Order Code IB98048
CRS Issue Brief for Congress
Received through the CRS Web
Social Security Reform
Updated February 4, 2005
Dawn Nuschler
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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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
Legislation in 109th Congress
Legislation in the 108th Congress
LEGISLATION

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Social Security Reform
SUMMARY
Although the Social Security system is
Security may not be as good a value in the
now running surpluses of income over outgo,
future. These concerns and a belief that the
its board of trustees projects that its trust
nation must increase its national savings have
funds would be depleted in 2042 and only
led to proposals to revamp the system.
73% of its benefits would be payable then
with incoming receipts. The trustees project
Others suggest that the system’s prob-
that on average the system’s cost would be
lems are not as serious as critics claim. They
14% higher than its income over the next 75
maintain that the system is now running sur-
years; by 2080 it would be 45% higher. The
pluses, that the public still likes it, and that
primary reason is demographic: the post-
there is risk in some of the new reform ideas.
World War II baby boomers will begin retiring
They contend that only modest changes to the
in less than a decade and life expectancy is
system are needed.
rising. Between 2000 and 2025 the number of
people age 65 and older is predicted to grow
Today, the ideas range from restoring
by 76%. In contrast, the number of workers
solvency with minimal changes to scrapping
supporting the system would grow by 17%.
the system entirely for something modeled
after IRAs or 401(k)s. This broad spectrum
The trustees project that Social Security’s
was reflected clearly in the report of a 1997
surplus of taxes and interest will cause the
Social Security Advisory Council. The Advi-
system’s trust funds, comprised exclusively of
sory Council presented three very different
federal bonds, to grow to a peak of $6.6 tril-
plans, none of which received a majority of
lion in 2027. The system’s outgo thereafter
the council’s endorsement. Similar diversity
would exceed its income and the trust funds
is reflected in the many reform bills intro-
would be drawn down until their depletion.
duced in recent Congresses. In his last three
However, the trustees project that the system’s
years in office, President Clinton also high-
taxes by themselves would fall below its
lighted the issue. President Clinton proposed
outgo beginning in 2018. At that point, other
using the Social Security portion of then-
federal receipts would be needed to help pay
projected budget surpluses to buy down the
for benefits (by providing cash as the federal
federal debt and crediting the system with the
bonds held by the trust funds are redeemed).
reductions — what effectively would be
If there are no other surplus governmental
general fund infusions to the system.
receipts, policymakers would have three
choices: raise taxes or other income, cut
In 2001, a commission appointed by
spending, or borrow the money.
President Bush recommended three sets of
reform options, all of which feature personal
This adverse outlook is reflected in
accounts. In his 2005 State of the Union
public opinion polls showing that fewer than
address, President Bush highlighted Social
50% of respondents are confident that Social
Security reform as a priority and outlined his
Security can meet its long-term commitments.
guidelines for program changes, including the
There also is a growing perception that Social
creation of personal accounts.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
In May 2001, President Bush appointed a commission to make recommendations to
reform Social Security. The commission issued a report in December 2001 that presented
three options to reform the program. All three feature individual accounts. In the 108th
Congress, Representatives Shaw, Nick Smith, DeMint, Kolbe, Ryan, and Sam Johnson and
Senators Lindsey Graham and Sununu introduced reform proposals that would have
established personal accounts to supplement or replace part of the Social Security system
(H.R. 75, H.R. 3055, H.R. 3177, H.R. 3821, H.R. 4851, H.R. 4895, S. 1878 and S. 2782,
respectively). In addition, Representative Obey introduced a reform measure (H.R. 5179)
that did not include the creation of personal accounts. Senator Corzine introduced a
resolution (S.Res. 432) expressing the sense of the Senate that Congress should reject Social
Security “privatization” proposals. In the 109th Congress, reform measures have been re-
introduced by Representative Kolbe (H.R. 440) and Representative Johnson (H.R. 530). In
his 2005 State of the Union address, President Bush highlighted Social Security reform as
a priority and outlined his guidelines for an overall reform plan that includes the creation of
personal accounts.
