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Social Security: What Would Happen If the
Trust Funds Ran Out?
Christine Scott
Specialist in Social Policy
August 20, 20092, 2011
Congressional Research Service
7-5700
www.crs.gov
RL33514
CRS Report for Congress
Prepared for Members and Committees of Congress
c11173008
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Social Security: What Would Happen If the Trust Funds Ran Out?
Summary
The Social Security trust funds are projected to become exhausted in 20412036, according to the 20082011
Social Security Trustees Report. If Congress does not act before then, the trust funds would be
unable to pay full Social Security benefits on time. If full Social Security benefits could not be
paid on time, the lives of millions of people who rely on Social Security could be disrupted. The
consequences of waiting to act are also serious. By 2041, the benefit cuts and tax increases
required to achieve long-range solvency are projected to be about twice as large as those needed
today.
The Social Security Act does not specify what would happen to benefits if the trust funds became
insolvent. However, it is clear that full Social Security benefits could not be paid on time because
the Antideficiency Act prohibits government spending in excess of available funds. After
insolvency, Social Security would continue to receive tax income, from which some benefits
could be paid. Either full benefit checks would be paid on a delayed schedule or reduced benefits
would be paid on time. In either case, Social Security beneficiaries and qualifying applicants
would remain legally entitled to full benefits and could take legal action to claim the balance of
their benefits. The legal conflict between benefit entitlement and the Antideficiency Act would
need to be resolved either by Congress or by the courts.
Social Security solvency could be restored by cutting Social Security’s spending, increasing its
income, or some combination of the two. Over the long range (i.e., over the next 75 years), the
Social Security trustees estimate that the trust funds have a shortfall of $4.36.5 trillion in present
value terms, or 1.72.22% of taxable payroll. The sooner Congress acts to fill this gap, the smaller the
changes to Social Security need to be, because earlier changes could be spread to a larger number
of workers and beneficiaries over a longer period of time. If Congress waits until the moment of
insolvency to act, the trust funds’ annual deficits could be eliminated with benefit cuts of about
2223% in 20412036 that will gradually rise to about 2526% by 20822085. Congress could also eliminate annual
deficits by raising the Social Security payroll tax rate from 12.40% to 15.9416.4% in 20412036, then
gradually increasing it to 16.609% by 20822085. To maintain annual balance after 20822085, larger benefit
reductions or tax increases would be required.
Prompt action to restore Social Security solvency would be advantageous. The trustees project
that the combined trust
funds will beginbegan to run annual cash-flow deficits in 2017, requiring the
redemption of government bonds accumulated in earlier years. The Disability Insurance (DI) trust
fund is already running cash-flow deficits2010. Cash-flow deficits require the redemption
of government bonds accumulated in earlier years. Cash-flow deficits do not affect Social Security
Security directly, but the redemption of the trust fund bonds puts pressure on the overall federal
budget,
which is in deficit. Earlier changes would allow workers and beneficiaries time to adjust their
their retirement plans. Finally, if Congress were to act today, the benefit cuts or tax increases necessary
necessary to restore solvency until 20822085 would be about half as large assmaller than those needed if Congress waited
until the trust funds became insolvent to act. This report will be updated as events warrant.
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Social Security: What Would Happen If the Trust Funds Ran Out?
Contents
Introduction ................................................................................................................................1
Background ................................................................................................................................1
The Social Security Trust Funds ............................................................................................1
How the Trust Funds Work..............................................................................................1
Historical Trust Fund Operations.....................................................................................3
The Trustees’ Projections ................................................................................................4
Legal Background on Trust Fund Insolvency.........................................................................5
The Antideficiency Act ...................................................................................................5
Legal Entitlement to Social Security Benefits ..................................................................5
What Happens to Benefits in the Case of Insolvency? .....................................................65
What If Congress Waits to Act?...................................................................................................76
Benefit Cut Scenario .............................................................................................................87
Size of Benefit Cuts ........................................................................................................87
Impact of Benefit Cuts ....................................................................................................8
Tax Increase Scenario ......................................................................................................... 1211
Size of Payroll Tax Rate Increases................................................................................. 1211
Impact of Payroll Tax Increases..................................................................................... 12
Conclusion................................................................................................................................ 13
Figures
Figure 1. Scheduled Benefits Payable at Current Law Payroll Tax Rates, 2008-2082 2011-2085 ...................8
Figure 2. Initial Replacement Rates Under Benefit Cut Scenario, 2008-2082 2011-2085 ....................................... 10
Figure 3. Initial Annual Benefits Payable Under Benefit Cut Scenario, 2008-20822011-2085..................... 11
Figure 4. Combined Payroll Tax Rate Needed To Fund Scheduled Benefits, 2008-20822011-2085............. 12
Tables
Table 1. Current Social Security Benefit Payment Schedule.........................................................76
Contacts
Author Contact Information ...................................................................................................... 13
Acknowledgments .................................................................................................................... 13
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Social Security: What Would Happen If the Trust Funds Ran Out?
Introduction
Each year when the Social Security trustees release their annual report, attention is focused on the
trustees’ latest projections of when the Social Security trust funds will become insolvent. 1 Less
attention is paid to what trust fund insolvency would mean. What would happen to benefits?
What options would Congress have to restore solvency? How would policy changes at this point
affect beneficiaries?
There are many misconceptions about what would happen if the Social Security trust funds ran
out. For example, many Americans—particularly younger Americans—some Americans may believe that if the trust
funds were exhausted, Social
Security will be completely broke and unable to pay any benefits.2
This is not the case. In fact, in 2041
2036, the first year of projected insolvency, the program is
projected to have enough tax income
to pay about 7877% of scheduled benefits, declining to about
75% in 2082. However, the percentage of scheduled benefits that could
be paid with tax income would decline to 76.5% in 2037, and continue to decline to 74.4% in
2085, at the end of the trustees’ long-term projection period.
