Order Code RL33544
Social Security Reform:
Current Issues and Legislation
Updated April 25, 2007
Dawn Nuschler
Specialist in Social Legislation
Domestic Social Policy Division

Social Security Reform: Current Issues and Legislation
Summary
In recent years, President Bush’s initiative to restructure Social Security through
the creation of individual accounts moved Social Security reform to the forefront of
the political debate. While much attention has been focused on the issue, there has
been no legislative action. In his Fiscal Year 2008 Budget, President Bush restated
his support for voluntary individual accounts funded with a portion of current payroll
taxes and a change in the benefit formula known as “progressive indexing” as part
of a Social Security reform package.
The spectrum of ideas for reform have ranged from relatively minor changes to
the pay-as-you-go social insurance system enacted in the 1930s to a redesigned,
“modernized” program based on personal savings and investments modeled after
IRAs and 401(k)s. Proponents of the fundamentally different approaches to reform
cite varying objectives that go beyond simply restoring long-term financial stability
to the system. They cite objectives that reflect different philosophical views about
the role of the Social Security program and the federal government in providing
retirement income. However, the system’s long-range financial outlook provides a
backdrop for much of the Social Security reform debate in terms of the timing and
degree of recommended program changes.
Currently, the Social Security system is generating surplus tax revenues.
However, its board of trustees reports that the trust funds will be depleted in 2041,
at which point an estimated 75% of benefits would be payable with incoming receipts
(under the intermediate projections). The primary reason is demographics. Between
2010 and 2030, the number of people age 65 and older is projected to grow by 75%
while the number of workers supporting the system is projected to grow by 6%. In
addition, the trustees project that the system will begin running cash flow deficits in
2017, at which point other federal receipts would be needed to meet benefit costs.
If there are no other surplus governmental receipts, policymakers would have three
options: raise taxes or other income, reduce spending or borrow.
Public opinion polls show that fewer than 50% of respondents are confident that
Social Security can meet its long-term commitments. There is also a public
perception that Social Security may not be as good a value for future retirees. These
concerns and a belief that the nation must increase national savings have led to
proposals to redesign the system. At the same time, others suggest that the system’s
financial outlook is not a “crisis” in need of immediate action. Supporters of the
current program structure point out that the system is now running surpluses,
continues to have public support and could be affected adversely by the risk
associated with some of the reform ideas. They contend that only modest changes
are needed to restore long-range solvency to the Social Security system.
During the 109th Congress, 10 Social Security reform bills, most of which would
have established individual accounts, were introduced. None received congressional
action. In the 110th Congress to date, one Social Security reform measure, which
would establish voluntary individual accounts funded with general revenues, has
been introduced. This report will be updated as legislative activity warrants.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Basic Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Push for Major Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Arguments for Retaining the Existing System . . . . . . . . . . . . . . . . . . . . . . . . 7
Specific Areas of Contention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
System’s Financial Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Public Confidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Doubts About Money’s Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Debate Over Individual Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Retirement Age Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Cost-of-Living Adjustments (COLA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Social Security and the Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Initiatives for Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Legislation Introduced in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Legislation Introduced in the 110th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
List of Figures
Figure 1. Projected Social Security Trust Fund Balances, Under Intermediate
Assumptions of the 2007 Trustees Report, Calendar Years 2007-2040 . . . . 5
Figure 2. Projected Social Security Surpluses/Deficits, Under Intermediate
Assumptions of the 2007 Trustees Report, Calendar Years 2007-2040 . . . . 5
List of Tables
Table 1. Projected Income and Outgo of the Social Security Trust Funds,
Under Intermediate Assumptions, Calendar Years 2007-2040 . . . . . . . . . . . 3

Social Security Reform:
Current Issues and Legislation
Background
In recent years, President Bush’s initiative to restructure Social Security through
the creation of individual accounts moved Social Security reform to the forefront of
the political debate. The President has advocated a system in which benefits would
be based increasingly on what is referred to as a pre-funded system through personal
savings and investments with the creation of individual accounts. He has pointed to
the system’s projected long-range funding shortfall as a driver for change in
conjunction with his vision of an “ownership society.” Most Democrats have
supported maintenance of the current program structure (i.e., a defined benefit system
funded on a pay-as-you-go basis). Democrats have pointed to the system’s projected
long-range financial outlook to support their view that the system is not in “crisis,”
and that only modest changes aimed at supporting the current structure of the
program may be needed.
Proponents of the fundamentally different approaches to reform — from
relatively minor changes to the current pay-as-you-go social insurance system
originally enacted in the 1930s to the creation of a “modernized” program based on
personal savings and investments modeled after IRAs and 401(k)s — cite varying
objectives that go beyond simply restoring long-term financial stability to the system.
They cite objectives that reflect different philosophical views about the role of the
Social Security program and the federal government in providing retirement income.
However, the system’s long-range financial outlook provides a backdrop for much
of the Social Security reform debate in terms of the timing and degree of
recommended program changes. In addition, one of the key criteria used to evaluate
any reform proposal is its projected impact on the Social Security trust funds. To
place the discussion of Social Security reform issues into context, this report will
look first at the long-range projections for the Social Security trust funds, then at the
various objectives and proposals for reform.
Currently, Social Security income exceeds outgo. The Social Security Board
of Trustees (which is composed of three officers of the President’s Cabinet, the
Commissioner of Social Security, and two public representatives) projects that, on
average over the next 75 years, Social Security outgo will exceed income by 14%,
and by 2041 the trust funds will be depleted (based on the trustees’ intermediate, or
mid-range, projections).1 At that point, revenues are projected to cover an estimated
1 The 2007 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Disability Insurance Trust Funds
, April 23, 2007, available at
(continued...)

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75% of program costs. One of the primary reasons is demographics. The leading
edge of the post-World War II baby boom generation will begin retiring in 2008 and
projected increases in life expectancy will contribute to an older society. Between
2010 and 2030, the number of people age 65 and older is projected to increase by
75%, while the number of workers whose taxes will finance future benefits is
projected to increase by 6%. As a result, the number of workers supporting each
recipient is projected to decline from 3.3 today to 2.3 in 2025.2
Social Security revenues are paid into the U.S. Treasury and most of the
proceeds are used to pay benefits. Surplus revenues are invested in federal securities
recorded to the Old Age, Survivors, and Disability Insurance (OASDI) trust funds
maintained by the Treasury Department.3 Social Security benefits and administrative
costs are paid out of the Treasury and a corresponding amount of trust fund securities
are redeemed. When 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
and administrative costs. Surplus tax revenues and interest credited to the trust funds
in the form of government bonds appear as growing trust fund balances. Beginning
in 2027, the system’s outgo will exceed total income and trust fund assets will begin
to be depleted. In 2041, the trust funds are projected to be exhausted and technically
insolvent (see Table 1 and Figure 1).
Beginning in 2017, however, Social Security tax revenues (i.e., income
excluding interest credited to the trust funds) are projected to fall below the system’s
outgo (i.e., the system is projected to begin running cash flow deficits). Because
interest credited to the trust funds is an exchange of credits between Treasury
accounts — rather than a resource for the government from outside sources — other
federal receipts would be needed to meet the system’s costs beginning in 2017 (that
is, the government would begin redeeming bonds held by the trust funds). At that
point, policymakers would have three options: raise taxes, reduce spending or
borrow the money from the public (i.e., replace bonds held by the trust funds with
bonds held by the public). The system’s reliance on general revenues is projected to
be $68 billion by 2020 and $267 billion by 2030 (in constant 2007 dollars).
Projected annual Social Security surpluses and deficits, as well as projected annual
cash flow surpluses and deficits, are shown in Table 1 and Figure 2.
Today, the annual cost of the system ($594 billion) is equal to 11.21% of
workers’ pay subject to Social Security payroll taxes (or taxable payroll). The
trustees project that the system’s costs will increase at a faster rate than tax income
1 (...continued)
[http://www.ssa.gov/OACT/TR/TR07/]. The trust fund projections cited throughout this
CRS report are based on the trustees’ 2007 intermediate projections.
2 For more information, please refer to CRS Report RL32981, Age Dependency Ratios and
Social Security Solvency
, by Laura B. Shrestha.
3 OASDI is the formal name for Social Security.

