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Rick Perrys Proposal To Turn Social Security Over To The States

A ROMNEY FOR PRESIDENT WHITE PAPER

September 22, 2011

Paid for by Romney for President, Inc. www.MittRomney.com

Rick Perrys Proposal To Turn Social Security Over To The States


A ROMNEY FOR PRESIDENT WHITE PAPER
September 22, 2011

EXECUTIVE SUMMARY Governor Rick Perry has proposed that Social Security be turned over to the states. But transferring the programs fiscal challenges to states already facing severe budget crises of their own will only make matters worse, especially in those states with relatively high numbers of Social Security beneficiaries. While Perry has not yet provided an explanation of his proposal that would allow a thorough evaluation of its specific contours, an initial assessment can be made on the basis of the ideas that he has outlined. This white paper has two goals: first, to identify the questions that must be addressed before Perrys proposal can be thoroughly analyzed; second, to use what information is available about the proposal to estimate its possible effects on various states. The paper considers three states Florida, Iowa, and Arizona and assesses the budgetary impacts of a basic plan under which each state is responsible for funding its own social security program out of its own tax revenues. The findings are as follows: Florida could face a $16 billion shortfall, requiring it to either: o Reduce the scale of its program by removing more than one million recipients or cutting benefits per recipient by more than $4,000; o Make dramatic cuts elsewhere in its budget, such as elimination of its public education and prison systems; or o Raise taxes. Iowa could face a $1.5 billion shortfall more than 25% of its general fund. Arizona could face a nearly $3 billion shortfall more than 33% of its general fund. Methodology, assumptions, and illustrative calculations are provided in an appendix to the paper. As Perry provides additional details about his proposal, these projections can be refined.

Paid for by Romney for President, Inc.

Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

INTRODUCTION Social Security is Americas social safety net for the elderly and disabled. The program was enacted in 1935 in the midst of the Great Depression as part of the New Deal. While it initially sparked controversy, it has over seven decades proved to be a success, providing needed benefits to millions of Americans in need and serving as a source of retirement income for Americas middle class. The program currently covers 56 million beneficiaries and pays out more than $700 billion annually in old-age and disability benefits. It is unsurprising that half a century after its founding, Ronald Reagan spoke approvingly of our nations ironclad commitment to Social Security1 and called it essential that the integrity of all aspects of Social Security be preserved.2 Social Security has serious problems, which reside in the financial sphere. The Social Security system recently began paying out more in benefits than it receives in tax revenues, in part because of increasing life expectancy and the demographic bulge of the Baby Boom. Such a situation is not sustainable and will cause the program to consume a growing portion of the federal budget in the years to come.3 One of President Obamas great failings has been his refusal to focus on this problem or provide the leadership required to pursue a solution. Thoughtful policymakers have identified a number of responsible reforms for strengthening Social Security, to address the financial challenges of a program whose underlying principles remain as sound as ever. Mitt Romney strongly supports this objective and has outlined his own ideas for reform. However, the very existence of Social Security has unexpectedly become a major point of contention in the 2012 presidential race. Rick Perry, the Governor of Texas, has offered a radical critique of the program and put forth a novel proposal to dismantle it. In his 2010 book, Fed Up! Our Fight to Save America From Washington, and in a series of television and print media
1 2

Remarks on Signing the Social Security Amendments of 1983, 4/20/83. Acceptance Speech at the 1980 Republican Convention, 7/17/80. 3 CBOs 2011 Long-Term Projections for Social Security: http://www.cbo.gov/ftpdocs/123xx/doc12375/08-05-LongTermSocialSecurityProjections.pdf.

