CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

Social Security

Policy Options

JULY 2010
Pub. No. 4140
The Congress of the United States O Congressional Budget Office

A

STUDY

CBO

Social Security Policy Options

July 2010
CBO

Notes

Unless otherwise noted, all years are calendar years.

Numbers in the text and tables may not add up to totals because of rounding.
Preface

CBO

Social Security is the federal government’s largest single program, and as the 

U.S. population grows older in the coming decades, its cost is projected to increase more 

rapidly than its revenues. As a result, under current law, resources dedicated to the program 

will become insufficient to pay full benefits in 2039, the Congressional Budget Office (CBO) 

projects. Long-run sustainability for the program could be attained through various 

combinations of raising taxes and cutting benefits; such changes would also affect the 

Social Security taxes paid and the benefits received by various groups of people. This CBO 

study examines a variety of approaches to changing Social Security, updating an earlier work, 

Menu of Social Security Options, which CBO published in May 2005. In keeping with CBO’s 

mandate to provide objective, impartial analysis, the current study makes no 

recommendations.

The study was written by Noah Meyerson, Charles Pineles-Mark, and Michael Simpson of 

CBO’s Health and Human Resources Division, under the direction of Joyce Manchester and 

Bruce Vavrichek. Research assistance was provided by Philip Armour, Sarah Axeen, and 

L. Daniel Muldoon. James Baumgardner, Sheila Dacey, Benjamin Page, David Rafferty, 

Jonathan Schwabish, and Julie Topoleski provided helpful comments on earlier drafts. 

Andrew Biggs of the American Enterprise Institute and Paul Van de Water of the Center for 

Budget and Policy Priorities also provided useful comments. (The assistance of external 

reviewers implies no responsibility for the final product, which rests solely with CBO.)

Kate Kelly edited the manuscript, and Leah Mazade and Sherry Snyder proofread it. 

Maureen Costantino took the cover photograph and designed the cover, and Jeanine Rees 

prepared the study for publication. Jonathan Schwabish provided help with graphics. 

Monte Ruffin produced the initial printed copies, Linda Schimmel coordinated the print 

distribution, and Simone Thomas prepared the electronic version for CBO’s Web site 

(www.cbo.gov).

Douglas W. Elmendorf

Director

July 2010

Contents

CBO

Summary ix

Introduction 1

An Overview of Social Security 1

Social Security Projections 4

Assessing Options for Changing Social Security 7

Key Elements of Social Security 8

Scope of the Options 9

Effects of the Options on the System’s Finances 11

Effects of the Options on Payroll Taxes Paid and Benefits Received by 

Various Groups 13

Effects of the Options on Work and Saving 15

Options That Would Change the Taxation of Earnings 16

Option 1: Increase the Payroll Tax Rate by 1 Percentage Point in 2012 17

Option 2: Increase the Payroll Tax Rate by 2 Percentage Points Over 20 Years 17

Option 3: Increase the Payroll Tax Rate by 3 Percentage Points Over 60 Years 17

Option 4: Eliminate the Taxable Maximum 18

Option 5: Raise the Taxable Maximum to Cover 90 Percent of Earnings 18

Option 6: Tax Covered Earnings Above the Taxable Maximum; 

Do Not Increase Benefits 18

Option 7: Tax Covered Earnings Up to $250,000; Do Not Increase Benefits 19

Option 8: Tax All Earnings Above the Taxable Maximum at 4 Percent; 

Do Not Increase Benefits 19

Option 9: Tax All Earnings Above $250,000 at 4 Percent; 

Do Not Increase Benefits 19

Options That Would Change the Benefit Formula 20

Option 10: Raise from 35 to 38 the Years of Earnings Included in the AIME 20

Option 11: Index Earnings in the AIME Formula to Prices 20

Option 12: Reduce All PIA Factors by 15 Percent 21

Option 13: Reduce the Top Two PIA Factors by Roughly OneThird 21

Option 14: Reduce the Top PIA Factor by OneThird 22

Option 15: Reduce All PIA Factors by 0.5 Percent Annually 22

Option 16: Index Initial Benefits to Changes in Longevity 22

Option 17: Reduce PIA Factors to Index Initial Benefits to Prices Rather 

Than Earnings 23
VI SOCIAL SECURITY POLICY OPTIONS

CBO

Option 18: Lower Initial Benefits for the Top 70 Percent of Earners 23

Option 19: Lower Initial Benefits for the Top 50 Percent of Earners 24

Option 20: Index the Bend Points in the PIA Formula to Prices 26

Option 21: Index Earnings in the AIME and Bend Points in the 

PIA Formula to Prices 26

Option 22: Replace the Current PIA Formula with a New TwoPart Formula 26

Options That Would Increase Benefits for Low Earners 28

Option 23: Modify the Special Minimum Benefit and Index It to 

Growth in Earnings 28

Option 24: Introduce a New PovertyRelated Minimum Benefit 29

Option 25: Enhance LowEarners’ Benefits on the Basis of Years Worked 29

Options That Would Raise the Full Retirement Age 30

Option 26: Raise the FRA to 68 31

Option 27: Raise the FRA to 70 31

Option 28: Index the FRA to Changes in Longevity 31

Options That Would Reduce Cost-of-Living Adjustments 31

Option 29: Reduce COLAs by 0.5 Percentage Points 32

Option 30: Base COLAs on the Chained CPIU 32

Appendix: Distributional Effects of Options with Similar Effects on the 

System’s Finances 47

Glossary 51

Options That Would Change the Benefit Formula (Continued)
CONTENTS SOCIAL SECURITY POLICY OPTIONS VII

CBO

Tables

1. Social Security’s Revenues and Outlays Under Current Law with 

Scheduled Benefits 6

2. Changes to Social Security’s Finances Under Various Options with 

Scheduled Benefits 33

3. Changes to Social Security’s Scheduled Benefits and Payroll Taxes for 

Different Groups Under Various Options 39

4. Changes to Social Security’s Payable Benefits and Payroll Taxes for 

Different Groups Under Various Options 43

A1. Changes to Social Security’s Scheduled Benefits and Payroll Taxes for 

Different Groups Under Various Options That Have Similar 

Effects on the System’s Finances 49

Figures

S1. Effects of the Policy Options on the OASDI Trust Fund Actuarial Balance xi

1. Distribution of Social Security Beneficiaries, by Type of 

Benefits Received, 2010 2

2. U.S. Population Age 65 or Older as a Percentage of the Population 

Ages 20 to 64, 1962 to 2080 4

3. Social Security’s Revenues and Outlays with Scheduled and Payable Benefits 7

4. Projected Outlays for Social Security Under Current Law and with a 

Gradual Reduction in Benefits Starting in 2012 8

5. Effect of Delaying a Payroll Tax Increase or Benefit Reduction on 

Social Security’s Finances 12

6. Calculating the PIA in 2010 Under the Current Social Security System 21

7. Calculating Initial Benefits with Progressive Price Indexing 25

8. Calculating Initial Benefits with Indexing of Bend Points to Prices 27

CBO

Summary

Social Security, the federal government’s largest 

single program, provides benefits to retired workers 

(through OldAge and Survivors Insurance, OASI), to 

people with disabilities (through Disability Insurance, 

DI), and to their families as well as to some survivors of 

deceased workers. Those benefits are financed primarily 

by payroll taxes collected on people’s earnings. In 2010, 

for the first time since the enactment of the Social Secu

rity Amendments of 1983, Social Security’s annual out

lays will exceed its annual tax revenues, the Congressional 

Budget Office (CBO) projects. If the economy continues 

to recover from the recent recession, those tax revenues 

will again exceed outlays, but only for a few years. CBO 

anticipates that starting in 2016, if current laws remain in 

place, the program’s annual spending will regularly exceed 

its tax revenues.

Social Security’s dedicated revenue stream sets it apart 

from most other federal programs in that the dedicated 

revenues are credited to trust funds that are used to 

finance the program’s activities. Interest on the balances 

of those funds also is credited to the funds (which often 

are treated collectively as the OASDI trust funds). CBO 

estimates that, unless changes are made to the system, the 

trust funds combined will be exhausted in 2039. At that 

point, the resources available to the Social Security 

program will be insufficient to pay full benefits as they 

are currently structured.1

This CBO study first provides an overview of Social 

Security and discusses some criteria for evaluating 

proposals to change the system. It then presents a variety 

of options for changing the Social Security system and 

analyzes the financial and distributional effects of those 

options—that is, how they would affect Social Security’s 

finances and how they would alter the benefits paid to 

people in various earnings categories and people born in 

various decades. 

The Outlook for Social Security’s 

Finances

As the population of the United States continues to 

grow older, the number of Social Security beneficiaries 

will continue to rise, and the program’s outlays will 

increase faster than its revenues. Longterm projections 

are unavoidably uncertain but, under a broad range of 

assumptions, benefits that are scheduled under current 

law will consistently exceed revenues.

CBO projects that beginning in 2039 the Social Security 

Administration will not be able to pay those scheduled 

benefits, however. If revenues were not increased, benefits 

would need to be cut by about 20 percent in 2040 to 

equalize outlays and revenues. Those proportionately 

lower payments, which would be made to all Social 

Security recipients once the trust funds were exhausted, 

are known as payable benefits. 

A commonly used summary measure of the system’s long

term financial condition is the 75year actuarial bal

ance—a figure that measures the longterm difference 

between the resources dedicated to Social Security and 

the program’s costs under current law. The actuarial bal

ance is the value of Social Security’s revenues over the 

75year period, discounted to their value in current dol

lars, plus the current balance in the OASDI trust funds,

1. See Congressional Budget Office, The LongTerm Budget Outlook

(June 2010), Chapter 3.
X SOCIAL SECURITY POLICY OPTIONS

CBO

minus the present value of future Social Security outlays, 

minus the value of a year’s worth of benefits as a reserve at 

the end of the period.2

 CBO estimates the 75year actuar

ial balance to be 0.6 percent of gross domestic product 

(GDP); that is, under current law, the resources dedicated 

to financing the program over the next 75 years fall short 

of the benefits that will be owed to beneficiaries by 

about 0.6 percent of GDP.3

 That figure is the amount 

by which the Social Security payroll tax would have to 

be raised or scheduled benefits reduced for the system’s 

revenues to be sufficient to cover scheduled benefits. In 

other words, to bring the program into actuarial balance 

over the 75 years, payroll taxes would have to be 

increased immediately by 0.6 percent of GDP and kept 

at that higher rate, or scheduled benefits would have to 

be reduced by an equivalent amount, or some com

bination of those changes and others would have to be 

implemented. 

The actuarial balance averages the smaller deficits that 

would occur near the beginning of the projection period 

and the larger ones that would occur near the end. In 

2084, scheduled outlays would exceed revenues by 

1.4 percent of GDP.

Policy Options

In this study, CBO analyzes 30 options that are among 

those that have been considered by various analysts and 

policymakers as possible components of proposals to pro

vide longterm financial stability for Social Security. The 

options follow the convention of not reducing initial ben

efits for people who are currently older than 55, and all 

would directly affect outlays for benefits or federal 

revenues dedicated to Social Security. 

