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This file contains material relating to proposals for reform of social security financing.
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James Cannon's Issues Files
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The original documents are located in Box 33, folder "Social Security (2)" of the James M.
Cannon Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
ACTION
THE WHITE HOUSE
WASHINGTON
May 16, 1975
FC23
MEMORANDUM FOR:
THE PRESIDENT
FROM:
JIM CANNON
FORD is LIBRARY GERALD
SUBJECT:
Social Security
The purpose of this memorandum is to present for your decision
key issues regarding the financing of Social Security. Behind
all of these issues lie two questions:
1. Whether you should propose before 1977 some kind of
increase in the payroll tax.
2. If you should, when should you propose the increase.
CURRENT SYSTEM
Under present law benefits are financed out of current income
from Social Security taxes. These taxes are applied equally to
employer and employee. The revenue flows through trust funds
- one set of funds for Old Age, Survivors, and
Disability (OASDI) benefits.
-- and a Medicare fund to finance health care for
the aged.
Benefits are related to actual income (the wage base subject
to Social Security taxes) but are also adjusted according to
the cost of living. The wage base subject to taxes is also
adjusted for inflation.
Under present law:
Calendar Year
1976
1977
1978
1979
1980
OASDI Tax
4.95%
4.95
4.95
4.95
4.95
Medicare Tax
0.90
0.90
1.10
1.10
1.10
Total Tax
5.85
5.85
6.05
6.05
6.05
Earnings Base
15,000
16,500
18,300
19,800
21,300
Digitized from Box 33 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
-2-
ISSUE
A. Financing
1. Short Term
Since the Social Security system is exceedingly sen-
sitive to changing economic conditions most recent
trends indicate that Old Age, Survivors, and Disability
outgo will exceed income by a widening margin so that
trust fund reserves will be exhausted in the early
1980's. The Medicare Trust Fund is projected to be
relatively stable.
2. Long Term
Current demographic projections and recent provisions
for automatic cost of living adjustments which provide
a double benefit increase for current workers raise
serious questions about the fiscal stability of the
system over the next 50 years.
B. Selected Advisory Council Recommendations
The Advisory Council on Social Security recommended
action to deal with a number of specific items such as:
--- maintaining retirement test
-- equal treatment of men and women
-- minimum benefits
-- older disabled workers
STRATEGY FOR DEALING WITH ISSUES
Secretary Weinberger must testify before Ways and Means on
May 20th and recommends:
1. A specific decision be made now on a proposal to
deal with the short term financing problem and
announced in his May 20 testimony.
2. In that testimony we should indicate the Administra-
tion intends to submit in January a proposal to deal
with the long term issues.
3. Not dealing now with the selected Advisory Council
recommendations with the one exception of equal treat-
ment for men and women which has recently been sub-
ject of a Supreme Court decision.
REACTIONS TO THIS PROPOSED STRATEGY
I recommend concurrence with strategy items two and three
above. No objections have been raised on these points and
the long term problem needs to be addressed and
January would be an appropriate point in time.
equal treatment of men and women has been the
subject of a court decision and the options avail-
able now are not likely to change with time.
There is, however, a sharp difference of opinion on the key
question, point one, of whether the short term problem should
be:
-- dealt with now and a specific option should be announced
by the Secretary on May 20th, or
-- should be included with the longer term problems
and a single comprehensive plan to stabilize the
Social Security system should be presented in Janu-
ary 1976.
ARGUMENTS IN FAVOR OF ACTING ON THE SHORT TERM PROBLEM NOW
1. The public is concerned about the stability of the
system and a specific proposal now will help calm that
concern.
2. Failure to present a specific recommendation could
provide increased impetus to Congressional moves
toward general, revenue funding.
3. Action now would put the Administration in the
position of taking the initiative.
ARGUMENTS AGAINST ACTION NOW
1. Since proposals, either now or in January, would
not become effective until 1977 at the earliest
there is no need to make a decision immediately.
2. OMB believes the data furnished by HEW is insufficient
to make a decision as important as this.
3. Any adjustments now have a long term affect anyway
so they will have to be integrated in the long term
proposal.
-4-
4. The long term proposal is needed not just for
financial problems but also for basic structural
changes. Action now could remove the leverage
needed to gain support for these changes.
STRATEGY DECISIONS
Option I: Act now on the short term problems by having
Secretary Weinberger announce a specific proposal on
May 20th.
Favored by:
HEW
Bill Seidman
Option II: Defer action on the short term problem,
proceed with work on both long and short term problems
and submit in January 1976 a single comprehensive plan
for stabilizing the system.
Favored by: OMB
Treasury Department
Phil Buchen
Alan Greenspan
RECOMMENDATION
That you approve Option II, deferring action on short term
issues now and including short term issues in a single
comprehensive plan in January 1976.
Approve
Disapprove
SPECIFIC OPTIONS FOR ACTION NOW
The Secretary suggests three basic options if you wish to
deal now with the short term problem. He suggests that the
aim be to maintain OASDI Trust Fund reserves of no less than
30 percent of outgo. The options available are:
1. TAX RATE ONLY OPTION: Simply raise the tax rate.
-- In 1977 increase total tax from 5.85 to 6.20.
The OASDI tax would go from 4.95 to 5.30. In
1978, take the scheduled .20 percent Medicare
tax increase and apply it in part. A total tax
of 6.20 would apply in 1977 and 6.40 in 1978.
Pro
1. Would stabilize trust fund at about 36
percent of outgo.
-5-
2. Utilizes relative stability of Medicare
Trust Fund to assist troubled OASDI system.
3. Has promptest corrective affect on trust
fund.
4. Would have the least detrimental affect
on savings flow and capital investment.
Con
1. Would impact most heavily on low income families
reinforcing charge that Social Security tax
is regressive.
2. Largest total tax increase of any option.
3. A higher tax yields no increase in benefits
by itself.
2. BASE/RATE OPTION A: Modest increase in earnings
base coupled with some tax increase.
--
Rather than the scheduled 1977 increase to $16,500
in earnings base subject to tax, increase the
base to $18,000. In addition, raise total tax
rate in 1978 from scheduled 6.05 to 6.30. Part
of scheduled Medicare increase would be shifted
and coupled with an additional increase to
protect OASDI Trust Fund.
Pro
1. Would spread burden to higher income levels
thus moving toward greater progressivity.
2. Change in earnings base is not severe and
will have a lesser affect on savings.
3. Occurs in conjunction with previously
scheduled increases.
Con
1. Tax increase beyond present law.
2. New level of wages subject to tax.
3. Slowest affect on stabilizing trust fund.
-6-
2. BASE/RATE OPTION B: Increase wage base substantially
and shift part of Medicare increase.
--
This proposal would increase wage base to $21,000
in 1977, shift part of the 1978 Medicare increase
to OASDI but not increase total tax beyond what
present law requires.
Pro
1. Total tax is not increased beyond present
law.
2. Moves substantially toward greater pro-
gressivity.
3. Has more immediate corrective affect on
trust fund outgo.
4. It gives something back in higher benefits
to those who will be paying the higher rate.
Con
1. It has long been agreed that Social Security
protection should not extend to the total
earnings of covered workers for this coverage
would substitute for private insurance
funded in the private sector. Under this
option, 95 percent of the covered work force
would have their entire salary protected
under Social Security.
2. Concentrates total cost of correcting trust
fund problems on the higher income group,
thus having the most severe affect on savings
flow.
3. This is a short-term proposal, but the effect
of an increase in the wage base goes well
into the long range future. A wage base
increase results in a higher base for the
computation of benefits. It increases the
cost of the system in the future not
all of the revenue is available for covering
the deficit. Some is lost in higher future
benefits). Thus, it is a more costly and
permanent change than a tax rate increase
for the same amount of revenue.
-7-
STAFF COMMENTS
Robert Hartmann: Base/Rate Option A
Jack
Marsh: Tax Rate Only Option with Base/Rate Option A
as a fall back position.
Alan Greenspan: "If there is to be action now tax rate
only
more progressivity reduced savings
flow and capital investment. "
Phil Buchen:
"Any proposal advanced at this time
should
combine increases in both the tax rate and
earnings base. "
Bill Seidman:
Supports the three recommendations by Secretary
Weinberger including Base/Rate Option B.
RECOMMENDATION
I recommend that if you choose to act now you select the
Base/Rate Option A which provides for a modest increase in
earnings base and a tax increase.
Approve
Disapprove
ACTION
THE WHITE HOUSE
WASHINGTON
May 16, 1975
MEMORANDUM FOR:
THE PRESIDENT
FROM:
JIM CANNON
QUEALO FORD LIBRARY
SUBJECT:
Social Security
The purpose of this memorandum is to present for your decision
key issues regarding the financing of Social Security. Behind
all of these issues lie two questions:
1. Whether you should propose before 1977 some kind of
increase in the payroll tax.
2. If you should, when should you propose the increase.
CURRENT SYSTEM
Under present law benefits are financed out of current income
from Social Security taxes. These taxes are applied equally to
employer and employee. The revenue flows through trust funds
-- one set of funds for Old Age, Survivors, and
Disability (OASDI) benefits.
-- and a Medicare fund to finance health care for
the aged.
Benefits are related to actual income (the wage base subject
to Social Security taxes) but are also adjusted according to
the cost of living. The wage base subject to taxes is also
adjusted for inflation.
Under present law:
Calendar Year
1976
1977
1978
1979
1980
OASDI Tax
4.95%
4.95
4.95
4.95
4.95
Medicare Tax
0.90
0.90
1.10
1.10
1.10
Total Tax
5.85
5.85
6.05
6.05
6.05
Earnings Base
15,000
16,500
18,300
19,800
21,300
-2-
ISSUE
A. Financing
1. Short Term
Since the Social Security system is exceedingly sen-
sitive to changing economic conditions most recent
trends indicate that Old Age, Survivors, and Disability
outgo will exceed income by a widening margin so that
trust fund reserves will be exhausted in the early
1980's. The Medicare Trust Fund is projected to be
relatively stable.
2. Long Term
Current demographic projections and recent provisions
for automatic cost of living adjustments which provide
a double benefit increase for current workers raise
serious questions about the fiscal stability of the
system over the next 50 years.
B. Selected Advisory Council Recommendations
The Advisory Council on Social Security recommended
action to deal with a number of specific items such as:
-- maintaining retirement test
-- equal treatment of men and women
--- minimum benefits
-- older disabled workers
STRATEGY FOR DEALING WITH ISSUES
Secretary Weinberger must testify before Ways and Means on
May 20th and recommends:
1. A specific decision be made now on a proposal to
deal with the short term financing problem and
announced in his May 20 testimony.
2. In that testimony we should indicate the Administra-
tion intends to submit in January a proposal to deal
with the long term issues.
3. Not dealing now with the selected Advisory Council
recommendations with the one exception of equal treat-
ment for men and women which has recently been sub-
ject of a Supreme Court decision.
-3-
REACTIONS TO THIS PROPOSED STRATEGY
I recommend concurrence with strategy items two and three
above. No objections have been raised on these points and
-- the long term problem needs to be addressed and
January would be an appropriate point in time.
-- equal treatment of men and women has been the
subject of a court decision and the options avail-
able now are not likely to change with time.
There is, however, a sharp difference of opinion on the key
be: question, point one, of whether the short term problem should
-- dealt with now and a specific option should be announced
by the Secretary on May 20th, or
--- should be included with the longer term problems
and a single comprehensive plan to stabilize the
Social Security system should be presented in Janu-
ary 1976.
ARGUMENTS IN FAVOR OF ACTING ON THE SHORT TERM PROBLEM NOW
1. The public is concerned about the stability of the
system and a specific proposal now will help calm that
concern.