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

interviews, Perry has suggested that the system is unconstitutional and unneeded and should be sent to the states to operate. Perry begins from the premise that Social Security is unconstitutional. It is a program, he writes, that weve been forced to accept for more than 70 years now . . . at the expense of respect for the Constitution and limited government.4 Perry does not see providing Social Security as an appropriate function of the federal government and has suggested that it might be a program that we dont need.5 He has been pointedly asking: Why is the federal government even in the pension program?6 He advocates handing over Social Securitys core functions to the states. Let the states [decide] how to run the pensions,7 he told one interviewer. Let the states do it,8 is what he said to another, continuing, [t]hat . . . is one of the ways this federal government can get out of our business, save a lot of money and get back to that constitutional way of doing business in those enumerated powers that theyre supposed to have.9 Such a striking proposal deserves careful scrutiny. What would implementing it entail?
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IMPORTANT QUESTIONS There are several issues wrapped up in this bundle. The first is legal. The Supreme Court upheld the constitutionality of Social Security in Helvering v. Davis in 1937 and has not looked back. Perry has called the Courts judgment on this point into question. Even if that is an unusual claim these days, it warrants attention given that Perry is a presidential candidate. If Perry is right about the Social Security systems unconstitutionality, that would be the end of the discussion. No matter how effective or desirable the program, if it is beyond Congresss power to enact, then it
4 5 6

Rick Perry, Fed Up!, 2010, p. 50. Andrew Romano, Rick Perry On The Record, The Daily Beast, 8/12/11. MSNBCs Morning Joe, 11/5/10. 7 Foxs On The Record With Greta Van Susteren, 11/8/10. 8 MSNBCs Morning Joe, 11/5/10. 9 MSNBCs Morning Joe, 11/5/10.

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

must by definition be dismantled. This has appeared to be Perrys position since 2010, though he has declined to explain his reasoning or acknowledge the implications. In understanding Perrys thinking, then, a first order question is whether he sees the dismantlement of Social Security as an unavoidable constitutional imperative or whether he simply thinks it is good policy. If the latter, it would certainly remain within Congresss powers to abolish Social Security and turn its functions over to the states. This, however, represents a dramatic change in course for one of our most basic governmental institutions. Social Security has been analyzed by innumerable commissions and study groups over recent decades, but moving in the direction Perry suggests is not a solution that any reputable body has settled upon. And it is not difficult to see why. Taking a centrally run program serving 56 million people and dividing it into fifty separate pieces raises a large number of extremely complicated and potentially irresolvable public policy issues. For one thing, as everyone recognizes, the current Social Security system has future unfunded liabilities.10 How would these liabilities be managed by the states? Many states are currently facing severe fiscal pressures even without assuming responsibility for Social Security. Indeed, quite a few states have run into severe difficulties managing the pensions of their own public employees. How would this additional and far more sizable burden affect their finances? Although there is no precedent for it in our history, it is fully conceivable that a state could go bankrupt if it failed to generate sufficient tax revenues to pay its retirees. What would happen to recipients of Social Security in that kind of scenario? As of yet, Perry has not offered sufficient details that would permit us to answer. Further, there is the problem of the federal governments current use of a so-called Trust Fund for accounting purposes. Currently, the Treasury pays the Social Security system interest on its savings from the surpluses of years past, and these funds go toward paying todays benefits.
10

CBOs 2011 Long-Term Projections for Social Security: http://www.cbo.gov/ftpdocs/123xx/doc12375/08-05-LongTermSocialSecurityProjections.pdf.

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

Benefits are also funded in part by the federal tax revenues that are collected on some Social Security payments themselves. Were the system broken apart, the states would not necessarily have access to such revenue streams and each would be left to find alternative sources of funding. Were the federal government to attempt a transfer of these streams to the states, perplexing problems of equity and administration would arise and the existing systems difficulties might actually be exacerbated. Perrys proposal has not, thus far, acknowledged these complexities. Whats more, America is a highly mobile society. Millions of Americans move from state to state over the course of their lives.11 Some work in one state for a period of years and then move to another state to retire. In that instance, under Perrys proposal, one state would have presumably collected some form of payroll tax from the worker, and another state would be responsible for paying benefits. This sets up an obvious potential for conflict when states set different levels of taxes and benefits from one another, as would be within their rights. How would this be managed? A related issue is that between four and seven million Americans (excluding the military) currently live abroad. Many of them are not residents of any state. How would their benefits be handled? Again, Perry has not provided answers. Yet another set of problems arises out of the potential for states to opt out of Social Security entirely. Would states be free to offer no social security at all? What would happen to the elderly living in states that made that choice? Would penury force many to move to states with more congenial policies? Conversely, if under Perrys proposal, states would be compelled by the federal government to have a social security plan, this would seem an infringement of state sovereignty wide open to challenge on constitutional grounds. Indeed, this would be a far more troubling exercise of federal power than the one that Perry objects to in operating Social Security in the first place. Perry has thus far declined to enter into a discussion of these details.
11

