U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

1 

89–010★ (Star Print) 

" ! SENATE 

111TH CONGRESS

2d Session 

REPORT

2010

111–187 

SOCIAL SECURITY MODERNIZATION: 

OPTIONS TO ADDRESS SOLVENCY AND 

BENEFIT ADEQUACY 

R E P O R T 

OF THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE 

MAY 13, 2010.—Ordered to be printed 

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E:\Seals\Congress.#13
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SPECIAL COMMITTEE ON AGING

HERB KOHL, Wisconsin, Chairman 

RON WYDEN, Oregon BOB CORKER, Tennessee, Ranking Member 

BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama 

EVAN BAYH, Indiana SUSAN COLLINS, Maine 

BILL NELSON, Florida ORRIN HATCH, Utah 

BOB CASEY, Pennsylvania GEORGE LEMIEUX, Florida 

CLAIRE MCCASKILL, Missouri SAM BROWNBACK, Kansas 

SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina 

MARK UDALL, Colorado SAXBY CHAMBLISS, Georgia 

MICHAEL BENNET, Colorado 

KIRSTEN GILLIBRAND, New York 

ARLEN SPECTER, Pennsylvania 

AL FRANKEN, Minnesota 

DEBRA WHITMAN, Majority Staff Director 

MICHAEL BASSETT, Minority Staff Director 

Prepared by: 

Debra Whitman, Majority Staff 

Jason Holsclaw, Majority Staff 

Jeff Cruz, Majority Staff 

Neil Thakur, Majority Staff 

Ashley Glacel, Majority Staff 

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LETTER OF TRANSMITTAL 

U.S. SENATE

SPECIAL COMMITTEE ON AGING

Washington, DC. 

Hon. JOE BIDEN, 

President, U.S. Senate, 

Washington, DC. 

DEAR MR. PRESIDENT: Under authority of Senate Resolution 73 

agreed to March 10, 2009, I am submitting to you a report of the 

U.S. Senate Special Committee on Aging entitled: Social Security 

Modernization: Options To Address Solvency and Benefit Adequacy. 

Senate Resolution 4, the Committee Systems Reorganization 

Amendments of 1977, authorizes the Special Committee on Aging 

‘‘to conduct a continuing study of any and all matters pertaining 

to problems and opportunities of older people, including but not 

limited to, problems and opportunities of maintaining health, of assuring adequate income, of finding employment, of engaging in productive and rewarding activity, of securing proper housing and, 

when necessary, of obtaining care and assistance.’’ Senate Resolution 4 also requires that the results of these studies and recommendation be reported to the Senate annually. 

This Aging Committee report, together with the testimony received during a June 2009 hearing on the topic of Social Security, 

outlines the challenges currently facing Social Security’s retirement 

program and highlights options for addressing program solvency, 

benefit adequacy, and retirement income security for economicallyvulnerable groups. The options described in this report represent a 

range of proposals that are commonly considered and should not be 

construed as proposals that have been endorsed by the Committee 

or its members. Many members of the Committee, including myself, do not support and actively oppose many of the options. However, a full and informed debate begins with the collection of research and information, and it is our hope that this report will 

serve as a resource to Congress and policymakers as they discuss 

ways to ensure that Social Security will remain strong for another 

75 years. 

I am pleased to transmit this report to you. 

Sincerely, 

HERB KOHL, Chairman. 

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FOREWORD 

Since its inception, the Special Committee on Aging (Aging Committee) has examined various aspects of the Old-Age, Survivors, 

and Disability program—otherwise known as Social Security—in 

an effort to assist Congress in devising ways to strengthen this 

critical program for seniors. For nearly 75 years, Social Security 

has served as the foundation of retirement income for American 

workers and their families, dramatically reducing poverty among 

our nation’s elderly. Today, it is estimated that 44 percent of older 

Americans would be considered poor by federal standards if they 

did not receive Social Security benefits. And for the majority of retired Americans, Social Security serves as their primary source of 

income. 

Although Social Security remains a crucial benefit for millions of 

seniors, the program was designed to serve an American society of 

75 years ago. Much has changed since its inception: Americans are 

living longer, women’s participation in the labor force has significantly increased, and with a rise in the divorce rate, household 

composition has changed. In addition, the labor force is growing 

more slowly and the nature of work and compensation has altered 

in ways that affect workers’ ability to save for retirement. As a result, under its current design, Social Security may not be as effective as it could be in addressing the needs of our society both now 

and in the future. Therefore, modernizing the program to reflect 

America’s evolving demographics is vital to ensuring that benefits 

are adequate and equitable for generations to come. 

Social Security also faces fiscal challenges. The 2009 report of the 

Social Security Board of Trustees projects that the program will 

continue to add tax revenue to its Trust Funds through 2016, after 

which it will need to subsidize its revenues by drawing from the 

Trust Funds in order to pay out full benefits. By 2037, the Trustees 

estimate that the reserves will be depleted. Since the Social Security program is prohibited from borrowing, tax revenues at that 

point would only be sufficient to pay out roughly 76 percent of benefits. Congress should enact modest changes to Social Security in 

the near future in order to bring its long-term financing into balance and improve benefits for those who need them most. 

This Aging Committee report, together with the testimony received during a June 2009 hearing on the topic of Social Security, 

outlines the challenges currently facing Social Security’s retirement 

program and highlights options for addressing program solvency, 

benefit adequacy, and retirement income security for economicallyvulnerable groups. The options described in this report represent a 

range of proposals that are commonly considered and should not be 

construed as proposals that have been endorsed by the Committee 

or its members. Many members of the Committee, including myself, do not support and actively oppose many of the options. Howsmartinez on DSKB9S0YB1PROD with REPORTS

VI

ever, a full and informed debate begins with the collection of research and information, and it is our hope that this report will 

serve as a resource to Congress and policymakers as they discuss 

ways to ensure that Social Security will remain strong for another 

75 years. 

HERB KOHL, Chairman. 

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C O N T E N T S 

Page 

Foreword ................................................................................................................... V 

Committee Jurisdiction ........................................................................................... 1 

Committee Background ........................................................................................... 2 

Senate Committee Hearings ................................................................................... 2 

Relevant Aging Committee Hearings ..................................................................... 3 

Executive Summary ................................................................................................. 6 

Introduction .............................................................................................................. 10 

Background .............................................................................................................. 10 

How Does the Social Security Program Work? .............................................. 11 

Retirement Benefits .................................................................................. 15 

Disability Benefits ..................................................................................... 15 

Supplemental Security Income ................................................................. 16 

How Are Social Security Benefits Determined? ............................................. 17 

Benefits for the Worker’s Family Members ............................................ 18 

Benefit Adjustments for Retirement Before or After the Full Retirement Age ................................................................................................ 23 

Benefit Adjustments for the Government Pension Offset (GPO) and 

Windfall Elimination Provision (WEP) ................................................ 24 

Benefit Adjustments for the Retirement Earnings Test ........................ 24 

Special Minimum Benefit ......................................................................... 26 

How is the Social Security Program Financed? ............................................. 26 

Payroll Taxes ............................................................................................. 26 

Taxation of Benefits .................................................................................. 28 

Interest on Special U.S. Obligation ......................................................... 28 

The Social Security Trust Funds ............................................................. 28 

Historical Status of the Trust Funds ....................................................... 29 

Social Security and the Federal Budget .................................................. 30 

Legacy Costs .............................................................................................. 30 

The Annual Report of the Board of Trustees ................................................. 30 

Findings in the 2009 Trustees Report ..................................................... 31 

The Congressional Budget Office Forecast .............................................. 33 

Who Receives Benefits From Social Security? ............................................... 34 

How Does Social Security Compare With Other Sources of Income ............ 37 

Sources of Income by Income Quartile ........................................................... 39 

Social Security Modernization: Setting the Stage ................................................. 43 

Options To Raise Revenue To Address Program Solvency ................................... 44 

Options To Increase the Social Security Contribution Rate ......................... 44 

Increase Worker and Employer Contributions by 1.1 Percent .............. 44 

Increase Worker and Employer Contributions by One Percent in 

2022, and by an Additional One Percent in 2052 ............................... 44 

Increase Worker and Employer Contributions 1/20 Percent Annually 

for 20 years ............................................................................................. 44 

Raise Rates Based on the Trustees’ Most Current Intermediate Assumptions of the Tax Rate Needed To Balance Revenues and Outlays .......................................................................................................... 45 

Enhance Collection of Existing Taxes ..................................................... 45 

Options To Consider Broadening Revenue Base for Social Security ............ 45 

Options To Modify the Social Security Tax Cap ..................................... 46 

Eliminate the Cap—Do Not Count the Additional Earnings Toward Benefits .................................................................................. 46 

Eliminate the Cap—Count the Earnings Toward Benefits ............ 46 

Eliminate the Cap—Count Earnings Toward the Benefits Using 

Different Formula ........................................................................... 46 

Gradually Restore the Cap To Cover 90 Percent of Earnings ........ 47 

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VIII 

Options To Raise Revenue To Address Program Solvency—Continued 

Options To Consider Broadening Revenue Base for Social Security—Continued 

Options To Modify the Social Security Tax Cap—Continued 

Gradually Restore the Cap To Cover 90 Percent of Earnings 

for Workers and Eliminate the Contribution Cap for Employers .................................................................................................... 47 

Options To Extend Social Security Coverage to All Workers ................ 47 

Extend Social Security Coverage to Newly-Hired Non-Covered 

State and Local Government Employees ...................................... 48 

Option To Treat All Salary Reduction Plans Like 401(k)s ............. 48 

Options To Use Progressive Taxes To Cover Social Security’s Legacy 

Costs ....................................................................................................... 49 

Dedicate Estate Tax Revenue at the 2009 Level to Social Security ................................................................................................... 49 

Three Percent Legacy Tax on Earnings Above the Tax Cap .......... 49 

Three Percent Legacy Tax on AGI Over $250,000 for Couples 

and $125,000 for Individuals ......................................................... 49 

Five Percent Legacy Tax on AGI over $250,000 for Couples and 

$125,000 for Individuals ................................................................ 50 

Options To Maintain Reserves and Diversify Investments .......................... 50 

Gradually Invest 15 Percent of Trust Funds Assets in Equities ........... 50 

Gradually Invest 40 Percent of Trust Funds Assets in Equities ........... 50 

Options To Reduce Benefits To Address Program Solvency ......................... 51 

Options To Reduce the Cost-of-Living Adjustment ................................ 51 

Reduce the COLA by One Percent Each Year ........................................ 51 

Reduce the COLA by One-Half Percent Each Year ................................ 51 

Adopt the ‘‘Chained’’ Consumer Price Index (CPI) ................................. 51 

Options To Raise the Age for Full Retirement Benefits ................................ 52 

Accelerate the Increase to 67; Then Increase the Full Benefit Age 

by One Month Every Two Years to Age 68 ......................................... 52 

Accelerate the Increase to 67; Then Increase the Full Benefit Age 

by One Month Every Two Years to Age 70 ......................................... 52 

Gradually Index the Full-Benefits Age for Longevity Indefinitely ....... 53 

Options To Lengthen the Career-Earnings Averaging Period ...................... 53 

Increase the Averaging Period From 35 to 38 Years ............................. 53 

Increase the Averaging Period From 35 to 40 Years ............................. 53 

Options To Reduce Benefits for New Beneficiaries ....................................... 53 

Reduce Benefits by Three Percent for New Beneficiaries in 2010 

and Later ................................................................................................ 54 

Reduce Benefits by Five Percent for New Beneficiaries in 2010 and 

Later ....................................................................................................... 54 

Price Index Benefits for Successive Generations Beginning in 2013 .... 54 

Gradually Lower the Supplemental Spouse Benefit .............................. 54 

Options To Protect Benefits for Vulnerable Groups ............................................. 55 

Option: Guaranteeing a Minimum Benefit ..................................................... 55 

Option: Reducing Work Requirements for Eligibility .................................... 57 

Option: Supplementing Benefits for Low-Income Single Workers ............... 58 

Option: Adopting Earnings Sharing ................................................................ 59 

Option: Reducing the Marriage Duration Required for Spousal Benefits ... 60 

Option: Providing Caregiver Credits ............................................................... 61 

Option: Increasing Survivor Benefits .............................................................. 62 

Option: Providing Longevity Insurance .......................................................... 63 

Benefit Adequacy Options Could Reduce Other Benefits for Vulnerable 

Groups, but Approaches To Mitigate These Effects Are Available .................. 64 

Supplemental Security Income ........................................................................ 64 

Medicaid ............................................................................................................ 65 

Supplemental Nutrition Assistance Program ................................................ 66 

Steps Could Be Taken To Mitigate Potential Benefit Reductions ....................... 68 

Conclusion ................................................................................................................ 69 

Appendix ................................................................................................................... 71 

Glossary of Key Terms ............................................................................................ 73 

Acknowledgments .................................................................................................... 81 

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111TH CONGRESS REPORT " ! SENATE 2d Session 111–187 

SOCIAL SECURITY MODERNIZATION: OPTIONS TO 

ADDRESS SOLVENCY AND BENEFIT ADEQUACY 

MAY 13, 2010.—Ordered to be printed 

Mr. KOHL, from the Special Committee on Aging, 

submitted the following 

R E P O R T 

COMMITTEE JURISDICTION 

It shall be the duty of the special committee to conduct a continuing study of any and all matters pertaining to problems and 

opportunities of older people, including, but not limited to, problems and opportunities of maintaining health, of assuring adequate 

income, of finding employment, of engaging in productive and rewarding activity, of securing proper housing, and when necessary, 

of obtaining care or assistance. 

Source: SPECIAL COMMITTEE ON AGING, Jurisdiction and 

Authority, S. Res. 4, 104, 95th Cong., 1st Sess. (1977)11 As amended by S. Res. 78. 95th Cong., 1st Sess. (1977), S. Res. 376, 95th 

Cong., 2d Sess. (1978), S. Res. 274, 96th Cong., 1st Sess. (1979), S. 

Res. 389, 96th Cong., 2d Sess. (1980). 

A Committee is a panel of members elected or appointed to perform some service or function for its parent body. The legislative 

subjects and other functions are assigned to a committee by rule, 

precedent, resolution, or statute. In general, committees conduct investigations, make studies, issue reports, and make recommendations. Select or Special Committees are established by a resolution 

for a special purpose and, usually, for a limited time. Most select 

and special committees are assigned specific investigations or studies, but are not authorized to report measures to their chambers. 

Within the assigned areas, these functional subunits gather information; compare and evaluate legislative alternatives; identify policy problems and propose solutions; select, determine, and report 

measures for full chamber consideration; monitor executive branch 

performance (oversight); and investigate allegations of wrongdoing. 

While special committees have no legislative authority, they can 

study issues, conduct oversight of programs, and investigate reports of fraud and waste. 

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COMMITTEE BACKGROUND 

The Senate Special Committee on Aging was first established in 

1961 as a temporary Committee of the U.S. Senate, and was granted permanent status on February 1, 1977. While special committees have no legislative authority, Congress relies on them to study 

issues, conduct oversight of programs, and investigate reports of 

fraud, waste, and abuse. Throughout its existence, the Aging Committee has served as a focal point in the Senate for discussion and 

debate on matters relating to older Americans, and often submits 

its findings and legislative recommendations to the Senate, as well 

as publishes materials of assistance to those interested in public 

policies related to the aging and elderly. 

The Aging Committee has a long and influential history, and has 

called the Congress’ and the nation’s attention to many problems 

affecting older Americans. The Aging Committee was exploring 

health insurance coverage of older Americans prior to the enactment of Medicare in 1965. Since the passage of that legislation, the 

Aging Committee has continually reviewed Medicare’s performance 

on an almost annual basis. The Aging Committee has also regularly reviewed pension coverage and employment opportunities for 

older Americans. It has conducted oversight of the administration 

of major programs like Social Security and the Older Americans 

Act. Finally, it has crusaded against frauds targeting the elderly 

and federal programs on which the elderly depend. 

SENATE COMMITTEE HEARINGS 

Committee hearings afford Senators an opportunity to gather information on, and draw attention to, legislation and issues within 

a committee’s purview, conduct oversight of programs or agencies, 

and investigate allegations of wrongdoing. 

Hearings are committee or subcommittee meetings to receive testimony for legislative, investigative, or oversight purposes. Witnesses often include government officials, spokespersons for interested groups, experts, officials from the Government Accountability 

Office, and members of Congress. Committees may issue subpoenas 

to summon reluctant witnesses. Both houses require that the vast 

majority of hearings be open to the media and public and, if possible, publicly announced at least a week before they begin. 

Witnesses before Senate committees (except Appropriations) generally must provide a committee with a copy of their written testimony at least one day prior to their oral testimony [Rule XXVI, 

paragraph 4(b)]. It is common practice to request witnesses to limit 

their oral remarks to a brief summary of the written testimony. A 

question and answer period usually follows the witnesses’ oral testimony. Following hearings, committees usually publish the transcripts of witness testimony and questions and answers. 

Congressional committee hearings may be broadly classified into 

four types: (1) legislative, (2) oversight, (3) investigative, and (4) 

confirmation. Hearings may be held on Capitol Hill or elsewhere, 

such as a committee member’s district or state or a site related to 

the subject of the hearing. All hearings have a similar formal purpose, to gather information for use by the committee in its activities. 

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RELEVANT AGING COMMITTEE HEARINGS 

http://aging.senate.gov/hearings.cfm 

111TH CONGRESS

Social Security: Keeping the Promise in the 21st Century, June 

18, 2009 

Boomer Bust? Securing Retirement in a Volatile Economy, February 25, 2009 

Saving Smartly for Retirement: Are Americans Being Encouraged To Break Open The Piggy Bank?, July 16, 2008 

The Aging Workforce: What Does It Mean For Businesses And 

The Economy?, February 28, 2007 

109TH CONGRESS

Social Security: Do We Have To Act Now?, February 3, 2005 

108TH CONGRESS

Analyzing Social Security: GAO Weighs the President’s Commission’s Proposals, January 15, 2003 

Social Security: Whose Trust Will Be Broken?, July 29, 2003 

Strengthening Social Security: What Can We Learn From Other 

Nations?, May 18, 2004 

Strengthening Social Security: What Can Personal Retirement 

Accounts Do For Low-Income Workers?, June 15, 2004 

107TH CONGRESS

Straight Shooting on Social Security: The Trade-offs of Reform, 

December 10, 2001 

106TH CONGRESS

Inviting Fraud: Has the Social Security Administration Allowed 

Some Payees to Deceive the Elderly and Disabled?, May 2, 2000 

Income Taxes: The Solution to the Social Security and Medicare 

Crisis?, March 27, 2000 

The Impact of Social Security Reform on Women, June 1, 1999 

Social Security Reform: Is More Money the Answer?, March 1, 

1999 

Women and Social Security Reform: Are Individual Accounts the 

Answer?, February 22, 1999 

105TH CONGRESS

2010 and Beyond: Preparing Social Security for the Baby 

Boomers, Omaha, NB, August 26, 1997 

A Starting Point for Reform: Identifying the Goals of Social Security, February 10, 1998 

The Stock Market and Social Security: The Risks and the Rewards, April 22, 1998 

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104TH CONGRESS

Social Security Reform Options: Preparing for the 21st Century, 

September 24, 1996 

Problems in the Social Security Disability Programs: The Disabling of America, March 2, 1995 

101ST CONGRESS

New Directions for SSA: Revitalizing Service, May 18, 1990 

SSA’s Toll-Free Telephone System: Service or Disservice?, April 

10, 1989 

100TH CONGRESS

The Social Security Notch: Justice or Injustice?, February 22, 

1988 

99TH CONGRESS

The Closing of Social Security Field Offices, Pittsburgh, PA September 9, 1985 

98TH CONGRESS

Social Security Disability Reviews: The Human Costs: Part 1: 

Chicago, IL, February 16, 1984; Part 2: Dallas, TX, February 17, 

1984; Part 3: Hot Springs, AR, March 24, 1984 

Social Security Reviews of the Mentally Disabled, April 7–8, 1983 

Social Security: How Well Is It Serving the Public?, November 

29, 1983 

97TH CONGRESS

Social Security Disability: The Effects of the Accelerated Review, 

Ft. Smith, AR, November 19, 1982 

Social Security Reform and Retirement Income Policy, September 

16, 1981 

The Social Security System: Averting the Crisis, Evanston, IL, 

August 10, 1981 

Social Security Reform: Effect on Work and Income after Age 65, 

Rogers, AR, May 18, 1981 

Social Security Oversight: Part 1: (Short-Term Financing Issues), 

June 16, 1981; Part 2: (Early Retirement), June 18, 1981; Part 3: 

(Cost-of-Living Adjustments), June 24, 1981 

96TH CONGRESS

Social Security: What Changes Are Necessary?: Part 1: Washington, DC, November 21, 1980; Part 2: Washington, DC, December 

2, 1980; Part 3: Washington, DC, December 3, 1980; Part 4: Washington, DC, December 4, 1980 

Adapting Social Security to a Changing Work Force, November 

28, 1979 

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94TH CONGRESS

Future Directions in Social Security: Part 9: Washington, DC, 

March 18, 1975; Part 10: Washington, DC, March 19, 1975; Part 

11: Washington, DC, March 20, 1975; Part 12: Washington, DC, 

May 1, 1975; Part 13: San Francisco, CA, May 15, 1975; Part 14: 

Los Angeles, CA, May 16, 1975; Part 15: Des Moines, IA, May 19, 

1975; Part 16: Newark, NJ, June 30, 1975; Part 17: Toms River, 

NJ, September 8, 1975; Part 18: Washington, DC, October 22, 

1975; Part 19: Washington, DC, October 23, 1975; Part 20: Portland, OR, November 24, 1975; Part 21: Portland, OR, November 25, 

1975; Part 22: Nashville, TN, December 6, 1975; Part 23: Boston, 

MA, December 19, 1975 

Future Directions of Social Security: Part 24: Providence, RI, 

January 26, 1976; Part 25: Memphis, TN, February 13, 1976 

93RD CONGRESS

Future Directions in Social Security: Part 1: Washington, DC, 

January 15, 1973; Part 2: Washington, DC, January 22, 1973; Part 

3: Washington, DC, January 23, 1973; Part 4: Washington, DC, 

July 25, 1973; Part 5: Washington, DC, July 26, 1973; Part 6: Twin 

Falls, ID, May 16, 1974; Part 7: Washington, DC, July 15, 1974; 

Part 8: Washington, DC, July 16, 1974 

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1The 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund, May 12, 2009, available at: http://www.ssa.gov/ 

OACT/TR/2009/tr09.pdf (hereafter cited as the 2009 Social Security Trustees’ Report). 

AGING COMMITTEE REPORT 

EXECUTIVE SUMMARY

ABOUT THIS REPORT 

The Chairman and Ranking Members of the Aging Committee and its individual members do not support all of the options discussed in this report. In fact, many of the options are 

opposed by individual members of the Committee. Nevertheless, the report is written in the spirit of creating an open and 

informed debate on the range of options to improve both solvency and benefit adequacy. 

The options presented represent a common, but by no means 

exhaustive, list of policies Congress could institute. There are 

therefore numerous combinations of changes to tax and benefit 

provisions that could be considered. Further, this report focuses on possible changes to the Social Security retirement 

program and does not offer proposals for reforming the Social 

Security Disability Insurance program. 

This report uses estimates of the 2009 Social Security Trustees Report 1 as a basis for analysis. The 2010 Trustees report, 

which will be issued in June of this year, will likely have different estimates of the Trust Funds’ solvency due to the impact 

of the economic downturn reducing revenues and increasing 

the number of new beneficiaries. 

OVERVIEW

Since its inception, the Senate Special Committee on Aging 

(Aging Committee) has examined various aspects of the Old-Age, 

Survivors, and Disability program—otherwise known as Social Security—in an effort to assist Congress in devising ways to strengthen this critical program for seniors. This Aging Committee report, 

together with the testimony received during a June 2009 hearing 

on Social Security, outlines the challenges currently facing Social 

Security’s retirement program and highlights options for addressing program solvency, benefit adequacy, and retirement income security for economically-vulnerable groups. It does not offer proposals for reforming the Social Security Disability Insurance program. 

Modernizing Social Security means ensuring the program is both 

solvent and effective, for all Americans, now and in the future. Efsmartinez on DSKB9S0YB1PROD with REPORTS

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forts to improve solvency may enhance, weaken or have no impact 

on the ability of Social Security to provide retirement security for 

all Americans, whereas efforts to improve the adequacy of benefits 

will likely come at a cost to the system. Timing also plays a role 

in the decisions that must be made. Modernizing the program will 

become increasingly difficult as the Social Security Trust Funds diminish, therefore it will be easier and less costly to make changes 

now. So it is with some urgency that Congress should simultaneously address the twin challenges of solvency and effectiveness, 

and because the program is critical to every American family, it 

should be done in a bipartisan and transparent way. 

A full and informed debate on how to tackle these challenges begins with the collection of relevant options. It is our hope that this 

report will serve as a resource to Congress and policymakers as 

they discuss the future of the Social Security. 

THE PROMISE AND CHALLENGES OF SOCIAL SECURITY

Social Security benefits, while not generous, provide an important source of income for retired Americans and serve as the foundation of retirement income for the majority of retirees. In 2009, 

the average monthly retirement benefit was $1,164. Although Social Security is not meant to be the sole source of income for retirees, in 2008 nearly one-quarter of beneficiaries age 65 and older 

lived in households that relied on it for at least 90 percent of 

household income. These individuals were mostly single women 

and Social Security’s oldest beneficiaries. 

The Social Security program faces a modest long-term financing 

shortfall of tax revenue and interest on Trust Fund assets. The Social Security Trustees estimated in 2009 that the Old Age, Survivors, and Disability Insurance program will continue to add tax 

revenue to their Trust Funds up to 2016. The Trust Funds will continue to grow because of interest earned through 2023, at which 

time total assets will be $4.3 trillion. Subsequently, Social Security 

will gradually draw down all reserves before the end of 2037, at 

which point it will have sufficient resources to pay about threequarters of scheduled benefits. Congress could take steps to modify 

the program’s financing and benefit structure in order to ensure 

that full benefits continue to be paid after 2037. 

The pressure on Social Security’s finances comes primarily from 

the dramatic changes in birthrates and life expectancy that have 

taken place since the program’s inception in the 1930s, and the increase in income inequality over the last several decades. First, the 

aging of the baby boom generation and increases in life expectancy 

will continue to contribute to an older society, and between 2010 

and 2030, the number of people aged 65 and older is estimated to 

increase by 75 percent. At the same time, the number of workers 

whose taxes will finance future benefits is projected to increase by 

only 14 percent. 

