The Future Financial Status of the Social Security Program. The concepts of solvency, sustainability, and budget impact are common in discussions of Social Security, but are not well understood.
Currently, the Social Security Board of Trustees projects program cost to rise by 2. This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children per woman. Importantly, this shortfall is basically stable after 2. Social Security program on a sustainable basis for the foreseeable future. Finally, as Treasury debt securities (trust fund assets) are redeemed in the future, they will just be replaced with public debt. If trust fund assets are exhausted without reform, benefits will necessarily be lowered with no effect on budget deficits.
The author is the Chief Actuary of the Social Security Administration. Acknowledgments: This article is possible only as a result of the consistent efforts of the Social Security Board of Trustees and their staffs in producing a highly professional and informative report each year. Particular appreciation is extended to Karen Glenn of the Office of the Chief Actuary for her invaluable review and editing of the article. In addition, Michael Leonesio, David Weaver, and Jason Fichtner of the Office of Retirement and Disability Policy provided critical and constructive comments on the draft that contributed substantially to the end product.
The findings and conclusions presented in the Bulletin are those of the authors and do not necessarily represent the views of the Social Security Administration. Introduction. Selected Abbreviations. DIDisability Insurance. GDPgross domestic product. HIHospital Insurance.
NRAnormal retirement age. OASDIOld- Age, Survivors, and Disability Insurance.
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OASIOld- Age and Survivors Insurance. PAYGOpay as you go.
As a result of changes to Social Security enacted in 1. At the point where the reserves are used up, continuing taxes are expected to be enough to pay 7. Thus, the Congress will need to make changes to the scheduled benefits and revenue sources for the program in the future. The Social Security Board of Trustees project that changes equivalent to an immediate reduction in benefits of about 1. Since the inception of the Social Security program in 1.
Social Security provides a basic level of monthly income to workers and their families after the workers have reached old age, become disabled, or died. The program now provides benefits to over 5. Further modifications of the program are a certainty as the Congress continues to evolve and shape this program, reflecting the desires of each new generation. This article describes the financial status of the Social Security program, including an analysis of the concepts of solvency and sustainability and the relationship of Social Security to the overall federal unified budget. The future is uncertain in many respects, and based on new information, projections of the financial status of the Social Security program vary somewhat over time. What is virtually certain is that the benefits that almost all Americans become entitled to and most depend on will be continued into the future with modifications deemed appropriate by their elected representatives in the Congress.
Annual Reports by the Trustees. Each year, starting in 1.
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The Federal Programs That Are Eating the Budget Alive. How Does Mandatory Spending Affect the U.S. The 2015 Social Security and Medicare Trustees Reports paint a dire picture of both programs. Does payroll tax (FICA). Office of Personnel Management. About Open 'About' Submenu. Federal Leadership Programs; Leadership Development; Federal Executive Institute. Two of the three parts of FERS. What Is the FICA Withholding Rate? The FICA tax is actually comprised of two separate taxes. An exempt withholding status only applies to federal income tax withholding and does not extend to the FICA withholding rate.
The FICA withholdings are known as.
Social Security Board of Trustees has presented a required report on the financial status of the program to the Congress. The board has six members, including the Secretary of the Treasury as the managing trustee, the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security, plus two public trustees appointed by the president and confirmed by the senate. The Social Security Act requires that the annual report include (1) the financial operations of the trust funds in the most recent past year, (2) the expected financial operations of the trust funds over the next 5 years, and (3) an analysis of the actuarial status of the program. The recent financial operations and the operations projected for the next few years are a finger on the pulse of the program.
The actuarial status of the program is intended to provide an early warning of any potential longer- term financial issues or challenges that will be facing the program. The longer- term analysis of the actuarial status of the Social Security trust funds provides the Congress with an essential early warning of future challenges and provides the time to make desired changes in a careful and thoughtful manner. Although legislative changes may sometimes appear to be decided at the last minute before a crisis, the long advance warning of financial challenges provided by the trustees in the annual reports has always promoted broad consideration of options for change that allow any eventual modification of the law to be based on sound analysis and consideration of a comprehensive view of possible changes and their effects. Since the last major amendments to the Social Security program were enacted in 1. The 1. 98. 3 Trustees Report indicated that the Social Security program was put into .