The options fall into five categories:

B Increases in the Social Security payroll tax,

B Reductions in people’s initial benefits,

B Increases in benefits for low earners,

B Increases in the full retirement age, and

B Reductions in the costofliving adjustments that are 

applied to continuing benefits.

Each option is analyzed in isolation, although most pro

posals to make substantial changes to Social Security 

combine several provisions. Many options would interact 

with one another, so combining them might cause 

changes to the overall finances of the system that are 

larger or smaller than would be produced by a simple 

sum of the effects of several discrete options.

This list of options is far from exhaustive. It does not 

include changes that would draw on general government 

revenues, create individual accounts, or change the trust 

funds’ investments. Other than an increase in the Social 

Security payroll tax, changes to federal tax policy are not 

considered. The options do not include any that apply 

only to people who receive DI benefits, although some of 

the options would affect OASI and DI beneficiaries alike. 

Effects of the Options

This study analyzes the overall effect of each option on 

the finances of the Social Security system. Some options, 

such as those that would apply the payroll tax rate to all 

earnings or those that would index initial benefits to 

prices, would more than eliminate Social Security’s actu

arial deficit; others would have far smaller financial effects 

(see Summary Figure 1). 

This study also analyzes the options’ effects on taxes that 

would be paid and benefits that would be received by var

ious groups of program participants. For that distribu

tional analysis, participants are grouped by the amount of 

their lifetime household earnings and by their birth 

cohort (that is, by the decade in which they were born). 

Those distributional effects of the options are measured 

relative to the outcomes that would result both from 

scheduled benefits and from payable benefits under 

current law.

2. CBO discounts those values using a real (inflationadjusted) 

discount rate of 3 percent, equal to CBO’s estimated longterm 

interest rate used to compute interest credited to the Social 

Security trust funds. The actuarial balance is calculated on the 

basis of Social Security’s scheduled benefits, which are the benefits 

specified under current law without regard to the balances in the 

system’s trust funds. Scheduled benefits are used in this study’s 

analysis of the system’s finances because, by definition, the system 

is in financial balance with payable benefits, which would be set so 

as to eliminate any system deficit.

3. The projected actuarial balance can also be expressed as 

1.6 percent of taxable payroll.
SUMMARY SOCIAL SECURITY POLICY OPTIONS XI

CBO

Summary Figure 1.

Effects of the Policy Options on the OASDI Trust Fund Actuarial Balance

Source: Congressional Budget Office.

Notes: The actuarial balance is the present value of revenues plus the OASDI trust fund balance at the beginning of 2010, minus the present 

value of outlays from 2010 to 2084, minus a year’s worth of benefits as a reserve at the end of the period, expressed as a percentage 

of the present value of GDP over the period. 

The AIME for a retired worker who reaches age 62 after 1990 is calculated on the highest 35 years of earnings on which that worker 

paid Social Security taxes (up to the taxable maximum, $106,800 in 2010). Earnings before age 60 are indexed to compensate for 

inflation and for real (inflation-adjusted) growth in wages; earnings after age 59 enter the computations at nominal values. Dividing 

total earnings by 420 (35 years times 12 months) yields the AIME.

The PIA is the monthly payment to a worker who begins receiving retirement benefits at the full retirement age or to a disabled

worker who has never received a retirement benefit reduced for age. For workers who turn 62, become disabled, or die in 2010 (for 

calculation of survivor benefits), the PIA formula is 90 percent of the first $761 of the AIME plus 32 percent of the AIME between 

$761 and $4,586 plus 15 percent of the AIME over $4,586. Those percentages constitute the PIA factors.

A COLA is an annual increase in benefits indexed to consumer prices. Under current law, the COLA equals the percentage increase in 

the CPI-W; the chained CPI-U is an alternative measure of inflation. 

OASDI = Old-Age, Survivors, and Disability Insurance; GDP = gross domestic product; AIME = average indexed monthly earnings; 

PIA = primary insurance amount; FRA = full retirement age; COLA = cost-of-living adjustment; CPI-W = consumer price index 

for all urban wage earners and clerical workers; chained CPI-U = chained CPI for all urban consumers; * = between -0.05 percentage 

points and zero.

Base COLAs on the Chained CPI-U

Reduce COLAs by 0.5 Percentage Points

Index the FRA to Changes in Longevity

Raise the FRA to 70

Raise the FRA to 68

Enhance Low-Earners' Benefits on the Basis of Years Worked

Introduce a New Poverty-Related Minimum Benefit

Modify the Special Minimum Benefit and Index It to Growth in Earnings

Replace the Current PIA Formula with a New Two-Part Formula

Index Earnings in the AIME and Bend Points in the PIA Formula to Prices

Index the Bend Points in the PIA Formula to Prices

Lower Initial Benefits for the Top 50% of Earners

Lower Initial Benefits for the Top 70% of Earners

Reduce PIA Factors to Index Initial Benefits to Prices Rather Than Earnings

Index Initial Benefits to Changes in Longevity

Reduce All PIA Factors by 0.5% Annually

Reduce the Top PIA Factor by One-Third

Reduce the Top Two PIA Factors by Roughly One-Third

Reduce All PIA Factors by 15%

Index Earnings in the AIME Formula to Prices

Raise from 35 to 38 the Years of Earnings Included in the AIME

Tax All Earnings Above $250,000 at 4%; Do Not Increase Benefits

Tax All Earnings Above the Taxable Maximum at 4%; Do Not Increase Benefits

Tax Covered Earnings Up to $250,000; Do Not Increase Benefits

Tax Covered Earnings Above the Taxable Maximum; Do Not Increase Benefits

Raise the Taxable Maximum to Cover 90% of Earnings

Eliminate the Taxable Maximum

Increase the Payroll Tax Rate by 3 Percentage Points Over 60 Years

Increase the Payroll Tax Rate by 2 Percentage Points Over 20 Years

Increase the Payroll Tax Rate by 1 Percentage Point in 2012 0.3

0.6

0.5

0.6

0.2

0.9

0.5

0.3

0.1

0.1

0.2

0.5

0.7

0.1

0.4

0.2

0.5

0.4

0.5

0.6

0.2

-0.2

-0.3

0.1

0.3

0.2

0.3

0.2

1.0

*

Change the

Taxation of

Earnings

Change the

Benefit Formula

Increase Benefits

for Low Earners

Raise the Full

Retirement Age

Reduce Cost-of-Living

Adjustments

0.3

0.6

0.5

0.6

0.2

0.9

0.5

0.3

0.1

0.1

0.2

0.5

0.7

0.1

0.4

0.2

0.5

0.4

0.5

0.6

0.2

-0.2

-0.3

0.1

0.3

0.2

0.3

0.2

1.0

*

Change the

Taxation of

Earnings

Change the

Benefit Formula

Increase Benefits

for Low Earners

Raise the Full

Retirement Age

Reduce Cost-of-Living

Adjustments
XII SOCIAL SECURITY POLICY OPTIONS

CBO

Some options, such as an acrosstheboard increase in the 

payroll tax rate or a flat reduction in benefits, would 

affect all participants proportionately, but some options 

would have disparate effects on people in different earn

ings groups. For example, some options would primarily 

affect people with higher lifetime earnings by placing an 

additional tax on earnings above a threshold or by 

increasing the progressivity of the Social Security benefit 

formula.

Many options with similar financial effects in the 

aggregate would affect older and younger generations 

differently. In particular, the timing of the changes would 

affect their impact on different generations (as well as the 

magnitude of the change necessary to bring the system 

into balance). Some options, such as one that would 

reduce benefits by a flat 15 percent, would take effect in a 

single year and would affect all future beneficiaries the 

same way. Others would be phased in and, initially, 

would have only small effects. For example, a policy that 

gradually reduced benefits would have a much larger 

effect on people whose benefits began in 2040 than it 

would on those whose benefits began in 2020. Raising 

tax rates would increase the amounts paid by younger 

people but make little difference in the sum of taxes paid 

over a lifetime by people who already have left or are 

about to leave the workforce.
CBO

Social Security Policy Options

Introduction 

The federal government levies taxes on workers to pro

vide Social Security benefits to the elderly, to disabled 

people, and to their families as well as to some survivors 

of deceased workers. Although the program is part of the 

overall federal budget, its funding differs from that of 

many other programs in the budget: Its spending is 

financed from two trust funds that are credited with the 

dedicated tax revenues and from which benefits may be 

paid, without further legislative action, as long as the 

trust funds have sufficient balances.1

 The balances that 

exist today—more that $2 trillion—have accumulated 

over many years, during which tax revenues credited to 

the trust funds exceeded the benefit payments from 

those funds. Interest on the balances is credited to the 

trust funds.

In 2010, for the first time since the enactment of the 

Social Security Amendments of 1983, the Congressional 

Budget Office (CBO) projects that Social Security’s 

annual outlays will exceed its annual revenues, excluding 

interest credited to the trust funds. As the babyboom 

generation (the group of people born between 1946 and 

1964) continues to age, the number of Social Security 

beneficiaries will increase, and outlays will rise faster than 

revenues. In part because of this growth, the federal bud

get is on an unsustainable path: Without significant 

changes in government policy, in coming decades the 

aging of the population and rising health care costs will 

boost federal outlays sharply relative to the size of the 

economy under any plausible assumptions about future 

trends in the economy, demographics, and health care 

costs.2

 Also because of the growing number of Social 

Security beneficiaries, CBO projects that, under current 

law, the Social Security trust funds will be exhausted in 

2039. Thereafter, the Social Security Administration 

will not have the legal authority to pay the full benefits 

specified in law.

This study analyzes the effects of 30 options for changing 

Social Security. The options are among those commonly 

proposed by policymakers and analysts for bringing long

term financial stability to the program.3

 This study 

describes the options’ effects on the finances of the Social 

Security system, on the taxes the program’s participants 

pay, and on the benefits participants receive. Participants 

are grouped by their lifetime household earnings and 

birth cohort (that is, by the decade of their birth).

An Overview of Social Security

The Social Security Act of 1935 created the federal gov

ernment’s largest single program. Currently, 53 million 

people receive Social Security benefits, and, although 

Social Security is commonly thought of as a retirement 

program, only 69 percent of its beneficiaries are retired 

workers, their spouses, and children (see Figure 1). 

Another 12 percent of beneficiaries are survivors of 

deceased workers, and the remaining 19 percent are peo

ple who are receiving Disability Insurance (DI) benefits

1. Spending for Social Security benefits and receipts from Social 

Security taxes are part of the unified federal budget but are 

categorized as “offbudget” for certain budget enforcement 

procedures.

2. See Congressional Budget Office, The LongTerm Budget Outlook

(June 2010).

3. CBO presented an analysis of various longterm Social Security 

options in Menu of Social Security Options (May 25, 2005). 

Versions of some of the options presented in this study also were 

discussed in Congressional Budget Office, Budget Options, 

Volume 2 (August 2009). The Chief Actuary of the Social Security 

Administration has published a list of policy options that would 

address the solvency of the Social Security trust funds and other 

issues related to Social Security benefits and financing. That 

document, Individual Changes Modifying Social Security, is 

available at www.ssa.gov/OACT/solvency/provisions/index.html. 