Program design features contribute to the projected growth in 

program spending and program revenues. For example, elements of 

the Social Security benefit formula are indexed to average wage 

growth, resulting in an increase in the real (inflation-adjusted) 

value of benefits for future retirees. This feature ensures that benefits will replace a relatively constant share of a beneficiary’s earnsmartinez on DSKB9S0YB1PROD with REPORTS

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ings in retirement, but it also means Social Security outlays increase over time as the number of beneficiaries grow. However, increasing wage growth has an offsetting positive effect of increasing 

revenues as payrolls rise over time. 

Finally, rising income inequality in the last several decades has 

caused the share of aggregate earnings that are not taxed to increase from 10 percent to 17 percent, as high-income workers have 

seen their salaries rise faster than the Social Security taxable earnings threshold. This means revenues for the Social Security Trust 

Funds are lower than they would have been if earnings were distributed more evenly among American workers as they were in previous decades. 

Economic and demographic changes are also having an impact on 

other sources of retirement income. Improvements in longevity 

have increased the likelihood that retirees will outlive their retirement savings, and the rise in the divorce rate and the shortening 

of average marriages have left more single individuals who will not 

benefit from spousal protections. Furthermore, the proportion of individuals who depend on Social Security for the majority of their 

income may grow over time due to the decline in defined benefit 

pensions, the recent decline the value of retirement accounts, and 

the relatively slow growth in wages for low and moderate income 

workers over the last several decades. 

KEEPING THE PROMISE: OPTIONS TO ADDRESS SOLVENCY AND BENEFIT

ADEQUACY

Congress could implement a range of options to effectively modernize the Social Security retirement program, simultaneously improving the program’s solvency and ensuring benefits remain adequate for the elderly and economically-vulnerable beneficiaries. In 

an effort to highlight both types of options and their implications, 

this report presents information from the National Academy of Social Insurance (NASI), the Congressional Research Service (CRS), 

and the U.S. Government Accountability Office (GAO), and assessments of their fiscal impacts on solvency by the Social Security Actuaries. These options to improve solvency and benefit adequacy 

discussed in this report are summarized in the tables below: 

PROTECTING THE STABILITY OF SOCIAL SECURITY: OPTIONS TO ADDRESS PROGRAM SOLVENCY 

Description 

Income as 

percent of 

taxable 

payroll 

Percentage 

decrease in 

shortfall 

Page number 

Raise Revenue for Program Solvency 

Increase the Social Security Contribution Rate: 

Increase Worker and Employer Contributions by 1.1 percent ....................... 2.09 104 44 

Increase Worker and Employer Contributions by One percent in 2022, and 

by an Additional One percent in 2052 ..................................................... 2.06 103 44 

Increase Worker and Employer Contributions 1/20 percent Annually for 20 

years .......................................................................................................... 1.39 69 44 

Raise Rates Based on the Trustees’ Most Current Intermediate Assumptions of the Tax Rate Needed to Balance Revenues and Outlays ........... varies 100 45 

Enhance Collection of Existing Taxes ............................................................ No estimate No estimate 45 

Broaden the Revenue Base for Social Security 

Modify the Social Security Tax Cap: 

Eliminate the Cap—Do Not Count the Additional Earnings ........................ 2.32 116 46 

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PROTECTING THE STABILITY OF SOCIAL SECURITY: OPTIONS TO ADDRESS PROGRAM SOLVENCY— 

Continued 

Description 

Income as 

percent of 

taxable 

payroll 

Percentage 

decrease in 

shortfall 

Page number 

Eliminate the Cap—Count the Earnings toward Benefits ........................... 1.89 95 46 

Eliminate the Cap—Count Earnings toward Benefits Using Different Formula .......................................................................................................... 2.17 108 46 

Gradually Restore the Cap to Cover 90 percent of Earnings ....................... 0.60 28 47 

Gradually Restore the Cap to Cover 90 percent of Earnings for Workers 

and Eliminate the Contribution Cap for Employers ................................. 1.37 69 47 

Extend Social Security Coverage to all Workers: 

Extend Social Security Coverage to Newly-Hired Non-covered State and 

Local Government Employees .................................................................... 0.17 9 48 

Treat All Salary Reduction Plans Like 401(k)s ............................................. 0.25 12 48 

Use Progressive Taxes to Cover Social Security’s Legacy Costs: 

Dedicate Estate Tax Revenue at the 2009 Level to Social Security ............ 0.40 20 49 

Three percent Legacy Tax on Earnings Above the Tax Cap .......................... 0.57 28 49 

Three percent Legacy Tax on AGI over $250,000 for Couples and 

$125,000 for tIndividuals ......................................................................... 0.74 37 49 

Five percent Legacy Tax on AGI over $250,000 for Couples and $125,000 

for Individuals ........................................................................................... 1.23 62 50 

Maintain Reserves and Diversify Investments: 

Gradually Invest 15 percent of Trust Fund Assets in Equities (with assumed nominal rate of return on equities of 9.4%) ............................... 0.27 14 50 

Gradually Invest 40 percent of Trust Fund Assets in Equities (with assumed nominal rate of return on equities of 9.4%) ............................... 0.67 33 50 

Reduce Benefits To Address Program Solvency 

Reduce the Cost-Of-Living Adjustment: 

Reduce the COLA by One percent Each Year ................................................ 1.55 78 51 

Reduce the COLA by One-half percent Each Year ........................................ 0.81 40 51 

Adopt the ‘‘Chained’’ Consumer Price Index (CPI) ....................................... 0.49 24 51 

Raising the Age for Full Retirement Benefits: 

Accelerate the Increase to 67; Then Increase the Full-Benefit Age by One 

Month Every Two Years to Age 68 ............................................................ 0.46 23 52 

Accelerate the Increase to 67; Then Increase the Full-Benefit Age by One 

Month Every Two Years to Age 70 ............................................................ 0.62 31 52 

Gradually Index the Full-benefit Age for Longevity Indefinitely .................... 0.40 18 53 

Lengthen the Career-Earnings Averaging Period: 

Increase the Averaging Period from 35 to 38 Years .................................... 0.29 14 53 

Increase the Averaging Period from 35 to 40 Years .................................... 0.46 23 53 

Reduce Benefits for New Beneficiaries: 

Reduce Benefits by Three percent for New Beneficiaries in 2010 and 

Later .......................................................................................................... 0.36 18 54 

Reduce Benefits by Five percent for New Beneficiaries in 2010 and Later 0.61 30 54 

Price Index Benefits for Successive Generations Beginning in 2013 .......... 1.31 65 54 

Gradually Lower the Supplemental Spouse Benefit ...................................... 0.12 6 54 

PROTECTING THE EFFECTIVENESS OF SOCIAL SECURITY: 

GAO OPTIONS TO PROTECT VULNERABLE GROUPS 

Option Page number 

Guaranteeing a Minimum Benefit—Guaranteeing a minimum benefit by increasing Social Security retirement 

benefits for those who have worked in low-wage jobs throughout their careers .............................................. 55 

Reducing Work Requirements for Eligibility—Reducing the work requirements for Social Security retirement 

benefit eligibility, allowing people who have shorter earnings histories to receive benefits ............................ 57 

Supplementing Benefits for Low-income Single Workers—Supplementing benefits for low-income single workers by adjusting the formula used to calculate Social Security retirement benefits ........................................ 58 

Adopting Earnings Sharing—Earnings sharing combines married individuals’ annual earnings and evenly divides them between the two spouses for each year of marriage when calculating individuals’ Social Security retirement benefits. Each spouse accrues an individual benefit, even if only one of them worked ......... 59 

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2This report does not address options for strengthening disability insurance. 

PROTECTING THE EFFECTIVENESS OF SOCIAL SECURITY: 

GAO OPTIONS TO PROTECT VULNERABLE GROUPS—Continued 

Option Page number 

Reducing the Marriage Duration Required for Spousal Benefits—Reducing the number of years a marriage 

needed for a divorced person to receive spousal benefits thereby increasing the number of people who are 

eligible to receive Social Security spousal benefits ........................................................................................... 60 

Providing Caregiver Credits—Providing caregiver credits increases benefits for those who spend time out of 

the workforce to care for dependent children or elderly relatives ..................................................................... 61 

Increasing Survivor Benefits—Increasing benefits for surviving spouses, often widowed women, by providing 

a Social Security retirement benefit equal to 75 percent of the combined amount the couple received ........ 62 

Providing Longevity Insurance—Longevity insurance seeks to reduce the risk that people fall into poverty at 

older ages by increasing Social Security retirement benefits for beneficiaries who reach an advanced age 63 

These options described in this report demonstrate that the challenges facing Social Security, despite their size and complexity, can 

be resolved. However, it is important to provide some context to the 

information. The estimates on solvency are calculated by Social Security Administration actuaries with the assumption that all other 

elements of Social Security remain the same. Further, options to 

increase solvency may not impact everyone in the same way—some 

recipients may see their Social Security taxes and benefits change, 

while others may not—and the impacts of proposals should be examined for both current beneficiaries and future generations of retirees, as many options phase in over time. Combining options requires new estimates to predict their effects on solvency and the 

various sub-populations of beneficiaries. Importantly, Social Security solvency and effectiveness are separate factors, but should be 

analyzed together. 

Congress should act to ensure that Social Security will remain 

strong for another 75 years and provide future generations of 

Americans with economic security. The Aging Committee will support this effort by continuing to seek ideas and evaluate options for 

Social Security modernization. 

INTRODUCTION 

Title II of the Social Security Act, as amended, established the 

Old-Age, Survivors, and Disability Insurance (OASDI) program, 

which is generally known as Social Security. Since the 1930s, many 

American seniors have depended on its benefits as a significant 

part of their retirement income, and the program has significantly 

decreased poverty among the elderly. However, the Social Security 

program will face increasing challenges in the future as an aging 

American population begins to strain the program financially. Even 

though the program is currently financially strong, Congressional 

action is needed to ensure fiscal stability for years to come. This 

Committee report highlights potential options for addressing the 

solvency and benefit adequacy of the Social Security retirement 

program.2

BACKGROUND 

The Social Security Act, signed into law by Franklin Roosevelt on 

August 14, 1935, formed the basis of an old-age insurance program 

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3 ‘Social Security: A Program and Policy History,’ by Patricia Martin and David Weaver, Social 

Security Bulletin, Vol. 66, No. 1, 2005. http://www.ssa.gov/policy/docs/ssb/v66n1/ 

v66n1p1.pdf. 

by providing income security to workers aged 65 and older in most 

commerce and industry. Although the Great Depression provided 

the catalyst for the landmark legislation, its principles were rooted 

in social insurance, which required payment of benefits based on 

contributions from workers. It became effective only in 1937 and 

therefore was not intended to provide immediate economic relief 

from the effects of the Depression. It was meant to smooth out 

large fluctuations in income typical in an industrial society. 

The Social Security program has evolved in significant ways over 

the past seven decades.3 With the 1939 amendments, it became 

more family-based by expanding the program from workers only to 

include dependents and survivors of workers. In 1950 and later, 

amendments expanded the program to make it more universal. 

States could, under certain conditions, provide coverage to their 

employees. Also covered were regularly-employed farm and domestic workers and, with some exceptions, most self-employed workers. 

The Disability program was added to the Social Security program 

in 1956. The 1983 amendments prohibited states from opting out 

of the system, and in 1990 coverage for state employees became 

mandatory, if state and local employees did not have a state or 

local government pension plan. 

The expansionary period of the early four decades has been followed by a period where concerns have focused on the long-range 

financing of the program. The 1977 amendments focused on stabilizing costs and addressing the revenue side of the program. The 

1983 amendments addressed financial problems by extending coverage to bring more workers into the system, subjecting a portion 

of Social Security benefits to income taxation, scheduling changes 

in the payroll tax rate, and adopting a phased-in increase in the 

full retirement age starting for workers born in 1938 or later. 

Despite the evolution of the OASDI program over the decades, 

two core principles—contributory in nature and progressivity—continue to define the program. Benefits are determined by work in 

covered employment, and benefits replace a higher share of earnings for lower wage earners than for higher wage earners. This progressivity is in part to compensate for the shorter life expectancies 

of lower-wage earners, and in part to into account for the decreased 

ability low wage earners have to cope with income reductions or 

supplement their benefits with private savings. The success of the 

program in bringing about a sharp reduction in poverty among the 

elderly is well-documented. Any changes to the program today will 

need to address the dual challenges of meeting the adequacy needs 

of vulnerable groups and confronting the financing needs of the 

program, while ensuring that the program remains fair and effective for all Americans. 

HOW DOES THE SOCIAL SECURITY PROGRAM WORK?

The Social Security program provides monthly cash benefits to 

retired and disabled workers and their dependents, and to the survivors of deceased workers. To qualify for benefits, individuals 

must work in Social Security-covered employment for a specified 

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4 A minimum of six earnings credits (or 11⁄2 years of covered employment) is needed to qualify 

for benefits. 5The amount of earnings needed for one credit is indexed to average wage growth. 

6Social Security Administration, 2010 Social Security/SSI/Medicare Information, December 

28, 2009. Available at http://www.socialsecurity.gov/legislation/2010factsheet.pdf. 7 Elected office holders, political appointees, and judges are mandatorily covered by both Social 

Security and HI regardless of when their service began. 8 J–1 visa holders who are in the United States for 18 months or longer are required to pay 

Social Security payroll taxes. 

period of time. Generally, a worker needs 40 credits to become ‘‘insured’’ for benefits (fewer credits are needed for disability and survivor benefits, depending on the worker’s age at the time he or she 

became disabled or died).4 In 2010, a worker earns one credit for 

each $1,120 in covered earnings, up to a maximum of four credits 

for the year (based on annual earnings of $4,480 or more).5

Most jobs in the United States are covered under Social Security. 

In 2010, 94 percent of workers in paid employment or self-employment are covered by Social Security.6 The major categories of workers who are exempt from Social Security coverage are: 

1. State and local government workers participating in alternative retirement systems (Medicare Hospital Insurance (HI) 

tax is mandatory for State and local government workers 

hired since April 1, 1986); 2. Election workers earning $1,500 or less in 2010; 

3. Ministers who choose not to be covered, and certain religious 

sects; 

4. Federal workers hired before 1984 (the HI portion is mandatory for all Federal workers); 7

5. College students working at their academic institutions; 

6. Household workers earning less than $1,700 in 2010, or those 

under age 18 for whom household work is not their principal 

occupation; 7. Self-employed workers with annual net earnings below $400; 

8. Foreign students and exchange visitors who hold F–1, J–1, M– 

1, Q1, and Q2 visas if the work is performed in connection 

with their studies or for the purpose of their visit to the 

United States; 8 and 

9. Foreign agricultural workers who hold H–2A visas. 

In 2008, of a total work force of approximately 173.6 million 

workers, an estimated 162.4 million workers were covered under 

Social Security (see Table 1). 

TABLE 1: ESTIMATED SOCIAL SECURITY COVERAGE, 2008 

Total 

(millions) 

Non-covered 

(millions) 

Percent 

covered 

Workers 1 ..................................................................................................................... 173.6 11.2 93.6 

Jobs: 

State and local government 2 ............................................................................ 23.1 5.6 75.8 

Federal civilian .................................................................................................. 3.7 0.5 86.5 

Students 3 .......................................................................................................... 1.5 1.5 0.0 

1 Includes both wage and salary and self-employed workers. 

2 Excludes students. 

3 Includes students employed at both public and private colleges and universities. 

Source: Office of the Chief Actuary, Social Security Administration. 

In 2008, an estimated 11.2 million workers were not covered 

under Social Security. The majority of non-covered positions were 

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state and local government jobs. As shown in Table 2, 73 percent 

of state and local government workers overall were covered under 

Social Security in 2007. 

TABLE 2: ESTIMATED SOCIAL SECURITY COVERAGE OF WORKERS WITH STATE AND LOCAL 

GOVERNMENT EMPLOYMENT, 2007 

[Based on 1-percent sample] 

State All 

workers 

Covered 

workers 

Percent 

covered 

Alabama .................................................................................................................. 390,000 361,100 92.6 

Alaska ..................................................................................................................... 64,300 42,100 65.5 

Arizona .................................................................................................................... 444,300 406,300 91.4 

Arkansas ................................................................................................................. 203,300 182,500 89.8 

California ................................................................................................................ 2,478,000 1,084,400 43.8 

Colorado .................................................................................................................. 409,100 124,300 30.4 

Connecticut ............................................................................................................. 287,400 205,900 71.6 

Delaware ................................................................................................................. 65,600 61,900 94.4 

District of Columbia ............................................................................................... 75,400 58,600 77.7 

Florida ..................................................................................................................... 1,162,800 1,032,800 88.8 

Georgia .................................................................................................................... 699,200 518,700 74.2 

Hawaii ..................................................................................................................... 113,400 79,700 70.3 

Idaho ....................................................................................................................... 134,800 127,300 94.4 

Illinois ..................................................................................................................... 961,600 526,400 54.7 

Indiana .................................................................................................................... 497,900 448,500 90.1 

Iowa ......................................................................................................................... 288,800 261,600 90.6 

Kansas .................................................................................................................... 289,200 266,500 92.2 

Kentucky .................................................................................................................. 373,300 279,000 74.7 

Louisiana ................................................................................................................. 329,700 92,700 28.1 

Maine ...................................................................................................................... 118,000 63,900 54.2 

Maryland ................................................................................................................. 458,300 415,700 90.7 

Massachusetts ........................................................................................................ 474,700 20,400 4.3 

Michigan ................................................................................................................. 772,600 684,400 88.6 

Minnesota ................................................................................................................ 445,100 417,900 93.9 

Mississippi .............................................................................................................. 260,900 240,300 92.1 

Missouri ................................................................................................................... 463,500 341,600 73.7 

Montana .................................................................................................................. 95,700 83,500 87.3 

Nebraska ................................................................................................................. 152,200 142,500 93.6 

Nevada .................................................................................................................... 159,400 29,500 18.5 

New Hampshire ....................................................................................................... 108,100 95,400 88.3 

New Jersey ............................................................................................................... 686,800 638,300 92.9 

New Mexico ............................................................................................................. 197,400 177,400 89.9 

New York ................................................................................................................. 1,734,700 1,681,800 97.0 

North Carolina ......................................................................................................... 713,100 659,700 92.5 

North Dakota ........................................................................................................... 74,900 65,300 87.2 

Ohio ......................................................................................................................... 845,800 21,700 2.6 

Oklahoma ................................................................................................................ 310,500 281,800 90.8 

Oregon ..................................................................................................................... 290,400 267,800 92.2 

Pennsylvania ........................................................................................................... 808,600 749,400 92.7 

Puerto Rico .............................................................................................................. 257,700 222,700 86.4 

Rhode Island ........................................................................................................... 65,200 55,300 84.8 

South Carolina ........................................................................................................ 375,800 352,700 93.9 

South Dakota .......................................................................................................... 79,200 73,800 93.2 

Tennessee ................................................................................................................ 484,900 441,400 91.0 

Texas ....................................................................................................................... 1,752,600 836,400 47.7 

Utah ........................................................................................................................ 222,000 202,800 91.4 

Vermont ................................................................................................................... 60,700 59,300 97.7 

Virginia .................................................................................................................... 677,200 641,400 94.7 

Washington ............................................................................................................. 563,900 500,100 88.7 

West Virginia ........................................................................................................... 155,300 144,700 93.2 

Wisconsin ................................................................................................................ 484,400 429,900 88.7 

Wyoming .................................................................................................................. 78,500 69,200 88.2 

Other 1 ..................................................................................................................... 6,400 1,300 20.3 

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9 Note: To reflect the fact that employees split payroll taxes on their salaries between themselves and their employers, the taxable base for the self-employment tax is adjusted downward 

by 7.65 percent and self-employed workers are allowed to deduct half of their self-employment 

tax liability for income tax purposes. 

TABLE 2: ESTIMATED SOCIAL SECURITY COVERAGE OF WORKERS WITH STATE AND LOCAL 

GOVERNMENT EMPLOYMENT, 2007—Continued 

[Based on 1-percent sample] 

State All 

workers 

Covered 

workers 

Percent 

covered 

Total ............................................................................................................... 23,702,600 17,269,600 72.9 

These data are derived from the Social Security Administration, Office of Research, Evaluation and Statistics, 1% Continuous Work History 

Sample (CWHS) Employee Employer File. 

1 Includes persons employed by American Samoa, Guam, Northern Marianas and Virgin Islands. 

Source: Office of Research, Evaluation and Statistics, Social Security Administration. 

Social Security coverage varies from state to state. For example, 

approximately 97 percent of state and local employees in New York 

and Vermont were covered by Social Security compared to approximately 3 percent in Ohio and 4 percent in Massachusetts. This disparity in coverage occurs because though Social Security originally 

did not cover any state and local government workers, over time 

the law has changed. Most state and local government employees 

became covered by Social Security through voluntary agreements 

between the Social Security Administration and individual states 

(these agreements are known as ‘‘Section 218 agreements’’ because 

they are authorized by Section 218 of the Social Security Act). Beginning in July 1991, state and local employees who were not members of a public retirement system were mandatorily covered by Social Security. Those public employees who were already members 

of a public retirement system through their employment were not 

mandatorily covered because their state pensions already fulfilled 

the social insurance functions of Social Security. 

Social Security is financed primarily by payroll taxes levied on 

the wages and self-employment income of covered workers. In 2010, 

covered workers and their employers are both required to pay 6.2 

percent of earnings up to $106,800, or a maximum of $6,622 in individual payroll taxes per year. Self-employed workers are required 

to pay 12.4 percent of net self-employment income up to $106,800, 

or a maximum of $13,243 in self-employment taxes per year.9 The 

annual limit on covered earnings subject to payroll taxes is called 

the contribution and benefit base or the taxable earnings base. The 

taxable earnings base is indexed to average wage growth and is increased if a Social Security Cost of Living Adjustment (COLA) is 

payable. 

The maximum amount of annual earnings subject to payroll 

taxes from 1950 to 2008 is shown in Table 3. The payroll tax rate 

is fixed under current law. The percentage of covered earnings subject to Social Security payroll taxes has fluctuated over time. In 

2008, about 84 percent of total earnings in covered employment 

were subject to Social Security payroll taxes. 

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TABLE 3: EARNINGS COVERED BY THE SOCIAL SECURITY SYSTEM, 1950–2008 

Calendar year 

Earnings in covered employment 

Contribution 

and benefit 

base 1

Taxable earnings (billions) 

Taxable earnings as a percent of total 

earnings in 

covered employment 

Wages and 

salaries (billions) 

Self-employment (billions) Total (billions) 

1950 ............................................. $109.8 — $109.8 $3,000 $87.5 79.7 

1955 ............................................. 171.6 $26.7 198.3 4,200 157.5 79.4 

1960 ............................................. 236.0 32.4 268.4 4,800 207.0 77.1 

1965 ............................................. 311.4 45.9 357.3 4,800 250.7 70.2 

1970 ............................................. 483.6 53.1 536.7 7,800 415.6 77.4 

1975 ............................................. 717.2 75.9 793.1 14,100 664.8 83.8 

1980 ............................................. 1,235.6 103.7 1,339.3 25,900 1,173.8 87.6 

1985 ............................................. 1,802.4 149.6 1,952.0 39,600 1,717.3 88.0 

1990 ............................................. 2,510.4 205.9 2,716.3 51,300 2,358.9 86.8 

1991 ............................................. 2,566.7 207.9 2,774.6 53,400 2,422.5 87.3 

1992 ............................................. 2,709.7 220.7 2,930.4 55,500 2,532.8 86.4 

1993 ............................................. 2,808.9 228.0 3,036.9 57,600 2,636.3 86.8 

1994 ............................................. 2,973.9 232.7 3,206.6 60,600 2,785.3 86.9 

1995 ............................................. 3,164.9 242.3 3,407.2 61,200 2,919.6 85.7 

1996 ............................................. 3,347.8 256.0 3,603.8 62,700 3,073.5 85.3 

1997 ............................................. 3,608.2 272.1 3,880.3 65,400 3,285.3 84.7 

1998 ............................................. 3,907.5 290.4 4,197.9 68,400 3,528.0 84.0 

1999 ............................................. 4,173.2 308.0 4,481.3 72,600 3,749.1 83.7 

2000 ............................................. 4,514.7 326.4 4,841.1 76,200 4,008.9 82.8 

2001 ............................................. 4,609.1 332.4 4,941.5 80,400 4,171.1 84.4 

2002 ............................................. 4,612.6 341.6 4,954.1 84,900 4,250.0 85.8 

2003 ............................................. 4,727.3 360.3 5,087.6 87,000 4,354.7 85.6 

2004 ............................................. 4,994.3 396.9 5,391.2 87,900 4,554.5 84.5 

2005 ............................................. 5,252.1 433.8 5,686.0 90,000 4,769.6 83.9 

2006 ............................................. 5,598.3 453.3 6,051.6 94,200 5,084.3 83.4 

2007 ............................................. 5,899.8 471.8 6,371.6 97,500 5,272.2 82.7 

2008 ............................................. 6,079.4 473.3 6,552.8 102,000 5,511.1 84.1 

1 Amounts for 1937–74 and for 1979–81 were set by statute. All other amounts were determined under automatic adjustment provisions of the Social Security Act. 

Source: Office of the Chief Actuary, Social Security Administration. 

Retirement Benefits 

The Social Security program provides benefits to eligible workers 

and their family members. For retirement benefits, a worker generally needs 40 credits (10 years in covered employment). Full (unreduced) retirement benefits are first payable at the full retirement 

age (FRA), which ranges from age 65 to age 67 depending on the 

person’s year of birth. A worker may elect to receive retirement 

benefits as early as age 62; however, his or her benefits are permanently reduced to take into account the longer expected period of 

benefit receipt. In addition, a worker may elect to postpone benefit 

receipt until after the FRA, and receive an increase in benefits 

based on delayed retirement credits that are payable from the 

FRA, up to age 70. 

Disability Benefits 

Although this report is not intended to address the disability insurance provided under Social Security, it is important to understand that such benefits are available under the larger program. To 

be eligible for disability benefits, a worker must be: (1) insured and 

(2) disabled according to the definition of disability. To be insured, 

a worker must have worked a minimum amount of time in employment covered by Social Security (similar to eligibility for retirement 

benefits). However, for disability benefits, if an individual does not 

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10 In 2010, the SGA earnings level for non-blind beneficiaries is $1,000 a month (net of impairment-related work expenses). For blind beneficiaries, the SGA earnings level is $1,640 a month. 

