Order Code RL33544
Social Security Reform:
Current Issues and Legislation
Updated May 29, 2008
Dawn Nuschler
Specialist in Income Security
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. Although much attention has been focused on the issue, there
has been no legislative action. In the Fiscal Year 2009 Budget, President Bush
restated his support for voluntary individual accounts funded with a portion of
current Social Security payroll taxes as well as 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 projects that the trust funds will be depleted in 2041,
at which point an estimated 78% of benefits will 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 increase by
75% while the number of workers supporting the system is projected to increase by
8%. In addition, the trustees project that the system will begin running cash flow
deficits in 2017, at which point other federal receipts will 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 measures were introduced,
most of which would have established individual accounts. None of the measures
received congressional action. During the 110th Congress, five Social Security
reform measures have been introduced, four of which would establish individual
accounts. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
List of Figures
Figure 1. Projected Social Security Trust Fund Balances, Under Intermediate
Assumptions of the 2008 Trustees Report, Calendar Years 2008-2040 . . . . 5
Figure 2. Projected Social Security Surpluses/Deficits, Under Intermediate
Assumptions of the 2008 Trustees Report, Calendar Years 2008-2040 . . . . 5
List of Tables
Table 1. Projected Income and Outgo of the Social Security Trust Funds,
Under Intermediate Assumptions, Calendar Years 2008-2040 . . . . . . . . . . . 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). They 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 looks
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. However, the Social Security
Board of Trustees (composed of three officers of the President’s Cabinet, the
Commissioner of Social Security, and two public representatives) projects that Social
Security outgo will exceed income by 12% on average over the next 75 years.1 In
addition, the trustees project that the Social Security trust funds will be exhausted by
1 The 2008 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Disability Insurance Trust Funds
, March 25, 2008, available at
[http://www.ssa.gov/OACT/TR/TR08/]. Trust fund projections cited in this CRS report are
based on the trustees’ 2008 intermediate, or mid-range, assumptions.

CRS-2
2041, at which point incoming receipts will cover an estimated 78% of program
costs. One of the primary reasons is demographics. The leading edge of the post-
World War II baby boom generation begins 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 8%.
As a result, the number of workers supporting each Social Security recipient is
projected to decline from 3.3 today to 2.1 in 2035.2
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, however, the system’s outgo is projected to exceed total income (tax
revenues plus interest income), and trust fund assets will begin to be drawn down.
By 2041, the trust funds are projected to be exhausted and technically insolvent (see
Table 1 and Figure 1).
Beginning in 2017, the system’s outgo is projected to exceed Social Security tax
revenues (income excluding interest credited to the trust funds). With the emergence
of cash flow deficits, the system will rely on interest credited to the trust funds to
meet annual expenditures. Because interest credited to the trust funds is an exchange
of credits between Treasury accounts (rather than a financial resource for the
government from outside sources), other federal receipts will be needed to meet the
system’s costs. If there are no other surplus governmental receipts, 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 about $77 billion by
2020 and $258 billion by 2030 (in constant 2008 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 ($623.5 billion) is equal to 11.20% 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
over the next several decades. Program costs are projected to increase sharply
between 2010 and 2030 as the baby boom generation moves into retirement. As a
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.

CRS-3
share of taxable payroll, the cost of the system is projected to reach 12.62% in 2015,
14.14% in 2020, and 16.41% in 2030. Program costs are then projected to increase
at a slower rate for about five years, reaching 16.84% of taxable payroll in 2035.
Beyond 2035, program costs as a share of taxable payroll are projected to remain
relatively stable for several decades before gradually increasing to 17.63% of taxable
payroll in 2085. Over the 75-year projection period, the average cost of the system
is projected to be 15.63% of taxable payroll, or 12% higher than average income.
However, the gap between income and outgo is projected to increase over the period.
In 2085, the cost of the system is projected to exceed income by 33%. As a share of
Gross Domestic Product (GDP), program costs are projected to increase from 4.3%
of GDP today to a peak of 6.1% of GDP in the 2030s. Over the following decade,
program costs are projected to decline slightly as a share of GDP before stabilizing
at about 5.8% of GDP for the remainder of the projection period.
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 2008-2040
(in billions of constant 2008 dollars)

Cash Flow
Trust
Tax
Interest
Total
Surplus/
Cost
Surplus/
Fund
Revenues
Income
Income
Deficita
Deficitb
Balance
2008
$702.5
$117.1
$819.7
$623.5
$196.2
$79.0
$2,434.7
2009
728.9
122.6
851.5
643.9
207.6
85.0
2,582.8
2010
747.3
130.7
878.0
664.1
213.9
83.2
2,727.0
2011
763.1
139.5
902.6
686.7
215.9
76.4
2,868.6
2012
778.5
148.5
926.9
712.7
214.2
65.8
3,004.8
2013
793.5
157.0
950.5
741.6
208.9
51.9
3,131.8
2014
807.6
164.9
972.5
772.0
200.5
35.6
3,247.0