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during the 2010-2030 period as the baby boom generation moves into retirement.
The cost of the system is projected to reach 12.43% of taxable payroll in 2015 and
16.59% of taxable payroll in 2030. After 2030, the cost of the system relative to tax
income will continue to increase, though at a slower rate, reaching 17.27% of taxable
payroll in 2040 and 18.55% of taxable payroll in 2081. Over the 75-year projection
period (2007-2081), the average cost of the system is projected to be 15.87% of
taxable payroll, or 14% higher than average income. However, the gap between
projected income and outgo would increase over the period. By 2081, the projected
cost of the system would exceed income by 39%.
The projected long-range financial outlook is reflected in public opinion polls
that show fewer than 50% of respondents express confidence in Social Security’s
ability to meet its long-term commitments. There is a growing public 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 the
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 aging society, are among the factors behind reform efforts.
Supporters of the current program structure suggest that the issues confronting
the system are not as serious as sometimes portrayed and believe there is no
imminent crisis. They point out that the system is now running surpluses, that there
continues to be public support for the program, and there would be considerable risk
in some of the reform ideas. They contend that relatively modest changes could
restore long-range solvency to the system.
Table 1. Projected Income and Outgo of the Social Security
Trust Funds, Under Intermediate Assumptions,
Calendar Years 2007-2040
(in billions of constant 2007 dollars)

Cash Flow
Trust
Tax
Interest
Total
Surplus/
Cost
Surplus/
Fund
Revenues
Income
Income
Deficita
Deficitb
Balance
2007
$673.7
$109.2
$782.8
$594.3
$188.5
$79.4
$2,236.6
2008
693.1
115.2
808.3
603.0
205.3
90.1
2,390.0
2009
715.0
123.7
838.7
620.7
218.0
94.3
2,545.7
2010
732.3
133.0
865.3
642.5
222.8
89.8
2,699.3
2011
750.0
142.7
892.7
663.9
228.8
86.1
2,854.5
2012
766.1
152.0
918.1
689.8
228.3
76.3
3,005.0
2013
780.1
161.1
941.2
718.0
223.2
62.1
3,146.5
2014
793.6
169.6
963.2
747.7
215.5
45.9
3,276.3
2015
807.8
177.3
985.0
778.6
206.4
29.2
3,393.5
2016
822.2
184.2
1,006.5
810.7
195.8
11.5
3,496.9

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Cash Flow
Trust
Tax
Interest
Total
Surplus/
Cost
Surplus/
Fund
Revenues
Income
Income
Deficita
Deficitb
Balance
2017
836.8
191.0
1,027.8
843.5
184.3
-6.7
3,585.9
2018
851.1
197.0
1,048.1
877.4
170.7
-26.3
3,659.0
2019
865.3
202.2
1,067.4
912.1
155.3
-46.8
3,714.7
2020
879.4
206.4
1,085.8
947.2
138.6
-67.8
3,752.1
2021
893.6
209.6
1,103.2
982.0
121.2
-88.4
3,771.1
2022
907.5
210.1
1,117.6
1,016.5
101.1
-109.0
3,769.4
2023
921.5
209.4
1,130.9
1,051.2
79.7
-129.7
3,746.4
2024
935.6
207.5
1,143.1
1,085.9
57.2
-150.3
3,701.5
2025
949.9
204.4
1,154.3
1,120.8
33.5
-170.9
3,634.2
2026
964.2
200.1
1,164.3
1,155.5
8.8
-191.3
3,544.0
2027
978.7
194.5
1,173.2
1,190.0
-16.8
-211.3
3,430.6
2028
993.2
187.6
1,180.8
1,224.5
-43.7
-231.3
3,293.5
2029
1,008.1
179.4
1,187.5
1,257.6
-70.1
-249.5
3,133.6
2030
1,023.2
169.9
1,193.1
1,289.7
-96.6
-266.5
2,951.7
2031
1,038.3
159.2
1,197.5
1,320.8
-123.3
-282.5
2,748.0
2032
1,053.8
147.4
1,201.2
1,351.1
-149.9
-297.3
2,523.3
2033
1,069.7
134.4
1,204.1
1,380.0
-175.9
-310.3
2,278.6
2034
1,085.9
120.3
1,206.2
1,407.3
-201.1
-321.4
2,015.5
2035
1,102.2
105.3
1,207.5
1,433.1
-225.6
-330.9
1,734.9
2036
1,118.5
89.3
1,207.7
1,458.1
-250.4
-339.6
1,437.3
2037
1,135.0
72.3
1,207.3
1,482.3
-275.0
-347.3
1,123.2
2038
1,151.8
54.5
1,206.3
1,505.5
-299.2
-353.7
793.4
2039
1,169.0
35.8
1,204.8
1,527.8
-323.0
-358.8
448.8
2040c
1,186.1
16.3
1,202.5
1,549.5
-347.0
-363.4
89.6
Source: Congressional Research Service based on data from The 2007 Annual Report of the Board
of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds
,
April 23, 2007, table VI.F7, available at [http://www.ssa.gov/OACT/TR/TR07/lr6F7.html].
a. The annual surplus/deficit is equal to total income minus cost.
b. The annual cash flow surplus/deficit is equal to tax revenues minus cost.
c. The Social Security trust fund is projected to be exhausted in 2041.

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Figure 1. Projected Social Security Trust Fund Balances, Under
Intermediate Assumptions of the 2007 Trustees Report,
Calendar Years 2007-2040
(in trillions of constant 2007 dollars)
$ 4 . 0
$ 3 . 5
$ 3 . 0
$ 2 . 5
$ 2 . 0
$ 1 . 5
$ 1 . 0
$ 0 . 5
$ 0 . 0
2 0 0 7
2 0 1 0
2 0 1 3
2 0 1 6
2 0 1 9
2 0 2 2
2 0 2 5
2 0 2 8
2 0 3 1
2 0 3 4
2 0 3 7
2 0 4 0
Figure 2. Projected Social Security Surpluses/Deficits, Under
Intermediate Assumptions of the 2007 Trustees Report,
Calendar Years 2007-2040
(in billions of constant 2007 dollars)
$ 3 0 0
P r o je c te d S o c ia l S ec u r ity S u r p lu s /D e f ic it
( T o ta l I n c o m e M in u s C o s t)
$ 2 0 0
$ 1 0 0
$ 0
2 0 0 7
2 0 1 0
2 0 1 3
2 0 1 6
2 0 1 9
2 0 2 2
2 0 2 5
2 0 2 8
2 0 3 1
2 0 3 4
2 0 3 7
2 0 4 0
- $ 1 0 0
P r o je c te d S o c ia l S ec u r ity
C a sh F lo w S u r p lu s /D e f ic it
- $ 2 0 0
( T ax R e v e n u e s M in u s C o s t)
- $ 3 0 0
- $ 4 0 0
Source: Both figures based on data from The 2007 Annual Report of the Board of Trustees of the
Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds
, April 23, 2007.