2. Failure to present a specific recommendation could
provide increased impetus to Congressional moves
toward general revenue funding.
3. Action now would put the Administration in the
position of taking the initiative.
GRAND FORD CLARARY
ARGUMENTS AGAINST ACTION NOW
1. Since proposals, either now or in January, would
not become effective until 1977 at the earliest
there is no need to make a decision immediately.
2. OMB believes the data furnished by HEW is insufficient
to make a decision as important as this.
3. Any adjustments now have a long term affect anyway
so they will have to be integrated in the long term
proposal.
-4-
4.
The long term proposal is needed not just for
financial problems but also for basic structural
changes. Action now could remove the leverage
needed to gain support for these changes.
STRATEGY DECISIONS
Option I: Act now on the short term problems by having
Secretary Weinberger announce a specific proposal on
May 20th.
Favored by:
HEW
Bill Seidman
Option II: Defer action on the short term problem,
proceed with work on both long and short term problems
and submit in January 1976 a single comprehensive plan
for stabilizing the system.
Favored by:
OMB
Treasury Department
Phil Buchen
Alan Greenspan
RECOMMENDATION
That you approve Option II, deferring action on short term
issues now and including short term issues in a single
comprehensive plan in January 1976.
Approve
Disapprove
SPECIFIC OPTIONS FOR ACTION NOW
The Secretary suggests three basic options if you wish to
deal now with the short term problem. He suggests that the
aim be to maintain OASDI Trust Fund reserves of no less than
30 percent of outgo. The options available are:
1. TAX RATE ONLY OPTION: Simply raise the tax rate.
-- In 1977 increase total tax from 5.85 to 6.20.
The OASDI tax would go from 4.95 to 5.30. In
FORD
1978, take the scheduled .20 percent Medicare
tax increase and apply it in part. A total tax
of 6.20 would apply in 1977 and 6.40 in 1978.
LIBRAR
Pro
1. Would stabilize trust fund at about 36
percent of outgo.
-5-
2. Utilizes relative stability of Medicare
Trust Fund to assist troubled OASDI system.
3. Has promptest corrective affect on trust
fund.
4. Would have the least detrimental affect
on savings flow and capital investment.
Con
1. Would impact most heavily on low income families
reinforcing charge that Social Security tax
is regressive.
2. Largest total tax increase of any option.
3. A higher tax yields no increase in benefits
by itself.
2. BASE/RATE OPTION A: Modest increase in earnings
base coupled with some tax increase.
-- Rather than the scheduled 1977 increase to $16,500
in earnings base subject to tax, increase the
base to $18,000. In addition, raise total tax
rate in 1978 from scheduled 6.05 to 6.30. Part
of scheduled Medicare increase would be shifted
and coupled with an additional increase to
protect OASDI Trust Fund.
Pro
1. Would spread burden to higher income levels
thus moving toward greater progressivity.
2. Change in earnings base is not severe and
will have a lesser affect on savings.
3. Occurs in conjunction with previously
scheduled increases.
Con
1. Tax increase beyond present law.
2. New level of wages subject to tax.
3. Slowest affect on stabilizing trust fund.
-6-
2. BASE/RATE OPTION B: Increase wage base substantially
and shift part of Medicare increase.
-- This proposal would increase wage base to $21,000
in 1977, shift part of the 1978 Medicare increase
to OASDI but not increase total tax beyond what
present law requires.
Pro
1. Total tax is not increased beyond present
law.
2. Moves substantially toward greater pro-
gressivity.
3. Has more immediate corrective affect on
trust fund outgo.
4. It gives something back in higher benefits
to those who will be paying the higher rate.
Con
1. It has long been agreed that Social Security
protection should not extend to the total
earnings of covered workers for this coverage
would substitute for private insurance
funded in the private sector. Under this
option, 95 percent of the covered work force
would have their entire salary protected
under Social Security.
2. Concentrates total cost of correcting trust
fund problems on the higher income group,
flow. thus having the most severe affect on savings
3. This is a short-term proposal, but the effect
of an increase in the wage base goes well
into the long range future. A wage base
increase results in a higher base for the
computation of benefits. It increases the
cost of the system in the future (i.e., not
all of the revenue is available for covering
the deficit. Some is lost in higher future
benefits). Thus, it is a more costly and
permanent change than a tax rate increase
for the same amount of revenue.
STAFF COMMENTS
Robert Hartmann: Base/Rate Option A
Jack Marsh: Tax Rate Only Option with Base/Rate Option A
as a fall back position.
Alan Greenspan: "If there is to be action now tax rate
only more progressivity reduced savings
flow and capital investment. "
Phil Buchen: "Any proposal advanced at this time should
combine increases in both the tax rate and
earnings base. "
Bill Seidman: Supports the three recommendations by Secretary
Weinberger including Base/Rate Option B.
RECOMMENDATION
I recommend that if you choose to act now you select the
Base/Rate Option A which provides for a modest increase in
earnings base and a tax increase.
Approve
Disapprove
Secretary Weinberger's
Memorandum
WASHINGTON, D. C. 20201
MASSACHUSETTS
May 2, 1975
MEMORANDUM FOR THE PRESIDENT
FROM
: Caspar W. Weinberger
SUBJECT: Social Security
I have been called before the Congress later this month to testify
on the Administration's position on the short-term financing problem
in the social security system and the longer term financial and
structural problems and prospects for social security. In addition,
the Administration has not yet, but should react more comprehensively
to the Social Security Advisory Council report delivered to you and
the Congress (and made public) in March. You and I commented un-
favorably on its recommendation to finance Medicare from general
revenues, and have indicated general endorsement of some revision
in the future benefit structure. We have not, however, reacted to
its other recommendations on benefits and coverage, or to its
specific proposals for solving short- and long-term financial deficits.
This memorandum highlights a somewhat longer decision memorandum
that is attached.
Background
There is a serious short-term financing problem in social security
cash benefit programs. This problem was understated in the Advisory
Council report, but later cost estimates are now available, and are
known publicly. The forthcoming Trustees Report will underscore it.
Given current projects and current law, outgo exceeds income by
a widening margin so that reserves, now 66 percent of annual outgo,
dwindle to nothing in the early 1980's.
These problems arise because the social security system is exceedingly
sensitive to changing economic conditions. The recent high inflation
rates followed by recession have caused large unanticipated reductions
in income and increases in outgo. Also Congress has increased benefits
by about 70% in the last 5 1/2 years.
Beyond the near-term problems, there are a series of interrelated
financing issues. These issues are caused by the demographic shift
Page 2 -- Memorandum for the President
toward a proportionately larger aged population as a result of falling
birth rates, and by the current computational structure for social
security benefits which automatically adjusts the benefits of future
retirees in such a way as to overcompensate for inflation.
The Congress is aware of these issues, and plans to debate the near-
term issue soon. The relevant committees have initiated a review on
a more deliberate schedule of the long-term issue. The Advisory
Council has offered its solution. Many ideas, including general fund
financing, exist in the Congress. A debate of immense importance is
under way.
Discussion
The first problem at hand is near-term financing. In brief, we need
more revenue, even though current law provides for some increases in
the future. (The earnings base on which payroll taxes are collected
goes up for both social security cash benefits and Medicare under the
indexing features of current law. Medicare also has a small payroll
tax rate increase scheduled in law for 1978.) In my opinion, the
realistic alternatives for increasing revenues are a small increase
in payroll tax rates, an increase in the payroll tax earnings base,
or a combination thereof. While the Advisory Council recommended
general revenue financing, I strongly believe that we should con-
tinue to maintain our stance against it. I regard the Advisory
Council recommendation as a first step toward destroying the
discipline of connecting benefits and taxes.
The timing of the increase in revenues is partly judgmental, but is
strongly determined by the perception of how large or how small the
reserve should be. Not long ago, we thought it should be 75-100
percent of annual outgo. There is no "right" number, but I think
less than about 30 percent would not suffice in recessionary periods
and would begin to erode public confidence in the system. If this
is correct, then increased revenues should start to flow in 1977.
In addition, the longer we wait to increase revenues, the higher
and sharper the increases in any one year must be.
We also need to grapple with the long-term issues, correctly identi-
fied by the Advisory Council. There is a substantial consensus that
we need to stabilize the future benefit structure, but the Advisory
Council solution is only one of many. Like the Congress seems prepared
to do, I believe we should work our way carefully through this problem,
looking toward a proposal to Congress next January. With respect to
other Advisory Council recommendations on benefits and coverage, I
think we should openly set those aside for now as too costly to con-
sider. I would make an exception for those low-cost items related
to unequal treatment of men and women, particularly in light of the
recent Supreme Court decision in this area.
Page 3 -- Memorandum for the President
The final area of concern relates to the timing of Administration
proposals to solve the short-term financing problem. I believe we
must take a position on this subject. We do, however, have the
choice of announcing now our specific proposals for increasing
short-term revenues and waiting until next year to put forward
long-range solutions, or alternatively acknowledging the issues
now and announcing all our proposals in January. The advantages
of proceeding now with a specific proposal include: attempting to
lead the debate, preempting or competing early with other solutions
we would oppose, and avoiding a new tax increase proposal in 1976.
Waiting would allow us to tie the short- and long-range proposals
together in one comprehensive Administration plan.
Recommendations
In the attached memo which contains the specific decision options,
I am recommending that you choose the following:
Adopt a specific proposal now to deal with the short-term
financing problem (through 1980). The proposal would adjust
upward the earnings base beginning in 1977 but would not
alter the combined social security/Medicare payroll tax rate
currently scheduled in law.
Reconfirm endorsement of need for legislation to stabilize
future benefit structure and proceed with studies of alter-
native ways of accomplishing this. Ignore other Advisory
Council financing recommendations that are based on cost
estimates that are now out of date.
With the exception of selected measures on equal treatment,
set aside for now Advisory Council recommendations on benefits
and coverage in light of economic conditions and the overriding
importance of the short- and long-term financing problems.
Attachment
May 2, 1975
MEMORANDUM FOR THE PRESIDENT
Through: Honorable James M. Cannon
Domestic Council
Purpose
The purpose of this memorandum is to obtain Presidential
decisions concerning:
RL
1. The Administration's response to the recommendations
of the 1975 Advisory Council on Social Security.
2. The financing of deficits (both short- and long-term)
facing the social security system.
Each of these topics is discussed separately below. At the
end of each topic you will find a set of options for
Presidential decision.
I. ADVISORY COUNCIL RECOMMENDATIONS
On December 11, there was a briefing for the President on
social security financing problems and on the major social
security issues that have been addressed by the Advisory
Council. An outline of each of the Council's major recom-
mendations was also contained in the enclosed memorandum
of January 24 (Tab A).
The Council's report, which has been transmitted to the
Congress, recommended a series of cash benefit proposals
to (1) modify coverage and benefits; (2) stabilize the
future benefit structure; and (3) finance both the short-
and long-term deficit.
Coverage and Benefit Modifications
The first group of proposals affecting coverage and benefit
provisions (by eliminating differences in the treatment of
men and women, liberalizing the retirement test, changing
the definition of disability for older workers, etc.) are
described in Tab A. Some of them have merit. The Council's
recommendations for promoting equal rights for men and
women under social security are of particular interest at
this time in light of the recent Supreme Court decision in
the Wiesenfeld case which held unconstitutional the provision
of present law under which social security benefits are
payable to a widow with a child beneficiary in her care but
not to a similarly situated widower. In the near future the
Department of Health, Education, and Welfare will forward
recommendations for changing those provisions of the social
security law which differentiate between men and women.
