TRENDS AND ISSUES IN FEDERAL RETIREMENT AND DISABILITY PROGRAMS

1. Summary

Over one-third of Federal outlays are devoted to the replacement of lost income or income supplementation for Americans who are retired, disabled, or the survivors of deceased breadwinners. Nearly one-third of all Federal revenues are derived from the special taxes levied to fund these retirement systems. And nearly half the yearly growth in the current services budget results from rising numbers of beneficiaries entitled under these programs, from automatic cost-of-living increases for these beneficiaries, and from higher real benefits caused by a rising wage base.

Estimated outlays for retirement programs in fiscal 1977 under current law will total $150 billion, about $87 billion of which is for social security and railroad retirement benefits. Another $29 billion goes for Medicare and the Federal share of that part of Medicaid that aids the aged and disabled. Civil service and military retirement account for $18 billion, and veterans disability compensation and pension benefits total $8 billion. Welfare programs for the aged and disabled will pay out $6 billion.

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A number of policy issues, particularly the issue of social security financing, are important in the context of the 1977 budget and the period of 1977 to 1981. However, these issues must be considered in a broader context for two reasons: (1) the long-range projections for social security show a large deficit in the 21st century, due in almost equal measure to adverse demographic trends and to the "coupling" problem; and (2) many beneficiaries under one retirement program draw benefits from others concurrently, so that individual program issues necessarily interact with each other. Thus, alternative approaches to short-run problems must allow for their likely impact on long-range financing problems and for their effects on all related benefits considered as a single system. The following paragraphs describe the major issues of immediate interest this year.

1 "Coupling" refers to a problem in the way social security benefits are adjusted for inflation. The adjustment affects not only current benefit payments but also future benefits for people now working. This results in their being overcompensated for inflation. (91)

A. SOCIAL SECURITY

In May 1975, the Social Security Trustees reported an anticipated deficit in the trust fund 2 by the early 1980's. This forecast was based on a rapid rise in benefits responding to double-digit inflation, and shortfall in revenues due to the recession. Since that report, official but unpublished projections are more optimistic. They show trust fund reserves declining to $30 billion (about 3 months worth of benefits) in fiscal 1981. A projection by CBO has the reserves bottoming out at $28 billion in fiscal 1980 and rising in the next year.3

Although the outlook is now more optimistic for the short-run, the President has proposed raising the tax rate by 0.3 percent each for employee and employer (from 5.85 percent of covered wages to 6.15 percent). This would raise fiscal 1977 revenues by $3.3 billion ($4.4 billion for a full year). Reserves in fiscal 1980 would amount to 4 or 5 months' worth of benefits. This proposal has been criticized for three reasons: (1) it will add to the cost of goods and services, thereby contributing to inflation; (2) it reduces the proposed fiscal stimulus of further income tax cuts; and (3) it would combine an increase in a regressive tax with a proposal to reduce the progressive income tax. There are a number of alternatives available to Congress including the following:

(1) Action could be delayed for a year or two if the financial situation permits, so that appropriate action for the short-run can be considered and developed as an integral part of the long-run solution. A delay would cost the fund between $1.5 and $5 billion for each year of delay, to be recovered over the actuarial period of 75 years.

(2) Limited changes could be made now in the tax and/or benefit structure which might be deemed an appropriate part of any remedy for the long-range problem. This would reduce the pressure to develop an integrated solution quickly. Alternatives for limited changes include:

(a) Increasing the wage base, which redistributes the tax burden toward those persons who earn wages higher than the current maximum of $15,300. It could be argued that these individuals could most easily bear the additional burden, which would be at no greater rate than that paid by lower wage earners, and on no greater portion of their wages. On the other hand, the higher wage base would generate higher benefits in the future, although not by enough to increase the longrun deficit. Consideration also must be given to the potential adverse effect on private investment markets and on private capital formation.

(b) Eliminating the ceiling on the wage base for the employer only is a possible long-run remedy because it does not result in higher employee benefits in the future. However, it would be a sharp tax increase for employers, which might be passed on to workers through smaller wage increases or in shifts between capital and labor.

(c) Use of part of the Medicare payroll tax for cash benefits was

This discussion refers to a combination of two trust funds: the old-age and survivors insurance trust fund; and the disability insurance trust fund. Medicare is financed through two other trust funds: the hospital insurance trust fund; and the supplementary medical insurance trust fund.

