History
The Social Security system is primarily a pay-as-you-go system, meaning that payments to current retirees come from current payments into the system.
In 1977, President Jimmy Carter and the 95th Congress increased the FICA tax to fund Social Security, phased in gradually into the 1980s. In the early 1980s, financial projections of the Social Security Administration indicated near-term revenue from payroll taxes would not be sufficient to fully fund near-term benefits (thus raising the possibility of benefit cuts). The federal government appointed the National Commission on Social Security Reform, headed by Alan Greenspan (who had not yet been named Chairman of the Federal Reserve), to investigate what additional changes to federal law were necessary to shore up the fiscal health of the Social Security program. The Greenspan Commission projected that the system would be solvent for the entirety of its 75-year forecast period with certain recommendations. The changes to federal law enacted in 1983 and signed by President Reagan and pursuant to the recommendations of the Greenspan Commission advanced the time frame for previously scheduled payroll tax increases (though it raised slightly the payroll tax for the self-employed to equal the employer-employee rate), changed certain benefit calculations, and raised the retirement age to 67 by the year 2027. As of the end of calendar year 2010, the accumulated surplus in the Social Security Trust Fund stood at just over $2.6 trillion.
Social Security benefits are paid from a combination of social security payroll taxes paid by current workers and interest income earned by the Social Security Trust Fund. According to the projections of the Social Security Administration, the Trust Fund will continue to show net growth until 2022 because the interest generated by its bonds and the revenue from payroll taxes exceeds the amount needed to pay benefits. After 2022, without increases in Social Security taxes or cuts in benefits, the Fund is projected to decrease each year until being fully exhausted in 2033. At this point, if legislative action is not taken, the benefits would be reduced.
Read more about this topic: Social Security Trust Fund
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