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Basic Debate
The Social Security system has faced funding shortfalls in the past. In 1977 and
1983, Congress enacted a variety of measures to address the system’s financial
imbalance. These measures include constraints on the growth of initial benefit levels,
a gradual increase in the full retirement age from 65 to 67 (i.e., the age at which
unreduced benefits are payable), payroll tax increases, taxation of benefits for higher-
income recipients, and extension of Social Security coverage to federal and nonprofit
workers. Subsequently, projections showed the re-emergence of long-term deficits
as a result of changes in actuarial methods and assumptions, and because program
changes had been evaluated with respect to their effect on the average 75-year
deficit. That is, while program changes were projected to restore trust fund solvency
on average over the 75-year period, a period of surpluses was followed by a period
of deficits.
Some policymakers believe that some type of action should be taken sooner
rather than later. This view has been shared by the Social Security trustees and other
recent panels and commissions that have examined the problem. In recent years, a
wide range of interest groups have echoed this view in testimony before Congress.
However, there is no consensus on whether the projections represent a “crisis.” In
1977 and 1983, the trust fund balances were projected to fall to zero within a very
short period (within months of the 1983 reforms). Today, the problem is perceived
to be as few as 11 or as many as 35 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 1983, the debate was not about
fundamental reform. Rather, it revolved around how to raise the system’s income
and constrain 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 reflected in the 1997 Social Security
Advisory Council report, which presented three different reform plans. None of the
plans was supported by a majority of the 13-member council. Similar diversity is
reflected in the Social Security reform bills introduced in recent Congresses.
Push for Major Reform
Advocates of reform view 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 70
years require the system to change, and they point to changes made in other countries
that now use market-based individual 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 allows workers to acquire wealth and provide for their retirement
by investing in individual accounts.
Reform advocates also view it as a way to counter skepticism about the current
system by giving workers a greater sense of “ownership” of their retirement savings.

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They contend that private investments would yield larger retirement incomes because
stocks and bonds historically have provided higher returns than are projected from
the current system. Some believe that individual accounts would address what they
view as the system’s contradictory mix of insurance and social welfare goals
(although benefits are not based strictly on a worker’s contributions, many of its
social benefits go to financially well-off individuals in the absence of a means test).
Others maintain that creating a system of individual accounts would prevent the
government from using surplus Social Security taxes for other government spending.
Some, who do not necessarily seek a new system, view enactment of long-range
Social Security constraints as one way to curb federal entitlement spending. The
aging of society means that the cost of 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.
As a matter of fairness, it has been pointed out that many current recipients get
back more than the value of their Social Security contributions, and far more than the
baby boom generation will receive. They believe that to delay making changes to the
program is unfair to current workers, who must pay for “transfer” payments that they
characterize as “overgenerous” and unrelated to need, while facing the prospect that
their own benefits may have to be scaled back severely. Others emphasize the
system’s projected long-range funding shortfall and contend that steps should be
taken soon (e.g., raising the full retirement age, constraining the growth of initial
monthly benefits for future retirees, reducing COLAs, raising taxes) so that changes
can be phased in, allowing workers more time to adjust their retirement
expectations/plans to reflect what these programs will be able to provide in the
future. Otherwise, they maintain that more abrupt changes in taxes and benefits
would be required.
Arguments for Retaining the Existing System
Those who favor a more restrained approach believe that the issues facing the
system can be resolved with modest tax and spending changes, and that the
program’s critics are raising the specter that Social Security will “bankrupt the
nation” to undermine public support and provide an excuse to incorporate individual
accounts into the system. They contend that individual 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 individual accounts
would pose large transition problems by requiring younger workers to save for their
own retirement while paying taxes to cover benefits for current retirees. Some doubt
that it would increase national savings, arguing that higher government debt
(resulting from the redirection of current payroll taxes to individual accounts) would
offset the increased individual account savings. They also contend that the capital
markets’ inflow created by the accounts would make the markets difficult to regulate

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and potentially distort equity valuations. They point out that some of the countries
that have moved to individual 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 individual accounts would expose participants to
excessive market risk for an income source that has become essential to many of the
nation’s elderly. They say that the nation has a three-tiered retirement system
(consisting of Social Security, private pensions and personal assets) that already
includes private savings 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 individual
accounts could be very large and significantly erode their value.
Some say that concerns about the future growth of entitlement spending 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. They state
that a projected low ratio of workers to dependents is not unprecedented, as it existed
when the baby boomers were in their youth.
Specific Areas of Contention
System’s Financial Outlook
There are conflicting views about the severity of Social Security’s projected
funding shortfall. Some maintain that the problem is more acute than portrayed
under the traditional 75-year projections (under the traditional projections, the
average 75-year deficit is equal to 1.95% of taxable payroll). They believe this view
is supported by an alternative portrayal in the trustees’ report that extends the
projections beyond the traditional 75-year window. On an “infinite horizon” basis
(i.e., looking indefinitely into the future), the projected funding shortfall is equal to
3.5% of taxable payroll, making the financial status of the program more dire. They
also point out that, in 2030, the cost of the system is projected to exceed income by
3.4% of taxable payroll (i.e., costs would exceed income by 26%). At the end of the
75-year projection period (2081), the funding gap is projected to equal 5.20% of
taxable payroll (i.e., costs would exceed income by 39%). Thus, on a pay-as-you-go
basis, the system would require more than a 14% change in taxes or expenditures
over the next 75 years to cover projected program costs (over the next 75 years, on
average
, the cost of the system is projected to exceed income by 14%).
They maintain that viewing the problem as 35 years away (because the trust
funds are projected to have a balance until 2041) does not take into account the
financial pressure Social Security will exert on the government beginning in 2017
when expenditures are projected to exceed tax revenues (that is, the system would
begin running cash flow deficits). At that point, the government would have to rely

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on other resources to help cover program costs, resources that could be used to
finance other governmental functions.4
Others express concern that the problem is being exaggerated. First, they
maintain that in contrast to earlier episodes of financial imbalance, the system has no
immediate problem. Surplus tax receipts are projected for 10 years and the trust
funds are projected to have a balance for 34 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 increasing the payroll tax rate immediately by 0.975 percentage point
on employees and employers. They point out that, as a share of GDP, projections
show that the cost of the system would increase from 4.3% today to 6.2% 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 are becoming more prevalent, and some older workers are
viewing retirement increasingly as more than an all-or-nothing decision.
Public Confidence
In recent years, public opinion polls have shown that a majority of Americans
lack confidence in the system’s ability to meet its future commitments. While
skepticism abated following enactment of legislation in 1983 to shore up the system,
it has risen again with just over half of the public expressing a lack of confidence
(CBS News/New York Times Poll, June 2005). Younger workers are particularly
skeptical. For example, 62% of persons aged 18-34, 56% of persons aged 35-44, and
49% of persons aged 45-54 expressed a lack of confidence in the system’s ability to
pay benefits scheduled under current law in the future, compared with 16% of
persons aged 55 and older (Newsweek Poll, February 2005).
Some observers express 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. 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
benefits scheduled under current law and thus more trusting of the system. Others,
however, suggest that the skepticism is justified by the system’s repeated financial
difficulties and diminished “money’s worth” for younger workers.
4 The trust fund projections cited in this report are based on the 2007 annual report of the
Social Security Board of Trustees. Projections released by the Congressional Budget Office
(CBO) in June 2006 reflect a similar long-range outlook for the Social Security trust funds.
CBO projects that the trust funds will be exhausted in 2046, and that Social Security
expenditures will exceed tax revenues beginning in 2019. For more information, please
refer to CBO, Updated Long-Term Projections for Social Security, June 2006, available at
[http://www.cbo.gov/ftpdocs/72xx/doc7289/06-14-LongTermProjections.pdf].