(The short-term cost of these legislative recommendations is
not large enough to have an effect on the short-term financing
options discussed in part II of this paper.)
Almost all of the Council's other benefit recommendations
involve additional program costs. All things considered,
it is recommended that this group of recommendations be
opposed at this time on the grounds that the current economic
outlook and the tenuous financial status of the social
security system militate against these changes in benefits
and coverage. Such a position would be consistent with the
President's "no-new-starts" policy.
Stabilizing the Benefit Structure
The subject of stabilizing the benefit structure replacement
rates was discussed in some detail in a meeting with the
President on December 11 and in the enclosed memorandum of
December 23 (Tab B). It is recommended that the President
strongly endorse the principle of stabilization and the need
to develop and adopt a stabilization proposal as quickly as
possible but that we consider the Council's model as one
among a number of possible alternatives. The Administration
should take the position that it is examining alternative
ways of accomplishing the objective and will present a
specific recommendation to the Congress at a later date.
FORD
Financing the Deficits
As a practical matter, the Council's financing plan is not
GERALD
very helpful:
-- First, it will not completely solve the long-term
financing problem. While their plan would finance
a long-term deficit of over 3 percent of taxable
payroll, the latest actuarial estimates suggest a
deficit of over 5 percent.
3
-- Moreover, the Council would finance Medicare from
general revenues and transfer Medicare payroll
taxes to bail out the old-age, survivors and
disability insurance (OASDI) trust funds. The
Administration should oppose this and all other
general fund financing schemes.
Another consideration is that it would probably be a
mistake to decide on a long-term financing plan before a
decision is made concerning a specific benefit stabilization
plan, since stabilization will substantially reduce the
long-term deficit.
Suggested Presidential Decisions Concerning Advisory
Council Report
1. Proceed with development of proposals on equal
treatment of men and women and reject the
Council's other proposed modifications in
coverage and benefits not on their merits,
but on grounds that the system cannot afford
the cost.
Approved
Disapproved
2. Endorse legislation to revise and stabilize
benefit structure and indicate that Administration
will present specific plan to Congress.
Approved
Disapproved
3. Concur in Council's conclusion that steps must
be taken to solve system's financing problems;
reject Council's specific plan; and develop an
Administration financing plan.
Approved
Disapproved
4
II. FINANCING
A. Long Term
Long-range actuarial cost estimates indicate that the old-age,
survivors, and disability insurance system has a substantial
long-range deficit. It is estimated that the program is under-
financed over the customary long-range valuation period of
75 years by an average annual amount equivalent to 5.32 percent
of taxable payroll, with the larger part of this deficit
occurring after the turn of the century. A significant part of
the high long-range cost of the program in the next century is
due to the projected increases in benefit levels relative to
earnings levels under the automatic benefit adjustment provisions
of present law. The previously mentioned recommendation to
stabilize the future benefit structure would have a significant
favorable impact on this long-range deficit. The Department
is studying alternative proposals that would result in such
stabilization. However, until a specific plan to accomplish this
is developed, a specific method of dealing with this long-range
deficit should be postponed. There is adequate time to deal
with this long-range problem.
B. Short Term
The immediate financing problem--probably the most critical of
the several issues facing the social security system--is what
to do about the short-term deficit facing the cash benefit
part of the system. At the time the President was briefed in
December, the yearly deficits in the cash benefit trust funds
beginning in 1976 were expected to be small; it appeared that
these deficits could be covered over the next 5 or more years
without reducing the reserve to an unacceptable level.
Projections of the status of the trust funds were revised
later in December, when the Council of Economic Advisers'
economic assumptions for the 1976 budget became available.
Current projections of program costs are based on more recent
assumptions developed for use in the 1975 Trustees' reports
which will be submitted to the Congress next week. (These
latest assumptions are used throughout this memorandum.) Cost
estimates based on the latest economic assumptions show (as
did those based on the 1976 budget assumptions) that the reserve
in the cash benefit funds will be impaired almost immediately
and will be completely exhausted by the early 1980's.
Social security is of course a dynamic system sensitive to
changes in the economy, and shifts in the short-term economic
outlook can have a significant effect on trust fund income
and outgo. Income from the payroll tax is strongly influenced
by the amount and duration of unemployment and the rate of
increase in wages. With anticipated benefit increases tied
to the cost-of-living projections, outgo estimates can vary
sharply if. CPI assumptions are changed in any significant way.
Basically, as compared to the 1976 budget assumptions, the
Trustees' report assumptions show a slower rise in the CPI
over the next several years, project unemployment rates to
be somewhat higher in 1975 and lower in 1978-1980, and are
less optimistic about productivity improvements in the latter
part of this decade. (See Tab C.)
The tables below show the status under present law of the
cash benefit (OASDI) trust funds through 1980 under the
assumptions developed by HEW for the Trustees' reports.
Status of Old-Age, Survivors and Disability Insurance Trust Funds
1975-1980 Existing Legislation
(Amounts in Billions)
Calendar Year
1975
1976
1977
1978
1979
1980
1981
Income
$66.5
$72.3
$81.8
$91.1
$100.3
$109.1
Outgo
69.5
78.1
87.5
97.1
107.1
116.8
Net (surplus/
deficit)
-3.0
,-5.8
-5.8
-6.0
-6.8
-7.7
Reserve at start
of year:
Amount
$45.9
$42.9
$37.1
$31.3
$25.4
$18.6
$10.9
As percent of
year's outgo
66%
55%
42%
32%
24%
16%
9%
6
Decisions on how to deal with the central issue of short-range
financing of the cash benefits part of social security will
necessarily involve resolution of three important sub-issues:
the treatment of proposed social security legislation set
forth in the 1976 budget; the timing of any financing initiative;
and the specific nature of such an initiative.
1. Effect of Social Security Cost-Control Legislation on
Financing
The Administration has proposed a number of administrative
and legislative initiatives which would have the effect
of holding down social security costs. (A complete list
of these proposals is included at Tab D.) The key measures
which would have a significant effect on the funds are
legislative proposals to (a) place a one-time, 5-percent
limit on the social security cash benefit increase payable
in July 1975, and (b) institute greater Medicare cost-sharing.
It now appears extremely unlikely that the Congress will
enact either the 5-percent cap on social security benefits
or the Medicare cost-sharing legislation. (The Senate
Finance Committee, in their budget considerations, did
not accept the 5-percent cap, and more than 50 Senators
have co-sponsored a Senate resolution opposing the cap.
The House Ways and Means Committee has expressed strong
sentiment against it.) Nor, to the best of our knowledge,
is there any Congressional support for Medicare còst-sharing
legislation. The Congress refused to consider this type
of legislation 2 years ago.
As a practical matter, therefore, it would seem unwise to
predicate a financing plan on the assumption that the
Administration's proposed social security cost-reduction
legislation will be enacted. On the other hand, it is
important to understand the effect that enactment of
these proposals would have on the trust funds and their
financing arrangements. We have therefore shown at Tab E
an analysis of the effect of the proposed cost-control
legislation and of a related financing plan that could
be proposed assuming enactment of that legislation. The
remainder of this paper assumes that the legislation will
not be enacted.
7
2. Timing
There are two questions with respect to the timing of
Administration short-term financing proposals: When
must additional revenue-producing measures take effect?
When should the Administration submit a financing proposal
to the Congress?
The timing of a legislative effective date raises broad
economic and political considerations, as well as the
obvious concerns about the fiscal integrity of the social
security system and public confidence in the system.
Viewing the issue solely from the position of stewardship
of the trust funds, the Administration would have to
advocate legislation to provide additional financing at
the earliest possible moment--that is, beginning in calendar
1976, when, under present law, expenditures from the cash
benefit funds will significantly exceed income. It is
recognized, however, that in the current economic situation
such a proposal is strongly contraindicated.
The basic premise therefore should be that, due to the
state of the economy, no tax increases or other social
security revenue-producing measures should be proposed
which affect calendar years 1975 or 1976. Then the
timing and design of financing alternatives should employ
the following criteria:
a. Further revenue development can be held in
abeyance until, but not beyond, a point where
the reserve level falls so low as to seriously
erode public.confidence. (This is a judgmental
matter.)
b. The trust funds should not be allowed to operate
with an annual deficit for any longer than
necessary. In other words, income to the
funds should exceed outgo as soon as it can be
FORD LIBRARY
safely assumed that additional revenue-producing
measures will not adversely affect economic
19
recovery.
C. Whatever the revenue-producing measure (s)
adopted, it should not produce a sharp rise in
the tax rates in any single year.
8
Considering the first criterion--public confidence level
of the reserves--trust fund balances must be at least
stabilized at (and not fall below) a level equal to roughly
one-third of annual outgo. (Ideally, the financing plan
should produce or trend toward a higher level--say
50 percent--but there is also a need to restrain tax
increases in the near future.) The one-third level is to
a certain extent arbitrary; it is probably as low as can
be safely countenanced, given previous public expressions
that the reserve should be set at 100 percent of annual
outgo. Under present law, the reserve level of the cash
benefits trust funds will have declined to the one-third
level (32 percent) by the beginning of 1978. Thus, any
financing plan based on present law must either (1) generate
additional OASDI revenues beginning in 1977 or (2) involve
a substantial increase in revenues effective January 1, 1978.
Although implementation of additional financing measures
can be delayed until 1977 or beyond, depending on
circumstances, there remains the question of when to
propose financing legislation. On balance, the
Administration should introduce legislation this year,
the earlier, the better. Controversy and public concern
about the financing of the system is building rapidly,
and release of the Social Security Trustees' reports
this spring, as required by law, will add fuel to the
fire. (The reports will increase public awareness of
the deficit.) The Congress is almost certain to take
the initiative if the Administration does not. Absent
an Administration initiative, the forces favoring major
general revenue financing of the trust funds would likely
play a stronger hand, particularly in light of the
Advisory Council recommendations. We believe that in light
of these considerations it is desirable for the Administration
to take the initiative promptly, rather than delaying until
a comprehensive proposal dealing with both the short-range
and the long-range situation could be presented.
The Subcommittee on Social Security of the House Ways and
Means Committee has scheduled hearings for later this month
on the status of the trust funds and possible financing
initiatives. These hearings would provide an ideal forum
for presenting the Administration's plans.
9
3.
Method of Financing
a. General Approach
There are four possible sources of trust fund revenue
which can be used either singly or in combination.
All require legislation. There are:
-- Increased payroll tax rate (employer and
employee, alike).
- Increased earnings base (the maximum annual
amount of earnings to which the tax rate is
applied).
-- Transfer of tax income from Medicare funds.
(Existing law calls for an increase in the
Medicare tax rate in 1978; some of the income
from this increase is more than necessary to
meet short-term needs.)
------------------------- General revenue financing.
Consistent with previously stated Administration
views, the Administration should continue to oppose
any financing proposal involving substantial general
revenues.
Further, unless it is assumed that the proposed
cost-control legislation is enacted, any proposal
to rely solely on tax rate increases would involve
significant tax rate increases.
The Department's 'preferred approach combines increases
in the earnings base with an adjustment in the tax
rate schedule to transfer some income from Medicare
to OASDI. The earnings base will increase annually
due to the "automatic" provisions of present law;
the Department's preferred approach would speed up
the rate of the increases in the earnings base that
will be produced by the "automatic" provisions of
present law. Under one of the two earnings base/tax
increase options that we are proposing, the total
tax rate (OASDI-Medicare combined) would increase;
under the other, the total tax rate would be
unchanged from present law.
IV
A tax-rate-increase-only approach and an earnings
base increase combined with a tax increase would be
significantly different in their impacts on the
taxpaying population at different wage levels.
