workers effectively pay both the employee's and
Figure 1
employer's shares of the payroll tax.) The max-
Projected Social Security Cash Flow, 19982072
imum wage subject to tax automatically rises on
18
the basis of the increase in average wages. In
just 10 years the OASI tax will apply to about
15
$100,000 of wage income.6 Starting in 2000 the
12
tax rate falls to 10.6 percent. For 1997 the OASI
9
payroll tax revenue was $349.9 billion.7
6
The Social Security system receives revenue
3
from a tax on part of the Social Security bene-
fits, but the revenue is proportionally small and
0
not significantly variable over time. It is not
3
included in this analysis. If it were, conclusions
6
would not be materially different. The OASI
9
Trust Fund is also credited interest income. This
fund will be discussed in the next section.
OASI costs are benefit payments and rela-
Year
tively minor administrative expenses. Last year
Benefits
Payroll Taxes
Net cash Flow
costs totaled $318.4 billion.8 For 1997, there-
Note: The annual data are estimated from the 1998 Trustees Report.
fore, OASI payroll tax revenues exceeded costs
by $31.5 billion. In 2015 the tax revenue excess
is expected to end, and cash flows will be nega-
tive for every year thereafter.9 Figure 1 shows
· The age at which full benefits could be
the trends of revenues, costs, and the resulting
received would be raised from 65 to 67.
deficits for the next 75 years as projected by
· Early retirement age benefits were reduced.
Social Security's actuaries.
The new law was to make Social Security
actuarially sound for the next 75 years; that is,
The OASI Trust Fund: The Social Security
all future benefits could be paid until 2058 with-
system did not always have a comfortable cash
out any further tax increases.
flow surplus. During the early 1980s the sys-
During the system's early period, the law
tem had a deficit and had to borrow money
worked according to plan. For the first 15 years
from other government programs. In anticipa-
taxes exceeded benefits. But as in previous peri-
tion of this problem, in 1981 President Ronald
ods when the system enjoyed a positive cash
Reagan established the National Commission
flow, the difference was not saved and invested
on Social Security Reform, informally called
for future retirees; it was spent by the federal
the Greenspan Commission for its chairman,
government on goods and services not related to
Alan Greenspan. The Commission was to
Social Security. Because of these expenditures,
review the condition of the Trust Fund, analyze
the government issued nonmarketable bonds to
potential solutions to ensure its financial
the OASI Trust Fund. The bonds, which are
integrity, and provide appropriate recommen-
interest bearing, are backed by the full faith and
dations.10 On April 20, 1983, the president
credit of the United States government. If at
signed into law the 1983 Social Security
some date OASI taxes are no longer sufficient to
Amendments that resulted from the Commis-
pay benefits, then Social Security will present
sion's work. Some of the important amend-
the bonds to the government for payment. The
ments included the following:11
government, which has no assets set aside for
this contingency, would have to raise additional
· New federal employees were required to be
covered by Social Security.
taxes, reduce other spending, or issue more debt
· State and local governments could no longer
to redeem the bonds. The bonds, therefore, are a
opt out of Social Security.
potential tax liability facing American workers
· Up to half of the Social Security benefits
as well as an asset of the OASI Trust Fund. The
would be taxed for higher-income elderly.
bonds are not a store of wealth, but rather a gov-
· The cost of living adjustments would be
ernment accounting convention. The year 2015
delayed for six months.
is when OASI is expected not to have enough
· The timing of the increase in the payroll tax
tax income to pay benefits and, therefore, to
rate would be accelerated.
3