BACKGROUND AND ANALYSIS
Although Social Security’s income is currently exceeding 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 income by 14% and by 2042 its trust funds would be depleted.
At that point, revenues would pay for only 73% of program costs. The primary reason is
demographic: the post-World War II baby boom generation will be retiring soon and
increasing life expectancy is creating an older society. Between 2000 and 2025, the number
of people age 65 and older is predicted to rise by 76%, while the number of workers whose
taxes will finance future benefits is projected to grow by only 17%. As a result, the number
of workers supporting each recipient is projected to fall from 3.3 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, the formal name for Social Security) trust
funds maintained by the Treasury Department. 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 $6.6 trillion in 2027, after
which the system’s outgo would exceed its income and the balances would fall. By 2042,
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 2018. Since interest paid to the funds is an exchange of credits between Treasury accounts
and not a resource for the government, in 2018 other federal receipts would be needed to help
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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 2004
dollars) is projected to be $56 billion by 2020, and $256 billion by 2030.
Today, the annual cost of the system ($500 billion) is equal to 11.07% of workers’ pay
subject to Social Security taxation (or taxable payroll). It is projected to rise slowly over the
next decade, reaching 11.76% of payroll in 2013. It would then rise more precipitously to
15.56% in 2025 and 17.56% in 2035, as the baby boomers retire. Afterward, the system’s
cost would rise slowly to 19.39% of payroll in 2080. The system’s average cost over the
entire period (2004-2078) would be 15.73% 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 13.39% of payroll, outgo would equal 19.39% of payroll, and
the gap would equal 6% of payroll. By 2080, outgo would exceed income by 45%.
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 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 few as 14 or as many
as 38 years away. Lacking a “crisis,” the pressure to compromise is diffused and the issues
and the divergent views about them have led to myriad complex proposals. In 1977 and
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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 maintain that the vast economic,
social, and demographic changes that have transpired over the past 68 years require the
system to change and point to 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 believe that personal
accounts would correct what they see as Social Security’s contradictory mix of insurance and
social welfare goals, that is, 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
maintain 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 these programs express concern 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 believe 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.
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The Arguments for Retaining the Existing System. Those who favor a more
restrained approach believe 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 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 that have moved to personal accounts did so to create capital
markets. Such markets, they argue, are already well developed in the United States.
Some believe 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 say 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 state 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
1994-1996 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 maintain that the problem is more
acute than has been portrayed traditionally (e.g., as having an average 75-year deficit of 14%,
or 1.89% of taxable payroll). They believe their view has been buttressed by a new portrayal
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in the most recent Trustees report that shows that, if projections are made beyond the 75-year
window, the status of the program is even more dire (e.g., instead of 1.89% of taxable payroll
over the next 75 years, the long-range deficit looking indefinitely into the future would be
3.5% of taxable payroll). They also point out that the system’s costs are projected to exceed
receipts by 3.62% of taxable payroll in 2030 (i.e., there would be a difference of 27%
between the system’s projected income — 13.21% of taxable payroll — and the system’s
projected cost — 16.83% of taxable payroll). In 2080, the gap would be 6% of taxable
payroll (i.e., there would be a difference of 45% between the system’s projected income —
13.39% of taxable payroll — and the system’s projected cost — 19.39% of taxable payroll).
Thus, on a pay-as-you-go basis, the system would need a lot more than a 14% change in
taxes or expenditures over the next 75 years to be able to meet its promises. They maintain
that thinking the problem is 37 years away (because the trust funds would not be depleted
until 2042) ignores the financial pressure Social Security will exert on the government when
projected expenditures exceed taxes in 2018 (and beyond). 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 maintain that
in contrast to earlier episodes of financial distress, the system has no immediate problem.