Both limits are indexed to average wage growth. For more information, see CRS Report 

RS20479, Social Security: Substantial Gainful Activity for the Blind, available at http:// 

www.aging.senate.gov/crs/crslsociallsecuritylpolicy.cfm. 11For children, the definition of disability under the SSI program is different than the adult 

standard. Under Sec. 1614(a)(3)(C)(i) of the Social Security Act, disabled means that the child 

has a medically determinable physical or mental impairment that results in severe functional 

limitations, and that can be expected to last 12 months or result in death. 

have 40 credits, he or she must have one credit for each year after 

1950 or from age 21 up to the onset of disability. In addition, a 

work test requires the worker to have 20 credits in the 40 quarters 

preceding the onset of disability (generally five years of covered 

employment in the last 10 years). Workers under age 31 need to 

have credit in one-half of the quarters during the period between 

when they attained age 21 and when they became disabled (a minimum of 6 credits is required). For disability benefits, ‘‘disability’’ 

is defined as the inability to engage in substantial gainful activity 

(SGA) by reason of a medically-determinable physical or mental impairment expected to result in death or last at least 12 continuous 

months.10 Generally, the worker must be unable to do any kind of 

work, taking into account age, education and work experience. An 

initial waiting period of five full months is required before disability benefits are paid. 

Supplemental Security Income 

The Supplemental Security Income (SSI) Program is also administered by the Social Security Administration, but it is different 

and separate from Social Security. SSI is a means-tested, federally 

administered, income assistance program authorized by Title XVI 

of the Social Security Act. Established in 1972 with benefits first 

paid in 1974, SSI provides monthly cash payments in accordance 

with uniform, nationwide eligibility requirements to needy aged, 

blind, and disabled persons. 

The SSI Program is funded by general revenues of the U.S. 

Treasury whereas Social Security benefits are funded by the Social 

Security taxes paid by workers, employers, and self-employed persons. The programs also differ in other ways such as the conditions 

of eligibility and the method of determining payments. In addition, 

States have the option of supplementing the basic Federal SSI payment. 

To qualify for SSI payments, a person must satisfy the program 

criteria for age, blindness, or disability. The aged are defined as 

persons 65 years and older. Disabled individuals are those unable 

to engage in any substantial gainful activity by reason of a medically determined physical or mental impairment expected to last 

for a continuous period of at least 12 months or result in death. 

Children may also qualify for SSI if they are under age 18 (or 

under age 22 if a full-time student), unmarried, and meet the applicable SSI disability 11 or blindness, income, and resource requirements. Further, SSI recipients must have limited income, limited 

resources, (typically defined as $2000 for an individual and $3000 

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12For a full description of SSI Eligibility criteria, see Social Security Administration, ‘‘Understanding Supplemental Security Income, SSI Eligibility Requirements,’’ 2010 Edition, available 

at http://www.socialsecurity.gov/ssi/text-eligibility-ussi.htm. 

13 2009 Social Security Trustees’ Report, Table VI.F10, available at http:// 

www.socialsecurity.gov/OACT/TR/2009/VIlOASDHIl dollars.html#119381. 

for a couple), and meet specific citizenship and residency requirements.12

HOW ARE SOCIAL SECURITY BENEFITS DETERMINED?

A worker’s monthly Social Security retirement benefit is based 

on an average of his or her 35 highest-paid earnings years. The 

worker’s entire record of Social Security earnings up through age 

60 are indexed to historical wage growth in order to place older 

wage amounts on the same terms as current wage levels. Earnings 

after age 60 are not indexed but are included in the benefit computation. The 35 highest years of annual indexed earnings are 

averaged, and the resulting amount is divided again by 12 to determine the worker’s average indexed monthly earnings, or AIME. 

Some workers do not have 35 years of earnings as a result of unemployment, poor health, or caregiving: for these workers, the 

years of no earnings are entered as zeros. 

The worker’s Primary Insurance Amount, or PIA, is found by applying a formula to the AIME. First, AIME is sectioned into three 

brackets, or levels, of earnings. Three progressive factors—90 percent, 32 percent, and 15 percent—are applied to the three different 

brackets of AIME. The three products of the factors and AIME are 

added together. For workers who reach age 62 in 2010, the PIA is 

determined as follows: 

TABLE 4: SAMPLE CALCULATION OF A WORKER’S PRIMARY INSURANCE AMOUNT IN 2010 

Factor Average indexed monthly earnings (2010) 

Benefit of a 

worker with 

AIME of 

$5,000 

90 percent ..................................................................... First $761, plus ........................................................... $684.90 

32 percent ..................................................................... Earnings over $761 and through $4,586, plus .......... 1,224.00 

15 percent ..................................................................... Over $4,586 ................................................................. 62.10 

Total ..................................................................... $5000 ........................................................................... 1,971.00 

The Social Security benefit formula is designed to be progressive. 

That is, workers with low average lifetime earnings receive a benefit that is a larger proportion of their pre-retirement earnings 

than do workers with high average lifetime earnings. Progressivity 

is affected through factors that decline as AIME increases, with the 

first $761 of AIME being replaced at a rate of 90 percent, while 

amounts over $761 are replaced at rates of 32 percent or 15 percent. The replacement rate for the average earner who claims benefits at the full retirement age in 2010 is about 41 percent of preretirement wages. For low-income workers, high income workers, 

and workers who have earned the maximum taxable amount 

throughout their careers, the replacement rates in 2010 are about 

56 percent, 34 percent and 28 percent, respectively.13

The factors (90 percent, 32 percent and 15 percent) are the same 

each year, but the bracket amounts ($761 and $4,586) are indexed 

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to growth in average wages. As noted earlier, as part of determining PIA, a worker’s earnings history is brought up to current 

wage levels by indexing earnings in previous years to wage growth. 

The result of these provisions is that a worker’s initial Social Security benefit is wage indexed. Wage indexation of the PIA calculation 

ensures that benefits replace a similar fraction of pre-retirement 

income for each successive cohort (as noted above, about 41 percent 

for a worker with average wages). In other words, wage indexation 

causes the dollar amount of workers’ initial benefits (PIA) to increase from one generation to the next at the rate of increase in 

the national average wage or, generally, with living standards. 

After a worker becomes eligible to receive Social Security benefits, at age 62, the cash benefit amount is adjusted annually 

through retirement for changes in the Consumer Price Index (CPI). 

That is, the initial benefit is price indexed through retirement, to 

ensure that inflation does not erode the purchasing power of the 

individual’s initial benefit. Due to increases in worker productivity, 

wages (and living standards) tend to rise faster than prices when 

measured over long periods of time. 

A worker’s Social Security cash benefit may be more or less than 

PIA. An individual who claims benefits at his or her full retirement 

age (FRA) will receive the full amount of his or her PIA. The FRA 

is the earliest age at which unreduced retirement benefits can be 

received. The FRA is 65 for persons born before 1938 and is rising 

gradually to 67 for persons born in 1960 or later. 

TABLE 5: SOCIAL SECURITY FULL RETIREMENT AGE BY YEAR OF BIRTH 

Year of birth Year age 62 attained Full retirement age 

1936 or earlier ........................................................ 1986–98 ................................................................. 65 

1937 ........................................................................ 1999 ........................................................................ 65 

1938 ........................................................................ 2000 ........................................................................ 65 and 2 months 

1939 ........................................................................ 2001 ........................................................................ 65 and 4 months 

1940 ........................................................................ 2002 ........................................................................ 65 and 6 months 

1941 ........................................................................ 2003 ........................................................................ 65 and 8 months 

1942 ........................................................................ 2004 ........................................................................ 65 and 10 months 

1943–54 .................................................................. 2005–2016 ............................................................. 66 

1955 ........................................................................ 2017 ........................................................................ 66 and 2 months 

1956 ........................................................................ 2018 ........................................................................ 66 and 4 months 

1957 ........................................................................ 2019 ........................................................................ 66 and 6 months 

1958 ........................................................................ 2020 ........................................................................ 66 and 8 months 

1959 ........................................................................ 2021 ........................................................................ 66 and 10 months 

1960 or later ........................................................... 2022 or later .......................................................... 67 

Source: Congressional Research Service. 

Benefits for the Worker’s Family Members 

Dependents and survivors of a worker, including surviving children, spouses, former spouses and dependent parents, may be eligible for benefits, as well as survivor benefits if a worker dies. These 

auxiliary benefits are based on the primary earner’s benefit, subject 

to a maximum family amount. The basis for entitlement to dependents and survivors benefits are summarized in Table 6. 

Social Security pays a monthly benefit to the spouse of an entitled retired or disabled worker equal to 50 percent of a retired 

spouse’s primary insurance amount. Qualifying spouses must be at 

least age 62 or have a qualifying child (a child who is under the 

age of 16 or who receives Social Security disability benefits) in 

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their care. Spousal benefits are reduced when the spouse takes 

benefits before the FRA, unless the spouse has a qualifying child 

in his or her care. Based on a FRA of 66, a spouse who claims benefits as early as age 62 may receive a benefit that is as little as 

37.5 percent of the working spouse’s PIA. Spousal benefits may also 

be reduced or fully offset by the dual entitlement provision or the 

government pension offset (described below) if the spouse is entitled to his/her own Social Security benefit based on work in covered 

employment or to a pension based on his or her own employment 

in certain federal, state or local government positions that are not 

covered by Social Security. 

A monthly survivor benefit equal to 100 percent of the deceased 

worker’s PIA is payable to a widow(er) or divorced spouse of a deceased worker who was fully insured at the time of death. The surviving spouse must be age 60 (age 50 if disabled) and must not 

have remarried before age 60 (age 50 if disabled). As with spousal 

benefits, the surviving spouse’s benefit may be reduced if he or she 

takes benefits before the FRA, or if the surviving spouse has a benefit from employment in certain federal, state or local government 

positions that are not covered by Social Security (see the discussion 

of the government pension offset, or GPO, below). 

Some spouses and widow(er)s are entitled to benefits based on 

both their own earnings record and their spouse’s earnings record. 

These workers are known as dually-entitled beneficiaries. A beneficiary who is dually entitled will receive his or her own worker 

benefit plus the difference between the worker benefit and his or 

her spouse’s benefit. The total benefit may not be greater than the 

highest single benefit amount to which he or she is entitled. 

Over time, more women have become entitled to Social Security 

benefits based on their own work records, either as workers or as 

dually-entitled workers, as shown in Figure 1. The number of 

women who were entitled to benefits based either on their own 

work records or as dually-entitled beneficiaries grew from 43 percent in 1960 to 72 percent in 2008. Within these numbers, however, 

most of the growth has been among dually-entitled beneficiaries. 

The percent of women who are entitled based solely on their own 

work records has fluctuated in a range between 39 percent and 44 

percent between 1960 and 2008. Reliance on spousal benefits as a 

wife or widow, whether from dual entitlement or from spousal benefits alone, has fallen slightly over the past five decades, from 61 

percent in 1960 to 56 percent in 2008. 

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14 Before May 1985, student’s benefits were payable to certain postsecondary students aged 

18–22. P.L. 97–35, The Omnibus Budget Reconciliation Act of 1981, phased out by May 1985 

the child’s benefit for students in postsecondary schools age 18 and older, except for full-time, 

unmarried elementary or secondary school students between ages 18 and 19 (known as a ‘‘student’s’’ benefit). Student’s benefits end at age 19 or at the end of the current semester or quarter, whichever is later. 

Divorced spouses may qualify for spousal and/or survivor benefits 

if the marriage lasted at least 10 years before the divorce became 

final. To qualify for spousal benefits, a divorced spouse must be at 

least age 62 and not currently married. Survivor benefits are available to a divorced surviving spouse if he or she is age 60 or over 

(age 50 if disabled) and has not remarried before age 60 (age 50 

if disabled). Divorced spouses who meet these criteria receive the 

same spousal and survivor benefits as spouses and widow(er)s. As 

with married and surviving spouses, a divorced spouse’s benefit 

will be reduced if taken before the full retirement age, to offset a 

pension from non-covered federal, state or local government employment, or as a result of earnings above the retirement earnings 

test threshold. A dually-entitled divorced spouse (i.e., entitled to a 

benefit based on his or her own work record) will receive the higher 

of the spousal benefit or his or her own benefit. A divorced spouse 

may also become entitled on the worker’s record if the worker has 

not yet filed for benefits, provided that the divorce has been in effect for at least 2 years and that both the worker and the divorced 

spouse are at least age 62. 

A monthly benefit is payable to the child (including biological, 

adopted, step- child) of a retired, disabled, or deceased worker who 

was fully or currently insured at the time of death. The child must 

be either: (1) under age 18; or (2) a full-time elementary or secondary student under age 19; or (3) a disabled person age 18 or 

older whose disability began before age 22. Prior to May 1985, certain children in college were also eligible for the benefit.14 The 

child of a deceased worker is eligible for 75 percent of the worker’s 

PIA, subject to the family maximum benefit, as described below. 

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21 

The child of a disabled or retired worker is eligible for 50 percent 

of the worker’s PIA, subject to the family maximum benefit. 

Social Security also provides a monthly mother’s or father’s benefit to a surviving parent of any age who cares for the deceased 

worker’s child, when that child is either under the age of 16 or disabled. Mother’s and father’s benefits are 75 percent of the worker’s 

basic benefit, subject to the maximum family benefit. These mother’s or father’s benefit payments cease when the youngest entitled 

child being cared for reaches age 16, is no longer disabled, or if the 

mother or father remarries. 

A monthly survivor benefit is payable to a parent of a deceased 

fully insured worker if the parent is age 62 or older and has not 

married since the worker’s death. The parent must have been receiving at least one-half of his or her support from the worker at 

the time of the worker’s death or, if the worker had a period of disability which continued until death, at the beginning of the period 

of disability. Proof of support must be filed within 2 years after the 

worker’s death or the month in which the worker filed for disability. 

Total benefits payable to a family based on a retired or deceased 

worker’s record are capped by the maximum family benefit. The 

maximum family benefit varies from 150 percent to 188 percent of 

the retired or deceased worker’s PIA, and a family’s total benefit 

cannot be exceeded regardless of the number of recipients entitled 

on that earnings record. If the total individual monthly benefits 

payable to all recipients entitled on one earnings record exceeds the 

maximum, each dependent’s or survivor’s benefit is reduced in 

equal proportion to bring the total within the maximum. For the 

family of a worker who turns 62 or dies in 2010 before reaching 

age 62, the total amount of benefits payable is limited to: • 150 percent of the first $972 of PIA, plus • 272 percent of PIA over $972 through $1,403, plus • 134 percent of PIA over $1,403 through $1,830, plus • 175 percent of PIA over $1,830. 

The dollar amounts in this benefit formula are indexed to average wage growth, as in the primary benefit formula. 

For the family of a worker who is entitled to disability benefits, 

the maximum family benefit is the lesser of 85 percent of the worker’s AIME or 150 percent of the worker’s PIA. However, the family 

benefit cannot be lower than 100 percent of the worker’s PIA. 

Table 6 summarizes Social Security’s auxiliary benefits to the 

spouses, divorced spouses, children and parents of a retired, disabled or deceased worker. As will be discussed below, the basic 

benefit may be reduced (or increased) for retirement below (or 

above) the full retirement age, for earnings above certain thresholds, for family maximums, and/or for receipt of a pension from 

work that was not covered by Social Security. 

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TABLE 6: SOCIAL SECURITY AUXILIARY BENEFITS 

Basis for entitlement Eligibility Basic benefit amount before any adjustments 

Spouse ..................................................... At least age 62 .....................................

The worker on whose record benefits 

are based must be receiving benefits.

50 percent of worker’s PIA 

Divorced Spouse (if divorced individual 

was married to the worker for at 

least 10 years before the divorce became final and is currently unmarried).

At least age 62 .....................................

Generally, the worker on whose record 

benefits are based must be receiving benefits. However, a divorced 

spouse may receive benefits on the 

worker’s record if the worker is eligible for (but not receiving) benefits 

and the divorce has been final for 

at least 2 years.

50 percent of worker’s PIA 

Widow(er) & Divorced ............................. At least age 60 ..................................... 100 percent of worker’s 

Widow(er) (if divorced individual was 

married to the worker for at least 10 

years before the divorce became final 

and did not remarry before age 60).

................................................................ PIA 

Disabled Widow(er) & Divorced Disabled 

Widow(er).

At least age 50 

The qualifying disability must have occurred: 

(1) before or within 7 years of the 

worker’s death; 

(2) within 7 years of having been previously entitled to benefits on the 

worker’s record as a widow(er) with 

a child in his/her care; or 

(3) within 7 years of having been previously entitled to benefits as a disabled widow(er) that ended because 

the qualifying disability ended 

(whichever is later).* 

100 percent of worker’s PIA 

Mothers and Fathers ............................... Surviving parent of any age who cares 

for the deceased worker’s child, 

when that child is either under the 

age of 16 or disabled. Eligibility 

generally ceases if the surviving 

mother or father remarries.

75 percent of the deceased worker’s 

primary insurance amount (subject 

to the family maximum benefit*) 

Parents .................................................... At least age 62 or older and has not 

married since the worker’s death. 

The parent must have been receiving at least one-half of his or her 

support from the worker at the time 

of the worker’s death or, if the 

worker had a period of disability 

which continued until death, at the 

beginning of the period of disability.

82.5 percent of the deceased worker’s 

PIA if only one parent is entitled to 

benefits. If two parents are entitled 

to benefits, then each parent receives 75 percent of the deceased 

worker’s PIA. Subject to the family 

maximum benefit. 

Child ........................................................ Children, including adopted, step-, or 

unmarried biological child of a retired, disabled, or deceased worker 

who was fully or currently insured 

at the time of death. The child 

must be either: 

(1) under age 18; 

(2) a full-time elementary or secondary 

student under age 19; or 

(3) a disabled person age 18 or older 

whose disability began before age 

22. 

75 percent of the deceased worker’s 

primary insurance amount to children of deceased workers (subject 

to the family maximum benefit*) 50 

percent of the worker’s primary insurance amount to children of disabled or retired workers (subject to 

the family maximum benefit*) 

For a full description of Social Security eligibility, see http://www.socialsecurity.gov/retire2/yourspouse.htm and 

http://www.socialsecurity.gov/ww&os2.htm. 

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* The maximum family benefit varies from 150 percent to 188 percent of a retired or deceased worker’s PIA. For the family of a worker 

who is entitled to disability benefits, the maximum family benefit is the lesser of 85 percent of the worker’s AIME or 150 percent of the 

worker’s PIA, but no less than 100 percent of the worker’s PIA. It does not apply with respect to a divorced spouse or surviving spouse’s 

benefits. 

Social Security benefits are not particularly generous. Table 7 

shows the number of Social Security beneficiaries in 2008 as well 

as average monthly benefits by gender. In 2008, the average 

monthly retirement benefit was $1,299 for men ($15,588 per year) 

and $1,001 for women ($12,012 per year). Spouses, who receive half 

of the worker’s benefits, received on average $556 per month for 

women ($6,672 per year) and $324 for men ($3,888 per year). Widows received, on average, $1,115 per month ($13,380 per year) and 

widowers received $938 ($11,256 per year). 

Since Social Security benefit levels are based on contributions up 

to the taxable maximum, benefits for even high earners are relatively modest. In 2010, the maximum Social Security retirement 

benefit that could be received would be $1,824 per month ($21,888 

per year) if someone retired at the early eligibility age of 62, and 

$2,346 per month ($28,152 per year) if they retired at the full retirement age of 66. However, to receive this level of benefits, someone would have to earn the taxable maximum or more for at least 

35 years of their career, which almost never occurs. 

TABLE 7: NUMBER AND AVERAGE MONTHLY BENEFIT IN DECEMBER 2008 BY BENEFIT TYPE 

AND GENDER 

Number (in thousands) 

Average 

monthly 

Benefit 

Retired Workers: 

Men ............................................................................................................................... 16,455.8 $1,299 

Women .......................................................................................................................... 15,817.8 $1,001 

Disabled Workers: 

Men ............................................................................................................................... 3,924.5 $1,191 

Women .......................................................................................................................... 3,502.2 $920 

Spouses: 

Wives ............................................................................................................................. 2,472.3 $556 

Husbands ...................................................................................................................... 52.6 $324 

Widowed Mothers and Fathers: 

Women .......................................................................................................................... 149.2 $843 

Men ............................................................................................................................... 10.4 $720 

Nondisabled Widow(er)s: 

Women .......................................................................................................................... 4,094.9 $1,115 

Men ............................................................................................................................... 55.3 $938 

Disabled Widow(er)s: 

Women .......................................................................................................................... 220.3 $692 

Men ............................................................................................................................... 9.7 $498 

Parents: 

Women .......................................................................................................................... 1.5 $988 

Men ............................................................................................................................... 0.2 $910 

Source: Social Security Administration, Annual Statistical Supplement, 2009, Washington, DC, tables 5.A1.1, 5.A1.2, 5.A1.3, 5.A1.5, 5.A1.6, 

5.A1.7 and 5.A1.8, http://www.socialsecurity.gov/policy/docs/statcomps/supplement/2009/5a.html#table5.a1.5. 

Benefit Adjustments for Retirement Before or After the Full Retirement Age 

For persons claiming benefits before (or after) their full retirement age (FRA), the monthly benefit amount is decreased (or increased) by an adjustment that is roughly actuarially fair. The actuarial adjustment ensures that, on average, an individual will receive the same total benefits over his or her expected lifetime, but 

the monthly benefit will be reduced (or increased) to account for 

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15 Retirement benefits are reduced by 5/9 of one percent (or 0.0056) of the primary earner’s 

benefit for each month of entitlement before FRA, for a reduction of about 6.7 percent a year, 

up to 36 months. For each month of retirement in excess of 36 months for which the worker 

is below the FRA, retirement benefits are reduced by 5/12 of one percent (or 0.0042), for a reduction of 5 percent a year. Starting in 1990, the delayed retirement credit increased by .5 percent 

every other year until it reached 8 percent for workers who reached age 65 after 2007. See Table 

1–26 on page 1–60 of ‘‘Background Material and Data on Programs within the Jurisdiction of 

the Committee on Ways and Means, 2004,’’ The Green Book. House Ways and Means Committee 

Print, Washington, DC: Government Printing Office, available at http:// 

waysandmeans.house.gov/media/pdf/111/ssgb.pdf. 

the greater (or fewer) number of months that the person is expected to receive benefits.15 For persons with an FRA of 65 (i.e. 

somebody who was born in 1938 or earlier), collecting benefits upon 

turning 62 would entail a 20 percent cut in PIA. For a person with 

an FRA of 67, the decision to start collecting benefits upon turning 

62 would result in a 30 percent cut to PIA. Benefits of workers who 

choose to retire after their FRA are increased by delayed retirement 

credits. 

Benefit Adjustments for the Government Pension Offset (GPO) and 

Windfall Elimination Provision (WEP) 

Two provisions reduce the Social Security benefits of workers and 

their spouses who may have pensions from employment that was 

not covered by Social Security. 

The windfall elimination provision reduces the benefit of workers 

who have pensions from work that was not covered by Social Security. The WEP is intended to remove an unintentional advantage 

for workers who have a pension from non-covered work in addition 

to qualifying for Social Security benefits. Before the WEP was introduced, workers who had short careers in Social Security-covered 

jobs received an unintended ‘‘windfall’’ because the Social Security 

formula recorded the many years in jobs not covered by Social Security as years of ‘‘zero’’ earnings. This made the employee appear 

to have had low lifetime earnings, and the worker benefited from 

the Social Security benefit formula’s progressivity which is intended for workers who have had long careers at low wages. 

The government pension offset reduces Social Security spousal 

and survivor benefits that would be payable to spouses who also receive a public pension as a result of his or her own work in a government job (Federal, State, or local) not covered by Social Security. The amount of the reduction is equal to two-thirds of the government pension. This provision is intended to parallel the Social 

Security ‘‘dual entitlement’’ rule (discussed above), which imposes 

a dollar-for-dollar offset of spouses’ Social Security retirement benefits. 

Benefit Adjustments for the Retirement Earnings Test 

Social Security beneficiaries who are under the full retirement 

age and continue to work and have earnings above a threshold 

have their current benefits reduced and their future benefits increased. The retirement earnings test reduces benefits for workers 

under the FRA (age 67 for workers born in 1960 or later) who earn 

income from work in excess of an ‘‘exempt’’ amount. The exempt 

amount in 2010 is $14,160 in annual wages or self-employment income. Beneficiaries with earnings above this amount, who are also 

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16 A different reduction factor and exempt amount apply in the year beneficiaries attain the 

FRA. In 2010, these individuals can earn up to $37,680 a year in the months before they attain 

the FRA. For earnings above these amounts, the RET results in a reduction of $1 in benefits 

for each $3 of excess earnings. 

below the FRA, experience a benefit reduction of $1 of benefits for 

each $2 of earnings above the exempt amount.16

The retirement earnings test does not apply to pensions, rents, 

dividends, interest, and other types of ‘‘unearned’’ income. The test 

also does not apply to beneficiaries at the FRA or older, or to those 

who are disabled (disabled recipients are subject to separate limits 

on earnings known as substantial gainful activity amounts). The 

exempt amounts rise each year at the same rate as average wages 

in the economy. 

Retired workers whose benefits are reduced by the retirement 

earnings test are compensated, once they retire, through increases 

in their benefit amount. The following example illustrates the effect of the retirement earnings test. The example worker is age 63 

and has $12,000 in annual benefits before the test is applied: 

RETIREMENT EARNINGS TEST, 2010 

Earnings in 2010 ............................................................................................. $15,160 

Exempt amount in 2010 for persons under FRA .......................................... $14,160 

Excess over exempt amount ........................................................................... $1,000 

Benefit reduction (50 percent of excess) ........................................................ $500 

Annual Benefits the worker will receive ....................................................... $11,500 

The rationale for the retirement earnings test was described in 

the 1935 report of the Committee on Economic Security, which recommended that no benefits be paid before a person had ‘‘retired 

from gainful employment.’’ The retirement earnings test has been 

changed many times over the years. 

Table 8 illustrates the number of retired workers by full retirement age (FRA), as affected by the Social Security Retirement 

Earnings Test (RET) in 2006, the latest year for which data are 

available. 

TABLE 8: NUMBER OF RETIRED WORKERS WITH EARNINGS, BY FULL RETIREMENT AGE (FRA), 

2006 

Earnings 

Younger than 

FRA for all of 

2006 

Attains FRA in 

2006 

$1–4,999 ......................................................................................................................................... 356,000 117,500 

5,000–9,999 .................................................................................................................................... 226,500 69,900 

10,000–14,999 ................................................................................................................................ 213,500 60,900 

15,000–19,999 ................................................................................................................................ 72,800 35,800 

20,000–24,999 ................................................................................................................................ 39,200 17,100 

25,000–29,999 ................................................................................................................................ 17,600 9,700 

30,000–34,999 ................................................................................................................................ 10,200 7,800 

35,000–39,999 ................................................................................................................................ 6,300 6,000 

40,000–44,999 ................................................................................................................................ 5,600 2,100 

45,000–49,999 ................................................................................................................................ 3,600 1,700 

50,000–54,999 ................................................................................................................................ 2,500 1,500 

55,000–59,999 ................................................................................................................................ 2,100 1,300 

60,000–64,999 ................................................................................................................................ 1,800 700 

65,000–69,999 ................................................................................................................................ 1,300 800 

70,000–74,999 ................................................................................................................................ 1,300 500 

75,000–79,999 ................................................................................................................................ 1,000 700 

80,000–84,999 ................................................................................................................................ 800 600 

85,000–89,999 ................................................................................................................................ 900 400 

90,000–99,999 ................................................................................................................................ 900 800 

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17 Annual Statistical Supplement to the Social Security Bulletin, 2009, Table 5.A.8, available 

at http://www.socialsecurity.gov/policy/docs/statcomps/supplement/2009/5a.html#table5.a8. 