According to the Census Bureau, in between 2009 and 2010, 37.5 million Americans over the age of one moved. Of those, 11.5 percent moved to a different state: http://www.census.gov/newsroom/releases/archives/mobility_of_the_population/cb11-91.html.

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

A very thorny set of issues would arise for states from Florida to Arizona to Maine that have a high proportion of retirees relative to workers. With a small payroll tax base and a high percentage of beneficiaries, these states would immediately be thrust into a fiscal maelstrom. Similarly, states with high unemployment like Nevada, California, and Michigan, which have a weak payroll tax base to finance their programs, would also find themselves in severe fiscal straits. What kinds of protections would such states require to make Perrys proposal work? Would states be free to set different levels of eligibility and benefits? Could some states have higher retirement ages than others? Discussion of Perrys proposal should include an examination of these problems. Not to be neglected are the administrative issues raised by Perrys proposal. What kinds of records would be kept as individuals moved from state to state? Would it require an interconnected record-keeping system for all fifty states? If so, who would be responsible for managing it? Would there be federal standards for protecting peoples Social Security numbers and the flow of funds into their accounts? Would each state generate Social Security numbers on its own, or would there be a central system? Social Securitys administrative expenses have been held to a remarkably low 0.9 percent by the federal government. With one program replaced by fifty, and the cost of administrative overhead rising significantly, who would pay the additional costs? These are all important questions, but no details have been made available. ***

THE IMPACT ON STATES Policy analysts and political leaders have considered a variety of options for responsibly reforming and strengthening Social Security. Such proposals have been vetted, analyzed, and scored by respected economists and scrutinized by the media. The details are well understood. Given the dramatic break in policy that Perry proposes, his ideas surely require similar examination. In the

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

absence of specifics from Perry himself, it is incumbent on others to look at some of these issues in closer detail. To that end, it is worthwhile to examine how his proposal might work in various states under a basic scenario in which each state is expected to provide its own Social Security benefits using payroll taxes comparable to those currently assessed nationally. Here, we consider three: Florida, Iowa, and Arizona.

Florida
Let us begin with Florida. Florida has a population today of approximately 18.8 million people. Of these, 3.3 million, or 17.3 percent, are 65 and older. As is well known, the Sunshine State is a favorite retirement destination for elderly Americans. Thus, Florida comprises 6 percent of the total U.S. population, but it has 8 percent of our nations elderly. Because Florida has an unusually high ratio of retirees to working people, its workers generate far less in Social Security payroll taxes than its residents currently receive in Social Security benefits. In 2010, Florida workers paid approximately $34.5 billion in payroll taxes while Florida Social Security recipients drew in an estimated $50.5 billion in benefits. Under our current Social Security arrangements, this imbalance does not present any particular problems for Florida. But under Perrys proposal, the dynamic could produce a budgetary disaster. If it attempted to pay benefits to its large number of retirees while only collecting existing payroll taxes from its workers, Florida could be saddled overnight with a $16 billion budget gap. This could impose an immediate and severe financial crunch on a state that has had tremendous difficulty balancing its budget even without carrying social security obligations. This year, Florida was forced to close a $3.8 billion shortfall, and Governor Rick Scott vetoed an additional $615 million in state spending. An additional $16 billion gap is so large that even eliminating funding for

