Current Social Security

Funding

OASI and DI receive the major portion of their revenues (85% in 2003) from a direct tax on payroll. The rate will be 6.2% (for employee and employer, each) on subject payroll and self-employment income. The income subject to the tax is capped at $90,000. Of that 6.2%, 5.3% goes towards OASI and .9% to DI.

in addition to the revenues received from the direct tax on payroll, both funds also earn income by investing their surpluses in government securities (in 2003, 13% of total revenues) and a tax on Social Security benefits for those whose income exceeds a certain amount (2% of total revenues)

While OASI and DI have separate trust funds (and differing projected dates for the actual onset of various "crisis" points), discussions have revolved around the combined assets of both funds and, having made the distinction between the funds, we will now, also, refer solely to the combined funds (which the Social Security Administration refers to as "OASDI".

"Social Security" (and particularly the OASDI component) is and never has a been a "savings program." It has always operated on the premise that we will pay for our parents' benefits and count on our children to pay for ours. As such, its funding is most appropriately thought of as a dedicated "inter-generational tax."

As such, the Trust Funds were little more than temporary holding accounts through which the funds flowed. In 1983, a commission chaired by Alan Greenspan, looked at the long-term flows and recommended a number of changes in tax rates and income caps to correct a negative cash flow (more benefits paid than revenues received) that existed and to account for the eventual retirement of the baby boomers. Among the suggestions proposed and adopted was that a large reserve be built to smooth the funds that would be needed when the baby boomers stopped contributing and starting drawing benefits. As a result, the Trust funds today have an asset value of about $1.5 trillion and which is expected to grow to $3.3 trillion, before the anticipated draw down begins (in about 2017).

It is important to repeat this last point....

The draw down of Social Security trust funds that will begin in about 2017 is part of the plan proposed by Alan Greenspan in 1983. In fact, the Social security trust funds are as large as they are, solely so they will be available for this very purpose.