Order Code IB98048
Issue Brief for Congress
Received through the CRS Web
Social Security Reform
Updated March 6, 2003
Geoffrey Kollmann and Dawn Nuschler
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

---

CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
The Basic Debate
The Push for Major Reform
The Arguments for Retaining the Existing System
The Basic Choices
Specific Areas of Contention
The System’s Financial Outlook
Public Confidence
Increasing Doubts About Money’s Worth
“Privatization” Debate
The Retirement Age Issue
Cost-of-Living Adjustments (COLAs)
Social Security and the Budget
Reform Initiatives
Reform Bills in Recent Congresses
Legislation in 107th Congress
Legislation in the 108th Congress
LEGISLATION

---

IB98048
03-06-03
Social Security Reform
SUMMARY
Although the Social Security system is
future. These concerns and a belief that the
now running surpluses of income over outgo,
nation must increase its national savings have
its board of trustees projects that its trust
led to proposals to revamp the system.
funds would be depleted in 2041 and only
73% of its benefits would be payable then
Others suggest that the system’s prob-
with incoming receipts. The trustees project
lems are not as serious as its critics claim.
that on average the system’s cost would be
They argue that it is now running surpluses,
14% higher than its income over the next 75
that the public still likes it, and that there is
years; by 2080 it would be 50% higher. The
risk in some of the new reform ideas. They
primary reason is demographic: the post-
contend that only modest changes are needed.
World War II baby boomers will begin retiring
in less than a decade and life expectancy is
Today, the ideas range from restoring
rising. By 2025 the number of people age 65
solvency with minimal changes to scrapping
and older is predicted to grow by 74%. In
the system entirely for something modeled
contrast, the number of workers supporting
after IRAs or 401(k)s. This broad spectrum
the system would grow by 14%.
was clearly reflected in the report of a 1997
Social Security Advisory Council. Three very
The trustees project that Social Security’s
different plans were presented, none of which
surplus of taxes and interest will cause the
received a majority’s endorsement. Similar
system’s trust funds, comprised exclusively of
diversity is reflected in the many reform bills
federal bonds, to grow to a peak of $7.2 tril-
introduced in the 105th, 106th, 107th and 108th
lion in 2026. The system’s outgo thereafter
Congresses. In his last three years in office,
would exceed its income and the trust funds
former President Clinton also highlighted the
would be drawn down until their depletion.
issue. He proposed using the Social Security
However, the trustees project that the system’s
portion of then-projected budget surpluses to
taxes by themselves would fall below its
buy down the federal debt while crediting the
outgo in 2017. At that point, other federal
system with the reductions – what effectively
receipts would be needed to help pay for
would be general fund infusions to the system.
benefits (by providing cash as the federal
bonds held by the trust funds are redeemed).
During the 2000 Presidential campaign,
If there are no other surplus governmental
President Bush stated that he favored allowing
receipts, policymakers would have three
workers to put some of their Social Security
choices: raise taxes or other income, cut
taxes in personal accounts where they could
spending, or borrow the money.
invest in stocks if they so desired. He later
appointed a commission to make recommen-
This adverse outlook is reflected in
dations to reform Social Security. The com-
public opinion polls showing that fewer than
mission issued a report on December 21,
50% of respondents are confident that Social
2001, which includes three options to reform
Security can meet its long-term commitments.
the program. All options feature individual
There also is a growing perception that Social
accounts.
Security may not be as good a value in the
Congressional Research Service ˜ The Library of Congress

---

IB98048
03-06-03
MOST RECENT DEVELOPMENTS
During the Presidential campaign, President Bush stated that he favored allowing
workers to put some of their Social Security taxes into personal accounts. In May 2001, he
appointed a commission to make recommendations to reform Social Security. The
Commission issued a report in December 2001 that presents three options to reform the
program. All three feature individual accounts. In the 107th Congress, Representatives
DeMint, Kolbe, Matsui, Petri, Sessions, Shaw and Stenholm, and Senator Gramm,
introduced bills that would have established personal accounts to supplement or replace part
of the Social Security system. Representative Matsui’s bills would have enacted options 1,
2, and 3, respectively, of the President’s Commission. Representatives Matsui and Shows
also introduced bills that would have rejected proposals that would substitute traditional
Social Security benefits with personal accounts. In the 108th Congress, Representative Shaw
has reintroduced his reform proposal in a slightly modified form (H.R. 75).
BACKGROUND AND ANALYSIS
Although Social Security’s income is currently exceeding its outgo, its board of trustees
(three officers of the President’s Cabinet, the Commissioner of Social Security, and two
members representing the public) projects that on average over the next 75 years Social
Security’s outgo will exceed its income by 14% and by 2041 its trust funds would be
depleted. At that point, its revenues could pay for only 73% of the costs of the program. The
primary reason is demographic: the post-World War II baby boom generation will soon be
retiring and increasing life expectancy is creating an older society. By 2025, the number of
people age 65 and older is predicted to rise by 74%. In contrast, the number of workers
whose taxes will finance future benefits is projected to grow by only 14%. As a result, the
number of workers supporting each recipient is projected to fall from 3.4 today to 2.3 in
2025.
Social Security revenues are paid into the U.S. Treasury and most of the proceeds are
used to pay for benefits. Surplus revenue is invested in federal securities recorded to the Old
Age, Survivors, and Disability Insurance (OASDI) trust funds maintained by the Treasury
Department (OASDI being the formal title for Social Security). Social Security benefits and
administrative costs are paid out of the Treasury and a corresponding amount of trust fund
securities are redeemed. Whenever current Social Security taxes are insufficient to pay
benefits, the trust fund’s securities are redeemed and Treasury makes up the difference with
other receipts.
Currently, Social Security tax revenues exceed what is needed to pay benefits. These
surpluses and the interest the government “pays” to the trust funds appear as growing trust
fund balances. The trustees project that the balances will grow to $7.2 trillion in 2026, after
which the system’s outgo would exceed its income and the balances would fall. By 2041,
the trust funds would be exhausted and technically insolvent. The point at which Social
Security taxes alone (ignoring interest paid to the funds) would fall below the system’s outgo
is 2017. Since interest paid to the funds is an exchange of credits between Treasury accounts
and not a resource for the government, in 2017 other federal receipts would be needed to help
CRS-1