CRS-4
Cash Flow
Trust
Tax
Interest
Total
Surplus/
Cost
Surplus/
Fund
Revenues
Income
Income
Deficita
Deficitb
Balance
2015
821.8
172.0
993.8
803.3
190.5
18.5
3,349.1
2016
836.2
178.7
1,014.9
835.6
179.3
0.6
3,437.1
2017
850.5
185.3
1,035.8
869.1
166.7
-18.6
3,510.1
2018
865.1
190.5
1,055.6
902.3
153.3
-37.2
3,567.7
2019
879.6
194.9
1,074.5
936.4
138.1
-56.8
3,608.6
2020
894.2
198.3
1,092.6
971.1
121.5
-76.9
3,631.8
2021
908.8
200.8
1,109.6
1,005.3
104.3
-96.5
3,637.2
2022
923.4
202.4
1,125.7
1,039.0
86.7
-115.6
3,624.9
2023
938.0
201.1
1,139.1
1,072.9
66.2
-134.9
3,592.4
2024
952.9
198.8
1,151.7
1,106.7
45.0
-153.8
3,539.6
2025
967.9
195.3
1,163.2
1,140.2
23.0
-172.3
3,466.1
2026
983.1
190.8
1,173.8
1,173.4
0.4
-190.3
3,372.2
2027
998.4
185.0
1,183.3
1,206.5
-23.2
-208.1
3,257.2
2028
1,013.9
178.0
1,191.9
1,239.4
-47.5
-225.5
3,120.9
2029
1,029.8
169.9
1,199.7
1,272.0
-72.3
-242.2
2,963.6
2030
1,045.9
160.6
1,206.5
1,303.4
-96.9
-257.5
2,785.9
2031
1,062.4
150.3
1,212.7
1,334.0
-121.3
-271.6
2,588.8
2032
1,079.2
138.8
1,218.1
1,363.6
-145.5
-284.4
2,372.7
2033
1,096.5
126.4
1,222.8
1,391.9
-169.1
-295.4
2,139.0
2034
1,114.1
113.0
1,227.0
1,418.6
-191.6
-304.5
1,889.2
2035
1,131.8
98.7
1,230.5
1,444.1
-213.6
-312.3
1,624.3
2036
1,149.7
83.7
1,233.4
1,468.9
-235.5
-319.2
1,344.5
2037
1,168.0
67.8
1,235.7
1,493.0
-257.3
-325.0
1,050.6
2038
1,186.5
51.2
1,237.7
1,516.0
-278.3
-329.5
743.7
2039
1,205.5
33.8
1,239.4
1,538.1
-298.7
-332.6
424.8
2040c
1,224.8
15.9
1,240.7
1,559.6
-318.9
-334.8
94.3
Source: CRS, on the basis of data from The 2008 Annual Report of the Board of Trustees of the
Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds
, March 25, 2008,
table VI.F7, available at [http://www.socialsecurity.gov/OACT/TR/TR08/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.

CRS-5
Figure 1. Projected Social Security Trust Fund Balances,
Under Intermediate Assumptions of the 2008 Trustees
Report, Calendar Years 2008-2040
$4.0
$3.5
$3.0
lars)
8 dol
$2.5
200
tant
$2.0
ns
o
of c
$1.5
rillions
(t
$1.0
$0.5
$0.0
2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038
Figure 2. Projected Social Security Surpluses/Deficits,
Under Intermediate Assumptions of the 2008 Trustees
Report, Calendar Years 2008-2040
$300
Projected Social Security
Surplus/Deficit
$200
(Total Income Minus Cost)
rs)
$100
la
dol
$0
t 2008
tan
2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038
ons
c
-$100
of
llions
Projected Social Security
-$200
(bi
Cash Flow Surplus/Deficit
(Tax Revenues Minus Cost)
-$300
-$400
Source: Figures are based on data from The 2008 Annual Report of the
Board of Trustees of the Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds
, March 25, 2008.