Another myth is that the Social Security Act includes a specific “fail-safe” provision in case of
trust fund exhaustion—for example, a formula for cutting benefits or raising taxes to eliminate
annual deficits. This is also untrue. In fact, the act does not specify what would happen to benefits
if the trust funds are exhausted. The most likely scenario seems to be that benefit checks would be
delayed.
This report explains what the Social Security trust funds are and how they work. It describes the
historical operations of the trust funds and the Social Security trustees’ projections of future
operations. It explains what could happen if Congress allowed the trust funds to run out. It also
analyzes two scenarios that assume Congress waits until the moment of insolvency to act,
showing the magnitude of benefit cuts or tax increases needed and how such changes would
affect beneficiaries.
Background
The Social Security Trust Funds
How the Trust Funds Work
Social Security provides retirement, disability, and survivor benefits to qualifying workers and
their families. These benefits are funded from two trust funds: the Old-Age and Survivors
Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund. The two funds operate
separately but are closely linked. This report generally assumes the merged operations of the
OASI and DI trust funds, treating the two funds as if they were one collective OASDI fund.
1
The 2011
1
The 2008 Trustees Report projected trust fund exhaustion in 20412036. (Social Security Administration, 20082011 Annual
Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds,
April 10, 2008May 13, 2011, at http://www.ssasocialsecurity.gov/OACT/TR/TR08/tr08.pdf2011. Hereafter cited as 2008 Social Security Trustees
Report.)
2
According to the 1997 Retirement Confidence Survey, 30% of Americans age 25 and older believed that trust fund
exhaustion meant the “system will be broke and unable to pay any benefits.” Nearly half (48%) of Americans age 25 to
33 held this belief. (Employee Benefit Research Institute, Public and Employer Opinion on Social Security and Social
Security Reform, SR-39, August 2001, at http://www.ebri.org/pdf/publications/srpdfs/sr39.pdf.)2011 Social Security Trustees
Report.)
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Social Security: What Would Happen If the Trust Funds Ran Out?
separately but are closely linked. This report generally assumes the merged operations of the
OASI and DI trust funds, treating the two funds as if they were one collective OASDI fund.
Income to the Trust Funds
The trust funds receive income from several sources. Their primary income source is the Social
Security payroll tax levied on wages and self-employment income. 32 Social Security-covered
employees and employers each pay 6.2% of wages up to the taxable maximum ($102,000 in
2008).4106,800 in
2011).3 By law, about 85% of Social Security payroll taxes are credited to the OASI trust fund
and about 15% are credited to the DI trust fund. 54 The trust funds also receive income from
interest on the trust funds’ assets and from the taxation of Social Security benefits. In 2007, 84%
2010,
81.9% of the trust funds’ income was from payroll taxes, 1415.0% was from interest on trust fund
assets, and
2 3.1% was from taxation of benefits.65 The proportion of income from each of these
sources varies
over time. 76
Outgo from the Trust Funds
Almost all of the trust funds’ spending is for benefit payments and a small amount goes toward
administrative expenses. The OASI trust fund istrust funds are also party to a financial interchange with the
Railroad Retirement Board.87 This annual exchange of funds places the Social Security trust funds
in the same financial position in which they would have been if railroad service had been covered
by Social Security. In 20072010, more than 98% of the trust funds’ spending was for Social Security
benefits, less than 1
0.92% was for administrative costs, and less than 10.62% was transferred to the
Railroad Railroad
Retirement Board (RRB).98 The trust funds spend essentially the same proportion of
funds on each
of these items each year.
3Annual Cash Flow
If, in a given year, the trust funds take in more tax income (i.e., payroll taxes and federal income
taxes paid on benefits) than they spend, the trust funds have a cash-flow surplus. By law, surplus
revenues are invested in interest-bearing U.S. government securities—usually special issue
2
Payroll taxes are formally known as Federal Insurance Contributions Act (FICA) and Self-Employment Contributions
Act (SECA) taxes. FICA and SECA taxes also include a 1.45% payroll tax on each employee and employer for
Medicare Hospital Insurance.
43
Self-employed individuals pay 12.4% of wages up to the taxable maximum. The taxable maximum is indexed to the
Average Wage Index (AWI). Economists typically attribute both the employee and employer share of the payroll tax to
workers since it is assumed that the employer portion of the tax is passed on to workers in the form of lower wages.
5
42 U.S.C. § 401.
6
For the OASI trust fund, 83% of income was from payroll taxes, 14% was from interest on trust fund assets, and 3%
was from taxation of benefits in 2007. For the DI trust fund, 86% of income was from payroll taxes, 12% was from
interest on trust fund assets, and 1% was from taxation of benefits in 2007. (Figures may not add to 100% due to
rounding.)
7 For
2010, employees and the self-employed will pay a lower rate of tax to reflect the 2% payroll tax holiday, with the trust
funds being reimbursed for the amount of the payroll tax holiday from general funds.
4
42 U.S.C. § 401.
5
For the OASI trust fund, 80.8% of income was from payroll taxes, 16.0% was from interest on trust fund assets, and
3.3% was from taxation of benefits in 2010. For the DI trust fund, 89.3% of income was from payroll taxes, 8.9% was
from interest on trust fund assets, and 1.8% was from taxation of benefits in 2010. (Figures may not add to 100% due to
rounding.)
6
The proportion of income from taxation of benefits is projected to increase over time as more people are subject to
taxation of benefits. (See CRS Report RL32552, Social Security: Calculation and History of Taxing Benefits, by
Janemarie Mulvey and Christine Scott.) The proportion of income from interest is projected to increase in the short
term, as Social Security continues to run surpluses, then decrease as the balance of the trust funds are drawn down to
pay benefits.
