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Detail Outline for Exam 7 – 2007 Part C - page 18 / 28





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Rejda, "Financing the Social Security Program," Social Insurance & Economic SecuritySK (1999)

SS is partial-reserve financing: the intake should be sufficient for the payment of current benefits + the future benefits and expenses.  A large fund is built up so distant future benefits can be paid.  This reserve is larger than a contingency fund.

In 60s and 70s, SS program was current-cost.  1977 and 1983 amendments made it more what it is today.

No Full Funding – fully funded means if the program terminates, there would be enough funds to pay out all remaining liabilities.  This is considered unnecessary because the program is expected to continue forever, the program is compulsory so new entrants will support it, the taxing/borrowing powers of fed govt can be used to raise additional revenues if necessary, plus full funding would mean higher payroll taxes – causing deflation and unemployment.

In contrast, pensions are fully funded because they do terminate.

Actuarially Sound Program – at present, OASDI is not in actuarial balance over the long run.

Some Individual Equity Considerations – tax paid by younger workers entering the program should not be so high that it could purchase greater protection from private insurers.

Social Security Trust Funds

Nature of the Trust Funds – financed through Federal Old-Age and Survivors Insurance Trust Fund (OASI – 1940), the Federal Disability Insurance Trust Fund (DI – 1956), the Federal Hospital Insurance Trust Fund (HI – 1965), and Federal Supplementary Medical Insurance Trust Fund (SMI – 1965).

Revenues to OASI and DI include: payroll taxes, interest on trust fund assets, revenues derived from federal income tax on part of the monthly cash benefits.

Revenue to Medicare program include: HI payroll taxes, SMI monthly premiums, general revenues of fed govt that fund a large part of the SMI program, and part of income taxes paid on OASDI benefits.

Taxes are collected by IRS and appropriated into trust funds on an estimated basis.

Purposes of Trust Funds – to provide some interest income, to help meet any deficiencies in income, and to help to establish greater public confidence in the program.

Investment of Trust Funds – excess can be invested in interest-bearing obligations of the fed govt; obligations guaranteed as to P&I by the US; certain fed sponsored agency obligations.

Maintaining Present Investment Policies – arguments supporting:

1) SS is designed for all society, so trust funds must be confined to safe investments.

2) Allowing funds to be invested in private stocks/bonds could in effect let the govt gain control of free enterprise.

3) To obtain an adequate rate of interest w/ reasonable safety, the govt would have to establish a rating organization to evaluate securities, which would involve them in the private economy.

Changing the Investment Policies

1) Trust funds should invest in common stocks to obtain higher long-run returns.

2) Younger workers are skeptical of present OASDI program because of the low rate of return.

3) Trust funds should be allowed to invest in social goods: hospitals, highways, public housing, etc.

Disadvantage 1) If trust funds owned large amts of common stocks, fed govt would have a powerful impact on private corps w/ respect to voting rights.

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