[Senate Report 111-187]
[From the U.S. Government Publishing Office]
_______________________________________________________________________
111th Congress
2d Session SENATE Report
111-187
_______________________________________________________________________
SOCIAL SECURITY MODERNIZATION:
OPTIONS TO ADDRESS SOLVENCY AND BENEFIT ADEQUACY
__________
R E P O R T
of the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
May 13, 2010.--Ordered to be printed
Special Committee on Aging
HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon BOB CORKER, Tennessee, Ranking
Member
BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama
EVAN BAYH, Indiana SUSAN COLLINS, Maine
BILL NELSON, Florida ORRIN HATCH, Utah
BOB CASEY, Pennsylvania GEORGE LeMIEUX, Florida
CLAIRE McCASKILL, Missouri SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado SAXBY CHAMBLISS, Georgia
MICHAEL BENNET, Colorado
KIRSTEN GILLIBRAND, New York
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
Debra Whitman, Majority Staff Director
Michael Bassett, Minority Staff Director
Prepared by:
Debra Whitman, Majority Staff
Jason Holsclaw, Majority Staff
Jeff Cruz, Majority Staff
Neil Thakur, Majority Staff
Ashley Glacel, Majority Staff
LETTER OF TRANSMITTAL
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U.S. Senate
Special Committee on Aging
Washington, DC.
Hon. Joe Biden,
President, U.S. Senate,
Washington, DC.
Dear Mr. President: Under authority of Senate Resolution 73
agreed to March 10, 2009, I am submitting to you a report of
the U.S. Senate Special Committee on Aging entitled: Social
Security Modernization: Options To Address Solvency and Benefit
Adequacy.
Senate Resolution 4, the Committee Systems Reorganization
Amendments of 1977, authorizes the Special Committee on Aging
``to conduct a continuing study of any and all matters
pertaining to problems and opportunities of older people,
including but not limited to, problems and opportunities of
maintaining health, of assuring adequate income, of finding
employment, of engaging in productive and rewarding activity,
of securing proper housing and, when necessary, of obtaining
care and assistance.'' Senate Resolution 4 also requires that
the results of these studies and recommendation be reported to
the Senate annually.
This Aging Committee report, together with the testimony
received during a June 2009 hearing on the topic of Social
Security, outlines the challenges currently facing Social
Security's retirement program and highlights options for
addressing program solvency, benefit adequacy, and retirement
income security for economically-vulnerable groups. The options
described in this report represent a range of proposals that
are commonly considered and should not be construed as
proposals that have been endorsed by the Committee or its
members. Many members of the Committee, including myself, do
not support and actively oppose many of the options. However, a
full and informed debate begins with the collection of research
and information, and it is our hope that this report will serve
as a resource to Congress and policymakers as they discuss ways
to ensure that Social Security will remain strong for another
75 years.
I am pleased to transmit this report to you.
Sincerely,
Herb Kohl, Chairman.
FOREWORD
Since its inception, the Special Committee on Aging (Aging
Committee) has examined various aspects of the Old-Age,
Survivors, and Disability program--otherwise known as Social
Security--in an effort to assist Congress in devising ways to
strengthen this critical program for seniors. For nearly 75
years, Social Security has served as the foundation of
retirement income for American workers and their families,
dramatically reducing poverty among our nation's elderly.
Today, it is estimated that 44 percent of older Americans would
be considered poor by federal standards if they did not receive
Social Security benefits. And for the majority of retired
Americans, Social Security serves as their primary source of
income.
Although Social Security remains a crucial benefit for
millions of seniors, the program was designed to serve an
American society of 75 years ago. Much has changed since its
inception: Americans are living longer, women's participation
in the labor force has significantly increased, and with a rise
in the divorce rate, household composition has changed. In
addition, the labor force is growing more slowly and the nature
of work and compensation has altered in ways that affect
workers' ability to save for retirement. As a result, under its
current design, Social Security may not be as effective as it
could be in addressing the needs of our society both now and in
the future. Therefore, modernizing the program to reflect
America's evolving demographics is vital to ensuring that
benefits are adequate and equitable for generations to come.
Social Security also faces fiscal challenges. The 2009
report of the Social Security Board of Trustees projects that
the program will continue to add tax revenue to its Trust Funds
through 2016, after which it will need to subsidize its
revenues by drawing from the Trust Funds in order to pay out
full benefits. By 2037, the Trustees estimate that the reserves
will be depleted. Since the Social Security program is
prohibited from borrowing, tax revenues at that point would
only be sufficient to pay out roughly 76 percent of benefits.
Congress should enact modest changes to Social Security in the
near future in order to bring its long-term financing into
balance and improve benefits for those who need them most.
This Aging Committee report, together with the testimony
received during a June 2009 hearing on the topic of Social
Security, outlines the challenges currently facing Social
Security's retirement program and highlights options for
addressing program solvency, benefit adequacy, and retirement
income security for economically-vulnerable groups. The options
described in this report represent a range of proposals that
are commonly considered and should not be construed as
proposals that have been endorsed by the Committee or its
members. Many members of the Committee, including myself, do
not support and actively oppose many of the options. However, a
full and informed debate begins with the collection of research
and information, and it is our hope that this report will serve
as a resource to Congress and policymakers as they discuss ways
to ensure that Social Security will remain strong for another
75 years.
Herb Kohl, Chairman.
C O N T E N T S
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Page
Foreword......................................................... V
Committee Jurisdiction........................................... 1
Committee Background............................................. 2
Senate Committee Hearings........................................ 2
Relevant Aging Committee Hearings................................ 3
Executive Summary................................................ 6
Introduction..................................................... 10
Background....................................................... 10
How Does the Social Security Program Work?................... 11
Retirement Benefits...................................... 15
Disability Benefits...................................... 15
Supplemental Security Income............................. 16
How Are Social Security Benefits Determined?................. 17
Benefits for the Worker's Family Members................. 18
Benefit Adjustments for Retirement Before or After the
Full Retirement Age.................................... 23
Benefit Adjustments for the Government Pension Offset
(GPO) and Windfall Elimination Provision (WEP)......... 24
Benefit Adjustments for the Retirement Earnings Test..... 24
Special Minimum Benefit.................................. 26
How is the Social Security Program Financed?................. 26
Payroll Taxes............................................ 26
Taxation of Benefits..................................... 28
Interest on Special U.S. Obligation...................... 28
The Social Security Trust Funds.......................... 28
Historical Status of the Trust Funds..................... 29
Social Security and the Federal Budget................... 30
Legacy Costs............................................. 30
The Annual Report of the Board of Trustees................... 30
Findings in the 2009 Trustees Report..................... 31
The Congressional Budget Office Forecast................. 33
Who Receives Benefits From Social Security?.................. 34
How Does Social Security Compare With Other Sources of Income 37
Sources of Income by Income Quartile......................... 39
Social Security Modernization: Setting the Stage................. 43
Options To Raise Revenue To Address Program Solvency............. 44
Options To Increase the Social Security Contribution Rate.... 44
Increase Worker and Employer Contributions by 1.1 Percent 44
Increase Worker and Employer Contributions by One Percent
in 2022, and by an Additional One Percent in 2052...... 44
Increase Worker and Employer Contributions 1/20 Percent
Annually for 20 years.................................. 44
Raise Rates Based on the Trustees' Most Current
Intermediate Assumptions of the Tax Rate Needed To
Balance Revenues and Outlays........................... 45
Enhance Collection of Existing Taxes..................... 45
Options To Consider Broadening Revenue Base for Social
Security................................................... 45
Options To Modify the Social Security Tax Cap............ 46
Eliminate the Cap--Do Not Count the Additional
Earnings Toward Benefits........................... 46
Eliminate the Cap--Count the Earnings Toward Benefits 46
Eliminate the Cap--Count Earnings Toward the Benefits
Using Different Formula............................ 46
Gradually Restore the Cap To Cover 90 Percent of
Earnings........................................... 47
Gradually Restore the Cap To Cover 90 Percent of
Earnings for Workers and Eliminate the Contribution
Cap for Employers.................................. 47
Options To Extend Social Security Coverage to All Workers 47
Extend Social Security Coverage to Newly-Hired Non-
Covered State and Local Government Employees....... 48
Option To Treat All Salary Reduction Plans Like
401(k)s............................................ 48
Options To Use Progressive Taxes To Cover Social
Security's Legacy Costs................................ 49
Dedicate Estate Tax Revenue at the 2009 Level to
Social Security.................................... 49
Three Percent Legacy Tax on Earnings Above the Tax
Cap................................................ 49
Three Percent Legacy Tax on AGI Over $250,000 for
Couples and $125,000 for Individuals............... 49
Five Percent Legacy Tax on AGI over $250,000 for
Couples and $125,000 for Individuals............... 50
Options To Maintain Reserves and Diversify Investments....... 50
Gradually Invest 15 Percent of Trust Funds Assets in
Equities............................................... 50
Gradually Invest 40 Percent of Trust Funds Assets in
Equities............................................... 50
Options To Reduce Benefits To Address Program Solvency....... 51
Options To Reduce the Cost-of-Living Adjustment.......... 51
Reduce the COLA by One Percent Each Year................. 51
Reduce the COLA by One-Half Percent Each Year............ 51
Adopt the ``Chained'' Consumer Price Index (CPI)......... 51
Options To Raise the Age for Full Retirement Benefits........ 52
Accelerate the Increase to 67; Then Increase the Full
Benefit Age by One Month Every Two Years to Age 68..... 52
Accelerate the Increase to 67; Then Increase the Full
Benefit Age by One Month Every Two Years to Age 70..... 52
Gradually Index the Full-Benefits Age for Longevity
Indefinitely........................................... 53
Options To Lengthen the Career-Earnings Averaging Period..... 53
Increase the Averaging Period From 35 to 38 Years........ 53
Increase the Averaging Period From 35 to 40 Years........ 53
Options To Reduce Benefits for New Beneficiaries............. 53
Reduce Benefits by Three Percent for New Beneficiaries in
2010 and Later......................................... 54
Reduce Benefits by Five Percent for New Beneficiaries in
2010 and Later......................................... 54
Price Index Benefits for Successive Generations Beginning
in 2013................................................ 54
Gradually Lower the Supplemental Spouse Benefit.......... 54
Options To Protect Benefits for Vulnerable Groups................ 55
Option: Guaranteeing a Minimum Benefit....................... 55
Option: Reducing Work Requirements for Eligibility........... 57
Option: Supplementing Benefits for Low-Income Single Workers. 58
Option: Adopting Earnings Sharing............................ 59
Option: Reducing the Marriage Duration Required for Spousal
Benefits................................................... 60
Option: Providing Caregiver Credits.......................... 61
Option: Increasing Survivor Benefits......................... 62
Option: Providing Longevity Insurance........................ 63
Benefit Adequacy Options Could Reduce Other Benefits for
Vulnerable Groups, but Approaches To Mitigate These Effects Are
Available...................................................... 64
Supplemental Security Income................................. 64
Medicaid..................................................... 65
Supplemental Nutrition Assistance Program.................... 66
Steps Could Be Taken To Mitigate Potential Benefit Reductions.... 68
Conclusion....................................................... 69
Appendix......................................................... 71
Glossary of Key Terms............................................ 73
Acknowledgments.................................................. 81
111th Congress Report
SENATE
2d Session 111-187
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SOCIAL SECURITY MODERNIZATION: OPTIONS TO ADDRESS SOLVENCY AND BENEFIT
ADEQUACY
_______
May 13, 2010.--Ordered to be printed
_______
Mr. Kohl, from the Special Committee on Aging, submitted the following
R E P O R T
COMMITTEE JURISDICTION
It shall be the duty of the special committee to conduct a
continuing study of any and all matters pertaining to problems
and opportunities of older people, including, but not limited
to, problems and opportunities of maintaining health, of
assuring adequate income, of finding employment, of engaging in
productive and rewarding activity, of securing proper housing,
and when necessary, of obtaining care or assistance.
Source: SPECIAL COMMITTEE ON AGING, Jurisdiction and
Authority, S. Res. 4, 104, 95th Cong., 1st Sess. (1977)\1\\1\
As amended by S. Res. 78. 95th Cong., 1st Sess. (1977), S. Res.
376, 95th Cong., 2d Sess. (1978), S. Res. 274, 96th Cong., 1st
Sess. (1979), S. Res. 389, 96th Cong., 2d Sess. (1980).
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\ 11\
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A Committee is a panel of members elected or appointed to
perform some service or function for its parent body. The
legislative subjects and other functions are assigned to a
committee by rule, precedent, resolution, or statute. In
general, committees conduct investigations, make studies, issue
reports, and make recommendations. Select or Special Committees
are established by a resolution for a special purpose and,
usually, for a limited time. Most select and special committees
are assigned specific investigations or studies, but are not
authorized to report measures to their chambers. Within the
assigned areas, these functional subunits gather information;
compare and evaluate legislative alternatives; identify policy
problems and propose solutions; select, determine, and report
measures for full chamber consideration; monitor executive
branch performance (oversight); and investigate allegations of
wrongdoing. While special committees have no legislative
authority, they can study issues, conduct oversight of
programs, and investigate reports of fraud and waste.
COMMITTEE BACKGROUND
The Senate Special Committee on Aging was first established
in 1961 as a temporary Committee of the U.S. Senate, and was
granted permanent status on February 1, 1977. While special
committees have no legislative authority, Congress relies on
them to study issues, conduct oversight of programs, and
investigate reports of fraud, waste, and abuse. Throughout its
existence, the Aging Committee has served as a focal point in
the Senate for discussion and debate on matters relating to
older Americans, and often submits its findings and legislative
recommendations to the Senate, as well as publishes materials
of assistance to those interested in public policies related to
the aging and elderly.
The Aging Committee has a long and influential history, and
has called the Congress' and the nation's attention to many
problems affecting older Americans. The Aging Committee was
exploring health insurance coverage of older Americans prior to
the enactment of Medicare in 1965. Since the passage of that
legislation, the Aging Committee has continually reviewed
Medicare's performance on an almost annual basis. The Aging
Committee has also regularly reviewed pension coverage and
employment opportunities for older Americans. It has conducted
oversight of the administration of major programs like Social
Security and the Older Americans Act. Finally, it has crusaded
against frauds targeting the elderly and federal programs on
which the elderly depend.
SENATE COMMITTEE HEARINGS
Committee hearings afford Senators an opportunity to gather
information on, and draw attention to, legislation and issues
within a committee's purview, conduct oversight of programs or
agencies, and investigate allegations of wrongdoing.
Hearings are committee or subcommittee meetings to receive
testimony for legislative, investigative, or oversight
purposes. Witnesses often include government officials,
spokespersons for interested groups, experts, officials from
the Government Accountability Office, and members of Congress.
Committees may issue subpoenas to summon reluctant witnesses.
Both houses require that the vast majority of hearings be open
to the media and public and, if possible, publicly announced at
least a week before they begin.
Witnesses before Senate committees (except Appropriations)
generally must provide a committee with a copy of their written
testimony at least one day prior to their oral testimony [Rule
XXVI, paragraph 4(b)]. It is common practice to request
witnesses to limit their oral remarks to a brief summary of the
written testimony. A question and answer period usually follows
the witnesses' oral testimony. Following hearings, committees
usually publish the transcripts of witness testimony and
questions and answers.
Congressional committee hearings may be broadly classified
into four types: (1) legislative, (2) oversight, (3)
investigative, and (4) confirmation. Hearings may be held on
Capitol Hill or elsewhere, such as a committee member's
district or state or a site related to the subject of the
hearing. All hearings have a similar formal purpose, to gather
information for use by the committee in its activities.
RELEVANT AGING COMMITTEE HEARINGS
http://aging.senate.gov/hearings.cfm
111TH CONGRESS
Social Security: Keeping the Promise in the 21st Century,
June 18, 2009
Boomer Bust? Securing Retirement in a Volatile Economy,
February 25, 2009
Saving Smartly for Retirement: Are Americans Being
Encouraged To Break Open The Piggy Bank?, July 16, 2008
The Aging Workforce: What Does It Mean For Businesses And
The Economy?, February 28, 2007
109TH CONGRESS
Social Security: Do We Have To Act Now?, February 3, 2005
108TH CONGRESS
Analyzing Social Security: GAO Weighs the President's
Commission's Proposals, January 15, 2003
Social Security: Whose Trust Will Be Broken?, July 29, 2003
Strengthening Social Security: What Can We Learn From Other
Nations?, May 18, 2004
Strengthening Social Security: What Can Personal Retirement
Accounts Do For Low-Income Workers?, June 15, 2004
107TH CONGRESS
Straight Shooting on Social Security: The Trade-offs of
Reform, December 10, 2001
106TH CONGRESS
Inviting Fraud: Has the Social Security Administration
Allowed Some Payees to Deceive the Elderly and Disabled?, May
2, 2000
Income Taxes: The Solution to the Social Security and
Medicare Crisis?, March 27, 2000
The Impact of Social Security Reform on Women, June 1, 1999
Social Security Reform: Is More Money the Answer?, March 1,
1999
Women and Social Security Reform: Are Individual Accounts
the Answer?, February 22, 1999
105TH CONGRESS
2010 and Beyond: Preparing Social Security for the Baby
Boomers, Omaha, NB, August 26, 1997
A Starting Point for Reform: Identifying the Goals of
Social Security, February 10, 1998
The Stock Market and Social Security: The Risks and the
Rewards, April 22, 1998
104TH CONGRESS
Social Security Reform Options: Preparing for the 21st
Century, September 24, 1996
Problems in the Social Security Disability Programs: The
Disabling of America, March 2, 1995
101ST CONGRESS
New Directions for SSA: Revitalizing Service, May 18, 1990
SSA's Toll-Free Telephone System: Service or Disservice?,
April 10, 1989
100TH CONGRESS
The Social Security Notch: Justice or Injustice?, February
22, 1988
99TH CONGRESS
The Closing of Social Security Field Offices, Pittsburgh,
PA September 9, 1985
98TH CONGRESS
Social Security Disability Reviews: The Human Costs: Part
1: Chicago, IL, February 16, 1984; Part 2: Dallas, TX, February
17, 1984; Part 3: Hot Springs, AR, March 24, 1984
Social Security Reviews of the Mentally Disabled, April 7-
8, 1983
Social Security: How Well Is It Serving the Public?,
November 29, 1983
97TH CONGRESS
Social Security Disability: The Effects of the Accelerated
Review, Ft. Smith, AR, November 19, 1982
Social Security Reform and Retirement Income Policy,
September 16, 1981
The Social Security System: Averting the Crisis, Evanston,
IL, August 10, 1981
Social Security Reform: Effect on Work and Income after Age
65, Rogers, AR, May 18, 1981
Social Security Oversight: Part 1: (Short-Term Financing
Issues), June 16, 1981; Part 2: (Early Retirement), June 18,
1981; Part 3: (Cost-of-Living Adjustments), June 24, 1981
96TH CONGRESS
Social Security: What Changes Are Necessary?: Part 1:
Washington, DC, November 21, 1980; Part 2: Washington, DC,
December 2, 1980; Part 3: Washington, DC, December 3, 1980;
Part 4: Washington, DC, December 4, 1980
Adapting Social Security to a Changing Work Force, November
28, 1979
94TH CONGRESS
Future Directions in Social Security: Part 9: Washington,
DC, March 18, 1975; Part 10: Washington, DC, March 19, 1975;
Part 11: Washington, DC, March 20, 1975; Part 12: Washington,
DC, May 1, 1975; Part 13: San Francisco, CA, May 15, 1975; Part
14: Los Angeles, CA, May 16, 1975; Part 15: Des Moines, IA, May
19, 1975; Part 16: Newark, NJ, June 30, 1975; Part 17: Toms
River, NJ, September 8, 1975; Part 18: Washington, DC, October
22, 1975; Part 19: Washington, DC, October 23, 1975; Part 20:
Portland, OR, November 24, 1975; Part 21: Portland, OR,
November 25, 1975; Part 22: Nashville, TN, December 6, 1975;
Part 23: Boston, MA, December 19, 1975
Future Directions of Social Security: Part 24: Providence,
RI, January 26, 1976; Part 25: Memphis, TN, February 13, 1976
93RD CONGRESS
Future Directions in Social Security: Part 1: Washington,
DC, January 15, 1973; Part 2: Washington, DC, January 22, 1973;
Part 3: Washington, DC, January 23, 1973; Part 4: Washington,
DC, July 25, 1973; Part 5: Washington, DC, July 26, 1973; Part
6: Twin Falls, ID, May 16, 1974; Part 7: Washington, DC, July
15, 1974; Part 8: Washington, DC, July 16, 1974
AGING COMMITTEE REPORT
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Executive Summary
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ABOUT THIS REPORT
The Chairman and Ranking Members of the Aging Committee and its individual
members do not support all of the options discussed in this report. In
fact, many of the options are opposed by individual members of the
Committee. Nevertheless, the report is written in the spirit of creating an
open and informed debate on the range of options to improve both solvency
and benefit adequacy.
The options presented represent a common, but by no means exhaustive, list
of policies Congress could institute. There are therefore numerous
combinations of changes to tax and benefit provisions that could be
considered. Further, this report focuses on possible changes to the Social
Security retirement program and does not offer proposals for reforming the
Social Security Disability Insurance program.
This report uses estimates of the 2009 Social Security Trustees Report\1\
as a basis for analysis. The 2010 Trustees report, which will be issued in
June of this year, will likely have different estimates of the Trust Funds'
solvency due to the impact of the economic downturn reducing revenues and
increasing the number of new beneficiaries.
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\1\The 2009 Annual Report of the Board of Trustees of the Federal
Old-Age and Survivors Insurance and Disability Insurance Trust Fund,
May 12, 2009, available at: http://www.ssa.gov/OACT/TR/2009/tr09.pdf
(hereafter cited as the 2009 Social Security Trustees' Report).
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OVERVIEW
Since its inception, the Senate Special Committee on Aging
(Aging Committee) has examined various aspects of the Old-Age,
Survivors, and Disability program--otherwise known as Social
Security--in an effort to assist Congress in devising ways to
strengthen this critical program for seniors. This Aging
Committee report, together with the testimony received during a
June 2009 hearing on Social Security, outlines the challenges
currently facing Social Security's retirement program and
highlights options for addressing program solvency, benefit
adequacy, and retirement income security for economically-
vulnerable groups. It does not offer proposals for reforming
the Social Security Disability Insurance program.
Modernizing Social Security means ensuring the program is
both solvent and effective, for all Americans, now and in the
future. Efforts to improve solvency may enhance, weaken or have
no impact on the ability of Social Security to provide
retirement security for all Americans, whereas efforts to
improve the adequacy of benefits will likely come at a cost to
the system. Timing also plays a role in the decisions that must
be made. Modernizing the program will become increasingly
difficult as the Social Security Trust Funds diminish,
therefore it will be easier and less costly to make changes
now. So it is with some urgency that Congress should
simultaneously address the twin challenges of solvency and
effectiveness, and because the program is critical to every
American family, it should be done in a bipartisan and
transparent way.
A full and informed debate on how to tackle these
challenges begins with the collection of relevant options. It
is our hope that this report will serve as a resource to
Congress and policymakers as they discuss the future of the
Social Security.
THE PROMISE AND CHALLENGES OF SOCIAL SECURITY
Social Security benefits, while not generous, provide an
important source of income for retired Americans and serve as
the foundation of retirement income for the majority of
retirees. In 2009, the average monthly retirement benefit was
$1,164. Although Social Security is not meant to be the sole
source of income for retirees, in 2008 nearly one-quarter of
beneficiaries age 65 and older lived in households that relied
on it for at least 90 percent of household income. These
individuals were mostly single women and Social Security's
oldest beneficiaries.
The Social Security program faces a modest long-term
financing shortfall of tax revenue and interest on Trust Fund
assets. The Social Security Trustees estimated in 2009 that the
Old Age, Survivors, and Disability Insurance program will
continue to add tax revenue to their Trust Funds up to 2016.
The Trust Funds will continue to grow because of interest
earned through 2023, at which time total assets will be $4.3
trillion. Subsequently, Social Security will gradually draw
down all reserves before the end of 2037, at which point it
will have sufficient resources to pay about three-quarters of
scheduled benefits. Congress could take steps to modify the
program's financing and benefit structure in order to ensure
that full benefits continue to be paid after 2037.
The pressure on Social Security's finances comes primarily
from the dramatic changes in birthrates and life expectancy
that have taken place since the program's inception in the
1930s, and the increase in income inequality over the last
several decades. First, the aging of the baby boom generation
and increases in life expectancy will continue to contribute to
an older society, and between 2010 and 2030, the number of
people aged 65 and older is estimated to increase by 75
percent. At the same time, the number of workers whose taxes
will finance future benefits is projected to increase by only
14 percent.
Program design features contribute to the projected growth
in program spending and program revenues. For example, elements
of the Social Security benefit formula are indexed to average
wage growth, resulting in an increase in the real (inflation-
adjusted) value of benefits for future retirees. This feature
ensures that benefits will replace a relatively constant share
of a beneficiary's earnings in retirement, but it also means
Social Security outlays increase over time as the number of
beneficiaries grow. However, increasing wage growth has an
offsetting positive effect of increasing revenues as payrolls
rise over time.
Finally, rising income inequality in the last several
decades has caused the share of aggregate earnings that are not
taxed to increase from 10 percent to 17 percent, as high-income
workers have seen their salaries rise faster than the Social
Security taxable earnings threshold. This means revenues for
the Social Security Trust Funds are lower than they would have
been if earnings were distributed more evenly among American
workers as they were in previous decades.
Economic and demographic changes are also having an impact
on other sources of retirement income. Improvements in
longevity have increased the likelihood that retirees will
outlive their retirement savings, and the rise in the divorce
rate and the shortening of average marriages have left more
single individuals who will not benefit from spousal
protections. Furthermore, the proportion of individuals who
depend on Social Security for the majority of their income may
grow over time due to the decline in defined benefit pensions,
the recent decline the value of retirement accounts, and the
relatively slow growth in wages for low and moderate income
workers over the last several decades.
KEEPING THE PROMISE: OPTIONS TO ADDRESS SOLVENCY AND BENEFIT ADEQUACY
Congress could implement a range of options to effectively
modernize the Social Security retirement program,
simultaneously improving the program's solvency and ensuring
benefits remain adequate for the elderly and economically-
vulnerable beneficiaries. In an effort to highlight both types
of options and their implications, this report presents
information from the National Academy of Social Insurance
(NASI), the Congressional Research Service (CRS), and the U.S.
Government Accountability Office (GAO), and assessments of
their fiscal impacts on solvency by the Social Security
Actuaries. These options to improve solvency and benefit
adequacy discussed in this report are summarized in the tables
below:
PROTECTING THE STABILITY OF SOCIAL SECURITY: OPTIONS TO ADDRESS PROGRAM
SOLVENCY
------------------------------------------------------------------------
Income as
percent of Percentage
Description taxable decrease in Page number
payroll shortfall
------------------------------------------------------------------------
Raise Revenue for Program SolvencyIncrease the Social Security
Contribution Rate:
Increase Worker and Employer 2.09 104 44
Contributions by 1.1 percent
Increase Worker and Employer 2.06 103 44
Contributions by One percent
in 2022, and by an
Additional One percent in
2052........................
Increase Worker and Employer 1.39 69 44
Contributions 1/20 percent
Annually for 20 years.......
Raise Rates Based on the varies 100 45
Trustees' Most Current
Intermediate Assumptions of
the Tax Rate Needed to
Balance Revenues and Outlays
Enhance Collection of No estimate No estimate 45
Existing Taxes.............. Broaden the Revenue Base for Social SecurityModify the Social Security Tax
Cap:
Eliminate the Cap--Do Not 2.32 116 46
Count the Additional
Earnings....................
Eliminate the Cap--Count the 1.89 95 46
Earnings toward Benefits....
Eliminate the Cap--Count 2.17 108 46
Earnings toward Benefits
Using Different Formula.....
Gradually Restore the Cap to 0.60 28 47
Cover 90 percent of Earnings
Gradually Restore the Cap to 1.37 69 47
Cover 90 percent of Earnings
for Workers and Eliminate
the Contribution Cap for
Employers...................
Extend Social Security Coverage
to all Workers:
Extend Social Security 0.17 9 48
Coverage to Newly-Hired Non-
covered State and Local
Government Employees........
Treat All Salary Reduction 0.25 12 48
Plans Like 401(k)s..........
Use Progressive Taxes to Cover
Social Security's Legacy Costs:
Dedicate Estate Tax Revenue 0.40 20 49
at the 2009 Level to Social
Security....................
Three percent Legacy Tax on 0.57 28 49
Earnings Above the Tax Cap..
Three percent Legacy Tax on 0.74 37 49
AGI over $250,000 for
Couples and $125,000 for
tIndividuals................
Five percent Legacy Tax on 1.23 62 50
AGI over $250,000 for
Couples and $125,000 for
Individuals.................
Maintain Reserves and Diversify
Investments:
Gradually Invest 15 percent 0.27 14 50
of Trust Fund Assets in
Equities (with assumed
nominal rate of return on
equities of 9.4%)...........
Gradually Invest 40 percent 0.67 33 50
of Trust Fund Assets in
Equities (with assumed
nominal rate of return on
equities of 9.4%)........... Reduce Benefits To Address Program SolvencyReduce the Cost-Of-Living
Adjustment:
Reduce the COLA by One 1.55 78 51
percent Each Year...........
Reduce the COLA by One-half 0.81 40 51
percent Each Year...........
Adopt the ``Chained'' 0.49 24 51
Consumer Price Index (CPI)..
Raising the Age for Full
Retirement Benefits:
Accelerate the Increase to 0.46 23 52
67; Then Increase the Full-
Benefit Age by One Month
Every Two Years to Age 68...
Accelerate the Increase to 0.62 31 52
67; Then Increase the Full-
Benefit Age by One Month
Every Two Years to Age 70...
Gradually Index the Full- 0.40 18 53
benefit Age for Longevity
Indefinitely................
Lengthen the Career-Earnings
Averaging Period:
Increase the Averaging Period 0.29 14 53
from 35 to 38 Years.........
Increase the Averaging Period 0.46 23 53
from 35 to 40 Years.........
Reduce Benefits for New
Beneficiaries:
Reduce Benefits by Three 0.36 18 54
percent for New
Beneficiaries in 2010 and
Later.......................
Reduce Benefits by Five 0.61 30 54
percent for New
Beneficiaries in 2010 and
Later.......................
Price Index Benefits for 1.31 65 54
Successive Generations
Beginning in 2013...........
Gradually Lower the 0.12 6 54
Supplemental Spouse Benefit.
------------------------------------------------------------------------
PROTECTING THE EFFECTIVENESS OF SOCIAL SECURITY: GAO OPTIONS TO PROTECT
VULNERABLE GROUPS
------------------------------------------------------------------------
Option Page number
------------------------------------------------------------------------
Guaranteeing a Minimum Benefit--Guaranteeing a minimum 55
benefit by increasing Social Security retirement benefits
for those who have worked in low-wage jobs throughout
their careers.............................................
Reducing Work Requirements for Eligibility--Reducing the 57
work requirements for Social Security retirement benefit
eligibility, allowing people who have shorter earnings
histories to receive benefits.............................
Supplementing Benefits for Low-income Single Workers-- 58
Supplementing benefits for low-income single workers by
adjusting the formula used to calculate Social Security
retirement benefits.......................................
Adopting Earnings Sharing--Earnings sharing combines 59
married individuals' annual earnings and evenly divides
them between the two spouses for each year of marriage
when calculating individuals' Social Security retirement
benefits. Each spouse accrues an individual benefit, even
if only one of them worked................................
Reducing the Marriage Duration Required for Spousal 60
Benefits--Reducing the number of years a marriage needed
for a divorced person to receive spousal benefits thereby
increasing the number of people who are eligible to
receive Social Security spousal benefits..................
Providing Caregiver Credits--Providing caregiver credits 61
increases benefits for those who spend time out of the
workforce to care for dependent children or elderly
relatives.................................................
Increasing Survivor Benefits--Increasing benefits for 62
surviving spouses, often widowed women, by providing a
Social Security retirement benefit equal to 75 percent of
the combined amount the couple received...................
Providing Longevity Insurance--Longevity insurance seeks to 63
reduce the risk that people fall into poverty at older
ages by increasing Social Security retirement benefits for
beneficiaries who reach an advanced age...................
------------------------------------------------------------------------
These options described in this report demonstrate that the
challenges facing Social Security, despite their size and
complexity, can be resolved. However, it is important to
provide some context to the information. The estimates on
solvency are calculated by Social Security Administration
actuaries with the assumption that all other elements of Social
Security remain the same. Further, options to increase solvency
may not impact everyone in the same way--some recipients may
see their Social Security taxes and benefits change, while
others may not--and the impacts of proposals should be examined
for both current beneficiaries and future generations of
retirees, as many options phase in over time. Combining options
requires new estimates to predict their effects on solvency and
the various sub-populations of beneficiaries. Importantly,
Social Security solvency and effectiveness are separate
factors, but should be analyzed together.
Congress should act to ensure that Social Security will
remain strong for another 75 years and provide future
generations of Americans with economic security. The Aging
Committee will support this effort by continuing to seek ideas
and evaluate options for Social Security modernization.
INTRODUCTION
Title II of the Social Security Act, as amended,
established the Old-Age, Survivors, and Disability Insurance
(OASDI) program, which is generally known as Social Security.
Since the 1930s, many American seniors have depended on its
benefits as a significant part of their retirement income, and
the program has significantly decreased poverty among the
elderly. However, the Social Security program will face
increasing challenges in the future as an aging American
population begins to strain the program financially. Even
though the program is currently financially strong,
Congressional action is needed to ensure fiscal stability for
years to come. This Committee report highlights potential
options for addressing the solvency and benefit adequacy of the
Social Security retirement program.\2\
---------------------------------------------------------------------------
\2\This report does not address options for strengthening
disability insurance.
---------------------------------------------------------------------------
BACKGROUND
The Social Security Act, signed into law by Franklin
Roosevelt on August 14, 1935, formed the basis of an old-age
insurance program by providing income security to workers aged
65 and older in most commerce and industry. Although the Great
Depression provided the catalyst for the landmark legislation,
its principles were rooted in social insurance, which required
payment of benefits based on contributions from workers. It
became effective only in 1937 and therefore was not intended to
provide immediate economic relief from the effects of the
Depression. It was meant to smooth out large fluctuations in
income typical in an industrial society.
The Social Security program has evolved in significant ways
over the past seven decades.\3\ With the 1939 amendments, it
became more family-based by expanding the program from workers
only to include dependents and survivors of workers. In 1950
and later, amendments expanded the program to make it more
universal. States could, under certain conditions, provide
coverage to their employees. Also covered were regularly-
employed farm and domestic workers and, with some exceptions,
most self-employed workers. The Disability program was added to
the Social Security program in 1956. The 1983 amendments
prohibited states from opting out of the system, and in 1990
coverage for state employees became mandatory, if state and
local employees did not have a state or local government
pension plan.
---------------------------------------------------------------------------
\3\`Social Security: A Program and Policy History,' by Patricia
Martin and David Weaver, Social Security Bulletin, Vol. 66, No. 1,
2005. http://www.ssa.gov/policy/docs/ssb/v66n1/v66n1p1.pdf.
---------------------------------------------------------------------------
The expansionary period of the early four decades has been
followed by a period where concerns have focused on the long-
range financing of the program. The 1977 amendments focused on
stabilizing costs and addressing the revenue side of the
program. The 1983 amendments addressed financial problems by
extending coverage to bring more workers into the system,
subjecting a portion of Social Security benefits to income
taxation, scheduling changes in the payroll tax rate, and
adopting a phased-in increase in the full retirement age
starting for workers born in 1938 or later.
Despite the evolution of the OASDI program over the
decades, two core principles--contributory in nature and
progressivity--continue to define the program. Benefits are
determined by work in covered employment, and benefits replace
a higher share of earnings for lower wage earners than for
higher wage earners. This progressivity is in part to
compensate for the shorter life expectancies of lower-wage
earners, and in part to into account for the decreased ability
low wage earners have to cope with income reductions or
supplement their benefits with private savings. The success of
the program in bringing about a sharp reduction in poverty
among the elderly is well-documented. Any changes to the
program today will need to address the dual challenges of
meeting the adequacy needs of vulnerable groups and confronting
the financing needs of the program, while ensuring that the
program remains fair and effective for all Americans.
HOW DOES THE SOCIAL SECURITY PROGRAM WORK?
The Social Security program provides monthly cash benefits
to retired and disabled workers and their dependents, and to
the survivors of deceased workers. To qualify for benefits,
individuals must work in Social Security-covered employment for
a specified period of time. Generally, a worker needs 40
credits to become ``insured'' for benefits (fewer credits are
needed for disability and survivor benefits, depending on the
worker's age at the time he or she became disabled or died).\4\
In 2010, a worker earns one credit for each $1,120 in covered
earnings, up to a maximum of four credits for the year (based
on annual earnings of $4,480 or more).\5\
---------------------------------------------------------------------------
\4\A minimum of six earnings credits (or 1\1/2\ years of covered
employment) is needed to qualify for benefits.
\5\The amount of earnings needed for one credit is indexed to
average wage growth.
---------------------------------------------------------------------------
Most jobs in the United States are covered under Social
Security. In 2010, 94 percent of workers in paid employment or
self-employment are covered by Social Security.\6\ The major
categories of workers who are exempt from Social Security
coverage are:
---------------------------------------------------------------------------
\6\Social Security Administration, 2010 Social Security/SSI/
Medicare Information, December 28, 2009. Available at http://
www.socialsecurity.gov/legislation/2010factsheet.pdf.
---------------------------------------------------------------------------
1. State and local government workers participating in
alternative retirement systems (Medicare Hospital Insurance
(HI) tax is mandatory for State and local government workers
hired since April 1, 1986);
2. Election workers earning $1,500 or less in 2010;
3. Ministers who choose not to be covered, and certain
religious sects;
4. Federal workers hired before 1984 (the HI portion is
mandatory for all Federal workers);\7\
---------------------------------------------------------------------------
\7\Elected office holders, political appointees, and judges are
mandatorily covered by both Social Security and HI regardless of when
their service began.
---------------------------------------------------------------------------
5. College students working at their academic
institutions;
6. Household workers earning less than $1,700 in 2010, or
those under age 18 for whom household work is not their
principal occupation;
7. Self-employed workers with annual net earnings below
$400;
8. Foreign students and exchange visitors who hold F-1, J-
1, M-1, Q1, and Q2 visas if the work is performed in connection
with their studies or for the purpose of their visit to the
United States;\8\ and
---------------------------------------------------------------------------
\8\J-1 visa holders who are in the United States for 18 months or
longer are required to pay Social Security payroll taxes.
---------------------------------------------------------------------------
9. Foreign agricultural workers who hold H-2A visas.
In 2008, of a total work force of approximately 173.6
million workers, an estimated 162.4 million workers were
covered under Social Security (see Table 1).
TABLE 1: ESTIMATED SOCIAL SECURITY COVERAGE, 2008
------------------------------------------------------------------------
Total Non-covered Percent
(millions) (millions) covered
------------------------------------------------------------------------
Workers\1\......................... 173.6 11.2 93.6
Jobs:
State and local government\2\.. 23.1 5.6 75.8
Federal civilian............... 3.7 0.5 86.5
Students\3\.................... 1.5 1.5 0.0
------------------------------------------------------------------------
\1\Includes both wage and salary and self-employed workers.
\2\Excludes students.
\3\Includes students employed at both public and private colleges and
universities.Source: Office of the Chief Actuary, Social Security Administration.
In 2008, an estimated 11.2 million workers were not covered
under Social Security. The majority of non-covered positions
were state and local government jobs. As shown in Table 2, 73
percent of state and local government workers overall were
covered under Social Security in 2007.
TABLE 2: ESTIMATED SOCIAL SECURITY COVERAGE OF WORKERS WITH STATE AND
LOCAL GOVERNMENT EMPLOYMENT, 2007
[Based on 1-percent sample]
------------------------------------------------------------------------
All Covered Percent
State workers workers covered
------------------------------------------------------------------------
Alabama.......................... 390,000 361,100 92.6
Alaska........................... 64,300 42,100 65.5
Arizona.......................... 444,300 406,300 91.4
Arkansas......................... 203,300 182,500 89.8
California....................... 2,478,000 1,084,400 43.8
Colorado......................... 409,100 124,300 30.4
Connecticut...................... 287,400 205,900 71.6
Delaware......................... 65,600 61,900 94.4
District of Columbia............. 75,400 58,600 77.7
Florida.......................... 1,162,800 1,032,800 88.8
Georgia.......................... 699,200 518,700 74.2
Hawaii........................... 113,400 79,700 70.3
Idaho............................ 134,800 127,300 94.4
Illinois......................... 961,600 526,400 54.7
Indiana.......................... 497,900 448,500 90.1
Iowa............................. 288,800 261,600 90.6
Kansas........................... 289,200 266,500 92.2
Kentucky......................... 373,300 279,000 74.7
Louisiana........................ 329,700 92,700 28.1
Maine............................ 118,000 63,900 54.2
Maryland......................... 458,300 415,700 90.7
Massachusetts.................... 474,700 20,400 4.3
Michigan......................... 772,600 684,400 88.6
Minnesota........................ 445,100 417,900 93.9
Mississippi...................... 260,900 240,300 92.1
Missouri......................... 463,500 341,600 73.7
Montana.......................... 95,700 83,500 87.3
Nebraska......................... 152,200 142,500 93.6
Nevada........................... 159,400 29,500 18.5
New Hampshire.................... 108,100 95,400 88.3
New Jersey....................... 686,800 638,300 92.9
New Mexico....................... 197,400 177,400 89.9
New York......................... 1,734,700 1,681,800 97.0
North Carolina................... 713,100 659,700 92.5
North Dakota..................... 74,900 65,300 87.2
Ohio............................. 845,800 21,700 2.6
Oklahoma......................... 310,500 281,800 90.8
Oregon........................... 290,400 267,800 92.2
Pennsylvania..................... 808,600 749,400 92.7
Puerto Rico...................... 257,700 222,700 86.4
Rhode Island..................... 65,200 55,300 84.8
South Carolina................... 375,800 352,700 93.9
South Dakota..................... 79,200 73,800 93.2
Tennessee........................ 484,900 441,400 91.0
Texas............................ 1,752,600 836,400 47.7
Utah............................. 222,000 202,800 91.4
Vermont.......................... 60,700 59,300 97.7
Virginia......................... 677,200 641,400 94.7
Washington....................... 563,900 500,100 88.7
West Virginia.................... 155,300 144,700 93.2
Wisconsin........................ 484,400 429,900 88.7
Wyoming.......................... 78,500 69,200 88.2
Other\1\......................... 6,400 1,300 20.3
--------------------------------------
Total........................ 23,702,600 17,269,600 72.9
------------------------------------------------------------------------
These data are derived from the Social Security Administration, Office
of Research, Evaluation and Statistics, 1% Continuous Work History
Sample (CWHS) Employee Employer File.\1\Includes persons employed by American Samoa, Guam, Northern Marianas
and Virgin Islands.Source: Office of Research, Evaluation and Statistics, Social Security
Administration.
Social Security coverage varies from state to state. For
example, approximately 97 percent of state and local employees
in New York and Vermont were covered by Social Security
compared to approximately 3 percent in Ohio and 4 percent in
Massachusetts. This disparity in coverage occurs because though
Social Security originally did not cover any state and local
government workers, over time the law has changed. Most state
and local government employees became covered by Social
Security through voluntary agreements between the Social
Security Administration and individual states (these agreements
are known as ``Section 218 agreements'' because they are
authorized by Section 218 of the Social Security Act).
Beginning in July 1991, state and local employees who were not
members of a public retirement system were mandatorily covered
by Social Security. Those public employees who were already
members of a public retirement system through their employment
were not mandatorily covered because their state pensions
already fulfilled the social insurance functions of Social
Security.
Social Security is financed primarily by payroll taxes
levied on the wages and self-employment income of covered
workers. In 2010, covered workers and their employers are both
required to pay 6.2 percent of earnings up to $106,800, or a
maximum of $6,622 in individual payroll taxes per year. Self-
employed workers are required to pay 12.4 percent of net self-
employment income up to $106,800, or a maximum of $13,243 in
self-employment taxes per year.\9\ The annual limit on covered
earnings subject to payroll taxes is called the contribution
and benefit base or the taxable earnings base. The taxable
earnings base is indexed to average wage growth and is
increased if a Social Security Cost of Living Adjustment (COLA)
is payable.
---------------------------------------------------------------------------
\9\Note: To reflect the fact that employees split payroll taxes on
their salaries between themselves and their employers, the taxable base
for the self-employment tax is adjusted downward by 7.65 percent and
self-employed workers are allowed to deduct half of their self-
employment tax liability for income tax purposes.
---------------------------------------------------------------------------
The maximum amount of annual earnings subject to payroll
taxes from 1950 to 2008 is shown in Table 3. The payroll tax
rate is fixed under current law. The percentage of covered
earnings subject to Social Security payroll taxes has
fluctuated over time. In 2008, about 84 percent of total
earnings in covered employment were subject to Social Security
payroll taxes.
TABLE 3: EARNINGS COVERED BY THE SOCIAL SECURITY SYSTEM, 1950-2008
----------------------------------------------------------------------------------------------------------------
Earnings in covered employment Taxable
--------------------------------------- earnings as
Contribution Taxable a percent
Calendar year Wages and Self- and benefit earnings of total
salaries employment Total base\1\ (billions) earnings in
(billions) (billions) (billions) covered
employment
----------------------------------------------------------------------------------------------------------------
1950............................. $109.8 -- $109.8 $3,000 $87.5 79.7
1955............................. 171.6 $26.7 198.3 4,200 157.5 79.4
1960............................. 236.0 32.4 268.4 4,800 207.0 77.1
1965............................. 311.4 45.9 357.3 4,800 250.7 70.2
1970............................. 483.6 53.1 536.7 7,800 415.6 77.4
1975............................. 717.2 75.9 793.1 14,100 664.8 83.8
1980............................. 1,235.6 103.7 1,339.3 25,900 1,173.8 87.6
1985............................. 1,802.4 149.6 1,952.0 39,600 1,717.3 88.0
1990............................. 2,510.4 205.9 2,716.3 51,300 2,358.9 86.8
1991............................. 2,566.7 207.9 2,774.6 53,400 2,422.5 87.3
1992............................. 2,709.7 220.7 2,930.4 55,500 2,532.8 86.4
1993............................. 2,808.9 228.0 3,036.9 57,600 2,636.3 86.8
1994............................. 2,973.9 232.7 3,206.6 60,600 2,785.3 86.9
1995............................. 3,164.9 242.3 3,407.2 61,200 2,919.6 85.7
1996............................. 3,347.8 256.0 3,603.8 62,700 3,073.5 85.3
1997............................. 3,608.2 272.1 3,880.3 65,400 3,285.3 84.7
1998............................. 3,907.5 290.4 4,197.9 68,400 3,528.0 84.0
1999............................. 4,173.2 308.0 4,481.3 72,600 3,749.1 83.7
2000............................. 4,514.7 326.4 4,841.1 76,200 4,008.9 82.8
2001............................. 4,609.1 332.4 4,941.5 80,400 4,171.1 84.4
2002............................. 4,612.6 341.6 4,954.1 84,900 4,250.0 85.8
2003............................. 4,727.3 360.3 5,087.6 87,000 4,354.7 85.6
2004............................. 4,994.3 396.9 5,391.2 87,900 4,554.5 84.5
2005............................. 5,252.1 433.8 5,686.0 90,000 4,769.6 83.9
2006............................. 5,598.3 453.3 6,051.6 94,200 5,084.3 83.4
2007............................. 5,899.8 471.8 6,371.6 97,500 5,272.2 82.7
2008............................. 6,079.4 473.3 6,552.8 102,000 5,511.1 84.1
----------------------------------------------------------------------------------------------------------------
\1\Amounts for 1937-74 and for 1979-81 were set by statute. All other amounts were determined under automatic
adjustment provisions of the Social Security Act.Source: Office of the Chief Actuary, Social Security Administration.
Retirement Benefits
The Social Security program provides benefits to eligible
workers and their family members. For retirement benefits, a
worker generally needs 40 credits (10 years in covered
employment). Full (unreduced) retirement benefits are first
payable at the full retirement age (FRA), which ranges from age
65 to age 67 depending on the person's year of birth. A worker
may elect to receive retirement benefits as early as age 62;
however, his or her benefits are permanently reduced to take
into account the longer expected period of benefit receipt. In
addition, a worker may elect to postpone benefit receipt until
after the FRA, and receive an increase in benefits based on
delayed retirement credits that are payable from the FRA, up to
age 70.
Disability Benefits
Although this report is not intended to address the
disability insurance provided under Social Security, it is
important to understand that such benefits are available under
the larger program. To be eligible for disability benefits, a
worker must be: (1) insured and (2) disabled according to the
definition of disability. To be insured, a worker must have
worked a minimum amount of time in employment covered by Social
Security (similar to eligibility for retirement benefits).
However, for disability benefits, if an individual does not
have 40 credits, he or she must have one credit for each year
after 1950 or from age 21 up to the onset of disability. In
addition, a work test requires the worker to have 20 credits in
the 40 quarters preceding the onset of disability (generally
five years of covered employment in the last 10 years). Workers
under age 31 need to have credit in one-half of the quarters
during the period between when they attained age 21 and when
they became disabled (a minimum of 6 credits is required). For
disability benefits, ``disability'' is defined as the inability
to engage in substantial gainful activity (SGA) by reason of a
medically-determinable physical or mental impairment expected
to result in death or last at least 12 continuous months.\10\
Generally, the worker must be unable to do any kind of work,
taking into account age, education and work experience. An
initial waiting period of five full months is required before
disability benefits are paid.
---------------------------------------------------------------------------
\10\In 2010, the SGA earnings level for non-blind beneficiaries is
$1,000 a month (net of impairment-related work expenses). For blind
beneficiaries, the SGA earnings level is $1,640 a month. Both limits
are indexed to average wage growth. For more information, see CRS
Report RS20479, Social Security: Substantial Gainful Activity for the
Blind, available at http://www.aging.senate.gov/crs/
crs_social_security_policy.cfm.
---------------------------------------------------------------------------
Supplemental Security Income
The Supplemental Security Income (SSI) Program is also
administered by the Social Security Administration, but it is
different and separate from Social Security. SSI is a means-
tested, federally administered, income assistance program
authorized by Title XVI of the Social Security Act. Established
in 1972 with benefits first paid in 1974, SSI provides monthly
cash payments in accordance with uniform, nationwide
eligibility requirements to needy aged, blind, and disabled
persons.
The SSI Program is funded by general revenues of the U.S.
Treasury whereas Social Security benefits are funded by the
Social Security taxes paid by workers, employers, and self-
employed persons. The programs also differ in other ways such
as the conditions of eligibility and the method of determining
payments. In addition, States have the option of supplementing
the basic Federal SSI payment.
To qualify for SSI payments, a person must satisfy the
program criteria for age, blindness, or disability. The aged
are defined as persons 65 years and older. Disabled individuals
are those unable to engage in any substantial gainful activity
by reason of a medically determined physical or mental
impairment expected to last for a continuous period of at least
12 months or result in death. Children may also qualify for SSI
if they are under age 18 (or under age 22 if a full-time
student), unmarried, and meet the applicable SSI disability\11\
or blindness, income, and resource requirements. Further, SSI
recipients must have limited income, limited resources,
(typically defined as $2000 for an individual and $3000 for a
couple), and meet specific citizenship and residency
requirements.\12\
---------------------------------------------------------------------------
\11\For children, the definition of disability under the SSI
program is different than the adult standard. Under Sec.
1614(a)(3)(C)(i) of the Social Security Act, disabled means that the
child has a medically determinable physical or mental impairment that
results in severe functional limitations, and that can be expected to
last 12 months or result in death.
\12\For a full description of SSI Eligibility criteria, see Social
Security Administration, ``Understanding Supplemental Security Income,
SSI Eligibility Requirements,'' 2010 Edition, available at http://
www.socialsecurity.gov/ssi/text-eligibility-ussi.htm.
---------------------------------------------------------------------------
HOW ARE SOCIAL SECURITY BENEFITS DETERMINED?
A worker's monthly Social Security retirement benefit is
based on an average of his or her 35 highest-paid earnings
years. The worker's entire record of Social Security earnings
up through age 60 are indexed to historical wage growth in
order to place older wage amounts on the same terms as current
wage levels. Earnings after age 60 are not indexed but are
included in the benefit computation. The 35 highest years of
annual indexed earnings are averaged, and the resulting amount
is divided again by 12 to determine the worker's average
indexed monthly earnings, or AIME. Some workers do not have 35
years of earnings as a result of unemployment, poor health, or
caregiving: for these workers, the years of no earnings are
entered as zeros.
The worker's Primary Insurance Amount, or PIA, is found by
applying a formula to the AIME. First, AIME is sectioned into
three brackets, or levels, of earnings. Three progressive
factors--90 percent, 32 percent, and 15 percent--are applied to
the three different brackets of AIME. The three products of the
factors and AIME are added together. For workers who reach age
62 in 2010, the PIA is determined as follows:
TABLE 4: SAMPLE CALCULATION OF A WORKER'S PRIMARY INSURANCE AMOUNT IN
2010
------------------------------------------------------------------------
Benefit of
Average indexed a worker
Factor monthly earnings with AIME
(2010) of $5,000
------------------------------------------------------------------------
90 percent......................... First $761, plus...... $684.90
32 percent......................... Earnings over $761 and 1,224.00
through $4,586, plus.
15 percent......................... Over $4,586........... 62.10
------------------------------------
Total.......................... $5000................. 1,971.00
------------------------------------------------------------------------
The Social Security benefit formula is designed to be
progressive. That is, workers with low average lifetime
earnings receive a benefit that is a larger proportion of their
pre-retirement earnings than do workers with high average
lifetime earnings. Progressivity is affected through factors
that decline as AIME increases, with the first $761 of AIME
being replaced at a rate of 90 percent, while amounts over $761
are replaced at rates of 32 percent or 15 percent. The
replacement rate for the average earner who claims benefits at
the full retirement age in 2010 is about 41 percent of pre-
retirement wages. For low-income workers, high income workers,
and workers who have earned the maximum taxable amount
throughout their careers, the replacement rates in 2010 are
about 56 percent, 34 percent and 28 percent, respectively.\13\
---------------------------------------------------------------------------
\13\2009 Social Security Trustees' Report, Table VI.F10, available
at http://www.socialsecurity.gov/OACT/TR/2009/VI_OASDHI_
dollars.html#119381.
---------------------------------------------------------------------------
The factors (90 percent, 32 percent and 15 percent) are the
same each year, but the bracket amounts ($761 and $4,586) are
indexed to growth in average wages. As noted earlier, as part
of determining PIA, a worker's earnings history is brought up
to current wage levels by indexing earnings in previous years
to wage growth. The result of these provisions is that a
worker's initial Social Security benefit is wage indexed. Wage
indexation of the PIA calculation ensures that benefits replace
a similar fraction of pre-retirement income for each successive
cohort (as noted above, about 41 percent for a worker with
average wages). In other words, wage indexation causes the
dollar amount of workers' initial benefits (PIA) to increase
from one generation to the next at the rate of increase in the
national average wage or, generally, with living standards.
After a worker becomes eligible to receive Social Security
benefits, at age 62, the cash benefit amount is adjusted
annually through retirement for changes in the Consumer Price
Index (CPI). That is, the initial benefit is price indexed
through retirement, to ensure that inflation does not erode the
purchasing power of the individual's initial benefit. Due to
increases in worker productivity, wages (and living standards)
tend to rise faster than prices when measured over long periods
of time.
A worker's Social Security cash benefit may be more or less
than PIA. An individual who claims benefits at his or her full
retirement age (FRA) will receive the full amount of his or her
PIA. The FRA is the earliest age at which unreduced retirement
benefits can be received. The FRA is 65 for persons born before
1938 and is rising gradually to 67 for persons born in 1960 or
later.
TABLE 5: SOCIAL SECURITY FULL RETIREMENT AGE BY YEAR OF BIRTH
------------------------------------------------------------------------
Year age 62
Year of birth attained Full retirement age
------------------------------------------------------------------------
1936 or earlier................ 1986-98........... 65
1937........................... 1999.............. 65
1938........................... 2000.............. 65 and 2 months
1939........................... 2001.............. 65 and 4 months
1940........................... 2002.............. 65 and 6 months
1941........................... 2003.............. 65 and 8 months
1942........................... 2004.............. 65 and 10 months
1943-54........................ 2005-2016......... 66
1955........................... 2017.............. 66 and 2 months
1956........................... 2018.............. 66 and 4 months
1957........................... 2019.............. 66 and 6 months
1958........................... 2020.............. 66 and 8 months
1959........................... 2021.............. 66 and 10 months
1960 or later.................. 2022 or later..... 67
------------------------------------------------------------------------
Source: Congressional Research Service.
Benefits for the Worker's Family Members
Dependents and survivors of a worker, including surviving
children, spouses, former spouses and dependent parents, may be
eligible for benefits, as well as survivor benefits if a worker
dies. These auxiliary benefits are based on the primary
earner's benefit, subject to a maximum family amount. The basis
for entitlement to dependents and survivors benefits are
summarized in Table 6.
Social Security pays a monthly benefit to the spouse of an
entitled retired or disabled worker equal to 50 percent of a
retired spouse's primary insurance amount. Qualifying spouses
must be at least age 62 or have a qualifying child (a child who
is under the age of 16 or who receives Social Security
disability benefits) in their care. Spousal benefits are
reduced when the spouse takes benefits before the FRA, unless
the spouse has a qualifying child in his or her care. Based on
a FRA of 66, a spouse who claims benefits as early as age 62
may receive a benefit that is as little as 37.5 percent of the
working spouse's PIA. Spousal benefits may also be reduced or
fully offset by the dual entitlement provision or the
government pension offset (described below) if the spouse is
entitled to his/her own Social Security benefit based on work
in covered employment or to a pension based on his or her own
employment in certain federal, state or local government
positions that are not covered by Social Security.
A monthly survivor benefit equal to 100 percent of the
deceased worker's PIA is payable to a widow(er) or divorced
spouse of a deceased worker who was fully insured at the time
of death. The surviving spouse must be age 60 (age 50 if
disabled) and must not have remarried before age 60 (age 50 if
disabled). As with spousal benefits, the surviving spouse's
benefit may be reduced if he or she takes benefits before the
FRA, or if the surviving spouse has a benefit from employment
in certain federal, state or local government positions that
are not covered by Social Security (see the discussion of the
government pension offset, or GPO, below).
Some spouses and widow(er)s are entitled to benefits based
on both their own earnings record and their spouse's earnings
record. These workers are known as dually-entitled
beneficiaries. A beneficiary who is dually entitled will
receive his or her own worker benefit plus the difference
between the worker benefit and his or her spouse's benefit. The
total benefit may not be greater than the highest single
benefit amount to which he or she is entitled.
Over time, more women have become entitled to Social
Security benefits based on their own work records, either as
workers or as dually-entitled workers, as shown in Figure 1.
The number of women who were entitled to benefits based either
on their own work records or as dually-entitled beneficiaries
grew from 43 percent in 1960 to 72 percent in 2008. Within
these numbers, however, most of the growth has been among
dually-entitled beneficiaries. The percent of women who are
entitled based solely on their own work records has fluctuated
in a range between 39 percent and 44 percent between 1960 and
2008. Reliance on spousal benefits as a wife or widow, whether
from dual entitlement or from spousal benefits alone, has
fallen slightly over the past five decades, from 61 percent in
1960 to 56 percent in 2008.
Divorced spouses may qualify for spousal and/or survivor
benefits if the marriage lasted at least 10 years before the
divorce became final. To qualify for spousal benefits, a
divorced spouse must be at least age 62 and not currently
married. Survivor benefits are available to a divorced
surviving spouse if he or she is age 60 or over (age 50 if
disabled) and has not remarried before age 60 (age 50 if
disabled). Divorced spouses who meet these criteria receive the
same spousal and survivor benefits as spouses and widow(er)s.
As with married and surviving spouses, a divorced spouse's
benefit will be reduced if taken before the full retirement
age, to offset a pension from non-covered federal, state or
local government employment, or as a result of earnings above
the retirement earnings test threshold. A dually-entitled
divorced spouse (i.e., entitled to a benefit based on his or
her own work record) will receive the higher of the spousal
benefit or his or her own benefit. A divorced spouse may also
become entitled on the worker's record if the worker has not
yet filed for benefits, provided that the divorce has been in
effect for at least 2 years and that both the worker and the
divorced spouse are at least age 62.
A monthly benefit is payable to the child (including
biological, adopted, step- child) of a retired, disabled, or
deceased worker who was fully or currently insured at the time
of death. The child must be either: (1) under age 18; or (2) a
full-time elementary or secondary student under age 19; or (3)
a disabled person age 18 or older whose disability began before
age 22. Prior to May 1985, certain children in college were
also eligible for the benefit.\14\ The child of a deceased
worker is eligible for 75 percent of the worker's PIA, subject
to the family maximum benefit, as described below. The child of
a disabled or retired worker is eligible for 50 percent of the
worker's PIA, subject to the family maximum benefit.
---------------------------------------------------------------------------
\14\Before May 1985, student's benefits were payable to certain
postsecondary students aged 18-22. P.L. 97-35, The Omnibus Budget
Reconciliation Act of 1981, phased out by May 1985 the child's benefit
for students in postsecondary schools age 18 and older, except for
full-time, unmarried elementary or secondary school students between
ages 18 and 19 (known as a ``student's'' benefit). Student's benefits
end at age 19 or at the end of the current semester or quarter,
whichever is later.
---------------------------------------------------------------------------
Social Security also provides a monthly mother's or
father's benefit to a surviving parent of any age who cares for
the deceased worker's child, when that child is either under
the age of 16 or disabled. Mother's and father's benefits are
75 percent of the worker's basic benefit, subject to the
maximum family benefit. These mother's or father's benefit
payments cease when the youngest entitled child being cared for
reaches age 16, is no longer disabled, or if the mother or
father remarries.
A monthly survivor benefit is payable to a parent of a
deceased fully insured worker if the parent is age 62 or older
and has not married since the worker's death. The parent must
have been receiving at least one-half of his or her support
from the worker at the time of the worker's death or, if the
worker had a period of disability which continued until death,
at the beginning of the period of disability. Proof of support
must be filed within 2 years after the worker's death or the
month in which the worker filed for disability.
Total benefits payable to a family based on a retired or
deceased worker's record are capped by the maximum family
benefit. The maximum family benefit varies from 150 percent to
188 percent of the retired or deceased worker's PIA, and a
family's total benefit cannot be exceeded regardless of the
number of recipients entitled on that earnings record. If the
total individual monthly benefits payable to all recipients
entitled on one earnings record exceeds the maximum, each
dependent's or survivor's benefit is reduced in equal
proportion to bring the total within the maximum. For the
family of a worker who turns 62 or dies in 2010 before reaching
age 62, the total amount of benefits payable is limited to:
150 percent of the first $972 of PIA, plus
272 percent of PIA over $972 through $1,403,
plus
134 percent of PIA over $1,403 through $1,830,
plus
175 percent of PIA over $1,830.
The dollar amounts in this benefit formula are indexed to
average wage growth, as in the primary benefit formula.
For the family of a worker who is entitled to disability
benefits, the maximum family benefit is the lesser of 85
percent of the worker's AIME or 150 percent of the worker's
PIA. However, the family benefit cannot be lower than 100
percent of the worker's PIA.
Table 6 summarizes Social Security's auxiliary benefits to
the spouses, divorced spouses, children and parents of a
retired, disabled or deceased worker. As will be discussed
below, the basic benefit may be reduced (or increased) for
retirement below (or above) the full retirement age, for
earnings above certain thresholds, for family maximums, and/or
for receipt of a pension from work that was not covered by
Social Security.
TABLE 6: SOCIAL SECURITY AUXILIARY BENEFITS
------------------------------------------------------------------------
Basic benefit
Basis for entitlement Eligibility amount before any
adjustments
------------------------------------------------------------------------
Spouse.......................... At least age 62... 50 percent of
The worker on worker's PIA
whose record
benefits are
based must be
receiving
benefits.
Divorced Spouse (if divorced At least age 62... 50 percent of
individual was married to the Generally, the worker's PIA
worker for at least 10 years worker on whose
before the divorce became final record benefits
and is currently unmarried). are based must be
receiving
benefits.
However, a
divorced spouse
may receive
benefits on the
worker's record
if the worker is
eligible for (but
not receiving)
benefits and the
divorce has been
final for at
least 2 years.
Widow(er) & Divorced............ At least age 60... 100 percent of
worker's
Widow(er) (if divorced .................. PIA
individual was married to the
worker for at least 10 years
before the divorce became final
and did not remarry before age
60).
Disabled Widow(er) & Divorced At least age 50 100 percent of
Disabled Widow(er). The qualifying worker's PIA
disability must
have occurred:
(1) before or
within 7 years of
the worker's
death;
(2) within 7 years
of having been
previously
entitled to
benefits on the
worker's record
as a widow(er)
with a child in
his/her care; or
(3) within 7 years
of having been
previously
entitled to
benefits as a
disabled
widow(er) that
ended because the
qualifying
disability ended
(whichever is
later).*
Mothers and Fathers............. Surviving parent 75 percent of the
of any age who deceased worker's
cares for the primary insurance
deceased worker's amount (subject
child, when that to the family
child is either maximum benefit*)
under the age of
16 or disabled.
Eligibility
generally ceases
if the surviving
mother or father
remarries.
Parents......................... At least age 62 or 82.5 percent of
older and has not the deceased
married since the worker's PIA if
worker's death. only one parent
The parent must is entitled to
have been benefits. If two
receiving at parents are
least one-half of entitled to
his or her benefits, then
support from the each parent
worker at the receives 75
time of the percent of the
worker's death deceased worker's
or, if the worker PIA. Subject to
had a period of the family
disability which maximum benefit.
continued until
death, at the
beginning of the
period of
disability.
Child........................... Children, 75 percent of the
including deceased worker's
adopted, step-, primary insurance
or unmarried amount to
biological child children of
of a retired, deceased workers
disabled, or (subject to the
deceased worker family maximum
who was fully or benefit*) 50
currently insured percent of the
at the time of worker's primary
death. The child insurance amount
must be either: to children of
(1) under age 18; disabled or
(2) a full-time retired workers
elementary or (subject to the
secondary student family maximum
under age 19; or benefit*)
(3) a disabled
person age 18 or
older whose
disability began
before age 22.
------------------------------------------------------------------------
For a full description of Social Security eligibility, see http://
www.socialsecurity.gov/retire2/yourspouse.htm and http://
www.socialsecurity.gov/ww&os2.htm.*The maximum family benefit varies from 150 percent to 188 percent of a
retired or deceased worker's PIA. For the family of a worker who is
entitled to disability benefits, the maximum family benefit is the
lesser of 85 percent of the worker's AIME or 150 percent of the
worker's PIA, but no less than 100 percent of the worker's PIA. It
does not apply with respect to a divorced spouse or surviving spouse's
benefits.
Social Security benefits are not particularly generous.
Table 7 shows the number of Social Security beneficiaries in
2008 as well as average monthly benefits by gender. In 2008,
the average monthly retirement benefit was $1,299 for men
($15,588 per year) and $1,001 for women ($12,012 per year).
Spouses, who receive half of the worker's benefits, received on
average $556 per month for women ($6,672 per year) and $324 for
men ($3,888 per year). Widows received, on average, $1,115 per
month ($13,380 per year) and widowers received $938 ($11,256
per year).
Since Social Security benefit levels are based on
contributions up to the taxable maximum, benefits for even high
earners are relatively modest. In 2010, the maximum Social
Security retirement benefit that could be received would be
$1,824 per month ($21,888 per year) if someone retired at the
early eligibility age of 62, and $2,346 per month ($28,152 per
year) if they retired at the full retirement age of 66.
However, to receive this level of benefits, someone would have
to earn the taxable maximum or more for at least 35 years of
their career, which almost never occurs.
TABLE 7: NUMBER AND AVERAGE MONTHLY BENEFIT IN DECEMBER 2008 BY BENEFIT
TYPE AND GENDER
------------------------------------------------------------------------
Average
Number (in monthly
thousands) Benefit
------------------------------------------------------------------------
Retired Workers:
Men................................. 16,455.8 $1,299
Women............................... 15,817.8 $1,001
Disabled Workers:
Men................................. 3,924.5 $1,191
Women............................... 3,502.2 $920
Spouses:
Wives............................... 2,472.3 $556
Husbands............................ 52.6 $324
Widowed Mothers and Fathers:
Women............................... 149.2 $843
Men................................. 10.4 $720
Nondisabled Widow(er)s:
Women............................... 4,094.9 $1,115
Men................................. 55.3 $938
Disabled Widow(er)s:
Women............................... 220.3 $692
Men................................. 9.7 $498
Parents:
Women............................... 1.5 $988
Men................................. 0.2 $910
------------------------------------------------------------------------
Source: Social Security Administration, Annual Statistical Supplement,
2009, Washington, DC, tables 5.A1.1, 5.A1.2, 5.A1.3, 5.A1.5, 5.A1.6,
5.A1.7 and 5.A1.8, http://www.socialsecurity.gov/policy/docs/statcomps/
supplement/2009/5a.html#table5.a1.5.
Benefit Adjustments for Retirement Before or After the Full Retirement
Age
For persons claiming benefits before (or after) their full
retirement age (FRA), the monthly benefit amount is decreased
(or increased) by an adjustment that is roughly actuarially
fair. The actuarial adjustment ensures that, on average, an
individual will receive the same total benefits over his or her
expected lifetime, but the monthly benefit will be reduced (or
increased) to account for the greater (or fewer) number of
months that the person is expected to receive benefits.\15\ For
persons with an FRA of 65 (i.e. somebody who was born in 1938
or earlier), collecting benefits upon turning 62 would entail a
20 percent cut in PIA. For a person with an FRA of 67, the
decision to start collecting benefits upon turning 62 would
result in a 30 percent cut to PIA. Benefits of workers who
choose to retire after their FRA are increased by delayed
retirement credits.
---------------------------------------------------------------------------
\15\Retirement benefits are reduced by 5/9 of one percent (or
0.0056) of the primary earner's benefit for each month of entitlement
before FRA, for a reduction of about 6.7 percent a year, up to 36
months. For each month of retirement in excess of 36 months for which
the worker is below the FRA, retirement benefits are reduced by 5/12 of
one percent (or 0.0042), for a reduction of 5 percent a year. Starting
in 1990, the delayed retirement credit increased by .5 percent every
other year until it reached 8 percent for workers who reached age 65
after 2007. See Table 1-26 on page 1-60 of ``Background Material and
Data on Programs within the Jurisdiction of the Committee on Ways and
Means, 2004,'' The Green Book. House Ways and Means Committee Print,
Washington, DC: Government Printing Office, available at http://
waysandmeans.house.gov/media/pdf/111/ssgb.pdf.
---------------------------------------------------------------------------
Benefit Adjustments for the Government Pension Offset (GPO) and
Windfall Elimination Provision (WEP)
Two provisions reduce the Social Security benefits of
workers and their spouses who may have pensions from employment
that was not covered by Social Security.
The windfall elimination provision reduces the benefit of
workers who have pensions from work that was not covered by
Social Security. The WEP is intended to remove an unintentional
advantage for workers who have a pension from non-covered work
in addition to qualifying for Social Security benefits. Before
the WEP was introduced, workers who had short careers in Social
Security-covered jobs received an unintended ``windfall''
because the Social Security formula recorded the many years in
jobs not covered by Social Security as years of ``zero''
earnings. This made the employee appear to have had low
lifetime earnings, and the worker benefited from the Social
Security benefit formula's progressivity which is intended for
workers who have had long careers at low wages.
The government pension offset reduces Social Security
spousal and survivor benefits that would be payable to spouses
who also receive a public pension as a result of his or her own
work in a government job (Federal, State, or local) not covered
by Social Security. The amount of the reduction is equal to
two-thirds of the government pension. This provision is
intended to parallel the Social Security ``dual entitlement''
rule (discussed above), which imposes a dollar-for-dollar
offset of spouses' Social Security retirement benefits.
Benefit Adjustments for the Retirement Earnings Test
Social Security beneficiaries who are under the full
retirement age and continue to work and have earnings above a
threshold have their current benefits reduced and their future
benefits increased. The retirement earnings test reduces
benefits for workers under the FRA (age 67 for workers born in
1960 or later) who earn income from work in excess of an
``exempt'' amount. The exempt amount in 2010 is $14,160 in
annual wages or self-employment income. Beneficiaries with
earnings above this amount, who are also below the FRA,
experience a benefit reduction of $1 of benefits for each $2 of
earnings above the exempt amount.\16\
---------------------------------------------------------------------------
\16\A different reduction factor and exempt amount apply in the
year beneficiaries attain the FRA. In 2010, these individuals can earn
up to $37,680 a year in the months before they attain the FRA. For
earnings above these amounts, the RET results in a reduction of $1 in
benefits for each $3 of excess earnings.
---------------------------------------------------------------------------
The retirement earnings test does not apply to pensions,
rents, dividends, interest, and other types of ``unearned''
income. The test also does not apply to beneficiaries at the
FRA or older, or to those who are disabled (disabled recipients
are subject to separate limits on earnings known as substantial
gainful activity amounts). The exempt amounts rise each year at
the same rate as average wages in the economy.
Retired workers whose benefits are reduced by the
retirement earnings test are compensated, once they retire,
through increases in their benefit amount. The following
example illustrates the effect of the retirement earnings test.
The example worker is age 63 and has $12,000 in annual benefits
before the test is applied:
Retirement Earnings Test, 2010
Earnings in 2010.............................................. $15,160
Exempt amount in 2010 for persons under FRA................... $14,160
Excess over exempt amount..................................... $1,000
Benefit reduction (50 percent of excess)...................... $500
Annual Benefits the worker will receive....................... $11,500
The rationale for the retirement earnings test was
described in the 1935 report of the Committee on Economic
Security, which recommended that no benefits be paid before a
person had ``retired from gainful employment.'' The retirement
earnings test has been changed many times over the years.
Table 8 illustrates the number of retired workers by full
retirement age (FRA), as affected by the Social Security
Retirement Earnings Test (RET) in 2006, the latest year for
which data are available.
TABLE 8: NUMBER OF RETIRED WORKERS WITH EARNINGS, BY FULL RETIREMENT AGE
(FRA), 2006
------------------------------------------------------------------------
Younger
than FRA Attains FRA
Earnings for all of in 2006
2006
------------------------------------------------------------------------
$1-4,999...................................... 356,000 117,500
5,000-9,999................................... 226,500 69,900
10,000-14,999................................. 213,500 60,900
15,000-19,999................................. 72,800 35,800
20,000-24,999................................. 39,200 17,100
25,000-29,999................................. 17,600 9,700
30,000-34,999................................. 10,200 7,800
35,000-39,999................................. 6,300 6,000
40,000-44,999................................. 5,600 2,100
45,000-49,999................................. 3,600 1,700
50,000-54,999................................. 2,500 1,500
55,000-59,999................................. 2,100 1,300
60,000-64,999................................. 1,800 700
65,000-69,999................................. 1,300 800
70,000-74,999................................. 1,300 500
75,000-79,999................................. 1,000 700
80,000-84,999................................. 800 600
85,000-89,999................................. 900 400
90,000-99,999................................. 900 800
100,000 or more............................... 5,400 3,100
-------------------------
Total with Earnings....................... 969,300 338,900
------------------------------------------------------------------------
Sources: Office of Research, Evaluation and Statistics, Social Security
Administration: 2007, 1 Percent Continuous Work History Sample and
2006 Employee and Employer File.
Special Minimum Benefit
The special minimum PIA is payable to some persons who
worked in covered employment for many years but had low
earnings. Unlike the retired worker's PIA described above,
which is based on a worker's average earnings, the special
minimum is based on the number of years of covered employment
at a specified level of substantial earnings. The amount of the
special minimum is determined by multiplying the number of
years of substantial earnings in excess of 10 years and up to
30 years by $11.50 for monthly benefits payable in 1979.
Parameters used to determine the special minimum benefit are
indexed to price inflation.
A worker is awarded the special minimum benefit only if it
exceeds the worker's regular benefit. However, the value of the
special minimum benefit, which is indexed to prices, is rising
more slowly than the value of the regular Social Security
benefit, which is indexed to wages. Therefore, the number of
beneficiaries of the special minimum benefit has declined with
each year. In December 2008, there were 89,000
beneficiaries\17\ who received the special minimum benefit. One
study predicted that the special minimum benefit will disappear
for workers reaching age 62 in 2013 and later.\18\
---------------------------------------------------------------------------
\17\Annual Statistical Supplement to the Social Security Bulletin,
2009, Table 5.A.8, available at http://www.socialsecurity.gov/policy/
docs/statcomps/supplement/2009/5a.html#table5.a8.
\18\Kelly A. Olsen and Don Hoffmeyer, ``Social Security's Special
Minimum Benefit,'' Social Security Bulletin, vol. 64, no. 2 (2002), p.
6, available at http://www.ssa.gov/policy/docs/ssb/v64n2/v64n2p1.pdf.
---------------------------------------------------------------------------
HOW IS THE SOCIAL SECURITY PROGRAM FINANCED?
The Social Security program is financed through three
sources of funds. These sources are: (1) payroll taxes
collected under the Federal Insurance Contributions Act (FICA)
and the Self Employment Contributions Act (SECA); (2) federal
income taxes on the benefits of certain beneficiaries; and (3)
interest on special U.S. government obligations held by the
Trust Funds.
Payroll Taxes
Payroll taxes (i.e., social-insurance contributions as
stipulated by the Federal Insurance Contributions Act (FICA)
and Self-Employment Contributions Act (SECA)) are levied on the
wages and net self-employment income of workers covered by
Social Security. The FICA tax is levied at a rate of 15.3
percent, with employees and their employers each paying half of
the total amount. Of the total 15.3 percent FICA tax, 12.4
percent is used to finance the Social Security program, and 2.9
percent is used to finance the Medicare program. The Social
Security portion of the tax is levied on earnings up to
$106,800 in 2010.\19\ The Medicare portion of the tax is levied
on all earnings.
---------------------------------------------------------------------------
\19\The ``taxable wage base'' increases annually with average wage
growth in the economy.
---------------------------------------------------------------------------
The SECA tax also is levied at a rate of 15.3 percent, with
the same 12.4 percent and 2.9 percent split between Social
Security and Medicare as the FICA tax. However, to reflect the
fact that employees do not pay FICA taxes on the employer's
portion of the FICA tax, the taxable base for the SECA tax is
adjusted downward by 7.65 percent and self-employed workers are
allowed to deduct half of their SECA tax liability for income
tax purposes.
Table 9 and Table 10 show FICA and SECA tax rates and
maximum taxable earnings for 1937-2010, respectively.
TABLE 9: FICA TAX RATES, AVERAGE WAGE INDEX, AND MAXIMUM TAXABLE EARNINGS, SELECTED YEARS 1937-2010
[In percent]
----------------------------------------------------------------------------------------------------------------
Rate paid by employee and employer
-------------------------------------------------- Average Maximum
Calendar year Disability Hospital wage taxable
OASI insurance OASDI insurance Total index earnings\1\
(DI) (HI)
----------------------------------------------------------------------------------------------------------------
1937................................... 1.00 NA NA NA 1.00 $1,138 $3,000
1950................................... 1.50 NA NA NA 1.50 2,544 3,000
1960................................... 2.75 0.25 3.00 NA 3.00 4,007 4,800
1970................................... 2.75 0.55 4.20 0.60 3.65 6,186 7,800
1980................................... 4.52 0.56 5.08 1.05 6.13 12,513 25,900
1990................................... 5.60 0.60 6.20 1.45 7.65 21,028 51,300
1995................................... 5.26 0.94 6.20 1.45 7.65 24,706 61,200
2000................................... 5.30 0.90 6.20 1.45 7.65 32,155 76,200
2005................................... 5.30 0.90 6.20 1.45 7.65 36,953 90,000
2008................................... 5.30 0.90 6.20 1.45 7.65 41,335 102,000
2009................................... 5.30 0.90 6.20 1.45 7.65 * 106,800
2010................................... 5.30 0.90 6.20 1.45 7.65 * 106,800
----------------------------------------------------------------------------------------------------------------
\1\OASDI; no limit on HI.
NA--Not applicable.
*--Not available.
Note--Until 1991, the maximum taxable earnings for HI were the same as for OASDI. In 1991, 1992, and 1993
maximum taxable earnings were $125,000, $130,200, and $135,000 respectively, with no limit after 1993. Only
92.35 percent net self-employment earnings are taxable and half of the SECA taxes so computed is deductible
for income tax purposes. Source: Social Security Administration.
TABLE 10: OASDI AND HI TAX RATES FOR SELF-EMPLOYED INDIVIDUALS, 1980-2010
[In percent]
----------------------------------------------------------------------------------------------------------------
Total
Calendar year OASI DI OASDI HI (OASDI and
HI)
----------------------------------------------------------------------------------------------------------------
1980........................................... 6.2725 0.7775 7.05 1.05 8.10
1981........................................... 7.0250 0.9750 8.00 1.30 9.30
1982........................................... 6.8125 1.2375 8.05 1.30 9.35
1983........................................... 7.1125 0.9375 8.05 1.30 9.35
1984........................................... 10.4000 1.0000 11.40 2.60 \1\14.00
1985........................................... 10.4000 1.0000 11.40 2.70 \1\14.10
1986-1987...................................... 10.4000 1.0000 11.40 2.90 \1\14.30
1988-1989...................................... 11.0600 1.0600 12.12 2.90 \1\15.02
1990-1993...................................... 11.2000 1.2000 12.40 2.90 15.30
1994-1996...................................... 10.5200 1.8800 12.40 2.90 15.30
1997-1999...................................... 10.7000 1.7000 12.40 2.90 15.30
2000 and later................................. 10.6000 1.8000 12.40 2.90 15.30
----------------------------------------------------------------------------------------------------------------
\1\Tax credits for the self-employed equaled 2.7 percent in 1984, 2.3 percent in 1985, and 2.0 percent in 1986-
1989. The tax rate is not reduced for these credits.Source: Social Security Administration.
Taxation of Benefits
Social Security beneficiaries with incomes\20\ above
certain thresholds are required to include a portion of their
Social Security benefits in their federal taxable income. The
Social Security Amendments of 1983 required beneficiaries with
incomes of more than $25,000 if single, and $32,000 if married
filing jointly,\21\ to include up to 50 percent of their
benefits in taxable income, beginning in 1984. Revenues from
taxing up to 50 percent of Social Security benefits are
credited to the Social Security Trust Funds. The Omnibus Budget
Reconciliation Act of 1993 required beneficiaries with modified
incomes of more than $34,000 if single, and $44,000 if married
filing jointly, to include up to 85 percent of their benefits
in their taxable income, beginning in 1994. Revenues from
taxing 51 percent to 85 percent of Social Security benefits are
credited to the Medicare Hospital Insurance Trust Fund. These
income thresholds are specified in the law and by design are
not indexed. Thus over time, an increasing number of
individuals will be subject to federal income tax on a portion
of Social Security benefits. When taxes on benefits were first
imposed, eight percent of recipients were affected. The
Congressional Budget Office (CBO) estimates that for tax year
2005, 39 percent of recipients were affected.
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\20\Income is defined as adjusted gross income plus tax-exempt bond
interest plus one-half of Social Security benefits.
\21\There is no separate threshold for married persons who live
together and file separately.
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Interest on Special U.S. Obligation Bonds
The Social Security Trust Funds earn interest because it
holds Special US Obligation Treasury Bonds to which it is
legally entitled interest, as prescribed in the Social Security
Act: ``Special issues . . . will pay a rate of interest equal
to the average market yield on all marketable interest-bearing
obligations of the United States which are not due or callable
(redeemable) for at least 4 years.'' The interest on the
special U.S. obligations thus is equal to the prevailing
average rate on outstanding Federal securities with a maturity
of four years or longer. This interest is credited to the Trust
Funds twice a year (on June 30 and December 31) by issuing more
special securities to the Trust Funds.
The Social Security Trust Funds
Social Security is funded through dedicated payroll taxes
and taxation of benefits which legally may only be used to pay
current benefits or to invest in a Social Security Trust Fund
reserve for payment of future benefits. The securities issued
to the Trust Funds, like those sold to the public, are legal
obligations of the U.S. Government.
Technically, there are two separate Trust Funds: the Old-
Age and Survivors Insurance (OASI) Trust Fund, which holds in
trust those funds that the federal government intends to use to
pay future benefits to retirees and their survivors; and, the
Disability Insurance (DI) Trust Fund, which holds in trust
those funds that the federal government intends to use to pay
benefits to those who are judged by the federal government to
be disabled and incapable of productive work, as well as to
their spouses and dependents.
To the extent that payroll taxes exceed benefit payouts in
a given year, participants in the Social Security program are
in effect saving for their future retirement, disability or
survivor benefit needs, or for those of other participants in
the program. These pre-funded amounts earn interest, which
accrues to the Trust Funds. In 2008, the Trust Fund's assets
earned interest at an effective annual rate of 5.1 percent.\22\
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\22\2009 Social Security Trustees' Report, available at http://
www.ssa.gov/OACT/TR/2009/II_cyoper.html#94983.
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The long-range status of the Trust Funds is often expressed
in terms of percent of taxable payroll rather than in dollar
amounts. This permits a direct comparison between the tax rate
in the law and the cost of the program. For example, if the
program is projected to have a deficit of two percent of
taxable payroll as it was in 2009, the OASDI tax rates now in
the law would have to be increased by one percentage point each
for employee and employer (a total of two percent) in order to
pay for the benefits due. Alternatively, the program could be
brought back into balance by an equivalent reduction in
benefits. For example, if the program is projected to have a
deficit of two percent of taxable payroll, and expenditures are
projected to be 10 percent of taxable payroll, then a 20
percent (2 divided by 10) reduction in benefits would be needed
to bring the program into long-range fiscal balance. Finally,
fiscal balance could also be met through a combination of
revenue increases and benefit reductions.
Historical Status of the Trust Funds
For more than three decades after Social Security taxes
were first levied in 1937, the system's income routinely
exceeded its outgo, and its Trust Funds grew. The situation
changed, however, in the early 1970s.
Beginning in 1973, the program's income fell below
expenditures, and the Trust Funds declined rapidly. Congress
stepped in five times during the late 1970s and early 1980s to
keep the Trust Funds from being exhausted. Although major
changes enacted in 1977 greatly reduced the program's long-run
deficit, they did not eliminate it, and the short-run changes
made by the legislation were not sufficient to enable the
program to withstand back-to-back recessions in 1980 and 1982,
coupled with high inflation and low wage growth. A Social
Security disability bill in 1980 and temporary fixes in 1980
and 1981 were followed by another major reform package in 1983.
The 1983 changes, along with improved economic conditions,
dramatically improved the short- and long-range fiscal outlook
for Social Security. Income began to exceed outgo in 1983 and
the Trust Funds grew substantially. By the end of calendar year
2008, the balance in the Trust Funds reached $2.4 trillion, an
amount equivalent to 354 percent of expenditures in 2008
(between three and four years' worth of benefits).
Social Security and the Federal Budget
By law, the receipts and disbursements of the Social
Security Trust Funds are excluded from the President's budget
and the Congressional budget resolution (in other words, the
Trust Funds are ``off-budget''). The off-budget status of the
Social Security Trust Funds has meant that legislation
affecting the receipts and disbursements of the Trust Funds is
excluded from the general budget constraints associated with
the annual Congressional budget resolution, resulting in the
need for separate rules to ensure that legislation considered
by Congress does not negatively affect the Social Security
Trust Funds balances. For example, Social Security is
prohibited from borrowing funds, going into debt, and
contributing to the federal deficit. Social Security will only
pay benefits if it has the dedicated funds. Social Security's
monies are kept in a trust apart from the general fund, and the
Budget Act expressly prohibits changes made to Social Security
as part of any budget reconciliation process (see Appendix for
House and Senate Procedures that protect Social Security
balances).
Legacy Costs
In initial years of Social Security, retirees received
benefits that far exceeded the value of contributions that they
and their employers had been able to make in the short time
Social Security had been operational. Social Security
contributions were first collected from workers and employers
in 1937 and benefits were first paid in 1940. This created a
deficit of contributions or ``legacy cost''. Some people
advocate for a revenue source outside current workers payroll
to pay for this legacy cost. Economists have estimated that
Social Security's legacy cost is roughly $13 trillion.\23\
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\23\Munnell, Alicia H., ``Should Social Security Rely Solely on the
Payroll Tax?,'' Center for Retirement Research at Boston College, Brief
Number 9-16, Boston, MA: Center for Retirement Research, 2009,
available at http://crr.bc.edu/briefs/
should_social_security_rely_solely_ on_the_payroll_tax_.html.
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THE ANNUAL REPORT OF THE BOARD OF TRUSTEES
The Social Security Act requires that the Board of
Trustees\24\ report to the Congress annually on the financial
status of the Social Security Trust Funds. The Social Security
Trustees report short-range (10-year) projections and long-
range (75-year) projections of the financial status of the
Social Security system. Projections are made separately for
each of the two Social Security Trust Funds (the Old-Age and
Survivors Insurance (OASI) Trust Fund and the Disability
Insurance (DI) Trust Fund) and for the Trust Fund on a combined
basis (the OASDI Trust Fund).
---------------------------------------------------------------------------
\24\The Board of Trustees is comprised of the Secretary of Treasury
(who is the Managing Trustee), the Secretary of Labor, Health and Human
Services, the Commissioner of Social Security and two representatives
of the public.
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Because the Social Security program is designed as a
contributory system in which workers who pay payroll taxes to
support the system are considered to be earning the right to
future benefits, Congress has traditionally required long-range
estimates of the program's actuarial balance. Under current
procedures, the traditional long-range actuarial analysis of
the program covers a 75-year period, which generally would be
sufficient to cover the anticipated retirement years of persons
currently in the work force.
The long-range projections are affected by three types of
factors: (1) demographic factors, such as rates of fertility,
life expectancy, and immigration, which determine the number of
workers in relation to recipients; (2) economic factors, such
as unemployment, productivity, interest rates and inflation;
and (3) factors specifically related to the Social Security
program, such as eligibility rules, benefit levels, and the
categories of covered employment.
Given the uncertainty surrounding the long-range
projections, the actuaries at the Social Security
Administration (SSA) employ three sets of alternative economic
and demographic assumptions: Alternative I, based on optimistic
assumptions; Alternative II, based on intermediate assumptions;
and Alternative III, based on pessimistic assumptions.
Alternative II generally is considered the ``best guess'' of
long-term solvency and is the most frequently cited.
Findings in the 2009 Trustees Report
The latest report of the Social Security Board of Trustees
was released on May 12, 2009.\25\ Projections\26\ show the Old
Age, Survivors, and Disability Insurance program will continue
to add tax revenue to their Trust Funds up to 2016. The Trust
Funds will continue to grow because of interest earned through
2023. After 2023, the Trust Funds' assets will begin to be
tapped to help pay for the retirement of the unusually large
baby boomer cohort. By 2037, the reserves are expected to be
exhausted, and current revenues will only be sufficient to
finance 76 percent of benefits.\27\
---------------------------------------------------------------------------
\25\2009 Social Security Trustees' Report, available at http://
www.ssa.gov/OACT/TR/2009/tr09.pdf 26 The 2009 Social Security Trustees'
Report, Table VI.F7, available at http://www.ssa.gov/OACT/TR/2009/
tr09.pdf.
\26\The 2009 Social Security Trustees' Report, Table VI.F7,
available at http://www.ssa.gov/OACT/TR/2009/lr6f8.html.
\27\The term ``exhausted'' is commonly used to indicate that the
Trust Fund balance plus payroll taxes and other revenues would be
insufficient to pay all benefits when they are due.
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On average, over the next 75 years (2009-2083), the
system's projected actuarial deficit is 2.00 percent of taxable
payroll. In present value terms, over the next 75 years the
system's projected unfunded obligation is $5.3 trillion, an
amount equivalent to 0.7 percent of Gross Domestic Product
(GDP). In the 75th year of the period, the cost of the system
is projected to exceed income by 4.34 percent of taxable
payroll.
Social Security has always been structured primarily as a
pay-as-you-go system, with current benefits mostly funded out
of current tax revenues. However, Social Security is currently
running a surplus. In 2009, an estimated 94 percent of Social
Security tax revenues were spent to meet current expenditures
(benefits and administrative costs). The surplus tax revenues,
along with interest credited to the Trust Fund, contribute to a
growing Trust Fund balance. For OASDI, interest income will
first be needed to pay a portion of benefits in 2016, although
the Trust Fund will continue to accumulate assets until around
2025, when Social Security begin drawing down the Trust Fund.
Long-range projections for the Social Security Trust Fund
are based on many demographic, economic, and program-specific
factors. In large part, however, the system's projected long-
range funding shortfall is related to demographic changes in
the United States. According to the Social Security actuaries,
lower birth rates are the principal reason that the cost of the
Social Security program will increase over the next quarter
century. The ``total fertility rate,'' or the average number of
children women have, was about 3.3 children per woman during
the baby boom years from 1946 through 1965. By 1972, however,
the total fertility rate dropped to two children per woman and
has stayed at about that level ever since.
Moreover, the first wave of the 80 million member baby boom
generation reached age 62 in 2008, the age at which reduced
Social Security retirement benefits are first payable. In
addition, projected increases in life expectancy will
contribute to an older society. The Trustees intermediate
assumptions project that, between 2010 and 2030, the number of
beneficiaries will increase by 59 percent, while the number of
workers whose taxes will finance future benefits will increase
by 14 percent. As a result, the number of workers supporting
each Social Security recipient is projected to decline from 3.0
today to 2.2 in 2030. After the baby boomer retirement,
however, the ratio is projected to stabilize at approximately
two, with only a very gradual decline due to projected
increases in life expectancy.
An increase in older Americans participating in the
workforce can increase the solvency of Social Security.\28\ The
65-and-over labor force participation rate had been at historic
lows during the 1980s and early 1990s, but has increased
steadily over the past decade. In 2008, 20.5 percent of men
over the age of 65 and 11.9 percent of women over 65 were in
the labor force, for a total workforce participation of 15.5
percent.
---------------------------------------------------------------------------
\28\Bureau of Labor Statistics, ``Older Workers,'' July 2008,
available at http://www.bls.gov/spotlight/2008/older_workers/
---------------------------------------------------------------------------
The aging of the U.S. population will continue to be an
important factor after the baby boomers have died. Forecasts of
continuing increases in life expectancy mean that Social
Security recipients will receive benefits for longer periods in
the future. Projected increases in life expectancy and low
fertility rates, mean that persons age 67 and older will
continue to represent a growing share of the U.S. population.
The long-range intermediate projections assume that GDP
will increase at an ultimate rate of 2.1 percent annually; the
average wage is assumed to increase at an ultimate rate of 3.9
percent annually; inflation is assumed to increase at an
ultimate rate of 2.8 percent annually; and the unemployment
rate is assumed to average 5.5 percent.\29\ Details on the
demographic assumptions are available in the 2009 Trustees
report. The 2010 Trustees report, which will be issued in June
of this year, will likely have different estimates of the Trust
Funds' solvency due to the impact of the economic downturn in
reducing revenues and increasing the number of new
beneficiaries.
---------------------------------------------------------------------------
\29\Ultimate values are assumed to be reached within the first 25
years of the projection period. The ultimate economic assumptions are
unchanged from the 2007 report.
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The Congressional Budget Office Forecast
The Congressional Budget Office (CBO) generates projections
of the Social Security Trust Funds independent of the Social
Security Trustees. In January 2010,\30\ the CBO projected that,
excluding the interest from its surplus, the Social Security
Trust Funds will have a cash flow deficit (income excluding
interest will be less than outlays) in fiscal years 2010
through 2013 and in fiscal years 2016 through 2020. CBO
projects that only in fiscal years 2014 and 2015 will the
Social Security Trust Funds have a cash flow surplus (income
excluding interest will be greater than outlays).
---------------------------------------------------------------------------
\30\Congressional Budget Office, The Budget and Economic Outlook:
Fiscal Years 2010 to 2020, January 2010, available at: http://
www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf. In addition, see
the CBO supplemental data table, available at http://www.cbo.gov/
budget/ factsheets/2010/oasdi.pdf.
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When total income of the Trust Funds (Social Security tax
revenues plus interest income) is taken into account, CBO
projects that the Social Security Trust Funds will have a
surplus in each fiscal year from 2010 to 2020. When the Social
Security Trust Funds operate with a cash flow deficit, a
portion of the U.S. government bonds held by the Trust Funds
must be redeemed to cover benefit payments and administrative
costs. The money needed to redeem these bonds, like all
Treasury bonds, comes from the U.S. Treasury's general fund.
CBO attributes the increase in outlays between fiscal years
2010 and 2020 to three factors: (1) an increase in those
claiming benefits; (2) changes in benefits including the effect
of projected wage growth on benefit levels for future retirees;
and (3) automatic cost-of-living adjustments to benefits. In
the CBO forecast, almost half of the change in spending (48.2
percent) between fiscal years 2010 and 2020 is due to an
increase in the number of people claiming benefits. This
increase\31\ is due both to the rise in the number of people
eligible for benefits and the economic downturn, which
increased the unemployment rate for workers aged 62-64 from 3.9
percent in 2008 to 6.2 percent in 2009.\32\
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\31\The Office of the Chief Actuary SSA estimated last year that,
even in the absence of an economic recession, applications for retired
worker benefits under the OASI program during FY 2009 would be about 15
percent higher than the number of applications during FY 2008, solely
due to increase in numbers of insured workers reaching the retirement
ages of 62 to 70. This increase was expected due to the aging of the
baby boomers and the increasing percentages of women reaching
retirement ages having attained insured status enabling them to receive
retired worker benefits.
The actual data for applications for retired worker benefits in FY
2009 (for October 2008 through September 2009) show an increase of 21
percent over the number of applications in FY 2008. Thus, retired
worker benefit applications were about 5 percent higher (1.21/1.15)
than had been expected in the absence of a recession for the entire
fiscal year 2009.
While retired worker benefit applications for FY 2009 were clearly
above the levels expected in the absence of a recession, this does not
mean that fewer workers of retirement age are working or seeking
employment. In fact, based on data from the ``household survey''
published by the Bureau of Labor statistics, we see that the average
number of people at ages 60 to 69 who were employed or seeking
employment (in the civilian labor force) during FY 2009 (October 2008
through September 2009) was 7.1 percent higher than for the same months
in FY 2008. In the 2008 Trustees Report, where no recession had been
expected, an increase in the labor force at these ages of 4.5 percent
had been expected for the same period. Thus, 2.5 percent more
individuals at ages 60 to 69 were working or seeking employment in FY
2009 than had been expected without a recession. This rise might be, in
part, a reflection of a desire of some older workers to work longer to
rebuild the level of their personal retirement assets. (Stephen Goss,
Chief Actuary of the Social Security Administration, 10/14/2009)
\32\Labor Force Statistics from the Current Population Survey,
provided by the Bureau of Labor Statistics on April 16, 2010.
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WHO RECEIVES BENEFITS FROM SOCIAL SECURITY?
In June, 2009, 51.9 million people--17 percent of the U.S.
population--received Social Security benefits. Social Security
is an important source of retirement income, but it also
protects workers and their families against the loss of income
that occurs due to a worker's death or disability. The majority
of Social Security beneficiaries are retired workers, but more
than one-third of persons who received Social Security benefits
in 2009 qualified on the basis of disability or as the spouse,
widow or widower, parent, or child of a retired, deceased, or
disabled worker.
In June, 2009, 63.7 percent of Social Security
beneficiaries (33.1 million people) were retired workers who
had earned benefits on the basis of retirement from covered
employment\33\ (See figure 2). The next largest category of
beneficiaries was disabled workers, comprising 14.6 percent of
all beneficiaries. More than 7.5 million people received Social
Security Disability Insurance (SSDI) in 2009. Widows and
widowers of workers and retirees were 8.7 percent of all
beneficiaries. More than 4.2 million people, comprising 8.1
percent of all Social Security beneficiaries, received
children's benefits from Social Security in 2009. Most children
qualified for Social Security because they were the dependents
of retired, deceased, or disabled workers. About one-fifth of
child beneficiaries were adults who had been disabled since
childhood. Spouses of retired or disabled workers were 4.8
percent of all beneficiaries in 2009.
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\33\Some beneficiaries are ``dually entitled'' to benefits as both
a retired worker and as the spouse of a retired or disabled worker. In
Figure 2, dually-entitled beneficiaries are classified as retired
workers.
Of the 51.9 million individuals who received Social
Security benefits in June, 2009, 80.7 percent were aged 60 or
older (See figure 3). Almost one-third of all beneficiaries
were 60 to 69 years old. This age group included disabled
workers, retired workers, spouses, widows and widowers, and
parents. Individuals who receive Social Security Disability
Insurance are re-classified as retired workers at the full
retirement age (66 in 2009). Retired-worker benefits are first
available at age 62, but the benefit is permanently reduced for
workers who claim it before they have reached the full
retirement age. Widows and widowers are eligible for benefits
at age 60. Disabled widows and widowers are eligible for Social
Security at age 50.
Almost half of Social Security beneficiaries (49.2 percent)
in June 2009 were aged 70 or older. Twenty-nine percent of
beneficiaries were 70 to 79 years old and 20 percent were aged
80 and older. Social Security's role in providing income
support to disabled workers and to the dependents of disabled
and deceased workers is illustrated by the fact that 19.2
percent of beneficiaries in 2009 were children under the age of
21 or adults under age 60. Together, these two age groups
accounted for nearly 10 million of the 51.9 million people who
received Social Security benefits in 2009.
More than half of all Social Security beneficiaries in 2009
were women (see figure 4). Forty percent of beneficiaries were
men and eight percent were children, including adults whose
disability had been present since childhood. Women are the
majority of adult Social Security beneficiaries in part because
they have a longer average life expectancy than men. Men are a
slight majority of disabled worker beneficiaries (53 percent in
2009), but this is more than offset by the higher mortality
rates among men at all ages compared to women. Because of their
longer average life expectancy, 57 percent of all Social
Security beneficiaries aged 60 and older were women in 2009, as
were 64 percent of all beneficiaries aged 80 and older.
In June 2009, the average monthly benefit for a man
receiving a Social Security retired worker benefit was $1,305,
while the average retired worker benefit for a woman was
$1,006. Men had higher benefits because they had both higher
average wages and a higher average number of years of earnings.
The pattern was similar for disabled workers. The average
monthly benefit in June 2009 for a man receiving SSDI was
$1,188, while for a woman receiving SSDI, the average monthly
benefit was $921. The average benefit for a widow(er) or parent
was $1,086. Benefits for spouses and children are typically
about half of an insured worker's PIA. In 2009, the average
Social Security spousal benefit was $553 and the average
child's benefit was $548.
HOW DOES SOCIAL SECURITY COMPARE WITH OTHER SOURCES OF INCOME?
Social Security provides a substantial proportion of total
income among households in which one or more residents is a
Social Security beneficiary, and its importance as a source of
income increases as people age. In 2008, Social Security
provided more than 25 percent of the total income of households
in which at least one household resident was a Social Security
beneficiary and the household head and his or her spouse (in
married-couple households) were both under 65 years old (See
Table 11). Earnings were the largest share of income among
these households, primarily because in many instances there
were other household members who worked. Pensions were the
third largest share of income in Social Security beneficiary
households in which both the household head and spouse were
under age 65, accounting for 8.3 percent of total household
income in 2008.
Social Security is the largest share of income among Social
Security beneficiary households headed by persons aged 75 and
older, providing 46.2 percent of all income received by these
households in 2008. Pensions were the second largest share of
income among these households, accounting for 19.3 percent of
their total income. Although earnings were a substantial source
of income, the portion of total income received as earnings in
2008 (16.6 percent) was much lower among households headed by
persons aged 75 and older than among beneficiary households
headed by persons aged 65 to 74 (36.7 percent) and beneficiary
households headed by persons under age 65 (56.2 percent).
Social Security beneficiary households headed by persons aged
75 and older received 14.8 percent of their total income from
assets in 2008.
TABLE 11: SHARES OF HOUSEHOLD INCOME IN 2008 AMONG BENEFICIARY
HOUSEHOLDS, BY AGE OF HOUSEHOLDER
------------------------------------------------------------------------
Age of household head
--------------------------------------
Source of income 75 and
Under 65 65 to 74 older
------------------------------------------------------------------------
Social Security.................. 25.5% 33.1% 46.2%
Earnings......................... 56.2% 36.7% 16.6%
Pensions......................... 8.3% 16.6% 19.3%
Assets........................... 4.3% 11.2% 14.8%
Public Assistance................ 1.2% 0.4% 0.4%
Other............................ 4.5% 2.0% 2.7%
--------------------------------------
Total........................ 100% 100% 100%
------------------------------------------------------------------------
This table illustrates the sources of income of beneficiary households
in the aggregate. Many households receive income from two or more of
the sources. Source: CRS analysis of the March 2009 Current Population Survey.
Some households that receive Social Security have no other
source of income. Figure 6 shows the percentage of total
household income received by Social Security beneficiary
households headed by persons under age 65 and age 65 and older
in 2008. Among Social Security beneficiary households in which
both the household head and spouse (in married-couple
households) were under age 65, 14 percent had no income other
than Social Security. Among beneficiary households in which
either the household head or spouse was 65 or older, 17 percent
had no income other than Social Security. Including the
households that received all of their income from Social
Security, 37 percent of beneficiary households headed by
persons under age 65, and 57 percent of beneficiary households
headed by persons aged 65 and older, received more than half of
their total income from Social Security.
SOURCES OF INCOME BY INCOME QUARTILE
Figure 7 shows the percentage of total income received from
each source by all households with any income in 2008, in which
either the householder or householder's spouse was 65 or older.
For example, among elderly households in the top 25 percent of
total income, 17 percent of income came from Social Security,
and 81 percent of total income came from earnings, pensions,
and assets. In contrast, among elderly households whose income
was in the lowest quartile, the ratio of Social Security to
other income sources was inverted. Figure 7 shows 84 percent of
income for households in the lowest quartile came from Social
Security, and 11 percent of total income came from earnings,
pensions, and assets. Elderly households in the second and
third income quartiles in 2008 drew 42 percent and 67 percent
of their income from Social Security, respectively.
The percentage of older Americans living in poverty fell
sharply from the late 1950s through the mid-1970s and then
continued a slow, steady decline until the early 1990s, when it
leveled off at about 10 percent. In 1959, 35.0 percent of
Americans aged 65 and older had family incomes below the
federal poverty threshold, which was more than double the
poverty rate among adults 18 to 64 years old. (See figure 8.)
By the early 1990s, the poverty rate among people 65 and
older had fallen below the poverty rate among adults aged 18 to
64. The poverty rate of 9.7 percent among Americans aged 65 and
older in 2008 was two percentage points lower than the poverty
rate among adults aged 18 to 64, and it was just half the 19
percent poverty rate among children under 18 years old.
However, while the proportion of persons aged 65 and older in
poverty has fallen over the past 50 years, the number of poor
elderly has remained relatively constant since the mid-1970s
due to the growth in the total number of elderly persons. In
2008, 3.6 million people aged 65 and older had incomes below
the federal poverty thresholds of $10,326 for single elderly
persons and $13,014 for elderly couples.
The reduction in the proportion of older Americans living
in poverty from 35 percent in 1959 to 10 percent in 2008 is one
of the most significant economic developments to occur in the
last 50 years. Without the decline in elderly poverty, the
economic burden of supporting those who can no longer work in
old age would weigh that much more heavily on their adult
children, and many millions of older Americans would likely
have to apply for public assistance or give up their homes to
live with their children. Both the increase in the proportion
of older persons who receive Social Security and increases in
average monthly benefits contributed to the decrease in the
proportion of older Americans whose income falls below the
federal poverty threshold.
The decline in poverty among the elderly is also due to the
fact that the poverty threshold is adjusted each year by the
rate of inflation as measured by the percentage change in the
Consumer Price Index (CPI). The federal poverty threshold
represents the amount of income necessary to maintain a
minimally adequate standard of living. Because the poverty
threshold is adjusted annually by the rate of inflation as
measured by the consumer price index, the real (inflation-
adjusted) value of income at the poverty threshold remains
constant over time. In contrast, growth in wages from year to
year reflects both the rising general level of prices and gains
in labor productivity.
Over long periods of time, wages and salaries grow faster
than prices because labor becomes more productive as a result
of better education and training, improved methods of
production and distribution, and new technologies. Over the
past 50 years, the ratio of the poverty threshold to the median
income of the population has fallen because earnings (which are
the largest source of income for most non-elderly households)
have risen faster than prices. As a consequence, the gap
between the official poverty threshold and the median household
income has grown, and persons with incomes at or below the
poverty threshold have become relatively poorer compared to
households with incomes at the median.
In 1968, the poverty threshold for an individual 65 or
older ($8,308 in 2008 dollars) was equal to 93 percent of the
median individual income ($8,962 in 2008 dollars) of all
persons aged 65 and older. In 2008, the poverty threshold for a
single person 65 or older ($10,326) was only 57 percent of the
real median income of individuals aged 65 and older ($18,208).
In the future, other things being equal, the disparity between
rising real incomes and a fixed real poverty threshold will
lead to a decreasing proportion of the elderly having incomes
below the federal poverty threshold. This means that the income
gap between those with incomes below the poverty threshold and
those with incomes at the median will grow larger. As a result,
the proportion of the elderly who are in poverty will shrink,
but those who are in poverty will be relatively poorer compared
to those who have average incomes.
Due to these problems with a fixed poverty measure,
Congress requested the National Academy of Sciences to convene
a group of experts to update and improve the measurement of
poverty. Its 1995 report\34\ recommended a broader definition
of necessary expenditures (that includes food, housing, out-of-
pocket health care expenses, child support expenses, and work-
related expenses such as transportation and childcare) and a
more refined measure of income (that takes into account taxes,
tax credits, and in-kind benefits such as such as food stamps
and housing subsidies). When this more realistic measure is
used, poverty among seniors is much higher than it appears as
calculated by traditional means,\35\ e.g. from 10 to 19 percent
in 2008, due in large part to recognition of out-of-pocket
health spending as a basic necessity.
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\34\Citro, C. F., & R. T. Michaels, eds., Measuring Poverty: A New
Approach, Washington, DC: National Academy Press, 2005, available at
http://www.nap.edu/catalog.php?record_id=4759.
\35\Reno, Virginia P. and Ben Veghte, ``Economic Status of the Aged
in the United States'', in Robert Binstock et al., ed., Handbook of
Aging in the Social Sciences. (Maryland Heights, MO: Elsevier,
forthcoming).
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SOCIAL SECURITY MODERNIZATION: SETTING THE STAGE
The Social Security program is not currently on a long-term
path of fiscal stability. According to the 2009 Trustees
Report, without Congressional action the program will exhaust
the Trust Funds beginning in 2037, and thereafter only collect
enough revenue to pay out 76% of promised benefits. To restore
long-term solvency, policymakers face three basic options:
raise contributions, cut benefits, or add revenues to the
system. The following section will outline several alternatives
for improving solvency, derived from NASI's October 2009 report
entitled Fixing Social Security: Adequate Benefits, Adequate
Financing.\36\ The solvency impact of the reforms are estimated
by the Social Security Administration's Office of the
Actuary\37\ and, where appropriate, CRS estimates of the impact
of these changes on future beneficiaries are included.\38\
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\36\Reno, Virginia P. and Joni Lavery, Fixing Social Security:
Adequate Benefits, Adequate Financing, National Academy of Social
Insurance, October, 2009, available at http://www.nasi.org/research/
2009/fixing-social-security.
\37\All estimates of the solvency impact of individual proposals
are based on the 2009 Trustee's Reports, available at: http://
www.ssa.gov/OACT/TR/2009/index.html.
\38\Haltzel, Laura, Dawn Nuschler, Kathleen Romig, Gary Sidor,
Scott Szymendera, Mikki Waid, and Debra Whitman, ``Options to Address
Social Security Solvency and Their Impact on Beneficiaries: Results
from the Dynasim Microsimulation Model,'' Congressional Research
Service Report RL33840, January 29, 2007, available at http://
www.aging.senate.gov/crs/crs_social_security_policy.cfm.
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As Congress explores potential reforms to Social Security,
it should not only strive to improve the fiscal health of the
program, but also ensure that it will meet the needs of
beneficiaries in years to come. The Committee requested that
GAO review options to strengthen the program for the most
vulnerable populations and their findings are included
herein.\39\
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\39\GAO, Social Security: Options to Protect Benefits for
Vulnerable Groups When Addressing Program Solvency, GAO-10-101R
(Washington, D.C.: December 7, 2009), available at http://www.gao.gov/
new.items/d10101r.pdf.
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It is important to note that the policy alternatives
described in the subsequent sections of this report by no means
represent an exhaustive list and are limited to Social Security
retirement and survivor benefit programs. Rather, they
illustrate the more commonly considered proposals for restoring
the program's fiscal alignment and improving the protections of
vulnerable groups. Variations or combinations of these
proposals could also prove useful to Congress as they consider
Social Security reform.\40\
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\40\For example, see Committee on the Fiscal Future of the United
States, ``Choosing the Nation's Fiscal Future,'' National Academies
Press 2010, available at http://www.ourfiscalfuture.org/wp-content/
uploads/fiscalfuture_full_report.pdf.
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The projected actuarial impacts of these reforms are
provided on the assumption that each reform was to be
implemented now or as described under the option, and that no
other changes were made. Projecting the impacts of combinations
of options and/or different implementation timeframes would
require a new and thorough analysis. Further, these analyses
should be detailed enough to understand how they would impact
vulnerable groups and protect the adequacy of Social Security
benefits.
OPTIONS TO RAISE REVENUE FOR PROGRAM SOLVENCY
OPTIONS TO INCREASE THE SOCIAL SECURITY CONTRIBUTION RATE
The Federal Insurance Contributions Act of 1939 (FICA)
authorized the Social Security program to be financed largely
by mandatory contributions from workers and employers. This
established a link between funding and insuring against
economic insecurity when wages are lost due to old age, death
of a family worker, and, later, disability. Some options for
adjusting the contribution rate are:
Increase Worker and Employer Contributions
by 1.1 percent. If the contribution rate were raised in
2010 so that workers contribute 7.3 percent instead of
6.2 percent of their earnings, the program's projected
deficit would decline by 2.09 percent of taxable
payroll. It is estimated that this change would
eliminate all of the deficit and make the program
solvent for 75 years. For example, a medium-wage
worker, making $43,451 in 2010, would face a tax
increase of $478 a year, or $9.19 a week, and the
employer would face an identical increase. However,
because the program will have surplus funds for the
next decade, an immediate rate increase would add to
the surpluses that are invested in Treasury securities.
Increase Worker and Employer Contributions
by one percent in 2022, and by an Additional one
percent in 2052. Because the Social Security program
has sufficient resources to pay benefits in the near
future, contribution rates could be designed to
increase as funds are needed. If determined by future
policymakers that funds are not needed, the rates could
be reduced or rescinded. As one example of this
approach, policymakers could act now to schedule a two-
step increase in the Social Security rate: from 6.2
percent to 7.2 percent for workers and employers in
2022, and to 8.2 percent in 2052. This option would
reduce the program's projected deficit by 2.06 percent
of payroll, eliminating the projected 75-year
shortfall. By 2022, workers' real wages--that is, their
purchasing power after adjusting for inflation--is
estimated to be about 16 percent higher than in 2009.
If two percent more of workers' wages went to support
Social Security, workers would still be 14 percent
wealthier than today's workers. By 2052, wages are
projected to have 56 percent greater buying power than
in 2009.
Increase Worker and Employer Contributions
1/20 percent Annually for 20 years. To avoid abrupt
changes in Social Security contribution rates, this
option would schedule gradual increases in the Social
Security contribution rate (i.e., one-twentieth of one
percent per year over 20 years for employees and
employers, each) beginning in 2015, increasing the rate
to 7.2 percent by 2035. In 2015, the increase for an
average earner making $53,085 then would be $26.50 a
year, or about 50 cents a week. It is estimated that
this approach would reduce the 75 year shortfall by
1.39 percent of taxable payroll or about 69 percent.
Raise Rates Based on the Trustees' Most
Current Intermediate Assumptions of the Tax Rate Needed
to Balance Revenues and Outlays. This option would
increase Social Security contribution rates in order to
correct future estimates of insolvency. The balancing
rate would be based on the Trustees' most current
intermediate assumptions of the tax rate needed to
balance revenues and outlays over the entire 75 year
projection period, and would take effect automatically
if Congress did not adjust revenues and costs. When
long-range forecasts change, the future fail-safe rate
would be automatically adjusted to maintain financing
for the next 75 years.
Enhance Collection of Existing Taxes. The
tax gap is the amount of taxes that are legally owed,
but not collected, by the federal government in a
timely fashion or at all. The IRS estimates the total
tax gap at about $345 billion a year, of which
approximately $58 billion is in Social Security and
Medicare payroll taxes (most of the $58 billion is from
Social Security payroll taxes).\41\ Increasing the
collection of unpaid Social Security payroll taxes
could significantly reduce the funds needed to make
Social Security solvent over the next 75 years.
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\41\The Internal Revenue Service estimates that in 2001 there were
$39 billion in underreported self-employment taxes, $14 billion in
underreported FICA, and five billion dollars in underpaid employment
taxes. United States Department of the Treasury, ``Update on Reducing
the Federal Tax Gap and Improving Voluntary Compliance,'' July 2009,
available at http://www.irs.gov/pub/newsroom/
tax_gap_report_final_version.pdf.
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OPTIONS TO CONSIDER BROADENING THE REVENUE BASE FOR SOCIAL SECURITY
As of 2009, workers' wages subject to Social Security
contributions amount to 39 percent of national income, or gross
domestic product (GDP).\42\ Some have argued that almost
everyone benefits from Social Security; therefore, broadening
sources of income would be more equitable. For example, many of
the sources of non-taxed income disproportionately benefit
upper income individuals. The sources of income not currently
taxed include:
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\42\2009 Social Security Trustees' Report, available at http://
www.ssa.gov/OACT/TR/2009/tr09.pdf.
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Earnings above the tax cap (about 17 percent
of aggregate earnings);
Earnings of workers not covered by Social
Security (about 25 percent of state and local
government employees do not participate in Social
Security);
Non-taxable fringe benefits paid by
employers, such as health insurance premiums, pensions,
and most other employee benefits;
Employees' tax-favored contributions to
``salary reduction'' plans for purposes other than
retirement (such as out-of-pocket spending for health
care, child care, or work expenses);
Income from capital, such as interest on
investments, stock dividends, and rental income from
real estate; and
Realized increases in the value of property
(capital gains) and transfers of property (through
gifts and inheritance).
Options to Modify the Social Security Tax Cap
In 2010, only earnings up to $106,800 are taxed and counted
toward workers' future Social Security benefits. The cap is
indexed to keep pace with the growth in average earnings of all
workers. In the past, Congress set the level of the cap to
cover 90 percent of the aggregate wages of all workers.\43\
Today, it covers only about 83 percent of such earnings.\44\
The decline occurred because those at the top of the income
distribution (the roughly six percent of workers who make more
than the cap) have had more growth in earnings than those who
make less than the cap. In 2010, the maximum Social Security
retirement benefit that could be received would be $2,346 per
month ($28,152 per year) if they retired at the full retirement
age of 66.\45\
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\43\Altman, Nancy J, ``Tier II Supplement to Social Security: The
Retirement-USA Plus Plan,'' presented at the Retirement-USA Symposium
(October 21, 2009).
\44\Janemarie Mulvey, ``Social Security: Raising or Limiting the
Taxable Earnings Base,'' Congressional Research Service, February 17,
2010. (RL32896). Available at http://www.aging.senate.gov/crs/
crs_social_security_policy.cfm.
\45\2009 Social Security Trustees' Report, Table VI.F10, http://
www.ssa.gov/OACT/TR/2009/tr09.pdf.
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Eliminate the Cap--Do Not Count the Additional Earnings
toward Benefits. If all earned income above $106,800 a year
were subject to Social Security contributions but did not count
toward benefits, Social Security would be solvent throughout
the long-range projection period. Making this change in 2010
would reduce the program's projected deficit by 2.32 percent of
payroll, thereby eliminating the 75-year deficit. However, with
this change, workers who earn more than the tax cap would pay
considerably more in taxes in a given year. For example, a
person making $400,000 per year would pay $18,178 more per year
and his or her employer would pay a matching amount, for a
total increase of $36,356. CRS projects that eliminating the
cap on contributions would impact roughly one in five
beneficiaries over his or her lifetime. As workers do not
generally have high earnings over their entire careers, the
total increase in taxes paid by individuals over their working
lives would be relatively small with a median increase in
lifetime contributions of three percent. Notably, under this
option the worker's maximum benefit would be no higher than
under current law changing the historic relationship between
contributions and benefits.
Eliminate the Cap--Count the Earnings toward Benefits. If
all wages above $106,800 in 2009 were taxed and counted toward
benefits, the change would almost make Social Security solvent
through the long-range period, reducing the payroll deficit by
1.89 percent and eliminating about 95 percent of the 75-year
shortfall. While high earners and their employers would pay
considerably more, these top earners would also receive much
higher benefits. For example, one who had paid taxes on
lifetime annual earnings of $400,000 would get a benefit of
about $6,000 per month, or $72,000 per year, which would
replace about 18 percent of the worker's average earnings.
Eliminate the Cap--Count Earnings toward Benefits Using
Different Formula. If all earnings above the cap were taxed and
counted toward benefits, policymakers could decide to change
the benefit formula to replace a smaller portion of earnings
above the old cap as a way to avoid paying very high Social
Security benefits. As previously noted, the Social Security
programs' formula is based on workers' average indexed monthly
earnings (AIME) in three brackets. In 2009, Social Security
paid:
90 percent of AIME up to $744, plus
32 percent of AIME between $744 and
$4,483, plus
15 percent of AIME over $4,483
A modified formula might apply the 15 percent bracket only
up to the old cap, and then provide a smaller replacement, say
three percent of earnings, above that. For example, the third
part of the above formula could be modified to:
15 percent of AIME between $4,483 and
$8,900 ($106,800 divided by 12), plus 3 percent of AIME
over $8,900
This option, starting in 2010, is estimated to eliminate
the 75-year deficit, resulting in savings of 2.17 percent of
payroll.
Gradually Restore the Cap to Cover 90 percent of Earnings.
Gradually increase the taxable earnings base to include 90
percent of earnings by increasing the base by two percent per
year above the growth in average wages. For example, the
maximum taxable base in 2010 would rise to $2,136 (two percent
of $106,800) beyond the automatic increase. In practice, the
deductions from earnings for the highest-paid six percent of
workers would continue for a few days longer into the year (and
for their additional contributions they would receive somewhat
higher benefits). For the 94 percent of covered workers with
earnings below the cap, there would be no change at all. The
change would bring the taxable maximum to the 90-percent level
in about 36 years and is projected to reduce the 75-year
deficit by 28 percent, or 0.60 percent of taxable payroll.
Similar to current law, the roughly one percent of the
population with earnings above the 90 percent cap would not pay
taxes on earnings above the new threshold.
Gradually Restore the Cap to Cover 90 percent of Earnings
for Workers and Eliminate the Contribution Cap for Employers.
Similar to the proposal above, the taxable earnings base would
be gradually increased until it covered 90 percent of aggregate
earnings, however it would only apply to the worker's share
(6.2 percent) of the payroll tax. In addition, employers would
pay their share of the payroll tax (6.2 percent) on the full
wages of their employers with no maximum amount. Self-employed
individuals, who currently pay the full 12.4 percent payroll
tax, would have a mixed basis for calculating their
contributions. Retirement benefits would be based only on the
workers earnings below the revised taxable maximum. This option
would reduce the 75-year deficit by 69 percent, or 1.37 percent
of taxable payroll.
Options to Extend Social Security Coverage to all Workers
As described previously, almost all workers pay into Social
Security, with the exception of the roughly 25 percent of state
and local government employees who are covered by alternative
pension systems.\46\ When Congress last extended coverage in
1983, it brought all newly hired federal employees into Social
Security but did not extend that requirement to non-covered
State and local employees.\47\ However, Congress no longer
allowed states that provide Social Security coverage to drop
that coverage.
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\46\U.S. Committee on Ways and Means, ``Background Material and
Data on Programs within the Jurisdiction of the Committee on Ways and
Means, 2004,'' The Green Book, House Ways and Means Committee Print,
Washington, DC: Government Printing Office, available at
http://waysandmeans.house.gov/media/pdf/111/ssgb.pdf.
\47\Following the 1983 legislation, a new Federal Employees
Retirement System was set up to supplement Social Security coverage for
newly-hired federal employees. Employees hired before 1984 could elect
to join the new system and be covered by Social Security or to remain
in the older Civil Service Retirement System. The number of federal
employees not covered by Social Security is gradually declining.
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Extend Social Security Coverage to Newly-Hired Non-covered
State and Local Government Employees. In order to achieve more
universal coverage under Social Security, newly hired state and
local government workers could be required to participate in
Social Security. Under this proposal, these workers would be
required to pay Social Security taxes and be eligible to
receive benefits. This change may also impact the funding of
the state and local government of pension systems. State and
local governments would need time to modify their pension
systems to fit with the Social Security program, as was done
for newly-hired federal employees after 1983. If, over a five
year period, all newly-hired state and local employees were
brought into Social Security coverage, this change is projected
to reduce the 75-year deficit by about nine percent, or 0.17
percent of payroll. The slight increase in revenue occurs
because the newly-covered workers and employers start to pay
into Social Security immediately, but claim benefits in the
future.
Option to Treat All Salary Reduction Plans Like 401(k)s.
Under the 1983 amendments to Social Security, employees pay
Social Security and Medicare taxes on their contributions to
retirement accounts, such as section 401(k), 403(b) and 457
plans, but they do not pay Social Security and Medicare taxes
on their payments into other types of salary reduction plans,
or ``flexible spending accounts.'' These are accounts that
employers set up to allow their workers to exclude from taxable
income out-of-pocket spending for health care, dependent care,
or qualified commuting costs for parking, van pooling, or
transit fares (Joint Committee on Taxation 2005).\48\ Employee
contributions to both 401(k)s and other flexible spending
accounts are exempt from personal income taxes for employees.
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\48\Joint Committee on Taxation, Testimony of George K. Yin, Chief
of Staff of the Joint Committee on Taxation at a Hearing of the Senate
Committee on Finance on ``Social Security: Achieving Sustainable
Solvency,'' JCX-38-05, May 25, 2005, available at http://
finance.senate.gov/imo/media/doc/gytest052505.pdf.
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The legislative rationale for keeping 401(k) contributions
subject to Social Security and Medicare taxes was to ensure
that such plans are not used to avoid Social Security tax
liability and that employees receive Social Security protection
based on those wages.\49\ This rationale applies equally to
salary reduction plans used for other purposes.\50\ Exempting
employee payments into flexible spending accounts from Social
Security and Medicare taxes means that the respective Trust
Funds are deprived of both the employee contributions and the
employers' matching share of Social Security and Medicare
contributions. If all employee contributions into salary
reduction plans were treated like 401(k) contributions and
subject to the payroll tax, it is projected that the 75-year
deficit in the Social Security program would be reduced by
about 12 percent, or 0.25 percent of taxable payroll.
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\49\Social Security Administration. 2009. Social Security
Amendments of 1983; H.R. 1900.
\50\Joint Committee on Taxation, 2005.
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Options to Use Progressive Taxes to Cover Social Security's Legacy
Costs
As described in the previous section, one reason the Social
Security program faces fiscal deficits is due to the estimated
$13 trillion in intergenerational transfers,\51\ or ``legacy
costs'', that arose from current generations of retirees
providing for their parents' and grandparents' retirement
income security during the early years of the program. Some
have argued that revenue to pay for these costs should be
raised in ways other than the Social Security payroll tax and
have proposed dedicating revenue from the estate tax to the
Social Security Trust Funds or levying a new legacy tax on
earnings above the tax cap on high-income households.
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\51\Diamond, Peter A. and Peter R. Orszag, ``Saving Social
Security: A Balanced Approach,'' Washington, DC: Brookings Institution
Press, 2004.
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Dedicate Estate Tax Revenue at the 2009 Level to
Social Security. Revenue from the estate tax could be used to
cover part of Social Security's legacy cost. In 2009, the
estate tax applied only to the value of an estate in excess of
$3.5 million if it is not left to a surviving spouse, who can
inherit all assets tax-free.\52\ Values above that level not
inherited by a spouse are taxed at 45 percent, with 55 percent
going to non-spouse heirs. The estate tax is slated to fall to
zero in 2010, and then revert to the higher tax rates
applicable in 2001 (a 55 percent tax on estates over $1 million
for individuals and $2 million for couples). Preserving the
estate tax into the future, and dedicating the revenue from the
tax with the 2009 level of exclusion and tax to Social
Security, would reduce the long-term deficit by 0.51 percent of
payroll, thereby eliminating about one fourth of the
deficit.\53\ This estimate assumes that the estate tax
threshold for Social Security revenue will remain $3.5 million
for all future years. If the amount of the estate tax exemption
rose with the consumer price index, this option would reduce
the 75-year deficit by 0.40 percent of payroll or about one-
fifth of the deficit.
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\52\Each member of a couple can leave $3.5 million to non-spouse
heirs without incurring any tax liability, thus shielding from taxation
married couples' estates valued up to $7 million.
\53\If Congress allowed the estate tax to return to its higher 2001
level in 2011, then this option would use part of estate tax revenue to
pay for Social Security and part would go to general revenues.
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Three percent Legacy Tax on Earnings Above the Tax
Cap. A legacy tax on earnings above the taxable earnings cap
could be raised as a way to ensure that very high earners
contribute to financing Social Security's legacy cost in
proportion to their full earnings. If a three percent legacy
tax on earnings above the tax cap began in 2010 (1.5 percent
for workers and employers each) and the higher earnings did not
count toward benefits, the long-term deficit would be reduced
by 0.57 percent of taxable payroll, or by just over one-fourth.
Three percent Legacy Tax on Adjusted Gross Income
(AGI) over $250,000 for Couples and $125,000 for Individuals.
The legacy tax threshold could be raised to eliminate increases
on the middle class. Dedicating to Social Security a three
percent legacy tax on AGI over $250,000 for couples and
$125,000 for individuals starting in 2010 is projected to
reduce the 75-year deficit by 0.74 percent of taxable payroll,
thereby reducing the deficit by just over one-third, assuming
thresholds indexed by average wage growth.
Five percent Legacy Tax on Adjusted Gross Income
over $250,000 for Couples and $125,000 for Individuals.
Dedicating to Social Security a five percent legacy tax on AGI
over $250,000 for couples and $125,000 for individuals is
projected to reduce the 75-year deficit by 1.23 percent of
taxable payroll, thereby eliminating roughly three-fifths of
the deficit.
OPTIONS TO MAINTAIN RESERVES AND DIVERSIFY INVESTMENTS
As part of a Social Security financing strategy, the
federal government could increase and maintain large reserves
so that the investment income would remain as a permanent
source of support for Social Security. A portion of these
Social Security funds could be invested in equities as is done
by most other public and private pension plans. Several other
government pension programs, such as those for employees of the
Federal Reserve System, the Tennessee Valley Authority, and the
Railroad Retirement Board, already make such direct investments
in stocks, as does the Canadian social insurance system.
Investing in equities would add risk to the investment
portfolio and exposes the Trust Funds to increased liabilities
in times of economic downturn. The impact on program solvency
depends on the assumptions about the long term rates of return
of equities relative to Treasury bonds. If they are equal, then
diversifying investments will have no impact on solvency. The
rate of return on equities has traditionally outpaced the
return on bonds, however, some economists argue that the
difference in the returns corresponds to the difference in risk
between these assets. The following are proposed options for
investing a portion of these funds in the equity markets, with
projected impacts based on high, medium, and low rates of
return.
Gradually Invest 15 percent of Trust Fund Assets
in Equities. The government could gradually invest Trust Fund
assets in a broad index of equity market securities, such as
the Wilshire 5000. If the Trust Funds' investments in equities
increased by 1.5 percent a year for 10 years and equity
investments were maintained at 15 percent thereafter, it would
reduce the long-range deficit by about 14 percent, or 0.27
percent of taxable payroll. These calculations assume that
Trust Funds invested in equities earn a constant nominal 9.4
percent return (or 6.4 percent real return over 2.8 percent
inflation) this is 3.5 percentage points over the expected
average yield on long-term Treasury bonds. If one assumes that
the investment earns the same return as Treasury bonds (2.9
percent real), there would be no impact on the 75-year deficit.
Gradually Invest 40 percent of Trust Fund Assets
in Equities. Alternatively, a larger portion of Trust Fund
assets could be invested in equities. If 40 percent of the
Trust Funds' assets were invested in equities, phased in over
15 years (between 2010 and 2024), and invested in a broad index
of equity markets which earned a 9.4 percent nominal return (or
a real return of 6.4 percent on top of inflation), it would
eliminate one third of the long-range deficit and reduce the
long-term deficit by 0.67 percent of payroll. If, instead, the
same investment policy ended up producing a smaller return of
8.4 percent (or a real return of 5.4 percent on top of
inflation), the policy could reduce the long-term deficit by
0.48 percent of taxable payroll, thereby eliminating about one-
fourth of the long-term deficit. If one assumes that the
investment earns the same return as Treasury bonds (2.9 percent
real), there would be no impact on the 75-year deficit.
OPTIONS TO REDUCE BENEFITS TO ADDRESS PROGRAM SOLVENCY
Options that would lower future benefits to balance long-
term finances include those that would reduce the annual cost-
of-living adjustment (COLA), increase the age for receiving
full retirement benefits, lengthen the average period used to
calculate lifetime earnings, lower benefits for new
beneficiaries, and lower the benefit payable to spouses of
retired workers.
Options to Reduce the Cost-Of-Living Adjustment
Under current law, Social Security benefits are
automatically adjusted each year to keep up with the cost of
living, as measured with the Consumer Price Index for Urban
Wage Earners and Clerical Workers (CPI-W). Some proposals would
lower Social Security benefit costs by changing the way in
which Social Security benefits are adjusted to keep pace with
inflation. Some proposals would pay less than the full COLA by
adjusting benefits by the COLA minus one percent, or minus half
of one percent. Another proposal would shift to a new index.
Groups of beneficiaries with relatively long periods of
eligibility for benefits, including older beneficiaries, women,
survivors, disabled beneficiaries, and low-income
beneficiaries, would face the most significant impacts on their
benefits from COLA reductions. These categories of
beneficiaries also have the highest rates of poverty and are
the most reliant on income from Social Security.
Reduce the COLA by one percent each year. If the
annual COLA increase for Social Security beneficiaries were
reduced by one percentage point, the long-term deficit would
decline by 1.55 percent of taxable payroll, or about 78
percent. If inflation were 2.8 percent per year (as assumed by
the Trustees), the annual increase for beneficiaries would be
1.8 percent per year. This change would impose the greatest
burden on the oldest beneficiaries because the reductions
accumulate over time. For example, a 92-year-old beneficiary
would have the purchasing power of her or his benefits eroded
by 25 percent if the cost of living went up by 2.8 percent
every year, but he or she received only a 1.8 percent increase
each year.
Reduce the COLA by one-half percent each year. If
policymakers reduce the COLA by half a percentage point, this
could potentially reduce the long-range deficit by 0.81 percent
of taxable payroll, thereby eliminating about 40 percent of the
shortfall. In this scenario, a 92-year-old beneficiary would
see the purchasing power of his or her benefits eroded by 14
percent if inflation were 2.8 percent per year, but she or he
received only a 2.3 percent annual increase.
Adopt the ``Chained'' Consumer Price Index (CPI).
Social Security benefits are now automatically adjusted by
changes in the CPI-W, as measured by the Bureau of Labor
Statistics (BLS). The BLS has developed a new ``chained'' CPI.
It differs from the CPI-W in that it takes into account
purchasing substitutions across broad categories of goods and
services (such as spending less on food to pay for higher-
priced gasoline). Because the ``chained'' CPI is expected to
increase about 0.3 percent slower each year than the CPI-W,
this change would reduce the long-run deficit by 0.49 percent
of taxable payroll, thereby shrinking the shortfall by nearly
one-fourth. Proponents of this approach argue that the chained
CPI is a more accurate and up-to-date measure of the cost of
living. Opponents point out that while it may be more accurate
for the general population, it may be less accurate for seniors
who spend a larger share of their incomes on health care. To
the extent that the chained CPI understates increases in the
cost of living for beneficiaries and is lower than the CPI-W,
the oldest beneficiaries could have significant reductions in
their benefits, as would be the case with all COLA reductions.
Options to Raise the Age for Full Retirement Benefits
The age at which retirees can collect full Social Security
benefits is now 66 years for people born in 1944 (who reach 65
in 2009). It is scheduled to rise to 67 for those born in 1960
or later. Increasing the full benefit age would improve Social
Security's long-range finances because such a change would
further lower benefits for all future retirees. For example,
when the full benefit age was 65, benefits starting at age 62
were reduced by 20 percent; when the full benefit age reaches
67, benefits starting at 62 will be reduced by 30 percent,
while benefits taken at age 65 will be reduced by 13.3 percent.
Proponents of increasing the full benefit age believe that
retirement ages should rise as people are living longer and
that a reduction in benefits would encourage individuals to
work longer. Opponents point out that Social Security's full-
benefit age (67 in the near future) is already much older than
eligibility ages in private or public pension plans, which
remain 65 or earlier, and that working longer may not be an
option for those in physically demanding jobs or for those who
cannot find work. Moreover, the full-benefit age is older than
the ages for penalty-free withdrawals from 401(k)s or IRAs
(59\1/2\). As under current law, benefits for the disabled will
be unaffected.
Accelerate the Increase to 67; then Increase the
Full-Benefit Age by One Month Every Two Years to Age 68. If
policymakers speed up the increase in the full-benefit
retirement age to reach 67 for those born in 1953 or later, and
raise the age one month every two years until it reaches age 68
for people born in 1977 and later, these changes are estimated
to reduce the long run deficit by 0.46 percent of taxable
payroll. This would eliminate just under one-fourth of the
long-term deficit. Under this change, when the full benefit age
is 68, benefits starting at age 65 would be reduced by 20
percent and benefits starting at age 62 would be reduced by
about a third.
Accelerate the Increase to 67; Then Increase the
Full-Benefit Age by One Month Every Two Years to Age 70. This
option would continue to increase the full-benefit age to 70.
If policymakers speed up the increase in the full-benefit
retirement age to reach age 67 for those born in 1953, and then
extend it one month every two years until it reaches age 70 for
people born in 2025, these changes would reduce the long-term
deficit by 0.62 percent of taxable payroll. This would
eliminate just under one-third of the long-range shortfall.
With this change, the benefit reduction for early retirement
would be larger. When the full-benefit age reached 70, benefits
starting at age 65 would be reduced by 30 percent and benefits
starting at age 62 would be reduced by 45 percent.
Gradually Index the Full-Benefit Age for Longevity
Indefinitely. After the full-benefit age reaches 67 for those
born in 1960, the full-benefit age would increase by one month
every two years for those born after 1960. It would increase to
age 68 for those born in 1984, to 69 for those born in 2008 and
to about age 70 for individuals born in 2032. This schedule
roughly matches assumptions about increasing life expectancy
for people reaching age 65 in the future. This change would
reduce the long-run deficit by 0.40 percent of taxable payroll,
thereby eliminating about 18 percent of the long-term
shortfall.
Options to Lengthen the Career-Earnings Averaging Period
As described previously, Social Security benefits are based
on a formula that uses a worker's highest 35 years of earnings.
Increasing the number of work years for calculating average
lifetime earnings will lower future benefits because the
additional years of earnings included in a worker's average
lifetime earnings will be lower than each of the 35 years now
used. This reduction would have the greatest impact on
individuals, especially those who are less educated, low-income
workers and women, with gaps in their paid work or individuals
who spent part of their working lives not covered by Social
Security because the additional years included would likely be
years with zero earnings. It would have a small impact on
individuals who had steady and consistent covered work records
of 38 or 40 or more years of work.
Increase the Averaging Period from 35 to 38 Years.
An increase in the number of years used to calculate average
lifetime earnings for retirement and survivor benefits (but not
for disabled workers) from 35 to 38, phased in from 2010
through 2014, would reduce the long-term deficit by 0.29
percent of taxable payroll, thereby shrinking the shortfall by
about 14 percent.
Increase the Averaging Period from 35 to 40 Years.
Lengthening the averaging period to 40 years, phased in between
2010 and 2018, for retirement and survivor benefits (but not
for disabled workers) would reduce the long-term shortfall by
0.46 percent of taxable payroll. It would shrink the shortfall
by about one-fourth.
Options to Reduce Benefits for New Beneficiaries
Two options below illustrate the impact of immediate
across-the-board reductions in benefits for new beneficiaries,
while a third option gradually phases in reductions that exempt
those with very low lifetime earnings. A fourth option
gradually scales back benefits for dependent spouses (but not
widowed spouses) of retired workers.
Reduce benefits by Three Percent for New
Beneficiaries in 2010 and Later. If benefits were reduced by
three percent for everyone newly eligible in 2010 or later,
this change would reduce program costs by 0.36 percent of
taxable payroll, thereby reducing the 75- year deficit by just
under one-fifth. This change would lower benefits for all new
recipients, including retirees and their dependents, widowed
spouses, disabled workers and their families, and families with
children whose working father or mother died.
Reduce Benefits by Five Percent for New
Beneficiaries in 2010 and Later. If benefits were reduced by 5
percent for everyone newly eligible for benefits in 2010 or
later, it is projected that it would reduce program costs by
about 0.61 percent of taxable payroll, thereby lowering the
long-range deficit by about three-tenths.
Price Index Benefits for Successive Generations
Beginning in 2013. Under current law, benefits for each
successive age cohort (or generation) of new beneficiaries are
indexed to keep pace with average-wage growth. The rationale
for doing so is to provide stable replacement rates for future
retirees across generations so that benefits for an average
earner retiring at full-benefit age in any future year would
replace the same portion of career earnings as for today's
retirees. After entitlement, benefits are automatically
adjusted to keep pace with price growth (inflation), with the
aim of maintaining beneficiaries' purchasing power. A variety
of options would gradually lower future benefit levels by
indexing benefits for newly eligible retirees across
generations by price growth instead of the higher average-wage
growth. Many such plans would exempt the lowest earning
retirees from the benefit reductions and are sometimes referred
to as ``progressive price indexing''.\54\ These proposals would
make the largest benefit cuts for those who earned more and
paid higher contributions over their careers. After a period of
time under progressive price indexing, the majority of
beneficiaries would receive the same flat benefit with little
relation to what contributions they had made. The Social
Security Actuaries have estimated that one progressive price
indexing proposal that exempted the bottom 30 percent of
earners would be projected to reduce long-range costs by about
1.31 percent of taxable payroll, or by just under two-thirds of
the long-range deficit.
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\54\Patrick Purcell, Neela K. Ranade, and Laura Haltzel, ``Indexing
Social Security Benefits: The Effects of Price and Wage Indexes,''
Congressional Research Service, May 12, 2005 (RL32900), available at
http://www.aging.senate.gov/crs/crs_social_security_policy.cfm.
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Gradually Lower the Supplemental Spouse Benefit.
Under current law, the spouse (age 62 or older) of a retired or
disabled worker can receive a benefit of up to 50 percent of
the primary worker's benefit, but only to the extent the
benefit exceeds what the spouse is entitled to on the basis of
her or his own work record. One such option would gradually
lower the supplemental spouse benefit for persons newly
eligible in 2010 and later. The reduction from 50 to 33 percent
of the primary worker's benefit would phase in by one
percentage point a year over 17 years--from 49 percent for the
newly eligible in 2010, to 33 percent for the newly eligible in
2026 and later. The change is estimated to lower the 75-year
average costs by 0.12 percent of taxable payroll and reducing
the long term deficit by about six percent. Reductions to the
spousal benefits could also be combined with improving benefits
for widowed spouses and/or for providing credit for caring for
young children as part of the benefit that workers earn based
on their own work records. However, depending on how the
benefits are balanced, it could have a positive or negative
effect on program solvency. Also, a reduction in supplemental
spouse benefit applied to the benefits of divorced spouses
could reduce benefits for a group already more likely to be
poor.
OPTIONS TO PROTECT BENEFITS FOR VULNERABLE GROUPS
In order to modernize the Social Security, any proposal for
reform must ensure benefits remain adequate for current and
future vulnerable Americans who rely on Social Security the
most. At the request of the Aging Committee, the Government
Accountability Office (GAO) identified proposals for improving
benefits for lifetime low earners, low-income women, and the
oldest beneficiaries.\55\ In certain cases, an option targeting
one group may also address concerns about other groups due to
the overlap in certain demographic groups. In addition to
examining an option's impact on improving benefit adequacy, GAO
examined the implications on program solvency and
administration. Therefore, GAO's assessment is categorized as
follows:
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\55\GAO, Social Security: Options to Protect Benefits for
Vulnerable Groups When Addressing Program Solvency, GAO-10-101R
(Washington, D.C.: December 7, 2009), available at
http://www.aging.senate.gov/letters/gaossreform.pdf.
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Adequacy: Retirement security experts and agency
officials\56\ had mixed views about the potential effectiveness
of these options. While experts told GAO that several of these
options could help address concerns about benefit adequacy,
agency officials said they may not have the expected effects
because of the complex rules governing Social Security
benefits. An option's design will play an important role in
determining its effectiveness.
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\56\See GAO, Social Security: Options to Protect Benefits for
Vulnerable Groups When Addressing Program Solvency, GAO-10-101R
(Washington, D.C.: December 7, 2009) for methodology, available at
http://www.aging.senate.gov/letters/gaossreform.pdf.
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Solvency: Because these options increase benefits, they
have cost implications that affect the solvency of the Social
Security system. The cost of a given option will depend on the
number of people affected by it and the amount of the benefit
increase. Additionally, cost will be affected by interactions
with other elements of an overall Social Security modernization
proposal. Key factors that influence cost are described for
each of the options.
Administration: Implications for program administration
vary among the options. Retirement security experts and agency
officials said that some options could be fairly easy to
administer, while others could be very complex. Even the less
complex options could create additional work for SSA, such as
monitoring eligibility for additional benefits. Options that
increase the number of people eligible for benefits could add
to SSA's administrative workload.
GAO identified and assessed the following modernization
options:
OPTION: GUARANTEEING A MINIMUM BENEFIT
Guaranteeing a minimum benefit by increasing Social
Security retirement benefits for those who have worked in low-
wage jobs throughout their careers addresses concerns about
benefit adequacy. A ``special minimum benefit'' provision
intended to increase benefit adequacy for low-earning steady
workers was enacted in 1972.\57\ However, because its
eligibility threshold has not kept pace with wage growth, few
people still qualify for the benefit. A number of proposals
include a new minimum benefit option. The amount and structure
of the benefit varies among proposals, but most minimum benefit
options are designed to address benefit adequacy by providing a
retirement benefit equal to some multiple of the federal
poverty line, with the multiple based on years worked in
covered employment. For example, one option would provide a
minimum benefit equal to 120 percent of the poverty line for a
minimum wage earner who had worked for 30 years. Another option
would provide a minimum benefit equal to 100 percent of the
poverty line for a 30-year worker and 111 percent of the
poverty line for a 40-year worker.\58\
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\57\The Social Security Amendments of 1972 added the ``special
minimum benefit'' provision. (42 U.S.C. Sec. 415(a)(1)(c)(i)).
\58\Other options would provide benefits ranging from 75 percent of
the federal poverty line for those meeting the standard Social Security
eligibility requirements (about 10 years of covered employment) up to
125 percent of the poverty line for a 30-year worker.
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Adequacy: The guaranteed minimum benefit option targets
lifetime low earners, a vulnerable group that relies heavily on
Social Security benefits for its retirement income. Retirement
security experts said that this option targets a broader group
of beneficiaries than proposals that focus on specific
subgroups of low earners. SSA officials said that, depending on
how this option is designed, it could work well, but it is
difficult to target lifetime low earners effectively. For
example, some officials and experts said that requiring a long
work history is problematic because low earners often have
recurring periods of unemployment and cannot satisfy such a
requirement. Thus, the target population may not be reached if
a lifetime of work is required to earn the benefit. However,
other experts said that if a lifetime of work is not required,
some people outside the target population would also benefit.
For example, higher-wage workers who worked for a short period
of time may also receive benefits.
The impact of this policy would likely decline over time,
as the federal poverty line tends to grow slower than wages.
Therefore, tying the minimum benefit to the federal poverty
line could cause these benefits to lose value over time
relative to the growth in the standard of living, similar to
the current special minimum benefit. Future generations would
have to find new benchmarks to ensure a minimum benefit remains
adequate.
Solvency: Cost implications of this option depend on the
number of work years required for eligibility, since that
requirement will directly influence the number of people who
would qualify for benefit increases. A shorter work requirement
will result in more people being eligible, and thus costs will
be higher. Additionally, most of the options reviewed set the
benefit amount at some multiple of the poverty line.\59\ The
multiple used can have a significant impact on cost. For
example, a guaranteed minimum benefit equal to 75 percent of
the 2009 federal poverty guidelines would be $677 per month,
whereas a benefit equal to 125 percent of the guidelines would
be $1,128 per month.\60\
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\59\How the initial benefit level increases for beneficiaries newly
eligible in succeeding years would also influence costs. For example,
over time, indexing the benefit to wages would be more costly than
indexing to prices.
\60\This is a GAO calculation based on the 2009 federal poverty
guideline of $902.50 per month for a single-person home in all states,
except Alaska and Hawaii, and the District of Columbia.
---------------------------------------------------------------------------
Administration: For the most part, experts and SSA
officials did not raise concerns about implementing and
administering a minimum benefit option, although one expert
said that policy makers would have to consider how to phase it
into the Social Security system.
OPTION: REDUCING WORK REQUIREMENTS FOR ELIGIBILITY
Reducing the work requirements for Social Security
retirement benefit eligibility enables people who have shorter
earnings histories to receive benefits. While some people who
do not have 40 credits are still eligible for benefits based on
the earnings of an eligible spouse, others do not qualify for
any benefits. For example, a small number of unmarried
individuals fail to qualify for benefits due to short earnings
records. A reduced work requirement would allow people with
shorter earnings records, potentially as short as a single
credit of covered employment depending on how it is designed,
to receive benefits. Benefit amounts would be calculated under
the existing formula, which uses the worker's average indexed
monthly earnings during the 35 years in which he or she earned
the most, even if there were no earnings from covered
employment during some of those years. SSI benefits exist
outside of OASDI benefits to help those with shorter earning
histories.
Adequacy: Reducing the Social Security work requirement is
an option that targets workers with low lifetime earnings due
to short work histories, as opposed to those with long
histories of low earnings. SSA officials told GAO there are
many people who fall just short of the 40 credits requirement
because they have intermittent work histories. However,
officials also said many of those people may already be
eligible for spousal benefits, resulting in few people
benefiting from this option. Other retirement security experts
expressed similar opinions about the limited number of people
who would be helped by reduced work requirements. In addition,
agency officials and experts said benefits based on such short
work histories are likely to be very low and questioned the
effectiveness of this option in addressing benefit adequacy. A
proposal that includes this option simulated its potential
effect and found similar limitations.\61\ This option could
also expand eligibility to those who receive benefits from a
pension for work in non-covered employment for state and local
governments, but an offset, such as the Windfall Elimination
Provision\62\ with some modifications, could be applied to
those benefits.\63\
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\61\Andrew G. Biggs, ``Enhancing Social Security benefits for low
earners: Effects of reducing eligibility requirements for Social
Security retirement benefits,'' National Academy of Social Insurance
(Nov. 14, 2008), available at http://www.nasi.org/sites/default/files/
research/ Andrew_Biggs_January_2009_Rockefeller.pdf.
\62\42 U.S.C. Sec. 415(a)(7).
\63\The Windfall Elimination Provision is an existing Social
Security provision that reduces Social Security benefits for those who
also receive pensions from employment that is not covered by Social
Security. Noncovered workers do not pay Social Security taxes on their
noncovered earnings. This provision is intended to treat such
beneficiaries in a manner that parallels treatment of beneficiaries who
paid Social Security taxes on all of their lifetime earnings.
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Solvency: Because this option increases the number of
people receiving benefits, it has cost implications for Social
Security's solvency. The number of credits required will
directly influence the number of people who would be newly
eligible for benefits. A shorter work requirement will result
in more people being eligible. However, because few people are
actually expected to receive benefits under this option, and
those who do are expected to receive modest benefits, the
impact of a reduced work requirement on program solvency is
unlikely to be very large.
Administration: Because few people are expected to gain
eligibility under this option, the impact on SSA's workload is
likely to be small.
OPTION: SUPPLEMENTING BENEFITS FOR LOW-INCOME SINGLE WORKERS
Supplementing benefits for low-income single workers by
adjusting the formula used to calculate Social Security
retirement benefits addresses concerns about benefit adequacy
for that group. In one proposal, the first threshold in the
benefit formula would be adjusted or supplemented so that it
increased by one-half, from $744 to $1,116 in 2009, for
eligible beneficiaries. The benefit amount would be capped to
prevent eligible workers from receiving higher benefits than
those who just miss qualifying for the supplement.
To be eligible for the supplement, a worker's AIME\64\ must
be lower than a multiple of the existing formula's first
threshold, such as 150 percent or 300 percent. For example, if
the multiple were set at 300 percent, a worker whose AIME was
less than $2,232 (3 $744) in 2009 would qualify. To
receive the supplement, a worker must have at least 30 years of
covered employment and the worker cannot be eligible for
spousal benefits, nor can anyone else claim spousal benefits
based on that worker's earnings record.
---------------------------------------------------------------------------
\64\A worker's AIME is calculated based on a worker's highest 35
years' earnings, after earnings have been indexed for wage growth over
time.
---------------------------------------------------------------------------
Adequacy: The benefit supplement option targets lifetime
low earners, generally women, who never married or were not
married long enough to qualify for spousal benefits. Low-income
single and divorced women are expected to benefit most from
this option. While some retirement experts are supportive of
this option because it focused on the needs of low-income
women, others questioned the rationale for basing eligibility
on marital status and said either that eligibility for the
supplement should be expanded to a broader group of
beneficiaries or that the needs of low-income single women
could be addressed through another option, such as a guaranteed
minimum benefit.
Solvency: Because a benefit supplement for low-income
single workers increases benefits, it has cost implications for
Social Security's solvency. The extent to which this option
affects solvency will depend largely on the number of people
who would be eligible for it. A key factor that directly
influences the number of eligible beneficiaries is the multiple
that would be applied to a worker's AIME, ranging from 150
percent to 300 percent. Another factor that could influence
cost is the way ``single'' is defined for purposes of
determining eligibility.\65\
---------------------------------------------------------------------------
\65\One proposal that includes this option defines marital status
at the time when a person first applies for Social Security retirement
benefits and includes a provision to address changes in status after
that time. See Patricia E. Dilley, ``Restoring Old Age Income Security
for Low Wage Single Workers,'' National Academy of Social Insurance
(2009), available at http://www.nasi.org/sites/default/files/research/
Patricia_Dilley_January_2009_Rockefeller.pdf.
---------------------------------------------------------------------------
Administration: Agency officials and retirement security
experts told GAO that determining an individual's single status
could be administratively complex because people's marital
statuses change over time and could change after an initial
determination is made, for example, from single to married.
OPTION: ADOPTING EARNINGS SHARING
Earnings sharing combines married individuals' annual
earnings and evenly divides them between the two spouses for
each year of marriage when calculating individuals' Social
Security retirement benefits. Each spouse accrues credits
toward an individual benefit, even if only one of them worked.
An earnings sharing approach is often proposed as an
alternative to or an adjustment of existing spousal and
survivor benefits. For example, under earnings sharing,
divorced spouses whose marriages lasted less than 10 years
would be entitled to the individual benefits accrued during the
marriage. This option is also seen as a way to equalize
benefits received by dual-earner married couples with those of
single-earner couples. Currently, a single-earner couple
receives higher total benefits than a dual-earner couple with
the same total lifetime earnings. Under some earnings sharing,
the total benefit amount a single-earner couple receives would
be the same as the amount received by a dual-earner couple who
makes the same total income, rather than 150 percent of the
worker's benefit. Over the years, analysts have proposed an
extremely wide range of earnings sharing proposals, which treat
spouse and survivor benefits in markedly different ways (some
eliminate these benefits altogether, others develop various
survivor adjustments, others impose self-financing of survivor
benefits, and others direct cost savings toward higher worker
benefits). Such details make large differences in the
proposals' costs and distributional effects.
Adequacy: Earnings sharing targets divorced spouses,
generally women, whose marriages were too short to qualify them
for spouse or survivor benefits and whose incomes while married
were lower than their spouses' incomes. Some retirement
security experts and agency officials said earnings sharing
could increase benefits for divorced women. Proponents of this
option also focus on it as a means to improve equity between
single earner and dual-earner married couples. However, other
experts said this option would not do much to improve benefits
for economically vulnerable beneficiaries, in part, because it
is not well targeted. For example, SSA's simulations found that
earnings sharing would decrease benefits for the majority of
future retirees, although benefits for some would increase.\66\
Specifically, benefits would decrease for about 50 percent of
divorced women and increase for about 40 percent of divorced
women. Benefits would also increase for over one-third of
married individuals, but decrease for the vast majority of
widow(er)s.
---------------------------------------------------------------------------
\66\Benefit reductions would be more widespread for married
individuals in single-earner couples, and benefit increases would be
more prevalent for those in dual-earner couples. See Iams, et al.,
``Earnings Sharing in Social Security: Projected Impacts of Alternative
Proposals Using the Mint Model,'' Social Security Bulletin, vol. 69,
no. 1 (2009), available at http://www.ssa.gov/policy/docs/ssb/v69n1/
v69n1p1.pdf.
---------------------------------------------------------------------------
Solvency: Because earnings sharing would increase benefits
for some but decrease them for others, its net impact on Social
Security's solvency is unclear. Its cost would depend on the
relative numbers of people whose benefits increase or decrease
and the amounts of those changes. In addition, cost will be
affected by future demographic trends regarding marriage,
workforce participation, and related variables.
Administration: The extent to which this option increases
SSA's workload depends on the number of newly eligible people
who would receive benefits, which will be influenced by future
trends in marriage and workforce participation. Some additional
administrative effort and cost would also be required to
transition from the current system's spousal benefit to an
earnings sharing approach, in part because of the need to
verify marriage and divorce data.
OPTION: REDUCING THE MARRIAGE DURATION REQUIRED FOR
SPOUSAL BENEFITS
Reducing the number of years a marriage must have lasted
for a divorced person to receive spousal benefits addresses
benefit adequacy by increasing the number of people who are
eligible to receive Social Security spousal benefits.
Proponents of this option note that reducing the marriage
requirement from ten to seven years would reflect current
trends for shorter marriages.\67\ One Social Security proposal
suggests that reducing the required marriage duration could be
combined with a minimum work requirement for the divorced
spouse. Combining at least seven years of marriage with a
minimum of three years of work would mimic the standard 10-year
work requirement for Social Security retirement benefits.
---------------------------------------------------------------------------
\67\According to the Census Bureau, the median duration of first
marriages that ended in divorce was eight years in 2001.
---------------------------------------------------------------------------
Adequacy: Reducing the marriage duration required for
spousal benefits is an option that targets divorced spouses,
generally women, whose marriages were too short to qualify them
for benefits. One retirement security expert said that this
option would be an improvement over the current 10-year
requirement and other experts and agency officials said it
would help address benefit adequacy for women. However, experts
also said they do not expect this option to effectively target
economically vulnerable groups. This option would not benefit
women who were never married but could benefit higher-income
women who are not economically vulnerable.
Solvency: The extent to which this option affects solvency
depends on how many people would become eligible with a shorter
marriage requirement.\68\ Increased eligibility will depend on
the way the option is designed. For example, not including a
corresponding work requirement would increase costs more
because people who have no work history would also be eligible.
In addition, cost will be affected by future demographic trends
regarding marriage.
---------------------------------------------------------------------------
\68\In prior work, GAO found that very few people would be newly
eligible for benefits if the marriage duration were reduced to 7 years.
See GAO, Retirement Security: Women Face Challenges in Ensuring
Financial Security in Retirement, GAO-08-105 (Washington, D.C.: Oct.
11, 2007), available at http://www.gao.gov/new.items/d08105.pdf.
---------------------------------------------------------------------------
Administration: The extent to which this option increases
SSA's workload depends on the number of newly eligible people
who would receive spousal benefits, which will be influenced by
future trends in marriage and workforce participation.
OPTION: PROVIDING CAREGIVER CREDITS
Providing caregiver credits increases benefits for those
who spend time out of the workforce to care for dependent
children or elderly relatives. Time spent out of covered
employment as a caregiver may reduce benefits for workers, and
others may not work enough to earn the required 40 credits to
be eligible for benefits.
A caregiver credit option can be designed in different
ways. One design allows a specified amount of caregiving time,
such as three or four years, to count as covered employment,
and assigns a wage to that time. For example, an average wage
for all workers could be assigned or a wage linked to an
individual beneficiary's prior earnings could be used. Another
design excludes a limited number of caregiving years from the
benefit calculation so that instead of averaging earnings over
35 years, earnings are averaged over fewer years. A final
design supplements caregivers' retired worker benefits
directly, regardless of whether they took time out of the
workforce for caregiving. For example, an income-tested
supplement could be given to increase retired worker benefits
by 75 percent for those who have one child and 80 percent for
those with two or more children. Both parents of a child would
be eligible for this supplement, as long as the total household
income did not exceed 125 percent of the federal poverty
line.\69\
---------------------------------------------------------------------------
\69\The credit would remain income tested if the parents are living
apart.
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Adequacy: Caregiver credits seek to improve benefit
adequacy for workers, primarily women, who have shorter
earnings records because they spent time providing care for
children or elderly relatives and do not qualify for spousal
benefits because they never married or were not married long
enough to qualify for them. Retirement security experts said
this option recognizes the societal value of caregiving, but
experts also said that, for various reasons, it may not reach
its target population. For example, some low-income people are
unable to take time off from work. Therefore, people who have
relatively higher incomes may benefit more from the creation of
caregiver credits. Effects would vary greatly based on the
credits' design. For example, capping the credit at half the
average wage for caregiving years would provide more benefits
for high income families.
Solvency: Because caregiver credits increase benefits they
have cost implications for Social Security's solvency. The
extent to which this option affects solvency depends largely on
who would be eligible to receive the credit: one or both
parents, all caregivers, or just those who have low incomes.
Extending eligibility to a greater number of people will
increase costs. In addition, the number of years that credits
may be received and the wage assigned to those years will
impact costs.
Administration: Retirement security experts and SSA
officials told GAO that caregiver credits would be complex to
administer. A key issue is how to verify that care was provided
to a qualifying person. Experts said a birth certificate could
be used to document child care, but elder care would be more
burdensome to document. Measuring time off and verifying that
caregiving actually occurred would also be difficult.
OPTION: INCREASING SURVIVOR BENEFITS
Increasing benefits for surviving spouses, often widowed
women, by providing a Social Security retirement benefit equal
to 75 percent of the combined amount the couple received
addresses concerns about benefit adequacy. The current benefit
structure decreases household income upon widowhood by one-
third if the couple's benefits had been based on one spouse's
work history and up to 50 percent if both spouses had been
receiving retired worker benefits. Increasing survivor benefits
would lessen the magnitude of this change.
Adequacy: Increasing survivor benefits is an option that
targets widowed women, although widowed men could also benefit.
Retirement security experts and agency officials said this
option could address benefit adequacy for a vulnerable group
and would be an improvement over the current system. They also
said that this option can be targeted specifically toward low-
income survivors, for example, by including a cap. Experts and
agency officials also said this option addresses equity
concerns by increasing benefits for dual-earner couples. Under
the current system, dual-earner couples experience a
proportionally greater decrease in benefits upon the death of a
spouse than single-earner couples experience. However, as some
experts noted, this option could increase the disparity between
benefits for women who do not qualify for spousal or survivor
benefits relative to those that do qualify.
Solvency: Increasing survivor benefits will have
implications for Social Security's solvency. The extent to
which this option increases costs depends on how much greater
the benefit amount is across all eligible survivors. Capping
the amount of the increase based on income could help moderate
costs. Some proposals also combine this option with a reduction
in spousal benefits to help finance the increase in survivor
benefits so it is cost neutral or has a very small affect on
solvency.
Administration: Agency officials told GAO that this option
could be complex to administer, in part because it uses a
``couple's benefit'' as a baseline for calculating survivor
benefits. Since such a benefit does not currently exist in the
Social Security system this could be problematic, for example,
in cases where one of the spouses dies before retiring. In
addition, officials said there are many complicated rules for
survivors because of an existing provision, called the
widow(er)'s limit, that caps benefit amounts for some
survivors.\70\ Benefit increases expected under this option
could be negated by this provision. To avoid this result, one
proposal\71\ would use the deceased spouse's full PIA in the
calculation of the couple's benefit, without any reduction
because the deceased spouse claimed benefits before the FRA,
and would increase disparities.
---------------------------------------------------------------------------
\70\42 U.S.C. 402(f)(2); (f)(3) and (q).
\71\Joan Entmacher, ``Strengthening Social Security Benefits for
Widow(er)s: The 75 Percent Combined Worker Benefit Alternative,''
January 2009, available at http://www.nasi.org/ research/2009/
strengthening-social-security-benefits-widowers-75-percent.
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OPTION: PROVIDING LONGEVITY INSURANCE
Providing longevity insurance addresses concerns about
benefit adequacy by increasing Social Security retirement
benefits for beneficiaries who reach an advanced age, such as
80 or 85. As people grow older, they risk outliving their other
resources, become less able to work, and become more dependent
on Social Security benefits for their income. Longevity
insurance seeks to reduce the risk that they fall into poverty
at older ages by increasing their Social Security benefits.
This option could be targeted specifically toward low-
income beneficiaries, or provided to all those who reach an
advanced age. Work history could be an additional condition for
eligibility. For example, one longevity insurance proposal
increases benefits for people who have low benefits at age 82
and have at least 20 years of covered employment. It would
provide a minimum benefit equal to 70 percent of the federal
poverty line for a 20-year worker and increases the benefit for
each additional year of work. Another proposal increases
benefits by 10 percent at age 85 for 30-year workers whose
benefits are lower than 75 percent of the average benefit all
workers receive.\72\
---------------------------------------------------------------------------
\72\This proposal presents different options for implementing the
increase, for example, adding the supplement to the cost-of-living
adjustment each year.
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Adequacy: Providing longevity insurance targets the oldest
Social Security beneficiaries. Retirement security experts
believe this could be an effective option for addressing
concerns about benefit adequacy for the very old, especially
the oldest widows, because women generally live longer than
men. However, some experts also said that unless this option is
specifically targeted toward low-income beneficiaries, most of
the benefits would accrue to higher-income people because they
tend to live longer. In addition, agency officials said this
option could create disincentives to save for retirement or
incentives to spend down resources before beneficiaries become
old enough to qualify for the longevity increase. By doing so,
those whose assets would be too high to satisfy the means test
could become eligible for the increase.
Solvency: Providing longevity insurance would increase
Social Security program costs. Key factors that influence costs
include the age at which the benefit increases, the amount of
the increase, and whether all beneficiaries or only low-income
ones are eligible to receive the benefit. Providing the benefit
at an earlier age, for example, at 80 instead of 85, would
increase costs, as would providing it to all 80-year-olds
instead of only those who are low income. Unless the proposal
adjusts to increases in life expectancy, costs would increase
in the future. A proposal that increased benefits by one
percent for each year a beneficiary lived beyond their average
life expectancy, so that beneficiaries who lived 10 years
longer than life expectancy would have a 10 percent higher
benefit, would cost 0.08 percent of taxable payroll.
Administration: This option would not increase the number
of beneficiaries SSA serves and could use existing information
to determine eligibility, and retirement security experts and
agency officials said that this option would be easy to
administer. However, one expert said adding measures to improve
targeting would increase administrative complexity.
BENEFIT ADEQUACY OPTIONS COULD REDUCE OTHER BENEFITS FOR VULNERABLE
GROUPS, BUT APPROACHES TO MITIGATE THESE EFFECTS ARE AVAILABLE
Many Social Security retirement beneficiaries receive
benefits from other federal programs. Nine percent of Social
Security beneficiaries age 65 or older, or more than 2.7
million people, also receive Supplemental Security Income
(SSI), Medicaid, or Supplemental Nutrition Assistance Program
(SNAP) benefits.\73\ Increasing Social Security benefits to
address concerns about adequacy for vulnerable groups of
beneficiaries could result in a decline in benefits from these
other programs. In fact, some beneficiaries could lose
eligibility for benefits from the other programs altogether. On
the other hand, some beneficiaries may not be affected because
their incomes, even with increased Social Security benefits,
would stay within the other programs' eligibility limits.
---------------------------------------------------------------------------
\73\For purposes of this analysis, GAO specifically examined Social
Security beneficiaries who receive retirement, spousal, or survivor
benefits.
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SUPPLEMENTAL SECURITY INCOME
An increase in Social Security retirement benefits could
cause some SSI recipients to receive lower SSI benefits,
although the total amount from both sources could remain
constant or even increase. Some recipients would lose SSI
eligibility altogether if their income, including their
enhanced Social Security benefits, exceeded the SSI income
eligibility standards. Every additional dollar of Social
Security benefits, beyond the first $20,\74\ results in a
dollar-for-dollar reduction in SSI benefits. This trade-off
results in no net loss of benefits from these two sources.
However, there could be a loss of SSI eligibility if the Social
Security benefit increase causes earned and unearned income,
after disregards, to exceed the maximum allowable SSI benefit,
or $674 per month in 2010.\75\ Assuming no other sources of
income, an SSI recipient who currently receives $693 per month
from Social Security alone or both programs combined retains
SSI eligibility, but an SSI recipient whose Social Security
benefit exceeds $693 per month loses SSI eligibility (see Table
12).
---------------------------------------------------------------------------
\74\The $20 amount is a general SSI income exclusion that was set
in the original law, and has not been updated.
\75\For couples receiving SSI, the maximum allowable payment in
2010 is $1,011. Some states offer supplements to the federal SSI
payment, which allow those with incomes above federal limits to qualify
for SSI.
TABLE 12: EXAMPLE OF HOW SSI ELIGIBILITY RELATES TO AN INDIVIDUAL'S
INCOME
------------------------------------------------------------------------------------------------------------------------------------------------
Social Security Benefits......... $620 $693 $694
Less income disregard............ -20 -20 -20
Total countable income for SSI... 600 673 674
SSI eligible?.................... Yes Yes No
SSI benefits..................... 74 1 0
Total income................. 694 694 694
------------------------------------------------------------------------
Source: GAO analysis of SSI eligibility requirements.
Losing SSI eligibility also closes one pathway to Medicaid
eligibility for some individuals, although individuals may be
able to keep their Medicaid coverage under other rules. Many
experts said losing Medicaid eligibility is more detrimental to
beneficiaries than losing SSI eligibility. Some beneficiaries
would be harmed rather than helped because the loss of Medicaid
coverage and the subsequent increase in out-of-pocket health
care costs could significantly outweigh the Social Security
benefit increase. Similarly, losing SSI eligibility also
eliminates a pathway to SNAP eligibility for some households,
but these households may still qualify for SNAP benefits based
on net income.
There are also reasons why some beneficiaries may prefer
Social Security benefits to SSI benefits. Several retirement
security experts said there may be a stigma associated with SSI
that deters people from participating because it is viewed as
welfare, while Social Security is tied to income earned through
work. In addition, Social Security benefits do not require the
income and asset testing that SSI benefits do, reducing the
application burden for beneficiaries. SSA officials said
applicants may consider that burden a deterrent to applying,
especially if their potential SSI benefit is small. Because
people may choose not to apply for SSI, some experts suggest
that Social Security may more effectively target vulnerable
populations.
MEDICAID
For some beneficiaries, Medicaid coverage is linked to
their receipt of SSI, which puts them at risk of losing
Medicaid if they lose SSI because their Social Security
benefits increase.\76\
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\76\Medicaid is a joint state and local means tested program that
finances health care coverage for certain categories of low-income
individuals, including those age 65 and older.
---------------------------------------------------------------------------
However, those who lose their SSI benefits may be able to
retain their Medicaid coverage under alternative state
eligibility criteria.\77\ For example, they may still be
eligible to retain Medicaid coverage if their income is low
enough or if they qualify under state rules as ``medically
needy.'' In 2007, about one-fifth of the more than 2 million
Social Security beneficiaries who received Medicaid also
received SSI benefits, and the other four-fifths were eligible
for Medicaid under other criteria (see figure 9).
---------------------------------------------------------------------------
\77\Because eligibility standards for Medicaid can vary by state,
an individual's option for coverage may be affected by where he or she
lives.
Medicaid beneficiaries whose income increases to the level
where they are no longer eligible for all Medicaid benefits may
still qualify for assistance with Medicare premiums, cost-
sharing, or both. However, under these circumstances, certain
benefits that may be covered by Medicaid, such as dental,
vision and long-term care services, would no longer be
covered.\78\ The amount of assistance with Medicaid premiums
and cost-sharing for which beneficiaries may qualify is based
on several factors, including income levels and states'
policies. For example, states are required to provide
assistance for Medicare premiums and cost-sharing to
beneficiaries with incomes at or below 100 percent of the
federal poverty line.\79\ For individuals with higher incomes,
states may vary in the amount of premium and cost sharing
assistance they provide.
---------------------------------------------------------------------------
\78\Medicare does not provide coverage for these services.
\79\Beneficiaries must also have resources that are at or below an
established level to qualify for this assistance.
---------------------------------------------------------------------------
In general, because Medicaid eligibility requires
beneficiaries to meet some sort of income test, an increase in
Social Security benefits could cause those near these income
limits to lose their Medicaid benefits entirely. The amount of
the increase that would result in a loss of Medicaid may vary
among states, because they have discretion to set income limits
above federal mandatory minimums and other eligibility
criteria.
While Social Security beneficiaries who lose Medicaid would
still have Medicare coverage, some beneficiaries could still
incur significant out-of-pocket health care expenses.\80\
Researchers have found that individuals who qualify for both
Medicare and Medicaid tend to have very low incomes and
experience serious and costly health conditions, such as heart
disease.
---------------------------------------------------------------------------
\80\In 2007, all Social Security beneficiaries age 65 and older
received Medicare benefits.
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SUPPLEMENTAL NUTRITION ASSISTANCE PROGRAM
An increase in Social Security benefits could cause a loss
of Supplemental Nutrition Assistance Program (SNAP) eligibility
for some beneficiaries.\81\ In all states except California,
households in which all members receive SSI qualify for SNAP
without meeting an income test.\82\ If SSI eligibility is lost,
beneficiaries may still qualify under SNAP's income eligibility
rules. In 2007, about 81 percent of Social Security
beneficiaries who received SNAP benefits qualified for them
under the program's rules, rather than through SSI, as
illustrated in Figure 10.
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\81\Supplemental Nutrition Assistance Program, formerly known as
the Food Stamp Program, is a means-tested food assistance program
designed to help low-income households with food purchases.
\82\California converted SNAP benefits to cash included in state
supplementary payments.
SNAP's eligibility rules are based on income limits that
are generally higher than those of SSI, and SNAP limits vary by
household size, as shown in Table 13.\83\ Households with an
elderly person must meet net income limits but not gross income
limits to qualify for SNAP. Under current rules, an elderly
individual living alone whose net monthly income exceeds $903
would not be eligible for SNAP benefits.\84\ Therefore, if an
elderly individual whose net monthly income is close to the
income limit receives a large enough increase in Social
Security benefits he or she may no longer meet the income test
for SNAP and lose all SNAP benefits. For example, if Social
Security benefits are increased by $104 for an individual
currently receiving $800, total income would increase to $904,
and they would lose SNAP eligibility.
---------------------------------------------------------------------------
\83\Households where all members receive Temporary Assistance for
Needy Families, or in some places, general assistance (benefits for
low-income individuals who are not eligible for federal assistance) do
not need to meet separate income limits to qualify for SNAP.
\84\Net income limits are higher in Alaska and Hawaii. In
determining net income, households in all states are allowed to make
certain deductions.
TABLE 13: FISCAL YEAR 2010 SNAP INCOME LIMITS FOR HOUSEHOLDS WITH AN ELDERLY MEMBER
--------------------------------------------------------------------------------------------------------------------------------------------------------
Additional
Size of household One Two Three Four Five Six Seven Eight members
--------------------------------------------------------------------------------------------------------------------------------------------------------
Net monthly income.............................................. $903 $1,215 $1,526 $1,838 $2,150 $2,461 $2,773 $3,085 +$312 each
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: U.S. Department of Agriculture, Food and Nutrition Service.
Note: Households with an elderly person must meet net income limits, whereas other households must meet net and gross income limits. Income limits are
higher in Alaska and Hawaii.
Although an increase in Social Security benefits could
prompt a reduction in SNAP benefits, the total benefits
received would increase. SNAP benefits are reduced by 30 cents
for every additional dollar of Social Security, unless the
increase becomes large enough to raise total income above the
SNAP eligibility limit. For example, an individual whose net
monthly income is $500 could currently qualify for $50 in SNAP
benefits (see Table 14). If the individual's monthly Social
Security income increased by $100, raising net monthly income
to $600, SNAP benefits would decline to $20 per month. However,
total monthly income would increase by $70, from $550 to $620
per month.
TABLE 14: EXAMPLE OF HOW SNAP ELIGIBILITY RELATES TO AN INDIVIDUAL'S
INCOME
------------------------------------------------------------------------------------------------------------------------------------------------
Monthly net income............................ $500 $600
(A) Maximum monthly SNAP allotment............ 200 200
(B) Net monthly income multiplied by 30 150 180
percent......................................
SNAP benefits (A-B)........................... 50 20
Total Income.............................. $550 $620
------------------------------------------------------------------------
Source: GAO analysis of SNAP eligibility requirements.
As with SSI, beneficiaries may prefer to receive benefits
through Social Security instead of SNAP. Several retirement
security experts said there may be a stigma associated with
SNAP because it is viewed as a welfare program, while Social
Security is tied to income earned through work, though stigma
may be mitigated when SNAP benefits are provided via debit
card. Additionally, unlike Social Security, SNAP benefits are
subject to income and asset tests, which can create a burden
for applicants and deter participation. Finally, beneficiaries
may prefer the flexibility of Social Security, a cash benefit,
to SNAP benefits, which are provided as grocery credits and
restricted to food purchases.
STEPS COULD BE TAKEN TO MITIGATE POTENTIAL BENEFIT REDUCTIONS
Retirement security experts suggested several ways to
mitigate the potential loss of benefits from other programs as
a result of an increase in Social Security benefits for
vulnerable groups. Each of these approaches would entail trade-
offs, including additional costs and administrative effort for
the affected programs. Depending on the scope and provisions of
each option when implemented, these approaches could also
increase states' Medicaid caseloads and have a significant
effect on their budgets.
Increasing the SSI general income disregard of $20
would let SSI recipients receive more Social Security before
losing SSI eligibility.
Increasing the maximum allowable SSI benefit would
also enable SSI recipients to receive more Social Security
before losing SSI eligibility.
Creating a Social Security exclusion in SSI would
allow income from Social Security to be disregarded when
calculating SSI benefits.
Deeming those who qualify for SSI under current
rules to be eligible for Medicaid would also allow those who
would otherwise lose SSI eligibility to retain Medicaid
coverage. The so-called ``Pickle Amendment'' allows those
formerly eligible for SSI to maintain SSI eligibility, at a
benefit level of zero dollars, for the purpose of receiving
Medicaid if they become ineligible as a result of Social
Security cost-of-living adjustments.\85\ A similar approach
could be used if beneficiaries become ineligible for Medicaid
as a result of an increase to Social Security benefits for
vulnerable groups.