8Christine Scott and Janemarie Mulvey.)
7
See CRS Report RS22350, Railroad Retirement Board: Retirement, Survivor, Disability, Unemployment, and
Sickness Benefits, by Kathleen Romig.
9
In 2007, about 99Alison M. Shelton.
8
In 2010, about 98.7% of OASI trust fund spending was for benefits, less than 10.61% was for administrative costs, and less
than 1
less than 0.67% was transferred to the RRB. In 20072010, about 97.3% of DI trust fund spending was for benefits and about 3
2.34% was
for administrative costs. (Figures may not add to 100% due to rounding.)
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Annual Cash Flow
If, in a given year, the trust funds take in more tax income (i.e., payroll taxes and taxation of
benefits) than they spend, the trust funds have a cash-flow surplus. By law, surplus revenues are
invested in interest-bearing U.S. government securities—usually special issue Treasury bonds.10
Treasury bonds. 9 In other words, Social Security’s cash surpluses (like proceeds from all
government bonds) are
borrowed by the U.S. Treasury and can be used for tax cuts, spending, or
repaying debt. The
Treasury, in turn, incurs an obligation to repay the bonds with interest, which
is also credited to
the trust funds.
If, in a given year, the trust funds spend more than the tax income they receive, they have a cashflow deficit. In deficit years, Social Security can redeem any bonds (including interest)
accumulated in previous years. When the bonds are redeemed, assets are transferred from the
Treasury’s general fund to the Social Security trust funds. In other words, unless the Treasury’s
general fund is running a surplus, Congress would need to cut overall spending, raise taxes, or
borrow during years in which Social Security has cash-flow deficits.
Trust Fund Solvency
If the trust funds are not able to pay all of current expenses out of current tax income and
accumulated trust fund assets, they are insolvent. Insolvency means that Social Security’s trust
funds are unable to pay full benefits on time. It does not mean that Social Security will be
completely broke and unable to pay any benefits.
Historical Trust Fund Operations
The OASI trust fund was established in 1937; the DI trust fund was established in 1957. Neither
of the Social Security trust funds has ever become insolvent. In 2007, the combined trust funds
had a cash-flow surplus of about $80 billion (about 10% of the trust funds’ income for that year),
which was invested in Treasury bonds.11 The DI trust fund had a cash-flow deficit for the third
year in a row. At the end of 2007, the combined trust funds held a total of about $2.2 trillion in
Treasury bonds. 122010, the OASI trust fund had a
cash-flow deficit of about $16.0 billion, and the DI trust fund had a cash-flow deficit of $32.9
billion, for a combined cash-flow deficit of $48.9 billion. At the end of 2010, the combined trust
funds held a total of about $2.6 trillion in Treasury bonds.10
Cash-Flow Surpluses and Deficits
The trust funds have run annual cash-flow surpluses in most years. These annual surpluses were
typically small relative to the size of the trust funds’ expenditures. After the 1983 amendments to
the Social Security Act, which increased Social Security’s income and reduced its spending, the
OASI trust fund began to run larger surpluses.13 The combined trust funds have run annual cash-
10
See CRS Report RS20607, Social Security: Trust Fund Investment Practices, by Dawn Nuschler.
In 2007, the OASI trust fund had a cash-flow surplus of $82.3 billion and the DI trust fund had a cash-flow deficit of
$2.1 billion.
12
At the end of 2007, the OASI trust fund held $2.0 trillion and the DI trust fund held $215 billion.
11
13
There is little evidence to suggest that the 1983 amendments were intended to create surpluses or to “advance fund”
future benefits. Records of Congressional proceedings at the time show that the primary goal of the legislation was to
assure that Social Security would not be threatened by insolvency if economic conditions were worse than expected.
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flow The combined trust funds have run annual cashflow deficits during 21 years, the last of which was in 1983.1411 The trust funds made up the
difference between income and outgo during these years by redeeming some of the bonds
accumulated in earlier years. In other words, the Social Security trust funds received net transfers
from the Treasury’s general fund.
Near-Insolvency in the Early 1980s
The Social Security trust funds have never been exhausted. However, in the early 1980s, a
solvency crisis loomed for the OASI trust fund. The 1982 Social Security Trustees Report
projected that in the absence of legislative changes the OASI trust fund would become insolvent
9
See CRS Report RS20607, Social Security: Trust Fund Investment Practices, by Dawn Nuschler.
At the end of 2010, the OASI trust fund held $2.4 trillion and the DI trust fund held $179.9 billion.
11
See CRS Report RL33028, Social Security: The Trust Fund, by Dawn Nuschler and Gary Sidor.
10
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by July 1983.12by July 1983.15 To relieve the pressure on the OASI trust fund temporarily, Congress permitted
the fund to borrow from the DI and Medicare Hospital Insurance (HI) trust funds.1613 Money was
transferred to the OASI fund in 1982 and repaid by 1986.1714 This temporary measure allowed
policymakers time to develop a more sustainable solution to Social Security’s solvency
problem—the 1983 amendments, which increased tax incomeincome from taxes and reduced benefits.18 Absent
15
Absent another act of Congress, the Social Security Act does not permit further interfund
borrowing.19
The Trustees’ Projections
The Social Security trustees issue an annual report in which they describe their short- and longrange projections of trust fund financial operations.20 The Trustees Report describes a range of
possible outcomes using different sets of demographic and economic assumptions, including
intermediate assumptions, high cost (pessimistic) assumptions, and low cost (optimistic)
assumptions. Each set of assumptions results in different projections of both when cash-flow
deficits will begin and when the trust funds will become insolvent.2116 This CRS report focuses on
the trustees’ long-range projections under their intermediate assumptions, which reflect their “best
estimates” of future trends. However, it is important to note that the trustees’ projections—like all
long-term projections—are uncertain. Other estimates differ from the trustees’ projections. For
14
See CRS Report RL33028, Social Security: The Trust Fund, by Dawn Nuschler and Gary Sidor.