While any plan that depends entirely on an increased
tax rate will impact on all workers, the greatest
relative impact would fall on the low-paid worker
as compared with the higher-paid worker (i.e., the
tax is regressive). A plan which relies in part on
an increase in the earnings base would be more
progressive, spreading more of the burden toward the
upper-income worker. The degree to which this
occurs depends, of course, on how rapidly and to
what level the earnings base is increased.
An increase in the earnings base reduces the cost of
the social security program expressed as a percentage
of payroll and therefore makes it possible to meet
long-term program costs with lower tax rates than
would otherwise be necessary. An earnings base increase
also increases the protection provided for higher-paid
workers by increasing the proportion of their earnings
that is counted for benefit purposes.
As a practical matter, any plan incorporating an
increase in the earnings base would automatically
increase income to the Medicare program but would not
affect outgo. This, in turn, would permit a transfer
of a greater amount of Medicare income to the cash
benefit programs, thereby helping to hold down the
combined OASDI/Medicare payroll tax rate needed to
finance the entire system.
It is recommended that any plan to improve the
short-range financing of the OASDI system include
provision for transferring any unneeded Medicare
income created during the period to the cash benefit
(OASDI) trust funds. The transfer of taxes now
scheduled for Medicare to OASDI is a critical element
in all the financing plans discussed below.
The proposed reallocation of Medicare taxes could have
implications for the Administration's Comprehensive
Health Insurance Plan (CHIP) when the Administration
resubmits it. Comprehensive Health Insurance Plan
contemplates the use of the Medicare taxes to finance
the principal costs of coverage for the aged. The
plans presented provide sufficient financing for
Medicare and for that part of CHIP that is to be
financed from payroll taxes.
TT
It should be recognized that a proposal to transfer
income from Medicare may lead to a need to increase
future scheduled Medicare taxes. While there will be
a Medicare surplus in the near term, under present
law, the outlook is for a small deficit over the full
25-year Medicare valuation period. To the extent that
funds are "borrowed" from this fund today, additional
revenue-producing measures may be required in later years.
b.
Specific Financing Approaches
The following points will help to put the alternatives
presented below into perspective. This review of the
status of the funds and their financing requirements
is limited to the period ending in 1980. The objective
is to provide the minimum financing necessary to sustain
the cash benefit trust funds through 1980 (i.e., keeping
the ratio of assets to outgo of the funds at no lower
than one-third in the latter part of the decade). This
has been done on the assumption that new long-term
financing provisions will be enacted and in effect by
the start of the next decade.
(i)
Tax Only Approach
The table below compares the tax rates scheduled
in present law with the tax rates that would be
necessary to prevent the OASDI trust funds from
falling below a level of one-third of a year's
outgo and to maintain the funds at about 36 percent
of outgo if there were no increases in the earnings
base over those that would go into effect
automatically under present law.
Calendar Year
1976
1977
1978
1979
1980
Present law
OASDI tax
GERALD R. LIBRATY FORD
4.95%
4.95%
4.95%
4.95%
4.95%
Medicare tax
0.90
0.90
1.10
1.10
1.10
Total tax
5.85
5.85
6.05
6.05
6.05
Earnings base
$15,000
$16,500
$18,300
$19,800
$21,300
Tax only approach
OASDI tax
4.95
5.30
5.40
5.40
5.40
Medicare tax
0.90
0.90
1.00
1.00
1.00
Total tax
5.85
6.20
6.40
6.40
6.40
Earnings base (same as present law)
12
Under this approach a large, immediate (1977)
increase in tax rates would be necessary and
the total tax rate through 1980 would be
significantly higher than under present law.
Also, as mentioned earlier, this approach would
impact most heavily on low-income earners.
These considerations raise serious doubts
about such a tax only approach. (Detailed
information on this option appears at Tab F.)
(ii) Base/Tax Approach
On balance an approach involving a combination of
earnings base and tax rate increases seems prefer-
able. The following table sets forth two options.
One shows modest base increases combined with a 1978
tax increase that goes significantly beyond the
increase scheduled in present law; the other shows
fairly substantial base increases--increases that
would make it possible, with a reallocation of the
Medicare tax, to avoid a total tax increase in
excess of that scheduled for 1978 in present law.
13
Calendar Year
1976
1977
1978
1979
1980
Present law
OASDI tax
4.95%
4.95%
4.95%
4.95%
4.95%
Medicare tax
0.90
0.90
1.10
1.10
1.10
Total tax
5.85
5.85
6.05
6.05
6.05
Earnings base
$15,000
$16,500
$18,300
$19,800
$21,300
Option A
OASDI tax
4.95
4.95
5.30
5.30
5.30
Medicare tax
0.90
0.90
1.00
1.00
1.00
Total tax
5.85
5.85
6.30*
6.30*
6.30*
Earnings base
$15,000
$18,000*
$20,700*
$22,500
$24,300
Option B
OASDI tax
4.95
4.95
5.10
5.10
5.10
Medicare tax
0.90
0.90
0.95
0.95
0.95
Total tax
5.85
5.85
6.05
6.05
6.05
Earnings base
$15,000
$21,000*
$24,000*
$26,100
$28,200
*
Changes from present law in the total tax rates and
earnings bases required for each option are identified
by an asterisk in the year they occur. An asterisk on
an earnings base amount denotes that automatic increase
provisions in present law would be overridden by a
legislative change affecting the amount of the base in
that year, but not affecting the functioning of the
automatic provisions in subsequent years.
The following table indicates the effects of these two
options on the OASDI annual deficit and on the trust fund
reserves. (Detailed information on these options appears
at Tab F.)
OASDI
Reserves at Start of
Income Minus
Year as a Percentage of
Outgo
Outgo During Year
(in Billions)
OASDI
Medicare
1977
1978
1978
1981
1978
1981
Present law
$-5.8
$-6.0
32%
9%
69%
90%
Option A
-4.2
3.0
34
36
71
74
Option B
-2.0
2.5
36
36
73
71
In order to provide some idea of the impact of the alternative
short-range financial approaches on individual workers, the
annual social security taxes for median workers and high-paid
workers under present law, under a tax only approach, and
under the two base/tax options are shown below. The table
clearly shows that increasing the earnings base (base/tax
options) would reduce the relative share of the additional
taxes that would be borne by low-paid workers and raise the
share borne by the higher-paid workers.
SOCIAL SECURITY TAX LIABILITY
Employee with wages equal to
Estimated Median Wage for
Employee with wages of
Male Wage Earners*
$24,000 or More
.
1975
1976
1977
1978
1975
1976
1977
1978
Present law
$479
$508
$554
$636
$825
$878
$ 965
$1107
Tax only option
479
508
592
673
825
878
1031
1171
Base/Tax Option A
479
508
554
662
825
878
1053
1304
Base/Tax Option B
479
508
554
636
825
878
1229
1452
*Estimated median wages for male wage earners: $8180 in
1975; $8687 in 1976; $9469 in 1977; and $10511 in 1978.
15
Another way of evaluating the effect of the tax
increases contemplated under present law and under
the alternative approaches is illustrated below.
Percent Increase in Combined
OASDHI Tax Rates, 1975-78
OASDHI Tax Rates
1975
1978
Increase
Percent Increase
Present Law
5.85
6.05
.20
3.4%
Tax Only Option
5.85
6.40
.55
9.4%
Base/Tax Option A
5.85
6.30
.45
7.7%
Base/Tax Option B
5.85
6.05
.20
3.4%
Suggested Presidential Decisions on Financing and Timing of
Public Announcements Concerning Social Security
1. Endorse a two-part financing plan as follows:
Part I. A proposal now to provide short-term financing--
through 1980--to handle the immediate problem and allow
sufficient time to reform benefit structure and develop
a long-term financing plan based on such reform.
Part II. An integrated long-term financing and revised
benefit structure plan to be submitted early next year.
2. Adopt financing plan represented by
Tax Only Option
Base/Tax Option A
Base/Tax Option B
Other
HEW recommends Base/Tax Option B.
Administration's posture as reflected by the decisions
indicated in this paper.
Approved
Disapproved
HEW recommends that the Secretary be authorized to present
the Administration's posture on or before his appearance
before the House Ways and Means Committee, scheduled by
the Committee for mid-May.
4. Authorize the Secretary to proceed with the preparation of
legislative proposals consistent with the decisions above.
Approved
Disapproved
HEW recommends approval.
Secretary
Enclosures
Tab A - Memorandum for the President of 1/24/75
Tab B - Memorandum for the President of 12/23/74
Tab C - - Discussion of Economic Assumptions
Tab D - - Administration Cost-Control Proposals
Tab E - Effect of Cost-Control Proposal
Tab F - Effect of Financing Options
PARATORS
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0
SURVEYS
SEPARATOR SHEET
A-69D (II-69)
MEMORANDUM FOR THE PRESIDENT
As you have no doubt learned from press reports, the
Advisory Council on Social Security met over the weekend
of January 18 and 19. (Since the Council's meetings were
open to the public, the press has been reporting major
Council actions as they have occurred.) This was the last
meeting of the Council, which has been studying Social
Security since last spring. The Council reached final
decisions concerning proposals that will be made in
its final report--now scheduled to be submitted formally
by mid-February. Under the law the report must be
sent to the Congress as well as to you.
The purpose of this memorandum is to alert you to the
decisions and conclusions of the Council. We have
already given you our general endorsement of one Council
recommendation, that is for restructuring social security
benefits to stabilize replacement rates. However, their
major recommendation has attracted so much attention that
I wanted you to have my personal opinion now. We will
be giving you our appraisal of the other recommendations
soon.
Unfortunately, the Council's recommendation on social
security financing reached at the last minute in their
deliberations, is most regrettable, in my opinion. They
FORD
is
recommend that we no longer finance Medicare from pay-
roll taxes, as at present, but that we use the Medicare
portion of the existing payroll tax for Social Security
GERALD
benefits. Medicare (some $14 billion) would be paid for
out of general fund revenues. As proposed by the Council,
this shift would occur gradually over several years
as the need for additional revenues for the cash benefits
program increases. This would be the first step in using
the general fund to finance social security - Medicare
benefits, and, in my opinion, would add to existing
pressures to fund all social security from the general
fund, thereby removing the discipline that now requires
tax increases to match (reasonably closely) benefit increases.
While under the Council's approach, no net increase in the
payroll tax would be necessary for many years obviously
we would have to add the Medicare costs to the already
huge deficit, or increase general taxation.
The Council's recommendations are described briefly in
the enclosed summary (Tab A). I am also attaching (Tab B)
a memorandum I submitted to you on this subject after
the Council's meeting in December. Much of that memorandum
has obviously been overtaken by events; however, we
would appreciate your guidance on the question of
stabilizing replacement rates, Issue #2 on page 4.
/s/ Cap Weinberger
Secretary
on Social Security
A. Cash Benefits
1. Purpose and principles. The earnings-related OASDI program should
be preserved as the Nation's primary means of providing economic
security in the event of retirement, death, or disability. Future
changes in OASDI should conform to the fundamental principles of
the program: universal compulsory coverage, earnings-related
benefits paid without a test of need, and contributions toward the
cost of the program from covered workers and employers.
2. Benefit structure--replacement rates. The provisions of present
law for computing average monthly earnings, on which benefits are
based, and for adjusting the benefit table in the law to changes
in prices may result over the long range in unintended,
unpredictable variations in the level of benefits. The benefit
structure should be revised to maintain the levels of benefits
in relation to pre-retirement earnings levels that now prevail.