Surplus tax receipts are projected for 13 years and the trust funds are projected to have a
balance for 37 years. They state that projections for the next 75 years, let alone the indefinite
future, cannot be viewed with any significant degree of confidence and Congress should
respond to them cautiously. They maintain that even if the 75-year projections hold, the
average imbalance could be eliminated by simply increasing the payroll tax rate immediately
by 0.95 percentage points on both employees and employers. They point out that as a share
of GDP, the projections show the system’s cost rising from only 4.33% today to 6.31% in
2030. While acknowledging that this would be a notably larger share of GDP, they point out
that GDP itself would have risen substantially in real terms. Moreover, while the ratio of
workers to recipients is projected to decline, they believe 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.
The preceding discussion of the system’s long-range financial outlook reflects the
intermediate projections of the Social Security Board of Trustees. Projections released by
the Congressional Budget Office (CBO) provide a somewhat more favorable long-range
outlook for the Social Security system. In its 2004 report, The Outlook for Social Security,
CBO projected that the Social Security system will begin running cash flow deficits in 2019
(1 year later than projected by the trustees) and that the trust funds will be depleted in 2052
(10 years later than projected by the trustees). At that point, an estimated 80% of promised
benefits would be payable. Overall, CBO projected that the system’s average 75-year
actuarial deficit will be equal to 1.00% of taxable payroll, compared to 1.89% under the
trustees’ latest projections (a difference of 47%). In terms of Social Security’s size relative
to the economy, CBO projected that, by 2080, outlays will be equal to 6.7% of GDP
(compared to 6.6% projected by the trustees) and revenues will be equal to 4.9% of GDP
(compared to 4.6% projected by the trustees). CBO attributed the differences between its
projections and the trustees’ projections to the use of different economic assumptions and
methodology. Despite the differences, however, CBO noted that the basic conclusion is the
same — “under current law, the program will generate a sustained and significant demand
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for budgetary resources” [page 29]. The CBO report may be accessed at
[http://www.cbo.gov/showdoc.cfm?index=5530&sequence=0&from=7]. In January 2005,
CBO updated their estimate of the year in which the system will begin running cash flow
deficits from 2019 to 2020.
Public Confidence. Polls in recent years have shown 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 just over half
of the public now expressing a lack of confidence [CBS News/New York Times Poll,
November 2004]. Younger workers are particularly skeptical. Fifty-seven percent of those
ages 18-29 and 67% of those ages 30-49 expressed little confidence in the system compared
to 35% of those ages 50-64 [Newsweek Poll, June 2000].
Some observers caution about inferring too much from polling data, arguing that public
understanding of Social Security is limited and often inaccurate. They maintain 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 believe 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.
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
taxes plus interest. For their counterparts who retired at age 65 in 2003, it will take 17.4
years. For those retiring in 2020, it will take 21.6 years (based on the trustees’ 2003
intermediate forecast). Some observers believe these discrepancies are inequitable and cite
them as evidence that the system needs to be substantially restructured.
Others discount this phenomenon, viewing Social Security as 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 many
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
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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 personal accounts and would
reduce their eventual Social Security benefit by the projected value of the account based on
a specified (rather than the actual) rate of return.
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. 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 account proponents believe that they would reduce future financial
demands on government and reassure workers by giving them a sense of ownership of their
retirement savings. Others believe that they 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 maintain that personal accounts would
increase national savings and promote economic growth. Some believe personal accounts
would correct what they view as Social Security’s contradictory mix of insurance and social
welfare goals — that 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 maintain that personal
accounts 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 express concern 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 maintain that Social Security’s problems can be solved
without altering the program’s fundamental nature. They express concern 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
personal accounts would pose large transition problems by requiring today’s younger workers
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to save for their own retirement while simultaneously paying taxes to support current retirees,
and would further exacerbate current budget deficits. Some doubt that they would increase
national savings, maintaining that any increase in private savings would be offset by more
borrowing by the government. They also point out that the investment pool created by the
accounts could be difficult to regulate and distort capital markets and equity valuations. Still
others view it as exposing participants to excessive market risk for something as essential
as core retirement benefits and, unlike Social Security, as providing 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 16.7 and 19.5 years, respectively, and by 2030 it is projected to be 18.4 and 21.2 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 two-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. 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 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 1 percentage point annually would eliminate almost
four-fifths of Social Security’s long-range deficit (based on the trustees’ 2003 intermediate
forecast). While some view further CPI changes as necessary to help keep Social Security
and other entitlement expenditures under control, others view such changes as just a
backdoor way of cutting benefits. They maintain 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.