15
Cash-Flow Projections
The combined trust funds began to have annual cash-flow deficits in 2010 that are projected to
continue in future years. When cash-flow deficits emerge, the trust funds need to redeem the
Treasury bonds accumulated during earlier years. Redeeming the bonds requires transfers from
the Treasury’s general fund to the Social Security trust funds. These transfers create pressure on
the overall federal budget.
Trust Fund Solvency Projections
According to the trustees’ intermediate projections, redemption of trust fund assets will allow the
trust funds to pay full benefits on time until 2036, when the trust funds will become exhausted. 17
At that time, the trust funds will continue to receive tax income (i.e., payroll taxes and federal
income taxes on benefits). The trustees project that tax income will be sufficient to cover about
12
Social Security Administration, 1982 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Disability Insurance Trust Funds, April 1, 1982. (Hereafter cited as 1982 Social Security Trustees
Report.)
1613
P.L. 97-123.
1714
The OASI trust fund borrowed $17.5 billion in November and December of 1982; about $5.1 billion was from the DI
trust fund and $12.4 billion was from Medicare’s HI trust fund.
18
P.L. 98-21.
19
Even if interfund borrowing were legally permitted, it is unlikely that the Social Security trust funds would be able to
borrow from Medicare’s HI trust fund. According to the 2008 Medicare Trustees Report, the HI trust fund is projected
to become insolvent in 2019.
20
For more information, see CRS Report RS22139, Social Security: Summary of Program Solvency and Projections,
by Gary Sidor.
21
15
P.L. 98-21.
16
Under the intermediate assumptions, the combined trust funds are projected to begin cash-flow deficits in 2017 and
to become insolvent in 20412036. Under the low
cost assumptions, the trust funds are not projected to become insolvent within the 75-year projection period. Under the
projected to have cash-flow deficits
temporarily and to return to cash-flow surplus by the end of the 75-year projection period; they are not projected to
become insolvent within the period. Under the high cost assumptions, the trust funds are projected to begin cash-flow
deficits in 2014 and to become insolvent in 2031. (20082028. (2011 Social Security Trustees Report, Tables IV.B1 and IV.B3.)
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example, the Congressional Budget Office (CBO) projects that the trust funds will begin cashflow deficits and become insolvent later than the trustees project.22
Cash-Flow Projections
The Social Security trustees project that the combined trust funds will continue to have a cashflow surplus (i.e., more tax income than spending on an annual basis) until 2017, at which point
annual cash-flow deficits will emerge. The DI trust fund has been running cash-flow deficits since
2005.23 When cash-flow deficits emerge, the trust funds need to redeem the Treasury bonds
accumulated during earlier years. Redeeming the bonds requires transfers from the Treasury’s
general fund to the Social Security trust funds. These transfers create pressure on the overall
federal budget.
Trust Fund Solvency Projections
According to the trustees’ intermediate projections, redemption of trust fund assets will allow the
trust funds to pay full benefits on time until 2041, when the trust funds will become exhausted.24
At that time, the trust funds will continue to receive tax income (i.e., payroll taxes and taxation of
benefits). The trustees project that tax income will be sufficient to cover about 78% of scheduled
benefits during the first year of trust fund insolvency in 2041, gradually declining to about 75%
of scheduled benefits in 2082
Report, Table IV.B3.)
17
Under the trustees’ intermediate assumptions, the OASI trust fund is projected to become insolvent in 2038 and the
DI trust fund is projected to become insolvent in 2018.
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77% of scheduled benefits during the first year of trust fund insolvency in 2036. This will decline
to 76.5% in 2037, and then gradually decline to 74.4% of scheduled benefits in 2085.
Legal Background on Trust Fund Insolvency
The Antideficiency Act
The Social Security Act specifies that benefit payments shall be made only from the trust funds
(i.e., accumulated trust fund assets and current tax income). 2518 Another law, the Antideficiency
Act, prohibits government spending in excess of available funds. 2619 Consequently, if the Social
Security trust funds become insolvent—that is, if current tax income and accumulated assets are
not sufficient to pay the benefits to which people are entitled—the law effectively prohibits full
Social Security benefits from being paid on time.
Legal Entitlement to Social Security Benefits
The Social Security Act states that every individual who meets program eligibility requirements is
entitled to benefits. 27 In other words, Social Security is an entitlement program, which means that
22
CBO projects that the combined trust funds will run cash-flow deficits starting in 2019 and will become insolvent in
2046. (Congressional Budget Office, Updated Long-Term Projections for Social Security, June 2006, at
http://www.cbo.gov/ftpdocs/72xx/doc7289/06-14-LongTermProjections.pdf.)
23
The OASI trust fund is projected to begin cash-flow deficits in 2018.
24
Under the trustees’ intermediate assumptions, the OASI trust fund is projected to become insolvent in 2042 and the
DI trust fund is projected to become insolvent in 2025.
25
42 U.S.C. § 401(h).
26
31 U.S.C. § 1341.
27
42 U.S.C. §§ 402 and 423.
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20 In other words, Social Security is an entitlement program, which means that
the government is legally obligated to pay Social Security benefits to all those who are eligible
for them as set forth in the statute.2821 If the government fails to pay the benefits stipulated by law,
beneficiaries could take legal action. Insolvency would not relieve the government of its
obligation to provide benefits. If benefits were reduced, beneficiaries would remain legally
entitled to the balance.