The Social Security Administration’s Office of Retirement and 

Disability Policy has published a series of policy briefs that analyze 

the distributional effects of various options, available at 

www.ssa.gov/policy/docs/policybriefs/index.html. 
2 SOCIAL SECURITY POLICY OPTIONS

CBO

Figure 1.

Distribution of Social Security 

Beneficiaries, by Type of Benefits 

Received, 2010

Sources: Congressional Budget Office; Social Security 

Administration, data for May 2010.

as disabled workers or who are the spouses and children 

of disabled workers. Social Security is an important 

source of income for the elderly. In 2008, almost 90 per

cent of people over age 65 received Social Security bene

fits. Among the population age 65 or older, those benefits 

were the major source of income (providing at least 

50 percent of total income) for 57 percent of families and 

90 percent or more of income for almost a third of such 

families.4

 Consequently, if Social Security benefits were 

reduced, many people would respond by working and 

saving more. The responses would be greater if such 

reductions were announced well in advance of the 

changes.

Social Security now consists of two parts: OldAge and 

Survivors Insurance (OASI), which pays benefits to 

retired workers and their dependents and to survivors of 

deceased workers; and Disability Insurance, which pays 

benefits to workers who become disabled when they are 

younger than the full retirement age (FRA, the age at 

which people can receive unreduced retirement benefits) 

and to their dependents. OldAge and Survivors Insur

ance currently accounts for 82 percent of benefits, and 

Disability Insurance accounts for 18 percent. CBO pro

jects that outlays for the program in fiscal year 2010 will 

total $708 billion, roughly onefifth of the federal bud

get. Since 1989, administrative expenses have totaled 

1 percent or less of program outlays. 

During the program’s first four decades, spending for 

Social Security benefits increased significantly relative to 

the size of the economy, reaching about 4 percent of gross 

domestic product (GDP) in the mid1970s. The costs 

spiked to nearly 5 percent of GDP in the early 1980s, the 

period that saw the most recent major legislative changes 

to the program. In the 1990s and early 2000s, spending 

for Social Security benefits fluctuated between 4.1 per

cent and 4.6 percent of GDP. During the recent eco

nomic downturn, GDP contracted and Social Security 

outlays increased more rapidly than they would have with 

stable economic growth because the number of OASI and 

DI claimants increased as the job market deteriorated. 

Social Security’s outlays rose to 4.8 percent of GDP in 

2009, and CBO projects they will remain at that level 

in 2010.

Taxes. Social Security has two primary sources of dedi

cated tax revenues: payroll taxes and taxes on benefits. 

Roughly 97 percent of dedicated tax revenues are col

lected from a payroll tax of 12.4 percent that is levied on 

earnings and split evenly by workers and their employers 

at 6.2 percent apiece. Selfemployed workers pay the 

entire 12.4 percent tax on earnings themselves. The pay

roll tax applies only to taxable earnings—earnings up to a 

maximum annual amount ($106,800 in 2010). Taxable 

earnings are about 83 percent of total covered earnings, 

which are all earnings—from wages and from self

employment income—for employment covered by Social 

Security. In addition, some Social Security benefits are 

subject to taxation: In 2009, about 3 percent of Social 

Security’s dedicated tax revenues came from the income 

taxes that higherincome beneficiaries paid on their Social 

Security benefits. 

Benefits. In general, workers are eligible to receive 

Social Security retirement benefits if they are age 62 or 

older and have paid a sufficient amount of Social Security 

4. See Social Security Administration, “Income Sources,” in Income 

of the Aged Chartbook, 2008, www.ssa.gov/policy/docs/

chartbooks/income_aged/2008/iac08.html#income.

Retired Workers

Disabled Workers

Spouses and 

Children of 

Disabled Workers

Survivors of 

Deceased 

Workers

Spouses and 

Children of 

Retired Workers

(5%)

(12%)

(15%)

(4%)

(64%)
SOCIAL SECURITY POLICY OPTIONS 3

CBO

taxes for at least 10 years.5

 Retirement benefits are 

reduced for workers who begin to collect Social Security 

before reaching the full retirement age, currently 66. 

Workers who are judged unable to perform substantial 

work because of a physical or mental disability can 

become eligible for DI benefits at an earlier age and, in 

many cases, with a shorter employment history. Various 

rules for determining eligibility and benefits apply to 

family members of retired, disabled, or deceased workers.

When retired or disabled workers first claim Social 

Security benefits, payments are based on their average 

lifetime earnings. The formula used to translate average 

earnings into benefits is progressive; that is, the replace

ment rate—the ratio of benefits received to a worker’s 

past earnings—is higher for people with lower average 

earnings than for people with higher earnings. The Social 

Security Administration estimates that workers who had 

average annual earnings throughout their careers and who 

claim benefits in 2010 at age 65 will be eligible for an 

annual benefit of about $16,500, an amount that will 

replace about 40 percent of their average preretirement 

earnings. 

For the purpose of calculating average earnings to deter

mine the initial benefit, the amounts earned in earlier 

years are converted to currentyear values based on 

changes in average annual earnings in the economy as a 

whole. Because average national earnings are projected to 

grow faster than inflation, that indexation will cause aver

age initial benefits to grow in real (inflationadjusted) 

terms and will keep the average replacement rate stable. 

(In later decades, the replacement rate will be slightly 

lower for workers with average earnings who claim bene

fits at age 65, mainly because of the scheduled increase in 

the full retirement age.)

An adjustment is made to retirement benefits on the basis 

of the age at which a recipient chooses to start claiming 

benefits: The longer someone waits (up to age 70), the 

higher the benefits will be. That adjustment is intended 

to be actuarially fair, so that a person’s total lifetime bene

fits will have an approximately equal value regardless of 

the age at which he or she begins collecting them. For all 

types of benefits, a costofliving adjustment (COLA) is 

made each year after the initial benefits are received to 

keep pace with annual changes in consumer prices.6

Trust Funds. Revenues from payroll taxes and from taxes 

on benefits, along with intragovernmental interest pay

ments, are credited to the two Social Security trust 

funds—one for OASI and one for DI. The program’s 

benefits and administrative costs are paid from those 

funds. Legally, the two funds are separate, but they often 

are described collectively as the OASDI trust funds.

Federal trust funds, including those for Social Security, 

essentially constitute an accounting mechanism. In a 

given year, the sum of receipts to a fund along with the 

interest that might be credited on previous balances, less 

spending for benefits and administrative costs, constitutes 

a fund’s surplus or deficit. The cash generated by a sur

plus in any year is turned over to the Treasury in 

exchange for special Treasury securities. The Treasury 

uses the cash to finance the government’s ongoing activi

ties. If the trust funds’ cash receipts are less than their 

outlays, the Treasury securities they hold are redeemed for 

cash as needed. The Treasury obtains that cash from 

other revenues or by borrowing from the public. 

The trust funds are part of the federal government, so 

transactions between Social Security and the Treasury are 

intragovernmental and have no net effect on federal bor

rowing from the public or on the unified budget. Any 

increase in revenues credited to the trust funds or 

decrease in outlays from the funds makes available addi

tional cash that can be used to finance other government 

activities without requiring new government borrowing 

from the public; the trust fund surpluses that were gener

ated in previous years have been used in that way. Simi

larly, any increase in outlays or decrease in revenues for 

the OASDI trust funds in some future year will represent 

a draw on the government’s cash in that year. Thus, the 

balances in the OASDI trust funds (in the form of 

government securities) are an asset to the Social Security

5. Most workers need to earn 40 credits (each credit is known as 

“a quarter of coverage”) to be eligible for retirement benefits. 

Workers can earn up to four credits per year on the basis of the 

amount they earn for employment that is covered under the 

program. In 2010, one credit is earned for each $1,120 in wages, 

so any worker who earns at least $4,480 will receive four credits 

for the year.

6. Social Security benefits are indexed to inflation as measured by the 

consumer price index for urban wage earners and clerical workers 

(CPIW). The Social Security Administration generally adjusts 

benefits paid in January on the basis of the change in the CPIW 

through the third quarter of the previous calendar year. If the 

resulting adjustment is negative, no COLA is given. The next 

COLA is made when the CPIW for the third quarter of the 

calendar year exceeds the CPIW for the third quarter of the last 

year in which an adjustment occurred.
4 SOCIAL SECURITY POLICY OPTIONS

CBO

Figure 2.

U.S. Population Age 65 or Older as a Percentage of the Population Ages 20 to 64, 

1962 to 2080

(Percent)

Sources: Congressional Budget Office; Social Security Administration.

system but a liability to the rest of the government. The 

resources to redeem government securities in the OASDI 

trust funds and thereby pay for Social Security benefits in 

some future year must be generated from taxes, other 

government income, or government borrowing in that 

year. 

Social Security Projections

Under current law, the cost of Social Security benefits will 

escalate in coming decades.7

 Economic growth leads to 

higher average benefits because benefits are based on past 

earnings.In addition, changes in the nation’s demo

graphic structure will cause total benefits to grow faster 

than the economy: As the babyboom generation reaches 

retirement age, and as decreasing mortality leads to 

longer lives and longer retirements, a larger share of the 

population will be drawing Social Security benefits.8

Rising Cost of Benefits. Between now and 2035, the 

number of people age 65 or older will increase by about 

90 percent, compared with an increase of more than 

10 percent in the number of people between the ages of 

20 and 64, CBO projects. Today, that older population is 

onefifth the size of the younger population; at those 

growth rates, it will be more than onethird the size of the 

younger group by 2035 (see Figure 2). In 2035, about 

93 million people will collect Social Security benefits, 

compared with 53 million today, and the average benefit 

will have grown nearly as rapidly as GDP per person.

As more baby boomers begin collecting benefits, spend

ing for the program will climb from 4.8 percent of GDP 

in 2010 to 6.2 percent of GDP in 2035, CBO projects. 

Spending as a share of GDP will decline slightly over the 

15 years after that, to 5.9 percent of GDP, as an 

increasing number of baby boomers die. However, 

1962 1970 1978 1986 1994 2002 2010 2018 2026 2034 2042 2050 2058 2066 2074

0

5

10

15

20

25

30

35

40

45

Actual Projected

7. This study uses projections for Social Security as published in 

Congressional Budget Office, The LongTerm Budget Outlook,

Chapter 3, based on An Analysis of the President’s Budgetary 

Proposals for Fiscal Year 2011 (March 2010). Future revenues from 

income taxes on benefits will depend on future income tax rates. 

The projections used here reflect the assumptions underlying the 

extendedbaseline scenario published in The LongTerm Budget 

Outlook, namely, that income tax law does not change and income 

taxes on benefits grow as a share of Social Security benefits 

throughout the 75year projection period. Under that report’s 

alternative fiscal scenario, in contrast, income taxes on benefits are 

assumed to remain a constant share of benefits after 2020. As a 

result, projected Social Security revenues are slightly lower under 

the alternative fiscal scenario.

