NASE Blogs

Social Security In 10 Minutes [Guest Post]

Friday, March 11, 2011

Note: This post was written by NASE Chief Counsel Mike Beene.

We hear about it. We talk about it. We know it is a big budget item. We blame it for many of our ills. And hardly anyone I talk to can comfortably explain it.      

After the stock market crashed in 1929 the country ended up with massive unemployment. President Roosevelt signed the Social Security Act into law in 1935.The first taxes were collected in January of 1937, and 53,000 retirees were paid benefits that year. Survivor benefits were first paid in 1940, and disability benefits in 1957. Today, the Social Security Administration (SSA) is headquartered in Baltimore and has numerous field offices. Seventy thousand people work for the SSA. Some 60 million individuals receive a payment each month.         

Social Security was set up to be a self-sustaining program. Its assets are held apart from the general funds of the treasury in two trust funds, which are also managed by the treasury department: The Old-Age, Survivors Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI).The OASI ,which pays retirement and, beginning in 1940, survivor benefits, was formed in 1937 and receives the larger portion of revenue. The DI was formed in 1957 and began paying disability benefits that year. Your social security taxes go directly to these trusts and by law the funds can only pay benefits and program administration. Unrelated to this discussion and not a part of the trust funds is a welfare program, Supplemental Security Income(SSI), which is administered from the general revenues of the U.S. government.           

Where does the trust fund money come from? From you through payroll and self-employment tax.  The self-employed pay roughly 15.3% of income in self-employment tax. The social security part of the tax is currently 12.4% of income up to $106,800, with a one-time 2% reduction for 2011 earned income.  The remaining 2.9% goes to Medicare Part A hospital insurance and does not have a ceiling. (For those employed by another, you pay half and the employer pays half to get to the same totals, roughly speaking). Since its inception, Social Security has taken in more than it has paid out in benefits and administration. Approximately $2.5 trillion more.      

What is in the trust funds? Instead of holding $2.5 trillion in cash, tax receipts are invested daily in “special issues” of the U.S. Treasury. These are similar to treasury bonds, but are not marketable (the funds historically held some bonds also).These are really IOUs backed by the United States. They pay interest set by formula but similar to government bonds. Their value does not fluctuate and they can be redeemed for their face amount plus interest accrued on any day immediately. When you see the over 14 trillion dollar debt owed by the U.S., 2.5 trillion of that is this money owed to the trust funds. 

What is the current financial health of Social Security? The funds today have enough coming in to cover payouts. However, this will quickly change. If benefit levels and tax rates remain the same, by 2016 the program costs will exceed revenues. That means we will start having to redeem and spend portions of the $2.5 trillion. By 2037, even with full repayment of the IOUs, the SSA projects the funds will be exhausted. The arguments concern not if but when. The only way to change this outcome is through a change in pay out and/or a change in intake. The population numbers do not bode well. When the Baby Boomers retire, there is not the population size behind them to pay for their benefits at current standards.           

Since I paid in, don’t I have a legal right to be paid? No. The Supreme Court has held that paying in creates no property right. Congress could today eliminate the program or change eligibility. You might have a moral or political right, but not a legal one. The system is not one of individual account ownership or even individual accounts and efforts to move in that direction have failed on several occasions. Remember, the system has always paid out money to beneficiaries with money coming in today. Without continued pay in, the system quickly collapses and benefits dry up. Those receiving benefits now paid for the generation ahead of them, so any break in the cycle has consequences. Unless we take steps to responsibly fix the system, there will come a day when the only options are harsh.

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