United States

2015 budget includes payroll tax shift

Annual Social Security Administration report suggests more may be needed


The Board of Trustees for the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (otherwise known as Social Security) reports annually to Congress on the status and operations of the funds. The 2015 report  asked lawmakers to timely address the funding status of the funds, as did the 2014 report. Congress responded in the Bipartisan Budget Act of 2015, but the report suggests other changes will be needed down the road.

The Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) programs that make up Social Security are legally distinct funds which operate independently. Using intermediate projections, the Trustee’s report projects that the OASI fund can pay benefits through 2035, but the DI fund is projected to become insolvent in the fourth quarter of 2016, in large part because the number of covered workers to program beneficiaries has steeply declined over the funds’ lifetimes (see Table IV.B3). As legally distinct funds, the DI program cannot use funds in the OASI portion without legislative action.

The majority of revenue for both the OASI and DI funds comes from payroll taxes. Currently, the combined employee and employer rate for the DI fund is 1.8 percent on all wages, and the OASI rate is 10.6 percent, for a total rate of 12.4 percent, up to a wage base of $118,500. The report estimates that the combined payroll rate would need to be 15.02 percent, benefits would need to be reduced by 16 to 19 percent, or some combination of the two methods to keep both funds solvent for the next 75 years. The 2014 report estimate was slightly worse, but very similar.

In 1994 when the funds were last in close proximity to insolvency, Congress reallocated the payroll tax rate between OASI and DI to get more revenue into the DI fund. The 2015 report indicates that similar legislation is needed to prevent the 2016 depletion of the DI fund, which is what Congress did in the recently passed budget. Section 833 of the budget reallocated 0.57 percent from OASI to DI, resulting in 10.03 percent and 2.37 percent attributable to OASI and DI, respectively.

The trustees report uses many estimates of future revenue and expenditures and related inputs to project the solvency of the funds. One estimate is the OASI wage base shown in Table V.C1. in the 2015 report. The projections were based on gradual increases to the wage base over the next ten years, reaching $159,300 to $190,500 in the high-cost and low-cost scenarios respectively.

The low-cost scenario shown in Table IV.B4 does show both funds being solvent through the next 75 years. However, the low-cost scenario is based not only on the larger increase in the OASI wage base but also on different rates for fertility, mortality, wage levels, and all other inputs as compared to the intermediate and high-cost projections.

Therefore, the report noted it would seem imprudent for Congress to rely on the low cost scenario to not make any changes to the system by the fourth quarter of 2016. Because legislators only agreed to a shift of rates from OASI to DI, though, the tone of the report suggests that more changes will still be needed in the future. Therefore, it is possible that all workers may see an increase in payroll tax rates in the future to help support the projected shortfall in the Social Security system.


Subscribe to Tax Insights

How can we help you with your tax planning & compliance?