Essential Things to Know About the Social Security Program
1) Its official name is the Federal Old-Age and Survivors Insurance and Federal Disability Insurance program. Drop the “Federal” and you can see where the acronym often used comes from: OASDI. It operates under Congressional legislation that dates back to 1935. OASI is the acronym for the Social Security insurance program and DI the acronym for the Disability Insurance program. [I use these acronyms in the blog charts.]
The programs’ Trustees are required to submit an annual report to Congress each year. Those reports explain how the programs operate and provide substantial details describing their actuarial assumptions with resulting 75-year forecasts. These reports and the Social Security Administration are the sole source of data for my Social Security blog posts. Here is the SS Administration’s online “library” of all the annual Trustees Reports. Select the report year. Look for the PDF icon or acronym and click on that. The full report appears. It has an index of its entire content and, most importantly, “Highlights.” Right at the beginning.
2) It is a pay-as-you-go program. That means that current year benefits are paid out of current year income.
This is perhaps the most important, confusing, and least appreciated feature despite any worker or retiree claiming that they have paid into the program for decades and expect to receive the promised benefits. Paying into the program does not guarantee an individual any payment of benefits in the future.
Social Security’s operations were largely set through 1983 amendments. Those were legislated after the Reagan administration’s Greenspan Committee recommendations. The SS program faced both short-term and long-term solvency issues. The 1983 amendments addressed the short-term issues and established a gradual increase in the retirement age from 65 to 67, which is still in effect. In my opinion, the Baby Boomers’ building and now depleting of the OASI Trust Fund provided political convenience to postpone finding solutions to the program’s pending insolvency. All Presidential-level study commissions have warned of the pending depletion.
3) Its income sources are defined. The Social Security Act limits income for annual benefit payments to three sources. First is OASDI payroll taxes paid by “covered” employed workers that year. Its amount is a line item on a paycheck. Second is income the Trust Fund assets earned that year. And third is drawing on the Trust Fund assets themselves if the first two sources aren’t sufficient.
Any excess of income after payment of benefits in a year are put into the Social Security Trust Fund and invested in U.S. Treasury securities. The Trust Funds were added in 1940. The “General Fund” (the U.S. government’s operating budget, in other words ordinary annual spending) cannot use Social Security income. Conversely, Social Security receives no income from the General Fund.”
The OASDI payroll tax percentage is applied to earned income up to a maximum amount. Here is a description of that limit and its inflation-adjusted size over the years.
Half the rate is paid by the employee and the other half by the employer. The self-employed pay their entire payroll tax. That payroll tax rate rose steadily from its initial 1.0% assessed on employers and employees (each) and has remained at a constant rate over the past four decades.
The key implication of these first statements is that Social Security is the law, but there is also no legislated guarantee that there will be sufficient funds to pay benefits in future years. The Social Security Trust Fund is a sequestration, not a funded investment vehicle. A “trust fund” in its more common meaning within the financial management industry is a portfolio of investments, which earns a return and, if managed well, provides income as a percentage of its total size to its named beneficiary or beneficiaries. While “covered workers” may have paid into the program and earned “credits” entitling them to benefits at retirement, CASH IS KING. If the three income sources are insufficient to pay full, promised benefits, as the Trustees currently forecast to happen in 2033 in their latest report, beneficiaries have no individual contract with the program to enforce payment in a court of law.
4) The sheer number of Baby Boomers has been and remains the #1 issue facing the program’s funding in the future. Servicemen returned from WWII and, having seen so much death and destruction, set about establishing homes, households, and families. They and their spouses increased the birthrate from 1946 until 1964, the accepted final year of the Baby Boomer generation. The rate was about 20 births per 1,000 women at the end of the war and rose rapidly to about 25. The birthrate steadily declined below 20 after the Baby Boomers were born to about 12 births per 1,000 women in recent years.
Here is a link to the U.S.’s birthrate history, in a table. The sources are the United Nations and the U.S. Department of Health and Human Services.