18Kelly A. Olsen and Don Hoffmeyer, ‘‘Social Security’s Special Minimum Benefit,’’ Social Security Bulletin, vol. 64, no. 2 (2002), p. 6, available at http://www.ssa.gov/policy/docs/ssb/ 

v64n2/v64n2p1.pdf. 

TABLE 8: NUMBER OF RETIRED WORKERS WITH EARNINGS, BY FULL RETIREMENT AGE (FRA), 

2006—Continued 

Earnings 

Younger than 

FRA for all of 

2006 

Attains FRA in 

2006 

100,000 or more .............................................................................................................................. 5,400 3,100 

Total with Earnings ................................................................................................................ 969,300 338,900 

Sources: Office of Research, Evaluation and Statistics, Social Security Administration: 2007, 1 Percent Continuous Work History Sample and 

2006 Employee and Employer File. 

Special Minimum Benefit 

The special minimum PIA is payable to some persons who 

worked in covered employment for many years but had low earnings. Unlike the retired worker’s PIA described above, which is 

based on a worker’s average earnings, the special minimum is 

based on the number of years of covered employment at a specified 

level of substantial earnings. The amount of the special minimum 

is determined by multiplying the number of years of substantial 

earnings in excess of 10 years and up to 30 years by $11.50 for 

monthly benefits payable in 1979. Parameters used to determine 

the special minimum benefit are indexed to price inflation. 

A worker is awarded the special minimum benefit only if it exceeds the worker’s regular benefit. However, the value of the special minimum benefit, which is indexed to prices, is rising more 

slowly than the value of the regular Social Security benefit, which 

is indexed to wages. Therefore, the number of beneficiaries of the 

special minimum benefit has declined with each year. In December 

2008, there were 89,000 beneficiaries 17 who received the special 

minimum benefit. One study predicted that the special minimum 

benefit will disappear for workers reaching age 62 in 2013 and 

later.18

HOW IS THE SOCIAL SECURITY PROGRAM FINANCED?

The Social Security program is financed through three sources of 

funds. These sources are: (1) payroll taxes collected under the Federal Insurance Contributions Act (FICA) and the Self Employment 

Contributions Act (SECA); (2) federal income taxes on the benefits 

of certain beneficiaries; and (3) interest on special U.S. government 

obligations held by the Trust Funds. 

Payroll Taxes 

Payroll taxes (i.e., social-insurance contributions as stipulated by 

the Federal Insurance Contributions Act (FICA) and Self-Employment Contributions Act (SECA)) are levied on the wages and net 

self-employment income of workers covered by Social Security. The 

FICA tax is levied at a rate of 15.3 percent, with employees and 

their employers each paying half of the total amount. Of the total 

15.3 percent FICA tax, 12.4 percent is used to finance the Social 

Security program, and 2.9 percent is used to finance the Medicare 

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19The ‘‘taxable wage base’’ increases annually with average wage growth in the economy. 

program. The Social Security portion of the tax is levied on earnings up to $106,800 in 2010.19 The Medicare portion of the tax is 

levied on all earnings. 

The SECA tax also is levied at a rate of 15.3 percent, with the 

same 12.4 percent and 2.9 percent split between Social Security 

and Medicare as the FICA tax. However, to reflect the fact that 

employees do not pay FICA taxes on the employer’s portion of the 

FICA tax, the taxable base for the SECA tax is adjusted downward 

by 7.65 percent and self-employed workers are allowed to deduct 

half of their SECA tax liability for income tax purposes. 

Table 9 and Table 10 show FICA and SECA tax rates and maximum taxable earnings for 1937–2010, respectively. 

TABLE 9: FICA TAX RATES, AVERAGE WAGE INDEX, AND MAXIMUM TAXABLE EARNINGS, SELECTED 

YEARS 1937–2010 

[In percent] 

Calendar year 

Rate paid by employee and employer 

Average 

wage 

index 

Maximum 

taxable 

earnings 1 OASI 

Disability 

insurance 

(DI) 

OASDI 

Hospital 

insurance 

(HI) 

Total 

1937 ......................................................................... 1.00 NA NA NA 1.00 $1,138 $3,000 

1950 ......................................................................... 1.50 NA NA NA 1.50 2,544 3,000 

1960 ......................................................................... 2.75 0.25 3.00 NA 3.00 4,007 4,800 

1970 ......................................................................... 2.75 0.55 4.20 0.60 3.65 6,186 7,800 

1980 ......................................................................... 4.52 0.56 5.08 1.05 6.13 12,513 25,900 

1990 ......................................................................... 5.60 0.60 6.20 1.45 7.65 21,028 51,300 

1995 ......................................................................... 5.26 0.94 6.20 1.45 7.65 24,706 61,200 

2000 ......................................................................... 5.30 0.90 6.20 1.45 7.65 32,155 76,200 

2005 ......................................................................... 5.30 0.90 6.20 1.45 7.65 36,953 90,000 

2008 ......................................................................... 5.30 0.90 6.20 1.45 7.65 41,335 102,000 

2009 ......................................................................... 5.30 0.90 6.20 1.45 7.65 * 106,800 

2010 ......................................................................... 5.30 0.90 6.20 1.45 7.65 * 106,800 

1 OASDI; no limit on HI. 

NA—Not applicable. 

*—Not available. 

Note—Until 1991, the maximum taxable earnings for HI were the same as for OASDI. In 1991, 1992, and 1993 maximum taxable earnings 

were $125,000, $130,200, and $135,000 respectively, with no limit after 1993. Only 92.35 percent net self-employment earnings are taxable 

and half of the SECA taxes so computed is deductible for income tax purposes. 

Source: Social Security Administration. 

TABLE 10: OASDI AND HI TAX RATES FOR SELF-EMPLOYED INDIVIDUALS, 1980–2010 

[In percent] 

Calendar year OASI DI OASDI HI Total (OASDI 

and HI) 

1980 ...................................................................... 6.2725 0.7775 7.05 1.05 8.10 

1981 ...................................................................... 7.0250 0.9750 8.00 1.30 9.30 

1982 ...................................................................... 6.8125 1.2375 8.05 1.30 9.35 

1983 ...................................................................... 7.1125 0.9375 8.05 1.30 9.35 

1984 ...................................................................... 10.4000 1.0000 11.40 2.60 1 14.00 

1985 ...................................................................... 10.4000 1.0000 11.40 2.70 1 14.10 

1986–1987 ............................................................ 10.4000 1.0000 11.40 2.90 1 14.30 

1988–1989 ............................................................ 11.0600 1.0600 12.12 2.90 1 15.02 

1990–1993 ............................................................ 11.2000 1.2000 12.40 2.90 15.30 

1994–1996 ............................................................ 10.5200 1.8800 12.40 2.90 15.30 

1997–1999 ............................................................ 10.7000 1.7000 12.40 2.90 15.30 

2000 and later ...................................................... 10.6000 1.8000 12.40 2.90 15.30 

1 Tax credits for the self-employed equaled 2.7 percent in 1984, 2.3 percent in 1985, and 2.0 percent in 1986–1989. The tax rate is not 

reduced for these credits. 

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20 Income is defined as adjusted gross income plus tax-exempt bond interest plus one-half of 

Social Security benefits. 21There is no separate threshold for married persons who live together and file separately. 

Source: Social Security Administration. 

Taxation of Benefits 

Social Security beneficiaries with incomes 20 above certain 

thresholds are required to include a portion of their Social Security 

benefits in their federal taxable income. The Social Security 

Amendments of 1983 required beneficiaries with incomes of more 

than $25,000 if single, and $32,000 if married filing jointly,21 to include up to 50 percent of their benefits in taxable income, beginning in 1984. Revenues from taxing up to 50 percent of Social Security benefits are credited to the Social Security Trust Funds. The 

Omnibus Budget Reconciliation Act of 1993 required beneficiaries 

with modified incomes of more than $34,000 if single, and $44,000 

if married filing jointly, to include up to 85 percent of their benefits 

in their taxable income, beginning in 1994. Revenues from taxing 

51 percent to 85 percent of Social Security benefits are credited to 

the Medicare Hospital Insurance Trust Fund. These income thresholds are specified in the law and by design are not indexed. Thus 

over time, an increasing number of individuals will be subject to 

federal income tax on a portion of Social Security benefits. When 

taxes on benefits were first imposed, eight percent of recipients 

were affected. The Congressional Budget Office (CBO) estimates 

that for tax year 2005, 39 percent of recipients were affected. 

Interest on Special U.S. Obligation Bonds 

The Social Security Trust Funds earn interest because it holds 

Special US Obligation Treasury Bonds to which it is legally entitled interest, as prescribed in the Social Security Act: ‘‘Special 

issues . . . will pay a rate of interest equal to the average market 

yield on all marketable interest-bearing obligations of the United 

States which are not due or callable (redeemable) for at least 4 

years.’’ The interest on the special U.S. obligations thus is equal to 

the prevailing average rate on outstanding Federal securities with 

a maturity of four years or longer. This interest is credited to the 

Trust Funds twice a year (on June 30 and December 31) by issuing 

more special securities to the Trust Funds. 

The Social Security Trust Funds 

Social Security is funded through dedicated payroll taxes and 

taxation of benefits which legally may only be used to pay current 

benefits or to invest in a Social Security Trust Fund reserve for 

payment of future benefits. The securities issued to the Trust 

Funds, like those sold to the public, are legal obligations of the U.S. 

Government. 

Technically, there are two separate Trust Funds: the Old-Age 

and Survivors Insurance (OASI) Trust Fund, which holds in trust 

those funds that the federal government intends to use to pay future benefits to retirees and their survivors; and, the Disability Insurance (DI) Trust Fund, which holds in trust those funds that the 

federal government intends to use to pay benefits to those who are 

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22 2009 Social Security Trustees’ Report, available at http://www.ssa.gov/OACT/TR/2009/ 

IIlcyoper.html#94983. 

judged by the federal government to be disabled and incapable of 

productive work, as well as to their spouses and dependents. 

To the extent that payroll taxes exceed benefit payouts in a given 

year, participants in the Social Security program are in effect saving for their future retirement, disability or survivor benefit needs, 

or for those of other participants in the program. These pre-funded 

amounts earn interest, which accrues to the Trust Funds. In 2008, 

the Trust Fund’s assets earned interest at an effective annual rate 

of 5.1 percent.22

The long-range status of the Trust Funds is often expressed in 

terms of percent of taxable payroll rather than in dollar amounts. 

This permits a direct comparison between the tax rate in the law 

and the cost of the program. For example, if the program is projected to have a deficit of two percent of taxable payroll as it was 

in 2009, the OASDI tax rates now in the law would have to be increased by one percentage point each for employee and employer (a 

total of two percent) in order to pay for the benefits due. Alternatively, the program could be brought back into balance by an 

equivalent reduction in benefits. For example, if the program is 

projected to have a deficit of two percent of taxable payroll, and expenditures are projected to be 10 percent of taxable payroll, then 

a 20 percent (2 divided by 10) reduction in benefits would be needed to bring the program into long-range fiscal balance. Finally, fiscal balance could also be met through a combination of revenue increases and benefit reductions. 

Historical Status of the Trust Funds 

For more than three decades after Social Security taxes were 

first levied in 1937, the system’s income routinely exceeded its 

outgo, and its Trust Funds grew. The situation changed, however, 

in the early 1970s. 

Beginning in 1973, the program’s income fell below expenditures, 

and the Trust Funds declined rapidly. Congress stepped in five 

times during the late 1970s and early 1980s to keep the Trust 

Funds from being exhausted. Although major changes enacted in 

1977 greatly reduced the program’s long-run deficit, they did not 

eliminate it, and the short-run changes made by the legislation 

were not sufficient to enable the program to withstand back-toback recessions in 1980 and 1982, coupled with high inflation and 

low wage growth. A Social Security disability bill in 1980 and temporary fixes in 1980 and 1981 were followed by another major reform package in 1983. The 1983 changes, along with improved economic conditions, dramatically improved the short- and long-range 

fiscal outlook for Social Security. Income began to exceed outgo in 

1983 and the Trust Funds grew substantially. By the end of calendar year 2008, the balance in the Trust Funds reached $2.4 trillion, an amount equivalent to 354 percent of expenditures in 2008 

(between three and four years’ worth of benefits). 

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23Munnell, Alicia H., ‘‘Should Social Security Rely Solely on the Payroll Tax?,’’ Center for Retirement Research at Boston College, Brief Number 9–16, Boston, MA: Center for Retirement 

Research, 2009, available at http://crr.bc.edu/briefs/shouldlsociallsecuritylrelylsolelyl 

onlthelpayrollltaxl.html. 24The Board of Trustees is comprised of the Secretary of Treasury (who is the Managing 

Trustee), the Secretary of Labor, Health and Human Services, the Commissioner of Social Security and two representatives of the public. 

Social Security and the Federal Budget 

By law, the receipts and disbursements of the Social Security 

Trust Funds are excluded from the President’s budget and the Congressional budget resolution (in other words, the Trust Funds are 

‘‘off-budget’’). The off-budget status of the Social Security Trust 

Funds has meant that legislation affecting the receipts and disbursements of the Trust Funds is excluded from the general budget 

constraints associated with the annual Congressional budget resolution, resulting in the need for separate rules to ensure that legislation considered by Congress does not negatively affect the Social 

Security Trust Funds balances. For example, Social Security is prohibited from borrowing funds, going into debt, and contributing to 

the federal deficit. Social Security will only pay benefits if it has 

the dedicated funds. Social Security’s monies are kept in a trust 

apart from the general fund, and the Budget Act expressly prohibits changes made to Social Security as part of any budget reconciliation process (see Appendix for House and Senate Procedures 

that protect Social Security balances). 

Legacy Costs 

In initial years of Social Security, retirees received benefits that 

far exceeded the value of contributions that they and their employers had been able to make in the short time Social Security had 

been operational. Social Security contributions were first collected 

from workers and employers in 1937 and benefits were first paid 

in 1940. This created a deficit of contributions or ‘‘legacy cost’’. 

Some people advocate for a revenue source outside current workers 

payroll to pay for this legacy cost. Economists have estimated that 

Social Security’s legacy cost is roughly $13 trillion.23

THE ANNUAL REPORT OF THE BOARD OF TRUSTEES

The Social Security Act requires that the Board of Trustees 24 report to the Congress annually on the financial status of the Social 

Security Trust Funds. The Social Security Trustees report shortrange (10-year) projections and long-range (75-year) projections of 

the financial status of the Social Security system. Projections are 

made separately for each of the two Social Security Trust Funds 

(the Old-Age and Survivors Insurance (OASI) Trust Fund and the 

Disability Insurance (DI) Trust Fund) and for the Trust Fund on 

a combined basis (the OASDI Trust Fund). 

Because the Social Security program is designed as a contributory system in which workers who pay payroll taxes to support the 

system are considered to be earning the right to future benefits, 

Congress has traditionally required long-range estimates of the 

program’s actuarial balance. Under current procedures, the traditional long-range actuarial analysis of the program covers a 75- 

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25 2009 Social Security Trustees’ Report, available at http://www.ssa.gov/OACT/TR/2009/ 

tr09.pdf 26 The 2009 Social Security Trustees’ Report, Table VI.F7, available at http:// 

www.ssa.gov/OACT/TR/2009/tr09.pdf. 26The 2009 Social Security Trustees’ Report, Table VI.F7, available at http://www.ssa.gov/ 

OACT/TR/2009/lr6f8.html. 27The term ‘‘exhausted’’ is commonly used to indicate that the Trust Fund balance plus payroll taxes and other revenues would be insufficient to pay all benefits when they are due. 

year period, which generally would be sufficient to cover the anticipated retirement years of persons currently in the work force. 

The long-range projections are affected by three types of factors: 

(1) demographic factors, such as rates of fertility, life expectancy, 

and immigration, which determine the number of workers in relation to recipients; (2) economic factors, such as unemployment, productivity, interest rates and inflation; and (3) factors specifically related to the Social Security program, such as eligibility rules, benefit levels, and the categories of covered employment. 

Given the uncertainty surrounding the long-range projections, 

the actuaries at the Social Security Administration (SSA) employ 

three sets of alternative economic and demographic assumptions: 

Alternative I, based on optimistic assumptions; Alternative II, 

based on intermediate assumptions; and Alternative III, based on 

pessimistic assumptions. Alternative II generally is considered the 

‘‘best guess’’ of long-term solvency and is the most frequently cited. 

Findings in the 2009 Trustees Report 

The latest report of the Social Security Board of Trustees was released on May 12, 2009.25 Projections 26 show the Old Age, Survivors, and Disability Insurance program will continue to add tax 

revenue to their Trust Funds up to 2016. The Trust Funds will continue to grow because of interest earned through 2023. After 2023, 

the Trust Funds’ assets will begin to be tapped to help pay for the 

retirement of the unusually large baby boomer cohort. By 2037, the 

reserves are expected to be exhausted, and current revenues will 

only be sufficient to finance 76 percent of benefits.27

On average, over the next 75 years (2009–2083), the system’s 

projected actuarial deficit is 2.00 percent of taxable payroll. In 

present value terms, over the next 75 years the system’s projected 

unfunded obligation is $5.3 trillion, an amount equivalent to 0.7 

percent of Gross Domestic Product (GDP). In the 75th year of the 

period, the cost of the system is projected to exceed income by 4.34 

percent of taxable payroll. 

Social Security has always been structured primarily as a payas-you-go system, with current benefits mostly funded out of current tax revenues. However, Social Security is currently running a 

surplus. In 2009, an estimated 94 percent of Social Security tax 

revenues were spent to meet current expenditures (benefits and administrative costs). The surplus tax revenues, along with interest 

credited to the Trust Fund, contribute to a growing Trust Fund balance. For OASDI, interest income will first be needed to pay a portion of benefits in 2016, although the Trust Fund will continue to 

accumulate assets until around 2025, when Social Security begin 

drawing down the Trust Fund. 

Long-range projections for the Social Security Trust Fund are 

based on many demographic, economic, and program-specific factors. In large part, however, the system’s projected long-range 

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28 Bureau of Labor Statistics, ‘‘Older Workers,’’ July 2008, available at http://www.bls.gov/ 

spotlight/2008/olderlworkers/ 29 Ultimate values are assumed to be reached within the first 25 years of the projection period. 

The ultimate economic assumptions are unchanged from the 2007 report. 

funding shortfall is related to demographic changes in the United 

States. According to the Social Security actuaries, lower birth rates 

are the principal reason that the cost of the Social Security program will increase over the next quarter century. The ‘‘total fertility rate,’’ or the average number of children women have, was 

about 3.3 children per woman during the baby boom years from 

1946 through 1965. By 1972, however, the total fertility rate 

dropped to two children per woman and has stayed at about that 

level ever since. 

Moreover, the first wave of the 80 million member baby boom 

generation reached age 62 in 2008, the age at which reduced Social 

Security retirement benefits are first payable. In addition, projected increases in life expectancy will contribute to an older society. The Trustees intermediate assumptions project that, between 

2010 and 2030, the number of beneficiaries will increase by 59 percent, while the number of workers whose taxes will finance future 

benefits will increase by 14 percent. As a result, the number of 

workers supporting each Social Security recipient is projected to 

decline from 3.0 today to 2.2 in 2030. After the baby boomer retirement, however, the ratio is projected to stabilize at approximately 

two, with only a very gradual decline due to projected increases in 

life expectancy. 

An increase in older Americans participating in the workforce 

can increase the solvency of Social Security.28 The 65-and-over 

labor force participation rate had been at historic lows during the 

1980s and early 1990s, but has increased steadily over the past 

decade. In 2008, 20.5 percent of men over the age of 65 and 11.9 

percent of women over 65 were in the labor force, for a total workforce participation of 15.5 percent. 

The aging of the U.S. population will continue to be an important 

factor after the baby boomers have died. Forecasts of continuing increases in life expectancy mean that Social Security recipients will 

receive benefits for longer periods in the future. Projected increases 

in life expectancy and low fertility rates, mean that persons age 67 

and older will continue to represent a growing share of the U.S. 

population. 

The long-range intermediate projections assume that GDP will 

increase at an ultimate rate of 2.1 percent annually; the average 

wage is assumed to increase at an ultimate rate of 3.9 percent annually; inflation is assumed to increase at an ultimate rate of 2.8 

percent annually; and the unemployment rate is assumed to average 5.5 percent.29 Details on the demographic assumptions are 

available in the 2009 Trustees report. The 2010 Trustees report, 

which will be issued in June of this year, will likely have different 

estimates of the Trust Funds’ solvency due to the impact of the economic downturn in reducing revenues and increasing the number 

of new beneficiaries. 

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30 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2010 to 2020, 

January 2010, available at: http://www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf. In 

addition, see the CBO supplemental data table, available at http://www.cbo.gov/budget/ 

factsheets/2010/oasdi.pdf. 31The Office of the Chief Actuary SSA estimated last year that, even in the absence of an 

economic recession, applications for retired worker benefits under the OASI program during FY 

2009 would be about 15 percent higher than the number of applications during FY 2008, solely 

due to increase in numbers of insured workers reaching the retirement ages of 62 to 70. This 

increase was expected due to the aging of the baby boomers and the increasing percentages of 

women reaching retirement ages having attained insured status enabling them to receive retired 

worker benefits. 

The actual data for applications for retired worker benefits in FY 2009 (for October 2008 

through September 2009) show an increase of 21 percent over the number of applications in FY 

2008. Thus, retired worker benefit applications were about 5 percent higher (1.21/1.15) than had 

been expected in the absence of a recession for the entire fiscal year 2009. 

While retired worker benefit applications for FY 2009 were clearly above the levels expected 

in the absence of a recession, this does not mean that fewer workers of retirement age are working or seeking employment. In fact, based on data from the ‘‘household survey’’ published by 

the Bureau of Labor statistics, we see that the average number of people at ages 60 to 69 who 

were employed or seeking employment (in the civilian labor force) during FY 2009 (October 2008 

through September 2009) was 7.1 percent higher than for the same months in FY 2008. In the 

2008 Trustees Report, where no recession had been expected, an increase in the labor force at 

these ages of 4.5 percent had been expected for the same period. Thus, 2.5 percent more individuals at ages 60 to 69 were working or seeking employment in FY 2009 than had been expected 

without a recession. This rise might be, in part, a reflection of a desire of some older workers 

to work longer to rebuild the level of their personal retirement assets. (Stephen Goss, Chief Actuary of the Social Security Administration, 10/14/2009) 32Labor Force Statistics from the Current Population Survey, provided by the Bureau of 

Labor Statistics on April 16, 2010. 

The Congressional Budget Office Forecast 

The Congressional Budget Office (CBO) generates projections of 

the Social Security Trust Funds independent of the Social Security 

Trustees. In January 2010,30 the CBO projected that, excluding the 

interest from its surplus, the Social Security Trust Funds will have 

a cash flow deficit (income excluding interest will be less than outlays) in fiscal years 2010 through 2013 and in fiscal years 2016 

through 2020. CBO projects that only in fiscal years 2014 and 2015 

will the Social Security Trust Funds have a cash flow surplus (income excluding interest will be greater than outlays). 

When total income of the Trust Funds (Social Security tax revenues plus interest income) is taken into account, CBO projects that 

the Social Security Trust Funds will have a surplus in each fiscal 

year from 2010 to 2020. When the Social Security Trust Funds operate with a cash flow deficit, a portion of the U.S. government 

bonds held by the Trust Funds must be redeemed to cover benefit 

payments and administrative costs. The money needed to redeem 

these bonds, like all Treasury bonds, comes from the U.S. Treasury’s general fund. 

CBO attributes the increase in outlays between fiscal years 2010 

and 2020 to three factors: (1) an increase in those claiming benefits; (2) changes in benefits including the effect of projected wage 

growth on benefit levels for future retirees; and (3) automatic costof-living adjustments to benefits. In the CBO forecast, almost half 

of the change in spending (48.2 percent) between fiscal years 2010 

and 2020 is due to an increase in the number of people claiming 

benefits. This increase 31 is due both to the rise in the number of 

people eligible for benefits and the economic downturn, which increased the unemployment rate for workers aged 62–64 from 3.9 

percent in 2008 to 6.2 percent in 2009.32

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33Some beneficiaries are ‘‘dually entitled’’ to benefits as both a retired worker and as the 

spouse of a retired or disabled worker. In Figure 2, dually-entitled beneficiaries are classified 

as retired workers. 

WHO RECEIVES BENEFITS FROM SOCIAL SECURITY?

In June, 2009, 51.9 million people—17 percent of the U.S. population—received Social Security benefits. Social Security is an important source of retirement income, but it also protects workers 

and their families against the loss of income that occurs due to a 

worker’s death or disability. The majority of Social Security beneficiaries are retired workers, but more than one-third of persons 

who received Social Security benefits in 2009 qualified on the basis 

of disability or as the spouse, widow or widower, parent, or child 

of a retired, deceased, or disabled worker. 

In June, 2009, 63.7 percent of Social Security beneficiaries (33.1 

million people) were retired workers who had earned benefits on 

the basis of retirement from covered employment 33 (See figure 2). 

The next largest category of beneficiaries was disabled workers, 

comprising 14.6 percent of all beneficiaries. More than 7.5 million 

people received Social Security Disability Insurance (SSDI) in 2009. 

Widows and widowers of workers and retirees were 8.7 percent of 

all beneficiaries. More than 4.2 million people, comprising 8.1 percent of all Social Security beneficiaries, received children’s benefits 

from Social Security in 2009. Most children qualified for Social Security because they were the dependents of retired, deceased, or 

disabled workers. About one-fifth of child beneficiaries were adults 

who had been disabled since childhood. Spouses of retired or disabled workers were 4.8 percent of all beneficiaries in 2009. 

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Of the 51.9 million individuals who received Social Security benefits in June, 2009, 80.7 percent were aged 60 or older (See figure 

3). Almost one-third of all beneficiaries were 60 to 69 years old. 

This age group included disabled workers, retired workers, spouses, 

widows and widowers, and parents. Individuals who receive Social 

Security Disability Insurance are re-classified as retired workers at 

the full retirement age (66 in 2009). Retired-worker benefits are 

first available at age 62, but the benefit is permanently reduced for 

workers who claim it before they have reached the full retirement 

age. Widows and widowers are eligible for benefits at age 60. Disabled widows and widowers are eligible for Social Security at age 

50. 