3 Congressional Budget Office "Five-Year Budget Projections" report presented in testimony before the House Ways and Means Subcommittee on Social Security on February 3, 1976:

proposed by the 1975 Social Security Advisory Council. Medicare does not face a shortrun deficit, but advocates of expanded health insurance oppose such a transfer of funds.

(d) Some selective benefit reductions, such as those proposed in the President's budget, can be made, but large savings cannot be realized in the short run without the risk of creating hardship among current beneficiaries or those about to retire.

(3) A general fund grant can be made to the fund. It would be neutral in its interaction with remedies for the long-term deficit, and it would not result in permanent benefit increases. However, a temporary Federal transfer could become a permanent habit. If it became permanent, it would constitute a basic change in the self-financing structure of the social security program."

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(4) Congress could provide authorization for the manager of the fund to borrow from the Treasury in the event that the fund exhausted its reserves. Since such borrowing would be used only in the event of actual depletion, it would permit the system to retain its self-financing structure and would not require as large a reserve fund.

(5) A new tax could be levied on energy or another commodity, with the funds earmarked for social security. Such a proposal aims at replenishing the social security funds with a socially useful tax (e.g., a tax on energy to encourage conservation).

B. MEDICARE

The President has proposed protection against catastrophic health care costs for services covered under Medicare. No beneficiary would have to pay more than $500 in yearly out-of-pocket costs for covered hospital services, or more than $250 for covered physician's services. The cost of such protection ($430 million) would be more than offset by other proposals to increase beneficiary cost-sharing and to limit increases in fees reimbursable under Medicare.

A plan to protect all Americans against catastrophic illness has been proposed by Senator Long (S. 2470). His bill would also federalize and reform Medicaid. The total first-year net additional cost of the bill would be about $10 billion.

C. FEDERAL EMPLOYEE RETIREMENT

When cost-of-living adjustments are applied to benefits under the civil service and military retirement systems, an extra 1 percent is added to the consumer price index increase to make up for the time lag between the effects of inflation and the adjustments to retirees' checks. But this extra 1-percent factor overcompensates retirees for inflation over the long run, and the President has proposed a repeal of this provision.

The President's proposal would save $182 million in fiscal 1977; by the year 2000, this saving will grow to $6 billion a year. Alternative measures may be proposed in Congress, such as dropping the 1-percent add-on but making a lumpsum adjustment each time a retiree gets a cost-of-living increase. While this would save money in the long run, near-term outlays would be increased.

* Some advocates have proposed a permanent general fund contribution equal to the employees' contribution, or one-third of total funding. Congressman Burke, Chairman of the House Subcommittee on Social Security, favors this approach.

There is also interest in basic reform of the military retirement system. One major issue is whether or not the system should be made contributory like the non-military programs.

D. OTHER LEGISLATION

The Senate has passed a bill to reform the VA pension program (S. 2635). The House is considering amendments to the SSI program (H.R. 8911 and 8912) and the black lung benefits program (H.R. 10760). The first-full year cost of these bills would be almost $2 billion. The House is also considering a liberalization of the retirement income credit, which would reduce annual revenues by $340 million.

II. Importance of Retirement and Disability Programs to Fiscal Policy

BUDGET IMPACT OF RETIREMENT AND DISABILITY BENEFITS

The Federal role in provision of income to the retired, disabled, and survivors accounts for 35 percent of all Federal outlays, 37 percent of the growth in outlays from 1975 to 1976, and 45 percent of the expected growth in a projected budget level that would maintain current policy from 1976 to 1977. The trust fund revenues earmarked for these programs amount to 31 percent of all Federal revenues. Thus, future policy for retirement programs will have a major impact on future budget options, both on expenditures and revenue collections.

According to the President's budget, fiscal 1976 outlays under current law for retirement and disability programs will total $131 billion, and earmarked revenues will amount to $105 billion. The fiscal 1977 figures are $150 billion in outlays and $123 billion in revenues. The detail by program is as follows:

1 Programs with no revenues shown are funded from general revenues. Those with trust fund revenues also receive some transfers from general revenues as set forth in the particular statutes involved.

2 These Federal outlays are matched or supplemented by additional outlays of State and local governments.