CRS-10
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 full retirement age (the age at which
unreduced benefits are payable) is being increased gradually, it is becoming more
apparent that Social Security will be less of a good deal for many future retirees. 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
fare 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. In addition, current workers, who will receive less direct
value from their taxes compared to current 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 comparisons of taxes and benefits.
Debate Over Individual Accounts
Social Security’s projected long-range financial outlook, skepticism about the
sustainability of the current system, and a belief that economic growth could be
bolstered through increased savings have led to a number of proposals to incorporate
individual accounts into the Social Security system, reviving a philosophical debate
that dates back to the creation of the program in 1935. All three plans presented by
the 1994-1996 Social Security 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 pay to individual accounts to make up for
Social Security benefit reductions called for under the plan 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 individual accounts (funded with 5 percentage points of the current Social
Security tax rate).5
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 individual
accounts through government-approved pension funds, has been reflected in a
5 Report of the 1994-1996 Advisory Council on Social Security, Volume I: Findings and
Recommendations
, Wash., DC, January 1997.

CRS-11
number of reform bills introduced in recent Congresses.6 These measures would
permit or require workers to invest some or all of their Social Security payroll taxes
in individual accounts. Most call for future Social Security benefits to be reduced or
forfeited. Similarly, the three options presented by the Social Security reform
commission appointed by President Bush in 2001 would allow workers to participate
in individual accounts and would reduce their eventual Social Security benefit by the
projected value of the account based on an assumed (rather than the actual) rate of
return.7
Another approach is reflected in bills that would require any budget surpluses
to be used to finance individual accounts to supplement Social Security benefits for
those who pay Social Security payroll taxes. President Clinton’s January 1999
reform plan would have allocated a portion of budget surpluses to individual
accounts, supplemented by a worker’s own contributions and a government match
(scaled to income). In addition, the plan would have redirected a portion of budget
surpluses, or the interest savings resulting therefrom, to the Social Security trust
funds. Some of the funds would have been used to acquire stocks, similar to the
approach suggested in one of the Advisory Council plans and some past legislation.
Most of these approaches would require establishment of an independent board to
invest some of the funds in stocks or corporate bonds and the remaining funds in
federal securities.
Some individual account proponents believe that individual accounts would
reduce future financial demands on government and reassure workers by giving them
a sense of “ownership” of their retirement savings. Others believe that individual
accounts 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 individual accounts would increase
national savings and promote economic growth. Others maintain that individual
accounts would prevent the government from using surplus Social Security revenues
to “mask” public borrowing, or for other spending or tax reductions. Generally,
proponents of individual accounts express concern that “collective” investment of the
Social Security trust funds in the markets would concentrate too much economic
power in a government-appointed board.8
Opponents of individual accounts maintain that Social Security’s projected
long-range funding shortfall could be resolved without altering the fundamental
6 For more information on the reforms in Chile and other countries, please refer to
Congressional Budget Office, Social Security Privatization: Experiences Abroad, January
1999, available at [http://www.cbo.gov/ftpdocs/10xx/doc1065/ssabroad.pdf].
7 Strengthening Social Security and Creating Personal Wealth for All Americans, Final
Report of the President’s Commission to Strengthen Social Security, December 21, 2001,
available at [http://www.csss.gov/reports/Final_report.pdf].
8 For examples of arguments in support of individual accounts, please refer to Strengthening
Social Security and Creating Personal Wealth for All Americans
, Final Report of the
President’s Commission to Strengthen Social Security, December 21, 2001, available at
[http://www.csss.gov/reports/Final_report.pdf], and a variety of sources available from the
Cato Institute at [http://www.socialsecurity.org/].

CRS-12
nature of the program. They express concern that replacing Social Security with
individual accounts would erode the social insurance aspects of the system that favor
low-wage earners, survivors and the disabled. Others are concerned that individual
accounts would pose large transition problems by requiring younger workers to save
for their own retirement while simultaneously paying taxes to support current
retirees, and would further exacerbate current budget deficits. Some doubt that
individual accounts would increase national savings, maintaining that any increase
in private savings would be offset by increased government borrowing. 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.9
Retirement Age Issue
Raising the Social Security retirement age is often considered as a way to help
restore long-range solvency to the system. Much of the growth in Social Security’s
costs is a result of increasing life expectancy. Since benefits were first paid in 1940,
life expectancy for 65-year-old men and women has risen from 12.7 and 14.7 years,
respectively, to 17.0 and 19.7 years, respectively. By 2030, it is projected to be 18.5
and 21.2 years, respectively. This trend bolstered arguments for increasing the full
retirement age as a way to achieve savings when the system was facing major
financial problems in the early 1980s. Congress raised 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. The 1983 amendments did not raise the early
retirement age (age 62), however, the benefit reduction for persons who retire at age
62 will increase from 20% to 30%. Proponents of raising the early and/or full
retirement age view it as reasonable in light of projected increases in life expectancy.
Opponents believe 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 (COLA)
Social Security benefits are adjusted annually to reflect inflation as measured
by 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
9 For examples of arguments against individual accounts, please refer to the compilation of
sources provided in Social Security Issue Guide, Economic Policy Institute, May 2005,
available at [http://www.epinet.org/issueguides/socialsecurity/socialsecurityissueguide.pdf].

CRS-13
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.10 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 in recent years. However, calls for
adjustments continue.
According to the Social Security Administration, a COLA reduction of 0.5
percentage point annually (beginning December 2006) would improve the system’s
long-range actuarial balance by an estimated 40%. A COLA reduction of 1
percentage point annually would improve the long-range actuarial balance by an
estimated 78% (based on the trustees’ 2005 intermediate projections).11 While some
view further CPI changes as necessary to help keep Social Security and other
entitlement spending under control, others view such changes as a backdoor way of
reducing 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.12
Social Security and the Budget
By law, Social Security is considered “off budget” for many aspects of
developing and enforcing annual budget goals. However, it is a federal program and
its income and outgo help shape the year-to-year financial condition of the federal
government. As a result, policymakers often focus on “unified” (or overall) budget
totals that include Social Security. When President Clinton urged that the unified
budget surpluses projected at the time be reserved until Social Security’s projected
long-range funding issues were resolved, and proposed using a portion of those
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, there was substantial support for setting aside a portion equal
to the annual Social Security trust fund surpluses.
Although budget deficits have re-emerged, there remains some congressional
interest in the concept of a Social Security “lock box.” For example, in the 109th
Congress, H.R. 3435 (Savings for Seniors Act of 2005 introduced by Representative
10 Toward a More Accurate Measure of the Cost of Living, Final Report to the Senate
Finance Committee from the Advisory Commission to Study the Consumer Price Index,
December 4, 1996.
11 Social Security Administration, Estimated OASDI Long-Range Financial Effects of
Several Provisions Requested by the Social Security Advisory Board
, Memorandum, dated
August 10, 2005, available at [http://www.ssa.gov/OACT/solvency/provisions/index.html].
Choose the link titled “Our memorandum to the Advisory Board.”
12 For more information, please refer to CRS Report RS20060, A Separate Consumer Price
Index for the Elderly?
, by Brian W. Cashell and CRS Report RL30074, The Consumer Price
Index: A Brief Overview
, by Brian W. Cashell.