CRS-6
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
panels and commissions that have examined the issue. 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 10 or as many as 34 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 pressure on the federal budget 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
and plans to reflect what these programs will be able to provide in the future. They
maintain that otherwise 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
and potentially distort equity valuations. They point out that some of the countries

CRS-8
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 be willing and 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 the value of the accounts.
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 that show an average 75-year deficit equal
to 1.70% of taxable payroll. They believe this view is supported by an alternative
portrayal in the trustees’ report that extends the projections indefinitely into the
future. On an “infinite horizon” basis, the projected funding shortfall is equal to
3.2% of taxable payroll. They also point out that in 2030 the cost of the system is
projected to exceed income by 3.2% of taxable payroll (costs are projected to exceed
income by 24%) and that in 2085 the cost of the system is projected to exceed
income by 4.3% of taxable payroll (costs are projected to exceed income by 33%).
Thus, on a pay-as-you-go basis, the system would require more than a 12% 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 12%).
They maintain that viewing the problem as 34 years away (the trust funds are
projected to have a balance until 2041) does not take into account the pressure Social
Security will exert on the federal budget beginning in 2017 when annual cash flow
deficits are projected to emerge and the system begins to rely on interest credited to
the trust funds to meet annual expenditures. At that point, the government would
have to rely on other resources to help cover program costs, resources that could be
used to finance other governmental functions.4
4 The trust fund projections cited in this CRS report are based on the 2008 annual report of
(continued...)

CRS-9
Others express concern that the problem is being exaggerated. They maintain
that, in contrast to earlier episodes of financial imbalance, the system has no
immediate problem: surplus tax receipts are projected for 9 years and the trust funds
are projected to have a balance for 33 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 that Congress should respond to the projections with caution.
They point out that, even if the 75-year projections hold, the average imbalance could
be eliminated by increasing the payroll tax rate immediately by 0.85 percentage point
on employees and employers each. While acknowledging that the cost of the system
is projected to represent a notably larger share of GDP in the future (increasing from
4.3% of GDP today to a peak of 6.1% of GDP in the 2030s), 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
they have learned more about Social Security because they are more immediately
affected by the program. Some believe that the annual statements provided by the
Social Security Administration will make workers more aware of their estimated
future 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 (...continued)
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. 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 lower-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
program 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 future 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
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]; and CRS
Report RL34006, Social Security: The Chilean Approach to Retirement, by Christopher
Tamborini.
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
Opponents of individual accounts maintain that Social Security’s projected
long-range funding shortfall could be resolved without altering the fundamental
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 projected growth in Social
Security’s costs is a result of projected increases in life expectancy. Since benefits
were first paid in 1940, life expectancy for 65-year-old men and women has
increased from 12.7 and 14.7 years, respectively, to 17.5 and 19.8 years, respectively.
By 2030, it is projected to be 18.9 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). The increase in the full retirement age enacted in 1983 is currently
being phased in starting with persons born in 1938, with the full two-year increase
affecting persons born in 1960 or later. 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 increasing 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 compared to current retirees, persons 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
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
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 point. CBO estimated in
1994 that the overstatement ranged from 0.2 to 0.8 percentage point. 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.
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
Although budget deficits have re-emerged, some congressional interest remains
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 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
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. S. 1730 (Truth in Budgeting Act of 2005 introduced in the 109th Congress by
Senator Voinovich) 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). Under the measure, 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 that meets certain
requirements. 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 with “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 FY2008 budget resolution (S.Con.Res. 21) passed by
the Senate on March 23, 2007, included provisions aimed at “protecting” annual
Social Security surpluses. The Senate-passed version of the budget resolution
included a provision that would have created a new “Point of Order to Save Social
Security First.” The provision would have allowed 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 (i.e., a deficit in the part of the federal budget that excludes
Social Security and the Postal Service). 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). The point of order could
be waived with a three-fifths majority vote in the Senate. The Senate-passed version
also included a provision (“Circuit Breaker to Protect Social Security”) that would
have provided 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. These provisions, however, were not included in the
FY2008 budget resolution conference report (S.Con.Res. 21, H.Rept. 110-153)
passed by the House and Senate on May 17, 2007.13
13 During Senate floor consideration of S.Con.Res. 21 in March 2007, Senator DeMint
(continued...)

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. 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.
13 (...continued)
offered an amendment (S.Amdt. 489) that would have allowed for the creation of a reserve
fund for Social Security reform, provided that the Senate Finance Committee approve
legislation that meets certain requirements. Among other requirements, the amendment
specified that such legislation must ensure “that there is no change to current law scheduled
benefits for individuals born before January 1, 1951” and must 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. Senator
DeMint offered a similar amendment to the FY2009 budget resolution (S.Con.Res. 70) on
March 13, 2008. The amendment (S.Amdt. 4328) was defeated by a vote of 41 to 57.
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
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
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 future 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 that he says is 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 to 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
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
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
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 current law.18
As the first session of the 109th Congress came 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
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’ 2008 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 period.
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
(continued...)