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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 help 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 issue. Congressional views about what to do with the surpluses were
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 was substantial. 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 “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.
In 1998, the House Republican leadership attempted to define the use of 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 have been 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.
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, 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
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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
maintained 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.
In May 2001, President Bush 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 included three reform options. Each
option would allow workers to participate in voluntary personal accounts and reduce their
eventual Social Security benefit by the projected value of the account based on a specified
(rather than the actual) rate of return. The first option would allow workers to divert 2% of
taxable earnings to these accounts, but would make no other changes. The second option
would allow workers to divert 4% of taxable earnings, up to an annual maximum of $1,000;
reduce future benefits by indexing their growth to prices rather than wages; and increase
benefits to low-paid workers and widow(er)s. The third option would allow workers to
contribute an additional 1% of taxable earnings and receive a government match of 2.5% up
to an annual maximum of $1,000; reduce future benefits by indexing their growth to
increases in longevity and, for high-paid workers, by modifying the benefit formula; and
increase benefits for low-paid workers and widow(er)s.
On February 2, 2005, President Bush highlighted Social Security reform during his State
of the Union address. The President did not present a detailed plan for reform. Rather, he
used this opportunity to put forth guidelines for Congress to consider in the development of
legislation to create personal accounts within a program in need of “wise and effective
reform.”
The President offered the following guidelines for reform: (1) workers born before
1950 (i.e., workers age 55 and older in 2005) would not be affected by personal accounts or
other components of reform; (2) participation in personal accounts would be voluntary; (3)
eligible workers would be allowed to divert up to 4% of covered earnings into a personal
account, initially up to $1,000 per year; (4) a centralized government entity would administer
the accounts; (5) account assets would be available at retirement (i.e., assets would not be
available in the event of disability); workers would be required to annuitize the portion of
the account balance needed to provide at least a poverty-level stream of life-long income,
with any remaining balance available as a lump sum.
While the President restated his support for personal accounts, he acknowledged that
other changes would be needed to address the system’s projected long-range funding
problem. The President cited several potential program changes that would be on the table
for consideration: (1) raising the full retirement age; (2) reducing benefits for wealthy
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recipients; and (3) modifying the benefit formula. The only approach ruled out by the
President was an increase in payroll taxes, however, he did not specify whether this was in
reference to payroll tax rates, increases in the amount of earnings subject to the payroll tax,
or both.
Legislation in the 109th Congress. In the 109th Congress, Representative Kolbe
and Representative Johnson have re-introduced their reform bills from the 108th Congress
(H.R. 440 and H.R. 530, respectively). The full text of these bills is not yet available on the
Legislative Information System.
Legislation in the 108th Congress. Representative Shaw introduced H.R. 75 on
January 7, 2003. The bill would have established voluntary personal accounts funded with
general revenues and scaled annual contributions by limiting them to the lesser of 4% of
taxable earnings and $1,000 (indexed to average wage growth). The bill would have allowed
workers to choose among three investment portfolios, each with different mixes of stocks
and bonds. Upon benefit entitlement, an amount equal to 95% of a “life annuity” would have
been transferred monthly from each worker’s account to the Social Security system, and the
higher of a current-law Social Security benefit or the life annuity would have been paid to
the recipient (in effect, the annuity would have funded some or all of the Social Security
benefit). The remaining 5% of the account balance would have been paid to the worker as
a lump sum. The bill would have eliminated the earnings test for all retirees, and enhanced
spousal benefits by increasing benefits for divorced spouses, workers who stay home to care
for children, and retired or disabled widow(er)s.