CRS-14
Blackburn) would have established a Social Security Surplus Protection Account in
the OASI trust fund for the purpose of “holding” surplus Social Security tax
revenues, and it would have established a Social Security Investment Commission
to recommend alternative investment options for surplus Social Security funds.
Under the measure, investment of funds held in the account would have been
suspended pending enactment of legislation providing for trust fund investment in
nongovernmental assets. Another example from the 109th Congress is S. 1730 (Truth
in Budgeting Act of 2005 introduced by Senator Voinovich), which would have
established a Trust Fund Administration within the Treasury Department for the
purpose of investing all federal trust fund revenues in nongovernmental debt
instruments (such as municipal and corporate bonds) upon the issuance of special rate
Treasury obligations to the trust funds (investment in stocks would have been
prohibited). The measure specified that investment fund assets would have been
used to redeem outstanding special rate Treasury obligations.
In the 109th Congress, Senator DeMint offered an amendment to the Senate
budget resolution for FY2007 (S.Con.Res. 83) that would have allowed for the
creation of a reserve fund for surplus Social Security tax revenues, provided that the
Senate Finance Committee approve Social Security legislation meeting certain
conditions. For example, the amendment (S.Amdt. 3087) specified that such
legislation make no changes to Social Security benefits scheduled under current law
for individuals born before 1950 and provide individuals “the option to voluntarily
obtain legally binding ownership of at least some portion of each participant’s
benefits.” The amendment was defeated by a vote of 46-53.
In the 110th Congress, the Senate budget resolution for FY2008 (S.Con.Res. 21),
as passed by the Senate on March 23, 2007, includes provisions aimed at “protecting”
the annual Social Security surpluses. The measure includes a provision that would
create a new “Point of Order to Save Social Security First.” The provision would
allow a floor objection to be raised in the Senate against consideration of any
legislation that would increase the on-budget deficit in any fiscal year. The point of
order could be raised against such legislation until the President submits legislation
to Congress, and Congress enacts legislation, that would restore long-range solvency
to the Social Security system (as scored by the Social Security Administration
actuaries). (An on-budget deficit refers to the part of the federal budget that excludes
Social Security and the Postal Service.) The point of order could be waived with a
three-fifths majority vote in the Senate. S.Con.Res. 21 also includes a provision
(“Circuit Breaker to Protect Social Security”) that would provide a point of order
against any budget resolution that does not achieve an on-budget balance within five
years, with exceptions provided for periods of war or low economic growth. The
point of order could be waived with a three-fifths majority vote in the Senate.
Senator DeMint offered an amendment to S.Con.Res. 21 that would have
allowed for the creation of a reserve fund for Social Security reform, provided that
the Senate Finance Committee approve legislation meeting certain requirements.
Among other conditions, the amendment (S.Amdt. 489) specified that such
legislation must ensure “that there is no change to current law scheduled benefits for
individuals born before January 1, 1951,” and provide “participants with the benefits
of savings and investment while permitting the pre-funding of at least some portion
of future benefits.” The amendment was defeated by a vote of 45 to 52.

CRS-15
Initiatives for Change
The 1994-1996 Social Security Advisory Council presented three different
approaches to restore long-range solvency to the system, none of which was endorsed
by a majority of council members. The first (the “maintain benefits” plan) would
maintain the system’s current benefit structure by increasing revenues (including an
eventual increase in the payroll tax) and making minor benefit reductions. It was also
suggested that a portion of the Social Security trust funds be invested in stocks. The
second (the “individual account” plan) addressed the problem mostly with benefit
reductions, and would require workers to make an extra 1.6% of pay contribution to
individual 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 individual accounts funded by redirecting 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.13 The conceptual approaches incorporated
in the three plans are reflected in many of the reform bills introduced in recent years.
During his last three years in office, President Clinton repeatedly called for
using Social Security’s share of budget surpluses projected at the time to reduce
publicly-held federal debt and crediting the trust funds for the reduction.14 In the
1999 State of the Union address, 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
$0.6 trillion was to be invested in stocks, the rest in federal securities. The plan was
estimated to keep the system solvent until 2059. Concerns were raised that the plan
would be crediting the Social Security trust funds twice for its surpluses, and that the
plan would lead to government ownership of private companies. President Clinton
further proposed that $0.5 trillion of the budget surpluses be used to create new
Universal Savings Accounts — 401(k)-type accounts intended to supplement Social
Security benefits. In June 1999, he revised the 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, President Clinton revised the plan again by dropping the
stock investment idea and calling for all the infusions to be invested in federal bonds.
President Clinton’s last plan, offered in January 2000, was similar but again called
for investing up to 15% of the trust funds in stock.
During his first term, President Bush appointed a commission to make
recommendations to reform Social Security. As principles for reform, the President
stated that any reform plan must preserve the benefits of current retirees and older
workers, return Social Security to a firm financial footing, and allow younger
13 For more information, please refer to CRS Report 97-81, Social Security:
Recommendations of the 1994-1996 Advisory Council on Social Security
, by Geoffrey
Kollmann.
14 For more information, please refer to U.S. Congress, House Committee on Ways and
Means, The President’s Social Security Framework, hearing, 106th Cong., 1st sess., February
23, 1999, Serial 106-32 (Washington: GPO, 2000).

CRS-16
workers to invest in individual savings accounts. The commission’s final report,
which was issued on December 21, 2001, included three reform options. Each option
would allow workers to participate in individual accounts on a voluntary basis and
reduce their eventual Social Security benefit by the projected value of the account
based on an assumed (rather than the actual) rate of return.
The first option would allow workers to redirect 2% of taxable earnings to
individual accounts and would make no other changes. The second option would
allow workers to redirect 4% of taxable earnings, up to an annual limit of $1,000, to
individual accounts; reduce initial benefits for future retirees by indexing the growth
of initial benefits to prices rather than wages; and increase benefits for lower-wage
workers and widow(er)s. The third option would allow workers to contribute an
additional 1% of taxable earnings to individual accounts and receive a government
match of 2.5% of taxable earnings, up to an annual limit of $1,000; reduce initial
benefits for future retirees by slowing the growth of initial benefits to reflect
projected increases in life expectancy, and, for higher-wage workers, by modifying
the benefit formula; and increase benefits for lower-wage workers and widow(er)s.15
During his second term, President Bush has continued efforts to build support
for Social Security reform. Although the President has not presented a detailed plan
for reform, he has put forth guidelines for Congress to consider in the development
of legislation to create individual accounts within a program he calls in need of “wise
and effective reform.” During the 2005 State of the Union address, President Bush
offered the following guidelines for reform: (1) workers born before 1950 (age 55
and older in 2005) would not be affected by individual accounts or other components
of reform; (2) participation in individual accounts would be voluntary; (3) eligible
workers would be allowed to redirect up to 4% of covered earnings into an individual
account, initially up to $1,000 per year; (4) accounts would be administered by a
centralized government entity; and (5) 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.16
In addition to restating support for individual accounts as part of the creation of
an “ownership society,” President Bush acknowledged that other changes would be
needed to address the system’s projected long-range funding shortfall. The President
cited potential program changes that would be on the table for consideration,
including (1) raising the full retirement age; (2) reducing benefits for wealthy
recipients; and (3) modifying the benefit formula. At the time, the only approach
ruled out by the President was an increase in the payroll tax rate.
On April 28, 2005, during a television news conference, President Bush
proposed a change in the Social Security benefit formula in which future “benefits
for low-income workers [would] grow faster than benefits for people who are better
15 For more information, please refer to CRS Report RL32006, Social Security Reform:
Effect on Benefits and the Federal Budget of Plans Proposed by the President’s Commission
to Strengthen Social Security
, by Dawn Nuschler and Geoffrey Kollmann.
16 For more information, please refer to CRS Report RL32879, Social Security Reform:
President Bush’s 2005 Individual Account Proposal
, by Laura Haltzel.