What Happens to Benefits in the Case of Insolvency?
The Social Security Act does not stipulate what would happen to benefits if the trust funds ran
out. Because the Antideficiency Act would effectively prohibit the government from paying full
benefits on time and the Social Security Act entitles beneficiaries and qualifying applicants to
scheduled benefits, the conflict between these two laws would need to be resolved by Congress or
by the courts. In the meantime, either full benefit checks would be paid on a delayed schedule or
reduced benefits would be paid on time, according to trust fund experts in multiple federal
agencies.2922
To see how a delay could affect beneficiaries, consider the current Social Security benefit
payment schedule, shown in Table 1. (This schedule may be changed at the discretion of the
Social Security Commissioner.) New beneficiaries’ payment dates are generally based on their
day of birth—for example, if a retired worker was born on the first of the month (e.g., June 1), his
or her benefit check is paid on the second Wednesday in the month.30 If trust fund insolvency
caused delays in the benefit payment schedule, benefit checks could be paid in the usual order—
first to those who receive benefits on the third of the month, then to those on the second
Wednesday of the month, and so on, until the balance of the trust funds’ balance reached zero. At
that point, no benefits could be paid until more tax receipts were credited to the trust funds. Then
benefit payments could be picked up where they left off when the trust funds ran out. This cycle
could continue indefinitely. Under these circumstances, all beneficiaries would receive full
benefit checks in about nine months of each year after the trust funds first became exhausted. The
timing of these checks would be unpredictable.
28
18
42 U.S.C. § 401(h).
31 U.S.C. § 1341.
20
42 U.S.C. §§ 402 and 423.
21
However, Congress retains the right to modify provisions of the Social Security Act at any time, which could affect
the benefits current and future beneficiaries may receive. (42 U.S.C. § 1304.) For more details, see CRS Report
RL32822, Social Security Reform: Legal Analysis of Social Security Benefit Entitlement Issues, by Kathleen S.
Swendiman and Thomas J. Nicola.
2922
It seems most likely that benefits would be delayed (thus reducing the number of full benefit checks paid). It is
unclear whether the Social Security Commissioner or the other trustees would have the authority to reduce the benefit
amounts specified by law. The 1982 Trustees Report, which projected impending trust fund insolvency, stated that
unless legislative changes were made, “inability to pay some benefits on time would result.” (1982 Trustees Report, p.
2, emphasis added.)
30
For beneficiaries who receive Social Security benefits based on another person’s work record (e.g., spouse benefits),
their payment date depends on the birth date of the worker on whose record they receive benefits. The current benefit
payment schedule was first implemented for new beneficiaries in May 1997. By 2041, the number of beneficiaries
being paid each week of the month will be approximately equal.
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Table 1. Current Social Security Benefit Payment Schedule
Benefits Paid On
Third of every month
p. 2, emphasis added.)
19
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Social Security Commissioner.) New beneficiaries’ payment dates are generally based on their
day of birth—for example, if a retired worker was born on the first of the month (e.g., June 1), his
or her benefit check is paid on the second Wednesday in the month.23 If trust fund insolvency
caused delays in the benefit payment schedule, benefit checks could be paid in the usual order—
first to those who receive benefits on the third of the month, then to those on the second
Wednesday of the month, and so on, until the balance of the trust funds’ balance reached zero. At
that point, no benefits could be paid until more tax receipts were credited to the trust funds. Then
benefit payments could be picked up where they left off when the trust funds ran out. This cycle
could continue indefinitely. Under these circumstances, all beneficiaries would receive full
benefit checks in about nine months of each year after the trust funds first became exhausted. The
timing of these checks would be unpredictable.
Table 1. Current Social Security Benefit Payment Schedule
Benefits Paid On
Third of every month
Second Wednesday
Third Wednesday
Fourth Wednesday
Birth Date of Worker on Whose Record Benefits are Paid
Any birth date for:
(1) Beneficiaries who receive both Social Security and SSI benefits;
(2) Most beneficiaries who began to receive benefits prior to May 1997.
Second Wednesday
1st to 10th day of the month
Third Wednesday
11th to 20th day of the month
Fourth Wednesday
21st to 31st day of the month
Source: Social Security Administration.
NotesNote: For beneficiaries scheduled to receive payments on the third of the month, benefits may be paid earlier if
the third is on a weekend or holiday.
What If Congress Waits to Act?
There are many options to restore Social Security solvency, which could be combined or targeted
in a variety of ways. For example, Congress could decrease Social Security spending. This
essentially means cutting benefits because Because
more than 98% of Social Security spending is on
benefits. benefits, this essentially means cutting benefits.
Benefit cuts could be applied proportionately to all beneficiaries or structured to protect
certain certain
beneficiaries (e.g., disabled or low-income beneficiaries). Congress could also increase
Social Social
Security’s income by raising tax revenue (e.g., raising payroll tax rates or the amount of
wages wages
taxed), boosting interest income (e.g., investing surpluses in stocks), or adding a new
source of
revenue (e.g., transferring funds from the Treasury’s general fund). Tax increases could
be applied
proportionately to all workers or targeted to certain workers (e.g., those who earn more
than the
taxable maximum).
Over the long range (i.e., 75 years), the Social Security trustees project a shortfall of $4.36.5 trillion
in present value terms, or 1.72.22% of taxable payroll. The next section presents two of the policy
options Congress could choose to fill this gap:
•
The benefit cut scenario assumes that Congress covers the annual cash-flow
deficit by cutting benefits across the board.