---

IB98048
03-06-03
meet the system’s costs. At that point, policymakers would have three choices: raise taxes,
cut spending, or borrow the needed money. The annual draw from the general fund (in 2002
dollars), is forecast to be $74 billion by 2020, and $278 billion by 2030.
Today, the annual cost of the system, $465 billion, is equal to 10.84% of workers’ pay
subject to Social Security taxation (referred to as taxable payroll). It is projected to rise
slowly over the next decade, reaching 11.04% of payroll by 2010. It would then rise more
precipitously to 16.02% in 2025 and 17.77% in 2035, as the baby boomers retire. After that,
the system’s cost would rise slowly to 20.11% of payroll in 2080. The system’s average cost
over the entire period would be 15.59% of payroll, or 14% higher than its average income.
However, the gap between income and outgo would grow throughout the period and by 2080,
income would equal 13.43% of payroll, outgo would equal 20.11% of payroll, and the gap
would equal 6.68% of payroll. By 2080, outgo would exceed income by 50%.
This adverse outlook is mirrored in public opinion polls that show that fewer than 50%
of respondents express confidence that Social Security can meet its long-term commitments.
This skepticism is reinforced by a growing perception that Social Security may not be as
good a value in the future. Until recent years, retirees could expect to receive more in
benefits than they paid in Social Security taxes. However, because Social Security tax rates
have increased to cover the costs of a maturing “pay-as you-go” system, these ratios have
become less favorable. Such concerns and a belief that the nation must increase national
savings to meet the needs of an increasingly elderly society have led to a number of reform
proposals.
Others suggest that the issues confronting the system are not as serious as sometimes
portrayed. They point out that there is no imminent crisis, that the system is now running
surpluses and is projected to do so for two decades or more, that the public still likes the
program, and that there is considerable risk in some of the new reform ideas. They contend
that modest changes could resolve the long-range funding problem.
The Basic Debate
The current problem is not unprecedented. In 1977 and 1983, Congress enacted a
variety of measures to address similar financial problems. Among them were constraints on
the growth of initial benefit levels, a gradual increase from 65 to 67 in Social Security’s full
retirement age (i.e., the age for receipt of full benefits), payroll tax increases, taxation of
Social Security benefits of higher-income recipients, and extension of coverage to federal and
nonprofit workers. Subsequently, new long-term deficits have been forecast, resulting from
changes in actuarial methods and assumptions, and from the passage of time (during which
years of deficits at the end of the 75-year valuation period replace recent years of surpluses).
Many believe that action should be taken soon. This has been the view of the Social
Security trustees and other recent panels and commissions that have examined the problem,
and was echoed by a wide range of interest groups testifying in hearings during the past two
Congresses. One of the difficulties is that there is no sense of “near-term” crisis. In 1977
and 1983, the trust funds’ balances were projected to fall to zero in a very short time (within
months of the 1983 rescue). Today, the problem is perceived to be as little as 14 or as much
as 38 years away. Lacking a “crisis,” the pressure to compromise is diffused and the issues
CRS-2

