A: 47 million people — about one in six Americans — receive monthly benefit checks. They include elderly Americans, disabled workers and their families, and families with children where a parent has died.
Q: How important is it?
A: Social Security is the largest single source of income for most of the nation’s elderly. It accounts for more than half of all income for 2 out of 3 elderly beneficiaries. Social Security also provides benefits to disabled workers and their families. Although Social Security is best known as a retirement program, it also supports millions of children. Three million children receive Social Security themselves, and another two million live with family members who receive Social Security.
Q: Who pays for Social Security?
A: Workers pay through their FICA taxes. Employers also pay by matching worker’s FICA taxes. People who receive Social Security also pay, because part of the income taxes they pay on their Social Security benefit income is earmarked to pay for the program.
Q: How much do workers pay?
A: In 2004, workers and employers each pay 6.2 percent of wages up to $87,900 for Social Security. They pay an additional 1.45 percent for Medicare. The Medicare tax applies to all wages. The total FICA tax is 7.65 percent.
Q: Where does the money go?
A: Social Security taxes go to the Social Security trust funds. They money is used for three purposes: (1) to pay for current benefits; (2) for administrative costs; and (3) the rest is invested in Treasury bonds and earns interest to pay future benefits. By law, the Treasury bonds can be redeemed whenever they are needed to pay benefits.
Q: How much goes for administration?
A: Less than one percent of the money goes for administrative expenses.
Q: Who manages the Social Security trust funds?
A: A Board of Trustees oversees the funds. It is made up of three cabinet Secretaries (of Treasury, Labor, and Health and Human Services), the Commissioner of Social Security, and two public trustees from the private sector, who are independent experts.
Q: What do the Trustees do?
A: They report each year on: (1) what happened to the funds last year; (2) short-range projections of the funds for the next 10 years; and (3) long-range projections of the next 75 years. Professional actuaries make the projections. The Chief Actuary of Social Security certifies that the assumptions are reasonable and methods are accepted in the profession. Each year they update the forecast with new information. Because the future is uncertain, they use three different scenarios: a “low-cost”, a “high-cost” and a middle scenario, which is their “best estimate.”
Q: What is the latest forecast?
A: The 2004 “best estimate” shows that:
The Social Security funds will be adequate to pay all benefits until 2042.
Taxes coming into the Social Security trust funds will exceed benefit payments until 2018.
Interest on the reserves and the assets themselves will continue to supplement tax revenues until 2042.
In 2042, the reserves are projected to be depleted. Income coming into the funds at that time is expected to cover about 73 percent of the cost due at that time.
By 2078, the end of the 75-year projection period used by the Social Security trustees, and assuming no changes in taxes, benefits, or actual experience (i.e.in fertility, mortality, and economic growth, as against what is assumed in the report), revenues are projected to cover about 68 percent of costs.
Q: Why is Social Security projected to cost more in the future?
A: Social Security is projected to cost more largely because the number of Americans over 65 will grow faster than the number of workers. This occurs for three reasons: the baby boomers will begin to reach 65 in 2011, people are living longer after 65, and birthrates are assumed to remain historically low. While costs are projected to rise, the tax rate is constant under current law.
Q: How big is the problem? What would it take balance Social Security for 75 years?
A: The “best estimate” shows that a FICA rate of 7.15% instead of 6.2 percent would keep Social Security in balance for the next 75 years.
Q: What are the choices?
A: The choices for fixing Social Security are: to pay more into the Social Security system or to pay less in benefits. Options for paying more into the system include: (a) raising the tax cap, now $87,900; (b) using general revenues; (c) raising the FICA rate in the future; and (d) investing part of Social Security funds in equities. Options for lowering benefits include: (e) raising the retirement age for full or early retirement benefits; (f) lowering the cost-of-living adjustment; and/or (g) gradually scaling back benefits in other ways. A variation on these two options is to set aside funds today that can earn interest, and use those interest earnings to supplement other sources of income to help pay for the cost of benefits in the future. This is sometimes called “prefunding” or “advance funding.” It can be done either by establishing individual savings accounts, or through building up a larger trust fund. However, to build up these funds requires a larger tax increase or a larger benefit cut than would be otherwise necessary to bring the benefit costs into line with income to the system.