23
For beneficiaries who receive Social Security benefits based on another person’s work record (e.g., spouse benefits),
their payment date depends on the birth date of the worker on whose record they receive benefits. The current benefit
payment schedule was first implemented for new beneficiaries in May 1997. By 2037, the number of beneficiaries
being paid each week of the month will be approximately equal.
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•
The tax increase scenario assumes that Congress covers the annual cash-flow
deficit by raising the payroll tax rate.
Both scenarios assume that Congress waits until the trust funds become insolvent to make
changes. If made sooner, the changes could be smaller, since earlier changes could be spread to a
larger number of workers and beneficiaries over a longer period of time. 3124 Either scenario would
essentially convert Social Security to a pure pay-as-you-go system, in which income and outgo
31
The trustees estimate that 75-year solvency could be restored through an immediate payroll tax increase of 1.7
percentage points (split between employers and employees) or benefit reduction of about 11.5% (for all current and
future beneficiaries). These changes are about half as large as those required in 2041. (2008 Social Security Trustees
Report.)
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are equal on an annual basis and there are no trust fund assets. These scenarios are only two of a
wide range of possibilities.
Benefit Cut Scenario
Size of Benefit Cuts
If the trust funds were allowed to run out, Congress could eliminate annual cash-flow deficits by
cutting benefits so that spending equals tax income on an annual basis. According to the trustees,
achieving annual balance would require benefit cuts of 2223% in 20412036, the first year of insolvency,
rising to 2526% by 20822085. To maintain balance after 20822085, the Social Security trustees project that
larger benefit reductions would be needed, since the aging of the U.S. population, among other
factors, is causing the
cost of Social Security to grow over time. Figure 1 shows the percentage
of scheduled benefits
that are payable each year with scheduled revenues.
Figure 1. Scheduled Benefits Payable at Current Law Payroll Tax Rates,
2008-2082
Source: Social Security Administration memorandum by Chris Chaplain and Jason Schultz, Actuaries, “PresentLaw OASDI Payable Percentages: Present-Law Revenue as a Percent of the Cost Providing Scheduled Benefits
for Years 2041 through 2082,” April 23, 2008. (Hereafter cited as SSA Payable Benefits Memo.)
Notes
24
The trustees estimate that 75-year solvency could be restored through an immediate payroll tax increase of 2.15
percentage points (split between employers and employees) or benefit reduction of about 13.8% (for all current and
future beneficiaries). These changes are about half as large as those required in 2036. (2011 Social Security Trustees
Report.)
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Figure 1. Scheduled Benefits Payable at Current Law Payroll Tax Rates, 2011-2085
120%
Percentage of Scheduled Benefits
100%
80%
60%
40%
20%
83
80
20
77
20
74
20
71
20
68
20
65
20
59
56
62
20
20
20
53
20
50
20
47
20
41
44
20
20
38
20
35
20
32
20
29
20
23
26
20
20
20
20
17
20
14
20
20
20
11
0%
Calendar Year
Source: Social Security Administration memorandum by Christopher Chaplain and Jason Schultz, Supervisory
Actuaries, “Present-Law OASDI Payable Percentages: Present-Law Revenue as a Percent of the Cost of Providing
Scheduled Benefits for Years 2036 through 2085,” May 27, 2011. (Hereinafter cited as SSA Payable Benefits
Memo.)
Note: Although not shown in the figure, the trustees project that more than 100% of scheduled benefits could
be payable with scheduled payroll taxes prior to 2041prior to 2036.
Impact of Benefit Cuts
There are several ways to measure how beneficiaries would be affected under the benefit cut
scenario. This report analyzes projected replacement rates and real benefit amounts for a series of
hypothetical workers developed by the actuaries at the Social Security Administration (SSA).
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Replacement Rates
One way to illustrate the effect of across-the-board benefit cuts on beneficiaries is to use
replacement rates. A replacement rate is a comparison between a person’s income before and
after retirement; it is one way of measuring the adequacy of a person’s post-retirement income.
Replacement rates can be calculated in different ways. This report uses the same methodology as
SSA’s actuaries, which is to calculate a worker’s initial Social Security benefit as a percentage of
his or her average indexed monthly earnings, thus showing the proportion of earnings replaced by
benefits. 3225 Benefits tend to replace a higher proportion of lower earners’ wages than of higher
25
This formula uses the highest 35 years of earnings covered by Social Security, indexed to wages using the Average
(continued...)
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earners’ wages since the Social Security benefit formula is progressive. In 20082011, the estimated
replacement rate for a medium earner retiring at the age of age 65 is 3941.2%. Under current law,
beneficiaries’
replacement rates are gradually decreasing as the full retirement age (FRA)
gradually increases from 65
to 67 to 67. Although benefits are available between the ages of 62 and
FRA, the benefit amount is reduced.
Replacement rates are an important measure of the adequacy of Social Security benefits. Social
Security was established to replace income lost to a family as a result of the retirement, death, or
disability of a worker. To ensure that benefit levels keep up with increases in wages over time—
thus providing a steady replacement rate to beneficiaries—initial Social Security benefits are
indexed to wage growth. Historically, wages have generally risen faster than prices, which has
allowed the standard of living to rise from one generation to the next.3326 Indexing initial Social
Security benefits to wages has allowed beneficiaries to reap the benefits of rising living
standards.3427 Replacement rates show the extent to which initial Social Security benefits keep up
with wage growth and with rising standards of living.