---

IB98048
03-06-03
and the divergent views about them have led to myriad complex proposals. In 1977 and
1983, the debate was not about fundamental reform; it revolved around how to raise the
system’s income and constrain its costs. Today, the ideas range from restoring the system’s
solvency with as few alterations as possible to replacing it entirely with something modeled
after IRAs or 401(k)s. This broad spectrum was clearly reflected in the Social Security
Advisory Council’s report in 1997, which presented three different reform plans, none of
which garnered a majority of the Council’s 13 members. Similar diversity is reflected in the
many Social Security reform bills introduced in the past two Congresses.
The Push for Major Reform. Many advocates of reform see Social Security as an
anachronism, built on depression-era concerns about high unemployment and widespread
“dependency” among the aged. They see the prospect of reform today as an opportunity to
modernize the way society saves for retirement. They cite the vast economic, social, and
demographic changes that have transpired over the past 67 years and changes made in other
countries that now use market-based personal accounts to strengthen retirement incomes and
bolster their economies by spurring savings and investments. They believe government-run,
pay-as-you-go systems are unsustainable in aging societies. They prefer a system that lets
workers acquire wealth and provide for their retirement by investing in personal accounts.
They also see it as a way to counter skepticism about the current system by giving
workers a greater sense of ownership of their retirement savings. They contend that private
investments would yield larger retirement incomes because stocks and bonds have provided
higher returns than are projected from the current system. Some feel that personal accounts
would correct what they see as Social Security’s contradictory mix of insurance and social
welfare goals, i.e., its benefits are not based strictly on a person’s contributions, yet because
it is not means-tested, many of its social benefits go to well-to-do recipients. Others argue
that creating a system of personal accounts would prevent the government from using surplus
Social Security taxes to “mask” government borrowing or other spending.
Others, not necessarily seeking a new system, see enactment of long-range Social
Security constraints as one element of curbing federal entitlement spending. The aging of
society means that the costs of the entitlement programs that aid the elderly will increase
greatly in the future. The costs of the largest entitlement programs, Social Security,
Medicare, and Medicaid, are directly linked to an aging population. Proponents of imposing
constraints on them fear that, if left unchecked, their costs would place a large strain on the
federal treasury far into the future, consuming resources that could be used for other priorities
and forcing future generations to bear a much higher tax burden.
Some contend that action is needed now as a matter of fairness. They point out that
many of today’s recipients get back more than they paid in Social Security taxes and far more
than the baby boom generation will receive. They argue that to put off making changes is
unfair to today’s workers, who not only must pay for “transfer” payments that they
characterize as “overgenerous” and unrelated to actual need, but also have the prospect that
their own benefits will have to be scaled back severely. Others emphasize the trustees’
adverse outlook and contend that steps need to be taken today (raising Social Security’s full-
benefit retirement age, constraining its future benefit growth, cutting COLAs, raising taxes,
etc.) so that whatever is done to bring the system into balance can be phased in, giving
workers time to adjust retirement expectations to reflect what these programs will be able to
provide. Waiting, they fear, would require abrupt changes in taxes and benefits.
CRS-3

---

IB98048
03-06-03
The Arguments for Retaining the Existing System. Those who favor a more
restrained approach argue that its problems are resolvable with modest tax and spending
changes and that the program’s critics are raising the specter that Social Security will
“bankrupt the Nation” in order to undermine public support and to provide an excuse to
privatize it. They contend that a system of personal savings accounts would erode the social
insurance nature of the current system that favors low-income workers, survivors, and the
disabled.
Others are concerned that switching to a new system of personal accounts would pose
large transitional problems by requiring today’s younger workers to save for their own
retirement while paying taxes to cover current retirees’ benefits. Some doubt that it would
increase national savings, arguing that higher government debt (from the diversion of current
payroll taxes to new personal accounts) would offset the increased personal account savings.
They also contend that the capital markets’ inflow created by the accounts would make the
markets difficult to regulate and potentially distort equity valuations. They point out that
some of the other countries who have moved to personal accounts did so to create capital
markets. Such markets, they argue, are already well developed in the United States.
Some argue that a system of personal accounts would expose participants to excessive
market risk for an income source that has become so essential to many of the nation’s elderly.
They contend that the nation now has a three-tiered retirement system — consisting of Social
Security, private pensions, and personal assets — that already has private saving and
investment components. They contend that while people may want and be able to undertake
some “risk” in the latter two tiers, Social Security — as the tier that provides a basic floor
of protection — should be more stable. They further contend that the administrative costs
of maintaining personal accounts could be very large and significantly erode their value.
Some say that concerns about growing entitlements are overblown, arguing that as
people live longer, they will work longer as labor markets tighten and employers offer
inducements for them to remain on the job. Moreover, a more liberal immigration policy
could be used as a way to increase the labor force, if desired. They argue that the projected
low ratio of workers to dependents is not unprecedented; it existed when the baby boomers
were in their youth. They point out that the baby boomers are now in their prime working
and saving years and contend that the nation’s savings rate will rise as the boomers age.
The Basic Choices. There are many options. The three alternatives offered by the
1994-96 Social Security Advisory Council show that the range of choices is wide:
maintaining the current system as much as possible; reducing its future commitments while
mandating that workers save more on their own; and totally restructuring Social Security to
incorporate a large personal account component. Although there is a consensus that action
needs to be taken soon, there is uncertainty about what should be done and how quickly a
consensus plan can be forged.
Specific Areas of Contention
The System’s Financial Outlook. There are conflicting views about the severity
of Social Security’s looming financial shortfall. Some argue that the problem is more acute
than the 14% average deficit indicates. They point out that the system’s costs are projected
CRS-4

