Social Security

V

Programs

Several federal agencies today support and administer the various Social Security programs. The Administration for Children and Families within Health and Human Services (HHS) supports TANF by giving block grants to states, which administer the program. The SSA jointly administers Medicare with the Health Care Financing Administration of HHS. The U.S. Employment and Training Administration of the Department of Labor administers Unemployment Compensation. The SSA itself includes 10 regional offices, 6 program centers, and more than 1,300 district and branch offices.

The programs associated with Social Security include Old-Age, Survivors’, and Disability Insurance (OASDI); Medicare; Unemployment Compensation; and Supplemental Security Income (SSI). For people who have worked for a living, OASDI and Medicare provide support during their older years and when they have stopped working. Unemployment Compensation provides temporary financial help during periods between jobs. SSI provides income to people who cannot work for various reasons.

A

Retirement, Disability, Death, and Medicare Benefits

OASDI, Medicare hospital insurance, and Medicare supplementary medical insurance are separately financed segments of Social Security, each with separate trust funds. (OASDI has two funds.) The OASDI program provides benefits for the aged, for the disabled, and for survivors of deceased workers. Financing for the cash benefits for OASDI comes from earmarked payroll taxes levied on employees, their employers, and the self-employed. The rate of these contributions is based on the taxable earnings of employees, up to a maximum taxable amount, with the employer contributing an equal amount. Self-employed people contribute twice the amount levied on employees.

Social Security benefits replace a portion of a person’s former earned income. In the interests of fairness and saving money in Social Security trust funds, the government has structured Social Security benefits to provide proportionately more support to poorer citizens and less to wealthier citizens, in relation to income earned during working years. In other words, those who earned low wages or salaries receive a larger percentage of their former income in benefits than do recipients who had higher incomes. In couples with just one worker contributing to Social Security, the noncontributing spouse who first claims benefits at age 65 or older receives 50 percent of the amount paid to his or her spouse. Similar percentages are payable to disabled individuals and their spouses. Surviving spouses and children receive a percentage of the retirement benefit computed from the earnings of the deceased earner.

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In 2001 an estimated 153 million people contributed to Social Security funds. During an average month in 2001, almost 46 million people drew Social Security cash benefits. About 62 percent of the beneficiaries were retirees. The amount of cash benefits people receive varies depending on the combined wages, salaries, and self-employment income of the primary earner or earners in a family. The law specifies certain minimum and maximum monthly benefits. To keep the cash benefits in line with inflation, the SSA indexes them to increases in the cost of living. These adjustments—known as cost-of-living adjustments (COLAs)—are determined according to changes in the consumer price index, a figure compiled by the government to represent the current cost of a selection of goods and services.

Most eligible individuals can start receiving partial old-age benefits at age 62. Receipt of full benefits depends on year of birth. Those born in 1937 or earlier can receive full benefits starting at age 65, while those born after 1959 must wait until age 67 to receive full benefits. For eligible workers between 62 and 65, the amount of benefits depends on age and earnings.

Medicare health insurance for the elderly is split into two parts, hospital insurance, also known as part A, and supplementary medical insurance (SMI), also known as part B. Medicare hospital insurance pays for inpatient hospital services, nursing home and hospice care, and home health services. Financing for this part of Medicare comes for the most part from payroll taxes. Medicare supplementary medical insurance, which pays for many services provided by physicians, is funded in part by uniform monthly contributions from aged and disabled people enrolled in the program, and in part by federal general revenues. Legislation passed in 1982 and 1984 froze the share of SMI costs covered by federal revenues at 75 percent. In 2001 the Medicare SMI monthly premium for each participant was $54. In addition, patients are responsible for a deductible portion of their hospital costs and for copayment of 20 percent of physician charges. See also Health Insurance.

Americans pay significantly more for OASDI and Medicare hospital insurance today than they did when the program was first started. The rate of employee contribution, which was one percent of wages when the program began in 1937, had increased to 7.65 percent by 2002. Of that amount, 6.2 percent was slated for OASDI and 1.45 percent for hospital insurance. The maximum amount of annual income subject to taxation for OASDI and Medicare hospital insurance was $88,900 in 2002.

B

Unemployment Compensation

The Unemployment Compensation program provides monetary support for people who have lost jobs. The Employment Service program (established prior to the Social Security Act) provides training and job-finding services for people seeking work. The two programs are controlled cooperatively by the federal and state governments. Titles III and IX of the Social Security Act authorized the federal government to grant money to states to administer unemployment compensation, and established a federal unemployment insurance trust fund. The Federal Unemployment Tax Act of 1939 authorized the collection of both federal and state payroll taxes from employers and specified how these funds were to be used. Most of the federal tax can be offset by employer contributions to state funds under an approved state unemployment compensation law. The federal government uses its small portion of the tax to pay for the administrative costs of the Unemployment Compensation and Employment Service programs, and for loans to states whose funds run low.

State financing and benefit laws vary widely. In general, unemployment compensation benefits under state laws are intended to replace about 50 percent of the wages previously earned by a worker. Maximum weekly benefits provisions, however, result in benefits equal to less than 50 percent of wages for most higher-earning workers. All states pay benefits for up to 26 weeks to qualified recipients. In some states, the duration of benefits depends on the amount earned and the number of weeks worked in a previous year. In others, all recipients are entitled to benefits for the same length of time. During periods of heavy unemployment, federal law authorizes extended benefits, in some cases up to 39 weeks. For example, in 1975, during a period of high unemployment, extended benefits were payable for up to 65 weeks. Federal payroll taxes help to finance such extended benefits. See also Unemployment Insurance.

