Other Free Encyclopedias » Medicine Encyclopedia » Aging Healthy - Part 4 » Social Security and the U.S. Federal Budget - Social Security’s Financing, Social Security’s Treatment Within The Federal Budget, Social Security’s Effect On The National Economy

Social Security and the U.S. Federal Budget - Social Security’s Financing

treasury revenues funds trust

Nearly 90 percent of the funding for the OASDI programs’ benefits and administration comes from a dedicated tax on earnings, called the Federal Insurance Contributions Act (FICA) tax. Employers and employees each contribute 6.2 percent of their gross wages up to a certain annual limit that is increased yearly to reflect wage growth ($84,900 in the year 2002). Self-employed persons pay both the employer and employee portions of the FICA tax. The remainder of program funding comes from taxation of Social Security benefits and interest from the investment of surplus revenues.

The government operates Social Security on a ‘‘pay-as-you-go’’ basis, meaning Social Security uses most of its annual revenues to pay current beneficiaries. Aside from benefit payments, the programs use approximately 1 percent of FICA taxes to pay for operational expenses. Since the mid-1980s, Social Security’s revenues have exceeded its expenditures. The Treasury Department credits this excess revenue to the OASDI Trust Funds.

In 1999, Social Security revenues exceeded expenditures by approximately $134 billion (Trustees Report, Table II.F12). The Trust Funds invest excess revenues in special-issue Treasury bonds, which earn interest. The interest rate paid on the special-issue Treasury bonds equals the average yield on marketable Treasury bonds and other interest-bearing obligations of the United States that are not expected to be redeemed in the near future. In 1999, the Trust Funds earned approximately $56 billion in interest from their investments, which is equal to an effective interest rate of about 7 percent.

The federal government’s use of Social Security’s excess revenues is similar to how a bank uses money that is deposited into a bank account. The bank records the deposit on an account statement and pays the account holder interest for the bank’s right to ‘‘borrow’’ those dollars, much like the Treasury records the surplus FICA taxes to the Social Security trust funds and pays interest on the borrowed funds. Treasury then uses the excess Social Security revenue to fund or reduce other cash needs. The Treasury bonds issued to the Social Security Trust Funds represent an obligation of the government to pay Social Security the amount invested, plus interest.

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