Almost half of Social Security beneficiaries (49.2 percent) in June 

2009 were aged 70 or older. Twenty-nine percent of beneficiaries 

were 70 to 79 years old and 20 percent were aged 80 and older. 

Social Security’s role in providing income support to disabled workers and to the dependents of disabled and deceased workers is illustrated by the fact that 19.2 percent of beneficiaries in 2009 were 

children under the age of 21 or adults under age 60. Together, 

these two age groups accounted for nearly 10 million of the 51.9 

million people who received Social Security benefits in 2009. 

More than half of all Social Security beneficiaries in 2009 were 

women (see figure 4). Forty percent of beneficiaries were men and 

eight percent were children, including adults whose disability had 

been present since childhood. Women are the majority of adult Social Security beneficiaries in part because they have a longer average life expectancy than men. Men are a slight majority of disabled 

worker beneficiaries (53 percent in 2009), but this is more than offset by the higher mortality rates among men at all ages compared 

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to women. Because of their longer average life expectancy, 57 percent of all Social Security beneficiaries aged 60 and older were 

women in 2009, as were 64 percent of all beneficiaries aged 80 and 

older. 

In June 2009, the average monthly benefit for a man receiving 

a Social Security retired worker benefit was $1,305, while the average retired worker benefit for a woman was $1,006. Men had higher benefits because they had both higher average wages and a 

higher average number of years of earnings. The pattern was similar for disabled workers. The average monthly benefit in June 2009 

for a man receiving SSDI was $1,188, while for a woman receiving 

SSDI, the average monthly benefit was $921. The average benefit 

for a widow(er) or parent was $1,086. Benefits for spouses and children are typically about half of an insured worker’s PIA. In 2009, 

the average Social Security spousal benefit was $553 and the average child’s benefit was $548. 

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HOW DOES SOCIAL SECURITY COMPARE WITH OTHER SOURCES OF

INCOME?

Social Security provides a substantial proportion of total income 

among households in which one or more residents is a Social Security beneficiary, and its importance as a source of income increases 

as people age. In 2008, Social Security provided more than 25 percent of the total income of households in which at least one household resident was a Social Security beneficiary and the household 

head and his or her spouse (in married-couple households) were 

both under 65 years old (See Table 11). Earnings were the largest 

share of income among these households, primarily because in 

many instances there were other household members who worked. 

Pensions were the third largest share of income in Social Security 

beneficiary households in which both the household head and 

spouse were under age 65, accounting for 8.3 percent of total 

household income in 2008. 

Social Security is the largest share of income among Social Security beneficiary households headed by persons aged 75 and older, 

providing 46.2 percent of all income received by these households 

in 2008. Pensions were the second largest share of income among 

these households, accounting for 19.3 percent of their total income. 

Although earnings were a substantial source of income, the portion 

of total income received as earnings in 2008 (16.6 percent) was 

much lower among households headed by persons aged 75 and 

older than among beneficiary households headed by persons aged 

65 to 74 (36.7 percent) and beneficiary households headed by persons under age 65 (56.2 percent). Social Security beneficiary housesmartinez on DSKB9S0YB1PROD with REPORTS


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holds headed by persons aged 75 and older received 14.8 percent 

of their total income from assets in 2008. 

TABLE 11: SHARES OF HOUSEHOLD INCOME IN 2008 AMONG BENEFICIARY HOUSEHOLDS, BY AGE 

OF HOUSEHOLDER 

Source of income 

Age of household head 

Under 65 65 to 74 75 and older 

Social Security ........................................................................................................ 25.5% 33.1% 46.2% 

Earnings .................................................................................................................. 56.2% 36.7% 16.6% 

Pensions .................................................................................................................. 8.3% 16.6% 19.3% 

Assets ...................................................................................................................... 4.3% 11.2% 14.8% 

Public Assistance .................................................................................................... 1.2% 0.4% 0.4% 

Other ....................................................................................................................... 4.5% 2.0% 2.7% 

Total ............................................................................................................... 100% 100% 100% 

This table illustrates the sources of income of beneficiary households in the aggregate. Many households receive income from two or more of the sources. 

Source: CRS analysis of the March 2009 Current Population Survey. 

Some households that receive Social Security have no other 

source of income. Figure 6 shows the percentage of total household 

income received by Social Security beneficiary households headed 

by persons under age 65 and age 65 and older in 2008. Among Social Security beneficiary households in which both the household 

head and spouse (in married-couple households) were under age 65, 

14 percent had no income other than Social Security. Among beneficiary households in which either the household head or spouse 

was 65 or older, 17 percent had no income other than Social Security. Including the households that received all of their income from 

Social Security, 37 percent of beneficiary households headed by persons under age 65, and 57 percent of beneficiary households headed 

by persons aged 65 and older, received more than half of their total 

income from Social Security. 

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39 

SOURCES OF INCOME BY INCOME QUARTILE

Figure 7 shows the percentage of total income received from each 

source by all households with any income in 2008, in which either 

the householder or householder’s spouse was 65 or older. For example, among elderly households in the top 25 percent of total income, 

17 percent of income came from Social Security, and 81 percent of 

total income came from earnings, pensions, and assets. In contrast, 

among elderly households whose income was in the lowest quartile, 

the ratio of Social Security to other income sources was inverted. 

Figure 7 shows 84 percent of income for households in the lowest 

quartile came from Social Security, and 11 percent of total income 

came from earnings, pensions, and assets. Elderly households in 

the second and third income quartiles in 2008 drew 42 percent and 

67 percent of their income from Social Security, respectively. 

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41 

The percentage of older Americans living in poverty fell sharply 

from the late 1950s through the mid-1970s and then continued a 

slow, steady decline until the early 1990s, when it leveled off at 

about 10 percent. In 1959, 35.0 percent of Americans aged 65 and 

older had family incomes below the federal poverty threshold, 

which was more than double the poverty rate among adults 18 to 

64 years old. (See figure 8.) 

By the early 1990s, the poverty rate among people 65 and older 

had fallen below the poverty rate among adults aged 18 to 64. The 

poverty rate of 9.7 percent among Americans aged 65 and older in 

2008 was two percentage points lower than the poverty rate among 

adults aged 18 to 64, and it was just half the 19 percent poverty 

rate among children under 18 years old. However, while the proportion of persons aged 65 and older in poverty has fallen over the 

past 50 years, the number of poor elderly has remained relatively 

constant since the mid-1970s due to the growth in the total number 

of elderly persons. In 2008, 3.6 million people aged 65 and older 

had incomes below the federal poverty thresholds of $10,326 for 

single elderly persons and $13,014 for elderly couples. 

The reduction in the proportion of older Americans living in poverty from 35 percent in 1959 to 10 percent in 2008 is one of the 

most significant economic developments to occur in the last 50 

years. Without the decline in elderly poverty, the economic burden 

of supporting those who can no longer work in old age would weigh 

that much more heavily on their adult children, and many millions 

of older Americans would likely have to apply for public assistance 

or give up their homes to live with their children. Both the increase 

in the proportion of older persons who receive Social Security and 

increases in average monthly benefits contributed to the decrease 

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42 

34 Citro, C. F., & R. T. Michaels, eds., Measuring Poverty: A New Approach, Washington, DC: 

National Academy Press, 2005, available at http://www.nap.edu/catalog.php?recordlid=4759. 35 Reno, Virginia P. and Ben Veghte, ‘‘Economic Status of the Aged in the United States’’, in 

Robert Binstock et al., ed., Handbook of Aging in the Social Sciences. (Maryland Heights, MO: 

Elsevier, forthcoming). 

in the proportion of older Americans whose income falls below the 

federal poverty threshold. 

The decline in poverty among the elderly is also due to the fact 

that the poverty threshold is adjusted each year by the rate of inflation as measured by the percentage change in the Consumer 

Price Index (CPI). The federal poverty threshold represents the 

amount of income necessary to maintain a minimally adequate 

standard of living. Because the poverty threshold is adjusted annually by the rate of inflation as measured by the consumer price 

index, the real (inflation-adjusted) value of income at the poverty 

threshold remains constant over time. In contrast, growth in wages 

from year to year reflects both the rising general level of prices and 

gains in labor productivity. 

Over long periods of time, wages and salaries grow faster than 

prices because labor becomes more productive as a result of better 

education and training, improved methods of production and distribution, and new technologies. Over the past 50 years, the ratio 

of the poverty threshold to the median income of the population 

has fallen because earnings (which are the largest source of income 

for most non-elderly households) have risen faster than prices. As 

a consequence, the gap between the official poverty threshold and 

the median household income has grown, and persons with incomes 

at or below the poverty threshold have become relatively poorer 

compared to households with incomes at the median. 

In 1968, the poverty threshold for an individual 65 or older 

($8,308 in 2008 dollars) was equal to 93 percent of the median individual income ($8,962 in 2008 dollars) of all persons aged 65 and 

older. In 2008, the poverty threshold for a single person 65 or older 

($10,326) was only 57 percent of the real median income of individuals aged 65 and older ($18,208). In the future, other things being 

equal, the disparity between rising real incomes and a fixed real 

poverty threshold will lead to a decreasing proportion of the elderly 

having incomes below the federal poverty threshold. This means 

that the income gap between those with incomes below the poverty 

threshold and those with incomes at the median will grow larger. 

As a result, the proportion of the elderly who are in poverty will 

shrink, but those who are in poverty will be relatively poorer compared to those who have average incomes. 

Due to these problems with a fixed poverty measure, Congress 

requested the National Academy of Sciences to convene a group of 

experts to update and improve the measurement of poverty. Its 

1995 report 34 recommended a broader definition of necessary expenditures (that includes food, housing, out-of-pocket health care 

expenses, child support expenses, and work-related expenses such 

as transportation and childcare) and a more refined measure of income (that takes into account taxes, tax credits, and in-kind benefits such as such as food stamps and housing subsidies). When this 

more realistic measure is used, poverty among seniors is much 

higher than it appears as calculated by traditional means,35 e.g. 

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36 Reno, Virginia P. and Joni Lavery, Fixing Social Security: Adequate Benefits, Adequate Financing, National Academy of Social Insurance, October, 2009, available at http:// 

www.nasi.org/research/2009/fixing-social-security. 37 All estimates of the solvency impact of individual proposals are based on the 2009 Trustee’s 

Reports, available at: http://www.ssa.gov/OACT/TR/2009/index.html. 38 Haltzel, Laura, Dawn Nuschler, Kathleen Romig, Gary Sidor, Scott Szymendera, Mikki 

Waid, and Debra Whitman, ‘‘Options to Address Social Security Solvency and Their Impact on 

Beneficiaries: Results from the Dynasim Microsimulation Model,’’ Congressional Research Service Report RL33840, January 29, 2007, available at http://www.aging.senate.gov/crs/ crslsociallsecuritylpolicy.cfm. 39GAO, Social Security: Options to Protect Benefits for Vulnerable Groups When Addressing 

Program Solvency, GAO–10–101R (Washington, D.C.: December 7, 2009), available at http:// 

www.gao.gov/new.items/d10101r.pdf. 40For example, see Committee on the Fiscal Future of the United States, ‘‘Choosing the Nation’s Fiscal Future,’’ National Academies Press 2010, available at http:// 

www.ourfiscalfuture.org/wp-content/uploads/fiscalfuturelfulllreport.pdf. 

from 10 to 19 percent in 2008, due in large part to recognition of 

out-of-pocket health spending as a basic necessity. 

SOCIAL SECURITY MODERNIZATION: SETTING THE 

STAGE 

The Social Security program is not currently on a long-term path 

of fiscal stability. According to the 2009 Trustees Report, without 

Congressional action the program will exhaust the Trust Funds beginning in 2037, and thereafter only collect enough revenue to pay 

out 76% of promised benefits. To restore long-term solvency, policymakers face three basic options: raise contributions, cut benefits, or 

add revenues to the system. The following section will outline several alternatives for improving solvency, derived from NASI’s October 2009 report entitled Fixing Social Security: Adequate Benefits, 

Adequate Financing.36 The solvency impact of the reforms are estimated by the Social Security Administration’s Office of the Actuary 37 and, where appropriate, CRS estimates of the impact of these 

changes on future beneficiaries are included.38

As Congress explores potential reforms to Social Security, it 

should not only strive to improve the fiscal health of the program, 

but also ensure that it will meet the needs of beneficiaries in years 

to come. The Committee requested that GAO review options to 

strengthen the program for the most vulnerable populations and 

their findings are included herein.39

It is important to note that the policy alternatives described in 

the subsequent sections of this report by no means represent an exhaustive list and are limited to Social Security retirement and survivor benefit programs. Rather, they illustrate the more commonly 

considered proposals for restoring the program’s fiscal alignment 

and improving the protections of vulnerable groups. Variations or 

combinations of these proposals could also prove useful to Congress 

as they consider Social Security reform.40

The projected actuarial impacts of these reforms are provided on 

the assumption that each reform was to be implemented now or as 

described under the option, and that no other changes were made. 

Projecting the impacts of combinations of options and/or different 

implementation timeframes would require a new and thorough 

analysis. Further, these analyses should be detailed enough to understand how they would impact vulnerable groups and protect the 

adequacy of Social Security benefits. 

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OPTIONS TO RAISE REVENUE FOR PROGRAM 

SOLVENCY 

OPTIONS TO INCREASE THE SOCIAL SECURITY CONTRIBUTION RATE

The Federal Insurance Contributions Act of 1939 (FICA) authorized the Social Security program to be financed largely by mandatory contributions from workers and employers. This established a 

link between funding and insuring against economic insecurity 

when wages are lost due to old age, death of a family worker, and, 

later, disability. Some options for adjusting the contribution rate 

are: 

• Increase Worker and Employer Contributions by 1.1 percent. If the contribution rate were raised in 2010 so that workers contribute 7.3 percent instead of 6.2 percent of their earnings, the program’s projected deficit would decline by 2.09 percent of taxable payroll. It is estimated that this change would 

eliminate all of the deficit and make the program solvent for 

75 years. For example, a medium-wage worker, making 

$43,451 in 2010, would face a tax increase of $478 a year, or 

$9.19 a week, and the employer would face an identical increase. However, because the program will have surplus funds 

for the next decade, an immediate rate increase would add to 

the surpluses that are invested in Treasury securities. 

• Increase Worker and Employer Contributions by one percent in 2022, and by an Additional one percent in 2052. Because the Social Security program has sufficient resources to 

pay benefits in the near future, contribution rates could be designed to increase as funds are needed. If determined by future 

policymakers that funds are not needed, the rates could be reduced or rescinded. As one example of this approach, policymakers could act now to schedule a two-step increase in the 

Social Security rate: from 6.2 percent to 7.2 percent for workers and employers in 2022, and to 8.2 percent in 2052. This option would reduce the program’s projected deficit by 2.06 percent of payroll, eliminating the projected 75-year shortfall. By 

2022, workers’ real wages—that is, their purchasing power 

after adjusting for inflation—is estimated to be about 16 percent higher than in 2009. If two percent more of workers’ 

wages went to support Social Security, workers would still be 

14 percent wealthier than today’s workers. By 2052, wages are 

projected to have 56 percent greater buying power than in 

2009. 

• Increase Worker and Employer Contributions 1/20 percent 

Annually for 20 years. To avoid abrupt changes in Social Security contribution rates, this option would schedule gradual increases in the Social Security contribution rate (i.e., one-twentieth of one percent per year over 20 years for employees and 

employers, each) beginning in 2015, increasing the rate to 7.2 

percent by 2035. In 2015, the increase for an average earner 

making $53,085 then would be $26.50 a year, or about 50 cents 

a week. It is estimated that this approach would reduce the 75 

year shortfall by 1.39 percent of taxable payroll or about 69 

percent. 

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41The Internal Revenue Service estimates that in 2001 there were $39 billion in underreported self-employment taxes, $14 billion in underreported FICA, and five billion dollars in 

underpaid employment taxes. United States Department of the Treasury, ‘‘Update on Reducing 

the Federal Tax Gap and Improving Voluntary Compliance,’’ July 2009, available at http:// 

www.irs.gov/pub/newsroom/taxlgaplreportlfinallversion.pdf. 42 2009 Social Security Trustees’ Report, available at http://www.ssa.gov/OACT/TR/2009/ 

tr09.pdf. 

• Raise Rates Based on the Trustees’ Most Current Intermediate Assumptions of the Tax Rate Needed to Balance Revenues and Outlays. This option would increase Social Security 

contribution rates in order to correct future estimates of insolvency. The balancing rate would be based on the Trustees’ 

most current intermediate assumptions of the tax rate needed 

to balance revenues and outlays over the entire 75 year projection period, and would take effect automatically if Congress did 

not adjust revenues and costs. When long-range forecasts 

change, the future fail-safe rate would be automatically adjusted to maintain financing for the next 75 years. 

• Enhance Collection of Existing Taxes. The tax gap is the 

amount of taxes that are legally owed, but not collected, by the 

federal government in a timely fashion or at all. The IRS estimates the total tax gap at about $345 billion a year, of which 

approximately $58 billion is in Social Security and Medicare 

payroll taxes (most of the $58 billion is from Social Security 

payroll taxes).41 Increasing the collection of unpaid Social Security payroll taxes could significantly reduce the funds needed 

to make Social Security solvent over the next 75 years. 

OPTIONS TO CONSIDER BROADENING THE REVENUE BASE FOR SOCIAL

SECURITY

As of 2009, workers’ wages subject to Social Security contributions amount to 39 percent of national income, or gross domestic 

product (GDP).42 Some have argued that almost everyone benefits 

from Social Security; therefore, broadening sources of income would 

be more equitable. For example, many of the sources of non-taxed 

income disproportionately benefit upper income individuals. The 

sources of income not currently taxed include: 

• Earnings above the tax cap (about 17 percent of aggregate 

earnings); 

• Earnings of workers not covered by Social Security (about 

25 percent of state and local government employees do not participate in Social Security); 

• Non-taxable fringe benefits paid by employers, such as 

health insurance premiums, pensions, and most other employee benefits; 

• Employees’ tax-favored contributions to ‘‘salary reduction’’ 

plans for purposes other than retirement (such as out-of-pocket 

spending for health care, child care, or work expenses); 

• Income from capital, such as interest on investments, stock 

dividends, and rental income from real estate; and 

• Realized increases in the value of property (capital gains) 

and transfers of property (through gifts and inheritance). 

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43 Altman, Nancy J, ‘‘Tier II Supplement to Social Security: The Retirement-USA Plus Plan,’’ 

presented at the Retirement-USA Symposium (October 21, 2009). 44 Janemarie Mulvey, ‘‘Social Security: Raising or Limiting the Taxable Earnings Base,’’ Congressional Research Service, February 17, 2010. (RL32896). Available at http:// 

www.aging.senate.gov/crs/crslsociallsecuritylpolicy.cfm. 45 2009 Social Security Trustees’ Report, Table VI.F10, http://www.ssa.gov/OACT/TR/2009/ 

tr09.pdf. 

Options to Modify the Social Security Tax Cap 

In 2010, only earnings up to $106,800 are taxed and counted toward workers’ future Social Security benefits. The cap is indexed 

to keep pace with the growth in average earnings of all workers. 

In the past, Congress set the level of the cap to cover 90 percent 

of the aggregate wages of all workers.43 Today, it covers only about 

83 percent of such earnings.44 The decline occurred because those 

at the top of the income distribution (the roughly six percent of 

workers who make more than the cap) have had more growth in 

earnings than those who make less than the cap. In 2010, the maximum Social Security retirement benefit that could be received 

would be $2,346 per month ($28,152 per year) if they retired at the 

full retirement age of 66.45

Eliminate the Cap—Do Not Count the Additional Earnings toward Benefits. If all earned income above $106,800 a year were 

subject to Social Security contributions but did not count toward 

benefits, Social Security would be solvent throughout the longrange projection period. Making this change in 2010 would reduce 

the program’s projected deficit by 2.32 percent of payroll, thereby 

eliminating the 75-year deficit. However, with this change, workers 

who earn more than the tax cap would pay considerably more in 

taxes in a given year. For example, a person making $400,000 per 

year would pay $18,178 more per year and his or her employer 

would pay a matching amount, for a total increase of $36,356. CRS 

projects that eliminating the cap on contributions would impact 

roughly one in five beneficiaries over his or her lifetime. As workers do not generally have high earnings over their entire careers, 

the total increase in taxes paid by individuals over their working 

lives would be relatively small with a median increase in lifetime 

contributions of three percent. Notably, under this option the worker’s maximum benefit would be no higher than under current law 

changing the historic relationship between contributions and benefits. 

Eliminate the Cap—Count the Earnings toward Benefits. If all 

wages above $106,800 in 2009 were taxed and counted toward benefits, the change would almost make Social Security solvent 

through the long-range period, reducing the payroll deficit by 1.89 

percent and eliminating about 95 percent of the 75-year shortfall. 

While high earners and their employers would pay considerably 

more, these top earners would also receive much higher benefits. 

For example, one who had paid taxes on lifetime annual earnings 

of $400,000 would get a benefit of about $6,000 per month, or 

$72,000 per year, which would replace about 18 percent of the 

worker’s average earnings. 

Eliminate the Cap—Count Earnings toward Benefits Using Different Formula. If all earnings above the cap were taxed and counted toward benefits, policymakers could decide to change the benefit 

formula to replace a smaller portion of earnings above the old cap 

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46 U.S. Committee on Ways and Means, ‘‘Background Material and Data on Programs within 

the Jurisdiction of the Committee on Ways and Means, 2004,’’ The Green Book, House Ways 

Continued 

as a way to avoid paying very high Social Security benefits. As previously noted, the Social Security programs’ formula is based on 

workers’ average indexed monthly earnings (AIME) in three brackets. In 2009, Social Security paid: 

» 90 percent of AIME up to $744, plus 

» 32 percent of AIME between $744 and $4,483, plus 

» 15 percent of AIME over $4,483 

A modified formula might apply the 15 percent bracket only up 

to the old cap, and then provide a smaller replacement, say three 

percent of earnings, above that. For example, the third part of the 

above formula could be modified to: 

» 15 percent of AIME between $4,483 and $8,900 ($106,800 

divided by 12), plus 3 percent of AIME over $8,900 

This option, starting in 2010, is estimated to eliminate the 75- 

year deficit, resulting in savings of 2.17 percent of payroll. 

Gradually Restore the Cap to Cover 90 percent of Earnings. 

Gradually increase the taxable earnings base to include 90 percent 

of earnings by increasing the base by two percent per year above 

the growth in average wages. For example, the maximum taxable 

base in 2010 would rise to $2,136 (two percent of $106,800) beyond 

the automatic increase. In practice, the deductions from earnings 

for the highest-paid six percent of workers would continue for a few 

days longer into the year (and for their additional contributions 

they would receive somewhat higher benefits). For the 94 percent 

of covered workers with earnings below the cap, there would be no 

change at all. The change would bring the taxable maximum to the 

90-percent level in about 36 years and is projected to reduce the 

75-year deficit by 28 percent, or 0.60 percent of taxable payroll. 

Similar to current law, the roughly one percent of the population 

with earnings above the 90 percent cap would not pay taxes on 

earnings above the new threshold. 

Gradually Restore the Cap to Cover 90 percent of Earnings for 

Workers and Eliminate the Contribution Cap for Employers. Similar to the proposal above, the taxable earnings base would be 

gradually increased until it covered 90 percent of aggregate earnings, however it would only apply to the worker’s share (6.2 percent) of the payroll tax. In addition, employers would pay their 

share of the payroll tax (6.2 percent) on the full wages of their employers with no maximum amount. Self-employed individuals, who 

currently pay the full 12.4 percent payroll tax, would have a mixed 

basis for calculating their contributions. Retirement benefits would 

be based only on the workers earnings below the revised taxable 

maximum. This option would reduce the 75-year deficit by 69 percent, or 1.37 percent of taxable payroll. 

Options to Extend Social Security Coverage to all Workers 

As described previously, almost all workers pay into Social Security, with the exception of the roughly 25 percent of state and local 

government employees who are covered by alternative pension systems.46 When Congress last extended coverage in 1983, it brought 

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and Means Committee Print, Washington, DC: Government Printing Office, available at 

http://waysandmeans.house.gov/media/pdf/111/ssgb.pdf. 47Following the 1983 legislation, a new Federal Employees Retirement System was set up to 

supplement Social Security coverage for newly-hired federal employees. Employees hired before 

1984 could elect to join the new system and be covered by Social Security or to remain in the 

older Civil Service Retirement System. The number of federal employees not covered by Social 

Security is gradually declining. 48Joint Committee on Taxation, Testimony of George K. Yin, Chief of Staff of the Joint Committee on Taxation at a Hearing of the Senate Committee on Finance on ‘‘Social Security: 

Achieving Sustainable Solvency,’’ JCX–38–05, May 25, 2005, available at http:// 

finance.senate.gov/imo/media/doc/gytest052505.pdf. 49Social Security Administration. 2009. Social Security Amendments of 1983; H.R. 1900. 50 Joint Committee on Taxation, 2005. 

all newly hired federal employees into Social Security but did not 

extend that requirement to non-covered State and local employees.47 However, Congress no longer allowed states that provide Social Security coverage to drop that coverage. 

Extend Social Security Coverage to Newly-Hired Non-covered 

State and Local Government Employees. In order to achieve more 

universal coverage under Social Security, newly hired state and 

local government workers could be required to participate in Social 

Security. Under this proposal, these workers would be required to 

pay Social Security taxes and be eligible to receive benefits. This 

change may also impact the funding of the state and local government of pension systems. State and local governments would need 

time to modify their pension systems to fit with the Social Security 

program, as was done for newly-hired federal employees after 1983. 

If, over a five year period, all newly-hired state and local employees 

were brought into Social Security coverage, this change is projected 

to reduce the 75-year deficit by about nine percent, or 0.17 percent 

of payroll. The slight increase in revenue occurs because the newlycovered workers and employers start to pay into Social Security immediately, but claim benefits in the future. 

Option to Treat All Salary Reduction Plans Like 401(k)s. Under 

the 1983 amendments to Social Security, employees pay Social Security and Medicare taxes on their contributions to retirement accounts, such as section 401(k), 403(b) and 457 plans, but they do 

not pay Social Security and Medicare taxes on their payments into 

other types of salary reduction plans, or ‘‘flexible spending accounts.’’ These are accounts that employers set up to allow their 

workers to exclude from taxable income out-of-pocket spending for 

health care, dependent care, or qualified commuting costs for parking, van pooling, or transit fares (Joint Committee on Taxation 

2005).48 Employee contributions to both 401(k)s and other flexible 

spending accounts are exempt from personal income taxes for employees. 

