Social Security System Message to the Congress.

To the Congress of the United States:

The Social Security system affects the lives of more Americans than almost any other function of government. More than 33 million people currently receive benefits. Another 104 million people are making contributions with the expectation that they will receive benefits when they retire or become disabled, or when their survivors need help.

Today, the Board of Trustees of the Social Security Trust Funds is submitting its 1977 report to the Congress. The report tells us that the system critically needs financial support in the short term. The high unemployment of recent years has curtailed Social Security's revenues, while benefits have risen with inflation. Since 1975 expenditures have exceeded income; and existing reserves will soon be exhausted.

Unless we act now, the Disability Insurance Trust (DI) Fund will be exhausted in 1979 and the Old Age and Survivors Insurance (OASI) Trust Fund will run out in 1983.

The Trustees' Report indicates that there are serious longer term problems as well. Under current law the Social Security system will have an estimated deficit of 8.2 percent of taxable payroll over the next seventy-five years. About half of this deficit is due to changes in the projected composition of our population over those years. Higher life expectancy and lower birthrates will make the nation older as a whole. About half is due to a technical flaw in the automatic cost of living formula adopted in 1972.

While campaigning for President, I stressed my commitment to restore the financial integrity of the Social Security system. I pledged I would do my best to avoid increases above those already scheduled in tax rates, which fall most heavily on moderate and lower-income workers. I also promised to correct the technical flaw in the system which exaggerates the adjustment for inflation, and to do so without reducing the relative value of retirement benefits as compared with pre retirement earnings.

I am announcing today a set of proposals which meet those commitments and which solve both the short-term and long-term problems in the Social Security system through the end of the twentieth century. These proposals are designed to:

--Prevent the default of the trust funds now predicted to occur.

--Bring income and expenses into balance in 1978 and keep them that way through the end of the century.

--Create sufficient reserves to protect the system against sudden declines in revenue caused by unemployment or other economic uncertainties.

--Protect the system's integrity beyond the turn of the century to the extent we can predict what will happen in the next 75 years.

--Provide for an orderly review and examination of the system's basic structure.

My proposals are the result of a number of hard choices. I am convinced that action is needed now, and that these steps will restore the financial integrity of the Social Security system.

I will ask the Congress to take the following specific actions:

1. Compensate the Social Security trust funds from general revenues for a share of revenues lost during severe recessions. General revenues would be used in a countercyclical fashion to replace the payroll tax receipts lost as a result of that portion of unemployment in excess of six percent. General revenues would be used only in these carefully limited situations. Because this is an innovative measure, the legislation we submit will provide this feature only through 1982. The next Social Security Advisory Council will be asked to review this countercyclical mechanism to determine whether it should be made permanent.

2. Remove the wage-base ceiling for employers. Under present law employers and employees pay a tax only on the first $16,500 in wages. Under this proposal the employer ceiling would be raised over a three-year period, so that by 1981 the ceiling would be removed. This action will provide a significant source of revenue without increasing long-term benefit liabilities.

3. Increase the wage base subject to the employee tax by $600 in 1979, 1981, 1983, and 1985, beyond the automatic increases in current law. This will provide a progressive source of financing.

4. Shift revenues from the Hospital Insurance Trust Fund to the Old Age, Survivors, and Disability Trust Funds. In part, this shift will be made possible because of substantial savings to the Medicare system from the hospital cost containment legislation that I have proposed.

5. Increase the tax rate on the self-employed from 7 percent to 7.5 percent. This will restore the historical relationship between the OASI and the DI rates paid by the self-employed to one and one-half times that paid by employees.

6. Correct certain technical provisions of the Social Security Act which differentiate on the basis of sex. This will include a new eligibility test for dependent benefits. Recent Supreme Court decisions would result in unfinanced increases in the cost of the system and some inequities without this change.

These six steps, along with measures already contained in existing law, will eliminate the short-term financing problem and improve the overall equity of the Social Security system.

In order to guarantee the financial integrity of the system into the next century, two additional steps must be taken. I will be asking the Congress to:

1. Modify the Social Security benefit formula to eliminate the inflation overadjustment now in law. This modification, known as "decoupling," should be done in a way that maintains the current ratio of retirement benefits to preretirement wages.

2. Adjust the timing of a tax rate increase already contained in current law. The one percent tax rate increase presently scheduled for the year 2011 would be moved forward so that .25 percent would occur in 1985 and the remainder in 1990.

Taken together, the actions I am recommending today will eliminate the Social Security deficit for the remainder of this century. They will reduce the estimated 75-year deficit from the Trustee Report forecast of 8.2 percent of payroll to a manageable 1.9 percent.

Prompt enactment of the measure I have recommended will provide the Social Security system with financial stability. This is an overriding immediate objective.

In addition, I am instructing the Secretary of Health, Education and Welfare to appoint the independent Social Security Advisory Council required by law to meet each four years. I will ask the Council to conduct a thorough reexamination of the structure of the system, the adequacy of its benefits, the effectiveness and equity of disability definitions, and the efficiency and responsiveness of its administration. Their report, which will be issued within the next two years, will provide the basis for further improvements.

I call upon the Congress to act favorably on these major reform initiatives.

JIMMY CARTER

The White House,

May 9, 1977.