CRS-18
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
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. More recently, in the
Fiscal Year 2009 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 2013, individual accounts would be funded with 4%
of taxable earnings, up to a limit of $1,400 (the account contribution limit would
increase by $100 more than the growth in average wages each year through 2018).
In addition, President Bush 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
(Kolbe and Boyd), H.R. 530 (Sam Johnson), H.R. 750 (Shaw), H.R. 1776 (Paul
Ryan), H.R. 2472 (Wexler), H.R. 3304 (McCrery), S. 540 (Hagel), S. 857 (Sununu),
S. 1302 (DeMint), and S. 2427 (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. This section provides a
summary of Social Security reform legislation introduced in the 109th Congress, with
the exception of H.R. 530, H.R. 750, S. 540 and H.R. 2472. These measures, which
have been re-introduced in the current Congress, are included in the section that
follows (“Legislation Introduced in the 110th Congress”). Despite intense debate on
19 (...continued)
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-19
the issue of Social Security reform in the 109th Congress, there was no congressional
action on Social Security reform legislation.20
H.R. 440. Representatives Kolbe and 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-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 or 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
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].

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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. 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. 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.

CRS-21
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.
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
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.
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 “progressive indexing” of initial Social Security
benefits for future retirees. Progressive indexing applies a combination of wage
indexing and price indexing to the benefit formula that, under current projections,
would result in lower benefits for workers with earnings above a certain level (with
larger reductions for relatively higher earners) compared to current law. The measure
would have further constrained the growth of initial Social Security benefits for

CRS-22
future retirees by indexing initial benefits to increases in life expectancy, a provision
known as “longevity indexing” of benefits. It would have accelerated the increase
in the full retirement age (from 65 to 67) being phased-in under current law so that
the full retirement age would have reached 67 for persons born in 1955 or later (five
years earlier than under current law). The measure would have provided 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, five Social Security reform measures have been
introduced: H.R. 1090 (Social Security Guarantee Plus Act of 2007), H.R. 2002
(Individual Social Security Investment Program Act of 2007), H.R. 4181 (Securing
Medicare and Retirement for Tomorrow Act of 2007), S. 2765 (Saving Social
Security Act of 2008), and H.R. 5779 (Social Security Forever Act of 2008). H.R.
1090 (similar to H.R. 750 in the 109th Congress) would establish voluntary individual
accounts funded with general revenues, among other program changes. H.R. 2002
(similar to H.R. 530 in the 109th Congress), H.R. 4181, and S. 2765 (similar to S. 540
in the 109th Congress) would establish individual accounts funded with a redirection
of current payroll taxes, among other program changes. H.R. 5779 (similar to H.R.
2472 in the 109th Congress) would increase Social Security revenues by requiring
workers and employers each to contribute 3% of earnings above the Social Security
taxable wage base (in addition to current-law payroll tax contributions). This section
provides a summary of these measures.
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

CRS-23
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.
H.R. 2002. Representative Sam Johnson introduced H.R. 2002 (Individual
Social Security Investment Program Act of 2007) on April 23, 2007. The measure
would establish individual accounts funded with 6.2 percentage points of the current
Social Security payroll tax. Participation in the individual account system would be
voluntary for workers aged 22 to 54 (in 2007) and mandatory for younger individuals.
Workers who participate in the individual account system would no longer accrue
benefits under the current system and would be issued a marketable “recognition
bond” equal to the value of accrued benefits. The measure would provide workers
who participate in the individual account system a minimum benefit equal to a
specified percentage of the poverty level, up to 100% for workers who have at least
35 years of earnings.
Workers who choose not to participate in the individual account system would
remain in the current system, however, initial monthly benefits would be lower than
those scheduled under current law. The measure would constrain 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. 2002 would establish a central authority to administer the accounts and
provide at least three initial investment options with specified allocations in equities
and fixed income instruments (government bonds and corporate bonds), including
a default 60/40 investment mix. Once the account balance reaches $10,000 (indexed
to inflation), the worker would be allowed to transfer the balance to a private
financial institution. The account would become available at retirement (i.e., when
the individual reaches the Social Security full retirement age), or earlier if the account
balance is sufficient to provide an annuity at least equal to 100% of the poverty level.
In the case of pre-retirement account distribution, the worker would receive an annual
rebate of future payroll tax contributions (the employer share of the payroll tax would
not be subject to rebate). The worker would be 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 be taken as a lump sum. At retirement,
if the account balance is not sufficient to provide the prescribed minimum payment,
a supplemental payment would be made to the account from general revenues.
H.R. 4181. Representative Jeff Flake introduced H.R. 4181 (Securing Medicare
and Retirement for Tomorrow Act of 2007) on November 14, 2007. Among other
provisions, the measure would establish individual accounts funded with 6.2
percentage points of the current Social Security payroll tax. Participation in the
individual account system would be mandatory for workers who are below the Social
Security full retirement age. At retirement, workers would be allowed to choose
between a Social Security retirement benefit (Part A retirement benefit payable to
workers and spouses) and a retirement distribution from the individual account (Part
B benefit). Part A retirement benefits would be phased-out over time. Individuals