The legislative rationale for keeping 401(k) contributions subject 

to Social Security and Medicare taxes was to ensure that such 

plans are not used to avoid Social Security tax liability and that 

employees receive Social Security protection based on those 

wages.49 This rationale applies equally to salary reduction plans 

used for other purposes.50 Exempting employee payments into 

flexible spending accounts from Social Security and Medicare taxes 

means that the respective Trust Funds are deprived of both the 

employee contributions and the employers’ matching share of Social 

Security and Medicare contributions. If all employee contributions 

into salary reduction plans were treated like 401(k) contributions 

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51Diamond, Peter A. and Peter R. Orszag, ‘‘Saving Social Security: A Balanced Approach,’’ 

Washington, DC: Brookings Institution Press, 2004. 52 Each member of a couple can leave $3.5 million to non-spouse heirs without incurring any 

tax liability, thus shielding from taxation married couples’ estates valued up to $7 million. 53 If Congress allowed the estate tax to return to its higher 2001 level in 2011, then this option would use part of estate tax revenue to pay for Social Security and part would go to general 

revenues. 

and subject to the payroll tax, it is projected that the 75-year deficit in the Social Security program would be reduced by about 12 

percent, or 0.25 percent of taxable payroll. 

Options to Use Progressive Taxes to Cover Social Security’s Legacy 

Costs 

As described in the previous section, one reason the Social Secu- rity program faces fiscal deficits is due to the estimated $13 trillion 

in intergenerational transfers,51 or ‘‘legacy costs’’, that arose from 

current generations of retirees providing for their parents’ and 

grandparents’ retirement income security during the early years of 

the program. Some have argued that revenue to pay for these costs 

should be raised in ways other than the Social Security payroll tax 

and have proposed dedicating revenue from the estate tax to the 

Social Security Trust Funds or levying a new legacy tax on earnings above the tax cap on high-income households. • Dedicate Estate Tax Revenue at the 2009 Level to Social Security. Revenue from the estate tax could be used to cover part of Social Security’s legacy cost. In 2009, the estate tax applied only to 

the value of an estate in excess of $3.5 million if it is not left to 

a surviving spouse, who can inherit all assets tax-free.52 Values 

above that level not inherited by a spouse are taxed at 45 percent, 

with 55 percent going to non-spouse heirs. The estate tax is slated 

to fall to zero in 2010, and then revert to the higher tax rates applicable in 2001 (a 55 percent tax on estates over $1 million for individuals and $2 million for couples). Preserving the estate tax into 

the future, and dedicating the revenue from the tax with the 2009 

level of exclusion and tax to Social Security, would reduce the longterm deficit by 0.51 percent of payroll, thereby eliminating about 

one fourth of the deficit.53 This estimate assumes that the estate 

tax threshold for Social Security revenue will remain $3.5 million 

for all future years. If the amount of the estate tax exemption rose 

with the consumer price index, this option would reduce the 75- 

year deficit by 0.40 percent of payroll or about one-fifth of the deficit. 

• Three percent Legacy Tax on Earnings Above the Tax Cap. A 

legacy tax on earnings above the taxable earnings cap could be 

raised as a way to ensure that very high earners contribute to financing Social Security’s legacy cost in proportion to their full 

earnings. If a three percent legacy tax on earnings above the tax 

cap began in 2010 (1.5 percent for workers and employers each) 

and the higher earnings did not count toward benefits, the longterm deficit would be reduced by 0.57 percent of taxable payroll, or 

by just over one-fourth. 

• Three percent Legacy Tax on Adjusted Gross Income (AGI) over 

$250,000 for Couples and $125,000 for Individuals. The legacy tax 

threshold could be raised to eliminate increases on the middle 

class. Dedicating to Social Security a three percent legacy tax on 

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AGI over $250,000 for couples and $125,000 for individuals starting 

in 2010 is projected to reduce the 75-year deficit by 0.74 percent 

of taxable payroll, thereby reducing the deficit by just over onethird, assuming thresholds indexed by average wage growth. • Five percent Legacy Tax on Adjusted Gross Income over $250,000 for Couples and $125,000 for Individuals. Dedicating to Social Security a five percent legacy tax on AGI over $250,000 for 

couples and $125,000 for individuals is projected to reduce the 75- 

year deficit by 1.23 percent of taxable payroll, thereby eliminating 

roughly three-fifths of the deficit. 

OPTIONS TO MAINTAIN RESERVES AND DIVERSIFY INVESTMENTS

As part of a Social Security financing strategy, the federal government could increase and maintain large reserves so that the investment income would remain as a permanent source of support 

for Social Security. A portion of these Social Security funds could 

be invested in equities as is done by most other public and private 

pension plans. Several other government pension programs, such 

as those for employees of the Federal Reserve System, the Tennessee Valley Authority, and the Railroad Retirement Board, already make such direct investments in stocks, as does the Canadian social insurance system. 

Investing in equities would add risk to the investment portfolio 

and exposes the Trust Funds to increased liabilities in times of economic downturn. The impact on program solvency depends on the 

assumptions about the long term rates of return of equities relative 

to Treasury bonds. If they are equal, then diversifying investments 

will have no impact on solvency. The rate of return on equities has 

traditionally outpaced the return on bonds, however, some economists argue that the difference in the returns corresponds to the 

difference in risk between these assets. The following are proposed 

options for investing a portion of these funds in the equity markets, 

with projected impacts based on high, medium, and low rates of return. 

• Gradually Invest 15 percent of Trust Fund Assets in Equities. 

The government could gradually invest Trust Fund assets in a 

broad index of equity market securities, such as the Wilshire 5000. 

If the Trust Funds’ investments in equities increased by 1.5 percent a year for 10 years and equity investments were maintained 

at 15 percent thereafter, it would reduce the long-range deficit by 

about 14 percent, or 0.27 percent of taxable payroll. These calculations assume that Trust Funds invested in equities earn a constant 

nominal 9.4 percent return (or 6.4 percent real return over 2.8 percent inflation) this is 3.5 percentage points over the expected average yield on long-term Treasury bonds. If one assumes that the investment earns the same return as Treasury bonds (2.9 percent 

real), there would be no impact on the 75-year deficit. 

• Gradually Invest 40 percent of Trust Fund Assets in Equities. 

Alternatively, a larger portion of Trust Fund assets could be invested in equities. If 40 percent of the Trust Funds’ assets were invested in equities, phased in over 15 years (between 2010 and 

2024), and invested in a broad index of equity markets which 

earned a 9.4 percent nominal return (or a real return of 6.4 percent 

on top of inflation), it would eliminate one third of the long-range 

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deficit and reduce the long-term deficit by 0.67 percent of payroll. 

If, instead, the same investment policy ended up producing a smaller return of 8.4 percent (or a real return of 5.4 percent on top of 

inflation), the policy could reduce the long-term deficit by 0.48 percent of taxable payroll, thereby eliminating about one-fourth of the 

long-term deficit. If one assumes that the investment earns the 

same return as Treasury bonds (2.9 percent real), there would be 

no impact on the 75-year deficit. 

OPTIONS TO REDUCE BENEFITS TO ADDRESS PROGRAM SOLVENCY

Options that would lower future benefits to balance long-term finances include those that would reduce the annual cost-of-living 

adjustment (COLA), increase the age for receiving full retirement 

benefits, lengthen the average period used to calculate lifetime 

earnings, lower benefits for new beneficiaries, and lower the benefit 

payable to spouses of retired workers. 

Options to Reduce the Cost-Of-Living Adjustment 

Under current law, Social Security benefits are automatically adjusted each year to keep up with the cost of living, as measured 

with the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI–W). Some proposals would lower Social Security 

benefit costs by changing the way in which Social Security benefits 

are adjusted to keep pace with inflation. Some proposals would pay 

less than the full COLA by adjusting benefits by the COLA minus 

one percent, or minus half of one percent. Another proposal would 

shift to a new index. Groups of beneficiaries with relatively long 

periods of eligibility for benefits, including older beneficiaries, 

women, survivors, disabled beneficiaries, and low-income beneficiaries, would face the most significant impacts on their benefits 

from COLA reductions. These categories of beneficiaries also have 

the highest rates of poverty and are the most reliant on income 

from Social Security. • Reduce the COLA by one percent each year. If the annual 

COLA increase for Social Security beneficiaries were reduced by 

one percentage point, the long-term deficit would decline by 1.55 

percent of taxable payroll, or about 78 percent. If inflation were 2.8 

percent per year (as assumed by the Trustees), the annual increase 

for beneficiaries would be 1.8 percent per year. This change would 

impose the greatest burden on the oldest beneficiaries because the 

reductions accumulate over time. For example, a 92-year-old beneficiary would have the purchasing power of her or his benefits eroded by 25 percent if the cost of living went up by 2.8 percent every 

year, but he or she received only a 1.8 percent increase each year. 

• Reduce the COLA by one-half percent each year. If policymakers reduce the COLA by half a percentage point, this could potentially reduce the long-range deficit by 0.81 percent of taxable 

payroll, thereby eliminating about 40 percent of the shortfall. In 

this scenario, a 92-year-old beneficiary would see the purchasing 

power of his or her benefits eroded by 14 percent if inflation were 

2.8 percent per year, but she or he received only a 2.3 percent annual increase. 

• Adopt the ‘‘Chained’’ Consumer Price Index (CPI). Social Security benefits are now automatically adjusted by changes in the 

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CPI–W, as measured by the Bureau of Labor Statistics (BLS). The 

BLS has developed a new ‘‘chained’’ CPI. It differs from the CPI– 

W in that it takes into account purchasing substitutions across 

broad categories of goods and services (such as spending less on 

food to pay for higher-priced gasoline). Because the ‘‘chained’’ CPI 

is expected to increase about 0.3 percent slower each year than the 

CPI–W, this change would reduce the long-run deficit by 0.49 percent of taxable payroll, thereby shrinking the shortfall by nearly 

one-fourth. Proponents of this approach argue that the chained CPI 

is a more accurate and up-to-date measure of the cost of living. Opponents point out that while it may be more accurate for the general population, it may be less accurate for seniors who spend a 

larger share of their incomes on health care. To the extent that the 

chained CPI understates increases in the cost of living for beneficiaries and is lower than the CPI–W, the oldest beneficiaries 

could have significant reductions in their benefits, as would be the 

case with all COLA reductions. 

Options to Raise the Age for Full Retirement Benefits 

The age at which retirees can collect full Social Security benefits 

is now 66 years for people born in 1944 (who reach 65 in 2009). 

It is scheduled to rise to 67 for those born in 1960 or later. Increasing the full benefit age would improve Social Security’s long-range 

finances because such a change would further lower benefits for all 

future retirees. For example, when the full benefit age was 65, benefits starting at age 62 were reduced by 20 percent; when the full 

benefit age reaches 67, benefits starting at 62 will be reduced by 

30 percent, while benefits taken at age 65 will be reduced by 13.3 

percent. 

Proponents of increasing the full benefit age believe that retirement ages should rise as people are living longer and that a reduction in benefits would encourage individuals to work longer. Opponents point out that Social Security’s full-benefit age (67 in the 

near future) is already much older than eligibility ages in private 

or public pension plans, which remain 65 or earlier, and that working longer may not be an option for those in physically demanding 

jobs or for those who cannot find work. Moreover, the full-benefit 

age is older than the ages for penalty-free withdrawals from 

401(k)s or IRAs (591⁄2). As under current law, benefits for the disabled will be unaffected. • Accelerate the Increase to 67; then Increase the Full-Benefit Age 

by One Month Every Two Years to Age 68. If policymakers speed 

up the increase in the full-benefit retirement age to reach 67 for 

those born in 1953 or later, and raise the age one month every two 

years until it reaches age 68 for people born in 1977 and later, 

these changes are estimated to reduce the long run deficit by 0.46 

percent of taxable payroll. This would eliminate just under onefourth of the long-term deficit. Under this change, when the full 

benefit age is 68, benefits starting at age 65 would be reduced by 

20 percent and benefits starting at age 62 would be reduced by 

about a third. 

• Accelerate the Increase to 67; Then Increase the Full-Benefit 

Age by One Month Every Two Years to Age 70. This option would 

continue to increase the full-benefit age to 70. If policymakers 

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speed up the increase in the full-benefit retirement age to reach 

age 67 for those born in 1953, and then extend it one month every 

two years until it reaches age 70 for people born in 2025, these 

changes would reduce the long-term deficit by 0.62 percent of taxable payroll. This would eliminate just under one-third of the longrange shortfall. With this change, the benefit reduction for early retirement would be larger. When the full-benefit age reached 70, 

benefits starting at age 65 would be reduced by 30 percent and 

benefits starting at age 62 would be reduced by 45 percent. 

• Gradually Index the Full-Benefit Age for Longevity Indefinitely. 

After the full-benefit age reaches 67 for those born in 1960, the 

full-benefit age would increase by one month every two years for 

those born after 1960. It would increase to age 68 for those born 

in 1984, to 69 for those born in 2008 and to about age 70 for individuals born in 2032. This schedule roughly matches assumptions 

about increasing life expectancy for people reaching age 65 in the 

future. This change would reduce the long-run deficit by 0.40 percent of taxable payroll, thereby eliminating about 18 percent of the 

long-term shortfall. 

Options to Lengthen the Career-Earnings Averaging Period 

As described previously, Social Security benefits are based on a 

formula that uses a worker’s highest 35 years of earnings. Increasing the number of work years for calculating average lifetime earnings will lower future benefits because the additional years of earnings included in a worker’s average lifetime earnings will be lower 

than each of the 35 years now used. This reduction would have the 

greatest impact on individuals, especially those who are less educated, low-income workers and women, with gaps in their paid 

work or individuals who spent part of their working lives not covered by Social Security because the additional years included would 

likely be years with zero earnings. It would have a small impact 

on individuals who had steady and consistent covered work records 

of 38 or 40 or more years of work. 

• Increase the Averaging Period from 35 to 38 Years. An increase 

in the number of years used to calculate average lifetime earnings 

for retirement and survivor benefits (but not for disabled workers) 

from 35 to 38, phased in from 2010 through 2014, would reduce the 

long-term deficit by 0.29 percent of taxable payroll, thereby shrinking the shortfall by about 14 percent. 

• Increase the Averaging Period from 35 to 40 Years. Lengthening the averaging period to 40 years, phased in between 2010 

and 2018, for retirement and survivor benefits (but not for disabled 

workers) would reduce the long-term shortfall by 0.46 percent of 

taxable payroll. It would shrink the shortfall by about one-fourth. 

Options to Reduce Benefits for New Beneficiaries 

Two options below illustrate the impact of immediate across-theboard reductions in benefits for new beneficiaries, while a third option gradually phases in reductions that exempt those with very 

low lifetime earnings. A fourth option gradually scales back benefits for dependent spouses (but not widowed spouses) of retired 

workers. 

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54Patrick Purcell, Neela K. Ranade, and Laura Haltzel, ‘‘Indexing Social Security Benefits: 

The Effects of Price and Wage Indexes,’’ Congressional Research Service, May 12, 2005 

(RL32900), available at http://www.aging.senate.gov/crs/crslsociallsecuritylpolicy.cfm. 

• Reduce benefits by Three Percent for New Beneficiaries in 2010 

and Later. If benefits were reduced by three percent for everyone 

newly eligible in 2010 or later, this change would reduce program 

costs by 0.36 percent of taxable payroll, thereby reducing the 75- 

year deficit by just under one-fifth. This change would lower benefits for all new recipients, including retirees and their dependents, 

widowed spouses, disabled workers and their families, and families 

with children whose working father or mother died. • Reduce Benefits by Five Percent for New Beneficiaries in 2010 

and Later. If benefits were reduced by 5 percent for everyone newly 

eligible for benefits in 2010 or later, it is projected that it would 

reduce program costs by about 0.61 percent of taxable payroll, 

thereby lowering the long-range deficit by about three-tenths. • Price Index Benefits for Successive Generations Beginning in 

2013. Under current law, benefits for each successive age cohort (or 

generation) of new beneficiaries are indexed to keep pace with average-wage growth. The rationale for doing so is to provide stable 

replacement rates for future retirees across generations so that 

benefits for an average earner retiring at full-benefit age in any future year would replace the same portion of career earnings as for 

today’s retirees. After entitlement, benefits are automatically adjusted to keep pace with price growth (inflation), with the aim of 

maintaining beneficiaries’ purchasing power. A variety of options 

would gradually lower future benefit levels by indexing benefits for 

newly eligible retirees across generations by price growth instead 

of the higher average-wage growth. Many such plans would exempt 

the lowest earning retirees from the benefit reductions and are 

sometimes referred to as ‘‘progressive price indexing’’.54 These proposals would make the largest benefit cuts for those who earned 

more and paid higher contributions over their careers. After a period of time under progressive price indexing, the majority of beneficiaries would receive the same flat benefit with little relation to 

what contributions they had made. The Social Security Actuaries 

have estimated that one progressive price indexing proposal that 

exempted the bottom 30 percent of earners would be projected to 

reduce long-range costs by about 1.31 percent of taxable payroll, or 

by just under two-thirds of the long-range deficit. 

• Gradually Lower the Supplemental Spouse Benefit. Under current law, the spouse (age 62 or older) of a retired or disabled worker can receive a benefit of up to 50 percent of the primary worker’s 

benefit, but only to the extent the benefit exceeds what the spouse 

is entitled to on the basis of her or his own work record. One such 

option would gradually lower the supplemental spouse benefit for 

persons newly eligible in 2010 and later. The reduction from 50 to 

33 percent of the primary worker’s benefit would phase in by one 

percentage point a year over 17 years—from 49 percent for the 

newly eligible in 2010, to 33 percent for the newly eligible in 2026 

and later. The change is estimated to lower the 75-year average 

costs by 0.12 percent of taxable payroll and reducing the long term 

deficit by about six percent. Reductions to the spousal benefits 

could also be combined with improving benefits for widowed 

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55GAO, Social Security: Options to Protect Benefits for Vulnerable Groups When Addressing 

Program Solvency, GAO–10–101R (Washington, D.C.: December 7, 2009), available at 

http://www.aging.senate.gov/letters/gaossreform.pdf. 56See GAO, Social Security: Options to Protect Benefits for Vulnerable Groups When Addressing Program Solvency, GAO–10–101R (Washington, D.C.: December 7, 2009) for methodology, 

available at http://www.aging.senate.gov/letters/gaossreform.pdf. 

spouses and/or for providing credit for caring for young children as 

part of the benefit that workers earn based on their own work 

records. However, depending on how the benefits are balanced, it 

could have a positive or negative effect on program solvency. Also, 

a reduction in supplemental spouse benefit applied to the benefits 

of divorced spouses could reduce benefits for a group already more 

likely to be poor. 

OPTIONS TO PROTECT BENEFITS FOR VULNERABLE 

GROUPS 

In order to modernize the Social Security, any proposal for reform must ensure benefits remain adequate for current and future 

vulnerable Americans who rely on Social Security the most. At the 

request of the Aging Committee, the Government Accountability 

Office (GAO) identified proposals for improving benefits for lifetime 

low earners, low-income women, and the oldest beneficiaries.55 In 

certain cases, an option targeting one group may also address concerns about other groups due to the overlap in certain demographic 

groups. In addition to examining an option’s impact on improving 

benefit adequacy, GAO examined the implications on program solvency and administration. Therefore, GAO’s assessment is categorized as follows: 

Adequacy: Retirement security experts and agency officials 56 had 

mixed views about the potential effectiveness of these options. 

While experts told GAO that several of these options could help address concerns about benefit adequacy, agency officials said they 

may not have the expected effects because of the complex rules governing Social Security benefits. An option’s design will play an important role in determining its effectiveness. 

Solvency: Because these options increase benefits, they have cost 

implications that affect the solvency of the Social Security system. 

The cost of a given option will depend on the number of people affected by it and the amount of the benefit increase. Additionally, 

cost will be affected by interactions with other elements of an overall Social Security modernization proposal. Key factors that influence cost are described for each of the options. 

Administration: Implications for program administration vary 

among the options. Retirement security experts and agency officials 

said that some options could be fairly easy to administer, while 

others could be very complex. Even the less complex options could 

create additional work for SSA, such as monitoring eligibility for 

additional benefits. Options that increase the number of people eligible for benefits could add to SSA’s administrative workload. 

GAO identified and assessed the following modernization options: 

OPTION: GUARANTEEING A MINIMUM BENEFIT

Guaranteeing a minimum benefit by increasing Social Security 

retirement benefits for those who have worked in low-wage jobs 

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57The Social Security Amendments of 1972 added the ‘‘special minimum benefit’’ provision. 

(42 U.S.C. § 415(a)(1)(c)(i)). 58Other options would provide benefits ranging from 75 percent of the federal poverty line 

for those meeting the standard Social Security eligibility requirements (about 10 years of covered employment) up to 125 percent of the poverty line for a 30-year worker. 59 How the initial benefit level increases for beneficiaries newly eligible in succeeding years 

would also influence costs. For example, over time, indexing the benefit to wages would be more 

costly than indexing to prices. 

throughout their careers addresses concerns about benefit adequacy. A ‘‘special minimum benefit’’ provision intended to increase 

benefit adequacy for low-earning steady workers was enacted in 

1972.57 However, because its eligibility threshold has not kept pace 

with wage growth, few people still qualify for the benefit. A number of proposals include a new minimum benefit option. The 

amount and structure of the benefit varies among proposals, but 

most minimum benefit options are designed to address benefit adequacy by providing a retirement benefit equal to some multiple of 

the federal poverty line, with the multiple based on years worked 

in covered employment. For example, one option would provide a 

minimum benefit equal to 120 percent of the poverty line for a minimum wage earner who had worked for 30 years. Another option 

would provide a minimum benefit equal to 100 percent of the poverty line for a 30-year worker and 111 percent of the poverty line 

for a 40-year worker.58

Adequacy: The guaranteed minimum benefit option targets lifetime low earners, a vulnerable group that relies heavily on Social 

Security benefits for its retirement income. Retirement security experts said that this option targets a broader group of beneficiaries 

than proposals that focus on specific subgroups of low earners. SSA 

officials said that, depending on how this option is designed, it 

could work well, but it is difficult to target lifetime low earners effectively. For example, some officials and experts said that requiring a long work history is problematic because low earners often 

have recurring periods of unemployment and cannot satisfy such a 

requirement. Thus, the target population may not be reached if a 

lifetime of work is required to earn the benefit. However, other experts said that if a lifetime of work is not required, some people 

outside the target population would also benefit. For example, 

higher-wage workers who worked for a short period of time may 

also receive benefits. 

The impact of this policy would likely decline over time, as the 

federal poverty line tends to grow slower than wages. Therefore, 

tying the minimum benefit to the federal poverty line could cause 

these benefits to lose value over time relative to the growth in the 

standard of living, similar to the current special minimum benefit. 

Future generations would have to find new benchmarks to ensure 

a minimum benefit remains adequate. 

Solvency: Cost implications of this option depend on the number 

of work years required for eligibility, since that requirement will 

directly influence the number of people who would qualify for benefit increases. A shorter work requirement will result in more people being eligible, and thus costs will be higher. Additionally, most 

of the options reviewed set the benefit amount at some multiple of 

the poverty line.59 The multiple used can have a significant impact 

on cost. For example, a guaranteed minimum benefit equal to 75 

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60This is a GAO calculation based on the 2009 federal poverty guideline of $902.50 per month 

for a single-person home in all states, except Alaska and Hawaii, and the District of Columbia. 61 Andrew G. Biggs, ‘‘Enhancing Social Security benefits for low earners: Effects of reducing 

eligibility requirements for Social Security retirement benefits,’’ National Academy of Social 

Insurance (Nov. 14, 2008), available at http://www.nasi.org/sites/default/files/research/ 

AndrewlBiggslJanuaryl2009lRockefeller.pdf. 62 42 U.S.C. § 415(a)(7). 63The Windfall Elimination Provision is an existing Social Security provision that reduces Social Security benefits for those who also receive pensions from employment that is not covered 

by Social Security. Noncovered workers do not pay Social Security taxes on their noncovered 

Continued 

percent of the 2009 federal poverty guidelines would be $677 per 

month, whereas a benefit equal to 125 percent of the guidelines 

would be $1,128 per month.60

Administration: For the most part, experts and SSA officials did 

not raise concerns about implementing and administering a minimum benefit option, although one expert said that policy makers 

would have to consider how to phase it into the Social Security system. 

OPTION: REDUCING WORK REQUIREMENTS FOR ELIGIBILITY

Reducing the work requirements for Social Security retirement 

benefit eligibility enables people who have shorter earnings histories to receive benefits. While some people who do not have 40 

credits are still eligible for benefits based on the earnings of an eligible spouse, others do not qualify for any benefits. For example, 

a small number of unmarried individuals fail to qualify for benefits 

due to short earnings records. A reduced work requirement would 

allow people with shorter earnings records, potentially as short as 

a single credit of covered employment depending on how it is designed, to receive benefits. Benefit amounts would be calculated 

under the existing formula, which uses the worker’s average indexed monthly earnings during the 35 years in which he or she 

earned the most, even if there were no earnings from covered employment during some of those years. SSI benefits exist outside of 

OASDI benefits to help those with shorter earning histories. 

Adequacy: Reducing the Social Security work requirement is an 

option that targets workers with low lifetime earnings due to short 

work histories, as opposed to those with long histories of low earnings. SSA officials told GAO there are many people who fall just 

short of the 40 credits requirement because they have intermittent 

work histories. However, officials also said many of those people 

may already be eligible for spousal benefits, resulting in few people 

benefiting from this option. Other retirement security experts expressed similar opinions about the limited number of people who 

would be helped by reduced work requirements. In addition, agency 

officials and experts said benefits based on such short work histories are likely to be very low and questioned the effectiveness of 

this option in addressing benefit adequacy. A proposal that includes this option simulated its potential effect and found similar 

limitations.61 This option could also expand eligibility to those who 

receive benefits from a pension for work in non-covered employment for state and local governments, but an offset, such as the 

Windfall Elimination Provision 62 with some modifications, could be 

applied to those benefits.63

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earnings. This provision is intended to treat such beneficiaries in a manner that parallels treatment of beneficiaries who paid Social Security taxes on all of their lifetime earnings. 64 A worker’s AIME is calculated based on a worker’s highest 35 years’ earnings, after earnings have been indexed for wage growth over time. 

Solvency: Because this option increases the number of people receiving benefits, it has cost implications for Social Security’s solvency. The number of credits required will directly influence the 

number of people who would be newly eligible for benefits. A shorter work requirement will result in more people being eligible. However, because few people are actually expected to receive benefits 

under this option, and those who do are expected to receive modest 

benefits, the impact of a reduced work requirement on program solvency is unlikely to be very large. 

Administration: Because few people are expected to gain eligibility under this option, the impact on SSA’s workload is likely to 

be small. 