Figure 2 shows projected initial replacement rates under the benefit cut scenario for a
hypothetical low,
medium, and high earner. 3528 The low earner is assumed to have earned 45% of
the national
average wage during each year of his or her career (about $19,000 in 2008344 in 2011) and to
receive a
monthly Social Security benefit of about $795 in 2008.36867 in 2011.29 The medium earner is assumed
to have
earned the average wage during each year of his or her career (about $42,000 in 2008)
and to 987 in 2011) and to
receive a monthly Social Security benefit of about $1,310 in 2008428 in 2011. The high earner is
assumed to
have earned 160% of the average wage during each year of his or her career (about
$67,000 in 2008 $68,779 in
2011) and to receive a monthly Social Security benefit of about $1,740 in 2008. Each
893 in 2011. Each year in the
graph shows the projected replacement rate for each beneficiary if he or she turned 65 years old
and retired in January of that year.
32
This formula uses the highest 35 years of earnings covered by Social Security, indexed to wages using the Average
Wage Index (AWI).
33
Replacement rates for the beneficiaries in this example are projected to decline in the near term.
Between 2010 and 2036, replacement rates are projected to decrease about 11.6%.30 This decline
is mostly due to the increase in the full retirement age over the period. Combining the projected
percentage of benefits that will be payable (the benefit cut scenario) with the replacement rates
results in an effective (payable) replacement rate in 2036, the first year of insolvency, being
19.7% lower than if the trust funds were solvent.
(...continued)
Wage Index (AWI).
26
The standard of living is usually measured in terms of income and reflects the quality of life that people enjoy,
including factors such as the quality of housing, medical care, transportation, and communication.
3427
For more information on how benefits are indexed, see CRS Report RL32900, Indexing Social Security Benefits: The
Effects of Price and Wage Indexes, by Patrick Purcell, Neela K. Ranade, and Laura Haltzel.
3528
For information on the development of the hypothetical workers, see Social Security Administration, Office of the
Chief Actuary, Actuarial Note Number 144, “Internal Rates of Return Under the OASDI Program for Hypothetical
Workers,” by Orlo R. Nichols, et al., June 2001, at http://www.ssa.gov/OACT/NOTES/note2000s/note144.html.
3629
The average wage is defined by SSA’s Average Wage Index (AWI).
30
Initial replacement rates are estimated to be 55.2% for the low earner, 40.9% for the medium earner, and 33.9% for
the high earner in 2011.
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Figure 2. Initial Replacement Rates Under Benefit Cut Scenario, 2008-20822011-2085
0.6
Initial Replacement Rate
0.5
0.4
0.3
0.2
0.1
80
77
74
71
68
65
62
59
56
53
50
47
83
20
20
20
20
20
20
20
20
20
20
20
20
41
38
35
32
29
26
44
20
20
20
20
20
20
20
20
17
14
23
20
20
20
20
20
20
11
0
Calendar Year
Source: Congressional Research Service calculations, using figures from the 20082011 Social Security Trustees Report
and the SSA Payable Benefits Memo.
Notes: The workers in this figure are assumed to retire at age 65. The age at which beneficiaries may receive
full Social Security benefits is currently rising from 65 to 67, so the early retirement reduction for workers in this
example would increase over time. About two-thirds of new retirement beneficiaries began to receive benefits
before age 65.
Replacement rates for the beneficiaries in this example are projected to decline in the near term.
Between 2008 and 2040, initial replacement rates are projected to decrease about 7%.37 This
decline is mostly due to the increase in the full retirement age over the first two decades of that
period.
Under the benefit cut scenario, replacement rates are projected to drop significantly when the
trust funds become insolvent, then level off. Between 2040 and 2042, the first full year of
projected insolvency, initial replacement rates are projected to decrease about 22%.38
Replacement rates are expected to continue to decline after 2042 as benefit cuts under this
scenario grow larger. Between 2042 and 2082, the last year for which the trustees have
projections, initial replacement rates are projected to fall about 4%.
Real Benefit Levels
Another way to illustrate the effect of across-the-board benefit cuts is to look at projected initial
annual benefit amounts in real terms (i.e., after adjusting for inflation). Since benefits are based
on workers’
lifetime earnings, higher earners tend to receive higher benefit amounts than lower earners.
37
Initial replacement rates are estimated to be 53% for the low earner, 39% for the medium earner, and 32% for the
high earner in 2008.
38
In 2042, replacement rates are estimated to be 38% for the low earner, 28% for the medium earner, and 23% for the
high earner.
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Figure 3. Initial Annual Benefits Payable Under Benefit Cut Scenario, 2008-2082
Source: Congressional Research Service calculations, using figures from the 2008 Social Security Trustees Report
and the SSA Payable Benefits Memo.
Note: Please see notes for Figure 2.
earners.
The change in real benefit levels over time illustrates how well Social Security benefits are
projected to keep up with inflation (i.e., price growth). The real benefit levels in Figure 3 show
future initial benefit amounts in 20082011 dollars—in other words, they illustrate the extent to which
future beneficiaries could afford today’s living standards. Wages are expected to grow faster than
prices over the long term, which would allow living standards to rise. Real benefit levels do not
show the extent to which future beneficiaries could afford these rising living standards.
Real benefit levels are expected to rise in the near term. The trustees project that Social Security
benefits will rise as a result of growing wages, causing
initial real benefit amounts to increase
about 3125.4% between 2008 and 2040.39
Under the benefit cut scenario, real 2011 and 2036.31
31
Annual real benefits are estimated to be $10,398 for the low earner, $17,134 for the medium earner, and $22,717 for
(continued...)
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Under the benefit cut scenario, real payable benefit levels are projected to drop significantly after
the trust
funds become insolvent, then to rise gradually. Between 20402035, the last full year of
projected trust
fund solvency, and 20422037, the first full year of projected insolvency, initialpayable real
benefit levels are
projected to decline about 21%.40 Initial real benefit levels under the benefit cut scenario are
projected to be about 4% higher in 2042 than in 2008. Between 2042 and 2081, the last year for
which the trustees have projections, initial real benefit levels under this scenario are expected to
increase by about 47% as wages continue to rise.41
39
Annual real benefits are estimated to be $9,549 for the low earner, $15,732 for the medium earner, and $20,854 for
the high earner in 2008.
