Social Security Financing

A paper was presented at the annual meeting of the Industrial Relations Research Association which explored the reasons for the recent financial crisis in social security, the changes that Congress enacted earlier this year to deal with the latest crisis, current projections concerning the future status of the program, and some of the uncertainties inherent in assessing these projections. Since social security revenues are derived exclusively from a flat rate payroll tax, revenues collected in any given year are used mostly to finance the benefit payments of that year. The short range problems inherent in the social security program have been almost entirely the result of inflationary developments which have caused unanticipated changes in the benefit-earnings ratio. Long-range financial projections are more sensitive to demographic developments such as fertility and mortality rates rather than to economic variations. Due to modifications made in these assumptions, the costs of the system are very likely to rise dramatically in the 21st century. Recent legislation has reduced previously scheduled benefits and increased previously scheduled revenues, mainly through a one-time, 6-month delay in the cost-of-living adjustment and subjecting social security benefits to personal income taxation. However, 75-year cost and revenue projections still include uncertainties, and certain aspects of the treatment of women under social security remain controversial.