8. Expectations regarding how the baby boomers will fare financially 

in retirement are summarized in Congressional Budget Office, 

The Retirement Prospects of the Baby Boomers, Issue Brief (March 

18, 2004); for additional details, see Baby Boomers’ Retirement 

Prospects: An Overview (November 2003) and Will the Demand for 

Assets Fall When the Baby Boomers Retire? Background Paper 

(September 2009). 
SOCIAL SECURITY POLICY OPTIONS 5

CBO

demographers generally anticipate that life expectancy 

will continue to increase, and CBO projects that Social 

Security outlays will resume their upward trajectory rela

tive to GDP after 2050, reaching 6.3 percent in 2080.9

The aging of the population is primarily responsible for 

the growth in Social Security’s outlays as a percentage of 

GDP. If the age distribution of the population remained 

constant, Social Security outlays would decline slightly, 

from 4.8 percent of GDP today to 4.3 percent of GDP in 

2035 and remain approximately at that level thereafter; 

the decline would occur because the full retirement age 

will continue to rise under current law, effectively reduc

ing benefits. Social Security’s total benefits would remain 

a generally constant share of GDP in the absence of aging 

because scheduled benefits are indexed to growth in earn

ings and (after initial benefits are received) to inflation. If 

that indexation were changed in certain ways, average 

benefits could be significantly lower than those under 

current law. For example, if initial benefits grew at the 

same rate as average prices (rather than at the same rate as 

average wages as they do under current law), average ben

efits—and thus total outlays—would be onethird lower 

by 2060 and onehalf lower by 2080. Alternatively, if 

continuing benefits were increased by a smaller COLA 

than provided under current law, average benefits would 

be smaller. CBO estimates that, in years after 2040, more 

than 25 percent of the benefit payments under current 

law will be the result of COLAs provided between now 

and then. 

Worsening System Finances. CBO projects that, in 2010, 

for the first time since the Social Security reforms of the 

early 1980s, benefit payments from the trust funds will 

exceed trust fund receipts from the public. Receipts from 

the public consist mostly of revenues from payroll taxes 

and exclude interest on Treasury securities held by the 

trust funds. As the economy recovers from the recent 

recession, receipts will again exceed benefit payments, but 

only until 2016. If benefits are paid as specified under 

current law, outlays will exceed revenues by 0.3 percent of 

GDP in 2020, CBO projects, and by 1.0 percent to 

1.3 percent between 2040 and 2080 (see Table 1). 

Trust Fund Exhaustion. CBO projects that the Disability 

Insurance Trust Fund will be exhausted in fiscal year 

2018, with the sum of the balance in the fund at the 

beginning of the year and projected revenue in that year 

falling $15 billion below projected expenditures. Once 

the trust fund balance has fallen to zero and current reve

nues are insufficient to cover the benefits that are speci

fied in current law, the DI program will be unable to 

meet its obligations fully without changes in law. CBO 

projects that the OldAge and Survivors Insurance Trust 

Fund will be exhausted in 2042. 

The DI trust fund has been close to exhaustion before. 

The 1994 Annual Report of the Social Security Board of 

Trustees projected that the DI trust fund would be 

exhausted in 1995.10 That outcome was prevented by leg

islation that redirected revenue from the OASI trust fund 

to the DI trust fund. In part because of that experience, it 

is a common analytical convention to consider the DI 

and OASI trust funds as combined, and CBO projects 

that, if legislation to shift resources from the OASI trust 

fund to the DI trust fund was enacted, the combined 

OASDI trust funds would be exhausted in 2039.

Scheduled and Payable Benefits. Benefits as calculated 

under the Social Security Act, regardless of the balances in 

the trust funds, are known as scheduled benefits.11 How

ever, the Social Security Administration lacks authority 

to pay scheduled benefits if those payments would 

exceed the available balances. If the trust funds became 

exhausted, payments to beneficiaries would be reduced or 

otherwise modified as necessary to make outlays from the

9. For details on CBO’s methodology for projecting Social Security’s 

revenues and outlays, see Congressional Budget Office,

CBO’s LongTerm Projections for Social Security: 2009 Update

(August 2009), p. 4. 

10. See Board of Trustees of the Federal OldAge and Survivors 

Insurance and Disability Insurance Trust Funds, 1994 Annual 

Report, 78187 (April 11, 1994), www.ssa.gov/history/reports/

trust/1994/1994.pdf. 

11. CBO prepares cost estimates for legislation under the assumption 

that scheduled payments will be made, which is consistent with a 

longstanding statutory requirement that CBO, in its baseline 

projections, assume that laws are implemented as specified and 

that funding for entitlement programs is adequate to make all 

payments. See section 257 of the Balanced Budget and Emergency 

Deficit Control Act of 1985, Public Law 99177, as amended; 

2 U.S.C. 907.
6 SOCIAL SECURITY POLICY OPTIONS

CBO

Table 1.

Social Security’s Revenues and Outlays Under Current Law with 

Scheduled Benefits

(Percentage of GDP)

Source: Congressional Budget Office.

Notes: The 75-year period is 2010 through 2084. Revenues consist of payroll taxes and income taxes on benefits (but not interest credited to 

the trust funds) in the specified year. Outlays consist of Social Security benefits and administrative costs. The balance is the surplus or 

deficit, which is the difference between revenues and outlays. The 75-year present value of revenues includes the current Old-Age, 

Survivors, and Disability Insurance trust fund balance. The 75-year present value of outlays includes a year’s worth of benefits as a 

reserve at the end of the period.

GDP = gross domestic product.

funds equal revenues to the funds.12 Benefits reduced or 

modified in that way are known as payable benefits. Under 

those circumstances, all receipts to the trust funds would 

be used and the trust fund balance would remain essen

tially at zero.

In 2040, CBO projects, payroll tax revenues and revenues 

from the taxation of benefits will be 80 percent of sched

uled benefits for OASI and DI. At that time, payable 

benefits will be 20 percent lower than scheduled benefits 

for all beneficiaries. By 2084, the gap between scheduled 

and payable benefits will be 24 percent, CBO estimates 

(see Figure 3).

Cutting scheduled benefits or raising Social Security taxes 

during the next few decades would extend the solvency of 

the OASDI trust funds. For example, under a policy 

option with a gradual reduction in benefits such as a 

reduction in costofliving adjustments by 0.5 percent 

annually starting in 2012, the trust fund exhaustion date 

would be extended by nine years to 2048—such that 

benefits from 2039 through 2048 would be higher than 

payable benefits under current law (see Figure 4).

Actuarial Balance. A commonly used measure of the sus

tainability of a program that has a trust fund and a dedi

cated revenue source is its actuarial balance, a single 

measure of the difference between the trust fund’s 

resources and projected expenditures over a specified 

period. The actuarial balance is calculated as the present 

value of projected revenues, plus the trust fund balance at 

the beginning of the period, minus the present value of 

projected outlays and the cost of maintaining a reserve 

equal to a year’s worth of benefits at the end of the 

period, expressed as a percentage of the present value of 

GDP or (in the case of Social Security) as a percentage 

of taxable payroll over the same period. CBO estimates 

that over the 75year period from 2010 to 2084, dedi

cated revenues for Social Security will fall short of sched

uled benefits by 0.6 percent of GDP, assuming a real 

interest rate of 3 percent (see Table 1). (As a percentage of 

taxable payroll—the amount of earnings subject to the 

Social Security payroll tax—the shortfall is 1.6 percent.) 

Thus, to bring the program into actuarial balance over 

the 75year period—that is, for the system’s projected rev

enues to be sufficient to cover the benefits prescribed by 

current law—payroll taxes could be increased immedi

ately by 0.6 percent of GDP and kept at that higher rate, 

or scheduled benefits could be reduced by an equivalent 

amount, to give two examples. (Such an increase in

Revenues 4.9 4.9 4.9 4.9 5.0 5.2 14.4

Outlays 4.8 5.2 6.2 6.0 6.3 5.8 16.0

Balance 0.1 -0.3 -1.3 -1.1 -1.3 -0.6 -1.6

75-Year Present Value

Taxable 

2060 Payroll

as a Percentage of

2020 2080

Actual

2009 2040 GDP

12. See Kathleen Romig, Social Security: What Would Happen If the 

Trust Funds Ran Out? Report for Congress RL33514 

(Congressional Research Service, Updated April 25, 2008). The 

report notes the entitlement created under the Social Security Act, 

cites other law that prohibits officials from making expenditures 

in excess of available funds, and acknowledges that the two create 

a potential conflict that must be resolved by the Congress or in the 

courts.
SOCIAL SECURITY POLICY OPTIONS 7

CBO

Figure 3.

Social Security’s Revenues and Outlays with Scheduled and Payable Benefits

(Percentage of gross domestic product)

Source: Congressional Budget Office.

Note: Revenues consist of payroll taxes and income taxes on benefits (but not interest credited to the trust funds). Outlays consist of Social 

Security benefits and administrative costs. Benefits as calculated under the Social Security Act, regardless of the balances in the trust 

funds, are known as scheduled benefits. If the trust funds became exhausted, payments to beneficiaries would be reduced to make

outlays from the funds equal revenues to the funds; such benefits are known as payable benefits. In that case, total revenues would 

decline slightly because revenues from taxation of benefits would decline.

payroll taxes would generate about 13 percent more reve

nue than the amount projected under current law.) More 

generally, a combination of tax and benefit changes that 

in combination improved the 75year actuarial balance 

by 0.6 percent of GDP could be implemented over time. 

Trust Fund Ratio. Another common measure of Social 

Security’s finances is the ratio of the trust fund balance to 

the program’s annual outlays. That calculation indicates 

how many years’ worth of benefits could be financed by a 

given balance if outlays per year remained the same. The 

trust fund ratio for 2010—the balance in the Social 

Security trust funds at the beginning of the year divided 

by projected 2010 outlays for the program—was 3.6,

CBO estimates. The ratio is projected to peak in 2010 

and then to decline quickly until the trust funds are 

exhausted in 2039.

Sustainable Solvency. Some analysts suggest that changes 

to Social Security should have two financial objectives: 

balancing the system’s finances over the 75year projec

tion period and putting the system on a sustainable path 

thereafter, a goal known as sustainable solvency.13 The 

actuarial balance, as a single number, usefully summarizes 

the entire stream of revenues and outlays over the 75year 

period (after adjusting for the starting balance in the trust 

funds), but it does not convey any information about 

whether the pattern of annual finances is sustainable 

beyond 75 years. A proposal that would attain sustainable 

solvency would produce positive trust fund ratios 

throughout the 75year projection period as well as stable 

or rising ratios at the end of the period.

Assessing Options for Changing 

Social Security 

In this study, CBO examines 30 options for altering vari

ous elements of Social Security that have been considered 

by various analysts and policymakers. The options mostly 

involve changes to the system’s current structure that 

would have a marked influence on Social Security’s 

finances. Several criteria can be applied to analyze the var

ious options’ effects. This study considers how the 

options would affect Social Security’s finances over time 

and discusses distributional outcomes, such as the 

amount of taxes collected from or the amount of benefits 

1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080

0

4

5

6

7

Outlays with Payable Benefits

Actual Projected

Outlays with Scheduled Benefits

Outlays

Revenues

13. See, for example, Social Security Administration, Report of the 

1994–1996 Advisory Council on Social Security, Volume I: Findings 

and Recommendations (January 1997), www.ssa.gov/history/

reports/adcouncil/report/toc.htm.
8 SOCIAL SECURITY POLICY OPTIONS

CBO

Figure 4.