C

Supplemental Security Income

Under the Supplemental Security Income program (SSI), the federal government provides payments to elderly, blind, or disabled individuals with low income. SSI replaced federally subsidized programs of state assistance that existed from 1936 through 1973 for these three groups. The administration of President Richard Nixon implemented SSI in 1972, and the program began in 1974. Funding for SSI comes from general federal revenues, and many states add to SSI benefits from their own revenues.

SSI programs take into consideration the income and resources of individuals and families to determine the amount of aid provided to recipients. Under the Social Security Act, the federal government also provides financial grants to the states to operate programs offering maternal and child health care, services to disabled children, child welfare services, and social services such as daycare for children of working mothers. See also Child Welfare.

The government has relied on SSI to provide a safety net for the working and retired poor—that is, people who have worked, but earned minimal wages or did not work long enough to become vested in the Social Security Old Age or Disability programs. By the end of 2000, some 5.2 million disabled persons, 1.3 million aged persons, and 79,000 blind persons were receiving SSI benefits. The average monthly benefit for all recipients was $379, although benefits varied by eligibility status.

VI

Challenges to Stability and Proposals for Reform

In 2001 OASDI benefits, the largest of all social insurance payments and the largest single portion of the federal budget, amounted to about 22.5 percent of federal expenditures and 4.5 percent of the U.S. gross domestic product (the total goods and services produced within a country). In the future, the proportion of federal spending allocated to social support programs may increase, because of factors such as the growing number of senior citizens in the United States, an increasing population, and rising medical costs.

Since the inception of Social Security, the government had administrated it as a pay-as-you-go program, paying benefits out of current receipts rather than building up a capital fund for each contributor. However, in the mid-1970s, expenditures for Social Security benefits began to exceed tax payments coming into the trust funds. This occurred because a serious recession reduced employment and trust-fund revenues while inflation simultaneously created a need to increase benefits. Public concern developed over the possibility that the Social Security system might become bankrupt over time. Since the funds had been accumulating for more than 35 years, they had a reserve of more than $40 billion in 1976, so the system was in no immediate danger. Nevertheless, experts warned that in the long term the reserve would eventually become depleted. In an effort to restore the financial integrity of Social Security, the government began to reform the system of contributions and benefits.

Many significant changes came under the Social Security Reform Act of 1983, which resulted from recommendations of a National Commission on Social Security Reform, also known as the Greenspan Commission after its chairman, Alan Greenspan. The 1983 act provided for increased revenues for Social Security by authorizing taxes on Social Security benefits. It also accelerated scheduled increases in payroll tax rates from 1984 to 1989 and increased the tax rates on the self-employed.

Even with these reforms, however, longer-range financial problems remained. Many of these problems were related to demographic changes that would increase the amount that Social Security programs would have to pay in benefits. The number of elderly people relative to working-age adults as a proportion of the entire population had been rising steadily. In the 1990s the government estimated that by 2050 there would be twice as many U.S. citizens aged 65 or older than there were in 1975. The Greenspan Commission had recommended that the problem of having too many retirees for each contributor to Social Security be solved by raising the retirement age, which would reduce the cost of benefits in the future. As a result, the 1983 reform act provided for a gradual increase in the minimum age for receiving full retirement benefits.

Continuing concerns over the solvency of the Social Security trust funds led the SSA to create two long-term strategic plans during the late 1980s and early 1990s. In 1994 President Clinton appointed an Advisory Council on Social Security, the last of several since the 1930s, to review the status of the trust funds. In 1997 the council made its final report, in which it recommended reforms to Social Security. Among its recommendations, the council advocated building up trust-fund reserves, aligning benefits more closely with taxes paid, offering incentives to individuals to work to a later age, and accelerating the move toward later standard retirement ages. The council also advocated methods of both improving and encouraging the use of private investment and employer pension plans as alternatives or supplements to Social Security.

Advisory councils ended in 1995 when the SSA returned to independent agency status, and a permanent Social Security Advisory Board formed in 1997. The board was established to advise the president, Congress, and the commissioner of Social Security. A report issued by the board in 1998 echoed the recommendations of the last advisory board, but added further recommendations to curtail benefits, especially for people in higher income brackets; to reduce cost-of-living adjustments; to increase payroll taxes and taxes on benefits; and to phase in a later retirement age of 70.

One of the most controversial issues facing the Social Security system today is whether contributors ought to have some control over how their compulsory contributions are invested, as opposed to the federal government making these decisions. Plans that would allow workers partial or full control over Social Security investments are called privatization schemes. Proponents of privatization argue that the returns to Social Security investments historically have been low compared to what contributors would have enjoyed by investing in equities (the stock market). Opponents argue that Social Security is designed to be a final safety net for many economically vulnerable citizens and should not be subject to the risks of the stock market. Privatization schemes enjoyed some popularity in Congress during the mid- and late 1990s when the stock market was booming, but they became less popular as the market retreated and stagnated.

Fundamental differences of opinion on how to reform Social Security have thus far kept the government from making any major changes to the system. Recent estimates indicate that the Social Security trust fund will be exhausted by around 2041. Given the uncertain soundness of the system, efforts at reform are likely to continue for some time to come.