For those who like a more visual presentation, here is a graph illustrating the Baby Boomer birthrate bubble.
Over time, more Baby Boomers receiving Social Security benefits will have fewer workers in the economy earning income on which OASDI taxes are charged to pay for those benefits. The trustees have a ratio for that, too. The “Covered Worker Per OASDI Beneficiary” ratio. It was 3.4 at the ratio’s height during the Boomers’ working years and has declined to 2.7 in 2023. That means that immigrants are the only other source of new workers to produce future Social Security income contributions. Immigration has been challenged by politics and a global pandemic. Here is a history of the covered worker ratio, illustrating the rise and decline of the ratio.
SocSecCoveredWorkersBeneficiariesRatio
5) The Social Security and Disability Insurance programs were legislated as a combined insurance scheme, but they are operated separately. They had and continue to have different objectives.
Disability is a much smaller program. As it faced insolvency (the lack of resources to pay full “promised” benefits) in the mid-1990s and again in 2016, resources from Social Security were legislatively transferred to shore up Disability. As can be read in the Trustees Reports, Congress reallocated a portion of the OASDI payroll tax, increasing the percentage that went to DI and decreasing OASI’s percentage. The total OASDI tax rate was not changed. This has been done twice.
Here is a link to a table illustrating how it was done.
The 1995 reallocation shored up Disability for two decades while moving up the estimate of Social Security insolvency 13 years. The more modest 2015 reallocation solved DI’s short-term insolvency issue. Recent Trustees Reports describe how the Trump administration with bi-partisan approval from Congress tightened up administration of the Disability Insurance program, putting it on solid footing over the combined programs’ estimated future over its 75-year forecast horizon. This at least makes dealing with the Social Security longer-term funding issues simpler, minimizing the need for future reallocations.
Here is a link to a table that shows each Trust Fund’s depletion date in that year’s Trustees Report and the percentage the Trustees estimate can be paid at depletion (if that percentage was shown in the report — that I could find).
SocialSecurityDepletionDatesBenefitCuts
6) Each year the Trustees of the Social Security Trust Funds and programs are required to send a report to Congress. The Trustees Report covers in detail the operations of each of the two separate insurance programs and their combined operations. While they provide a massive amount of information that went into their assessments, each report starts with “Highlights” — a short summary, including estimated depletion dates.
The Act designates six Trustees. The U.S. Secretary of the Treasury is the Managing Trustee. Three others are the Secretary of Labor, the Secretary of Health and Human Services, and the head of the Social Security Administration. Each report shows the spot on the transmittal page for two additional trustees: the Public Trustees. These two positions were vacant in the 2008 to 2010 reports and have remained vacant since the 2016 report. Here is the latest for the 2024 report.
SocialSecurity2024TrusteesReportTransmittalLetter
The Trustees Report discusses the prior financial year’s performance. In my tables and charts, the columns should be clearly labeled “report year” or “financial year”.
Here is a link to the Trustees Reports online library. Look for and click on the PDF.
https://www.ssa.gov/OACT/TR/2024/
Social Security Fun Fact: A U.S. Budget History Date
1968 First use of the “Unified Budget” presentation by the Johnson administration, combining the Social Security and other “off-budget” programs with on-budget programs
Here is the OMB (Office of Management and Budget — the White House’s budget office) chart showing the Federal budget’s receipts and outlays over decades. It has the 1) “unified” (combined), 2) on-budget, and 3) off-budget surpluses and deficits. (Click on the link.) I noted key turning points — when the first Baby Boomers (born in 1946) turned 62 (earliest to collect SS), etc. — and the Presidencies. I also filled deficits in red. It’s pretty obvious that it was Social Security that ran the surpluses. They bulged rapidly in the Clinton years. And then began shrinking.
[This useful summary of budget history is from the OMB, the White House’s Office of Management and Budget.]
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