Projected Outlays for Social Security Under Current Law and with a 

Gradual Reduction in Benefits Starting in 2012

(Percentage of gross domestic product)

Source: Congressional Budget Office.

Note: Outlays consist of Social Security benefits and administrative costs. Benefits as calculated under the Social Security Act, regardless of 

the balances in the trust funds, are known as scheduled benefits. If the trust funds became exhausted, payments to beneficiaries 

would be reduced to make outlays from the funds equal revenues to the funds; such benefits are known as payable benefits. The 

gradual reduction in benefits would begin in 2012, reducing cost-of-living adjustments by 0.5 percent annually.

paid to people in different groups according to lifetime 

earnings or year of birth. Changes in economic incentives 

also are important; they are discussed below, although 

they are not analyzed in detail. 

Key Elements of Social Security

Each policy option would alter at least one significant 

element of Social Security that determines its revenues or 

outlays under current law. Descriptions of the key 

elements appear below.

Payroll Taxes. Several options would affect the amount of 

Social Security payroll taxes people would pay. The cur

rent system operates as follows:

B Tax Rate. Employers and employees each pay half of 

the 12.4 percent payroll tax (selfemployed people pay 

the entire amount). 

B Taxable Maximum. The payroll tax is imposed on 

earnings up to a maximum that increases as average 

earnings rise. In 2010, that taxable maximum is 

$106,800. 

Benefit Formula. Social Security benefits are determined 

by a formula that constructs summary measures of life

time earnings. That formula has several key elements:

B Average Indexed Monthly Earnings. Social Security 

benefits are determined by earnings over a person’s 

lifetime, expressed as average indexed monthly earn

ings (AIME). For anyone who reaches age 62 after 

1990, the total earnings amount is calculated based on 

earnings that are subject to Social Security taxes, using 

the highest 35 years of those earnings. For retirees, 

earnings before age 60 are indexed to compensate both 

for inflation and for economywide real growth in 

earnings; earnings at age 60 and later enter the com

putations at their actual amounts. For disabled work

ers, earnings in the two years before initial benefit 

computation enter at their actual amounts, and earlier 

earnings are indexed. For retirees, dividing the result

ing value for total earnings by 420 (35 years multi

plied by 12 months) yields the AIME. 

B Primary Insurance Amount. The primary insurance 

amount (PIA) is the monthly amount payable to a 

worker who begins to receive Social Security retire

ment benefits at the age at which he or she is eligible 

1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080

0

4

5

6

7

Actual Projected

With Payable Benefits Assuming

Gradual Reduction in Benefits

With Scheduled Benefits

Under Current Law

With Payable Benefits

Under Current Law
SOCIAL SECURITY POLICY OPTIONS 9

CBO

for full benefits or the amount payable to a disabled 

worker who has never received a retirement benefit. 

For workers who turn 62 or become disabled in 2010, 

for all of their dependents, and for dependents of 

workers who die in 2010, the PIA is calculated as 

90 percent of the first $761 of the AIME, plus 32 per

cent of the AIME between $761 and $4,586, plus 

15 percent of the AIME above $4,586. Actual 

monthly benefits paid to retired workers and their 

dependents differ from the PIA if an individual claims 

retirement benefits prior to or later than his or her full 

retirement age. 

B PIA Factors. The rates by which the components of the 

AIME are multiplied—90 percent, 32 percent, and 

15 percent—are the PIA factors. The PIA formula is 

progressive; it replaces a larger share of preretirement 

earnings for people with lower average earnings than it 

does for people with higher earnings.

B Bend Point. The threshold at which a PIA factor 

changes is called a bend point. Under current law, 

there are two: In 2010, they are $761 and $4,586. The 

bend points change every year with changes in the 

average annual earnings for the workforce as a whole. 

Consequently, bend points occur at approximately the 

same place in the distribution of the AIMEs each year 

(the 11th and 71st percentiles, respectively, of AIMEs 

for people who are age 62 and eligible for OASI bene

fits in 2010), and average initial benefits rise at a pace 

that matches the increase in average earnings over 

time. 

Special Minimum Benefits for Low Earners. Beneficiaries 

receive the larger of the standard benefit or a special min

imum benefit. For people who had very low earnings for 

more than 10 years, the special minimum benefit is 

sometimes larger than the standard benefit. The special 

minimum benefit increases over time, keeping pace with 

prices. Because the standard benefit formula increases 

with earnings, which tend to grow faster than prices, the 

special minimum benefit affects fewer people every year; 

it is projected to have no effect on beneficiaries who 

become eligible to collect benefits after 2010. 

Full Retirement Age. Social Security’s full retirement age, 

also called the “normal retirement age,” is the age at 

which someone is eligible to receive full retirement bene

fits. For workers born before 1938, the FRA is 65. Under 

current law, the FRA is increasing gradually; it will be 

67 for people born in 1960 or later. The age at which 

workers may start receiving reduced benefits—age 62—

remains the same. For each year that a worker claims ben

efits before reaching the FRA, benefits are reduced by an 

amount that ranges from 5 percent to 62/3 percent. For 

most current new beneficiaries, benefits are increased by 

8 percent for each year after the FRA that initial receipt 

of benefits is delayed, until age 70. (The increase is less 

than 8 percent for people born before 1943.)14

Cost-of-Living Adjustments. At the end of each year, the 

Social Security Administration adjusts each beneficiary’s 

PIA by an amount that is equal to any increase in the 

consumer price index for urban wage earners and clerical 

workers (CPIW). (When prices decline, the COLA is set 

at zero, as occurred in 2010.)

Scope of the Options 

This study focuses on options that would directly affect 

outlays for Social Security benefits or federal revenues ded

icated to Social Security. Most would increase the trust 

fund balances, but a few would reduce balances because 

they would raise benefits for people with low lifetime earn

ings. Each option is considered in isolation even though 

any substantial proposal to change the Social Security pro

gram probably would include several provisions.

Options that would reduce initial benefits are assumed to 

take effect in 2017; other options are assumed to take 

effect in 2012. Although some would affect all beneficia

ries, including those who receive disability insurance, 

CBO did not examine any options that are specific to DI. 

Options that are outside the current system’s structure 

and those that would not have sizable effects on the sys

tem’s finances are excluded from the study.

Timing of Implementation. The options that CBO has 

analyzed are not detailed legislative proposals and are 

generally presented in a simplified form. Several, for 

example, would involve abrupt reductions in benefits, so 

workers born a year apart would receive substantially dif

ferent amounts. In practice, policymakers might choose 

to introduce major changes gradually, as they have done 

in the past. Introducing changes incrementally ensures 

that people of similar ages and circumstances will be sub

ject to similar tax and benefit rules. (For all the options, 

14. See Social Security Administration, “Effect of Early or Delayed 

Retirement on Retirement Benefits” (November 12, 2009), 

www.ssa.gov/OACT/ProgData/ar_drc.html. 
10 SOCIAL SECURITY POLICY OPTIONS

CBO

as under current law, benefit rules that are applicable to 

an individual are those in force in the year in which that 

person becomes entitled to benefits, not the year he or 

she chooses to begin receiving benefits.)

Proposals to change Social Security commonly would not 

reduce benefits for people older than 55 in the year a 

reform proposal is considered. Therefore, options in this 

study that would reduce initial benefits would not affect 

anyone older than 55 in 2010. Because retired workers 

become entitled to benefits at age 62, the changes in 

initial benefits would generally apply to people in birth 

cohorts that will become entitled to benefits in 2017 

or later. 

Options That Would Affect Recipients of Disability 

Insurance. Some of the options would affect all Social 

Security beneficiaries, including people who receive DI 

benefits (see, for example, Options 12, 13, 14, and 15). 

If policymakers wanted to offset some of the effects on 

DI benefits of an option that changed retirement and dis

ability benefits alike, they could add an offsetting policy 

change that increased DI benefits.

Disability Insurance accounts for onesixth of Social 

Security benefits, and DI expenditures have increased 

rapidly over the past 20 years.15 Consequently, options 

specific to Disability Insurance could have substantial 

consequences for the system’s finances by reducing or 

increasing DI outlays. However, this study does not 

include options (such as those that would affect eligibility 

for benefits, adjust initial DI benefits, or apply different 

costofliving adjustments to DI benefits) that would 

affect DI beneficiaries only.

Options Not Encompassed by This Study. This study 

focuses on changes to the current structure of Social 

Security that could have sizable effects on the program’s 

finances. Thus, two main categories of options are 

excluded: options outside the context of the existing pro

gram and options within the program’s existing structure 

that would not have sizable effects on the system’s 

finances. 

The creation of individual accounts is a frequently dis

cussed possibility that would make changes outside the 

existing Social Security program. (The resources available 

to an account holder at retirement would depend on how 

much had been paid into such an account, most likely 

through a payroll tax, and the rate of return on the 

account’s assets during the account holder’s working life.) 

Most proposals that would introduce individual accounts 

also would involve changes to the current program, and 

the interactions between the accounts and the altered 

Social Security program are generally critical to such 

proposals. Although in the past CBO has analyzed com

prehensive proposals that would combine the establish

ment of individual accounts with changes to various 

elements of the Social Security system, such analyses are 

beyond this study’s scope.16

This study also includes no options that would draw on 

general government revenues for Social Security or that 

would change the form of investment for the trust funds. 

In addition, because this study does not consider revenue 

options that would directly affect taxes other than the 

Social Security payroll tax, it does not examine what 

might happen if income taxes on Social Security benefits 

were increased. Such changes could have sizable effects on 

the system’s finances.

Many other changes could achieve various policy goals 

for Social Security, although they would not produce a 

substantial change in the system’s longrun finances.17

Several possibilities that have received attention elsewhere 

are not included in this study:

B Changes could be aimed at reducing poverty by 

increasing benefits as Social Security beneficiaries get 

older. Poverty tends to be greater among the very old 

than among younger retirees, so directing benefit 

increases to the oldest beneficiaries could reduce 

poverty by more than if the same total amount of 

additional benefits were distributed more broadly. 

For example, benefits could be increased by fixed 

amounts or by percentages tied to beneficiaries’ ages. 

Alternatively, the COLA could rise as people age so 

that the oldest beneficiaries would receive larger 

increases.

15. The growth in spending for Disability Insurance has been driven 

largely by an increase in the number of people receiving benefits. 

In 1980, 4.7 million people received DI benefits; by 2009, there 

were 9.7 million beneficiaries. See Congressional Budget Office, 

Social Security Disability Insurance: Participation Trends and Their 

Fiscal Implications, Issue Brief (forthcoming).

16. For example, see Congressional Budget Office, letter to the 

Honorable Paul Ryan about an analysis of the Roadmap for 

America’s Future Act of 2010 (January 27, 2010).

