Social Security is the single largest item in the federal budget, consuming over 22% of total expenditures. (For comparative purposes, 17% of the budget is spent on national defense, 0.5% is spent on training and employment, and 2.5% is spent of food and nutritional assistance.) In 1996, the system is projected to collect $387 billion in tax revenues and distribute $355 billion to over 43 million recipients.
Social Security is an entitlement program and is thus funded automatically rather than through the annual appropriations process. All individuals who are legally eligible for benefits automatically receive them. As a result, it is demand, not supply, that sets spending levels for the program. The only way to alter spending for Social Security is to change the guiding legislation.
There are a number of basic principles underlying today's structure of Social Security system, including:
- The system is work related - Benefit levels for retirees and their families are related to earning history and wage level. The higher the contributions, the higher the benefits.
- Benefits are not means tested - Benefits are paid regardless of income from saving, pensions, insurance, or other forms of non-work income. Workers do not have to prove need to receive benefits.
- Universal compulsory coverage - Workers may not opt out of the Social Security system. By mandating participation, adverse selection (the situation that arises when individuals who draw the most from an insurance system are the ones who join it) is avoided.
- Benefits are defined by law - Any person who meets the legal requirements qualifies for benefits. Disagreements may be taken to court.