Benefits for workers coming on the rolls in the future should be
computed on the basis of a revised benefit formula using past
earnings indexed to take account of changes during their working
lives in the average earnings of all covered workers. As under
present law, benefits for people on the rolls would continue to
be increased as price levels increase.
3. Retirement test. The provisions of the present retirement test
should be modified so that beneficiaries who work can retain more
of their benefits. Instead of reducing benefits by one dollar for
every two dollars of earnings above the exempt amount of earnings,
as under present law, one dollar of benefits should be withheld
for every three dollars of earnings between the exempt amount and
twice the exempt amount, and one dollar for two dollars above that
level. Also, the provision under which 2. full benefit may be paid
for any month in which a beneficiary earns less than one-twelfth
of the annual exempt amount should be eliminated, except for the
first year of entitlement to benefits. The test should be based
on annual earnings. ÷
* Latter proposal was included in the November 26, 1974, Presidential
message on recommendations for reducing Federal outlays and is being
resubuitted to the Congress with the 1976 Budget.
1/20/75
4. Treatment of men and women. The requirements for entitlement to
dependents' and survivors' benefits that are now applied to women
should be applied to men, and benefits should be provided for
fathers and divorced men as they are for mothers and divorced
women. At the same time, the law should be changed, effective
prospectively, so that pensions based on one's work in employment
not covered by social security will be subtracted from his social
security dependents' 1 benefits. Other provisions of the social
security program which are the same for men and women but which
are criticized because they appear to have different effects on
men and women (or different effects based on merital status) should
not be changed.
5. Other recommendations.
2. Universal compulsory coverage. Although social security
coverage is nearly universal, the gaps in coverage that remain
may result in unwarranted duplication of benefits. Social
security coverage should be applicable to virtually all gainful
employment. Ways should be developed to extend coverage to
those areas of employment, especially public employment, for
which coordinated coverage under social security and existing
staff-retirerent systems would assure that total benefits are
reasonably related to a worker's lifetime earnings and
contributions.
b. Minimum benefit. Partly because of the gaps in social security
coverage, the minimum benefit is frequently a "windfall" benefit
to those, such as Federal retirees, who are already receiving
2 pension based on earnings in employment not covered by social
security. Almost all workers who have worked in social security
employment with some regularity become entitled to higher than
minimum social security benefits. The minimum benefit in
present law should be frozen at its level at the time the new
benefit structure recommended under number 2 above goes into
effect and the new system should not pay benefits exceeding
100 percent of the indexed earnings on which the benefit is
based.
C. Definition of disability. The definition of disability should
be revised to provide reduced disability benefits for workers
aged 55 or over who cannot qualify for benefits under present
law but who are so disabled that they can no longer perform
jobs for which they have considerable regular experience.
d.
Miscellaneous. Further study is needed on three matters:
the effects of the social security program on different racial
and ethnic groups, ways of simplifying the social security
program and its administration, and the frequency of cost-of-
living adjustments in benefits. In addition, a general study
of social security by a full-time non-Covernment body is
suggested.
B. Financing
1. Actuarial status. While the cash benefits program will have adequate
funds to meet its obligations for the short range, additional short-
range financing would be needed to maintain trust fund levels and
to meet the cost of the Council's benefit recommendations. Over
the 75-year valuation period, the program faces a serious deficit.
Steps should be taken soon to assure the financial integrity and
long-range financial soundness of the program.
2. Contribution rate.
a. Employee-emplover: No increase should be made in the total
contribution rates for employees and employers for cash
benefits and hospital insurance. However, the OASDI contribu-
tion rate should be gradually increased, as OASDI costs
increase, and the increases should be met by reallocating
contributions now scheduled in the law for Part A (Hospital
Insurance) of the Medicare program. Income lost to the
Hospital Insurance program by this reallocation should be made
up from the general funds of the Treasury.
b. Self-employed: The present 7-percent limitation on the
contribution rate for the self-employed should be removed.
The self-employment. OASDI contribution rate should be the same
multiple of the employee contribution rate as was fixed at the
time the self-employed were first covered-150 percent.
3. Retirement age. The Council recognizes that under current
demographic projections there will be a sharp rise in the number
of people who have reached retirement age relative to the working
age population in the first several decades of the next century.
Although the Council is not now recommending an increase in the
age of eligibility for social security retirement benefits in the
next century, the Council does believe that such a change might
merit consideration by the Congress in later years, when the burden
on people still working may become excessive.
E
PARATORS
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eration.
propriate
further
cation if
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SURVEYS
SEPARATOR SHEET
A-63D (11-69)
MEMORANDUM FOR THE PRESIDENT
On December 11, we discussed social security problems and
issues.
At the close of our meeting, I indicated that we would suggest
appropriate language concerning social security for inclusion
in the State of the Union Message. We have already transmitted
such language under separate cover as a part of this Department's
general proposals for the State of the Union Message. The
language that we recommend (Tab A) concerning social security
would indicate your awareness of the problems and issues facing
social security and your intention to make specific proposals
sufficient to maintain the future financial integrity of the
system--as soon as you have had an opportunity to consider the
conclusions and recommendations of the 1975 Advisory Council on
Social Security, which is expected to finish its work in late
January or early February. The language deliberately avoids
any commitment to a specific course of action at this time on
the assumption that specific recommendations should await receipt
of the Advisory Council report.
At the close of our December 11 meeting, I also indicated that
I would submit action proposals on each of the social security
issues that we discussed. Since that meeting, the Advisory
Council has had another session and is now considering several
new proposals affecting financing that were not anticipated
when we met with you. They have also moved a step closer to
recommendations that would liberalize several features of the
existing program. These liberalizations, if adopted, would
increase the cost of the program for both the short and long
term.
Perhaps the most significant proposal now being considered is
one that would increase the retirement age beginning in the 21st
century. This is being reviewed by the Council as one means of
reducing the long-term costs of the program and thereby limiting
future tax requirements. The Council is also debating some rather
rapid and early increases in the so-called wage base (the maximum
amount of earnings taxable for a worker). An early increase in
the wage base would produce new revenues and might facilitate
postponement of tax rate changes in the near term.
Adoption by the Council of any or all of these new considerations
could have a significant effect on the design and timing of tax
and other financing proposals--including any that the Adminis-
tration might want to consider.
Given these developments, I believe ve need to know more about
the Council's final conclusions before the Administration makes
its own decisions and choices. We should know precisely what
the Council will finally recommend by around mid-January. This
would still give us adequate time to make decisions and to draft
legislative proposals, to the extent needed, for early submission
to Congress.
Therefore, it is my recommendation that two matters be decided
at this time and that decisions on all other items be deferred
until we know more about the Council's final recommendations.
The two decisions that I believe to be necessary at this time
are:
1. A decision as to whether to include language in
the State of the Union Message-which we would
urge you to do. I gather that this has all but
been decided and that all that remains is
selection of the language itself.
2. A decision as to whether you want to adopt, in
principle at least, the idea of stabilizing
replacement rates. In this case, we already know
that the Advisory Council will recommend
stabilization of replacement rates.
Although a great deal of work has already been done on a rate
stabilization proposal, consideration of alternative approaches
and the design of a final legislative package will take some
time. For this reason, we believe it would be wise to make
a basic decision now.
It is our belief that the replacement rate criteria that have
been adopted by the Advisory Council would provide a sound
basis for any Administration replacement rate proposal. The
criteria being followed by the Advisory Council are:
1. The new formula should be constructed so as to
neither increase nor decrease, on the average,
current benefit levels.
2. The new formula should be constructed so as to
continue weighted benefits for low-income workers.
3. Criteria 1 and 2 would result in stabilized
replacement rates of about 60 percent for
low-income workers, about 40 percent for
median-income workers, and about 30 percent
for higher-income workers.
which no worker would be disadvantaged at the
time of his retirement by reason of the new
formula.
In deciding the question of whether or not to proceed with
development of an Administration proposal to stabilize
replacement rates based on the above criteria, you should
consider the following pros and cons:
Pro
1. Stabilized replacement rates would result in a
more rational social security system. In other
words, future benefits would be based on public
policy decisions as to how much of a person's
earnings should be replaced rather than on the
happenstance of future shifts in wages, prices,
and productivity.
2. Stabilization should improve public understanding
of what a worker earns for his tax contribution.
3. Under currently predicted economic circumstances
(or under any economic circumstance in which
inflation occurs or in which productivity falls),
a decision to stabilize has the advantage of
significantly reducing long-term costs. In
turn, future tax rates would not have to be as
high as otherwise predicted. Rate stabilization
should reduce the ultimate tax rate as applied to
the individual by 1 to 2 percent.
4. All actuaries and economists who have been consulted
on this matter, whether by the Advisory Council, the
Social Security Administration, or the Congress, have
supported stabilization of replacement rates. Any
proposal to do so should receive strong support
from professionals in these fields.
Con
1. Because future benefits would not rise as much as
under current law, some are apt to oppose it.
Organized labor might oppose such a proposal for
this reason. (At this writing, labor representatives
on the Advisory Council have tentatively voted for
it.)
about the adequacy of existing replacement rates.
(Times being what they are, we doubt that this
argument would prevail.)
3. Some might accuse us of making this proposal for
purely fiscal reasons and at the expense of lower
future benefits.
A further discussion of the replacement rate issue is enclosed
under Tab B.
Recommendations
We recommend that:
1. Language concerning social security be included
in the State of the Union Message.
2. That a Presidential decision be made now to
proceed with development of a specific plan for
replacement rate stabilization that would become
an early Administration initiative.
3. That, with the exception of the replacement rate
stabilization issue, Presidential decisions
concerning what to do about other social security
issues, including the question of tax changes, be
held in abeyance until about mid-January or as
soon as we know with greater certainty what the
Advisory Council will recommend on these issues.
(At that time, we would provide you with a set
of action choices on each of the items.)
Decisions
1. Include social security as topic in State of the
Union Message.
Approved
Disapproved
Other
LIBRARY
2. Proceed with immediate preparation of replacement
rate stabilization legislative proposal for my
later review and approval.
Approved
Disapproved
Other
3. Defer other social security issues until Advisory
Council recommendations become final (mid-January)
and present specific decision proposals at that
time.
Approved
Disapproved
Other
/s/ Caspar W. Weinberger
Secretary
Enclosures
3958938
This year marks the 40th anniversary of social security.
Today, almost every American family is protected by the
program, and one out of every seven Americans is currently
receiving social security benefits. In recent years,
great strides have been made in upgrading benefit levels
and assuring adequate benefits for the future. Our concern
now must be to insure that social security is adequately
financed for the future. The system's financing and
a number of other social security issues have been
under study by this Administration and the current Advisory
Council on Social Security. The Advisory Council is now
preparing its final report. After I have an opportunity
to consider the Council's conclusions, I will present to
the Congress my own recommendations for insuring the
future adequacy of the social security system.
The most meaningful way to measure the effect of social security
is to look at replacement rates--the share of a worker's most
recent earnings that is replaced by his retirement or disability
benefit.
Current law results in replacement rates with two characteristics:
1. They are weighted in favor of lower-income workers.
This is the result of a deliberate public policy
choice, adopted because low wage earners have less
margin for reduction in their income due to
retirement or disability.
2. They are not stable or fixed for the future. They
can change dramatically, depending on what happens
to the economy. This clouds public understanding
and does not reflect any deliberate public policy
choice.
Current Replacement Rates
Today, social security retirement benefits replace about
62 percent of the most recent earnings of a person with an
income of $3,200. For a person earning about $7,700 per year
(the median earnings), the current replacement rate is about
44 percent. In the case of a person earning $13,200 per year
(the maximum earnings base against which the tax is assessed),
the replacement rate is about 30 percent.