17. Some options of this type that CBO has presented elsewhere 

are not analyzed here. See Congressional Budget Office, 

Budget Options, Volume 2, pp. 141–155. 
SOCIAL SECURITY POLICY OPTIONS 11

CBO

B The treatment of spousal benefits could be changed to 

reduce the disparity between the benefits due to dual

and singleincome couples with the same earnings. For 

example, spousal benefits for couples with similar 

earnings could be increased, decreased, or adjusted 

after the death of a spouse. (Under current law, an eli

gible spouse of a retired or disabled worker is entitled 

to a spousal benefit that is equal to 50 percent of the 

worker’s benefit, but only if it is higher than the 

spouse’s own earned benefit. Therefore, benefits gen

erally replace a larger portion of lifetime earnings for 

couples with one earner than for couples with two 

earners.)

B Benefit increases could be targeted toward parents 

who had low earnings during years when they were 

caring for children.

B The earnings of those state and local government 

workers who now are exempt from the Social Security 

payroll tax could be taxed, and coverage could be 

made mandatory for all publicsector employees.

Effects of the Options on the System’s Finances 

As a summary measure of the consequences of each 

option, CBO estimated the change in the actuarial bal

ance as a percentage of GDP. That change is estimated 

using scheduled benefits because, by definition, the sys

tem is in financial balance with payable benefits, which 

would be automatically reduced to eliminate any short

fall. The calculations are based on the projections 

described in CBO’s 2010 The LongTerm Budget Outlook,

and the effects of various options were analyzed using 

CBO’s longterm Social Security model.18 Analysis of the 

effects of uncertainty in the projected values on the 

results for each option is outside the scope of this study.19

Some options would, by themselves, eliminate most or all 

of the actuarial imbalance of 0.6 percent of GDP (see 

Table 2 on page 33). For example, Option 2 would 

increase the payroll tax by 2 percentage points over the 

next two decades, and Option 12 would cut benefits for 

all new recipients by 15 percent. Most individual options 

could be altered to have a smaller or larger effect on the 

actuarial balance by affecting the same key elements of 

the system, but with different tax rates, benefit calcula

tion rates, or speed at which the policy would phase in. 

Depending on the timing of the changes encompassed by 

the option, eliminating the actuarial imbalance might or 

might not avert exhaustion of the trust fund balance. 

Most of the options presented would not eliminate the 

75year imbalance on their own; to achieve that goal, it 

would be necessary to combine several. For simplicity, 

however, CBO evaluated each policy in isolation. Com

bining several options might introduce changes to the 

overall finances of the system that were larger or smaller 

than would be produced by summing the effects of those 

options, because they would interact with one another. 

Some options would have their full effect immediately, 

and they would change annual revenues or outlays by 

roughly the same percentage each year (such as Options 6

to 9, which would increase payroll tax rates in 2012). 

Others would phase in slowly, resulting in increasingly 

larger changes in annual revenues or outlays (such as 

Option 3, which would increase taxes gradually, or 

Options 15 to 21, which would reduce benefits gradu

ally). Although most options would improve the system’s 

finances, three (Options 23 to 25) would focus on 

increasing benefits for people with low lifetime earnings. 

Those options would increase scheduled outlays and, 

taken alone, would worsen the system’s finances. 

Effects of Delayed Implementation. The effects of an 

option would be sensitive to the date of its implementa

tion. In particular, changing the year in which scheduled 

benefits are reduced could interact with changes in demo

graphics that will occur over the next 30 years. Delaying 

the start of such a reduction could help people to make 

informed decisions about preparing for retirement 

because they would have earlier warning about changes in 

Social Security’s rules. With every year that goes by, how

ever, larger changes would be needed to create a balance 

over the next 75 years between scheduled revenues and 

scheduled benefits. To demonstrate the effect of delaying 

18. The results presented in this study are based on a single simulation 

for each option, reflecting CBO’s longterm demographic and 

economic assumptions. For a description of the model, see 

Congressional Budget Office, CBO’s LongTerm Model: An 

Overview, Background Paper (June 2009). 

19. For more information, see Congressional Budget Office, 

Quantifying Uncertainty in the Analysis of LongTerm Social Security 

Projections, Background Paper (November 2005). 
12 SOCIAL SECURITY POLICY OPTIONS

CBO

Figure 5.

Effect of Delaying a Payroll Tax Increase or Benefit Reduction on 

Social Security’s Finances

(Trust fund ratio)

Source: Congressional Budget Office.

Notes: The trust fund ratio is the ratio of the trust fund balance (the amount in the OASDI trust funds at the beginning of a year) to one year’s 

outlays (Social Security benefits and administrative costs). The trust funds are exhausted when the trust fund ratio reaches zero. 

Under current law, the trust funds cannot incur negative balances. A negative balance is a projected shortfall, reflecting the trust 

funds’ inability to pay scheduled benefits out of current-law revenues.

OASDI = Old-Age, Survivors, and Disability Insurance; PIA = primary insurance amount.

the implementation of Social Security reforms, CBO 

analyzed the effects of varying the start dates for two 

options. 

In the first case, CBO estimated the effect of boosting the 

payroll tax rate by 2.0 percentage points gradually over 

two decades (Option 2) but starting in 2022 instead of 

2012. If the increase started in 2012, the Social Security 

trust funds would not be exhausted until 2083 (see the 

top panel of Figure 5). However, if the onset of payroll 

tax increases were delayed by 10 years, until 2022, the 

result would be quite different: The Social Security 

trust funds would be exhausted by 2056. If policymakers 

wanted to delay implementation by 10 years and still 

achieve the same improvement in the 75year actuarial 

balance, the increase in the tax rate would need to be 

more than a quarter larger: The tax rate would have to 

increase by 2.6 percentage points rather than by 

2.0 percentage points.

In the second instance, CBO evaluated the effect of a flat 

15 percent cut in benefits for new beneficiaries 

Option 12: Reduce All PIA Factors by 15 Percent

Option 2: Increase the Payroll Tax Rate by 2 Percentage Points Over 20 Years

1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080

-10

-8

-6

-4

-2

0

2

4

6

8 Actual Projected

Option Starts in 2022

Option Starts in 2012

Current Law

1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080

-10

-8

-6

-4

-2

0

2

4

6

8

Current Law

Option Starts in 2027

Option Starts in 2017

Actual Projected
SOCIAL SECURITY POLICY OPTIONS 13

CBO

(Option 12) but implemented in 2027 rather than in 

2017. Beginning this cut in 2017 would be nearly 

sufficient to restore Social Security to solvency over 75 

years, and the trust funds would be exhausted in 2076 

(see the bottom panel of Figure 5). With a 10year delay, 

however, the trust fund exhaustion date would be 2044, 

only five years later than CBO projects under current law. 

If policymakers wanted to implement a benefit reduction 

in 2027 and still achieve the same improvement in the 

75year actuarial balance as a 15 percent reduction in 

2017, the benefit cut in 2027 would need to be onethird 

larger: 20 percent, rather than 15 percent.

Sustainable Solvency. Different policies can have similar 

effects on the actuarial balance but different effects on 

Social Security’s finances at various points in time. For 

example, a policy that would implement large tax 

increases or benefit cuts in 30 years could eliminate the 

75year actuarial imbalance but not prevent trust fund 

exhaustion. And a policy that would immediately cut 

benefits or increase taxes by a flat percentage could elimi

nate the 75year imbalance and delay exhaustion beyond 

the projection period but still allow large and growing 

imbalances to remain in the 76th year and beyond.

One way to sustain solvency is to have a trust fund ratio 

that is positive throughout the projection period and then 

stable or growing after 75 years. Neither increasing the 

payroll tax by 2.0 percentage points over two decades nor 

cutting benefits by 15 percent would result in sustainable 

solvency; the trust funds would be exhausted around 

the end of the projection period and the trust fund ratio 

would still be declining after 75 years (see Figure 5). Only 

one option CBO analyzed (Option 17) would, by itself, 

result in sustainable solvency.

Effects of the Options on Payroll Taxes Paid and 

Benefits Received by Various Groups

Some options would affect people in all earnings groups 

similarly; others could have greater effects on people with 

higher or lower earnings or on members of other specific 

populations. In addition, some options would have 

greater effects on people born earlier or later. This section 

discusses the distributional effects of various options on 

initial benefits, lifetime benefits, and lifetime payroll 

taxes. It assumes that scheduled benefits are paid, consis

tent with the discussion of the Social Security system’s 

finances (see Table 2 on page 33). (For an analysis of the 

distributional effects of the options on scheduled bene

fits, see Table 3 on page 39; for an analysis of the 

distributional effects of the options on payable benefits, 

see Table 4 on page 43.) Specifically, CBO examined 

three measures to identify distributional effects: 

B The percentage change in initial benefits for retirees 

(calculations were made under the assumption that all 

workers claim benefits at age 65); 

B The percentage change in the present value at age 62 

of lifetime benefits; and 

B The percentage change in the present value at age 62 

of lifetime payroll taxes. 

Present values were computed using a real discount rate 

of 3 percent.

An option could have different effects on initial benefits 

and lifetime benefits. The initial benefits presented here 

are the initial retirement benefits that would be received 

by workers, assuming that all people claim retiree benefits 

at age 65.20 Lifetime benefits, by contrast, include the 

present value of all payments to recipients over time, 

including costofliving adjustments, and they include 

payments to disabled workers and to dependents and sur

vivors. Unlike the estimated initial benefits, the projected 

lifetime benefits take into account the age at which each 

person is actually expected to claim benefits.21

CBO examined the way changes resulting from the 

various policy options would affect beneficiaries in 

the low, middle, and high quintiles (the lowest, middle, 

and highest fifths) of households’ lifetime earnings in 

three 10year birth cohorts: people born in the 1960s, 

people born in the 1980s, and people born in the 

2000s.22

20. Values are based on earnings through age 61 and are net of the 

income taxes paid on benefits that are credited to the Social 

Security trust funds.

21. Values are net of the income taxes paid on benefits that are 

credited to the Social Security trust funds. The measure includes 

benefits received by oldage workers, disabled workers, oldage 

spouses, and oldage widows. Because there are insufficient data 

on benefits received by young widows and children for years 

before 1984, young widows, spouses of disabled workers, and 

child beneficiaries are excluded from this measure.

22. Each person who lives at least to age 45 is ranked by lifetime 

household earnings. For someone who is single in all years, 

lifetime earnings equals the sum of real earnings over a lifetime. In 

any year a person is married, the earnings measure is a function of 

his or her earnings plus those of his or her spouse (adjusted for 

economies of scale in household consumption). A person’s lifetime 

earnings consist of the present value of those annual amounts.
14 SOCIAL SECURITY POLICY OPTIONS

CBO

In all, therefore, the effects are identified for nine groups 

of people, measured in terms of how the option would 

affect the median value of each outcome; in other words, 

CBO’s analysis assesses the options’ effects on the person 

at the middle of the distribution of outcomes in a group. 

