Social Security is the foundation of the country’s retiree income safety net. About 60 million people are now beneficiaries under the program and, for many, Social Security benefits represent a majority of their income.
Unfortunately, the current Social Security program is unsustainable. The Board of Trustees of the Federal Old-Age and Survivors Insurance (“OASI”) and the Federal Disability Insurance (“DI” and together “OASDI”) estimate that the OASI and DI Trust Funds will be fully depleted in 2035 and 2023, respectively. Once this occurs, only a portion of the benefits due will be payable under existing law.
In the next two articles, The Informed Vermonter will try to explain how the Social Security Program actually works, what the OASDI Trust Funds actually are, why the Program is financially unsustainable as currently structured and the impact Social Security has on the federal budget deficit.
A Bit of History
The first thing resembling a social insurance program in the USA was the pension program put in place for Civil War veterans and their surviving widows and orphans. By 1906, old age alone was sufficient criteria for eligibility. As an historical note, these pensions were only made available to Union soldiers.
In Europe, the idea of national social insurance schemes gained pace throughout the second half of the 19th century. In 1889, Germany established the first national program and by 1935, 34 nations had put social insurance programs in place.
The US Social Security Program was put in place in 1935 for old age and survivors’ benefits. Given the highly visible and devastating impact of the Great Depression, there was strong bipartisan support for the measure. The Senate vote was 77-6 and the House vote was 371-33 in favor.
The Vermont vote was split. In the Senate, Warren Austin was a nay and Ernest Gibson was a yea. In the House, Charles Plumley was a yea. All three were Republicans.
The Disability Insurance program was put in place in 1956 under President Eisenhower.
As noted above, there are two programs. Old Age and Survivors’ Insurance pays a retirement income to individuals and their surviving spouse. This benefit is available once the age of 62 is reached. Disability Insurance provides an income to disabled individuals of any age. In both cases, the amount of the benefit is based on the beneficiary’s work history and contributions to the program.
Social Security was never intended to provide a full retirement income to beneficiaries. It provides supplemental income intended to compliment an individual’s other retirement savings. Today, the average Old Age Social Security payment is $16,956 per year.
The major source of funding for Social Security is FICA payroll taxes. The current tax is 12.4% of gross pay up to $128,400 of income. Employees and employers pay 6.2% each. Self-employed individuals pay the full 12.4%, but can deduct half for tax purposes.
Other dedicated sources of funding for the program are income taxes levied on Social Security benefit payments (which also help fund Medicare), interest earnings on the OASI and DI Trust Funds and redemptions from the Trust Funds.
Since inception, Social Security has collected $19.0 trillion in dedicated taxes and paid out $16.1 trillion in benefits, leaving it with a trust fund valued at $2.8 trillion in 2015.
However, the annual surplus is lent to the US government to meet general governmental expenses in return for a government IOU that pays interest. So, the money received from Social Security annually and the interest paid to Social Security is part of the overall US budget.
The sum of dedicated taxes and interest received exceed benefit payments today. Since 2010, on the basis of dedicated taxes only, there has been a shortfall which adds to the government’s overall budget deficit.
To be clear, from 1935 to 2010, dedicated Social Security taxes exceeded Social Security benefit payments and contributed a surplus to the US government. Since 2010, the reverse has occurred and the Social security program now adds to a growing government deficit.
So, the $2.8 trillion Trust Fund is actually a giant IOU from the federal government and, as it is now being used to fund benefit payments, the US budget will need to finance it. The Trust Fund is expected to be fully depleted by 2035 (in 17 years!).
 Status of the Social Security and Medicare Programs, 2016 Trustees Report, A Summary of the 2016 Annual Reports, Social Security and Medicare Boards of Trustees