Social Security Trust Funds and the Federal Budget
O'Donnell, Charles F., Strittmatter, Robert, The CPA Journal
Mixing Politics and Budgeting
Throughout its long history, the Social Security program has been a political football. It can balance the Federal budget or make it appear out of balance-creating a huge government budget deficit or surpluswith a shift of political viewpoint.
Most Americans know relatively little about the history and evolution of the Social Security program and the government's accounting for its trust funds. The details of the accounting provide a perspective on the massiveness of the program and its long-term implications. Much of the excitement over a budget "surplus" overlooks the fact that the money belongs to Social Security trust funds.
From 1939, when the Old Age and Survivors Insurance (OASI) program was established, until 1983, the OASI trust fund operated on a current-cost-financing (pay-as-you-go) basis, with current benefits financed by current payroll taxes and interest earned on the trust fund's investments. A contingency reserve was supposed to equal 6-12 months' expenditures so that, in the event of a recession, the trust fund balance would make up for a shortfall in current income.
This funding concept worked reasonably well until high levels of inflation and unemployment during the late 1970s and early 1980s steadily drained the OASI trust fund-from $37.8 billion in 1974 to $21.5 billion in 1981. In October 1982, the trust fund balance was $10 billion-about $ 1 billion less than the amount needed to pay the November benefits. For the first time in history, the OASI trust fund borrowed money from the Disability Insurance trust fund and the Health Insurance trust fund, and for all practical purposes the OASI trust fund was bankrupt.
During the Reagan era, the newly appointed National Commission on Social Security Reform delivered a report that called for changes in the program to solve short-term problems and address long-term concerns, including creating a surplus to help fund the retirement of the baby boomers. The commission's most significant action was changing the OASI trust fund from a pay-as-you-go system to an advanced-funding system, which provided for the large buildup of reserves that occurred in the 1980s and 1990s and which is expected to continue for the next decade. At the end of 1983, the OASI trust fund balance was $19.7 billion. By the beginning of 1999, it had increased to $682 billion. From 1999 to 2008, the trust fund is projected to grow to $2.122 trillion.
Trust Fund Receipts, Assets, and Disbursements
Each year, the board of trustees of the Federal OASI and Disability Insurance trust funds publishes a comprehensive report that includes detailed short- and long-range actuarial estimates and analysis. The report also includes information on trust fund financial operations. The OASI trust fund statement of operations for the fiscal year ending September 30, 1998, shows in detail the receipts and disbursements of the fund. All employees and employers in covered employment are required to contribute based on employee wages and tips, and selfemployed persons are required to contribute based on their net earnings from self employment. Net payroll tax contributions for the year were $364.9 billion, which represents 87.8% of total receipts.
From 1984 to 1994, up to 50% of a recipient's Social Security benefits was subject to Federal income tax if specified income and benefit levels were exceeded. The percentage was increased to 85% in 1994. Additional tax revenues resulting from this increase are transferred to the Hospital Insurance trust fund. The tax revenues appropriated to the Social Security trust funds are based on income taxes paid on the benefits from each fund. Receipts from taxation of benefits for fiscal year 1998 were $8.6 billion, which represents 2.1% of total OASI trust fund receipts. For fiscal year 1998, the OASI trust fund was credited with net interest of $42.2 billion, which represents 10. …