FUTURE TRENDS Retirement benefits will continue to be a growing sector of the Federal budget, assuming a continuation of current law. There are three major factors accounting for growth in these programs. First, except for veterans' benefits, these programs are all adjusted automatically for inflation. Such adjustments account for 62 percent of the growth in outlays from 1975 to 1976. A second major growth factor is a rising beneficiary population. In addition to the general population increase, program beneficiaries rise due to past changes in law, or because of such factors as a growth in the number of Federal civilian and military employees in prior decades producing more Federal retirees and veterans in this and future decades. Increasing numbers of beneficiaries accounted for 19 percent of growth in spending on retirement benefits from 1975 to 1976. A third factor in growth is a rising real value of benefits. New retirees have their benefits based on more recent wage histories, reflecting higher wage levels than earlier retirees. Hence, their benefits are higher as well. Real growth in benefit levels accounted for the remaining 19 percent in the 1976 outlay increase over 1975. The Congressional Budget Office (CBO) has made a 5-year projection of program outlays based on the Second Concurrent Budget Resolution for FY 1976. The projections indicate a 69-percent increase in outlays from 1976 to 1981 (see Table 1). Table 1.-CBO PATH B PROJECTIONS OF CURRENT SERVICES OUTLAYS FOR RETIREMENT AND DISABILITY PROGRAMS, 1975–81 3 At the request of the Senate Budget Committee, the CBO projected income transfer payments to the year 2000 to determine if any major shift should be expected in the proportion of gross national product transferred through Federal income transfer programs. The report indicates that, assuming no major changes in current law, the current share of GNP (9.3 percent) devoted to income transfers will not change greatly over the rest of this century. Those contributory programs providing retirement benefits will rise relatively (from 6.8 percent to about 8 percent of GNP), but this growth would be offset by a decline in the noncontributory programs, since the latter programs count increased benefits from other programs against recipient income (see Table 2). The retirement in the 21st century of people born after World War II will escalate the growth of social security. For example, in the year 2020, social security benefits will grow to $472 billion under current law, or 6.6 percent of GNP, compared to $179 billion and 4.9 percent in 2000. If "decoupled" to eliminate over-compensation for inflation, the figure in 2020 would be $356 billion, or 5.0 percent of GNP. Thus, without decoupling, there will be substantial relative growth in social security benefits in the next century. TAX EXPENDITURES A number of tax expenditures are relevant to the retired and aged population. These provisions of tax law are listed below, together with estimates of the fiscal 1976 revenue losses associated with them: TAX EXPENDITURE: Exclusion of military disability pensions-- Benefits for dependents and survivors exclusion_ Exclusion of railroad retirement system benefits Employer plans: exclusion of pension contributions and earnings. Plans for the self-employed and others: exclusion of pension con- Exclusion of capital gains on house sales if over 65. Fiscal 1976 cost 1 (millions) $85 280 2, 940 480 180 5, 740 710 10 Additional exemption if over 65.. 1, 250 Retirement income credit____ 70 1 Estimated by the Treasury Department and the Joint Committee on Internal Revenue Taxation. 3 "Growth of Government Spending for Income Assistance: A Matter of Choice," Senate Budget Committee Print, Dec. 3, 1975. Table 2.-CASELOADS AND COSTS OF FEDERAL INCOME ASSISTANCE PROGRAMS-Continued 1 Caseloads not available on a comparable basis for fiscal year 1975. 3 GNP for fiscal year 1975 with 5 percent unemployed is estimated Adjusted to a 5-percent rate of unemployment. The actual 5 Eligible persons. • Zero due to rounding. 7 Includes commodity distribution. 8 Caseloads are average monthly households. • Components may not sum to total due to rounding. 10 Cannot be summed because of multiple program beneficiaries. 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.1 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. |