OPTION: SUPPLEMENTING BENEFITS FOR LOW-INCOME SINGLE

WORKERS

Supplementing benefits for low-income single workers by adjusting the formula used to calculate Social Security retirement benefits addresses concerns about benefit adequacy for that group. In 

one proposal, the first threshold in the benefit formula would be 

adjusted or supplemented so that it increased by one-half, from 

$744 to $1,116 in 2009, for eligible beneficiaries. The benefit 

amount would be capped to prevent eligible workers from receiving 

higher benefits than those who just miss qualifying for the supplement. 

To be eligible for the supplement, a worker’s AIME 64 must be 

lower than a multiple of the existing formula’s first threshold, such 

as 150 percent or 300 percent. For example, if the multiple were 

set at 300 percent, a worker whose AIME was less than $2,232 (3 

× $744) in 2009 would qualify. To receive the supplement, a worker 

must have at least 30 years of covered employment and the worker 

cannot be eligible for spousal benefits, nor can anyone else claim 

spousal benefits based on that worker’s earnings record. 

Adequacy: The benefit supplement option targets lifetime low 

earners, generally women, who never married or were not married 

long enough to qualify for spousal benefits. Low-income single and 

divorced women are expected to benefit most from this option. 

While some retirement experts are supportive of this option because it focused on the needs of low-income women, others questioned the rationale for basing eligibility on marital status and said 

either that eligibility for the supplement should be expanded to a 

broader group of beneficiaries or that the needs of low-income single women could be addressed through another option, such as a 

guaranteed minimum benefit. 

Solvency: Because a benefit supplement for low-income single 

workers increases benefits, it has cost implications for Social Security’s solvency. The extent to which this option affects solvency will 

depend largely on the number of people who would be eligible for 

it. A key factor that directly influences the number of eligible beneficiaries is the multiple that would be applied to a worker’s AIME, 

ranging from 150 percent to 300 percent. Another factor that could 

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65One proposal that includes this option defines marital status at the time when a person 

first applies for Social Security retirement benefits and includes a provision to address changes 

in status after that time. See Patricia E. Dilley, ‘‘Restoring Old Age Income Security for Low 

Wage Single Workers,’’ National Academy of Social Insurance (2009), available at http:// 

www.nasi.org/sites/default/files/research/PatricialDilleylJanuaryl2009lRockefeller.pdf. 66 Benefit reductions would be more widespread for married individuals in single-earner couples, and benefit increases would be more prevalent for those in dual-earner couples. See Iams, 

et al., ‘‘Earnings Sharing in Social Security: Projected Impacts of Alternative Proposals Using 

Continued 

influence cost is the way ‘‘single’’ is defined for purposes of determining eligibility.65

Administration: Agency officials and retirement security experts 

told GAO that determining an individual’s single status could be 

administratively complex because people’s marital statuses change 

over time and could change after an initial determination is made, 

for example, from single to married. 

OPTION: ADOPTING EARNINGS SHARING

Earnings sharing combines married individuals’ annual earnings 

and evenly divides them between the two spouses for each year of 

marriage when calculating individuals’ Social Security retirement 

benefits. Each spouse accrues credits toward an individual benefit, 

even if only one of them worked. An earnings sharing approach is 

often proposed as an alternative to or an adjustment of existing 

spousal and survivor benefits. For example, under earnings sharing, divorced spouses whose marriages lasted less than 10 years 

would be entitled to the individual benefits accrued during the 

marriage. This option is also seen as a way to equalize benefits received by dual-earner married couples with those of single-earner 

couples. Currently, a single-earner couple receives higher total benefits than a dual-earner couple with the same total lifetime earnings. Under some earnings sharing, the total benefit amount a single-earner couple receives would be the same as the amount received by a dual-earner couple who makes the same total income, 

rather than 150 percent of the worker’s benefit. Over the years, analysts have proposed an extremely wide range of earnings sharing 

proposals, which treat spouse and survivor benefits in markedly 

different ways (some eliminate these benefits altogether, others develop various survivor adjustments, others impose self-financing of 

survivor benefits, and others direct cost savings toward higher 

worker benefits). Such details make large differences in the proposals’ costs and distributional effects. 

Adequacy: Earnings sharing targets divorced spouses, generally 

women, whose marriages were too short to qualify them for spouse 

or survivor benefits and whose incomes while married were lower 

than their spouses’ incomes. Some retirement security experts and 

agency officials said earnings sharing could increase benefits for divorced women. Proponents of this option also focus on it as a 

means to improve equity between single earner and dual-earner 

married couples. However, other experts said this option would not 

do much to improve benefits for economically vulnerable beneficiaries, in part, because it is not well targeted. For example, 

SSA’s simulations found that earnings sharing would decrease benefits for the majority of future retirees, although benefits for some 

would increase.66 Specifically, benefits would decrease for about 50 

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the Mint Model,’’ Social Security Bulletin, vol. 69, no. 1 (2009), available at http://www.ssa.gov/ 

policy/docs/ssb/v69n1/v69n1p1.pdf. 67 According to the Census Bureau, the median duration of first marriages that ended in divorce was eight years in 2001. 68 In prior work, GAO found that very few people would be newly eligible for benefits if the 

marriage duration were reduced to 7 years. See GAO, Retirement Security: Women Face Challenges in Ensuring Financial Security in Retirement, GAO–08–105 (Washington, D.C.: Oct. 11, 

2007), available at http://www.gao.gov/new.items/d08105.pdf. 

percent of divorced women and increase for about 40 percent of divorced women. Benefits would also increase for over one-third of 

married individuals, but decrease for the vast majority of 

widow(er)s. 

Solvency: Because earnings sharing would increase benefits for 

some but decrease them for others, its net impact on Social Security’s solvency is unclear. Its cost would depend on the relative 

numbers of people whose benefits increase or decrease and the 

amounts of those changes. In addition, cost will be affected by future demographic trends regarding marriage, workforce participation, and related variables. 

Administration: The extent to which this option increases SSA’s 

workload depends on the number of newly eligible people who 

would receive benefits, which will be influenced by future trends in 

marriage and workforce participation. Some additional administrative effort and cost would also be required to transition from the 

current system’s spousal benefit to an earnings sharing approach, 

in part because of the need to verify marriage and divorce data. 

OPTION: REDUCING THE MARRIAGE DURATION REQUIRED FOR

SPOUSAL BENEFITS

Reducing the number of years a marriage must have lasted for 

a divorced person to receive spousal benefits addresses benefit adequacy by increasing the number of people who are eligible to receive Social Security spousal benefits. Proponents of this option 

note that reducing the marriage requirement from ten to seven 

years would reflect current trends for shorter marriages.67 One Social Security proposal suggests that reducing the required marriage 

duration could be combined with a minimum work requirement for 

the divorced spouse. Combining at least seven years of marriage 

with a minimum of three years of work would mimic the standard 

10-year work requirement for Social Security retirement benefits. 

Adequacy: Reducing the marriage duration required for spousal 

benefits is an option that targets divorced spouses, generally 

women, whose marriages were too short to qualify them for benefits. One retirement security expert said that this option would be 

an improvement over the current 10-year requirement and other 

experts and agency officials said it would help address benefit adequacy for women. However, experts also said they do not expect 

this option to effectively target economically vulnerable groups. 

This option would not benefit women who were never married but 

could benefit higher-income women who are not economically vulnerable. 

Solvency: The extent to which this option affects solvency depends on how many people would become eligible with a shorter 

marriage requirement.68 Increased eligibility will depend on the 

way the option is designed. For example, not including a corsmartinez on DSKB9S0YB1PROD with REPORTS

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69The credit would remain income tested if the parents are living apart. 

responding work requirement would increase costs more because 

people who have no work history would also be eligible. In addition, 

cost will be affected by future demographic trends regarding marriage. 

Administration: The extent to which this option increases SSA’s 

workload depends on the number of newly eligible people who 

would receive spousal benefits, which will be influenced by future 

trends in marriage and workforce participation. 

OPTION: PROVIDING CAREGIVER CREDITS

Providing caregiver credits increases benefits for those who 

spend time out of the workforce to care for dependent children or 

elderly relatives. Time spent out of covered employment as a caregiver may reduce benefits for workers, and others may not work 

enough to earn the required 40 credits to be eligible for benefits. 

A caregiver credit option can be designed in different ways. One 

design allows a specified amount of caregiving time, such as three 

or four years, to count as covered employment, and assigns a wage 

to that time. For example, an average wage for all workers could 

be assigned or a wage linked to an individual beneficiary’s prior 

earnings could be used. Another design excludes a limited number 

of caregiving years from the benefit calculation so that instead of 

averaging earnings over 35 years, earnings are averaged over fewer 

years. A final design supplements caregivers’ retired worker benefits directly, regardless of whether they took time out of the workforce for caregiving. For example, an income-tested supplement 

could be given to increase retired worker benefits by 75 percent for 

those who have one child and 80 percent for those with two or more 

children. Both parents of a child would be eligible for this supplement, as long as the total household income did not exceed 125 percent of the federal poverty line.69

Adequacy: Caregiver credits seek to improve benefit adequacy for 

workers, primarily women, who have shorter earnings records because they spent time providing care for children or elderly relatives and do not qualify for spousal benefits because they never 

married or were not married long enough to qualify for them. Retirement security experts said this option recognizes the societal 

value of caregiving, but experts also said that, for various reasons, 

it may not reach its target population. For example, some low-income people are unable to take time off from work. Therefore, people who have relatively higher incomes may benefit more from the 

creation of caregiver credits. Effects would vary greatly based on 

the credits’ design. For example, capping the credit at half the average wage for caregiving years would provide more benefits for 

high income families. 

Solvency: Because caregiver credits increase benefits they have 

cost implications for Social Security’s solvency. The extent to which 

this option affects solvency depends largely on who would be eligible to receive the credit: one or both parents, all caregivers, or just 

those who have low incomes. Extending eligibility to a greater 

number of people will increase costs. In addition, the number of 

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70 42 U.S.C. 402(f)(2); (f)(3) and (q). 

years that credits may be received and the wage assigned to those 

years will impact costs. 

Administration: Retirement security experts and SSA officials 

told GAO that caregiver credits would be complex to administer. A 

key issue is how to verify that care was provided to a qualifying 

person. Experts said a birth certificate could be used to document 

child care, but elder care would be more burdensome to document. 

Measuring time off and verifying that caregiving actually occurred 

would also be difficult. 

OPTION: INCREASING SURVIVOR BENEFITS

Increasing benefits for surviving spouses, often widowed women, 

by providing a Social Security retirement benefit equal to 75 percent of the combined amount the couple received addresses concerns about benefit adequacy. The current benefit structure decreases household income upon widowhood by one-third if the couple’s benefits had been based on one spouse’s work history and up 

to 50 percent if both spouses had been receiving retired worker 

benefits. Increasing survivor benefits would lessen the magnitude 

of this change. 

Adequacy: Increasing survivor benefits is an option that targets 

widowed women, although widowed men could also benefit. Retirement security experts and agency officials said this option could address benefit adequacy for a vulnerable group and would be an improvement over the current system. They also said that this option 

can be targeted specifically toward low-income survivors, for example, by including a cap. Experts and agency officials also said this 

option addresses equity concerns by increasing benefits for dualearner couples. Under the current system, dual-earner couples experience a proportionally greater decrease in benefits upon the 

death of a spouse than single-earner couples experience. However, 

as some experts noted, this option could increase the disparity between benefits for women who do not qualify for spousal or survivor benefits relative to those that do qualify. 

Solvency: Increasing survivor benefits will have implications for 

Social Security’s solvency. The extent to which this option increases 

costs depends on how much greater the benefit amount is across 

all eligible survivors. Capping the amount of the increase based on 

income could help moderate costs. Some proposals also combine 

this option with a reduction in spousal benefits to help finance the 

increase in survivor benefits so it is cost neutral or has a very 

small affect on solvency. 

Administration: Agency officials told GAO that this option could 

be complex to administer, in part because it uses a ‘‘couple’s benefit’’ as a baseline for calculating survivor benefits. Since such a 

benefit does not currently exist in the Social Security system this 

could be problematic, for example, in cases where one of the 

spouses dies before retiring. In addition, officials said there are 

many complicated rules for survivors because of an existing provision, called the widow(er)’s limit, that caps benefit amounts for 

some survivors.70 Benefit increases expected under this option 

could be negated by this provision. To avoid this result, one prosmartinez on DSKB9S0YB1PROD with REPORTS

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71 Joan Entmacher, ‘‘Strengthening Social Security Benefits for Widow(er)s: The 75 Percent 

Combined Worker Benefit Alternative,’’ January 2009, available at http://www.nasi.org/ 

research/2009/strengthening-social-security-benefits-widowers–75–percent. 72This proposal presents different options for implementing the increase, for example, adding 

the supplement to the cost-of-living adjustment each year. 

posal 71 would use the deceased spouse’s full PIA in the calculation 

of the couple’s benefit, without any reduction because the deceased 

spouse claimed benefits before the FRA, and would increase disparities. 

OPTION: PROVIDING LONGEVITY INSURANCE

Providing longevity insurance addresses concerns about benefit 

adequacy by increasing Social Security retirement benefits for 

beneficiaries who reach an advanced age, such as 80 or 85. As people grow older, they risk outliving their other resources, become 

less able to work, and become more dependent on Social Security 

benefits for their income. Longevity insurance seeks to reduce the 

risk that they fall into poverty at older ages by increasing their Social Security benefits. 

This option could be targeted specifically toward low-income 

beneficiaries, or provided to all those who reach an advanced age. 

Work history could be an additional condition for eligibility. For example, one longevity insurance proposal increases benefits for people who have low benefits at age 82 and have at least 20 years of 

covered employment. It would provide a minimum benefit equal to 

70 percent of the federal poverty line for a 20-year worker and increases the benefit for each additional year of work. Another proposal increases benefits by 10 percent at age 85 for 30-year workers 

whose benefits are lower than 75 percent of the average benefit all 

workers receive.72

Adequacy: Providing longevity insurance targets the oldest Social 

Security beneficiaries. Retirement security experts believe this 

could be an effective option for addressing concerns about benefit 

adequacy for the very old, especially the oldest widows, because 

women generally live longer than men. However, some experts also 

said that unless this option is specifically targeted toward low-income beneficiaries, most of the benefits would accrue to higher-income people because they tend to live longer. In addition, agency 

officials said this option could create disincentives to save for retirement or incentives to spend down resources before beneficiaries 

become old enough to qualify for the longevity increase. By doing 

so, those whose assets would be too high to satisfy the means test 

could become eligible for the increase. 

Solvency: Providing longevity insurance would increase Social Security program costs. Key factors that influence costs include the 

age at which the benefit increases, the amount of the increase, and 

whether all beneficiaries or only low-income ones are eligible to receive the benefit. Providing the benefit at an earlier age, for example, at 80 instead of 85, would increase costs, as would providing 

it to all 80-year-olds instead of only those who are low income. Unless the proposal adjusts to increases in life expectancy, costs would 

increase in the future. A proposal that increased benefits by one 

percent for each year a beneficiary lived beyond their average life 

expectancy, so that beneficiaries who lived 10 years longer than life 

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73For purposes of this analysis, GAO specifically examined Social Security beneficiaries who 

receive retirement, spousal, or survivor benefits. 74The $20 amount is a general SSI income exclusion that was set in the original law, and 

has not been updated. 75For couples receiving SSI, the maximum allowable payment in 2010 is $1,011. Some states 

offer supplements to the federal SSI payment, which allow those with incomes above federal limits to qualify for SSI. 

expectancy would have a 10 percent higher benefit, would cost 0.08 

percent of taxable payroll. 

Administration: This option would not increase the number of 

beneficiaries SSA serves and could use existing information to determine eligibility, and retirement security experts and agency officials said that this option would be easy to administer. However, 

one expert said adding measures to improve targeting would increase administrative complexity. 

BENEFIT ADEQUACY OPTIONS COULD REDUCE OTHER 

BENEFITS FOR VULNERABLE GROUPS, BUT APPROACHES TO MITIGATE THESE EFFECTS ARE AVAILABLE 

Many Social Security retirement beneficiaries receive benefits 

from other federal programs. Nine percent of Social Security beneficiaries age 65 or older, or more than 2.7 million people, also receive Supplemental Security Income (SSI), Medicaid, or Supplemental Nutrition Assistance Program (SNAP) benefits.73 Increasing 

Social Security benefits to address concerns about adequacy for vulnerable groups of beneficiaries could result in a decline in benefits 

from these other programs. In fact, some beneficiaries could lose 

eligibility for benefits from the other programs altogether. On the 

other hand, some beneficiaries may not be affected because their 

incomes, even with increased Social Security benefits, would stay 

within the other programs’ eligibility limits. 

SUPPLEMENTAL SECURITY INCOME

An increase in Social Security retirement benefits could cause 

some SSI recipients to receive lower SSI benefits, although the 

total amount from both sources could remain constant or even increase. Some recipients would lose SSI eligibility altogether if their 

income, including their enhanced Social Security benefits, exceeded 

the SSI income eligibility standards. Every additional dollar of Social Security benefits, beyond the first $20,74 results in a dollar-fordollar reduction in SSI benefits. This trade-off results in no net loss 

of benefits from these two sources. However, there could be a loss 

of SSI eligibility if the Social Security benefit increase causes 

earned and unearned income, after disregards, to exceed the maximum allowable SSI benefit, or $674 per month in 2010.75 Assuming no other sources of income, an SSI recipient who currently receives $693 per month from Social Security alone or both programs 

combined retains SSI eligibility, but an SSI recipient whose Social 

Security benefit exceeds $693 per month loses SSI eligibility (see 

Table 12). 

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76Medicaid is a joint state and local means tested program that finances health care coverage 

for certain categories of low-income individuals, including those age 65 and older. 77 Because eligibility standards for Medicaid can vary by state, an individual’s option for coverage may be affected by where he or she lives. 

TABLE 12: EXAMPLE OF HOW SSI ELIGIBILITY RELATES TO AN INDIVIDUAL’S INCOME 

Social Security Benefits .............................................................................................. $620 $693 $694 

Less income disregard ................................................................................................ ¥20 ¥20 ¥20 

Total countable income for SSI ................................................................................... 600 673 674 

SSI eligible? ................................................................................................................. Yes Yes No 

SSI benefits ................................................................................................................. 74 1 0 

Total income ....................................................................................................... 694 694 694 

Source: GAO analysis of SSI eligibility requirements. 

Losing SSI eligibility also closes one pathway to Medicaid eligibility for some individuals, although individuals may be able to 

keep their Medicaid coverage under other rules. Many experts said 

losing Medicaid eligibility is more detrimental to beneficiaries than 

losing SSI eligibility. Some beneficiaries would be harmed rather 

than helped because the loss of Medicaid coverage and the subsequent increase in out-of-pocket health care costs could significantly 

outweigh the Social Security benefit increase. Similarly, losing SSI 

eligibility also eliminates a pathway to SNAP eligibility for some 

households, but these households may still qualify for SNAP benefits based on net income. 

There are also reasons why some beneficiaries may prefer Social 

Security benefits to SSI benefits. Several retirement security experts said there may be a stigma associated with SSI that deters 

people from participating because it is viewed as welfare, while Social Security is tied to income earned through work. In addition, 

Social Security benefits do not require the income and asset testing 

that SSI benefits do, reducing the application burden for beneficiaries. SSA officials said applicants may consider that burden a 

deterrent to applying, especially if their potential SSI benefit is 

small. Because people may choose not to apply for SSI, some experts suggest that Social Security may more effectively target vulnerable populations. 

MEDICAID

For some beneficiaries, Medicaid coverage is linked to their receipt of SSI, which puts them at risk of losing Medicaid if they lose 

SSI because their Social Security benefits increase.76

However, those who lose their SSI benefits may be able to retain 

their Medicaid coverage under alternative state eligibility criteria.77 For example, they may still be eligible to retain Medicaid 

coverage if their income is low enough or if they qualify under state 

rules as ‘‘medically needy.’’ In 2007, about one-fifth of the more 

than 2 million Social Security beneficiaries who received Medicaid 

also received SSI benefits, and the other four-fifths were eligible for 

Medicaid under other criteria (see figure 9). 

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78Medicare does not provide coverage for these services. 79 Beneficiaries must also have resources that are at or below an established level to qualify 

for this assistance. 80 In 2007, all Social Security beneficiaries age 65 and older received Medicare benefits. 

Medicaid beneficiaries whose income increases to the level where 

they are no longer eligible for all Medicaid benefits may still qualify for assistance with Medicare premiums, cost-sharing, or both. 

However, under these circumstances, certain benefits that may be 

covered by Medicaid, such as dental, vision and long-term care 

services, would no longer be covered.78 The amount of assistance 

with Medicaid premiums and cost-sharing for which beneficiaries 

may qualify is based on several factors, including income levels and 

states’ policies. For example, states are required to provide assistance for Medicare premiums and cost-sharing to beneficiaries with 

incomes at or below 100 percent of the federal poverty line.79 For 

individuals with higher incomes, states may vary in the amount of 

premium and cost sharing assistance they provide. 

In general, because Medicaid eligibility requires beneficiaries to 

meet some sort of income test, an increase in Social Security benefits could cause those near these income limits to lose their Medicaid benefits entirely. The amount of the increase that would result in a loss of Medicaid may vary among states, because they 

have discretion to set income limits above federal mandatory minimums and other eligibility criteria. 

While Social Security beneficiaries who lose Medicaid would still 

have Medicare coverage, some beneficiaries could still incur significant out-of-pocket health care expenses.80 Researchers have found 

that individuals who qualify for both Medicare and Medicaid tend 

to have very low incomes and experience serious and costly health 

conditions, such as heart disease. 

SUPPLEMENTAL NUTRITION ASSISTANCE PROGRAM

An increase in Social Security benefits could cause a loss of Supplemental Nutrition Assistance Program (SNAP) eligibility for 

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81Supplemental Nutrition Assistance Program, formerly known as the Food Stamp Program, 

is a means-tested food assistance program designed to help low-income households with food 

purchases. 82 California converted SNAP benefits to cash included in state supplementary payments. 83 Households where all members receive Temporary Assistance for Needy Families, or in 

some places, general assistance (benefits for low-income individuals who are not eligible for federal assistance) do not need to meet separate income limits to qualify for SNAP. 84 Net income limits are higher in Alaska and Hawaii. In determining net income, households 

in all states are allowed to make certain deductions. 

some beneficiaries.81 In all states except California, households in 

which all members receive SSI qualify for SNAP without meeting 

an income test.82 If SSI eligibility is lost, beneficiaries may still 

qualify under SNAP’s income eligibility rules. In 2007, about 81 

percent of Social Security beneficiaries who received SNAP benefits 

qualified for them under the program’s rules, rather than through 

SSI, as illustrated in Figure 10. 

SNAP’s eligibility rules are based on income limits that are generally higher than those of SSI, and SNAP limits vary by household size, as shown in Table 13.83 Households with an elderly person must meet net income limits but not gross income limits to 

qualify for SNAP. Under current rules, an elderly individual living 

alone whose net monthly income exceeds $903 would not be eligible 

for SNAP benefits.84 Therefore, if an elderly individual whose net 

monthly income is close to the income limit receives a large enough 

increase in Social Security benefits he or she may no longer meet 

the income test for SNAP and lose all SNAP benefits. For example, 

if Social Security benefits are increased by $104 for an individual 

currently receiving $800, total income would increase to $904, and 

they would lose SNAP eligibility. 

TABLE 13: FISCAL YEAR 2010 SNAP INCOME LIMITS FOR HOUSEHOLDS WITH AN ELDERLY 

MEMBER 

Size of household One Two Three Four Five Six Seven Eight Additional 

members 

Net monthly income ....... $903 $1,215 $1,526 $1,838 $2,150 $2,461 $2,773 $3,085 +$312 each 

Source: U.S. Department of Agriculture, Food and Nutrition Service. 

Note: Households with an elderly person must meet net income limits, whereas other households must meet net and gross income limits. 

Income limits are higher in Alaska and Hawaii. 

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Although an increase in Social Security benefits could prompt a 

reduction in SNAP benefits, the total benefits received would increase. SNAP benefits are reduced by 30 cents for every additional 

dollar of Social Security, unless the increase becomes large enough 

to raise total income above the SNAP eligibility limit. For example, 

an individual whose net monthly income is $500 could currently 

qualify for $50 in SNAP benefits (see Table 14). If the individual’s 

monthly Social Security income increased by $100, raising net 

monthly income to $600, SNAP benefits would decline to $20 per 

month. However, total monthly income would increase by $70, from 

$550 to $620 per month. 

TABLE 14: EXAMPLE OF HOW SNAP ELIGIBILITY RELATES TO AN INDIVIDUAL’S INCOME 

Monthly net income .................................................................................................................... $500 $600 

(A) Maximum monthly SNAP allotment ...................................................................................... 200 200

(B) Net monthly income multiplied by 30 percent .................................................................... 150 180 

SNAP benefits (A–B) .................................................................................................................. 50 20 

Total Income ...................................................................................................................... $550 $620 

Source: GAO analysis of SNAP eligibility requirements. 

As with SSI, beneficiaries may prefer to receive benefits through 

Social Security instead of SNAP. Several retirement security experts said there may be a stigma associated with SNAP because it 

is viewed as a welfare program, while Social Security is tied to income earned through work, though stigma may be mitigated when 

SNAP benefits are provided via debit card. Additionally, unlike Social Security, SNAP benefits are subject to income and asset tests, 

which can create a burden for applicants and deter participation. 

Finally, beneficiaries may prefer the flexibility of Social Security, 

a cash benefit, to SNAP benefits, which are provided as grocery 

credits and restricted to food purchases. 

STEPS COULD BE TAKEN TO MITIGATE POTENTIAL 

BENEFIT REDUCTIONS 

Retirement security experts suggested several ways to mitigate 

the potential loss of benefits from other programs as a result of an 

increase in Social Security benefits for vulnerable groups. Each of 

these approaches would entail trade-offs, including additional costs 

and administrative effort for the affected programs. Depending on 

the scope and provisions of each option when implemented, these 

approaches could also increase states’ Medicaid caseloads and have 

a significant effect on their budgets. 

• Increasing the SSI general income disregard of $20 would let 

SSI recipients receive more Social Security before losing SSI eligibility. 

• Increasing the maximum allowable SSI benefit would also enable SSI recipients to receive more Social Security before losing SSI 

eligibility. 

• Creating a Social Security exclusion in SSI would allow income 

from Social Security to be disregarded when calculating SSI benefits. 