---

IB98048
03-06-03
to exceed its receipts by 4.04% of taxable payroll in 2030, a difference of 31%. In 2080, the
gap would be 6.68% of taxable payroll, a difference of 50%. Thus, on a pay-as-you-go basis,
the system would need a lot more than a 14% change in taxes or expenditures to be able to
meet its promises. They contend that thinking the problem is 38 years away (i.e., because
the trust funds would not be depleted until 2041) ignores the financial pressure Social
Security will exert on the government when its expenditures exceed its taxes beginning in
2017. At that point the government would have to use other resources to help pay the
benefits, resources that would otherwise be used to finance other governmental functions.
Others express concern that the problem is being exaggerated. First, they argue that in
contrast to earlier episodes of financial distress, the system has no immediate problem.
Surplus tax receipts are projected for 14 years and the trust funds are projected to have a
balance for 38 years. They contend that projections 75 years into the future cannot be viewed
with any significant degree of confidence and Congress should respond to them cautiously.
They argue that even if the projections hold, the average imbalance could be eliminated by
raising the tax on employees and employers by less than one percent of pay (if started today).
They point out that as a share of GDP, the projections show the system’s cost rising from
only 4.46% today to 6.64% in 2030. While acknowledging that this would be a notably
larger share of GDP, they argue that GDP itself would have risen by 70% in real terms.
Moreover, while the ratio of workers to recipients is projected to decline, they contend that
employers are likely to respond with inducements for older workers to stay on the job longer.
Phased-in retirements already are becoming more prevalent, and older workers are
increasingly seeing retirement as something other than an all-or-nothing decision.
Public Confidence. Polls in recent years show that a majority of Americans have
a low level of confidence in the Social Security program. Although skepticism abated
following legislation in 1983 that shored up the system, it has risen again with more than half
of the public now expressing a lack of confidence. Younger workers are particularly
skeptical; nearly two-thirds of those below age 55 express little confidence compared to less
than one-third of those age 55 and older.
Some observers caution about inferring too much from polling data, noting that public
understanding of Social Security is limited and often inaccurate. They argue that a major
reason confidence is highest among older persons is that, being more immediately affected,
they have learned more about the program. Younger workers receive little information about
Social Security unless they request it, which very few do. In 1995, the Social Security
Administration began phasing in a system to provide annual statements to workers, which
some argue will make workers more aware of their promised benefits and thus more trusting
of the system. Others, however, suggest the skepticism is justified by the system’s repeated
financial difficulties and its diminished “money’s worth” to younger workers. Notably, in
recent polls, reform of Social Security ranked high as a legislative priority.
Increasing Doubts About Money’s Worth. Until recent years, Social Security
recipients received more, often far more, than the value of the Social Security taxes they
paid. However, because Social Security tax rates have increased over the years and the age
for full benefits is scheduled to rise, it is becoming increasingly apparent that Social Security
will be less of a good deal for many future recipients. For example, for workers who earned
average wages and retired in 1980 at age 65, it took 2.8 years to recover the value of the
retirement portion of the combined employee and employer shares of their Social Security
CRS-5

---

IB98048
03-06-03
taxes plus interest. For their counterparts who retired at age 65 in 2002, it will take 16.9
years. For those retiring in 2020, it will take 20.9 years (based on the trustees’ 2002
intermediate forecast.) Some observers feel these discrepancies are grossly inequitable and
cite them as evidence that the system needs to be substantially restructured.
Others discount this phenomenon, arguing that Social Security is a social insurance
program serving social ends that transcend questions of whether some individuals do better
than others. For example, the program’s anti-poverty features replace a higher proportion
of earnings for low-paid workers and provide additional benefits for workers with families.
Also, today’s workers who will receive less direct value from their taxes than today’s
retirees, have in large part been relieved from having to support their parents, and the elderly
are able to live independently and with dignity. These observers contend that the value of
these aspects of the system is not reflected in simple comparisons of taxes and benefits.
“Privatization” Debate. Social Security’s financing problems, skepticism about its
survival, and a belief that economic growth could be bolstered through increased savings
have led to a number of proposals to “privatize” part or all of the system, reviving a
philosophical debate that dates back to its creation in 1935. All three alternative plans of the
1996 Advisory Council featured program involvement in the financial markets. The first
called upon Congress to consider authorizing investment of part of the Social Security trust
funds in equities (on the assumption that stocks would produce a higher return to the system).
The second would require workers to contribute an extra 1.6% of their pay to new personal
accounts to make up for Social Security benefit cuts it called for to restore the system’s long-
range solvency. The third would redesign the system by gradually replacing Social Security
retirement benefits with flat-rate benefits based on length of service and personal accounts
(funded with 5 percentage points of the current Social Security tax rate).
The reform that Chile enacted in 1981, which replaced a troubled pay-as-you-go system
with one requiring workers to invest part of their earnings in personal accounts through
government-approved pension funds, has been reflected in a number of reform bills
introduced in recent Congresses. They would permit or require that workers invest some or
all of their Social Security tax into personal accounts. Most call for future Social Security
benefits to be reduced or forfeited. Likewise, the three options presented by President Bush’s
commission would allow workers to choose to participate in individual accounts and would
reduce their eventual Social Security benefit by the projected value of the account.
Still another approach is reflected in bills that would require that future budget surpluses
be used to finance personal accounts to supplement Social Security benefits for those who
pay Social Security taxes. Former President Clinton’s January 1999 reform plan would have
allocated a portion of the surpluses to personal accounts supplemented by a worker’s own
contributions and a government match (scaled to income). Another part of his plan called
for the diversion of a portion of budget surpluses or the interest savings resulting therefrom
to the Social Security trust funds, some of which would be used to acquire stocks, similar to
the approach suggested in the one of the Advisory Council’s plans and in some recent bills.
Most of these approaches require that a new independent board would invest some of these
new funds in stock or corporate bonds and the rest in federal securities.
Many personal accounts proponents see them as a way to reduce future financial
demands on government and to reassure workers by giving them a sense of ownership of
CRS-6