Representative Nick Smith introduced H.R. 3055 on September 10, 2003. The bill
would have allowed workers to redirect part of their payroll taxes to personal accounts and
reduced the worker’s Social Security benefit based on the value of the account, assuming it
were invested at a specified interest rate. Workers would have been allowed to make
additional contributions of up to $2,000 annually. The bill would have reduced Social
Security benefits for most recipients through benefit formula modifications and increases in
the full and early retirement ages. It would have increased delayed retirement credits and
benefits for widow(er)s, provided a minimum benefit and child care drop-out years, and
covered newly-hired state and local government workers.
Representative DeMint introduced H.R. 3177 on September 25, 2003. The measure
would have established voluntary personal accounts funded with Social Security payroll
taxes equal to 3% to 8% of taxable earnings (depending on the worker’s earnings level).
Specifically, workers would have been enrolled automatically in the personal account system
and given the option to disenroll from the plan. Social Security benefits would have been
offset by an amount equal to the account’s annuity value, assuming an investment mix of
65% stocks, 35% government bonds and annuitization of the total account balance. Workers,
however, would have been allowed to take up to 65% of the account balance as a lump sum,
if the remaining balance were to provide a combined monthly payment (net Social Security
benefit plus annuity) at least equal to the poverty level. The bill would have guaranteed a
monthly payment (based on annuitization of the total account balance) at least equal to
current-law Social Security benefits. It would have provided general revenue transfers to the
Social Security trust funds to maintain reserves equal to about one year’s worth of net Social
Security expenditures.
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Senator Lindsey Graham introduced S. 1878 on November 18, 2003. The bill would
have allowed workers age 25 and older to choose one of three options for the Social Security
program. Option 1 would have allowed workers under age 55 to redirect 4 percentage points
of the payroll tax to personal accounts. Social Security benefits would have been reduced
by the value of a hypothetical account annuity based on the worker’s contributions
compounded at an interest rate 0.3% below that of long-term government bonds, and by
reductions in the Social Security benefit formula. Social Security benefits would have been
increased for widow(er)s and low-paid workers. Option 2 would not have included personal
accounts, but it would have included the reductions in the Social Security benefit formula
and the increases for widow(er)s and low-paid workers under Option 1. Option 3, which
would not have included personal accounts, would have maintained current-law benefits by
increasing payroll taxes in the amount needed to fund them.
Representatives Kolbe and Stenholm introduced H.R. 3821 on February 24, 2004. For
workers under age 55, the measure would have redirected 3% of the first $10,000 of covered
earnings (indexed to average wage growth) and 2% of remaining covered earnings to
mandatory personal accounts. Workers would have been allowed to make additional
contributions of up to $5,000 annually (indexed to inflation), and lower-paid workers would
have been eligible to receive an additional credit toward their account of up to $600. The
measure would have provided for benefit formula constraints to limit the future growth of
benefits for middle and high-paid workers; reduced Social Security cost-of-living
adjustments; increased widow(er)s’ benefits to 75% of the couple’s combined pre-death
benefit; limited spousal benefits such that a couple’s combined benefit would not have
exceeded the maximum benefit payable to a hypothetical single worker with the same
eligibility year as the retired worker; and provided a minimum benefit tied to the poverty
level. The measure would have increased revenue by increasing the taxable wage base and
crediting all of the revenue from the taxation of Social Security benefits to the Social
Security trust funds (instead of crediting part to Medicare).
Representative Paul Ryan introduced H.R. 4851 on July 19, 2004. Senator Sununu
introduced a companion measure (S. 2782) on September 9, 2004. The bill would have
allowed workers under age 55 to redirect a portion of payroll taxes to voluntary personal
accounts. Workers would have been allowed to redirect 10% of the first $10,000 of covered
earnings (indexed to average wages) and 5% of remaining covered earnings to personal
accounts. SSA’s Office of the Chief Actuary estimated that, on average, 6.4 percentage
points of the 12.4% payroll tax would have been diverted to personal accounts. Workers
who participated in personal accounts would have been issued a “benefit credit certificate”
(or recognition bond) to reflect benefits accrued under the traditional system, although
benefits would have been reduced to reflect the payroll taxes diverted to the worker’s
account. (Benefits for disabled workers and their dependents and benefits for survivors
(except elderly widow(er)s) would not have been subject to the reduction.) The bill would
have guaranteed account participants a combined payment (traditional benefit plus annuity)
at least equal to current-law Social Security benefits. Workers who chose not to participate
in personal accounts would have received traditional Social Security benefits.
