FIG. 2.-Overlaps in beneficiaries age 65 and over, fiscal year 1975 Other program overlaps of interest in considering major policy issues include the following: (1) Medicare, an adjunct to social security, and Medicaid, a supplement to welfare aid, overlap each other, with about 17 percent of Medicaid recipients also eligible for Medicare benefits, although in some cases such dual coverage is supplementary. (2) About 38 percent of civil service retirees, and virtually all military retirees, are entitled to social security benefits-2.5 percent of social security beneficiaries receiving the minimum benefit are retired civil servants. (3) Most SSI recipients are eligible for food stamps, although only about 50 percent actually participate in the program. (4) About 36 percent of food stamp recipients receive benefits from social security as well. Thus, legislative changes in any one of these programs may affect the recipients of several other programs. Retirement policy should be considered for all of these related programs as a system in order to avoid unanticipated consequences detrimental to a beneficiary group or a particular policy goal. IV. Major Policy Issues A. FINANCING SOCIAL SECURITY IN THE SHORT RUN THE BACKGROUND Fund deficits Benefit payments under the social security old-age and survivors and disability insurance programs (OASDI) will exceed receipts of the related trust funds by some $2.9 billion in fiscal 1976 and by about $1.7 billion in the Transition Quarter. Unless legislative action is taken, this deficit will exceed $5 billion in fiscal 1977 under either the economic assumptions used in the President's budget or the Path B assumptions used in CBO's "Five-Year Budget Projections, Fiscal Years 1977-81." Predictions of the extent to which trust fund reserves will be reduced by deficits in later years depend upon the economic assumptions used. The CBO projection shows reserves dropping to $28 billion in 1980 (down from $48 billion in 1975) but rising again in 1981.1 Causes Historically, receipts from payroll taxes for OASDI have exceeded benefit payments, except during economic downturns. The present excess of payments over receipts is the result of rapid inflation combined with a deep recession. Under the provisions of amendments to the Social Security Act which became effective in 1972, benefit payments are automatically adjusted upward annually to compensate for increases in the cost of living. Prices rose rapidly in 1974 as the result of oil and food price increases and other inflationary forces. Simultaneously, business activity deteriorated with resultant unemployment and reductions in personal income. As a consequence of these events, total benefit payments increased rapidly as adjustments were made for price increases, while receipts of the OASDI trust funds, restricted by sluggish business activity, failed to reach anticipated levels. Extent of the problem Table 3 illustrates the problem.' The report of the trustees of the social security fund issued in May 1975, forecast a more rapid decline in the reserves of the OASDI funds than that indicated by the Path B section of Table 3. The trustees predicted that, on the basis of more pessimistic economic assumptions, both the old-age and survivors insurance and the disability insurance funds would be depleted by about 1980 or 1981. 1 Testimony of C. William Fischer, Assistant Director of the Congressional Budget Office, before the House Ways and Means Subcommittee on Social Security, February 3, 1976. Table 3.-PROJECTIONS OF THE RECEIPTS AND DISBURSEMENTS OF OASDI TRUST FUNDS, 1975-1981 [Fiscal years; in billions of dollars] 1 Excludes offsetting receipts. NOTE: These projections do not constitute a CBO estimate of Economic assumptions: PATH A: The rate of increase in real GNP would be 7 percent in 1977 and average 6 percent over the 5-year period. The unemployment rate would drop to 4.5 percent in 1980 and 1981. Inflation would remain at rates of 6-7 percent. PATH B: The rate of increase in real GNP would dip below Corrective action From 1961 to 1972, the ratio of reserves to annual benefits declined from 133 percent to 113 percent. Since then, it has declined sharply to 60 percent. If Congress determines that OASDI trust fund reserves should be maintained at higher levels because of the inherent uncertainties in economic projections, legislative action can be taken to increase receipts, selectively restrict benefit payments, or both. POSSIBLE REVENUE SOLUTIONS TO THE SHORT-RUN PROBLEM Alternatives Alternative ways of increasing OASDI trust fund receipts include(1) increasing the tax rate applicable to the employee and the employer; (2) increasing the tax rate applicable to the employer only; (3) increasing the maximum taxable earnings for both employees and employers; (4) increasing the maximum taxable earnings for the employer only; (5) a transfer of part of the Medicare payroll tax to the OASDI funds; (6) a regular appropriation from general revenues in amounts sufficient to maintain the fund reserves at the desired level; (7) a one-time loan or grant from general revenue in an amount sufficient to insure that the fund reserves are maintained at the desired level; or (8) a levy of an excise tax on some activity or commodity such as energy with the proceeds earmarked for the OASDI funds. Present tax structure The present social security tax structure involves the following payroll tax rates applicable both to the employee and the employer on the first $15,300 in wages and salaries: OASI_ Medicare--- Total... Percent 4. 375 5. 850 Since the tax is paid by both the employee and the employer, the combined rate is 11.7 percent. The OASI and DI rates (4.95 percent combined on both employee and employer) are fixed by present law until the year 2011 when the combined rate will increase by 1 percent for both employee and employer. The taxable wage base is adjusted upward by the rise in average wages each time an adjustment in the benefit structure results from an increase in the cost of living. This automatic adjustment is expected to increase the wage base from the present $15,300 to $16,500 on January 1, 1977. Increase tax rates One of the alternatives for increasing revenues for the OASI program is to increase the tax rate applicable to both the employer and the employee. The President's 1977 fiscal year budget proposes a tax rate increase of 0.3 percent on both employers and employees effective January 1, 1977, raising the total social security payroll tax from 11.7 percent to 12.3 percent. According to the President's budget, the proposed rate increase would generate $3.3 billion in additional revenue in the nine months of the 1977 fiscal year for which it would be effective. Social security receipts would exceed outlays in fiscal years 1977 through 1981 if this rate increase and recommended benefit adjustments are adopted. The recommended benefit adjustments are discussed in the next section of this paper. A tax rate increase distributes the burden proportionately on all taxpayers who pay on less than the maximum taxable earnings, avoids borrowings or grants from outside sources and is not necessarily inconsistent with long-run remedies. On the other hand, payroll tax rates are already high (more than half the U.S. households pay more social security taxes than personal income taxes), and the burden falls relatively harder on low-income salaried and wage employees. Half the payroll taxes collected in 1977 will relate to the wages of persons earning less than $7,500 a year. Others argue that the regressivity of the tax is more than compensated for by the relatively higher benefits enjoyed by low-income people upon retirement. Increase tax base Another alternative for increasing the OASDI revenues is to increase the amount of the wage or salary subject to tax. This would cause higher income people to bear more of the burden of financing the system. It is argued that the higher income individuals have greater ability to pay and, in any case, would be paying no greater portion of their income in social security taxes than do lower income people. On the other hand, since benefits are computed on the basis of average wages included in computing the tax, future benefits would be higher, although not by enough to increase the long-run deficit (to be discussed later). It is also argued that increasing the burden on higher income individuals could have an adverse effect on capital formation. Applying increases to employer only Eliminating the ceiling on the wage base for purposes of computing the employers' tax, but retaining the ceiling for the employees' tax, could eliminate the objection that the higher wage base would create a long-run problem of increasing benefits. It would also be possible to increase the tax rate on the employer without increasing the employee's rate. However, either of these approaches would sharply increase the employer's total tax, and the increase might eventually be passed on to employees through smaller or less frequent wage increases or through a shift to labor-saving machinery. |