---

IB98048
03-06-03
their retirement savings. Others feel that it would enhance workers’ retirement income
because stocks and bonds generally have provided higher rates of return than are projected
from Social Security. In concert with this, they argue it would increase national savings and
promote economic growth. Some feel it would correct what they see as Social Security’s
contradictory mix of insurance and social welfare goals — that its benefits are not based
strictly on the level of a person’s contributions, yet many of its social benefits go to well-to-
do recipients. Others argue that it would prevent the government from using surplus Social
Security revenues to “mask” public borrowing or for other spending or tax cuts. Generally,
proponents of personal accounts fear that investing the Social Security trust funds in the
markets would concentrate too much economic power in a government-appointed board.
Opponents of personal accounts argue that Social Security’s problems can be solved
without altering the program’s fundamental nature. They fear that replacing Social Security
with personal accounts would erode the social insurance aspects of the system that favor low-
wage earners, survivors and the disabled. Others are concerned that it would pose large
transition problems by requiring today’s younger workers to save for their own retirement
while simultaneously paying taxes to support current retirees. Some doubt that it would
increase national savings, arguing that any increase in private savings would be offset by
more borrowing by the government. They also fear that the investment pool created by the
accounts could be difficult to regulate and could distort capital markets and equity
valuations. Still others argue that it would expose participants to excessive market risk for
something as essential as core retirement benefits and, unlike Social Security, would provide
poor protection against inflation. Many prefer “collective” investment of the Social Security
trust funds in the markets to potentially bolster their returns and spread the risks of poor
performance broadly.
The Retirement Age Issue. Raising the Social Security retirement age is often
considered as a way to help restore the system’s solvency. Much of the growth in Social
Security’s costs is a result of rising life expectancy. From 1940, when benefits were first
paid, the life expectancy for 65-year-old men and women has risen from 12.7 and 14.7 years
to 16.5 and 19.7 years, respectively, and by 2030 it is projected to be 19.0 and 22.2 years,
respectively. This trend bolstered arguments for increasing Social Security’s full benefit age
as a way to achieve savings when the system was facing major financial problems in the early
1980s. Congress boosted the “full benefit” age from 65 to 67 as part of the Social Security
Amendments of 1983 (P.L. 98-21). This change is being phased in starting with those born
in 1938, with the full 2-year hike affecting those born after 1959. It will not raise the first
age of eligibility, now age 62, but the benefit reduction for retiring at 62 will rise from 20%
to 30%. Proponents of raising one or both of these ages further see it as reasonable in light
of past and projected increased longevity. Opponents say it will penalize workers who
already get a worse deal from Social Security than do current retirees, those who work in
arduous occupations, and racial minorities and others who have shorter life expectancies.
Cost-of-Living Adjustments (COLAs). Social Security benefits are adjusted
annually to reflect inflation. Social Security accounts for 80% of the federal spending on
COLAs. These COLAs are based upon the Bureau of Labor Statistics’ (BLS) Consumer
Price Index (CPI), which measures price increases for selected goods and services. In recent
years the CPI has been criticized for overstating the effects of inflation, primarily because
the index’s market basket of goods and services was not revised regularly to reflect changes
in consumer buying habits or improvements in quality. A BLS analysis in 1993 found that
CRS-7