40
In 2042, annual real benefits are projected to be $9,974 for the low earner, $16,438 for the medium earner, and
$21,790 for the high earner.
41
In 2082, annual real benefits are projected to be $14,689 for the low earner, $24,203 for the medium earner, and
$32,081 for the high earner.
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Social Security: What Would Happen If the Trust Funds Ran Out? projected to decline about 23.5%.32
Figure 3. Initial Annual Benefits Payable Under Benefit Cut Scenario, 2011-2085
$40,000
$35,000
Annual Benefits Payable
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
83
80
20
77
20
74
20
71
20
68
20
65
20
62
20
59
20
56
20
53
20
50
20
47
20
44
20
41
20
38
20
35
20
32
20
29
20
26
20
23
20
20
20
17
20
14
20
20
20
11
$0
Calendar Year
Source: Congressional Research Service calculations, using figures from the 2011 Social Security Trustees Report
and the SSA Payable Benefits Memo.
Note: Please see notes for Figure 2.
Tax Increase Scenario
Size of Payroll Tax Rate Increases
Congress could also eliminate cash-flow deficits by raising the payroll tax rate so that the trust
funds’ tax income would equal spending each year. The trustees project that taking such an action
at the point of insolvency would require combined employee and employer payroll taxes to
increase from their current rate of 12.404% to 15.9416.4% in 20412036, the year in which the trust funds
are are
projected to be exhausted, rising to 16.609% by 2082, the last year for which the trustees have
projections. To maintain balance after 20822085, the last year for which the trustees have
(...continued)
the high earner in 2011.
32
In 2037, annual real benefits are projected to be $13,193 for the low earner, $21,746 for the medium earner, and
$28,815 for the high earner.
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projections. To maintain balance after 2085, the Social Security trustees project that the payroll
tax rate would likely need to increase further. This is because the cost of Social Security is
expected to grow, due to U.S. population aging and the design of the Social Security system.
Figure 4 shows the payroll tax rates needed to pay scheduled benefits each year from 2008 to
20822011 to
2085.
Figure 4. Combined Payroll Tax Rate Needed To Fund Scheduled Benefits,
2008-2082 2011-2085
18.00%
Combined Social Security Payroll Tax Rate
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
83
80
20
77
20
74
20
71
20
68
20
65
20
62
20
59
20
56
20
53
20
50
20
47
20
44
20
41
20
38
20
35
20
32
20
29
20
26
20
23
20
20
20
17
20
14
20
20
20
11
0.00%
Calendar Year
Source: CRS calculations, using figures from the 20082011 Social Security Trustees Report.
Note: Prior to 2041, scheduled payroll tax rates could fund more than scheduled benefitsAlthough not shown in the figure, the trustees project that more than 100% of scheduled benefits could
be payable prior to 2036.
Impact of Payroll Tax Increases
Raising the payroll tax rate would increase most workers’ taxes by the same proportion. However,
since covered wages are taxable only up to a specified maximum ($102,000 in 2008106,800 in 2011), the
effective increase in the payroll tax would be smaller for people who earn more than the taxable
maximum than for other workers. About 6% of workers currently earn more than the taxable
maximum. 4233 Unlike the federal income tax, the Social Security payroll tax is levied at a flat rate
starting at the first dollar of wages. As a result of this flat structure and the cap on taxable wages,
42
CRS Report RL32896, Social Security: Raising or Eliminating the Taxable Earnings Base, by Kathleen Romig and
Janemarie Mulvey.
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the Social Security payroll tax places a relatively greater burden on low- and middle-income
workers.43
the Social Security payroll tax places a relatively greater burden on low- and middle-income
workers.34
33
CRS Report RL32896, Social Security: Raising or Eliminating the Taxable Earnings Base, by Janemarie Mulvey.
In 2006, about 66% of tax filers owed more in combined payroll taxes than in individual income taxes. (“Two-Thirds
(continued...)
34
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Conclusion
The consequences of allowing the trust funds to become insolvent can be avoided if Congress
makes changes to Social Security. The sooner Congress acts, the smaller the changes need to be.
If Congress acted today, the benefit cuts or tax increases necessary to restore solvency until 20822085
would be about half as large as those needed if Congress waited until the trust funds became
insolvent. Prompt action would also allow Congress to gradually phase in changes, rather than
abruptly cutting benefits or raising taxes, thus allowing workers to plan in advance for their
retirements. Another reason to act sooner rather than later is that the trustees project that the
combined trust funds will begin began
to run annual cash-flow deficits each year beginning in 2010in 2017, requiring the trust funds
to redeem
the bonds that they have accumulated in surplus years. Cash-flow deficits do not affect
Social Social
Security directly, but the redemption of the trust fund bonds puts pressure on the overall
federal federal
budget, which is in deficit.
Author Contact Information
Christine Scott
Specialist in Social Policy
cscott@crs.loc.gov, 7-7366
Acknowledgments
This paper was originally An earlier version of this paper was written by Kathleen Romig. All questions should be directed to the current
author.
43
In 2006, about 66% of tax filers owed more in combined payroll taxes than in individual income taxes. (“Two-Thirds
current author.
(...continued)
of Tax Units Pay More in Payroll Tax Than in Income Tax,” Tax Facts from the Tax Policy Center, by Leonard E.
Burman and Greg Leiserson, April 9, 2007, at http://www.taxpolicycenter.org/UploadedPDF/1001065_Tax_Units.pdf.)
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