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

Floridas entire public education system ($11.9 billion) and prison system ($2.2 billion) would not be sufficient to bring the budget back into balance. More plausibly, Florida would need to raise taxes to pay for the additional burden. Florida currently has no income tax. To raise $16 billion a year, it would almost certainly need to institute one. It might also have to raise its sales tax far above its current level of 6 percent. Alternatively, to stay solvent Florida could raise its retirement age and/or lower the benefits it pays to current seniors. The deficit could require either kicking more than one million individuals off of the program or cutting benefits by more than $4,000 per person per year. All of these nightmare options make Perrys proposal seem extremely unattractive, but they are the natural consequences of the vision he has outlined.

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

Iowa
In Iowa, meanwhile, workers paid almost $6.3 billion to Social Security last year while recipients received an estimated $7.8 billion in benefits. If Iowa assumed control of Social Security in the state, it could have a deficit of approximately $1.5 billion out of a state budget of $6 billion. To make up for the shortfall, Iowa could be compelled to drop more than 100,000 beneficiaries from its new, state-based program. To avoid this harsh solution, it could reduce benefits to all recipients by more than $2,500 per year. It could raise taxes dramatically. Or it could make cuts such as the elimination of the Board of Regents for Education ($522 million) and Department of Education ($216 million), as well as the Departments of Corrections ($347 million), Public Safety ($81 million), and Justice ($12 million). Then it would need to find more cuts.

Arizona
In 2010, Arizonas workers paid an estimated $11.6 billion in payroll taxes to the Social Security system. But residents received approximately $14.5 billion in benefits. Were Arizona to assume the costs of paying Social Security in the state, it could be stuck with an annual deficit approaching $3 billion. With approximately one million Social Security recipients living in the state, Arizona could close the deficit by removing more than 200,000 from the rolls. Another alternative would be to cut average benefits by more than $2,500. As elsewhere, Arizona could also opt to make up for the shortfall by raising taxes or cutting other forms of state spending. Cuts would need to be enormous: eliminating the entire public university ($682 million) and community college ($71 million) systems would get less than one-third of the way there.

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

***

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

REFORMING AND STRENGTHENING SOCIAL SECURITY As this brief survey of three states makes clear, the sum total of Perrys proposal to eliminate Social Security as a federal program and turn it over to the states is deeply problematic. It poses administrative problems of extraordinary complexity and could saddle some states with crushing burdens that may either force them into bankruptcy or compel them to cut retirement benefits, remove people from the program, raise taxes, cut other forms of state spending, or adopt all four unhappy approaches at once. This is not the way America ought to go, especially when there is another approach to Social Security that will solve the programs financial problems in a responsible fashion. That approach has been articulated by Mitt Romney. His starting point in addressing Social Security is the basic principle of keeping our promises both to current seniors and to future generations. Romney agrees with the programs many critics who express deep concern about the long-term financial health of the program. But he parts company with anyone who believes those financial problems require dismantling the program itself. Instead, he has elaborated a number of options that can keep the program solvent without having either to raise the payroll tax or to expand the base of income to which the tax is applied. One such approach is gradually increasing the retirement age. The average Americans life expectancy is more than ten years higher today than it was at the time of Social Securitys inception. Increasing the retirement age by even one or two years would help bring the system closer to sustainability. Because some people will be physically unable to work beyond todays retirement age, such an adjustment would have to allow for exceptions. But a great many older Americans are healthy, vital, and want to stay engaged in meaningful work and most are now capable of working a year or two past 65. If we increase the retirement age, we would encourage seniors to stay healthier