The latest long-range forecasts show, beginning in about 1995,
that replacement rates will start to rise sharply. They will
reach about 75 percent for the low-income worker at the turn
of the next century and will exceed 85 percent by the year 2040.
In some cases, it will even be possible for benefits to replace
significantly more than 100 percent of an individual's most
recent earnings. (This would be true only for low wage earners.)
Although replacement rates will not rise as sharply for median
earners and maximum earners, unplanned increases are also predicted
for these groups.
Effect of "Double Indexing" Under Present Law
Because the cost-of-living indexing system now in the law is
driven by changes in both wages and prices, replacement rates
will always rise whenever both wages and prices rise over a
to changes in wage levels rather than to both wages and prices,
as under present law, replacement rates would be stabilized
and long-term program costs would not increase to the extent
now estimated. Under this concept, cost-of-living increases
based on price rises would affect benefits only after a person
came onto the benefit rolls. In other words, under a stabilized
system, the benefit a current worker would receive when he
retired would increase based on increases in his wages, and
after retirement it would be kept up to date with the cost of
living.
If the benefit formula were changed so as to stabilize replacement
rates at current levels, long-term costs to the system could be
reduced. The Advisory Council has developed a rate stabilization
formula that would (1) stabilize replacement rates at about
current levels, (2) continue the existing weighting in the
benefit formula, (3) assure that the average worker would suffer
no loss in benefits during the period of transition from the old
formula to the new formula, and (4) result in about a one-third
reduction in the long-term actuarial deficit.
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SURVEYS
SEPARATOR SHEET
HOAD (11-69)
NOTE:
This memorandum was prepared on the assumption that the
automatic benefit increase for 1975 would be 8.1 percent
rather then 8.0 percent as determined by recent CPI changes.
All other assumptions are still valid, The actual dollar
figures relating to the progress of the trust funds
will change very slightly as 2 result of the lower benefit
increase.
4/23/75
GERALD 8. LIBRARY TORD
March 31, 1975
FROM: Lawrence Alpern
IAC-1
SUBJECT: Operations of the OASI and DI Trust Funds Under Present Law,
on the Basis of Two Sets of Economic Assumptions, Calendar
Years 1974-80
Estimates of the operations of the old-age and survivors insurance (OASI)
and disability insurance (DI) trust funds under present law in calerdar
years 1975-80 have been completed. The presentation of such estimates
necessarily calls for full recognition of the difficulties of estimating
the income and expenditures of 2 system that is highly sensitive to
economic change. This is particularly true today because of the un-
certainty of future economic developments.
One set of estimates WES prepared on the basis of the economic assumptions
set forth on page 41 of the President's 1976 Budget. Since significant
changes in economic trends have taken place after those assumptions were
prepared (e.g., 2 lower level of economic activity, 2 somewhat slower rate
of increase in the CPI, higher rates of unemployment), 2 second set of
economic assumptions was just completed in SSA for use in preparing an
updated set of estimates.
The results of the two sets of estimates are summarized in the table shown
at Tab A. The economic assumptions underlying the two sets of estimates,
together with 2 brief narrative statement relating to the SSA assumptions,
are shown at Tab B.
The future path of the CPI and future increases in average annual wages
in covered employment are different for the two sets of assumptions, as
shown in the following table.
Increase over prior year in annual average-
Calendar
Wages under-
CPI under-
1976 Budget
SSA
year
1976 Budget
SSA
assumptions
assumptions
assumptions
assumptions
1975
7.0%
6.2%
11.3%
9.0%
1976
9.8
9.0
7.8
6.6
1977
10.5
11.0
6.6
6.5
1978
9.2
8.8
5.2
5.7
1979
8.0
7.7
4.1
4.6
1980
7.9
7.0
4.0
4.0
The automatic increase provisions enacted in 1972 affect both future
income and future expenditures of the OASDI system. The estimates
presented herein reflect the following changes assumed to occur, under
the automatic increase provisions, in each year 1975-80 (actual amounts
for 1974, together with the already-established contribution and benefit
base for 1975, are also shown, as a basis for comparison):
General benefit increase
Contribution and benefit base
Calendar
for June, under-
on January 1, under-
1976 Budget
SSA
1976 Budget
SSA
year
assumptions
assumptions
assumptions
assumptions
1974
11.0%
11.0%
$13,200
$13,200
1975
8.7
8.1
14,100
14,100
1976
9.2
6.6
15,300
15,000
1977
6.9
6.4
16,800
16,500
1978
5.7
6.3
18,600
18,300
1979
4.4
4.8
20,400
19,800
1980
4.0
4.0
21,900
21,300
Alpern
Deputy Chief Actuary
Enclosures
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SED SEPARATOR SHEET
SSA-69
4-70}
GPO:1972 0-481-270 -
$
Entimated operations of the old-nge and survivors insurance (OASI) and disability insurance (DI) trust fundo under present lav,
on the basis of two octo of economic assumptions, calendar years 1974-80
(Amounts in billions)
Assets at beginnir
endar
Net increase
Asseto at end
year as n percent
Income
car
Outgo
in funds
of year
of outgo during
1976 Budget
SSA
1976 Dudget
SSA
1976 Dulget
SSA
1976 Budget
SSA
1976 Budget
assumptions
accumptions
assumptions
assumptions
assumptions
assumptions
assumptions
assumptions
assumptions
assu
OASI and DI trust fundo, combined
74
$62.1
$62.1
$60.6
$60.6
$1.5
$1.5
$45.9
$45.9
73%
75
67.4
66.5
69.8
69.6
-2.3
-3.0
43.6
42.9
66
76
73.6
72.3
79.7
78.2
-6.1
-5.9
37.5
37.0
55
77
82.2
81.8
90.5
87.6
-8.3
-5.9
29.2
31.1
41
78
91.3
91.1
100.4
97.2
-9.1
-6.1
20.1
25.1
29
79
100.6
100.3
110.2
107.2
-9.5
-6.9
10.6
18.2
18
80
110.2
109.1
119.9
116.9
-9.6
-7.8
0.9
10.4
9
OASI truot fund
74
$54.7
$54.7
$53.4
$53.4
$1.3
$1.3
$37.8
$37.8
68%
75
59.4
58.6
61.0
60.8
-1.6
-2.2
36.2
35.6
62
76
64.9
63.8
69.5
68.1
-4.6
mlt.4
31.6
31.2
52
77
72.5
72.2
78.8
76.3
-6.2
-4.1
25.4
27.1
40
78
80.3
80.1
87.2
84.5
-7.0
-11.4
18.4
22.7
29
79
88.5
88.2
95.7
93.1
-7.2
-4.9
11.2
17.8
19
80
97.0
96.0
104.0
101.4
-7.0
-5.5
4.1
12.3
11
DI truot fund
74
$7.4
$7.4
$7.2
$7.2
$0.2
$0.2
$8.1
$8.1
110%
1
75
8.0
7.9
8.8
8.8
-0.7
-0.8
7.4
7.3
92
76
8.7
8.6
10.2
10.1
-1.5
-1.5
5.8
5.8
72
77
9.7
9.6
11.7
11.4
-2.1
-1.8
3.8
4.0
50
78
11.1
11.0
13.1
12.7
-2.1
-1.7
1.7
2.3
29
79
12.2
12.1
14.5
14.1
-2.3
-2.0
-0.6
0.4
12
as
13.2
13.1
15.8
15.4
-2.6
-2.3
-3.2
-2.0
wlj
trust fund oxhausted 1n 1979 under 1976 Dudget accumptions and in 1980 under 8SA assumptions; reflocts "borrowing" from OASI trust fund.
Social Security Administration
Selected Numerical Values Under Two Sets of Economic Assumptions, 1975-80
Calendar years; dollar amounts in billions
1975
1976
1977
1978
1979
1980
Gross national product
Current dollars
Amount
Budget (1975)
$1,498
$1,686
$1,896
$2,123
$2,353
$2,506
Social Security Administration (SSA)
1,477
1,671
1,912
2,147
2,380
2,615
Percent change
Budget
7.2
12.6
12.4
12.0
10.8
10.8
SSA
5.7
13.1
14.4
12.3
10.9
9-9
Constant dollars
Amount
Budget
$794
$832
$879
$936
$997
$1,061
SSA
787
837
898
958
1,020
1,078
Percent change
Budget
-3.3
4.8
5.6
6.5
6.5
6.5
SSA
4.1
6.4
7-3
6.7
6.5
5.7
Wages end salaries
Budget
$792
$884
$999
$1,117
$1,236
$1,367
SSA
780
873
998
1,115
1,232
1,342
Prices (percent change)
GNP deflator
Budget
10.8
7.5
6.5
5.1
4.1
4.C
SSA
10.3
6.4
6.7
5.3
4.1
4.C
Consumer Price Index
Budget
11.3
7.8
6.6
5.2
4.1
4.C
SSA
9.0
6.6
6.5
5.7
4.6
4.C
Unemployment rate (percent)
Budget
8.1
7.9
7.5
6.9
6.2
5-5
SSA
8.8
8.0
7.0
6.2
5.4
4.E
Addendum:
Automatic benefit increase for
June (percent)
Budget
8.7
9.2
6.9
5-7
4.4
4.1
SSA
8.1
6.6
6.4
6.3
4.8
L-C
Social Security Administration
March 31, 1975
The path of prices, wages, and employment between 1975 and 1980 assumed
by SSA is intended to reflect the following factors:
1. 2. lower level of economic activity in 1975 than was assumed in
the 1976 Budget.
2. delay in implementation and uncertainty over the final form of
an energy program.
3. a somewhat slower rate of increase in the CPI in 1975-76 than
the Budget assumptions contain.
4. a more stimulative economic environment, which results in more
rapid economic growth in 1976-78 than was assumed in the Budget.
5. failure of output per manhour to recover fully recent short-
falls from its trend rate of growth, thus lowering projected
constant dollar GNP at full employment (potential GNP) below that
assumed in the Budget projections in 1977-80.
The SSA set of assumptions yields a lower current dollar GNP in both
1975 and 1976 than the Budget assumptions. This is due to the assumed
lower rate of increase in prices, and to the assumed delay in fully
implementing any energy program until the end of 1977. Current dollar
GNP is higher than the Budget assumptions in 1977-80, despite a somewhat
lower GNP deflator, reflecting the higher level of constant dollar GNP in
the alternative assumptions throughout that period.
Constant dollar GNP is lower in the alternative assumption only in
1975. The higher level of constant dollar GNP in 1976-80 is attributable
to & more stimulative fiscal environment which is assumed in the alternative.
The largest differences in constant dollar GNP growth rates between the
Budget and the SSA assumptions occur in 1976 and 1977. As a result,
constant dollar GNP is 2.4 percent higher in 1978 in the alternative
assumptions then in the Budget assumptions.
The unemployment rate averages 8.8 percent in 1975 in the alternative
assumptions compared to 8.1 percent in the Budget assumptions. This
reflects the more rapid decline in economic activity assumed in the
alternative in the near term. The more stimulative policy embodied in
the alternative causes the unemployment rate to fall below the unemploy-
ment rate projected in the Budget, starting in 1977. The trend rate of
unemployment is assumed to be 4 3/4 percent, which is reached in 1980.
Percentage increases in the CPI between the first quarter of each
year (the relevant measure for social security benefit increases) are
lower in 1975-77 in the SSA assumptions. The indicated automatic social
security benefit increase effective in 1975 is reduced from 8.7 percent
(Budget) to 8.1 percent. It is assumed that the recent favorable price
behavior will continue. The delay that has been assumed in the imple-
mentation of an energy program contributes to the reduction in the 1976
benefit increase (compared with the Budget assumptions). It is assumed
that the total impact of an energy program on the CPI will be to raise
the CPI by 2 percent, with the full effect being felt by the end of 1977.
