A Social Security Primer

If you are finding it difficult to untangle the issues involved in Social Security reform, you're not alone. The following are some Social Security changes being discussed to meet obligations to future retirees:

Reduce expenditures:

  • Make retirees wait longer to receive full Social Security benefits. The minimum age already is scheduled to increase gradually from 65 to 67, starting with recipients born in 1938. Those born in 1960 and later will wait until their 67th birthday.
  • Lower annual cost-of-living increases.
  • Limit benefits based on a Social Security recipient's other income and assets.

Increase revenue:

  • Raise income taxes on Social Security benefits when they're received.
  • Make local and state government workers join the system, enlarging the pool of contributors.
  • Increase the amount workers pay into the Social Security system from 6.2 percent of wages up to $68,400. Require workers to make contributions on income, including that exceeding $68,400.

Other reforms:

  • Continue Social Security system for current and near recipients, but change the system for future retirees by setting up personal security accounts and requiring workers to contribute to them. Most proposals would guarantee a minimum benefit. Individuals would invest and manage the assets in the accounts under some plans; the government would manage them under others.
  • Have Social Security's assets invested collectively in some stocks and bonds, which would be riskier but could yield higher interest rates than Treasury securities.

The journey of Social Security contributions:

  • Employers deduct Social Security contributions from their workers' pay, match the contributions and deposit the payroll taxes in the bank. The banks forward the money to the Treasury where it is placed in the Social Security trust fund.
  • The trust fund immediately buys Treasury securities, non-marketable short-term certificates of indebtedness and longer-term bonds. By buying the securities, the trust fund essentially is lending the Treasury money to run the government.
  • Like with T-bills, notes or bonds purchased by private investors, the government promises to pay back with interest the Treasury securities held by the trust fund. Once a year, interest on these securities is rolled into new investment and credited to the trust fund.
  • The trust fund is managed by Treasury Department employees in Parkersburg, W.Va. When the Social Security Administration needs money, it sends a fax to the Bureau of Public Debt in Parkersburg, giving employees there the authority to pull money from the trust fund.
  • Every month, the Social Security Administration redeems enough Treasury securities to cover the checks and administrative expenses. The checks are issued by a few Treasury financial service centers around the country.

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