---

IB98048
03-06-03
the annual overstatement might be as much as 0.6 percentage points. CBO estimated in 1994
that the overstatement ranged from 0.2 to 0.8 percentage points. A 1996 panel that studied
the issue for the Senate Finance Committee argued that it might be 1.1 percentage points.
In response to its own analysis as well as the outside criticisms, the BLS has since made
various revisions to the CPI. To some extent, these revisions may account for part of the
slower CPI growth seen in recent years. However, calls for adjustments continue. According
to SSA’s actuaries, a COLA reduction of one percentage point annually would eliminate
almost two-thirds of Social Security’s long-range deficit. While some view further CPI
changes as necessary to help keep Social Security and other entitlement expenditures under
control, others contend that such changes are just a backdoor way of cutting benefits. They
argue that the market basket of goods and services purchased by the elderly is different from
that of the general population around whom the CPI is constructed. It is more heavily
weighted with healthcare expenditures, which rise notably faster than the overall CPI, and
thus they contend that the cost of living for the elderly is higher than reflected by the CPI.
Social Security and the Budget. By law, Social Security is considered to be “off
budget” for many aspects of developing and enforcing annual budget goals. However, it is
still a federal program and its income and outgo helps to shape the year-to-year financial
condition of the government. As a result, policymakers often focus on “unified” or overall
budget figures that include Social Security. When President Clinton urged that future unified
budget surpluses be reserved until Social Security’s problems were resolved, and proposed
using a portion of the surpluses to shore up the system, Social Security’s budget treatment
became a major policy issue. Congressional views about what to do with the surpluses are
diverse, ranging from “buying down” publicly-held federal debt to cutting taxes to increasing
spending. However, support for setting aside a portion equal to the annual Social Security
trust fund surpluses is substantial and has made Social Security reform a place holder in
much of the current fiscal policy debate. The 106th Congress passed budget resolutions for
FY2000 and FY2001 that incorporated budget totals setting Social Security surpluses aside
pending consideration of reform legislation. It went on to consider, but did not pass,
additional so-called “lock box” measures intended to create procedural obstacles for bills that
would divert these set asides for tax cuts or spending increases. Similar legislation in the
107th Congress, H.R. 2, was passed by the House in February 2001 (see CRS Report
RS20165).
In 1998 the House Republican leadership attempted to define the use of the budget
surpluses with passage of H.R. 4579, which would have created a new Treasury account to
which 90% of the next 11 years’ projected surpluses would be credited. The underlying
principle was that 10% of the budget surpluses would be used for tax cuts and the remainder
held in abeyance until Social Security reforms were enacted. However, the bill was heavily
opposed by Democratic Members, who argued for holding 100% of the surpluses in
abeyance, and the Senate did not take up the measure before the 105th Congress adjourned.
Earlier in the 105th Congress, Social Security became an issue in consideration of a
constitutional amendment to require a balanced federal budget. The amendment (H.J.Res.
1 and S.J.Res. 1) would have included Social Security in the budget calculations, as did
similar measures considered in 1995 and 1996. Opponents of including Social Security
argued that it would cause the program’s surpluses to be used to cover deficits in the rest of
the budget and could lead to future cuts in Social Security benefits. Those who wanted to
CRS-8

---

IB98048
03-06-03
keep it in the calculations argued that it was not their purpose to cut Social Security, but that
the program represented too large a share of federal revenues and expenditures to be ignored
and that removing it from the calculations would make the goal of achieving a balanced
budget much more difficult. On each occasion, critics of the amendment attempted to
remove Social Security from the calculations. While these attempts failed, the balanced
budget amendment itself failed each time to get the requisite votes in the Senate.
Reform Initiatives
Although the 1994-96 Social Security Advisory Council could not reach a consensus
on a single plan, its 1997 report contained three different approaches to restore the system’s
solvency. The first (the “maintain benefits” plan) would keep the system’s benefit structure
essentially intact by increasing revenue (including an eventual rise in the payroll tax) and
making minor benefit cuts. Its proponents also suggested that part of the Social Security trust
funds be invested in stocks. The second (the “individual account” plan) addressed the
problem mostly with benefit reductions, and in addition would require workers to make an
extra 1.6% of pay contribution to new personal accounts. The third (the “personal security
account” plan) proposed a major redesign of the system that would gradually replace the
current earnings-related retirement benefit with a flat-rate benefit based on length of service
and establish personal accounts funded by diverting to them 5 percentage points of the
current payroll tax. It would cover transition costs with an increase in payroll taxes of
1.52% of pay and government borrowing. The conceptual approaches reflected in the
Council’s plans can be found in many reform bills introduced in recent Congresses.
In his last three years in office, former President Clinton repeatedly called for using
Social Security’s share of looming budget surpluses to reduce publicly-held federal debt and
crediting the trust funds for the reduction. In his 1999 State of the Union message, he
proposed crediting $2.8 trillion of some $4.9 trillion in budget surpluses projected for the
next 15 years to the trust funds — nearly $.6 trillion was to be invested in stocks, the rest in
federal securities. The plan was estimated to keep the system solvent until 2059. Critics
raised concerns that it was crediting Social Security’s trust funds twice for its surpluses and
that the plan would lead to Government ownership of private companies, which they argued
ran counter to the nation’s free enterprise system. Clinton further proposed that $.5 trillion
of the budget surpluses be used to create new Universal Savings Accounts (USAs) —
401(k)-like accounts intended to supplement Social Security. In June 1999, he revised his
plan by calling for general fund infusions to the trust funds equal to the interest savings
achieved by using Social Security’s share of the budget surpluses to reduce federal debt. The
infusions were to be invested in stocks until the stock portion of the trust funds’ holdings
reached 15%. In October 1999, he revised the plan again by dropping the stock investment
idea – all the infusions were to be invested in federal bonds. His last plan, offered in January
2000, was similar but again called for investing up to 15% of the trust funds in stock.
Although the 106th Congress took no action on the issue, a number of Social Security
changes were considered. Following a public statement by President Clinton that he would
support repeal of the Social Security earnings test, Congress passed and the President signed
H.R. 5 (P.L. 106-182), a bill allowing recipients ages 65 to 69 to work without losing
benefits effective in 2000. Under the old law, recipients age 65 to 69 who earned more than
$17,000 in 2000 would have lost one dollar in benefits for each three dollars they earned
CRS-9

