The 1996 Annual Reports of the Boards of Trustees of the Social Security and Medicare Trust Funds report in detail on the funds financial condition. The reports describe their current and projected financial condition within the next 10 years (the "short term") and over the next 75 years (the"long term"). Four trust funds have been established by law to finance the Social Security and Medicare programs. For Social Security, the Federal Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits, and the Federal Disability Insurance (DI) Trust Fund pays benefits after a worker becomes disabled. When both OASI and DI are considered together, they are called the OASDI program.
For Medicare, the Federal Hospital Insurance (HI) Trust Fund pays for hospital and related care (often called "Part A") for persons aged 65 or older and workers who are disabled. The Federal Supplementary Medical Insurance (SMI) Trust Fund pays for physician and outpatient services (often called "Part B") for persons aged 65 or older and workers who are disabled. These two trust funds are not usually considered together, because they are funded differently.
In all trust funds, assets that are not needed to pay current benefits or administrative expenses (the only purposes for which trust funds may be used) are invested in special issue U.S. Government securities guaranteed as to both principal and interest and backed by the full faith and credit of the U.S. Government.
Six people serve on the Social Security and Medicare Boards of Trustees: the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, the Commissioner of Social Security, and two members appointed by the President and confirmed by the Senate to represent the public. The Boards are required by law to report to the Congress each year on the operation of the trust funds during the preceding year and the projected financial status for future years.
Trust Fund Results
The OASI and DI funds increased in 1995, while the HI and SMI funds declined. At the end of the year, 43.4 million people were receiving OASDI benefits and about 37 million people were covered under Medicare. Trust fund operations, in billions of dollars, are shown in table 1. How the Trust Funds Are Financed
The major source of financing for the Social Security and Medicare programs is payroll taxes on earnings that are paid by employees, their employers, and the self-employed. Persons who are self-employed are charged the equivalent of the combined employer and employee shares. In 1995, almost 89 percent of total OASDI and HI income came from payroll taxes. The remainder was provided by interest earnings (9 percent) and revenue from taxation of benefits (2 percent).
The payroll tax rates are set by law and, for OASDI, apply only to earnings at or below a certain annual amount. This amount, called the earnings base, rises as average wages increase. In 1996, the earnings base for OASDI is $62,700. HI taxes are paid on total earnings. The tax rates for employees and employers each under current law, are shown in table 2.
Unlike the HI and OASDI programs, the SMI program is financed from monthly premiums ($42.50 in 1996) paid by beneficiaries and by payments from Federal general revenues. In 1995, premiums accounted for almost one-third of SMI income and interest income was about 3 percent. The remainder, about 65 percent, consisted of general revenue payments. Chart 1 shows sources of income in 1995 for OASDHI combined and for SMI.
Administrative expenses in fiscal year 1995, shown as a percentage of benefit payments from each trust fund, were:
How Estimates of Trust Fund Balances Are Made
Short-range (10-year) estimates are reported for all funds, and, for the OASI, DI, and HI Trust Funds, long-range (75year) estimates are reported. Because the future cannot be predicted with certainty, three alternative sets of economic and demographic assumptions are used to show a range of possibilities. …