Even with the growth of private pensions and income from assets, Social Security, which is expected to pay out about $201 billion in benefits this fiscal year, is by far the most important source of income for elderly and disabled Americans.
Virtually all of the nation's 27 million persons 65 and older receive benefits. In addition, monthly benefits go to:
*2.5 million who have opted to retire between 62 and 65 with reduced benefits.
*2.6 million disabled persons under age 65.
*About 5 million persons under 65 who are survivors and dependents of retired and disabled persons.
Thus, the monthly beneficiary list totals 37 million, or one of every seven persons in the United States.
According to the latest available figures, a quarter of the elderly get at least nine-tenths of their income from Social Security; an additional third of the elderly get over half their income from Social Security.
And of the total cash income received by those 65 and over, 40 percent comes from Social Security, 22 percent from asset income, 19 percent from jobs, 7 percent from private pensions and 7 percent from government employe pensions.
The growth of Social Security in the past generation is believed to be the main reason why the poverty rate for the elderly, which was over 35 percent in 1959 and far exceeded that of the rest of the population, had dropped to 12.4 percent by 1984, below the 14.4 percent poverty rate recorded by the Census Bureau for the nation as a whole.
In 1986, the maximum benefit for a worker retiring at age 65 will be $760 a month; if that worker also has an aged, dependent spouse, an additional 50 percent will be paid, for a monthly total of $1,140. Annual cost-of-living increases are automatically paid as well.
Most workers, however, do not make the maximum. According to Social Security figures, the average benefit for a retired worker at the start of 1986 will be $478 a month; for a retired couple, $812, and for an elderly widow, $431 a month.
In 1986, the Social Security payroll tax, now 7.05 percent each for workers and employers on the first $39,600 of wages, will rise to 7.15 percent on the first $42,000, so the maximum payment for a top-earning worker will be $3,003.
For self-employed persons, the maximum effective tax rate will rise to 12.3 percent on the first $42,000 of self-employment income, or $5,166. (The nominal tax rate is actually higher, but a Treasury credit available to the self-employed brings the net effective rate down to 12.3 percent.)
In 1986, a person under 65 will be permitted to earn up to $5,760 without reduction of Social Security benefits. Those 65 to 69 will be able to earn up to $7,800 without reductions. For people 70 and over, there is no limit on allowed employment.
These earnings limitations only apply to wages and salaries from a job. There is no limit on so-called "unearned income" -- interest, dividends and rents. The reason for the earnings limitation is that Social Security benefits are intended only for those who are basically retired and no longer earning a full regular salary.
Although Social Security was on the verge of insolvency several years ago, the rescue plan put together by a special bipartisan commission of congressional, labor and business representatives, and endorsed by both President Reagan and House Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.), put the system in good financial condition well into the 21st century under current economic and demographic projections by its actuaries.
Because there are expected to be lots of workers and relatively few retirees for the next generation and more, the old-age and disability trust funds are expected to be able to pay benefits until 2049 under the so-called intermediate economic-demographic scenario, the one considered most likely to occur. Even under a more pessimistic ("alternative III") scenario, the funds are estimated to last to 2021.
After about 2025, retirement of the big Baby Boom generation will raise the benefit payload considerably and place new strains on financing, probably requiring an increase in the payroll tax or some infusion of added funds beyond what now is expected.
The situation is less optimistic for Medicare, the giant health insurance system that is technically part of Social Security and that is financed in part from the Social Security payroll tax. Outlays in fiscal 1986 are estimated at $75 billion -- two-thirds for hospital costs and one-third for doctors and related services.
Although Congress has taken numerous steps to reduce Medicare outlays, high medical inflation rates relative to other sectors of the economy, an aging population that needs more treatment as it grows older, plus an explosion of technical improvements that could force up costs, are expected to drive the hospital insurance trust fund into insolvency by 1997-98 under the intermediate scenario and perhaps as early as 1992 under the more pessimistic scenario.
Some critics, such as former chief actuary Haeworth Robertson and former White House aide Peter J. Ferrara, believe that even the so-called pessimistic scenario may be more favorable than what actually will occur over the next two generations. If that proves the case, the system -- old-age and disability insurance and Medicare -- could face funding problems well before the dates projected in the reports of the system trustees.
Aside from increasing the payroll tax substantially, one way to solve this would be to decrease the level of benefits gradually, so they will be less costly.
Ferrara argues in a series of books and articles that workers should be allowed to divert part -- and perhaps eventually all -- of their Social Security tax payments into IRAs that are designed specifically to finance retirement and medical benefits in old age. He argued that, if the IRAs were invested at least partly in private companies, they would help the economy grow by providing more capital, and this, in turn, would generate a good return on the investments.
Although these ideas have received some attention, they run counter to the prevailing opinion on Capitol Hill and within the administration, where official projections suggest that the old-age and disability funds are in good shape for the next 35 to 65 years.