---

IB98048
03-06-03
above that amount; there was no loss of benefits once a person reached age 70 (see CRS
Report 98-789). Congress also considered, but did not pass, legislation to repeal part of the
income taxation of Social Security benefits, the part that is credited to the Medicare HI
program. Legislation enacted in 1993 had made up to 85% of benefits taxable for some
recipients. H.R. 4865, as passed by the House in the 106th Congress, would have repealed
that measure, and thereby limited the taxable portion of benefits to 50%. The bill, however,
was not taken up by the Senate before it adjourned sine die (see CRS Report RL30581).
Social Security reform became a major issue in the 2000 Presidential race. Candidate
George W. Bush favored giving workers the option to put some of their Social Security taxes
into personal accounts. Then Vice President Al Gore proposed buying down the debt and
crediting the interest savings to Social Security. He also endorsed a different form of
personal accounts, but not with Social Security taxes.
Reform Bills in Recent Congresses. A large number of reform bills have been
introduced in the past several Congresses. During the 103rd Congress, four bills sought a mix
of benefit reductions and tax hikes, including raising the full benefit age to 70, reducing
COLAs, and other benefit reductions. In the 104th Congress, three more proposals not only
encompassed some of these changes, but also sought to privatize a portion of the program.
Major reform proposals burgeoned in the 105th and 106th Congresses. In the 105th Congress,
ten bills designed to reform Social Security using personal accounts also were introduced.
(For a description of these bills, see CRS Report 98-750, Social Security Reform: Bills in the
105th Congress and other Proposals.)
In the 106th Congress, the most numerous Social Security bills introduced would alter
the program’s budget treatment or create budget “lock boxes,” mentioned earlier. More than
40 bills fell into this category. A second group would have addressed the system’s problems
directly with some combination of benefit restraints and income-producing measures. Many
also would have made some use of the nation’s financial markets, either by creating new
personal savings accounts to supplement or take the place of future Social Security benefits,
or by permitting the investment of the trust funds in the markets. Some in this group would
have phased-in new personal accounts rapidly, giving workers bonds for their past Social
Security taxes, while others envisioned a long transition. Still others did not propose altering
the current system but would have created personal accounts to offset constraints that may
eventually be needed to restore the system’s solvency. (For a description of these bills, see
CRS Report RL30138, Social Security Reform: Bills in the 106th Congress.)
During the 2000 campaign, President Bush stated that he favored allowing workers to
put some of their Social Security taxes in personal accounts. In May 2001, he appointed a
commission to make recommendations to reform Social Security. As principles for reform,
the President stated that it must preserve the benefits of current retirees and older workers,
return Social Security to a firm financial footing, and allow younger workers to invest in
personal savings accounts. The commission issued a final report on December 21, 2001,
which includes three options to reform the program. Each option allows workers to choose
to participate in individual accounts and reduces their eventual Social Security benefit by the
projected value of the account. The first option allows workers to divert 2% of their payroll
taxes to these accounts, but does not make any other changes. The second allows workers
to divert 4% of their payroll taxes, up to an annual maximum of $1,000; cuts future benefits
by indexing their growth to prices rather than wages; and increases benefits to low-paid
CRS-10

---

IB98048
03-06-03
workers and widow(er)s. The third allows workers to contribute an additional 1% of payroll
taxes with a government match of 2.5% up to an annual maximum of $1,000; cuts future
benefits by indexing their growth to increases in longevity and, for high-paid workers, by
modifying the benefit formula; and increases benefits to low-paid workers and widow(er)s.
Legislation in 107th Congress. Representatives Sessions and Shadegg introduced
H.R. 849 on March 1, 2001. Under the bill, workers could elect to contribute the equivalent
of their share (6.2%) of the Social Security tax to personal accounts. After participating in
the personal accounts for 15 years, the full (12.4%) of the Social Security tax would be
placed in the personal accounts. Workers who choose to participate would not receive any
Social Security benefits.
Representative Petri introduced H.R. 2110 on June 7, 2001. The bill would make no
changes to Social Security taxes or benefits, but it would allow workers to elect to contribute
up to $10,000 a year to personal Social Security accounts. When the account is opened, an
additional $1,000 would be deposited from the general fund of the Treasury. The funds
would be administered by an Investment Board and placed in a common stock indexed fund,
insurance contracts, certificates of deposit, or other investments as the board may provide.
Upon retirement or death of the account holder, the proceeds from the personal account
would be used to help provide Social Security benefits. If the amount in the personal account
was more than sufficient to pay Social Security benefits, then the excess would be distributed
in the form of an annuity or under a schedule similar to that applied to Individual Retirement
Accounts (IRAs).
Representatives Kolbe and Stenholm introduced H.R. 2771, a modified version of H.R.
1793 in the 106th Congress, on August 2, 2001. For workers under age 55, H.R. 2771 would
mandatorily divert three percentage points of the first $10,000 (adjusted thereafter to
inflation) of a worker’s earnings, and two percentage points on earnings above $10,000, of
the Social Security tax rate into new personal accounts. Workers would be allowed to make
additional contributions of up to $5,000 (adjusted thereafter to inflation), with lower-paid
workers eligible to receive additional credit toward their account of up to $600. It would
impose benefit formula constraints substantially limiting the future growth of benefits for
middle and high-paid workers, and reduce COLAs by 0.33%. It provides a minimum benefit
tied to the poverty level. It increases revenue by increasing the maximum taxable wage base
and crediting all of the revenue from taxation of Social Security benefits to the Social
Security trust funds, instead of part going to Medicare.
Representative Shaw introduced H.R. 3497 on Dec. 13, 2001. The bill would establish
a system of voluntary personal accounts equal to between 2% and 3% of pay for workers who
pay Social Security taxes. Workers’ Social Security taxes would be unaffected, since
initially the accounts would be funded with general revenues. The accounts would be
managed by selected investment companies through portfolios containing a 60/40% split of
equities and corporate bonds. Upon entitlement to Social Security, an amount equal to 95%
of a “life annuity” would be transferred monthly from each worker’s account to the Social
Security system, and the higher of current law Social Security benefits or the life annuity
would be paid to the recipient (in effect, the annuity payment would fund a portion or all of
the Social Security benefit). The remaining 5% of the account balance would be paid to the
worker as a lump sum. The account balances of deceased recipients would be used to
finance Social Security benefits of any eligible survivors or would otherwise revert to the
CRS-11

