The Real World of Health Policy

The Outlook for Social Security

Under current law, outlays for Social Security will rise from about 4.4 percent of gross domestic product (GDP) today to more than 6 percent of GDP 30 years from now, the Congressional Budget Office (CBO) projects. In later years, spending will continue to grow steadily, though more slowly. That projection is necessarily uncertain. But past variation in the economic and demographic factors underlying the projection suggests that over the next 50 to 100 years, Social Security's demand for economic resources will range between 5 percent and 8 percent of GDP.

By contrast, federal revenues dedicated to Social Security are expected to remain close to their current level—about 5 percent of GDP—over that period. As a result, outlays are projected to begin exceeding revenues in 2019, with the gap growing ever wider thereafter. Even if outlays for Social Security turn out to be lower than expected and revenues higher, a gap is likely to remain. Only four approaches to closing that gap are possible, each of which has its own drawbacks:

The benefits that are scheduled to be paid to future recipients under current law could be reduced, lowering Social Security's contribution to their income.

• The taxes that fund Social Security could be raised to draw additional resources from the economy to the program.

• The resources consumed by other federal programs could be reduced to cover the gap between Social Security's outlays and revenues.

• The federal government's borrowing could be increased, which would be another way to draw more resources from the economy to Social Security. That borrowing would need to be repaid by future generations, however, either through increased taxes or reduced federal spending.

Social Security is not the only source of pressure on the overall federal budget. The aging of the U.S. population—which is the main source of the projected increase in Social Security spending—will also raise costs for other entitlement programs. In particular, CBO projects that expenditures for Medicare and Medicaid will grow even faster than Social Security outlays because of rising healthcare costs. Unless taxation reaches levels that are unprecedented in the United States, current spending policies are likely to prove financially unsustainable over the long term because they will lead to an ever-growing burden of federal debt held by the public, which will have a corrosive and potentially contractionary effect on the economy.1

The Social Security Program at Present

In 2003, the federal government spent a total of $479 billion on the Social Security program. That year, about 47 million people received Social Security benefits—29.5 million retired workers; 5.9 million disabled workers; and 11.6 million family members of retired, disabled, or deceased workers. Social Security has two parts.2 The Old-Age and Survivors Insurance (OASI) program provides benefits to retired workers, members of their families, and their survivors. The Disability Insurance (DI) program pays benefits to disabled workers younger than the normal retirement age and their dependents.3 OASI is by far the larger program: last year it accounted for about 85 percent of spending for the two parts combined (referred to as OASDI). On average, retired workers received about $11,060 in OASI benefits in 2003, and disabled workers received $10,340 in DI benefits.

Benefits are financed primarily through payroll taxes, with half collected from employers and half from workers.4 The combined tax rate, currently 12.4 percent, is levied on wages and self-employment income covered by the OASDI program, up to the taxable maximum of $87,900. (That threshold rises annually with average earnings in the economy.) Last year, about 154 million workers were covered by Social Security and paid some payroll taxes. Their average taxable earnings were $28,100—for a total taxable payroll of $4.3 trillion and total payroll tax revenues of $534 billion. (The Medicare program is partially funded by a separate payroll tax, which raised $149 billion in 2003. References in this report to payroll taxes refer to Social Security taxes.)

The Social Security system also receives revenues from income taxes that the approximately one-third of beneficiaries with the highest income pay on their Social Security benefits.5 Those revenues are far smaller than payroll tax receipts: $13 billion in 2003.6

Social Security is currently running an annual surplus. In 2003, dedicated revenues exceeded outlays by $68 billion. Viewed as a component of the overall budget, that surplus helped reduce the government's total deficit in 2003. However, Social Security also has a distinct, specific accounting structure. Revenues from payroll taxes and the taxation of benefits are credited to the budget's OASI and DI trust funds. Any revenues not needed to pay for benefits or administrative expenses are invested in government bonds. The interest that the bonds earn (a total of $85 billion in 2003) is credited to the trust funds. But because that interest represents the government paying itself, it provides no net revenues to the government and has no effect on the total budget.7

The trust funds serve mainly as an accounting mechanism to track revenues and outlays for Social Security. The funds' balance represents the total amount that the government is legally authorized to spend on Social Security. That balance provides only a limited perspective on the program's finances, however, because it does not consider the interaction with other federal tax and spending programs. Although the Social Security system is authorized to spend certain amounts, the resources to finance those outlays derive from the budget as a whole—and ultimately from the economy.

NOTES

1. See Congressional Budget Office, The Long Term Budget Outlook, December 2003.

2. For more information about Social Security's structure and benefits, see Congressional Budget Office, Social Security: A Primer, September 2001, Chapter 2. The numbers in this paragraph are as of December 31,2003.

3. In Social Security, the "normal retirement age" is the age at which a worker becomes eligible for full retirement benefits. It is 65 for people born in or before 1937 and higher for those born later, rising to 67 for people born after 1959.

4. Economists generally agree that workers effectively pay the full tax because employers pass on their share to workers in the form of lower compensation.

5. All of the projections presented in this study are made under the assumption that the laws governing Social Security will not change. Such a baseline approach means that future analyses of proposed changes to the program can be compared with these projections to clearly identify the effects of the proposals. However, future revenues from income taxes paid on Social Security benefits depend on future income tax law, which is logically distinct from Social Security law and could be amended many times in coming years (excerpted from the original).

6. Some additional federal revenues from the taxation of Social Security benefits are allocated to Medicare's Hospital Insurance Trust Fund, but that stream of revenues is not considered in this report.

7. See Congressional Budget Office, The Impact of the Trust Fund Programs on Federal Budget Surpluses and Deficits, Long-Range Fiscal Policy Brief No. 5, November 4, 2002.

SOURCE: Congressional Budget Office. 2004. The Outlook for Social Security. [Online report; retrieved 1/23/05.] http://www.cbo.gov/showdoc.cfm?index=5530&sequence=0.

Value

Figure 3.1

The Operation of Political Markets

Demanders Exchange Suppliers -►

Usually involves negotiation

Structurally and operationally, a political market is very much like an economic market.

Feldstein (2001) also points out that decision makers in political markets use different decision criteria than those used in traditional economic markets. In both markets, thoughtful decision makers take into account both the benefits and the costs of their decisions. In political markets, however, decision makers may use different time frames. Because legislators stand for periodic reelection, they typically favor policies that provide immediate benefits to their constituencies, and they tend to weigh only, or certainly more highly, immediate costs. Unlike most decision makers in economic markets, where the costs and benefits of decisions are taken into account over the long run, decision makers in political markets are more likely to base decisions on whether immediate benefits exceed immediate costs. An obvious consequence of this is that policies with immediate benefits, but with burdensome future costs, occur.

The differences between the operations of economic and political markets notwithstanding, both those who "supply" policies and those individuals or groups who "demand" policies recognize the innate value of policies. In political markets, both suppliers and demanders stand to reap benefits or incur costs because of policies. Policies are valued commodities in the political marketplace. These relationships are shown in Figure 3.1.

Given that demanders and suppliers in political markets will enter into exchanges involving policies, it is important to know who the demanders and suppliers are and what motivates their decisions and actions in these markets.

Think of political markets as operating similarly to economic markets—that is, as markets in which something of value is exchanged between suppliers and de-manders. This permits public policies to be viewed as valued commodities, as a

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Responses

  • dahlak
    What motivates the demanders and suppliers in the healthcare policies?
    7 years ago
  • breann
    What motivites the demanders of health policies?
    7 years ago

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