in poverty w/o Social Security.
- Social Security benefits are low compared with other advanced countries, replacing only 38% of past earnings.
- Most elderly rely on Social Security for the majority of their income.
- 3 million children receive Social Security as dependents of retired, disabled, or deceased workers.
- Social Security Disability Insurance provides monthly benefits to insured disabled workers under the full retirement age (and to their eligible dependents) in amounts related to an individual’s work history and career-average earnings in jobs covered under Social Security. SSDI beneficiaries are also eligible for Medicare following a 24-month waiting period.
Long-term Outlook for Social Security and Implications for Fiscal Policy:
- In anticipation of the baby boom retirement, the Social Security system built up surpluses of nearly $3 trillion over the last three decades;
- Annual Social Security benefits will soon begin to exceed payroll tax revenues and this trend will continue as the number of beneficiaries grows at a substantially faster rate than the number of covered workers;
- In order to cover the growing shortfall, the Social Security system will draw down surpluses;
- The surpluses, by law, have been invested in U.S. Treasury bonds (the safest securities available);
- It is projected that around 2034, the surpluses will be depleted and will no longer be able to cover the gap between revenues and expenditures;
- At that time, payroll taxes will only cover about 77% of program costs (assuming current law remains unchanged); and
- The Social Security Administration would be forced to reduce benefit payments.
- In the immediate future, as the necessity of drawing down Social Security surpluses grows, the Treasury’s obligation to redeem bonds held by the Social Security Trust Funds will place increasing fiscal pressures on credit markets and the economy. To redeem the securities, the Treasury will have to borrow funds, raise taxes, or cut spending, or some combination of the three. The most likely scenario is borrowing; that is, the debt currently held by the Social Security Trust funds will be “rolled over” (converted) into debt held by the public. If America’s current non–Social Security budget deficits continue, the combined pressures of borrowing to cover budget deficits and to redeem bonds held by the Social Security Trust Funds risk higher interest rates, inflation, and greater indebtedness to foreign nations.
Background and Resources:
- CBO: Changes to CBO’s Long-Term Social Security Projections Since 2016 Oct 2017
- CBO: Long-Term Projections for Social Security Updated annually
- SSA Fact Sheet: Social Security – number of people covered and average benefits 2017
- CRS: Social Security – The Trust Funds Sept 2017
- CRS: Social Security – What Would Happen If the Trust Funds Ran Out Sept 2017
- CBPP: Top Ten Facts About Social Security Aug 2017
- Annual Report of the Social Security Trustees July 2017
- CRS: Social Security Survivors Benefits May 2017
- CBO: Options for Social Security (Taxation of Earnings; Benefit Formula; Retirement Age; COLAs) March 2017
- CRS: Social Security – The Lump-Sum Death Benefit Feb 2017
- CRS: Social Security Primer Dec 2016
- CBO: Long Term Projections for Social Security Dec 2016
- CRS: Social Security–What Would Happen if the Trust Funds Ran Out? Nov 2016
- CRS: How Social Security Benefits are Computed_In Brief Oct 2016
- CRS: Social Security – Cost-of-Living Adjustments Oct 2016
- CRS: Social Security – Calculation and History of Taxing Benefits Oct 2016
- CBO: Social Security Disability Insurance–Participation and Spending June 2016
- CRS: Social Security – The Windfall Elimination Provision (WEP) May 2016
- CRS: Primer on Disability Benefits Aug 2014
- CRS: Social Security Disability Insurance Trust Fund – Background and Solvency Issues Aug 2014
- CRS: Social Security – Trust Fund Investment Practices Aug 2014
- CRS: Social Security Minimum Benefits June 2014
- CRS Social Security – The Government Pension Offset (GPO) April 2014
- CRS: Social Security DI–Becoming Insured, Calculating Benefit Payments, and the Effect of Dropout Year Provisions Jan 2014
- CRS: Social Security – Major Decisions in the House and Senate Since 1935 Jan 2014
- CRS: Ticket to Work and Self-Sufficiency Program Jan 2014
- GAO: Social Security Reform–Answers to Key Questions May 2005