N. Tax Court Judges Survivors Annuity Fund

LEGISLATIVE HISTORY

The Tax Court Judges Survivors Annuity Fund was enacted in Public Law 87-370 on October 4, 1961. Amendments which increase the annuity amounts payable from the Fund were enacted in

Public Law 97-362 (H.R. 4717) on October 25, 1982. Amendments to increase the maximum annuities receivable by surviving children of a deceased Tax Court judge where the judge also leaves a surviving spouse were enacted in Public Law 98-369 (H.R. 4170) on July 18, 1984. Amendments to make the survivors annuity provisions relating to Tax Court judges parallel to those applicable to other Federal judges, following enactment of Public Law 99-336, were enacted in Public Law 99-514 (H.R. 3838), generally effective on November 1, 1986. Internal Revenue Code section 7448 provides the statutory basis for the annuities to surviving spouses and dependent children of Tax Court judges.

FINANCING MECHANISM

Any judge of the United States Tax Court may by written election while a judge (or before a successor takes office) participate in the Fund. There is deducted and withheld from the salary of each judge electing to participate 3.5 percent of that judge's salary. The amounts deducted and withheld are deposited, in accordance with procedures prescribed by the Comptroller General of the United States, in the U.S. Treasury to the credit of the Tax Court Judges Survivors Annuity Fund. A judge may deposit, with interest at 4 percent per annum to December 31, 1947, and at 3 percent per annum thereafter, compounded on December 31 of each year, to the credit of the Fund, a sum equal to 3 percent of the judge's salary and of that individual's basic salary, pay, or compensation for service as a Senator, Representative, Delegate, or Resident Commissioner in Congress, and for any other civilian service within the purview of 5 U.S.C. 8332 for services performed before November 1, 1986, and 3.5 percent for services performed after November 1, 1986. Each judge may elect to make the deposits in installments during continuance of service as a judge in such amount and under such conditions as may be determined in each instance by the chief judge of the Tax Court.

Notwithstanding the failure of a judge to make the deposit, credit is allowed for the service rendered, but the annuity of the surviving spouse of the judge is reduced by an amount equal to 10 percent of the amount of the deposit, computed as of the date of the death of the judge (unless the surviving spouse elects not to count the service, for which the deposit was not made, in determining the annuity due). No deposit is required from a judge for any year with

respect to which deductions from salary were actually made under the civil service retirement laws. Also, no deposit is required for any honorable service in the Army, Navy, Air Force, Marine Corps, or Coast Guard of the United States.

EXPENDITURE PURPOSES

The Fund is used to pay annuities to a deceased judge's surviving spouse and children.

If a judge who elects to participate in the Fund dies after having rendered at least 5 years of civilian service for which salary was withheld for the Fund (or for which salary was withheld under the civil service retirement laws), a surviving spouse or surviving dependent child is entitled to an annuity from the Fund. If the surviving spouse has not attained age 50 at the date of the judge's death (and no dependent child_survives), the annuity commences when the surviving spouse reaches age 50. The annuity payable to a surviving spouse terminates upon the surviving spouse's death or remarriage. An annuity payable to a dependent child and to a surviving spouse, if the judge is also survived by a dependent child, begins immediately after the judge's death. The annuity for a dependent child terminates generally upon the surviving child's reaching 18 years of age, marriage, or death. If the child is incapable of self support because of mental or physical disability, the annuity would terminate only upon death, marriage, or recovery from the disability.

The annuity payable to a surviving spouse of a judge electing under the Fund is equal to a stated percentage (generally 14 percent) of the average annual salary received by the judge (whether the judge's salary or compensation for other allowable Federal service) for the 5 consecutive years in which the judge received the largest average annual salary, multiplied by the sum of years of judicial or other allowable Federal service. The annuity for the surviving spouse cannot exceed 371⁄2 percent of the average annual salary of the judge. The annuity of the surviving spouse will be reduced to account for periods of time when the judge did not contribute to the Fund. The amount of the annuity payable to a surviving dependent is based upon the annuity payable to a surviving spouse (subject to certain limits).