The delay, along with the generally lower rates of price increase
contained in the alternative, reduces the 1976 benefit increase by 2.6
percentage points, while the lower rates of price increase reduce the
1977 benefit increase by 0.5 percentage point. Because some of the
until after the first quarter of 1977, the CPI increase in the alterna-
tive for 1978 is 0.6 percentage point higher.
Wages and salaries are lower than the Budget assumptions in 1975,
because of the lower levels of economic activity and average wages
assumed by SSA. The lower average wages in the alternative produce
lower wages and salaries in 1976-80, despite higher levels of economic
activity assumed for those years. The increase in wages and salaries
after 1975 is not as large as might be expected from the fiscal stimulus
assumed in the alternative. This occurs because the alternative
projections assume that part of the less-than-trerd increases in produc-
tivity of recent years will not be recouped, thus reducing real earnings
gains, and that the historically observed faster rate of growth in
nonwage compensation as compared with wages and salaries will retard
growth in total wages. Hence, contribution income, which is closely
linked with total wages and salaries, will be relatively unchanged between
the two sets of assumptions over the entire period 1975-80 even though
higher levels of economic activity are assumed by SSA starting in 1976.
FORD is LIBRARY 07/835
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SUAVEYS
SEPARATOR SHEET
-69D (11-69)
Social Security Legislative and Administrative Proposals
in FY '76 Budget
OASDI and SSI
Legislative Proposals:
1. Limit to 5 percent the amount of the automatic social security
and SSI benefit increases scheduled to be paid in July 1975.
2. Eliminate retroactivity of social security benefit applications
where permanently reduced benefits would result.
3. Tighten and simplify the retirement test by eliminating the
monthly test of retirement except for the first year for
which benefits are paid.
Administrative Proposals:
None
Medicare
Legislative Proposals:
1. Impose a hospital insurance (part A) coinsurance amount equal to
10 percent of charges above the $92 deductible amount.
2. Increase the supplementary medical insurance (part B) deductible
automatically in proportion to the increase in cash benefits.
Current deductible is $60.
3. Impose an annual cost-sharing liability limit under parts A and B
each of $750 increased in the future in proportion to increases
in cash benefits.
4. Authorize the Secretary to establish percentage limits on the rate
of increase in incurred costs recognized as reasonable in deter-
mining provider reimbursements.
5. Unfreeze the SMI premium.
Administrative Proposals:
1. Conduct utilization review concurrent with a patient's admission.
2. Set upper limits on the amounts which Medicare will recognize as
reasonable and will reimburse to hospitals. The current limit,
which is set at the 90th percentile, will be reduced so that no
routine costs above what the majority of hospitals incurred in
payment will be automatically recognized as reasonable.
3. Limit Medicare reimbursement for drugs to the cost of less
expensive generic equivalents if they are available.
4. Reduce the balances held by banks that service Medicare intermediaries.
5. Eliminate the allowance for higher than average nursing cost for
Medicare patients. At present Medicare reimburses hospitals
8.5 percent more for routine nursing care for aged beneficiaries
than for other patients.
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SEPARATOR SHEET
A-83D (11-69)
EFFECT OF COST-CONTROL PROPOSALS
While it is virtually certain that the Administration's cost-control
legislation will not be enacted, it is useful to understand the
specific effect of these proposals. The effect on the trust funds,
if the proposed social security cost-reduction legislation were
enacted, is illustrated in the attached table using presently
scheduled taxes. It should be noted that an effective date of
January 1, 1976, has been assumed for that portion of the cost-
reduction legislation carrying a budgeted effective date of
March 1, 1975. The 5-percent limit on the July 1975 benefit
increase cannot, of course, be delayed. (It would have to be
enacted by late April or early May in order to be reflected
in the July benefit payment.)
Enactment of the cost-control proposals would so substantially
improve the financial status of the program that, with some
reallocation of income from Medicare to OASDI, the tax rate
increase now scheduled for 1978 could be reduced. The attached
table also compares the tax rates scheduled under present law
with those that would be sufficient to adequately finance both
OASDI and Medicare if the cost-control legislation were enacted.
This specific alternative tax rate schedule permits a large
reallocation of Medicare income beginning in 1976 only because
of a major and almost immediate reduction in Medicare outlays
resulting from the cost-sharing proposals. Since these proposals
would not affect CHIP, however, the Medicare tax rates shown
in the attached table, although adequate to finance the Medicare
program, would not adequately finance CHIP.
Attachment
Calendar Year
1976
1977
1978
1979
1980
Tax rates for employer
and employee, each
Present law
OASDI
4.95%
4.95%
4.95%
4.95%
4.95%
Medicare
0.90
0.90
1.10
1.10
1.10
Total
5.85
5.85
6.05
6.05
6.05
Cost-Control Option
OASDI
4.95
5.05
5.20
5.20
5.20
Medicare
0.80
0.80
0.85
0.85
0.85
Total
5.75
5.85
6.05
6.05
6.05
Earnings base
Present law and
Cost-control option
$15,000
$16,500
$18,300
$19,800
$21,300
Income minus
outgo (in billions)
OASDI
Present law
-$5.8
-$5.8
-$6.0
-$6.8
-$7.7
Cost-control option
- 1.5
- 0.6
2.6
3.4
3.9
Medicare
Present law
$0.4
$0.9
$3.7
$3.9
$3.4
Cost-control option
0.3
1.1
1.4
0.9
0.3
Reserve at beginning
of year as a percentage
of outgo during year
OASDI
Present law
55%
42%
32%
24%
16%
Cost-control option
58
50
45
43
43
Medicare
Present law
82
73
69
79
86
Cost-control option
90
83
79
77
73
ARATORS
age for
ration.
ropriate
further
tion if
nd cover
scotch
discard
cert the
by tape.
0)
u
SURVEYS
DEPALD FORD LIBRARY
SEPARATOR SHEET
69D (11-69)
Calendar Year
1976
1977
1978
1979
1980
Tax rates for employer
and employee, each
Present law
OASDI
4.95%
4.95%
4.95%
4.95%
4.95%
Medicare
0.90
0.90
1.10
1.10
1.10
Total
5.85
5.85
6.05
6.05
6.05
Tax Only Option
OASDI
4.95
5.30
5.40.
5.40
5.40
Medicare
0.90
0.90
1.00
1.00
1.00
Total
5.85
6.20
6.40
6.40
6.40
Earnings base
Present law and
$15,000 $16,500 $18,300 $19,300 $21,300
Tax Only Option
Income minus
outgo (in billions)
OASDI
Present law
-$5.8
-$5.8
-$6.0
-$6.8
-$7.7
Tax Only Option
- 5.8
- 0.5
2.4
3.2
3.8
Medicare
Present law
0.4
0.9
3.7
3.9
3.4
Tax Only Option
0.4
1.0
2.0
1.7
0.9
CHIP (Tax Only Option) ÷
- 0.5
1.1
1.2
0.2
Reserve at beginning
of year as a percentare
of outgo during year
OASDI
Present law
55%
42%
32%
24%
16%
Tax Only Option
55
42
38
36
36
Medicare
Present law
82
73
69
79
86
Tax Only Option
82
73
69
71
70
CHIP (Tax Only Option) *
56
48
46
45
* Assumes effective date for CHIP of 1/1/77.
Calendar Year
1976
1977
1978
1979
1980
Tax rates for employer
and employee, each
Present law
OASDI
4.95%
4.95%
4.95%
4.95%
Medicare
4.95%
0.90
0.90
1.10
1.10
1.10
Total
5.85
5.85
6.05
6.05
6.05
Option A
OASDI
4.95%
4.95%
5.30%
5.30%
5.30%
Medicare
0.90
0.90
1.00
1.00
1.00
Total
5.85
5.85
6.30
6.30
6.30
Earnings base
Present law
$15,000
$16,500
$18,300
$19,800
$21,300
Option A
15,000
18,000
20,700
22,500
24,300
Income minus
outgo (in billions)
OASDI
Present law
-$5.8
-$5.8
-$6.0
$6.8
-$7.7
Option A
- 5.8
- 4.2
3.0
4.5
5.3
Medicare
Present law
$0.4
$0.9
$3.7
$3.9
$3.4
Option A
0.4
1.3
2.5
2.4
1.7
CHIP (Option A)*
-$0.2
$1.7
$1.9
$1.1
Reserve at beginning
of year as 2 percentage
of outgo during year
OASDI
Present law
55%
42%
32%
24%
16%
Option A
55
42
34
34
35
Medicare
Present law
82%
73%
69%
79%
86%
Option A
82
73
71
75
76
CHIP (Option A)*
56%
49%
49%
50%
* Assumes effective date for CHIP of 1/1/77.
Calendar Year
1976
1977
1978
1979
1930
Tax rates for employer
and employee, each
Present law
OASDI
4.95%
4.95%
4.95%
4.95%
Medicare
4.95%
0.90
0.90
1.10
1.10
1.10
Total
5.85
5.85
6.05
6.05
6.05
Option B
OASDI
4.95%
4.95%
5.10%
5.10%
Medicare
5.10%
0.90
0.90
0.95
0.95
Total
0.95
5.85
5.85
6.05
6.05
6.05
Earnings base
Present law
$15,000
$16,500
$18,300
$19,800
Option B
$21,300
15,000
21,000
24,000
26,100
28,200
Income minus
outgo (in billions)
OASDI
Present law
-$5.8
-$5.8
$6.0
$6.8
-$7.7
Option B
- 5.8
- 2.0
2.5
3.5
4.1
Medicare
Present law
$0.4
$0.9
$3.7
$3.9
$3.4
Option B
0.4
1.7
2.2
1.9
1.2
CHIP (Option B)*
$0.2
$1.3
$1.3
$0.6
Reserve at beginning
of year as a percentage
of outgo during year
OASDI
Present law
55%
42%
32%
24%
16%
Option B
55
42
36
35
35
Medicare
Present law
82%
73%
69%
79%
86%
Option B
82
73
73
75
75
CHIP (Option B)*
56%
50%
49%
48%
# Assumes effective date for CHIP of 1/1/77.
DRAFT
THE WHITE HOUSE
WASHINGTON
IW
November 28, 1975
MEMORANDUM FOR:
FROM:
SUBJECT:
Social Security Financing
The purpose of this memorandum is to present for your decision
options for dealing with the serious short and long term financing
problems facing the Social Security System. The timing of any
legislative proposal is clearly a key element in your decision.
Therefore, the discussion of options will include a projection of
the effect on the stability of the trust fund and an assessment of
political and budgetary consequences.
CURRENT SYSTEM:
In 1974, the Social Security System collected $58.90 billion for
OASDI from 99 million workers in covered employment and paid
$58.5 billion in OASDI benefits to 31 million beneficiaries. The
current OASDI tax rate is 9.9% (4.95% each paid by employers
and employees) on a minimum wage base of $14,100. The wage
base will increase to $15,300 in calendar year 1976. The current
tax rate for the HI (medicare) trust fund is 1.8% (.9% each paid
by employers and employees). An increase is scheduled in 1978.
Social Security Tax Rates:
Present Law
Calendar Year
OASDÍ
HI
TOTAL
1977
4.95%
0.90%
5.85%
1978
4.95
1.10
6.05
1979
4.95
1.10
6.05
1980
4.95
1.10
6.05
1981
4.95
1.35
6.30
1982
4.95
1.35
6.30
1983
4.95
1.35
6.30
1984
4.95
1.35
6.30
1985
4.95
1.35
6.30
Page 2 - Social Security Financing
PROBLEMS
The OASDI trust fund is underfinanced in the short and long term.