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

longer, keep their minds active and alert, and at the same time, we would relieve the strain the Social Security system faces when it comes to paying benefits to our children and grandchildren. An alternative or perhaps complementary approach would be to change the way the initial Social Security benefit is calculated for high-income individuals. Currently, the initial benefit for all recipients is keyed to their average lifetime earnings and inflated to current-year values to reflect changes in the overall economy. But the factor used in calculating that inflation is not the consumer price index (CPI), but rather the wage index. Because wages have gone up much faster than consumer prices over the years, the wage index raises the starting point for Social Security benefits more rapidly than would be the case if the CPI is used. The rationale for using the wage index has been that people who rely on Social Security for most or all of their retirement need the faster rising index to keep their standard of living from falling relative to those still in the workforce. For many low- and middle-income recipients, that rationale will continue to apply. Romneys approach would therefore be to continue to use the wage index for calculating the Social Security income for low- and middle-income citizens. But Romney would switch to the CPI to compute the initial benefits for higher-income individuals. Modest changes made now in the Social Security system along the lines suggested by Romney would enable the Social Security system to remain solvent beyond the next 75 years.12 That is a significant improvement from the current insolvency date around 2040. It is an even more significant improvement over an ill-thought out proposal to turn Social Security over to the states. The consequences of that proposal for seniors, for the disabled, and for state finances cannot be foretold with precision, but they are certain to be dire.

A bill now pending in the Senate that incorporates both of Romneys ideasThe Social Security Solvency and Sustainability Acthas been subjected to analysis by the chief actuary of the Social Security Administration and found to resolve the systems financial imbalance.

12

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

The keys to solving the challenges facing Social Security are leadership, courage, and responsibility, all of which have been sorely lacking from President Obama. In discussing Social Security, there are two equal but opposite errors that must be avoided. The first error President Obamas is to disregard the problem. There is a problem, and it is a substantial one. Given unavoidable demographic trends, Social Security cannot be sustained indefinitely as it operates today. The second error Governor Perrys is to react out of anger or panic, respond to the failures of Washington by calling Social Security itself a failure, and unreflectively impose an unmanageable burden on the states. The right answer, and the only answer that will protect the retirees of today and tomorrow, is to reform and strengthen Social Security as part of an overall program that fully addresses the financial condition of the federal government, creates economic growth, and empowers the American people to provide opportunity for themselves and their families. That is the approach conservative scholars and leaders have been taking for a generation. It is the answer Mitt Romney will offer to the American people should they choose him as their next president. ***

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

APPENDIX: METHODOLOGY FOR CALCULATING STATE IMPACT While Governor Rick Perry has not provided sufficient detail to determine precisely the impact that his proposal might have on the states as they attempt to formulate separate social security programs, some rough calculations indicate the scope of the fiscal calamity that might occur. This white paper takes Perrys proposal social security programs administered by the states at face value and determines what would happen if each state attempted to use a payroll tax comparable to the current federal tax to fund benefits comparable to current federal benefits. If Perry believes actual results would be less catastrophic, this would mean he expects either (a) increased taxation at the state level, (b) lower benefits at the state level, or (c) an as-yet-undefined transfer from the federal government to the state governments. This white paper uses several states to illustrate the dynamics at work here, the Florida example is used for purposes of describing methodology. Note that all numbers printed below are rounded and so the results of equations may appear slightly imprecise. A. Floridas annual benefits under current federal law. Calculated as Floridas share of national benefits, multiplied by total 2010 Old-Age, Survivors, and Disability Insurance (OASDI) outflows. Floridas share of national benefits is calculated using the Social Security Administrations OASDI Beneficiaries by State and County. In December 2009, Florida beneficiaries received $3.96 billion, or 7.1% of the $55.91 billion paid nationwide.13 In December 2010, Florida beneficiaries received $4.12 billion, or 7.1% of the $58.05 billion paid nationwide.14 This consistent percentage, 7.1%, represents an approximation of Floridas share of benefits paid over the course of 2010. OASDI outflows are available in the annual Social Security Trustees report. In 2010, total outflows for OASDI were $712.5 billion.15 Floridas benefits for 2010 are then calculated as $712.5 billion in benefits paid nationwide, multiplied by Floridas 7.1% share of all benefits. Florida Benefits: $50.5 billion. B. Floridas annual payroll taxes under current federal law. Calculated as Floridas share of <$100K Salaries & Wages, multiplied by total 2010 payroll taxes. Although payroll taxes are not precisely correlated to the first $100K of salary and wages earned by all tax filers, this methodology offers a very close approximation from readily available federal data. Calculating salary and wages below $100K requires two steps, using IRS data. First, total salary and wages reported for filers with <$100K Adjusted Gross Income (AGI) is included, because all such income is within the first $100K of AGI for the filer. Second, $100K of salary and wages is included for each filer reporting >$100K AGI, because each such filer had $100K of <$100K income as well as additional income that is not included for payroll tax purposes.
13 14