Under the 1982 amendments, annuities payable with respect to judges dying after the date of enactment are increased by (1) basing the annuity on the judges' salary for the 3 (versus 5) consecutive years in which the judges received the largest average annual salary, and (2) increasing the maximum annuity to 40 percent (versus 372 percent) of such average annual salary. These amendments also provide that survivor annuities will be adjusted for costof-living increases by increasing such annuities by 3 percent for each 5 percent by which the salary of Tax Court judges is increased. Annuities in pay status on the date of enactment are adjusted immediately to reflect post-1963 salary increases.

Under the 1984 amendments, the maximum annuities receivable by surviving children of a deceased Tax Court judge where the judge also leaves a surviving spouse are increased from $900 per year per family ($360 per child) to $4,644 per year per family ($1,548 per child). Where there is no surviving spouse, the maxi

mum annuities for surviving dependent children are increased to $5,580 per year per family, or $1,860 per child, whichever is less. These increases are effective for annuities payable for months beginning after July 18, 1984.

Under the 1986 Tax Reform Act, the judges' salary contribution to the fund and civilian service for benefits to be payable under the program increased from 3 percent to 3.5 percent. The annuity for a surviving spouse increased to 12 percent (versus 14 percent) of the judge's average salary per the 3-year consecutive year requirement, but cannot exceed 50 percent (versus 40 percent) of the average annual salary, nor be less than 25 percent of the average annual salary. The annuity payable to a surviving spouse does not terminate upon remarriage at 55 or older. Where there are children and a surviving spouse, the maximum annuity per child is the lesser of 10 percent of the average annual salary, or 20 percent of the average annual salary divided by the number of children (versus the lesser of 50 percent of the spouse's annuity to $4,644 per year per family, or $1,548 per child). Where there is no surviving spouse, the maximum annuity per child is the lesser of 20 percent of the average annual salary or 40 percent of the average annual salary divided by the number of children (versus an amount equal to what a spouse would have received if surviving not to exceed $5,580 per year per family, $1,860 per child, whichever is less). Judges who retire under a new retirement election, i.e., fixed salary and opportunity to practice law, will continue to have the prescribed deduction (3.5 percent) withheld from their retired pay and will receive credit for those years of contribution. A judge who 'ceases to be married" after electing to participate in the Fund may terminate his participation and receive a refund of contributions plus interest. The increase in salary deductions is effective November 1, 1986. The increase in the civilian service percentage is effective for service performed after November 1, 1986. The amendments apply to annuities starting after November 1, 1986. Any judge elected prior to November 1, 1986, to participate in the fund may revoke that election within the 180-day period beginning after enactment and receive a refund of contributions plus interest. Any judge who revokes within the 180-day period may later participate only upon repayment of entire refund plus interest.

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FINANCIAL STATUS OF FUND

As of September 30, 1992, 25 judges of the Tax Court were participating in the Fund, and 5 eligible widows were receiving survivor annuities. Outlays are expected to total $170,000 per year for the period 1992-94.

Section 7. Social Security Payroll Taxes

BACKGROUND

The Social Security Act of 1935 was signed into law on August 14, 1935. The immediate origin of this legislation was the Committee on Economic Security which had been charged by President Roosevelt with the task of devising safeguards "against misfortune which cannot be wholly eliminated in this man-made world of ours."

In addition to the Federal old-age retirement program (title II), the original Social Security Act also included grants-in-aid to States for: old-age pensions based on need (title I); unemployment compensation systems (title III); aid to dependent children (title IV); maternal and child welfare services, care of crippled children (title V); aid to the blind (title X); and public health work (title VI). The original act has been amended on numerous occasions since 1935. However, the most significant changes to title II were made by the Social Security Amendments of 1939, 1950, 1954, 1956, 1965, 1972, 1977, and 1983. In addition, the Medicare (title XVIII) program was added to the Social Security Act of 1965.