Outcomes for half of the people in the group would be 

lower and outcomes for half would be higher. In this 

study, “benefits for low earners” refers to median benefits 

for people in the lowest quintile of lifetime household 

earnings. A “change in taxes (or benefits) for high earn

ers” refers to the percentage change caused by a policy 

option, relative to current law, in the median of the pres

ent value of lifetime taxes (or benefits) at age 62 for peo

ple in the highest quintile of lifetime household earnings.

Outcomes shown in Table 3 and Table 4 are estimated 

percentage changes from the outcomes that would occur 

under current law. They are rounded to the nearest three 

percentage points to give a sense of likely effects on bene

fits and taxes without showing numerous small differ

ences in outcomes that are not analytically meaningful. 

The estimates are based on samples of people from the 

relevant groups, and different characteristics of people 

sampled can lead to small differences in outcomes across 

groups that are not meaningful from a policy perspective. 

For example, if an unusually high number of sampled 

people in a group were to turn out to have a shorterthan

average lifespan, then an option that would reduce 

COLAs would result in smaller changes in median life

time benefits for that group than in a more representative 

sample of the particular group, and the difference could 

lead to somewhat misleading comparisons with other 

groups.

To analyze distributional consequences of several policies 

that would produce the same effect on Social Security’s 

finances, CBO also analyzed eight variants of the main 

options in this study, each of which would improve the 

actuarial balance by one quarter, or by 0.15 percentage 

points of GDP (see the Appendix).

Options with Proportionate Effects on People in 

Different Earnings Categories. Several options presented 

in this study would make a proportionate change in ini

tial benefits for people of a particular age, regardless of 

their earnings:

B Change All PIA Factors. Among the possibilities CBO 

examined are a onetime flat reduction (Option 12) 

and a gradual reduction over time (Option 15). Other 

approaches that would phase in the reduction of 

scheduled benefits over time could link reductions in 

the PIA factors to the increasing longevity of the U.S. 

population (Option 16) or to real growth in earnings 

(Option 17).

B Increase the Full Retirement Age. An increase by one 

year in the FRA would reduce monthly benefits by 

between 5 percent and 8 percent, depending on the 

age at which a person chose to begin receiving bene

fits. Changes could be phased in either at a constant 

rate (Options 26 and 27) or according to the increase 

in life expectancy (Option 28).

An option that reduced all benefits by a similar percent

age would nevertheless have different consequences for 

different categories of beneficiaries. In dollar terms, the 

reduction would be larger for people who receive higher 

benefits. But measured as a percentage of total income, 

the reduction would be greatest for people who rely most 

heavily on Social Security. For example, someone who has 

no income other than Social Security would find a 

10 percent cut in benefits more burdensome than some

one for whom Social Security provides just onequarter of 

retirement income. (In 2008, Social Security benefits 

accounted for 90 percent or more of income for 21 per

cent of retired married couples who were beneficiaries. 

Fortythree percent of beneficiaries who were not cur

rently married received 90 percent or more of their 

income from Social Security.)23

For the most part, options that would have proportionate 

effects for people in all earnings categories would have 

greater effects on younger people. However, instituting a 

onetime reduction in the PIA factors would have similar 

effects on everyone born in 1955 or later.

Options with Very Different Effects on High and Low 

Earners. Some options would have much greater effects 

on the amount of payroll taxes levied on people or on the 

benefits they are scheduled to receive, depending on their 

lifetime earnings.

B Change the Maximum Amount of Earnings Subject to 

Payroll Taxes. The method for setting the taxable 

maximum (which usually increases to keep pace with 

average nominal earnings) could be changed. The tax

able maximum could be eliminated (Option 4) or 

23. See Social Security Administration, “Income Sources.”
SOCIAL SECURITY POLICY OPTIONS 15

CBO

increased so a larger percentage of covered earnings 

would be subject to payroll taxes (Option 5). 

Changing the taxable maximum also would change 

benefits, because the amount of earnings included in 

the AIME would change.

B Impose Taxes on Earnings Above the Current Taxable 

Maximum. Changing the taxable maximum would 

affect benefits, but an additional tax could be applied 

solely to raise revenue without affecting benefits. Such 

a policy could extend the existing tax rate to all earn

ings (Option 6) or to earnings up to a higher thresh

old (Option 7), or it could apply a different rate above 

the taxable maximum (Options 8 and 9) with no 

effect on benefits. 

B Change the PIA Factors Applied to Higher Earnings.

The top two PIA factors (currently 32 percent and 

15 percent) could be changed (Option 13), or the 

top factor alone could be changed (Option 14). The 

benefit formula could be changed so that it would 

have four different PIA factors rather than three 

(Options 18 and 19); that approach, commonly called 

progressive price indexing, would then reduce the top 

two PIA factors gradually until they reached zero. 

B Increase Benefits for Low Earners. Benefits for people 

with low lifetime earnings could be boosted by 

increasing the existing special minimum benefit or 

by creating a new minimum benefit with a different 

structure (Options 23 and 24). Alternatively, benefits 

for people who have many years of low earnings 

could be increased by raising their standard benefit 

(Option 25).

Most of those options would have greater effects on peo

ple born later. Effects of a onetime reduction in one or 

two of the top PIA factors would not vary much from 

one birth cohort to another.

Effects of the Options on Work and Saving

Social Security affects people’s decisions about how much 

to work, when to retire, and how much to save for retire

ment. Changing the rates and structure of Social Security 

taxes and benefits would influence those decisions. 

Because those behavioral responses are difficult to quan

tify, this study’s analysis of the effects on Social Security’s 

finances generally does not incorporate changes in behav

ior that might result from implementing the various 

options, such as the potential for alterations in a worker’s 

lifetime earnings.24

Like all taxes on earnings, Social Security taxes reduce the 

reward from work, which tends to decrease how much 

people work. At the same time, Social Security taxes and 

other taxes on earnings reduce takehome pay for any 

given amount of work, and the desire to earn a certain 

amount of takehome pay can lead people to work more. 

The net effect of taxes on work reflects the balance of 

those forces; most economists conclude that, on average, 

the negative effects of lower aftertax earnings for each 

additional hour worked slightly outweigh the positive 

effects of lower aftertax income from current working 

hours.25 Thus, in CBO’s estimation, increasing Social 

Security tax rates would tend to decrease modestly the 

hours of labor that workers supply. Increasing payroll tax 

rates also would encourage workers to shift some of their 

compensation to taxexempt fringe benefits. High earn

ers, who tend to have more flexibility about how to struc

ture their compensation, are particularly likely to reduce 

their taxable earnings by electing to receive more of their 

compensation as taxexempt fringe benefits. 

Options that would result in increased tax rates only up 

to a particular amount would affect all earners regardless 

of whether their earnings were above or below that 

amount. For example, Option 1 would increase the tax 

rate but would not change the existing taxable maximum; 

Option 5 would raise the taxable maximum but would 

not change the tax rate. People whose earnings would be 

well above the range of earnings affected by changes in 

tax rates would not confront the same disincentives to 

work, but they would have less income after taxes, which 

might tend to slightly increase their work effort. 

24. The current analysis incorporates some small changes in work 

behavior in response to changes in expected lifetime benefits. See 

Congressional Budget Office, Projecting Labor Force Participation 

and Earnings in CBO’s LongTerm Microsimulation Model,

Background Paper (October 2006).

25. For discussion, see Congressional Budget Office, The Effect of Tax 

Changes on Labor Supply in CBO’s Microsimulation Tax Model, 

Background Paper (April 2007), and Labor Supply and Taxes,

CBO Memorandum (January 1996). The 1996 memorandum 

assumed that the spouse of a household’s primary breadwinner 

would be more responsive to higher taxes on earnings than would 

the primary worker in a household. In recent years, CBO has 

revised downward its estimates of the responsiveness of such 

spouses because of evidence that their responsiveness has declined 

over time as their participation in the labor force has grown. 
16 SOCIAL SECURITY POLICY OPTIONS

CBO

Workers would probably consider not only the Social 

Security taxes they pay but also the benefits they expect to 

receive. Therefore, Option 6, which would eliminate the 

taxable maximum but would not affect benefits, would 

probably have a larger effect on work incentives than 

would Option 4, which would eliminate the maximum 

but include the additional taxable earnings in the benefit 

computation.

Options that would modify the way benefits are deter

mined also would influence how long people remain in 

the workforce and how much they work while they 

are in the workforce. If workers expected lower Social 

Security benefits, for example, they might stay in the 

workforce longer to claim benefits at a later age.26 How

ever, a reduction in benefits also could mean (depending 

on the formula through which benefits are reduced) that 

an extra year of work would increase future benefits by a 

smaller amount; that would amount to an increased tax 

on earnings, which would discourage work. On net, older 

workers would probably choose to work longer in 

response to a reduction in benefits, leading to an increase 

in the size of the labor force.27

The decision about how long someone would remain in 

the workforce would be influenced differently by options 

that would change benefits and by options that would 

raise the full retirement age. Because many workers claim 

benefits at the full retirement age, increasing that age 

would probably result in beneficiaries’ claiming benefits 

later than they would if an effectively identical policy 

were implemented through adjustments in the benefit 

formula. 

Increasing the full retirement age also would create a 

somewhat stronger incentive for some older workers—

particularly those in poor health—to leave the labor force 

and apply for DI benefits rather than continue to 

work and then claim OldAge benefits at age 62 in a 

decreased amount.28 (Changes in the full retirement age 

would not affect the benefits of workers who qualify for 

Disability Insurance.) Under current law, workers who 

claimed retirement benefits at age 62 in 2033 would 

receive 70 percent of their PIA (the benefit they would 

have received if they had claimed benefits at their full 

retirement age); if they qualified for DI benefits, however, 

they would receive 100 percent of that amount. Increas

ing the full retirement age would increase the difference 

between retirement and DI benefits if retirement benefits 

are claimed before a worker reaches the FRA.

Social Security also affects private saving. People who 

expect to receive Social Security benefits probably save 

less for their retirement than they would if there were no 

such program. In effect, Social Security substitutes to 

some extent for retirement saving: Some workers view the 

tax on their wages as a form of saving money each month 

for retirement; instead of accumulating assets to draw 

down when they retire, those workers are counting on 

receiving benefits from the government.29 Therefore, ben

efit reductions would probably result in higher personal 

saving.

To the extent that changes in Social Security increase pri

vate saving without increasing government deficits, those 

changes also would increase national saving—the total 

amount of saving in the economy by the government and 

private sector. Over time, greater national saving would 

raise the stock of capital and result in greater total wealth 

and larger incomes.

Options That Would Change the 

Taxation of Earnings

Payroll taxes for Social Security are proportional to earn

ings below the taxable maximum, and they are not col

lected on earnings above that amount. Currently, about 

93 percent of workers have earnings below the taxable 

maximum, and they pay Social Security taxes on all of 

their earnings. The remaining 7 percent have some 26. Before the recent recession, the increase in the full retirement age 

caused a benefit cut that led many workers to delay claiming 

Social Security benefits. See Jae Song and Joyce Manchester, Have 

People Delayed Claiming Retirement Benefits? Responses to Changes 

in Social Security Rules, Congressional Budget Office Working 

Paper 200804 (May 2008).

