I have seen a lot of misleading statements regarding Social Security’s (SS) financial health and future. To help educate myself, I decided to take a journey through the nuts and bolts of the program. Join me as I go through the history, dispel myths, and discuss the financial health of Social Security on the 76'th anniversary of its first payouts.
There are two trusts that make up what we call Social Security. The first is the Old-Age and Survivors Insurance (OASI) for Retired workers, their families, and survivors of deceased workers. The second is the Disability Insurance (DI) for disabled workers and their families. Both trusts together are called OASDI or simply Social Security.
Social Security was created by President Franklin D. Roosevelt. The signing of the law (below) took place on August 14, 1935. The program was enacted as a self-funded program not dependent on ANY federal revenue.
On Jan 15, 1935 -- two days before being submitted to Congress -- FDR noticed the actuarial tables contained a large federal revenue injection beginning in 1965. This was against his instructions on how the plan should work. He summoned Secretary Perkins to the White House and directed her to fix this error immediately. One day later as promised, the plan was submitted as a fully "self-supporting" program. I would have hated to be the person working 36 hours straight to fix that mistake!
The first recipient of a monthly benefit was Ida May Fuller, from Ludlow, Vermont. She participated for three years in the program and retired on January 31, 1940; her initial monthly check came to $22.54. Ten years later, a cost of living adjustment (COLA) was added. The photo (left) shows Ida May Fuller receiving her first COLA increased benefit on October 3, 1950.
Between 1950 & 1972 COLA was applied only if Congress enacted special legislation. After 1975 COLA became automatic and was linked to the consumer price index (CPI). Interesting note here, because of this law present day beneficiaries did not receive a COLA increase in 2010 and 2011.
Counter to some right wing blog claims, President Obama had no influence on this automatic adjustment. The 2010 mid-term elections were held just a month after the second announcement of no yearly increase. Looking at old posts on those sites, I see commenters fanning the conspiracy flames just before the 2010 elections. I am thinking this may have helped with Republican gains.
Social Security is funded through a separate 12.4% payroll tax on wages up to $113.7K. Half is paid by the employee (6.2%) and half by the employer (6.2%). This revenue is deposited into the trust accounts. Contrary to popular belief, the trusts have never been moved to the “general fund”. I believe the confusion lies in how it is treated for federal budget accounting purposes. The program has been On-Budget and Off-Budget several times. Currently, it is considered Off-Budget and as such is noted in federal budget documents.
The program went On-Budget in 1968 with President Johnson’s administration. MarshWiggle commented that President Johnson wanted defense spending to appear smaller in the federal budget. I tend to agree with that opinion, as Johnson was trying to cope with the runaway costs of the Vietnam War.
The official reason from the Social Security web site;
This 1968 change grew out of the recommendations of a presidential commission appointed by President Johnson in 1967, and known as the President's Commission on Budget Concepts. The concern of this Commission was not specifically with the Social Security Trust Funds, but rather it was an effort to rationalize what the Commission viewed as a confusing budget presentation.
MarshWiggle also asked what the Federal spending would look like today with SS removed. So let’s do that.
I treated SS as a separate entity and removed all SS payments (700B) for OASDI. I also added in all interest payments (115B). You’ll notice there is still a Social Security spending category for 102 billion. This is a Government transfer to make up for the payroll tax reduction as part of Tax Relief, Unemployment Insurance Re-authorization, and Job Creation Act of 2010. Because the program operates as a separate trust the scheduled payroll revenues still had to be provided.
Removing the off-budget items crowns a new king on the spending hill... Defense. I am sure the military industrial complex and their minions in Congress like to keep SS on all federal spending charts. I wonder how everyone would view defense spending if it was consistently shown in this manner.
Another interesting rumor is that Democrats enacted the law taxing SS benefits. Actually, President Regan signed the 1983 Tax Amendments into law (pictured). Funny how those rumors start and spread huh?
The diagram below shows the 2011 Social Security transactions for OASI program. When you hear people saying SS is on the verge of insolvency, they’re referencing the DI program. Yes, the disability insurance (DI) program is currently using its savings to fund payouts. But it is not insolvent, yet. It needs attention, and I wish Congress would work on this (more on why later).