CRS-17
off.” Although details of the proposal were not released, a White House press
statement indicated that the President was referring to a proposal similar to one put
forth by Robert Pozen, a member of the 2001 President’s Commission to Strengthen
Social Security
appointed by President Bush. Mr. Pozen’s proposal, known as
“progressive indexing,” would constrain the growth of initial benefits for future
retirees by using a combination of wage indexing and price indexing mechanisms in
the benefit formula (rather than wage indexing only) to apply differing degrees of
benefit reduction based on the worker’s level of earnings.17 Under progressive
indexing, lower-wage workers would receive a benefit that is indexed closer to wage
growth (as under current law) and higher-wage workers would receive a benefit that
is indexed closer to price growth (or inflation). Based on current wage and price
growth projections, a shift from wage indexing toward price indexing would result
in lower initial benefits for future retirees compared to benefits scheduled under
current law.18
As the first session of the 109th Congress drew to a close at the end of 2005, the
reform debate focused on legislation introduced by Senator DeMint (S. 1302) that
would have established voluntary individual accounts funded with surplus Social
Security tax revenues and reduced Social Security benefits to reflect account assets
(S. 1302 is described in the following section of the report). On November 15, 2005,
Senator Santorum made unanimous consent requests to discharge S. 1302 and a
second measure (S. 1750, 109th Congress) from the Senate Finance Committee and
bring those measures to the Senate floor for consideration. S. 1750, introduced by
Senator Santorum, would have provided for the issuance of Social Security “benefit
guarantee certificates” to persons born before 1950 for the stated purpose of
“guaranteeing their right to receive Social Security benefits ... in full with an accurate
annual cost-of-living adjustment.” The unanimous consent requests provided for 10
hours of debate on each measure followed by a vote on passage, with no
amendments. Objections raised against the unanimous consent requests prevented
further action on the measures.19
During the 2006 State of the Union address, President Bush expressed concern
regarding the level of federal spending for entitlement programs, citing projections
that Social Security, Medicare, and Medicaid would account for almost 60% of the
federal budget by 2030. The President called for the creation of a commission, that
17 For more information, please refer to Testimony on Progressive Indexing before the
Senate Finance Committee, April 26, 2005, by Robert C. Pozen, available at
[http://finance.senate.gov/hearings/testimony/2005test/ptest042605.pdf], and CRS Report
RL32900, Indexing Social Security Benefits: The Effects of Price and Wage Indexes, by
Patrick Purcell, Laura Haltzel, and Neela Ranade.
18 Under the trustees’ 2007 intermediate projections, wages are projected to increase at an
average annual rate of 3.9% over the 75-year projection period. By comparison, prices are
projected to increase at an average annual rate of 2.8% over the next 75 years.
19 For more information on S. 1302, please refer to CRS Report RS22278, Social Security
Reform: Growing Real Ownership for Workers (GROW) Act of 2005, H.R. 3304
, by
Kathleen Romig. For more information on S. 1750, please refer to CRS Report RL32822,
Social Security Reform: Legal Analysis of Social Security Benefit Entitlement Issues, by
Kathleen S. Swendiman and Thomas J. Nicola.

CRS-18
would include Members of Congress from both parties, to “examine the full impact
of baby boom retirements on Social Security, Medicare, and Medicaid.” In addition,
the President’s Fiscal Year 2007 Budget included a proposal for voluntary individual
accounts funded with a portion of current payroll taxes, a proposal which is similar
to the individual account proposal outlined by the President in the 2005 State of the
Union address. The President’s Fiscal Year 2007 Budget also restated support for
a change in the Social Security benefit formula known as “progressive indexing” to
constrain the growth of initial benefits for future retirees as a cost-saving measure.
Immediately following the November 2006 congressional elections, in which
Democrats gained a majority in both the House and the Senate, President Bush and
Administration officials publicly expressed interest in resuming discussions with
congressional leaders on the issue of Social Security reform. In his Fiscal Year 2008
Budget
, President Bush restated his support for voluntary individual accounts funded
with a portion of current payroll taxes. Under the President’s proposal, starting in
2012, individual accounts would be funded with 4% of taxable earnings, up to a limit
of $1,300 (the limit would increase by $100 each year through 2017). In addition,
the President restated his support for “progressive indexing” of initial Social Security
benefits for future retirees.
Legislation Introduced in the 109th Congress
During the past several Congresses, a number of Social Security reform bills
have been introduced, many of which would have established individual accounts
within the Social Security system either on a voluntary or mandatory basis. In the
109th Congress, 10 Social Security reform bills were introduced as follows: H.R. 440
(Representative Kolbe and Representative Boyd), H.R. 530 (Representative Sam
Johnson), H.R. 750 (Representative Shaw), S. 540 (Senator Hagel), S. 857 (Senator
Sununu), H.R. 1776 (Representative Paul Ryan), H.R. 2472 (Representative Wexler),
S. 1302 (Senator DeMint), H.R. 3304 (Representative McCrery), and S. 2427
(Senator Bennett). All but two of the measures (H.R. 2472 and S. 2427) would have
established individual accounts to supplement or replace traditional Social Security
benefits, among other changes. The following section provides a summary of Social
Security reform legislation introduced in the 109th Congress.20 Despite intense debate
on the issue of Social Security reform, there was no congressional action on Social
Security reform legislation.
H.R. 440. Representative Kolbe and Representative Boyd introduced H.R. 440
(Bipartisan Retirement Security Act of 2005) on February 1, 2005. For workers
under age 55, the measure would have redirected 3% of the first $10,000 of covered
earnings (indexed to wage growth) and 2% of remaining covered earnings to
mandatory individual accounts. Workers would have been allowed to make
additional contributions of up to $5,000 annually (indexed to inflation), and lower-
20 More detailed descriptions and estimates of the financial effects of these proposals are
available from the Social Security Administration, Office of the Chief Actuary, at
[http://www.ssa.gov/OACT/solvency/index.html].