Today the term "Social Security" is seldom used to refer to all of the programs included in the Social Security Act. The term is most often used to refer to the old-age and survivor insurance program (OASI), the disability insurance program (DI), both under title II, and Medicare part A hospital insurance (HI) under title XVIII. Together these are known as the OASDHI programs. Each of these programs is funded through a separate trust fund. The payroll tax that finances the old-age and disability insurance trust funds is known collectively as the OASDI tax. While the OASDI tax is collected as a single tax, portions of it are allocated by statute between the two separate trust funds. The HI tax is allocated entirely to the HI trust fund.

OVERVIEW OF CURRENT LAW FINANCING

The Social Security programs (OASDHI) are financed through the payroll tax and from income taxes paid on Social Security benefits. Most of current income to the system goes directly to meet current benefit obligations. Any funds collected in excess of the amount needed to make benefit payments are credited to the trust funds as reserves, in the form of Government securities. These reserves serve as a cushion against temporary shortfalls in revenues or large increases in outlays due to economic fluctuations; the reserves also provide interest income to the trust funds. As a result of the Social Security Amendments of 1983, OASDI (but not HI) reserves are projected to build up rapidly over the next 20 years.

Trust fund income is dependent on the amount of wages covered by Social Security on which taxes are levied according to the pay

roll tax rate for each year. Benefit outlays are made under a permanent appropriation, equal to the amount to which beneficiaries are entitled based on their earnings records, and are not limited to the amount of revenue credited to the trust fund from contributions and interest. If, as occurred in the early 1980's, yearly income is insufficient to cover benefit payments, reserves are used to make up the difference.

EMPLOYEE/EMPLOYER PAYROLL TAX (FICA)

The payroll tax is levied on earnings in employment covered by Social Security. The payroll tax is sometimes termed the FICA (Federal Insurance Contributions Act) tax. Portions of the total tax rate are allocated by law to each of the three trust funds (OASI, DI and HI). All persons who work in covered employment pay this mandatory tax on their earnings up to a maximum dollar amount. The maximum amount of earnings subject to the tax is known as the_contribution and benefit base, or earnings base. The Omnibus Budget Reconciliation Act of 1990 established two separate contribution bases, one for the OASDI tax and another for the HI tax. The employee's employer also pays a FICA tax equal to the tax paid by the employee.

The employer's share of FICA is deductible for income tax purposes. The employee's share is not deductible. In general, employees and employers do not pay taxes on earnings in excess of the maximum earnings bases for OASDI and HI. (Employees who work for more than one employer can receive a refund of any excess payments, but employers cannot).

As of January 1, 1993, the employer and the employee each pay an OASDI tax equal to 6.20 percent of the first $57,600 of earnings and an HI tax rate of 1.45 percent of the first $135,000 of earnings. The maximum amount of combined OASDHI tax payable by each is $5,528.70. The maximum combined liability of an employer and employee equals $11,057.40.

No future increase in the payroll tax rate is scheduled. The OASDI and HI earnings bases increase each year automatically according to a statutory formula. The increase is based on the increase in average wages in the economy, excluding self-employment earnings, each year. Increases are effective on a calendar year basis.

SELF-EMPLOYMENT PAYROLL TAX (SECA)

Individuals who are self-employed pay OASDHI taxes in the form of the self-employment tax (often termed the SECA, or SelfEmployed Contributions Act, tax). The self-employment OASDHI tax equals the combined FICA tax rate paid by employers and employees. The tax rate equals 15.3 percent (12.40 percent for OASDI and 2.90 percent for HI). The OASDI earnings base in 1993 is $57,600 and the HI earnings base is $135,000. The maximum selfemployment tax liability for an individual in 1993 equals $11,057.40 ($7,142.40 in OASDI tax and $3,915.00 in HI tax). Effective in 1990 and thereafter, the self-employed are permitted to deduct 7.65 percent from their net earnings before computing their Social Security tax and can also deduct half of their Social Security