The proposal would have provided three initial investment options with specified
allocations in equities and fixed income instruments (e.g., U.S. government bonds, corporate
bonds), including a default option of 65% equities, 35% fixed income instruments. Once the
worker’s account balance reached at least $2,500 (indexed to inflation), additional
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investment options would have been available. At retirement, the worker would have been
required to annuitize the portion of the account balance needed to provide a combined
payment (traditional benefit plus inflation-indexed annuity) at least equal to current-law
Social Security benefits. Any excess balance would have been available for withdrawal in
a manner chosen by the worker. Pre-retirement distribution would have been allowed if the
account were sufficient to provide an annuity at least equal to a required minimum payment.
The measure also contained several financing provisions, including one that would have
reduced future growth rates for federal spending.
Representative Sam Johnson introduced H.R. 4895 on July 22, 2004. The bill would
have allowed workers under age 55 to redirect 6.2 percentage points of the payroll tax to
voluntary personal accounts. Workers who participated in personal accounts would no
longer have accrued benefits under the traditional system and would have been issued a
recognition bond to take into account benefits already accrued. Workers who chose not to
participate in personal accounts would have remained in the traditional system, although
initial Social Security benefits for future retirees would have been lower than benefits
promised under current law. Under current law, initial benefits are indexed to average wage
growth. The measure would have constrained the growth in initial benefits for future retirees
by indexing initial benefits to price growth, rather than wage growth. This benefit formula
change would not have applied to disability benefits.
The proposal would have provided at least three initial investment options, each with
specified allocations in equities and fixed income instruments (e.g., U.S. government bonds,
corporate bonds), including a default option of 60% equities, 40% fixed income instruments.
Once the worker’s account balance reached at least $10,000 (indexed to inflation), additional
investment options would have been available. Account assets would have been available
at retirement, or earlier if the account balance would have provided an annuity at least equal
to 120% of the poverty line. The worker would have had three distribution options: annuity,
programmed withdrawal, or a combination of annuity and partial lump sum. Under the third
option, the worker would have been allowed to take as a lump sum the portion of the account
balance in excess of that needed to provide an annuity at least equal to 120% of the poverty
line. If the worker’s account balance was not sufficient to provide an annuity at least equal
to 120% of the poverty line, a supplemental payment would have been made to the account
from general revenues to provide the guaranteed minimum benefit payment.
Senator Corzine introduced S.Res. 432 on September 22, 2004, expressing the sense of
the Senate that Congress should reject Social Security “privatization” proposals.
Representative Obey introduced H.R. 5179 on September 29, 2004. The bill would
have increased the rate of growth in the Social Security taxable wage base by 2 percentage
points above average wage growth for years 2006 through 2036, to bring the percent of
covered earnings subject to the Social Security payroll tax up to 90%; used an alternative
Consumer Price Index measure to compute cost-of-living adjustments for current and future
retirees; retained the estate tax (with an applicable exclusion amount of $3.5 million) and
earmarked estate tax revenues for Social Security; and provided for future adjustments in the
Social Security payroll tax rate (employer/employee shares), if needed to bring the system
into balance based on the intermediate projections of the Social Security Board of Trustees.
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During the 108th Congress, reform measures were not considered by the House of
Representatives or the Senate. Congress approved H.R. 743 (The Social Security Protection
Act of 2004), designed to provide additional safeguards for Social Security and Supplemental
Security Income recipients with representative payees and enhance program protections.
President Bush signed the measure into law on March 2, 2004 (P.L. 108-203). For more
information, see CRS Report RL32089, The Social Security Protection Act of 2004.
LEGISLATION
In the 109th Congress, Representative Kolbe and Representative Johnson introduced
H.R. 440 and H.R. 530, respectively. This section will be updated as information becomes
available in the Legislative Information System.
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