CRS-19
wage workers would have been eligible for an additional credit of up to $600 toward
their account.
With respect to traditional Social Security benefits, the measure would have
made a number of benefit computation changes, including several adjustments to the
“replacement factors” used in the benefit formula. It would have constrained the
growth of initial monthly benefits for future retirees by indexing initial benefits to
increases in life expectancy, a provision known as “longevity indexing” of benefits.
The measure would have modified the calculation of the worker’s “average indexed
monthly earnings” (AIME) for benefit computation purposes. In the future, the
worker’s AIME would have been based on the worker’s average career earnings —
counting all years of earnings — divided by a 40-year computation period (rather
than the worker’s average career earnings — counting the 35 years of highest
earnings
— divided by a 35-year computation period).
In addition, the measure would have accelerated the increase in the full
retirement age from 65 to 67 scheduled under current law, so that it would have
reached age 67 for persons born in 1956 and later (four years earlier than under
current law). It would have modified the early retirement reduction factors and
delayed retirement credits; set widow(er)s’ benefits equal to 75% of the couple’s
combined pre-death benefit (rather than 50%-67%); limited benefits for aged spouses
of higher earners; provided a minimum benefit tied to the poverty level for workers
who meet specified coverage requirements; and reduced cost-of-living adjustments.
With respect to tax changes, the measure would have increased the taxable wage
base gradually so that 87% of covered earnings would be taxable. It would have
credited all revenues from the taxation of Social Security benefits to the Social
Security trust funds (instead of crediting part to the Medicare Hospital Insurance trust
fund).
H.R. 440 would have established a central authority to administer the accounts
and provided initial investment options similar to those available under the Thrift
Savings Plan for federal employees. Once the account balance reached $7,500
(indexed to inflation), the worker would have been allowed to choose among a
broader range of centrally-managed investment options. The account would have
become available at retirement, or earlier if the account balance were sufficient to
provide a payment at least equal to 185% of the poverty level. The worker would
have been required to annuitize the portion of the account balance needed to provide
a combined monthly payment (traditional benefit plus annuity) at least equal to 185%
of the poverty level. Any remaining balance could have been taken as a lump sum.
H.R. 530. Representative Sam Johnson introduced H.R. 530 (Individual Social
Security Investment Program Act of 2005) on February 2, 2005. The measure would
have allowed workers aged 21 to 54 to redirect 6.2 percentage points of the payroll
tax to voluntary individual accounts. Participation in the individual account system
would have been mandatory for persons under age 21. Workers participating in the
individual account system would no longer have accrued benefits under the
traditional system, and they would have been issued a marketable “recognition bond”
equal to the value of benefits accrued under the current system. The measure would
have provided workers participating in the individual account system a minimum

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benefit equal to a specified percentage of the poverty level, up to 100% for workers
with at least 35 years of earnings.
Workers who would have chosen not to participate in the individual account
system would have remained in the current system, however, initial monthly benefits
would have been lower than those scheduled under current law. The measure would
have constrained the growth of initial monthly benefits for future retirees by indexing
initial benefits to price growth (rather than wage growth), a provision known as
“price indexing” of benefits.
H.R. 530 would have established a central authority to administer the accounts
and provided at least three initial investment options with specified allocations in
equities and fixed income instruments (government bonds, corporate bonds),
including a default 60/40 investment mix. Once the account balance reached $10,000
(indexed to inflation), the worker would have been allowed to transfer the balance
to a private financial institution. The account would have become available at
retirement, or earlier if the account balance were sufficient to provide an annuity at
least equal to 100% of the poverty level. Once the account balance reached this
level, the worker could have received an annual rebate of future payroll tax
contributions (the employer share of the payroll tax would not have been subject to
the rebate). The worker would have been required to annuitize the portion of the
account balance needed to provide an annuity at least equal to 100% of the poverty
level. Any remaining balance could have been taken as a lump sum. If the account
balance were not sufficient to provide the prescribed minimum payment, a
supplemental payment would have been made to the account from general revenues.
H.R. 750. Representative Shaw introduced H.R. 750 (Social Security Guarantee
Plus Act of 2005) on February 10, 2005. The measure would have allowed workers
aged 18 and older to participate in voluntary individual accounts funded with general
revenues. Account contributions would have been equal to 4% of taxable earnings,
up to$1,000 (indexed to wage growth).
With respect to traditional Social Security benefits, the measure would have
provided up to five years of earnings credits for workers who stay at home to care for
a child under age seven and eliminated the earnings test for recipients below the full
retirement age. In addition, it would have set widow(er)’s benefits equal to 75% of
the couple’s combined pre-death benefit (compared with 50%-67%); allowed
widow(er)s to qualify for benefits based on a disability regardless of age and the time
frame in which the disability occurred; and lowered the Social Security
spousal/widow(er)’s benefit reduction under the Government Pension Offset from
two-thirds to one-third of the individual’s pension from noncovered employment.
Under H.R. 750, accounts would have been administered by private financial
institutions selected by the government. The measure would have provided three
initial investment options with specified allocations in equities and corporate bonds
(60/40, 65/35, 70/30). The account would have become available upon the worker’s
entitlement to retirement or disability benefits, or upon the worker’s death. Upon
benefit entitlement, the worker would have received a lump sum equal to 5% of the
account balance. The remaining balance would have been used to finance all or part
of the worker’s benefit. The account balance would have been withdrawn gradually

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and transferred to the trust funds for the payment of monthly benefits. In addition to
the 5% lump sum, the measure would have provided a monthly payment equal to the
higher of a benefit scheduled under current law and an annuity based on 95% of the
account balance.
S. 540. Senator Hagel introduced S. 540 (Saving Social Security Act of 2005)
on March 7, 2005. The measure would have allowed workers born in 1961 and later
to redirect 4 percentage points of the payroll tax to voluntary individual accounts
(workers would have been enrolled automatically in the individual account system
and given the option to disenroll).
With respect to traditional Social Security benefits, the measure would have
constrained the growth of initial monthly benefits for future retirees by indexing
initial benefits to increases in life expectancy, a provision known as “longevity
indexing” of benefits. The measure would have raised the full retirement age from
67 to 68 for persons born in 1961 and later. It would have increased the early
retirement reduction factors and delayed retirement credits. For account participants,
the traditional Social Security benefit would have been offset by an amount equal to
the annuity value of a hypothetical (or “shadow”) account assumed to earn a 3% real
rate of return.
S. 540 would have established a central authority to administer the accounts and
provided 5 investment options initially as under the Thrift Savings Plan for federal
employees. The individual account would have become available at retirement, or
in the event of the worker’s death. Upon entitlement to benefits, the worker would
have been required to annuitize the portion of the account balance needed to provide
a combined monthly payment (traditional benefit plus annuity) at least equal to 135%
of the poverty level. Any remaining balance could have been withdrawn in a manner
chosen by the worker.
S. 857/H.R. 1776. Senator Sununu introduced S. 857 (Social Security Personal
Savings Guarantee and Prosperity Act of 2005) on April 20, 2005. Representative
Paul Ryan introduced a companion measure (H.R. 1776) on April 21, 2005. The
measures would have allowed workers under age 55 to redirect a portion of payroll
taxes to voluntary individual accounts (workers would have been enrolled
automatically in the individual account system and given the option to disenroll).
From 2006 to 2015, workers would have been allowed to redirect 5% of covered
earnings up to a base amount ($10,000 in 2006, indexed to wage growth thereafter)
and 2.5% of remaining covered earnings to individual accounts. Beginning in 2016,
workers would have been allowed to redirect 10% of covered earnings up to the base
amount and 5% of remaining covered earnings to the accounts. Workers
participating in individual accounts would have been issued a “benefit credit
certificate” (or recognition bond) to reflect the value of benefits accrued under the
traditional system. The recognition bond would have been redeemable at retirement,
though the value of accrued benefits would have been reduced to reflect the payroll
taxes redirected to the worker’s account. The measures would have provided account
participants a combined monthly payment (traditional benefit plus annuity) at least
equal to benefits scheduled under current law. Workers who would have chosen not
to participate in individual accounts would have received traditional Social Security
benefits.