---

IB98048
03-06-03
Social Security trust funds. The account balances of workers who die before entitlement with
no eligible survivors would become part of the worker’s estate. The proposal also would
eliminate the Social Security earnings test for all retirees, and enhance benefits for spouses
by increasing benefits for divorced spouses, workers who stay home to care for children, and
retired or disabled widow(er)s.
Representatives DeMint and Armey introduced H.R. 3535 on Dec. 19, 2001. In some
respects it is similar to H.R. 3497. The main difference is that H.R. 3535 would divert from
3% to 8% of payroll taxes to the individual accounts. It also would allow more of the
individual account to be paid as a lump sum, and would place 40% of account investments
in U.S. government (rather than corporate) bonds. Also, H.R. 3535 does not contain
measures to eliminate the Social Security earnings test or enhance benefits for spouses.
Representative Matsui introduced H.R. 4022, H.R. 4023, and H.R. 4024 on Mar. 20,
2002. The bills would enact reform models 1, 2, and 3, respectively, of President Bush’s
Commission to Strengthen Social Security. The stated purpose is to subject the proposals
to debate now, rather than waiting until after this year’s Congressional elections. On May
21, 2002, Representative Matsui introduced H.R. 4780, a bill to reject proposals that would
partially or fully substitute traditional Social Security benefits with personal accounts.
Representative Thurman introduced H.Res. 425 on May 21, 2002. H.Res. 425 is a rule
that provides for consideration of H.R. 3497 (Shaw) in the House. It also provides for
consideration of H.R. 3535 (DeMint), H.R. 4022 (Matsui), H.R. 4023 (Matsui), H.R. 4024
(Matsui) and H.R. 4780 (Matsui) as amendments in the nature of a substitute to H.R. 3497.
The stated intent of the resolution is to bring proposals that would establish personal
accounts within the Social Security system to the House floor for debate. On June 19, 2002,
Representative Thurman filed a petition to discharge the Committee on Rules from
consideration of the resolution. Under House rules, the discharge petition (Petition 107-7)
must have 218 signatures to bring the measures specified in the resolution to the House floor
for debate.
Senators Gramm and Hagel introduced S. 5 on November 19, 2002. The bill would
allow younger workers to divert part of their payroll tax to a personal account that would be
supplemented by any unified budget surpluses attributable to annual surpluses in the Social
Security trust funds. When fully implemented, the government would guarantee that workers
would receive a combination of Social Security and personal account annuities that would
be at least 20% higher than the Social Security benefits promised under current law. When
the annuities provided by the personal accounts are large enough to cause Social Security
projected costs to go down, Social Security payroll tax rates would be reduced accordingly.
None of these major reform measures were considered by either House of the Congress.
However, H.R.4069 and H.R. 4070, introduced by Representative Shaw, which would have
enhanced spousal benefits and provided additional program safeguards, respectively, were
passed unanimously in the House. A version of H.R. 4070 was passed by voice vote in the
Senate, but the Congress adjourned before further action could be taken.
Legislation in the 108th Congress. Representative Shaw introduced H.R.75 on
January 7, 2003. While similar in most respects to H.R. 3497, his reform bill in the 107th
Congress (see above), H.R. 75 would scale annual contributions to personal accounts by
CRS-12

---

IB98048
03-06-03
limiting them to the lesser of 4% or $1,000, and would give workers a choice of three
investment portfolios, each with different mixtures of stocks and bonds. Mr. Shaw also
introduced H.R. 473, similar to H.R. 4070 in the 107th Congress, which would provide
additional safeguards for the Social Security and Supplemental Security Income programs.
LEGISLATION
H.R. 75 (Shaw)
Creates personal Social Security accounts ensuring continued payment of full benefits
and makes certain benefit improvements. Introduced January 7, 2003; referred to Committee
on Ways and Means.
H.R. 743 (Shaw)
Provides additional safeguards for Social Security and Supplemental Security Income
beneficiaries with representative payees and enhances program protections. Introduced
February 12, 2003; referred to Committee on Ways and Means. Considered by the House
of Representatives on March 5, 2003 and failed (249-180) to achieve the necessary two-
thirds majority required under suspension of the rules.
CRS-13

---