PROPOSALS FOR REFORM

In 1998 OASDI benefits, the largest of all social insurance payments and the largest single portion of the federal budget, amounted to about 23 percent of federal expenditures and 4.6 percent of the U.S. gross domestic product. In the future, the proportion of federal spending allocated to social support programs may increase, because of factors such as the growing number of senior citizens in the United States, an increasing population, expanding investment in private pension and health plans, and rising medical costs.

Since the inception of Social Security, the government had administrated it as a pay-as-you-go program, paying benefits out of current receipts rather than building up a capital fund for each contributor. However, in the mid-1970s, expenditures for Social Security benefits began to exceed tax payments coming into the trust funds. This occurred because a serious recession reduced employment and trust-fund revenues while inflation simultaneously created a need to increase benefits. Public concern developed over the possibility that the Social Security system might become bankrupt over time. Since the funds had been accumulating for over 35 years, they had a reserve of more than $40 billion in 1976, so the system was in no immediate danger. Nevertheless, experts warned that in the long term the reserve would eventually become depleted. In an effort to restore the financial integrity of Social Security , the government began to reform the system of contributions and benefits.

Many significant changes came under the Social Security Reform Act of 1983, which resulted from recommendations of a National Commission on Social Security Reform, also known as the Greenspan Commission after its chairman, Alan Greenspan. The 1983 act provided for increased revenues for Social Security by authorizing taxes on Social Security benefits. It made one-half of benefits taxable for individuals with incomes in excess of $25,000 annually and for couples with incomes in excess of $35,000. It also accelerated annual increases in FICA tax rates from 1984 to 1989, increased the FICA rates on the self-employed, and delayed the 1983 cost-of-living adjustment for six months to the beginning of 1984. Annual adjustments thereafter occurred at the beginning of the calendar year. Later legislation, passed in 1993, increased the percentage of Social Security benefits that could be subject to income taxes from 50 to 85 percent for individuals with income over $34,000 and for couples with income over $44,000.

Even with these reforms, however, longer-range financial problems remained. Many of these problems were related to demographic changes that would increase the amount that Social Security programs would have to pay in benefits. The number of elderly people relative to working-age adults as a proportion of the entire population had been rising steadily. In the 1990s the government estimated that by 2050 there would be twice as many U.S. citizens aged 65 or older than there were in 1975. The Greenspan Commission had recommended that the problem of having too many retirees for each contributor to Social Security be solved by raising the retirement age, which would reduce the cost of benefits in the future. As a result, the 1983 reform act set the retirement age at 66 for people born after 1938, who would become eligible for benefits in 2003, and at 67 for those born after 1954, who would become eligible in 2027.

The council advocated private investment as an alternative or supplement to Social Security.

Continuing concerns over the solvency of the Social Security trust funds led the SSA to create two long-term strategic plans during the late 1980s and early 1990s. In 1994 President Clinton appointed an Advisory Council on Social Security, the last of several since the 1930s, to review the status of the trust funds. In 1997 the council made its final report, in which it recommended reforms to Social Security. Among its recommendations, the council advocated building up trust-fund reserves, aligning benefits more closely with taxes paid, offering incentives to individuals to work to a later age, and accelerating the move toward later standard retirement ages. The council also advocated methods of both improving and encouraging the use of private investment and employer pension plans as alternatives or supplements to Social Security.

Advisory councils ended in 1995 when the SSA returned to independent agency status, and a permanent Social Security Advisory Board formed in 1997. The board was established to advise the president, Congress, and the commissioner of Social Security. A report issued by the board in 1998 echoed the recommendations of the last advisory board, but added further recommendations to curtail benefits, especially for people in higher income brackets; to reduce cost-of-living adjustments; to increase payroll taxes and taxes on benefits; and to phase in a later retirement age of 70. It also examined the options of using general revenues generated by a budget surplus to make up long-range deficits in the trust funds, investing some of the trust funds in the stock market, and allowing workers to privately invest some of the money they would otherwise pay in FICA taxes.

President Clinton and the Congress debated the merits of these options in 1998 and 1999. The president and many Democrats supported the ideas of having the government invest a portion of the trust funds in the stock market and using the budget surplus to eliminate the trust-fund deficit for several decades. Many Republicans favored the plan of allowing workers to keep more of their earnings to invest on their own. As of early 1999, these fundamental differences of opinion on how to reform Social Security promised to keep the government from making any major changes to the system that year.

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