The Old Age Survivors and Disability Insurance Program (OASDI), commonly called Social Security was one of the centerpieces of President Franklin D. Roosevelt's New Deal, For Roosevelt, the program guaranteed “the right to adequate protection from the economic fears of old age, sickness, accident, and unemployment." As William E. Springs, a senior fellow at the Economic Policy Institute, explains: “Social Security is an insurance program that protects workers and their families against the income loss that occurs when a worker retires, becomes disabled, or dies. All workers will eventually either grow too old to compete in the labor market, become disabled, or die. OASDI insures all workers and their families against these universal risks, while spreading the costs and benefits of that insurance protection among the entire workforce.”
By almost all accounts, Social Security has been a highly effective social insurance program. Poverty rates among the elderly have fallen from an estimated 50 percent in 1935 to 10.2% in 2003. Over two-thirds of elderly Social service beneficiaries receive more than half their income from Social Security, and, for 16 percent, Social Security is their sole income. And for certain segments of the population, Social Security is even more important. Racism made it more difficult for Black Americans to get jobs that paid a decent wage—wages that allowed for savings—and provided pension benefits. As a result 40 percent of elderly Black Americans are supported solely through their Social Security benefit. Elderly women are also disproportionately reliant on Social Security. According to the Century Foundation, a quarter of elderly women rely on social security for at least 90 percent of their income, a rate of reliance twice that of their male counterparts.
Social Security benefits are funded through Federal Insurance Contributions Act (FICA) payroll taxes of 6.2 percent on both employers and employees. Social Security was established as a “pay-as-you-go system,” where the current workforce’s payroll taxes paid for current retirees benefits.
At some point in the next twenty years future, Social Security benefit payouts will be greater than FICA receipts. No one knows exactly when this will happen, though the Social Security Administration (SSA) has annual estimates under three different economic scenarios, and the Congregational Budget Office put out its own analysis as well. The good news is that over the past decade, the date has been continually pushed further into the future. The even better news is that this shortfall isn’t taking us completely by surprise nor is it the first time the U.S. has faced the problem.
In 1981, President Reagan established the National Commission on Social Security Reform (informally known as the Greenspan Commission after its Chairman, Alan Greenspan). At the time, analysts thought that Social Service faced a solvency crisis as early as August of 1983. The Commission released its report in January 1983, and its recommendations were enacted in the Social Security Amendment Act of 1983. Those recommendations included an increase in the self-employment tax, the partial taxation of Social Security benefits to wealthier retirees, coverage of all federal employees and a gradual increase of the retirement age from 65 to 67, starting in 2000. The bill also accelerated the scheduled increases of Social Security tax rates. These changes did not simply restore solvency to the Trust Fund; they also created a surplus of revenue.
This surplus has been invested in special issue, interest bearing U.S. Treasury Bonds. When payroll receipts are no longer able to fund benefits, the Trust Fund will, for at least two decades, be able to rely on interest and then the bonds themselves to pay benefits. The Social Security Administration’s Board of Trustees estimates that beginning in 2018, payroll tax revenues will no longer cover the cost of benefit payments, and the program will begin relying on interest payments and later the redeemed bonds to meet benefit obligations. By 2042, the Trustees estimate that the surplus will have been exhausted, and the system will again revert to “pay-as-you-go.” At that point, payroll taxes will only be able to cover 70% of promised benefits. The Congregational Budget Office’s analysis suggests that the surplus will last until 2052, at which point Social Security would still be able to payout 80% of benefits. The complexity of economic predictions makes it impossible to account for all the possible circumstances that could arise over the coming decades.