• Deeming those who qualify for SSI under current rules to be 

eligible for Medicaid would also allow those who would otherwise 

lose SSI eligibility to retain Medicaid coverage. The so-called ‘‘Picksmartinez on DSKB9S0YB1PROD with REPORTS

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85Pub. L. No. 94–566, § 503 codified at 42 U.S.C. § 1396a. 86 42 U.S.C. § 1382h(b). To qualify, a person must have been eligible for SSI for at least 1 

month, still meet the disability and nondisability requirements, need Medicaid in order to work, 

and have gross earned income that is either below a predetermined state threshold or below 

an individualized threshold. 

le Amendment’’ allows those formerly eligible for SSI to maintain 

SSI eligibility, at a benefit level of zero dollars, for the purpose of 

receiving Medicaid if they become ineligible as a result of Social Security cost-of-living adjustments.85 A similar approach could be 

used if beneficiaries become ineligible for Medicaid as a result of 

an increase to Social Security benefits for vulnerable groups. • Disregarding increased Social Security benefits in determining 

Medicaid eligibility would allow those who would otherwise lose 

Medicaid to retain their coverage. There is some precedent for this 

approach: individuals who meet certain criteria currently can continue to receive Medicaid even if their earned income becomes too 

high to qualify for SSI benefits. However, this existing provision 

applies only to those who need Medicaid to work.86

• Although Medicaid already has other eligibility pathways that 

are income-based and not linked to SSI, breaking the direct link 

between SSI and Medicaid eligibility would prevent a loss of SSI 

from affecting Medicaid benefits. One expert suggested using a program with a higher income limit than SSI, such as SNAP, to test 

income eligibility for Medicaid. Other experts said that if the income limit for Medicaid were tied to some multiple of the federal 

poverty line, such as 100 percent or 133 percent, more Medicaid 

beneficiaries would retain coverage, despite increases in Social Security benefits. 

CONCLUSION 

For nearly 75 years, the Social Security program has served as 

the foundation of retirement income for American workers and 

their families. Yet Social Security is much more than just a retirement program; it provides benefits to survivors and other dependents as well as to disabled workers. Even though the program currently boasts large Trust Funds, an aging American population, a 

decline in the birthrate, and an increase in life expectancy will 

soon place a financial strain on Social Security. Congress should 

tackle this issue soon, while only minor changes to the system are 

needed. 

This report presents several options for increasing the long term 

solvency of Social Security, and provides estimates of the impacts 

of these efforts on the Social Security Trust Funds. However, these 

estimates have several limitations that deserve careful consideration. First, these estimates are provided with the assumption that 

all other elements of Social Security remain the same. Because 

many of the reforms would interact with each other, the estimated 

impacts on solvency of two or more options cannot simply be 

summed to estimate their impact if they were to be implemented 

simultaneously, and need to be recalculated. Similarly, these estimates are based on a particular timing of their implementation. 

Combining options or changing the timing would require new estimates to predict their effects on solvency. Further, options to increase solvency may not impact everyone in the same way—some 

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recipients may see their Social Security taxes and benefits change, 

while others may not. The impacts of proposals should be examined 

for both current beneficiaries and future generations of retirees, as 

many options phase in over time. 

Social Security solvency and effectiveness are separate factors, 

but should be analyzed together. Efforts to improve solvency may 

enhance, weaken, or have no impact on Social Security’s current 

level of effectiveness in providing retirement security for all Americans. Improving the adequacy of benefits for vulnerable populations 

may also have a cost to implement. In short, a full consideration 

of any group of options requires a thorough analysis to predict 

their effects on solvency and adequacy. 

Modernizing Social Security means ensuring that the program is 

both solvent and effective, for all Americans, now and in the future. 

This is a complex task that will become increasingly difficult as the 

Social Security Trust Funds diminish. Congress will have to address the twin challenges of solvency and effectiveness simultaneously, and because the program is critical to every American 

family, it should be done in a bipartisan and transparent way. 

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APPENDIX 

HOUSE AND SENATE BUDGET PROCEDURES TO PROTECT SOCIAL

SECURITY BALANCES

The rules to ensure that legislation considered by Congress does 

not negatively affect the Social Security Trust Funds balances differ between the House and the Senate. 

In the House, a point of order (i.e., a floor objection) may be 

raised against a bill that proposes more than $250 million in Social 

Security spending increases or tax cuts over five years (counting 

the fiscal year it becomes effective and the following four years) unless the bill also contains offsetting changes to bring the net impact 

within the $250 million limit. Costs of prior legislation that fall 

within the five-year period must be counted. A point of order also 

may be raised against a measure that would increase long-range 

(75-year) average costs or reduce long-range revenues by at least 

0.02 percent of taxable payroll. 

In the Senate, the annual congressional budget resolution must 

include separate amounts for Social Security Trust Fund revenues 

and outlays for each year covered by the resolution (i.e., separate 

from the budget totals). These amounts must reflect surpluses of 

the Social Security Trust Funds that are not less than those projected under current law. Once the resolution is adopted by Congress, subsequent measures that would be projected to cause Social 

Security Trust Funds’ surpluses to be lower (or deficits to be higher) than those reflected in the amounts in the budget resolution are 

subject to a point of order. A motion to waive the point of order requires an affirmative vote of three-fifths of Senators (i.e., 60 Senators if there are no vacancies). 

These rules do not prevent Congress from considering legislation 

that is projected to increase or reduce the receipts and disbursement levels of the Social Security Trust Fund. Instead, the rules 

require that the net effect of such changes do not negatively affect 

the balances of the Social Security Trust Funds. Congress, however, is prohibited from including any changes to the Social Security program in reconciliation legislation, which is considered under 

expedited procedures. As a result, Congress must consider changes 

to the Social Security program separate from other budgetary legislation. 

In addition, both the House and Senate have ‘‘pay-as-you-go’’ 

(PAYGO) requirements for revenue and mandatory spending legislation (Social Security disbursements are a form of mandatory 

spending). The House and Senate PAYGO rules prohibit the consideration of revenue and direct spending legislation that would have 

the net effect of increasing the deficit over either a six-year period 

or an 11-year period, respectively. The House PAYGO rule applies 

to legislation affecting the unified budget deficit, which includes 

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the receipts and disbursements of the Social Security Trust Funds. 

The Senate PAYGO rule, however, applies to legislation affecting 

the on-budget deficit, which excludes the Social Security Trust 

Funds. 

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GLOSSARY OF KEY TERMS 

Annuity—an insurance product that provides a stream of payments for a pre-established amount of time in return for a premium payment. For example, a life annuity provides payments for 

as long as the annuitant lives. Only insurance companies can underwrite annuities in the United States. Other financial intermediaries, such as banks and stock brokerage firms, may sell annuities issued by insurance companies. 

Average Indexed Monthly Earnings—the average monthly earnings received over a worker’s career, adjusted yearly by the change 

in national average earnings. It is the dollar amount used to calculate Social Security benefits for individuals who attain age 62 or 

become disabled (or die) after 1978. To arrive at the AIME, SSA 

adjusts a person’s actual past earnings using an ‘‘average wage 

index,’’ so he or she does not lose the value of past earnings in relation to more recent earnings. For people who attained age 62 or became disabled (or died) before 1978, SSA uses Average Monthly 

Earnings (AME). 

Baseline—a measurement that serves as a basis against which 

all following measurements are compared. 

Consumer Price Index (CPI)—a measure of the change over time 

in the prices, inclusive of sales and excise taxes, paid by urban 

households for a representative market basket of consumer goods 

and services. The CPI is prepared by the U.S. Department of Labor 

and used to compute COLA increases. 

Contribution and Benefit Base—the cap on taxable earnings used 

to fund Social Security. The cap, also called the taxable maximum 

wage or taxable wage base, limits the earnings that can be used 

in the benefit formula and, therefore, limits the size of benefits. 

The cap limits the program’s costs and the payroll taxes that pay 

for them. Limiting the size of benefits reflects the program’s role 

of only providing for a floor of protection. 

Cost-of-Living Adjustment (COLA)—an increase or decrease in 

wages or benefits according to the change in the cost-of-living as 

measured by some statistical measure, often the Consumer Price 

Index (CPI). Social Security benefits and Supplemental Security Income payments are increased each year to keep pace with increases 

in the cost-of-living (inflation), as measured by the CPI. 

Covered Earnings—earnings from a job which requires contributions to the Social Security program. (See covered worker for more 

information.) All covered earnings below the taxable wage base— 

that is, taxable earnings—are subject to Social Security payroll 

taxes. Covered earnings above the taxable wage base are exempt 

from the Social Security payroll tax. 

Covered Worker—workers in covered employment, that is, jobs 

through which the workers have made contributions to Social Security. 

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Credits—to be insured for retired worker benefits, an individual 

must accumulate at least 40 credits in the Social Security system, 

which is equivalent to at least 10 years of covered employment. In 

2006, a worker received one credit (up to a total of four per year) 

for each $970 in covered earnings. Fewer credits may be required 

in some survivor and disability cases; in these cases, benefits may 

be granted with as few as six credits. The amount of earnings required for a credit is wage indexed. Deficit—the amount by which the government’s spending exceeds 

its revenues in a given period, usually a fiscal year. The federal 

deficit is the shortfall created when the federal government spends 

more in a fiscal year than it receives in revenues. To cover the 

shortfall, the government sells bonds to the public. 

Defined Benefit—a type of retirement plan that guarantees a 

specified retirement payment at a certain age and after a specified 

period of service. Defined benefit plans promise their participants 

a steady retirement income, generally based on years of service, 

age at retirement, and salary averaged over some number of years. 

Defined benefit plans express benefits as an annuity, but may offer 

departing participants the opportunity to receive lump sum distributions. Defined benefit plans are one of two basic types of employer-sponsored pension plans. 

Defined Contribution—a type of retirement plan that establishes 

individual accounts for employees to which the employer, participants, or both make periodic contributions. Defined contribution 

plan benefits are based on employer and participant contributions 

to and investment returns (gains and losses) on the individual accounts. Employees bear the investment risk and often control, at 

least in part, how their individual account assets are invested. Defined contribution plans are one of two basic types of employersponsored pension plans. 

Delayed Retirement Credit—an increase to the primary insurance 

amount (PIA) if a beneficiary delays claiming Social Security benefits beyond his or her full retirement age (FRA). The amount of the 

increase varies depending on the beneficiary’s date of birth and 

how long a beneficiary delays benefit take-up beyond his or her 

FRA. However, the increase stops when a person reaches age 70, 

even if he or she continues to delay taking up benefits. 

Dependent—a person who is eligible for benefits or care because 

of his or her relationship to an individual. Under the Social Security Act, ‘‘dependent’’ means the same as it does for federal income 

tax purposes; i.e., someone for whom the individual is entitled to 

take a deduction on his personal income tax return, generally an 

individual supported by a tax filer for over half of a calendar year. 

Disabled—disability under Social Security is based on the inability to work. The definition of disability under Social Security is different than under other programs. SSA considers a person disabled 

under Social Security rules if the person cannot do work that he 

or she did before and SSA decides that the person cannot adjust 

to other work because of his or her medical condition(s). A person’s 

disability must also last or be expected to last for at least 1 year 

or to result in death. Social Security pays only for total long-term 

disability. No benefits are payable for partial disability or for shortterm disability. Social Security program rules assume that working 

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families have access to other resources to provide support during 

periods of short-term disabilities, including workers’ compensation, 

insurance, savings, and investments. 

Dually Entitled—workers who qualify for Social Security benefits 

from both their own work and their spouses’. Such workers do not 

receive both the benefits earned as a worker and the full spousal 

benefit; rather, the worker receives the higher amount of the two. 

Early Retirement Age (early eligibility age)—the age at which individuals qualify for reduced retirement benefits if they choose to 

collect benefits before the normal retirement age; the current early 

retirement age for Social Security is 62. Individuals who choose to 

take retirement benefits early will have their monthly benefits permanently reduced, based on the number of months they receive 

checks before they reach full retirement age. 

Earnings—Wages or self-employment income. Also see covered 

earnings and taxable earnings. 

Eligibility—conditions that must be met for participation. To be 

eligible for Social Security retirement benefits, everyone born in 

1929 or later needs 40 credits. Since a worker can earn 4 credits 

per year, he or she needs at least 10 years of work that is subject 

to Social Security to become eligible for Social Security retirement 

benefits. Each year, the amount of earnings needed for a credit 

rises as the average earnings levels rise. In 2005, a worker receives 

1 credit for each $920 of earnings, up to the maximum of 4 credits 

per year. 

Entitlement—a federal program or provision of law that requires 

payments to any person or unit of government that meets the eligibility criteria established by law. Social Security, Medicare, Medicaid, and veterans’ compensation are examples of entitlement programs. Entitlements leave no discretion with Congress on how 

much money to appropriate, and some entitlements carry permanent appropriations. 

Equity, including Intergenerational—the goal to ensure that the 

costs and benefits of Social Security bear some relationship to contributions and that a much greater burden is not placed on certain 

specific groups, including certain generations of workers. 

Federal Insurance Contributions Act (FICA) taxes—see payroll 

tax. 

Full Retirement Age (FRA) (Also called normal retirement age.)— 

the age at which individuals qualify for full, or unreduced, retirement benefits from Social Security and employer-sponsored pension 

plans. The normal retirement age for Social Security was 65 for 

many years. Beginning with year 2000 for workers and spouses 

born 1938 or later and widows/widowers born 1940 or later, the 

normal retirement age increases gradually from age 65 until it 

reaches age 67 in the year 2022. 

Fully Funded—a system that is fully funded, or ‘‘advance funded,’’ is one in which sufficient contributions are put aside each year 

to pay for future benefits when they come due. Defined contribution pensions and individual retirement accounts are fully funded 

by definition. 

Gross Domestic Product—a commonly used measure of total domestic national income. GDP measures the market value of total 

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tory, regardless of the ownership of the factors of production involved, i.e., local or foreign, during a given time period, usually a 

year. Earnings from capital invested abroad (mostly interest and 

dividend receipts) are not counted, while earnings on capital owned 

by foreigners but located in the country in question are included. 

GDP may be expressed in terms of product—consumption, investment, government purchases of goods and services, and net exports—or it may be expressed in terms of income earned-wages, interest, and profits. It is a rough indicator of the economic earnings 

base from which government draws its revenues. 

Income Adequacy—in Social Security’s history, ‘‘adequacy’’ has 

never been explicitly defined. However, the Congress expected that 

Social Security benefits would eventually provide more than a 

‘‘minimal subsistence’’ in retirement for full-time, full-career workers. Various measures help examine different aspects of this concept, but no single measure can provide a complete picture. Such 

measures include poverty rates, replacement rates, and the proportion of the population that depends on others for income support. 

Inflation (Prices)—a rate of increase in the general price level of 

all goods and services. The official measure of inflation in the 

United States is the Consumer Price Index. Indexation (See Price Indexation, Wage Indexation.) 

Insolvency—in the context of Social Security, the inability of the 

Trust Funds to pay all current expenses out of current tax income 

and accumulated Trust Fund assets. Insolvency would mean that 

Social Security’s Trust Funds were unable to pay full benefits on 

time. (Insolvency would not mean that Social Security would be 

completely broke and unable to pay any benefits.) 

Insured—in the context of Social Security, having enough credits 

to meet eligibility requirements for retired or disabled worker benefits, or to permit the worker’s spouse and children or survivors to 

establish eligibility for benefits in the event of the worker’s retirement, disability, or death. 

Intermediate Assumptions—the Social Security Administration 

actuaries’ ‘‘best estimate’’ of future demographic and economic 

trends. The actuaries also produce high cost (pessimistic) assumptions and low cost (optimistic) assumptions. These assumptions are 

published annually in the Social Security Trustees Report. 

Life Expectancy—an estimate of the average remaining number 

of years expected prior to death for a given cohort. In the context 

of Social Security, life expectancy at age 65 is most commonly used. 

Long Range—in the context of Social Security, the next 75 years. 

Long-range actuarial estimates are made for this period because it 

is approximately the maximum remaining lifetime of workers currently covered by Social Security. The annual Social Security 

Trustees Report includes long-range projections of Social Security’s 

financial status. (See also short range.) 

Microsimulation model—in the context of policy analysis, a statistical model that simulates how a government program would operate under policy changes and how participants would be affected. 

This report relies on a CRS analysis of the Dynasim microsimulation model. 

Off-Budget—refers to the status of transactions of the government (either federal funds or Trust Funds) that belong on-budget 

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according to generally accepted budget concepts, but which are required by law to be excluded from the budget. The budget documents routinely report the on-budget and off-budget amounts separately and then add them together to arrive at the consolidated 

government totals. 

Old-Age, Survivors, and Disability Insurance (OASDI)—the two 

Social Security programs—Old-Age and Survivors Insurance 

(OASI) and Disability Insurance (DI)—that provide monthly cash 

benefits to beneficiaries and their dependents when the beneficiaries retire, to beneficiaries’ surviving dependents, and to disabled worker beneficiaries and their dependents. 

On-Budget—refers to transactions that are included within the 

budget. 

Pay-As-You-Go—in the context of Social Security, a system of financing in which contributions that workers make in a given year 

fund the payments to beneficiaries in that same year, and the system’s Trust Funds are kept to a relatively small contingency reserve. 

Payroll Tax—tax imposed on some or all of workers’ earnings 

that can be imposed on employers, employees, or both. Payroll 

taxes are used to finance the Social Security and Medicare programs. Employers and employees each pay Social Security taxes 

equal to 6.2 percent of all employee earnings up to a cap and pay 

Medicare taxes of 1.45 percent, with no cap. Payroll taxes are also 

known as FICA (Federal Insurance Contributions Act) taxes or 

SECA (Self-Employment Contributions Act), if self-employed. 

Poverty—Americans are considered ‘‘poor’’ or ‘‘in poverty’’ if they 

reside in a household with income below the U.S. poverty threshold, as defined by the U.S. Office of Management and Budget. Poverty thresholds differ by family size and are updated annually for 

inflation using the Consumer Price Index. Median Social Security 

benefits have historically been close to the poverty threshold. Social 

Security has contributed to reducing poverty among the elderly. 

Primary Insurance Amount (PIA)—the monthly Social Security 

benefit amount payable to a retired worker who begins to receive 

benefits at the full retirement age (FRA) or, generally, to a disabled 

worker. This amount, which is based on the worker’s average indexed monthly earnings (AIME), is also used to calculate benefits 

payable on the worker’s earnings record—for example, benefits 

paid to his or her spouse or survivors. Also referred to as a basic 

benefit amount. 

Primary Insurance Amount (PIA) Bend Points—dollar amounts 

used to break a worker’s average indexed monthly earnings (AIME) 

into discrete brackets to help calculate the PIA. For example, if 

there are three bend points, first $761, earnings over $761 and 

through $4,586, and over $4,586, an income of $5,000 will be broken into three values, $761, $3825 and $414, to be multiplied by 

the specific PIA factor in accordance with the PIA formula. The 

specific dollar values of the bend points are indexed to growth in 

average wages. 

Primary Insurance Amount (PIA) Factors—the factors by which 

the dollar amounts in the primary insurance amount (PIA) formula 

are multiplied. The PIA factors are 90 percent, 32 percent and 15 

percent; each is applied to a worker’s average indexed monthly 

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earnings (AIME) amounts between the bend points in the PIA formula. 

Primary Insurance Amount (PIA) Formula—the formula to calculate the primary insurance amount (PIA) for workers who attain 

age 62, become disabled, or die after 1978. The PIA is equal to 90 

percent of a worker’s average indexed monthly earnings (AIME) up 

to the first bend point, plus 32 percent of AIME between the first 

and second bend points, plus 15 percent of AIME above the second 

bend point. 

Progressive—a system in which high earners pay a larger portion 

of their income in taxes or receive a lower portion of their income 

in benefits relative to low earners. To help ensure that beneficiaries have adequate incomes, Social Security’s benefit formula is 

designed to be progressive, that is, to provide disproportionately 

larger benefits, as a percentage of earnings, to lower earners than 

to higher earners. 

Purchasing Power—the amount of goods and services that a 

given amount of money can buy. In the context of Social Security, 

beneficiaries receive an annual cost-of-living adjustment (COLA) in 

which benefits are adjusted according to the growth in prices (i.e., 

inflation) as a way to maintain the purchasing power of benefits 

over the course of a beneficiary’s lifetime. 

Quarters of Coverage—see credits. 

Rate of Return—the gain or loss generated from an investment 

over a specified period of time; also referred to as total return. Calculated as the (value now minus value at time of purchase) divided 

by value at time of purchase, expressed as a percentage. In the context of Social Security, the implicit rate of return on Social Security 

contributions would be the constant discount rate that equates the 

present discounted value of contributions with the present discounted value of benefits. 

Regressive—a system in which lower earners pay proportionately 

higher taxes (or receive proportionately lower benefits) than do 

higher earners. The Social Security payroll tax is regressive, since 

the tax rate is flat and the amount of taxable earnings is capped. 

Replacement Rate—the ratio of retirement benefits (from Social 

Security or employer-sponsored plans) to pre-retirement earnings. 

Analysts often compare current benefits to a recipient’s previous 

wages to judge the adequacy of Social Security payments. In the 

context of Social Security, the implicit rate of return on Social Security contributions would be the constant discount rate that 

equates the present discounted value of contributions with the 

present discounted value of benefits. 

Retirement Earnings Test (RET)—a provision of the law which 

reduces Social Security benefits on account of earnings from work 

before the full retirement age (FRA). 

Spouse Benefits—Social Security benefits payable to the spouse 

or divorced spouse of a retired or disabled worker, based on the 

worker’s earnings record. The primary insurance amount (PIA) for 

a spouse beneficiary is generally 50 percent of his or her spouse’s 

PIA. 

Social Insurance—under a social insurance program, the society 

as a whole insures its members against various risks they all face, 

and members pay for that insurance at least in part through consmartinez on DSKB9S0YB1PROD with REPORTS

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tributions to the system. Social insurance programs, including Social Security, are designed to achieve certain social goals. 

Social Security Administration (SSA)—the federal agency that 

administers all Social Security related programs, including the 

Supplemental Security Income (SSI) and the Disability Insurance 

(DI) programs. 

Solvency—for Social Security, a condition of financial viability in 

which the program can meet its full financial obligations as they 

come due. Specifically, the ability to pay full benefits using existing 

revenue sources and Trust Fund balances. When a program does 

not meet these conditions, it is said to be insolvent. 

Solvency, Sustainable—for Social Security, to achieve sustainable 

solvency is to maintain the program’s solvency beyond Social Security’s Board of Trustees’ 75-year forecast and make Social Security 

permanently solvent. Also defined as having a stable and growing 

Trust Fund ratio with program revenues increasing faster than 

outlays at the end of the 75-year period. 

Supplemental Security Income (SSI)—a federal supplemental income program funded by general tax revenues (not Social Security 

taxes) that helps aged, blind, and disabled people who have little 

or no income, by providing monthly cash payments to meet basic 

needs for food, clothing, and shelter. 

Supplementary Medical Insurance (SMI)—Medicare SMI, also referred to as Part B, is a voluntary insurance program that covers 

physician services (in or outside of the hospital), outpatient hospital services, ambulatory services, and certain medical supplies 

and other services, for all persons age 65 or older and persons eligible for Part A because of disability or chronic renal disease. 

Survivor (Survivor Benefits)—after a beneficiary’s death, Social 

Security survivor benefits are paid to the beneficiary’s survivors, 

which include (1) the beneficiary’s widow/widower age 60 or older, 

50 or older if disabled, or any age if caring for a child under age 

16 or who became disabled before age 22; (2) the beneficiary’s children, if they are unmarried and under age 18, under 19 but still 

in school, or 18 or older but disabled before age 22; (3) the beneficiary’s parents, who are at least aged 62, if the beneficiary provided at least one-half of their support. A special one-time lump 

sum payment of $255 may be made to a spouse or minor children. 

An ex-spouse could also be eligible for a widow/widower’s benefit on 

the beneficiary’s record. 

Social Security Trust Fund—Technically, there are two separate 

Trust Funds: the Old-Age and Survivors Insurance (OASI) Trust 

Fund, which holds in trust those funds that the federal government 

intends to use to pay future benefits to retirees and their survivors; 

and, the Disability Insurance (DI) Trust Fund, which holds in trust 

those funds that the federal government intends to use to pay benefits to those who are judged by the federal government to be disabled and incapable of productive work, as well as to their spouses 

and dependents. 

Taxable Earnings—in the context of Social Security, wages and/ 

or self-employment income earned in covered employment that is 

less than the taxable earnings base. 

Taxable Earnings Base (See Contributions and Benefit Base.) 

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Transition Costs—refers to the additional revenue required to 

implement substitute individual account plans. Under some individual account plans, portions of Social Security contributions 

would be diverted to the accounts. However, under Social Security’s 

pay-as-you-go financing, some of those contributions would also be 

needed to pay for current benefits. Making account deposits while 

also meeting current benefit costs requires additional revenue, 

which we refer to as transition costs. 

Trust Fund—an account, designated as a ‘‘Trust Fund’’ by law, 

that is credited with income from earmarked collections and 

charged with certain outlays. Collections may come from the public 

(for example, from taxes or user charges) or from intrabudgetary 

transfers. The federal government has more than 150 trust funds. 

The largest and best known finance major benefit programs (including Social Security and Medicare) and infrastructure spending 

(the Highway and the Airport and Airway Trust Funds). These 

trust funds are essentially sub-accounts of the federal government’s 

accounting and budgeting processes. 

Unified Budget—the present form of the budget of the federal 

government in which receipts and outlays from federal funds and 

trust funds are consolidated into a single total. The unified budget 

includes trust fund receipts as income and trust fund payments as 

expenditures. As a result, any Social Security surpluses serve to reduce the overall, or unified, federal budget deficit. 

Wage Indexation (Compare Price Indexation.)—a method by 

which benefits are adjusted at periodic intervals. Under its current 

formula, SSA uses the national average wage indexing series to 

index a person’s lifetime earnings when computing that person’s 

Social Security benefits. 

Worker Benefits—Social Security benefits payable to a retired or 

disabled worker, based on his or her own earnings record. 

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ACKNOWLEDGMENTS 

The Aging Committee would like to thank the following individuals who made key contributions to this report through their research and technical assistance: 

Seung An, Social Security Administration 

Sharmila Choudhury, Congressional Research Service 

Michael Clingman, Social Security Administration 

Michael Collins, U.S. Government Accountability Office 

Steven Goss, Social Security Administration 

Joni Lavery, National Academy of Social Insurance 

Annamarie Lopata, U.S. Government Accountability Office 

Charles A. Jeszeck, U.S. Government Accountability Office 

Kristen Jones, U.S. Government Accountability Office 

Dawn Nuschler, Congressional Research Service 

Patrick Purcell, Congressional Research Service 

Virginia Reno, National Academy of Social Insurance 

Christine Scott, Congressional Research Service 

Alison Shelton, Congressional Research Service 

Gary Sidor, Congressional Research Service 

Scott Szymendera, Congressional Research Service 

Alice Wade, Social Security Administration 

Copyright—Reprinted information in this report was done so 

with the expressed permission and consent of the cited authors. 

Æ 

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