Benefit outlays are expected to exceed payroll tax receipts in 1975
and every year thereafter. Under current law, the projected
deficit will average 1.3% of taxable earnings over the next 25 years
(1975 - 1999) and will rise to 4.1% in the following 25-year period
(2000 - 2024).
Unless some action is taken, OASDI trust funds will fall from the
current 66% of yearly outgo to 43% in 1977, 33% in 1978; 11%in
1981, 3% in 1982, and the trust funds will be exhausted in 1983.
The projected rapid decline in trust funds assets over the next few
years can be attributed to:
-
Increased benefits resulting from wage growth and
inflation.
-
Absence of equivalent increases in payroll tax
revenues. (In fact payroll tax receipts have diminished
due to high rates of unemployment.)
The projected long term (beyond 2000) deficits can be attributed to:
Future population trends which include a substantially
increasing ratio of retired persons to the working
population after the beginning of the 21st Century.
A flaw in the current system which over adjusts the
benefits of future retirees to inflation. The current
formula which determines future benefits for workers
increases the weighting of earnings by the rate of.
inflation. Since wages normally grow with inflation,
the result is an overcompensation - commonly referred
to as a "coupled" system. There is a general consensus
in the Congress and among outside experts that the
inflation adjustment in the formula shoudl be eliminated,
thus "decoupling" the system. Such a change would not
affect the automatic CPI increases in benefits after re-
tirement. It should be emphasized here that "decoupling"
will have virtually no effect on the short term deficit.
POLITICAL CONTEXT:
An awareness of the political environment surrounding the Social
Security System is crucial as we sort out these very important
issues. Decisions regarding social security have traditionally
followed a unique pattern which has insulated the system from sudden
and far reaching changes. Structural modifications take place
usually after extensive public debate including exhaustive studies
and visible commissions. Protection of the system is fostered by
Page 3 - Social Security Financing
one of the strongest and largest constituencies in the public policy
arena, including the elderly, organized labor and all of the wage
earners who are contributing to the system and expect to benefit
from it in the future.
Members of Congress and espacially of the Finance and Ways and
Means Committees have institutionalized this process of incre-
mental reform. The Committees have jointly established a high
level advisory working group to examine the "decoupling" problem
and to recommend policy changes to the Committees in the spring
of 1976.
Because of the serious financing problems the Social Security System
now faces, the public has begun to question its stability. Although
the subtleties and complexities are not widely understood, there
exists some general pressure to move toward stabilizing the trust
fund with a minimum of disruption and change for those in the
system.
DECISIONS:
Alternatives for your decisions are presented in three categories:
1.
Options to deal with the short term decline in trust
fund assets.
2.
"Decoupling" options which alleviate the long term
deficit.
3.
Mechanisms for analyzing some of the broader structural
issues in the Social Security System.
These sets of options including choices of the timing of any initia-
tive you choose are described as follows.
SHORT TERM FINANCING:
The choices for preventing the rapid decline of the trust fund are
difficult ones. Simply expressed, revenues must be increased or
benefits must be reduced. Your decision and the timing of any
action should take into account the effect on the trust fund,
budgetary and political consequences.
Estimated Trust Fund Assets under Current Law:
Calendar Year
Assets at Beginning of Year as Percent
of Outgo during Year
1975
66%
1976
55%
1977
43%
1978
33%
Page 4 - Social Security Financing
Calendar Year
Assets at Beginning of Year as Percent
of Outgo during Year
1979
25%
1980
18%
1981
11%
1982
3%
1983
0%
These projections by the Social Security Administration are based
on economic assumptions which are regarded by many as
optimistic. HEW has taken the position that it would be dangerous
for the trust fund assets to fall below 33%. In order to prevent
the trust fund from falling below 33% in 1978, legislation to in-
crease revenues or to decrease benefits must be enacted before
January 1, 1978. If you agree that SSA's economic assumptions
are optimistic and/or that the trust fund should not fall so low,
then more immediate action is required during FY 1977 or FY 1978.
Short term financing options which prevent the trust fund assets
from falling below one-third include:
1.
Increase Revenues by Raising Payroll Taxes.
It would be necessary to increase taxes tes by .6% of payroll
beginning in 1977 or 1978 and to gradually increase that amount
to 1.1% or 1.2% by 1983.
Given your proposal for a permanent tax reduction, it
would be very difficult to propose and justify an increase in pay-
roll taxes in the next year or SO. An increase in the payroll tax
has a particularly harsh effect on low income wage earners. ON
the other hand, such an increase would eliminate the trust fund
deficit until 2000.
2.
Increase revenues by a combination of a more modest
increase in taxes and raising the wage base to which
they apply.
If the wage base were raised from the currently projected $16,800
for 1977 to $19,500, the necessary tax increase would be .3% of payroll
beginning in 1977 or 1978 and approximately .9% by 1983.
Again, even a more modest increase in taxes would be
difficult, given economic and political considerations. Even though
a tax/wage base increase would eliminate the trust fund deficit
until 2000, high wage earners would assume more of the tax burden
and would be entitled to higher future benefits, thereby enlarging
the trust fund deficit after 2000.
Page 6 - Social Security Financing
3.
Reduce outlays by placing a cap on the July, 1976 CPI
increase and decreasing certain other benefits.
OMB has proposed increasing benefits by only 60% of the
1976 CPI and several program changes including:
a) Do not pay retroactive benefits for the months before
an application is filed if such a lump-sum payment would require
a permanent actuarial reduction in future monthly benefits.
b) Eliminate the monthly retirement test, making the
retirement rest on cumulative annual earnings.
c) Eliminate over a 4-year period special benefits for
those aged 18 to 22 in school full-time.
The 60% cap on CPI would save $2.24 billion in 1978 and
an increasing amount in subsequent years. The other program
changes would save approximately $1 billion in 1977 and
in subsequent years. Such reduced expenditures would keep the
trust fund levels about one-third of outgo until 1980. It would
again be necessary to reduce expenditures further or to provide
some additional income.
This proposal to reduce benefits would be more consistent
with our economic policy than any tax increase, but it may be
difficult politically to propose reducing benefits for the elderly and
disabled. It eliminates only a portion of the deficit until 2000.
At best it postpones another decision on short term financing for about
4 years.
RECOMMENDATIONS:
Page 7 - Social Security Financing
DECISION
Take action in FY 1977
Option 1:
Option 2:
Option 3:
Defer action until:
FY 1978
FY 1979
DECOUPLING:
Decoupling is a long term financing issue, as the coupled system
(which went into effect in 1975) will not impact on the deficit until
after 2000.
There exists a general consensus in Congress and among outside
experts that the overadjustment for inflation should be changed,
thus "decoupling" the system. There is, unfortunately, no clear
consensus about how the formula should be changed.
The major issue, on which there may be wide disagreement, is
a philosophical question about what should be the future role of
social security. What levels of tax rates and benefits would be
appropriate in the context of overall taxes and retirement income.
In considering alternative "decoupling" models, this philosophical
question translates into a choice between continuing to provide
benefits at the same percentage of wages as the current system vs.
allowing replacement rates to decline over time.
A word of explanation about the concept of "replacement rates" --
The current benefit formula provides various replacement rates
(benefit amounts as a percentage of wages) for various wage groups.
At the time of retirement, the wages of a Social Security bene-
ficiary are replaced at a given percentage of his wages (replacement
rate). After retirement this benefit level rises automatically with
increases in the CPI. In the current coupled system, replacement
rates for every category of wage earner are rising over time due
to the double indexing of the benefit base. This is clearly un-
desirable and should be corrected.
The question is whether replacement rates should remain constant or
decline over time. If replacement rates are to remain constant, at
what level should they be fixed or if they are to decline, at what
rate should they be allowed to decline. The benefit formula can
be adjusted to produce the desired constant or declining replacement
rates.
Page 8 - Social Security Financing
The following graphs illustrates the effect on benefit levels (replace-
ment rates) and expenditures under three alternative decoupling
models as compared to the current law "coupled" system.
Projected Replacement Rates I'OI Regular workers WITH Average wages
%
\
Replacement
(c
Present Law (u
60
50
44
45
Altarnative 1
43
42
40
30
Alternative 3
30
20
Altarnative
10
if
i
1970 1976 1980
1990
2000
2010
2020
2030
2040
2050
Z
Expenditures under Present Law, ;- Constant Replacement Rates (Current Power) Levels),
EN percurres
and Contribution Rate and under Present Law (Percent of Taxable Payroll, 1975 Trustees' 1 Report Assumptions)
Declining Replacement Rates (Maintenance of Purchasing.
% of
Payroll
24
Present Law
21
Expenditures
Expenditures due to
rising replacement
rates
18
Constant
15
Replacement Rate
acternative
Expenditures
3
altericitive I
12
Contribution
Rate
Declining
21
Replacement Rate
Expenditures
2020
Page 9 - Social Security Financing
Rising replacement rates under the current system are clearly
unacceptable. The alternative choices are described, as follows:
1. Alternative 1 - simply holds constant current replace-
ment rates. It eliminates approximately 50% of the long term
deficit. Therefore additional tax revenues would be required
eventually. Because this proposal decoupleswith a minimum of
change in future benefits, it would probably prove the least
controversial among constitutent groups and in Congress.
2.
Alternative 2 - allows benefit levels for future
retirees to keep pace with inflation instead of real wage growth.
This means that if such a proposal were enacted in 1976, the level of
future benefits of workers would maintain a portion of their
purchasing power in 1976 rather than keeping up with higher standards
of living resulting from real wage growth. Replacement rates
would decline substantially over time, as illustrated in graph #1,
thus reducing the future role of social security. This proposal
would eliminate the entire long term deficit and would allow future
tax reductions. Such a far reaching change in the system would
probably be very controversial.
3. Alternative 3 - represents a middle ground between
alternatives 1 and 2. It allows future benefits to keep pace with
approximately half of the growth in real wages. It would eliminate
% of the long term deficit. This proposal could also be
politically difficult.
The existing consensus in opposition to the current coupled system
provides a forum for discussion of decoupling proposals. There-
fore one of these three models could be proposed in connection
with a short term financing proposal. However, these alternatives,
particularly the two which include declining replacement rates
would prove very controversial and raise some fundamental questions
about the role of social security which we may not be fully pre-
pared to address at this point.
STUDY OF SOCIAL SECURITY SYSTEM:
To allow time for the necessary data collection, for analysis of
the broader structural issues and for education of the public and
consensus building, it is our judgement that a comprehensive study
is needed.
If you decide to defer legislative action on a short term financing
proposal and/or decoupling, then the study group could address these
issues over the next year.
Page 10 - Social Security Financing
Clarification of the role of social security in our society is neces-
sary to insure its stability and continued public confidence. Some
of the fundamental questions include the following:
-
What should be the role of social security in the context of
the overall pension system?
-
What should be the role of social security in the overall
tax system?
-
What should be the role of social security in the context
of economic growth?
What should be the role of social security in terms of
wage replacement VS. income redistribution (welfare) ?
It is our judgment that Domestic Council members should assist in
developing a framework for the study which clearly identifies the
appropriate issues, and should assist in the selection of a group
of outside experts. The experts would provide needed analysis and
facilitate increased public awareness of the issues. Responsibility
for overseeing the study could be housed in either the Domestic
Council or the Office of the Secretary, HEW.
RECOMEMNDATION:
DECISION:
Propose decoupling:
Alternative 1:
Alternative 2:
Alternative 3:
Propose Study of Social Security: