Editor’s note: A summary of the provisions and financial effects discussed in this article
can be found on the U.S. Social Security Administration’s Office of the Chief Actuary website.
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The most recent actuarial valuation of the U.S. Social Security program shows that it faces financial shortfalls over the next 75 years. The program’s trust fund reserves are projected to begin declining in nominal dollars in 2020 and become depleted in 2034. Congress must make changes to the program before trust fund reserves are depleted in order to avoid sharp and immediate cuts in benefits to millions of Americans. Making adjustments sooner rather than later would allow necessary changes to be phased in gradually, and would give workers and beneficiaries time to adjust to them.
The last time major legislative changes were made to the Social Security program was in 1983. At that time, a combination of revenue increases and benefit adjustments was used to close the projected financing gap. Most notably, the 1983 law:
- Expanded Social Security coverage to new federal employees, employees of tax-exempt nonprofit organizations and certain other groups;
- Advanced scheduled increases in payroll tax rates and increased tax rates for self-employment income;
- Subjected the Social Security benefits of beneficiaries with income above specified levels to federal income tax; and
- Raised the normal retirement age (NRA) beginning with workers reaching age 62 in 2000.
Many policymakers have developed proposals and options to address the current long-range shortfall. These proposals cover a broad range of policy options that focus on both trust fund solvency and benefit adequacy. Each year, the U.S. Social Security Administration’s Office of the Chief Actuary (OCACT) publishes a summary of these provisions and their financial effects on its website.
Provisions fall into several broad categories. This article sets out to describe and show the financial effects of selected sample provisions. For each provision, we provide the change in two key financial indicators:
- The long-range actuarial balance measures the financial status of the program over the entire long-range (75-year) period. Based on the intermediate assumptions of the 2015 OASDI Trustees Report, the current-law shortfall in the long-range actuarial balance is 2.68 percent of payroll.
- The annual balance in the 75th year gives an indication of the yearly net cash flow at the end of the 75-year period. The current-law shortfall in the annual balance in the 75th year is 4.65 percent of payroll.
Figure 1 at the end of this article includes numerical results for all of the examples described throughout this article.
A. Provisions Affecting Cost-of-Living Adjustment
These provisions modify the annual cost-of-living adjustment (COLA). Each year, Social Security benefits are increased based on the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), calculated by the Bureau of Labor Statistics. There has been some debate in policy circles about the appropriate measure of CPI to use in calculating the COLA, as illustrated by the examples below.
Starting in December 2016, compute the COLA using a chained version of the CPI-W. We estimate this change would reduce the annual COLA by about 0.3 of a percentage point, on average. This provision is projected to decrease the shortfall in the long-range actuarial balance by 21 percent. (See the details for this and the other example provisions in Figure 1 at the end of this article).
Starting in December 2017, compute the COLA using the Consumer Price Index for the Elderly (CPI-E). We estimate this change would increase the annual COLA by about 0.2 of a percentage point, on average. This provision is projected to increase the shortfall in the long-range actuarial balance by 14 percent. Note that this provision would not help to close the funding shortfall; instead, it addresses concerns about the adequacy of benefits for older Americans.
B. Provisions Affecting Level of Monthly Benefits
These provisions modify the formula used for calculating the basic Social Security monthly benefit, called the Primary Insurance Amount (PIA), including provisions that:
- Change PIA bend points and factors, or their indexing
- Change computation years, which are the number of years of earnings used in determining benefits
- Increase minimum benefits for targeted individuals, generally those with low earnings and long work careers
- Provide additional benefit increases for older beneficiaries
Beginning with those newly eligible for Old-Age and Survivors (OASI) benefits in 2025, multiply the PIA factors by the ratio of life expectancy at age 67 for 2020 to the life expectancy at age 67 for the fourth year prior to the year of benefit eligibility. Unisex period life expectancies computed by OCACT would be used to determine the ratio. Disabled workers are: (a) not affected prior to NRA; and (b) subject to a proportional reduction in benefits, based on the worker’s years of disability, upon conversion to retired-worker beneficiary status. This provision is projected to decrease the shortfall in the long-range actuarial balance by 19 percent.
Provide an additional 5 percent increase to the monthly benefit amount of any beneficiary who is 85 or older at the beginning of 2016, or who reaches his or her 85th birthday after the beginning of 2016. This provision is projected to increase the shortfall in the long-range actuarial balance by 4 percent.
C. Provisions Affecting Retirement Age
These provisions modify:
- The NRA, the age at which individuals can retire and receive their full PIA;
- The earliest eligibility age (EEA), the age at which individuals can first begin receiving retirement benefits; or
- Both of the above.
Note that under current law, the NRA is age 66 for those born between 1943 and 1954 and is scheduled to increase gradually to age 67 for those born in 1960 and later. The EEA is age 62.
After the NRA reaches age 67, increase the NRA two months per year until it reaches age 69 for individuals attaining age 62 in 2034. Thereafter, increase the NRA one month every two years. This provision is projected to decrease the shortfall in the long-range actuarial balance by 38 percent.
D. Provisions Affecting Family Member Benefits
These provisions modify the benefit amounts received by widows, widowers, spouses or children based on a worker’s Social Security account.
E. Provisions Affecting Payroll Taxes
Some of these provisions modify the current-law payroll tax rate of 12.4 percent (6.2 percent each for employees and employers). Others modify the contribution and benefit base (CBB), or taxable maximum, which limits the amount of earnings subject to payroll tax and credited for benefit computation.
Increase the payroll tax rate (currently 12.4 percent) to 15.3 percent in 2016 and later. This provision is projected to decrease the shortfall in the long-range actuarial balance by 103 percent (i.e., it will lead to a surplus).
The 2015 Old-Age, Survivor and Disability Insurance (OASDI) Trustees Report, officially called “The 2015 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” presents the current and projected financial status of the trust funds. Download a PDF of the report.
Read the U.S. Social Security Administration’s Office of the Chief Actuary (OCACT) summary of the provisions and financial effects discussed in this article.
Increase the taxable maximum so that 90 percent of earnings would be subject to the payroll tax (phased in 2016–2025). Provide benefit credit for earnings up to the revised taxable maximum. This provision is projected to decrease the shortfall in the long-range actuarial balance by 29 percent.
F. Provisions Affecting Coverage of Employment or Earnings
These provisions extend or reduce the categories of workers or the amount of earnings covered under the Social Security system.
Starting in 2016, cover newly hired state and local government employees. This provision is projected to decrease the shortfall in the long-range actuarial balance by 6 percent.
G. Provisions Affecting Trust Fund Investment in Marketable Securities
These provisions allow for the investing of a portion of the Social Security trust funds in marketable securities (e.g., equities or corporate bonds), rather than in special-issue government bonds, as required under current law.
H. Provisions Affecting Taxation of Benefits
These provisions change the current rules for subjecting Social Security benefits to personal income tax. Under current law, beneficiaries with income above specified levels pay income taxes on their benefits. These taxes are credited to the Social Security and Medicare trust funds.
Starting in 2016, tax Social Security benefits in a manner similar to private pension income. Phase out the lower-income thresholds from 2016–2035. This provision is projected to decrease the shortfall in the long-range actuarial balance by 7 percent.
Figure 1 summarizes the financial effects of these selected example provisions on a stand-alone basis. These provisions, and the others listed on the OCACT website, may be combined to form a comprehensive proposal to restore trust fund solvency. However, it is important to note that individual provisions may interact with each other. Therefore, the sum of the shortfalls restored under the individual provisions may be different than the shortfall restored when the provisions are taken together as a whole proposal. As a result, further analysis is required in order to determine whether a proposal combining more than one provision is expected to achieve solvency throughout the 75-year period or beyond.
|Figure 1: Estimated Financial Effects of Selected Proposed Changes to the Social Security Program
|Change from Current Law as a Percentage of Payroll
|Percentage of Shortfall Eliminated
|Long-Range Actuarial Balance
|Annual Balance in 75th Year
|Long-Range Actuarial Balance
|Annual Balance in 75th Year
|Compute the COLA using a chained version of the CPI-W.
|Compute the COLA using the CPI-E.
|For OASI benefits, index the PIA factors by life expectancy.
|Provide a 5 percent increase to the monthly benefit amount for those 85 or older.
|After the NRA reaches 67, increase the NRA two months per year until it reaches 69 and by one month every two years thereafter.
|Increase the payroll tax rate (currently 12.4 percent) to 15.3 percent.
|Increase the taxable maximum so that 90 percent of earnings would be subject to the payroll tax. Provide benefit credit for earnings up to the revised taxable maximum.
|Cover newly hired state and local government employees.
|Tax Social Security benefits in a manner similar to private pension income.
|Current-law shortfall in long-range actuarial balance is 2.68 percent of payroll and in annual balance in 75th year is 4.65 percent of payroll. Estimates are based on the intermediate assumptions of the 2015 OASDI Trustees Report.