This meant that under the intermediate assumptions used in that report, representing the trustees' best estimate of future experience at that time, program financing was expected to be sufficient to pay scheduled benefits in full through 2. However, that report also indicated that well before 2. The report also showed that these reserves would be approaching exhaustion in 2. Thus, even at the enactment of the 1. Amendments to the Social Security Act, it was known that further changes would be needed. The continuing projections in the annual reports since 1.
Solvency of the Social Security Program. When individuals look at the financial status of the Social Security program, they often ask, . Solvency for the Social Security program is defined as the ability of the trust funds at any point in time to pay the full scheduled benefits in the law on a timely basis. The two Social Security trust funds, those for Old- Age and Survivors Insurance (OASI) benefits and for Disability Insurance (DI) benefits, are special. Along with the Hospital Insurance (HI) Trust Fund of the Medicare program, the OASI and DI Trust Funds have the important feature that benefits can only be paid to the extent that the trust funds actually have assets to draw on to pay the benefits. Unlike the rest of federal government operations, these three trust fund programs do not have the ability to borrow in order to continue paying benefits when the dedicated taxes and trust fund reserves are not sufficient. Because the ability of these programs to pay benefits is directly dependent on the availability of assets in their respective trust funds, the existence of assets over time in the future is the critical indicator of solvency.
Taken from the 2. Trustees Report, Chart 1 shows that under the trustees' intermediate assumptions (alternative II), the combined assets of the OASI and DI Trust Funds will soon peak at over 3. The relatively more optimistic assumptions of the low- cost alternative I show solvency for the program throughout the 7.
III assumptions show trust fund exhaustion even sooner than 2. These alternative sets of assumptions are just one of several ways the trustees illustrate the uncertainty of long- range projections for the future. Chart 1. Combined OASI and DI Trust Fund assets as a percentage of program cost, 1. SOURCE: 2. 00. 9 Social Security Trustees Report, Figure II. D6 and Table IV. B3. NOTES: Alternative I = low- cost assumptions; alternative II = intermediate assumptions; alternative III = high- cost assumptions. Exhaustion of trust fund assets is projected to occur under the intermediate assumptions because program cost will begin to exceed the tax revenues dedicated to the trust funds in the future, requiring increasing amounts of net redemptions from the trust funds.
The assumptions adopted for the 2. Trustees Report resulted in projected . It is only when the reserves in the trust funds are exhausted that timely payment of full scheduled benefits becomes an issue. As shown in the chart, at the time of projected trust fund exhaustion in 2.
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This precipitous drop in the level of benefits that would be payable in the absence of any legislative action between now and 2. Trustees Report. Historically, the OASI and DI Trust Funds have reached times where dedicated tax revenue fell short of the cost of providing benefits and also times where the trust funds have reached the brink of exhaustion of assets. For years 1. 97. 3 through 1. OASI and DI Trust Funds were operating with a negative cash flow that was depleting the trust fund reserves toward exhaustion (see Chart 3).
The Social Security Amendments of 1. The 1. 97. 7 amendments included a fundamental change in the indexation of benefits from one generation to the next. The 1. 98. 3 amendments included increases in the normal retirement age (NRA) from 6.
Social Security benefits with revenue credited to the trust funds. Chart 3. OASDI net cash flows as a percentage of gross domestic product (GDP), 1. SOURCE: Social Security Administration, Office of the Chief Actuary.
However, the occurrence of a negative cash flow, when tax revenue alone is insufficient to pay full scheduled benefits, does not necessarily mean that the trust funds are moving toward exhaustion. In fact, in a perfectly pay- as- you- go (PAYGO) financing approach, with the assets in the trust fund maintained consistently at the level of a .
This would occur when the interest rate on the trust fund assets is greater than the rate of growth in program cost. In this case, interest on the trust fund assets would be more than enough to grow the assets as fast as program cost, leaving some of the interest available to augment current tax revenue to meet current cost.
Under the trustees' current intermediate assumptions, the long- term average real interest rate is assumed at 2.