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The measures would have provided 6 indexed investment accounts, including
a default “lifecycle investment account” with an expected average investment mix
of 65% equities/35% fixed income instruments. Once the worker’s account balance
reached $25,000 (indexed to inflation), additional investment options would have
become available. At retirement, the worker would have been required to annuitize
the portion of the account balance needed to provide a combined monthly payment
(traditional benefit plus inflation-indexed annuity) at least equal to benefits scheduled
under current law. Any excess balance could have been withdrawn in a manner
chosen by the worker. Pre-retirement distribution would have been allowed if the
account balance were sufficient to provide an annuity at least equal to a required
minimum payment. The measures also included several financing provisions that
would have constrained future growth rates for federal spending and dedicated the
savings to Social Security; “reserved” annual Social Security cash flow surpluses for
Social Security purposes; and dedicated a portion of projected corporate tax revenue
increases to Social Security.
H.R. 2472. Representative Wexler introduced H.R. 2472 (Social Security
Forever Act of 2005) on May 18, 2005. The measure would have increased Social
Security revenues by requiring workers and employers each to contribute 3% of
earnings above the Social Security taxable wage base, in addition to the payroll tax
contributions paid under current law.
Under current law, workers and employers each contribute 6.2% of covered
earnings, up to a limit. The limit on the amount of earnings subject to the Social
Security payroll tax — the taxable wage base — is indexed to wage growth. In 2007,
the taxable wage base is $97,500. Earnings up to the taxable wage base (i.e.,
earnings on which contributions are paid) are credited for benefit computation
purposes.
Under H.R. 2472, workers and employers each would have been required to
contribute 3% of earnings above the taxable wage base, in addition to the 6.2% of
earnings up to the taxable wage base paid under current law. Earnings above the
taxable wage base taxed at the 3% rate would not have been credited for benefit
computation purposes. The measure also would have extended the pay-as-you-go
requirement under the Balanced Budget and Emergency Deficit Control Act of 1985
with respect to future direct spending or revenue legislation.
S. 1302. Senator DeMint introduced S. 1302 (Stop the Raid on Social Security
Act of 2005) on June 23, 2005. The measure would have established voluntary
individual accounts for workers born after 1949 (workers would have been enrolled
automatically in the individual account system and given the option to disenroll).
Individual accounts would have been funded with surplus Social Security tax
revenues from 2006 to 2016, the period during which surplus tax revenues are
projected under current law. Given the redirection of surplus Social Security tax
revenues to individual accounts, the measure would have provided for general
revenue transfers to the trust funds in amounts needed to maintain trust fund solvency
based on current-law projections.
S. 1302 would have established a central authority to administer the accounts.
Initially, funds would have been invested in long-term Treasury bonds. Beginning in

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2008, additional investment options may have been made available. The account
would have become available at retirement, or in the event of the worker’s death. At
retirement, the worker would have been required to annuitize the portion of the
account balance needed to provide a combined monthly payment (traditional benefit
plus annuity) at least equal to the poverty level. Any remaining balance could have
been taken as a lump sum. For account participants, traditional Social Security
benefits would have been offset by an amount equal to the annuity value of a
hypothetical (or “shadow”) account assumed to have earned, on average, a 2.7% real
rate of return. (The assumed rate of return for the hypothetical account was based on
the projected ultimate real rate of return for the Social Security trust funds (3% on
average) minus 0.3 percentage point to reflect administrative expenses.) The
measure would have made no other changes to traditional Social Security benefits.
H.R. 3304. Representative McCrery introduced H.R. 3304 (Growing Real
Ownership for Workers Act of 2005) on July 14, 2005. The measure, which is
similar to S. 1302, would have established voluntary individual accounts for workers
born after 1949 (workers would have been enrolled automatically in the individual
account system and given the option to disenroll). Individual accounts would have
been funded with general revenues in amounts equal to surplus Social Security tax
revenues from 2006 to 2016, the period during which surplus tax revenues are
projected under current law.
H.R. 3304 would have established a central authority to administer the accounts.
Initially, funds would have been invested in long-term Treasury bonds. Beginning
in 2009, additional investment options may have been made available. The account
would have become available at retirement, or in the event of the worker’s death. At
retirement, the worker would have been required to annuitize the portion of the
account balance needed to provide a combined monthly payment (traditional benefit
plus annuity) at least equal to the poverty level. Any remaining balance could have
been taken as a lump sum. For account participants, traditional Social Security
benefits would have been offset by an amount equal to the annuity value of a
hypothetical (or “shadow”) account assumed to have earned, on average, a 2.7% real
rate of return. (The assumed rate of return for the hypothetical account was based on
the projected ultimate real rate of return for the Social Security trust funds (3% on
average) minus 0.3 percentage point to reflect administrative expenses.) The
measure would have made no other changes to traditional Social Security benefits.
S. 2427. Senator Bennett introduced S. 2427 (Sustainable Solvency First for
Social Security Act of 2006) on March 16, 2006. The measure would have modified
the benefit formula to provide for “progressive indexing” of Social Security benefits
for future retirees. As noted above, “progressive indexing” would apply a
combination of wage-indexing and price-indexing to the benefit formula that would
result in projected benefit levels lower than those scheduled under current law for
workers with earnings above a certain level, with larger reductions for relatively
higher earners. The measure would have further constrained the growth of initial
monthly benefits for future retirees by indexing initial benefits to increases in life
expectancy, a provision known as “longevity indexing” of benefits. In addition, it
would have accelerated the increase in the full retirement age from 65 to 67
scheduled under current law, so that it would have reached age 67 for persons born
in 1955 and later (five years earlier than under current law). The measure would

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have provided for general revenue transfers to the Social Security trust funds as
needed to maintain adequate trust fund balances.
Legislation Introduced in the 110th Congress
During the 110th Congress to date, one comprehensive Social Security reform
measure has been introduced: H.R. 1090 (Social Security Guarantee Plus Act of
2007). H.R. 1090, which is the same as H.R. 750 introduced in the 109th Congress,
would establish voluntary individual accounts funded with general revenues, among
other program changes. The following section provides a summary of the measure.
H.R. 1090. Representative Ron Lewis introduced H.R. 1090 (Social Security
Guarantee Plus Act of 2007) on February 15, 2007. The measure would allow
workers aged 18 and older (who have been assigned a Social Security Number) to
participate in voluntary individual accounts funded with general revenues. Account
contributions would be equal to 4% of taxable earnings, up to a limit of $1,000 (the
limit would be indexed to wage growth).
With respect to traditional Social Security benefits, the measure would provide
up to five years of earnings credits for workers who stay at home to care for a child
under age seven and eliminate the earnings test for recipients below the full
retirement age. In addition, it would set widow(er)’s benefits equal to 75% of the
couple’s combined pre-death benefit (compared with 50%-67%); allow widow(er)s
to qualify for benefits based on a disability regardless of age and the time frame in
which the disability occurred; and lower the Social Security spousal/widow(er)’s
benefit reduction under the Government Pension Offset from two-thirds to one-third
of the individual’s pension from noncovered employment.
Under H.R. 1090, accounts would be administered by private financial
institutions selected by the government. The measure would provide three initial
investment options with specified allocations in equities and corporate bonds (60/40,
65/35, 70/30). The account would become available upon the worker’s entitlement
to retirement or disability benefits, or upon the worker’s death. Upon benefit
entitlement, the worker would receive a lump sum equal to 5% of the account
balance. The remaining balance would be used to finance all or part of the worker’s
benefit. The account balance would be withdrawn gradually and transferred to the
trust funds for the payment of monthly benefits. In addition to the 5% lump sum, the
measure would provide a monthly payment equal to the higher of a benefit scheduled
under current law and an annuity based on 95% of the account balance.