---------------------------------------------------------------------------
\85\Pub. L. No. 94-566, Sec. 503 codified at 42 U.S.C. Sec. 1396a.
---------------------------------------------------------------------------
Disregarding increased Social Security benefits in
determining Medicaid eligibility would allow those who would
otherwise lose Medicaid to retain their coverage. There is some
precedent for this approach: individuals who meet certain
criteria currently can continue to receive Medicaid even if
their earned income becomes too high to qualify for SSI
benefits. However, this existing provision applies only to
those who need Medicaid to work.\86\
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\86\42 U.S.C. Sec. 1382h(b). To qualify, a person must have been
eligible for SSI for at least 1 month, still meet the disability and
nondisability requirements, need Medicaid in order to work, and have
gross earned income that is either below a predetermined state
threshold or below an individualized threshold.
---------------------------------------------------------------------------
Although Medicaid already has other eligibility
pathways that are income-based and not linked to SSI, breaking
the direct link between SSI and Medicaid eligibility would
prevent a loss of SSI from affecting Medicaid benefits. One
expert suggested using a program with a higher income limit
than SSI, such as SNAP, to test income eligibility for
Medicaid. Other experts said that if the income limit for
Medicaid were tied to some multiple of the federal poverty
line, such as 100 percent or 133 percent, more Medicaid
beneficiaries would retain coverage, despite increases in
Social Security benefits.
CONCLUSION
For nearly 75 years, the Social Security program has served
as the foundation of retirement income for American workers and
their families. Yet Social Security is much more than just a
retirement program; it provides benefits to survivors and other
dependents as well as to disabled workers. Even though the
program currently boasts large Trust Funds, an aging American
population, a decline in the birthrate, and an increase in life
expectancy will soon place a financial strain on Social
Security. Congress should tackle this issue soon, while only
minor changes to the system are needed.
This report presents several options for increasing the
long term solvency of Social Security, and provides estimates
of the impacts of these efforts on the Social Security Trust
Funds. However, these estimates have several limitations that
deserve careful consideration. First, these estimates are
provided with the assumption that all other elements of Social
Security remain the same. Because many of the reforms would
interact with each other, the estimated impacts on solvency of
two or more options cannot simply be summed to estimate their
impact if they were to be implemented simultaneously, and need
to be recalculated. Similarly, these estimates are based on a
particular timing of their implementation. Combining options or
changing the timing would require new estimates to predict
their effects on solvency. Further, options to increase
solvency may not impact everyone in the same way--some
recipients may see their Social Security taxes and benefits
change, while others may not. The impacts of proposals should
be examined for both current beneficiaries and future
generations of retirees, as many options phase in over time.
Social Security solvency and effectiveness are separate
factors, but should be analyzed together. Efforts to improve
solvency may enhance, weaken, or have no impact on Social
Security's current level of effectiveness in providing
retirement security for all Americans. Improving the adequacy
of benefits for vulnerable populations may also have a cost to
implement. In short, a full consideration of any group of
options requires a thorough analysis to predict their effects
on solvency and adequacy.
Modernizing Social Security means ensuring that the program
is both solvent and effective, for all Americans, now and in
the future. This is a complex task that will become
increasingly difficult as the Social Security Trust Funds
diminish. Congress will have to address the twin challenges of
solvency and effectiveness simultaneously, and because the
program is critical to every American family, it should be done
in a bipartisan and transparent way.
APPENDIX
House and Senate Budget Procedures to Protect Social Security Balances
The rules to ensure that legislation considered by Congress
does not negatively affect the Social Security Trust Funds
balances differ between the House and the Senate.
In the House, a point of order (i.e., a floor objection)
may be raised against a bill that proposes more than $250
million in Social Security spending increases or tax cuts over
five years (counting the fiscal year it becomes effective and
the following four years) unless the bill also contains
offsetting changes to bring the net impact within the $250
million limit. Costs of prior legislation that fall within the
five-year period must be counted. A point of order also may be
raised against a measure that would increase long-range (75-
year) average costs or reduce long-range revenues by at least
0.02 percent of taxable payroll.
In the Senate, the annual congressional budget resolution
must include separate amounts for Social Security Trust Fund
revenues and outlays for each year covered by the resolution
(i.e., separate from the budget totals). These amounts must
reflect surpluses of the Social Security Trust Funds that are
not less than those projected under current law. Once the
resolution is adopted by Congress, subsequent measures that
would be projected to cause Social Security Trust Funds'
surpluses to be lower (or deficits to be higher) than those
reflected in the amounts in the budget resolution are subject
to a point of order. A motion to waive the point of order
requires an affirmative vote of three-fifths of Senators (i.e.,
60 Senators if there are no vacancies).
These rules do not prevent Congress from considering
legislation that is projected to increase or reduce the
receipts and disbursement levels of the Social Security Trust
Fund. Instead, the rules require that the net effect of such
changes do not negatively affect the balances of the Social
Security Trust Funds. Congress, however, is prohibited from
including any changes to the Social Security program in
reconciliation legislation, which is considered under expedited
procedures. As a result, Congress must consider changes to the
Social Security program separate from other budgetary
legislation.
In addition, both the House and Senate have ``pay-as-you-
go'' (PAYGO) requirements for revenue and mandatory spending
legislation (Social Security disbursements are a form of
mandatory spending). The House and Senate PAYGO rules prohibit
the consideration of revenue and direct spending legislation
that would have the net effect of increasing the deficit over
either a six-year period or an 11-year period, respectively.
The House PAYGO rule applies to legislation affecting the
unified budget deficit, which includes the receipts and
disbursements of the Social Security Trust Funds. The Senate
PAYGO rule, however, applies to legislation affecting the on-
budget deficit, which excludes the Social Security Trust Funds.
GLOSSARY OF KEY TERMS
Annuity--an insurance product that provides a stream of
payments for a pre-established amount of time in return for a
premium payment. For example, a life annuity provides payments
for as long as the annuitant lives. Only insurance companies
can underwrite annuities in the United States. Other financial
intermediaries, such as banks and stock brokerage firms, may
sell annuities issued by insurance companies.
Average Indexed Monthly Earnings--the average monthly
earnings received over a worker's career, adjusted yearly by
the change in national average earnings. It is the dollar
amount used to calculate Social Security benefits for
individuals who attain age 62 or become disabled (or die) after
1978. To arrive at the AIME, SSA adjusts a person's actual past
earnings using an ``average wage index,'' so he or she does not
lose the value of past earnings in relation to more recent
earnings. For people who attained age 62 or became disabled (or
died) before 1978, SSA uses Average Monthly Earnings (AME).
Baseline--a measurement that serves as a basis against
which all following measurements are compared.
Consumer Price Index (CPI)--a measure of the change over
time in the prices, inclusive of sales and excise taxes, paid
by urban households for a representative market basket of
consumer goods and services. The CPI is prepared by the U.S.
Department of Labor and used to compute COLA increases.
Contribution and Benefit Base--the cap on taxable earnings
used to fund Social Security. The cap, also called the taxable
maximum wage or taxable wage base, limits the earnings that can
be used in the benefit formula and, therefore, limits the size
of benefits. The cap limits the program's costs and the payroll
taxes that pay for them. Limiting the size of benefits reflects
the program's role of only providing for a floor of protection.
Cost-of-Living Adjustment (COLA)--an increase or decrease
in wages or benefits according to the change in the cost-of-
living as measured by some statistical measure, often the
Consumer Price Index (CPI). Social Security benefits and
Supplemental Security Income payments are increased each year
to keep pace with increases in the cost-of-living (inflation),
as measured by the CPI.
Covered Earnings--earnings from a job which requires
contributions to the Social Security program. (See covered
worker for more information.) All covered earnings below the
taxable wage base--that is, taxable earnings--are subject to
Social Security payroll taxes. Covered earnings above the
taxable wage base are exempt from the Social Security payroll
tax.
Covered Worker--workers in covered employment, that is,
jobs through which the workers have made contributions to
Social Security.
Credits--to be insured for retired worker benefits, an
individual must accumulate at least 40 credits in the Social
Security system, which is equivalent to at least 10 years of
covered employment. In 2006, a worker received one credit (up
to a total of four per year) for each $970 in covered earnings.
Fewer credits may be required in some survivor and disability
cases; in these cases, benefits may be granted with as few as
six credits. The amount of earnings required for a credit is
wage indexed.
Deficit--the amount by which the government's spending
exceeds its revenues in a given period, usually a fiscal year.
The federal deficit is the shortfall created when the federal
government spends more in a fiscal year than it receives in
revenues. To cover the shortfall, the government sells bonds to
the public.
Defined Benefit--a type of retirement plan that guarantees
a specified retirement payment at a certain age and after a
specified period of service. Defined benefit plans promise
their participants a steady retirement income, generally based
on years of service, age at retirement, and salary averaged
over some number of years. Defined benefit plans express
benefits as an annuity, but may offer departing participants
the opportunity to receive lump sum distributions. Defined
benefit plans are one of two basic types of employer-sponsored
pension plans.
Defined Contribution--a type of retirement plan that
establishes individual accounts for employees to which the
employer, participants, or both make periodic contributions.
Defined contribution plan benefits are based on employer and
participant contributions to and investment returns (gains and
losses) on the individual accounts. Employees bear the
investment risk and often control, at least in part, how their
individual account assets are invested. Defined contribution
plans are one of two basic types of employer-sponsored pension
plans.
Delayed Retirement Credit--an increase to the primary
insurance amount (PIA) if a beneficiary delays claiming Social
Security benefits beyond his or her full retirement age (FRA).
The amount of the increase varies depending on the
beneficiary's date of birth and how long a beneficiary delays
benefit take-up beyond his or her FRA. However, the increase
stops when a person reaches age 70, even if he or she continues
to delay taking up benefits.
Dependent--a person who is eligible for benefits or care
because of his or her relationship to an individual. Under the
Social Security Act, ``dependent'' means the same as it does
for federal income tax purposes; i.e., someone for whom the
individual is entitled to take a deduction on his personal
income tax return, generally an individual supported by a tax
filer for over half of a calendar year.
Disabled--disability under Social Security is based on the
inability to work. The definition of disability under Social
Security is different than under other programs. SSA considers
a person disabled under Social Security rules if the person
cannot do work that he or she did before and SSA decides that
the person cannot adjust to other work because of his or her
medical condition(s). A person's disability must also last or
be expected to last for at least 1 year or to result in death.
Social Security pays only for total long-term disability. No
benefits are payable for partial disability or for short-term
disability. Social Security program rules assume that working
families have access to other resources to provide support
during periods of short-term disabilities, including workers'
compensation, insurance, savings, and investments.
Dually Entitled--workers who qualify for Social Security
benefits from both their own work and their spouses'. Such
workers do not receive both the benefits earned as a worker and
the full spousal benefit; rather, the worker receives the
higher amount of the two.
Early Retirement Age (early eligibility age)--the age at
which individuals qualify for reduced retirement benefits if
they choose to collect benefits before the normal retirement
age; the current early retirement age for Social Security is
62. Individuals who choose to take retirement benefits early
will have their monthly benefits permanently reduced, based on
the number of months they receive checks before they reach full
retirement age.
Earnings--Wages or self-employment income. Also see covered
earnings and taxable earnings.
Eligibility--conditions that must be met for participation.
To be eligible for Social Security retirement benefits,
everyone born in 1929 or later needs 40 credits. Since a worker
can earn 4 credits per year, he or she needs at least 10 years
of work that is subject to Social Security to become eligible
for Social Security retirement benefits. Each year, the amount
of earnings needed for a credit rises as the average earnings
levels rise. In 2005, a worker receives 1 credit for each $920
of earnings, up to the maximum of 4 credits per year.
Entitlement--a federal program or provision of law that
requires payments to any person or unit of government that
meets the eligibility criteria established by law. Social
Security, Medicare, Medicaid, and veterans' compensation are
examples of entitlement programs. Entitlements leave no
discretion with Congress on how much money to appropriate, and
some entitlements carry permanent appropriations.
Equity, including Intergenerational--the goal to ensure
that the costs and benefits of Social Security bear some
relationship to contributions and that a much greater burden is
not placed on certain specific groups, including certain
generations of workers.
Federal Insurance Contributions Act (FICA) taxes--see
payroll tax.
Full Retirement Age (FRA) (Also called normal retirement
age.)--the age at which individuals qualify for full, or
unreduced, retirement benefits from Social Security and
employer-sponsored pension plans. The normal retirement age for
Social Security was 65 for many years. Beginning with year 2000
for workers and spouses born 1938 or later and widows/widowers
born 1940 or later, the normal retirement age increases
gradually from age 65 until it reaches age 67 in the year 2022.
Fully Funded--a system that is fully funded, or ``advance
funded,'' is one in which sufficient contributions are put
aside each year to pay for future benefits when they come due.
Defined contribution pensions and individual retirement
accounts are fully funded by definition.
Gross Domestic Product--a commonly used measure of total
domestic national income. GDP measures the market value of
total output of final goods and services produced within a
country's territory, regardless of the ownership of the factors
of production involved, i.e., local or foreign, during a given
time period, usually a year. Earnings from capital invested
abroad (mostly interest and dividend receipts) are not counted,
while earnings on capital owned by foreigners but located in
the country in question are included. GDP may be expressed in
terms of product--consumption, investment, government purchases
of goods and services, and net exports--or it may be expressed
in terms of income earned-wages, interest, and profits. It is a
rough indicator of the economic earnings base from which
government draws its revenues.
Income Adequacy--in Social Security's history, ``adequacy''
has never been explicitly defined. However, the Congress
expected that Social Security benefits would eventually provide
more than a ``minimal subsistence'' in retirement for full-
time, full-career workers. Various measures help examine
different aspects of this concept, but no single measure can
provide a complete picture. Such measures include poverty
rates, replacement rates, and the proportion of the population
that depends on others for income support.
Inflation (Prices)--a rate of increase in the general price
level of all goods and services. The official measure of
inflation in the United States is the Consumer Price Index.
Indexation (See Price Indexation, Wage Indexation.)
Insolvency--in the context of Social Security, the
inability of the Trust Funds to pay all current expenses out of
current tax income and accumulated Trust Fund assets.
Insolvency would mean that Social Security's Trust Funds were
unable to pay full benefits on time. (Insolvency would not mean
that Social Security would be completely broke and unable to
pay any benefits.)
Insured--in the context of Social Security, having enough
credits to meet eligibility requirements for retired or
disabled worker benefits, or to permit the worker's spouse and
children or survivors to establish eligibility for benefits in
the event of the worker's retirement, disability, or death.
Intermediate Assumptions--the Social Security
Administration actuaries' ``best estimate'' of future
demographic and economic trends. The actuaries also produce
high cost (pessimistic) assumptions and low cost (optimistic)
assumptions. These assumptions are published annually in the
Social Security Trustees Report.
Life Expectancy--an estimate of the average remaining
number of years expected prior to death for a given cohort. In
the context of Social Security, life expectancy at age 65 is
most commonly used.
Long Range--in the context of Social Security, the next 75
years. Long-range actuarial estimates are made for this period
because it is approximately the maximum remaining lifetime of
workers currently covered by Social Security. The annual Social
Security Trustees Report includes long-range projections of
Social Security's financial status. (See also short range.)
Microsimulation model--in the context of policy analysis, a
statistical model that simulates how a government program would
operate under policy changes and how participants would be
affected. This report relies on a CRS analysis of the Dynasim
microsimulation model.
Off-Budget--refers to the status of transactions of the
government (either federal funds or Trust Funds) that belong
on-budget according to generally accepted budget concepts, but
which are required by law to be excluded from the budget. The
budget documents routinely report the on-budget and off-budget
amounts separately and then add them together to arrive at the
consolidated government totals.
Old-Age, Survivors, and Disability Insurance (OASDI)--the
two Social Security programs--Old-Age and Survivors Insurance
(OASI) and Disability Insurance (DI)--that provide monthly cash
benefits to beneficiaries and their dependents when the
beneficiaries retire, to beneficiaries' surviving dependents,
and to disabled worker beneficiaries and their dependents.
On-Budget--refers to transactions that are included within
the budget.
Pay-As-You-Go--in the context of Social Security, a system
of financing in which contributions that workers make in a
given year fund the payments to beneficiaries in that same
year, and the system's Trust Funds are kept to a relatively
small contingency reserve.
Payroll Tax--tax imposed on some or all of workers'
earnings that can be imposed on employers, employees, or both.
Payroll taxes are used to finance the Social Security and
Medicare programs. Employers and employees each pay Social
Security taxes equal to 6.2 percent of all employee earnings up
to a cap and pay Medicare taxes of 1.45 percent, with no cap.
Payroll taxes are also known as FICA (Federal Insurance
Contributions Act) taxes or SECA (Self-Employment Contributions
Act), if self-employed.
Poverty--Americans are considered ``poor'' or ``in
poverty'' if they reside in a household with income below the
U.S. poverty threshold, as defined by the U.S. Office of
Management and Budget. Poverty thresholds differ by family size
and are updated annually for inflation using the Consumer Price
Index. Median Social Security benefits have historically been
close to the poverty threshold. Social Security has contributed
to reducing poverty among the elderly.
Primary Insurance Amount (PIA)--the monthly Social Security
benefit amount payable to a retired worker who begins to
receive benefits at the full retirement age (FRA) or,
generally, to a disabled worker. This amount, which is based on
the worker's average indexed monthly earnings (AIME), is also
used to calculate benefits payable on the worker's earnings
record--for example, benefits paid to his or her spouse or
survivors. Also referred to as a basic benefit amount.
Primary Insurance Amount (PIA) Bend Points--dollar amounts
used to break a worker's average indexed monthly earnings
(AIME) into discrete brackets to help calculate the PIA. For
example, if there are three bend points, first $761, earnings
over $761 and through $4,586, and over $4,586, an income of
$5,000 will be broken into three values, $761, $3825 and $414,
to be multiplied by the specific PIA factor in accordance with
the PIA formula. The specific dollar values of the bend points
are indexed to growth in average wages.
Primary Insurance Amount (PIA) Factors--the factors by
which the dollar amounts in the primary insurance amount (PIA)
formula are multiplied. The PIA factors are 90 percent, 32
percent and 15 percent; each is applied to a worker's average
indexed monthly earnings (AIME) amounts between the bend points
in the PIA formula.
Primary Insurance Amount (PIA) Formula--the formula to
calculate the primary insurance amount (PIA) for workers who
attain age 62, become disabled, or die after 1978. The PIA is
equal to 90 percent of a worker's average indexed monthly
earnings (AIME) up to the first bend point, plus 32 percent of
AIME between the first and second bend points, plus 15 percent
of AIME above the second bend point.
Progressive--a system in which high earners pay a larger
portion of their income in taxes or receive a lower portion of
their income in benefits relative to low earners. To help
ensure that beneficiaries have adequate incomes, Social
Security's benefit formula is designed to be progressive, that
is, to provide disproportionately larger benefits, as a
percentage of earnings, to lower earners than to higher
earners.
Purchasing Power--the amount of goods and services that a
given amount of money can buy. In the context of Social
Security, beneficiaries receive an annual cost-of-living
adjustment (COLA) in which benefits are adjusted according to
the growth in prices (i.e., inflation) as a way to maintain the
purchasing power of benefits over the course of a beneficiary's
lifetime.
Quarters of Coverage--see credits.
Rate of Return--the gain or loss generated from an
investment over a specified period of time; also referred to as
total return. Calculated as the (value now minus value at time
of purchase) divided by value at time of purchase, expressed as
a percentage. In the context of Social Security, the implicit
rate of return on Social Security contributions would be the
constant discount rate that equates the present discounted
value of contributions with the present discounted value of
benefits.
Regressive--a system in which lower earners pay
proportionately higher taxes (or receive proportionately lower
benefits) than do higher earners. The Social Security payroll
tax is regressive, since the tax rate is flat and the amount of
taxable earnings is capped.
Replacement Rate--the ratio of retirement benefits (from
Social Security or employer-sponsored plans) to pre-retirement
earnings. Analysts often compare current benefits to a
recipient's previous wages to judge the adequacy of Social
Security payments. In the context of Social Security, the
implicit rate of return on Social Security contributions would
be the constant discount rate that equates the present
discounted value of contributions with the present discounted
value of benefits.
Retirement Earnings Test (RET)--a provision of the law
which reduces Social Security benefits on account of earnings
from work before the full retirement age (FRA).
Spouse Benefits--Social Security benefits payable to the
spouse or divorced spouse of a retired or disabled worker,
based on the worker's earnings record. The primary insurance
amount (PIA) for a spouse beneficiary is generally 50 percent
of his or her spouse's PIA.
Social Insurance--under a social insurance program, the
society as a whole insures its members against various risks
they all face, and members pay for that insurance at least in
part through contributions to the system. Social insurance
programs, including Social Security, are designed to achieve
certain social goals.
Social Security Administration (SSA)--the federal agency
that administers all Social Security related programs,
including the Supplemental Security Income (SSI) and the
Disability Insurance (DI) programs.
Solvency--for Social Security, a condition of financial
viability in which the program can meet its full financial
obligations as they come due. Specifically, the ability to pay
full benefits using existing revenue sources and Trust Fund
balances. When a program does not meet these conditions, it is
said to be insolvent.
Solvency, Sustainable--for Social Security, to achieve
sustainable solvency is to maintain the program's solvency
beyond Social Security's Board of Trustees' 75-year forecast
and make Social Security permanently solvent. Also defined as
having a stable and growing Trust Fund ratio with program
revenues increasing faster than outlays at the end of the 75-
year period.
Supplemental Security Income (SSI)--a federal supplemental
income program funded by general tax revenues (not Social
Security taxes) that helps aged, blind, and disabled people who
have little or no income, by providing monthly cash payments to
meet basic needs for food, clothing, and shelter.
Supplementary Medical Insurance (SMI)--Medicare SMI, also
referred to as Part B, is a voluntary insurance program that
covers physician services (in or outside of the hospital),
outpatient hospital services, ambulatory services, and certain
medical supplies and other services, for all persons age 65 or
older and persons eligible for Part A because of disability or
chronic renal disease.
Survivor (Survivor Benefits)--after a beneficiary's death,
Social Security survivor benefits are paid to the beneficiary's
survivors, which include (1) the beneficiary's widow/widower
age 60 or older, 50 or older if disabled, or any age if caring
for a child under age 16 or who became disabled before age 22;
(2) the beneficiary's children, if they are unmarried and under
age 18, under 19 but still in school, or 18 or older but
disabled before age 22; (3) the beneficiary's parents, who are
at least aged 62, if the beneficiary provided at least one-half
of their support. A special one-time lump sum payment of $255
may be made to a spouse or minor children. An ex-spouse could
also be eligible for a widow/widower's benefit on the
beneficiary's record.
Social Security Trust Fund--Technically, there are two
separate Trust Funds: the Old-Age and Survivors Insurance
(OASI) Trust Fund, which holds in trust those funds that the
federal government intends to use to pay future benefits to
retirees and their survivors; and, the Disability Insurance
(DI) Trust Fund, which holds in trust those funds that the
federal government intends to use to pay benefits to those who
are judged by the federal government to be disabled and
incapable of productive work, as well as to their spouses and
dependents.
Taxable Earnings--in the context of Social Security, wages
and/or self-employment income earned in covered employment that
is less than the taxable earnings base.
Taxable Earnings Base (See Contributions and Benefit Base.)
Transition Costs--refers to the additional revenue required
to implement substitute individual account plans. Under some
individual account plans, portions of Social Security
contributions would be diverted to the accounts. However, under
Social Security's pay-as-you-go financing, some of those
contributions would also be needed to pay for current benefits.
Making account deposits while also meeting current benefit
costs requires additional revenue, which we refer to as
transition costs.
Trust Fund--an account, designated as a ``Trust Fund'' by
law, that is credited with income from earmarked collections
and charged with certain outlays. Collections may come from the
public (for example, from taxes or user charges) or from
intrabudgetary transfers. The federal government has more than
150 trust funds. The largest and best known finance major
benefit programs (including Social Security and Medicare) and
infrastructure spending (the Highway and the Airport and Airway
Trust Funds). These trust funds are essentially sub-accounts of
the federal government's accounting and budgeting processes.
Unified Budget--the present form of the budget of the
federal government in which receipts and outlays from federal
funds and trust funds are consolidated into a single total. The
unified budget includes trust fund receipts as income and trust
fund payments as expenditures. As a result, any Social Security
surpluses serve to reduce the overall, or unified, federal
budget deficit.
Wage Indexation (Compare Price Indexation.)--a method by
which benefits are adjusted at periodic intervals. Under its
current formula, SSA uses the national average wage indexing
series to index a person's lifetime earnings when computing
that person's Social Security benefits.
Worker Benefits--Social Security benefits payable to a
retired or disabled worker, based on his or her own earnings
record.
ACKNOWLEDGMENTS
The Aging Committee would like to thank the following
individuals who made key contributions to this report through
their research and technical assistance:
Seung An, Social Security Administration
Sharmila Choudhury, Congressional Research Service
Michael Clingman, Social Security Administration
Michael Collins, U.S. Government Accountability Office
Steven Goss, Social Security Administration
Joni Lavery, National Academy of Social Insurance
Annamarie Lopata, U.S. Government Accountability Office
Charles A. Jeszeck, U.S. Government Accountability Office
Kristen Jones, U.S. Government Accountability Office
Dawn Nuschler, Congressional Research Service
Patrick Purcell, Congressional Research Service
Virginia Reno, National Academy of Social Insurance
Christine Scott, Congressional Research Service
Alison Shelton, Congressional Research Service
Gary Sidor, Congressional Research Service
Scott Szymendera, Congressional Research Service
Alice Wade, Social Security Administration
Copyright--Reprinted information in this report was done so
with the expressed permission and consent of the cited authors.