According to the Trustees, the OASI program is in good shape. “Debbi Downers” often get around this good news by stating the OASI fund is currently paying out more than it takes in. Yes, that’s very clear from the above chart (592B in & 604B out) if you disregard interest payments. The plan detractors conveniently forget about that large sum of money saved up. Why is that huge amount there anyway? The Answer, Baby Boomers. It was just a few years ago that the leading edge of this population bubble started retiring.
From the Trust Annual Report;
Trustees Report, Long-Range ResultsWhen they say “assets are exhausted” they are referring to the built up savings. The Trustee’s point out that the smaller DI fund needs adjustments by 2016 or (they suggest) it could borrow from the larger OASI fund. Both funds together are projected to be OK until 2033 and after that they could pay ~75% of benefits until 2086. Let's see how a congressman interprets this information on his website.
The dollar level of the combined trust funds declines beginning in 2021 until assets are exhausted in 2033. Considered separately, the DI Trust Fund becomes exhausted in 2016 and the OASI Trust Fund becomes exhausted in 2035.
From Rep. Ken Calvert. (R-CA 42nd District) web site
As it has become increasingly obvious that Social Security will go bankrupt without action, Congress has been working to find a solution. The Social Security Board of Trustees has reported that payroll tax revenues will remain above program costs until 2017; thereafter the financial solvency of Social Security will be severely compromised.
Counter to Fox Viewers understanding, there is no vault at Treasury full of worthless IOU’s. The program assets are extra money collected to pay for the boomers as they retire. If you had extra money what would you do with it? Most likely put it in the bank and earn interest right? Or would you bury it in your back yard with treasure map, probably not.
From the SSA web site;
By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are "special issues" of the United States Treasury. Such securities are available only to the trust funds and not available to the public.So no, China is not allowed to own any of our SS Bonds.
Below is a chart showing yearly receipts, expenditures, and fund balances for the OASI trust. The gold bars (purposefully selected color) are scaled on the right, and the lines showing inputs and outputs are scaled to the left. Excess yearly funds are shown when the blue line is above the green line. You can see that there is quite a surplus (2.5T) built up starting with Reagan’s adjustment in 1983.
There are a couple of things floating around in the media that bother me right now. First, the description of the problem, many are pointing out the DI program shortfalls, and calling that a SS problem in general. The DI program is small in comparison to the larger OASI program. The chart shows the size of both programs in 2011.
Now my other aggravation involves solutions being tied to deficit talks. Social Security has never added one penny to the deficit or debt. Making adjustments to the program won’t lower our deficit/debt one penny. So it’s a bit sneaky to “put it on the table” for spending talks.
The program does eventually need an adjustment (before 2033) and the two solutions getting the most press are switching to chained CPI, or raising the retirement age. Both are looking at the program wrong.
Chained CPI was discussed here by kenm and it described how this would hurt future seniors. Increasing the retirement age is often cited along with the talking point that people are living longer. Joan McCarter dispelled this falsity recently here and Krugman here by pointing out that yes the wealthy are living longer, but the poor, not so much.
Taking away from the retiree’s in any form should not be a solution. I believe we should bring in more revenue as a way to shore up the program. How about adding a 3 or 4% tax to carried interest? That would ensure people not paying any payroll tax would contribute to our seniors. Mitt Romney would actually pay a bit more on his ridiculously low tax rate, a rate lower than most of us.
My preferred solution –- majority of Americans agree -- involves raising the cap on wages included in the payroll tax, currently it is set at 113.7K. Why not raise it to 300K, 500K, or 1M? SS would then be similar to Medicare which currently does not have a cap on qualified wages.
We need to shift the current narrative away from cutting benefits too instead raising funds coming into the program. Social Security has allowed our seniors to have a little piece of mind in their retirement years. This has been especially evident during the recent downturn; the program helped them weather the crisis better than most. Let’s help ensure that Social Security will continue to support our disabled and elderly long into the future.
Remember, most of us will eventually pass “GO”, it would be a shame to proceed straight to the poorhouse.