OASDI Beneficiaries by State and County 2009, Table 3: http://www.ssa.gov/policy/docs/statcomps/oasdi_sc/2009/ia.pdf. OASDI Beneficiaries by State and County 2010, Table 3: http://www.ssa.gov/policy/docs/statcomps/oasdi_sc/2010/ia.pdf. 15 2011 Annual Report of Board of Trustees, Table IV.A3: http://www.ssa.gov/oact/tr/2011/tr2011.pdf.

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Rick Perrys Proposal To Turn Social Security Over To The States

A Romney For President White Paper

In 2009 (the most recent year for which IRS data is available), total <$100K income salary and wages in Florida under this methodology was $261.1 billion, or 5.4% of the $4.82 trillion earned nationwide.16 Note that while 2009 data is used for purposes of calculating this ratio, the ratio is applied to a 2010 payroll tax total in the following calculation. Thus, the assumption is not that payroll taxes remained constant from 2009 to 2010, only that Floridas share of those taxes remained constant. OASDI inflows, including payroll taxes, are available in the annual Social Security Trustees report. In 2010, total net payroll tax contributions for OASDI were $637.3 billion.17 Floridas payroll taxes for 2010 are then calculated as $637.3 billion in payroll taxes nationwide, multiplied by Floridas 5.4% share of the relevant income base. Florida Taxes: $34.5 billion. C. Floridas shortfall. Based on this analysis, Florida received approximately $50.5 billion in Social Security benefits in 2010 while generating only $34.5 billion in payroll tax revenue. Were Florida to administer its own Social Security system under these parameters, it would face a $16 billion shortfall. If the shortfall were addressed through benefit reductions, cutting $16 billion in benefits from a $50.5 billion base would require a 32% reduction. Florida had approximately 3.7 million Social Security beneficiaries in 2010 (3.67 million in December 2009,18 3.78 million in December 201019). The average benefit can therefore be calculated by dividing the $50.5 billion in benefits over the 3.7 million recipients. Average benefits per recipient in 2010 totaled approximately $13,500.

If benefits were cut by removing recipients, a 32% reduction from the 3.7 million current beneficiaries would require the removal from the program of nearly 1.2 million people. If benefits were cut across the board, a 32% reduction from the $13,500 in current average benefits per recipient would require a decrease of more than $4,000 per person.

A quick survey of Floridas FY2011-12 Budget20 indicates the severity of the cuts that would be required if the state were to balance its budget without raising taxes or cutting benefits to current Social Security beneficiaries. For instance, the $16 billion deficit imposed by Perrys proposal would swallow the entire Departments of Education and Criminal Justice.

16 17 18

IRS Tax Stats 2009, Historical Table 2: http://www.irs.gov/pub/irs-soi/09in10fl.xls. 2011 Annual Report of Board of Trustees, Table IV.A3: http://www.ssa.gov/oact/tr/2011/tr2011.pdf. OASDI Beneficiaries by State and County 2009, Table 2: http://www.ssa.gov/policy/docs/statcomps/oasdi_sc/2009/ia.pdf. 19 OASDI Beneficiaries by State and County 2010, Table 2: http://www.ssa.gov/policy/docs/statcomps/oasdi_sc/2010/ia.pdf. 20 Florida FY2011-12 Budget, Summary by Section: http://www.flsenate.gov/Session/Bill/2011/2000/BillText/er/PDF.

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