CRS-24
who reach retirement age after a 42-year period following enactment of the bill would
not have the option of choosing Part A retirement benefits.21
The worker’s individual account would be maintained by the employer and
contributions would be invested in a qualified Social Security mutual fund. Workers
would designate an investment fund from among five qualified Social Security
mutual funds selected by the employer.
H.R. 4181 would establish a Social Security Escrow Fund within the U.S.
Treasury. The fund would include securities held by the Social Security trust fund
(the Old-Age and Survivors Insurance and the Disability Insurance trust funds
combined), 6.2 percentage points of the current Social Security payroll tax, Medicare
Hospital Insurance (HI) payroll taxes, and amounts appropriated for the
Supplemental Security Income (SSI) program, among other funding sources.22
Amounts held in the Social Security Escrow Fund would be available for the
payment of various types of Social Security benefits — including Part A retirement
benefits, benefits payable to a worker’s family members (such as children and
surviving spouses), disability benefits, and lump-sum death benefits — as well as for
the payment of SSI benefits. In addition, transfers would be made from the fund to
the Medicare HI trust fund in the amount of Medicare Part A benefits.
The measure would establish the Personal Accounts Management and Review
Board as an independent agency within the executive branch of the government.
Among other duties, the board would operate the Social Security Escrow Fund and
designate and regulate qualified Social Security mutual funds. The Secretary of the
Treasury would serve as managing trustee of the Social Security Escrow Fund.
S. 2765. Senator Hagel introduced S. 2765 (Saving Social Security Act of
2008) on March 13, 2008. The measure would allow workers born in 1963 or later
(workers age 45 or younger in 2008) to redirect 4 percentage points of the current
Social Security payroll tax to an individual account (known as a SAFE account).
Eligible workers would be enrolled automatically in the individual account system
and would be allowed to waive their eligibility for a SAFE account.
With respect to traditional Social Security benefits, the measure would constrain
the growth of initial benefits for future retirees by indexing initial benefits to
increases in life expectancy, a provision known as “longevity indexing” of benefits.
In addition, the measure would increase the full retirement age from 67 to 68 for
persons born in 1963 or later and increase the early retirement reduction factors. For
workers who participate in the individual account system, traditional Social Security
benefits would be offset by an amount equal to the annuity value of a hypothetical (or
“shadow”) account assumed to earn a 3% real rate of return. The measure would
21 The measure would also make changes to the Medicare program in connection with the
establishment of Social Security individual accounts.
22 If an individual elects to receive Part A retirement benefits (in lieu of Part B benefits), the
qualified Social Security mutual fund in which the individual’s account contributions are
invested would be required to transfer the amount of the individual’s Part B benefits to the
Social Security Escrow Fund.

CRS-25
provide a minimum “primary insurance amount” (basic benefit amount before any
adjustments for early or delayed retirement) up to 135% of the poverty level for
workers with 35 years of Social Security-covered employment (lower percentages
would apply to workers with fewer years of coverage).
S. 2765 would establish a central authority to administer the individual accounts
and would provide initial investment options such as those offered by the Thrift
Savings Plan for federal employees. The individual account would become available
at retirement, or in the event of the worker’s death. Upon entitlement to benefits, the
worker would be 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 be withdrawn in a
manner chosen by the worker.
H.R. 5779. Representative Wexler introduced H.R. 5779 (Social Security
Forever Act of 2008) on April 10, 2008. The measure would increase Social Security
revenues by requiring workers and employers each to contribute 3% of earnings
above the Social Security taxable wage base, in addition to payroll tax contributions
paid under current law. Under current law, workers and employers each contribute
6.2% of covered earnings, up to a limit (known as the Social Security taxable wage
base). The taxable wage base, which increases each year according to average wage
growth, is $102,000 in 2008. Earnings up to the taxable wage base (i.e., earnings on
which contributions are paid) are credited for benefit computation purposes.
Under H.R. 5779, workers and employers each would be 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 be credited for benefit computation purposes.
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