27. A reduction in scheduled benefits would extend the date of trust 

fund exhaustion and would result in higher payable benefits for 

several years (see Figure 5 on page 12), so a reduction in scheduled 

benefits might actually discourage work during that period.

28. Empirical evidence of the response in DI enrollment is discussed 

in Mark Duggan, Perry Singleton, and Jae Song, “Aching to 

Retire? The Rise in Full Retirement Age and Its Impact on the 

Social Security Disability Rolls,” Journal of Public Economics,

vol. 91 (2007), pp. 1327–1350.

29. See Congressional Budget Office, Social Security and Private 

Saving: A Review of the Empirical Evidence, CBO Memorandum 

(July 1998).
SOCIAL SECURITY POLICY OPTIONS 17

CBO

earnings that are not taxed and therefore have a lower 

average tax rate on their earnings. 

The options in this section would increase Social Security 

revenues beginning in 2012 by making changes to pay

roll taxes. Options that increased the taxable maximum 

without making other changes to the system also would 

increase the amount of earnings used in the computation 

of benefits, so in those options, a portion of the increase 

in revenues would be offset by increased outlays. (See 

Table 2 on page 33 for the effects of the options on 

Social Security’s finances, Table 3 on page 39 for effects 

on distributional outcomes assuming that scheduled 

benefits are paid, and Table 4 on page 43 for effects on 

distributional outcomes assuming that only payable 

benefits are paid.)

Option 1: Increase the Payroll Tax Rate by 

1 Percentage Point in 2012 

This option would raise the payroll tax rate for employers 

and employees by 0.5 percentage points each, beginning 

in 2012. The overall rate would be 13.4 percent: 6.7 per

cent paid by employers and by employees. (As with the 

other options discussed in this section, the tax rate for 

selfemployed workers would increase in line with the 

combined tax rate on employers and employees.)

Social Security’s total revenues would increase by about 

0.4 percentage points of GDP in 2040, or by about 

7 percent, relative to current law. (Taxable earnings are 

only a portion of GDP, so a 1 percentage point increase in 

the payroll tax rate leads to significantly less than a 1 per

centage point increase in revenues as a share of GDP.) 

This option would improve the 75year actuarial balance 

by 0.3 percentage points of GDP and would extend the 

trust fund exhaustion date by 17 years, to 2056. As a 

result, payable benefits would be higher for people who 

receive benefits in 2039 or later (because, under current 

law, total payable benefits are determined by total reve

nue during that period). The percentage increase in life

time payroll taxes paid would be similar for people in all 

categories of lifetime earnings within the same birth 

cohort.

Option 2: Increase the Payroll Tax Rate by 

2 Percentage Points Over 20 Years

Whereas Option 1 would increase taxes by a fixed 

amount in 2012 and later, this option would raise the 

combined payroll tax rate gradually, by 0.1 percentage 

point (0.05 percentage points each for employers and 

employees) every year from 2012 to 2031. By the end 

of that period, the rate would stand at 14.4 percent—

7.2 percent apiece for employers and employees—a 

total of 2 percentage points higher than the current rate 

of 12.4 percent. 

The Social Security payroll tax rate would increase by 

16 percent under this option relative to current law, 

but Social Security revenues would rise a bit less because 

the option would not affect income taxes on benefits. 

This option would improve the 75year actuarial balance 

by 0.6 percentage points of GDP and would extend the 

trust fund exhaustion date to 2083. As a result, payable 

benefits would be higher for people who receive benefits 

in 2039 or later. 

Lifetime payroll taxes would increase by a small amount 

for people born in the 1960s and by about 15 percent for 

those born in the 2000s. After the option is fully phased 

in, the percentage increase in lifetime payroll taxes paid 

would be similar for people in all categories of lifetime 

earnings.

Option 3: Increase the Payroll Tax Rate by 

3 Percentage Points Over 60 Years 

Under this option, the combined payroll tax rate would 

increase gradually, by 0.05 percentage points (0.025 per

centage points each for employers and employees) every 

year from 2012 to 2071. By that time, the rate would 

stand at 15.4 percent (3 percentage points higher than 

the current rate of 12.4 percent), with employers and 

employees each paying 7.7 percent. This option is similar 

to Option 2, except that the tax increase would be imple

mented more gradually and ultimately the tax rate would 

be higher. Under both options, the tax rate would be 

14.4 percent in 2051. Before that, it would be higher 

under Option 2, and in later years, it would be higher 

under this option.

Social Security’s total revenues would increase by about 

10 percent under this option in 2040, or by 0.5 percent

age points of GDP relative to current law. After the 

option was fully phased in (by 2071), revenues would 

increase by 20 percent. The option would improve the 

75year actuarial balance by 0.5 percentage points of 

GDP and would extend the trust fund exhaustion date by 

19 years, to 2058. As a result, payable benefits would be 

higher starting in 2039. 
18 SOCIAL SECURITY POLICY OPTIONS

CBO

Lifetime payroll taxes would increase by a small amount 

for people born in the 1960s and by about 15 percent for 

the 2000s cohort. The percentage increase in lifetime 

payroll taxes paid would be similar for people in all cate

gories of lifetime earnings within the same birth cohort.

Option 4: Eliminate the Taxable Maximum 

In 1983, 91 percent of all earnings from jobs covered by 

the Social Security program were below the maximum 

taxable amount. That percentage declined as the earnings 

of workers in the highest income groups grew faster than 

average earnings did. Thus, in 2009, about 83 percent of 

earnings from employment covered by OASDI (corre

sponding to 93 percent of workers, as mentioned above) 

was below the maximum taxable amount, now set at 

$106,800. Under this option, all covered earnings would 

be taxed at the current rate of 12.4 percent (6.2 percent 

paid by the employer and 6.2 percent paid by the 

employee) in 2012 and later. The additional taxable earn

ings would be included in benefit computations, resulting 

in higher benefits for the higherearning workers who 

would be subject to the additional tax.

Social Security’s total revenues would increase by 0.9 per

centage points of GDP in 2040, or by 19 percent relative 

to current law, and outlays would increase by 0.3 percent

age points of GDP, with further increases in subsequent 

years. This option would improve the 75year actuarial 

balance by 0.6 percentage points of GDP and extend the 

trust fund exhaustion date to 2083. 

This option would primarily affect taxes paid by high 

earners. The increase in taxes for high earners would be 

12 percent, 15 percent, and 18 percent for people born in 

the 1960s, 1980s, and 2000s, respectively. The increase 

would be greater for people with the very highest earn

ings. Among people born in the 1980s, lifetime taxes 

would rise by at least 40 percent for people in the top 

5 percent of lifetime earnings. The increase in benefits for 

the highest earners would be slightly smaller than the 

increase in their payroll taxes in percentage terms.30 In 

dollar terms, benefits would increase by much less than 

taxes because, under current law, over their lifetimes most 

high earners receive much less in benefits than they pay in 

taxes.

Option 5: Raise the Taxable Maximum to Cover 

90 Percent of Earnings

Because the earnings of workers in the highest income 

groups have grown faster than average earnings in recent 

decades, the share of all earnings from jobs covered by the 

Social Security program that were below the taxable max

imum has fallen from about 91 percent in 1983 to about 

83 percent in 2009. This option would raise the taxable 

maximum so that, beginning in 2012, 90 percent of earn

ings would be taxable; the additional amounts subject to 

the payroll tax would be used in benefit calculations. The 

taxable maximum in 2012 would be about $156,000 

under this option, CBO estimates, an amount 38 percent 

higher than the maximum of $113,700 estimated under 

current law. (The current taxable maximum is $106,800.) 

After 2012, the taxable maximum would increase so that 

90 percent of covered earnings would continue to be sub

ject to payroll taxes. 

Social Security’s total revenues would increase by about 

0.4 percentage points of GDP in 2040, or by about 

8 percent, relative to current law. This option would 

improve the 75year actuarial balance by 0.2 percentage 

points of GDP and would extend the trust fund exhaus

tion date by 11 years, to 2050. As a result, payable bene

fits would rise, especially for those who receive benefits in 

the 2040s. 

This option would primarily affect high earners, whose 

taxes would increase by about 6 percent for the 1960s 

cohort and by approximately 15 percent for the 2000s 

cohort. Benefits would be affected in the same manner 

as under Option 4.

Option 6: Tax Covered Earnings Above the Taxable 

Maximum; Do Not Increase Benefits

Under this option, starting in 2012, all covered earnings, 

including earnings above the taxable maximum, would be 

taxed at 12.4 percent (6.2 percent paid by the employer 

and 6.2 percent paid by the employee). This option 

would levy the same taxes as Option 4, but the taxable 

maximum under current law would still be used to 

30. The change in lifetime benefits is greater than that of initial 

benefits for two main reasons. First, lifetime benefits are based on 

the highest 35 years of earnings at any age. In contrast, initial 

benefits shown in this study are calculated on the basis of the 

highest 35 years of earnings through age 61 (and they omit 

earnings at older ages, including any earnings after age 61 above 

the taxable maximum). Second, lifetime benefits include spousal 

benefits on the basis of the earnings of the household’s primary 

earner (including earnings above the taxable maximum), whereas 

initial benefits shown here are calculated based on the spouse’s 

own earnings.
SOCIAL SECURITY POLICY OPTIONS 19

CBO

calculate benefits, and the option would therefore have no 

direct effect on scheduled benefits. 

Under this option, Social Security’s total revenues would 

increase by about 0.9 percentage points of GDP in 2040, 

or by about 18 percent relative to current law. This 

option would improve the 75year actuarial balance by 

0.9 percentage points of GDP and would extend the trust 

fund exhaustion date beyond the 75year projection 

period. As a result, payable benefits would be higher from 

2039 onward, especially for people born later. 

This option would primarily affect taxes paid by high 

earners. The effects on payroll taxes would be the same as 

in Option 4, but there would be no effect on scheduled 

benefits.

Option 7: Tax Covered Earnings Up to $250,000; 

Do Not Increase Benefits 

Under this option, starting in 2012, all covered earnings 

between the taxable maximum and $250,000 would be 

taxed at 12.4 percent (6.2 percent paid by the employer 

and 6.2 percent paid by the employee). The $250,000 

threshold would cover 93 percent of earnings in 2012 

and, in future years, the threshold would be indexed to 

earnings. Because the taxable maximum under current 

law would continue to be used to calculate benefits, the 

option would have no direct effect on scheduled benefits. 

This option is similar to Option 6, although the increase 

in the payroll tax would be smaller, as would be the finan

cial effects. 

Social Security’s total revenues would increase by about 

0.5 percentage points of GDP in 2040, or by about 

11 percent relative to current law. This option would 

improve the 75year actuarial balance by 0.5 percentage 

points of GDP and would extend the trust fund exhaus

tion date by 38 years, to 2077. Payable benefits would be 

higher in 2039 and later. There would be no increase in 

scheduled benefits. 

Like Option 6, this option would primarily affect taxes 

paid by high earners. Their taxes would increase by 

about 12 percent for the 1960s cohort and by approxi

mately 18 percent for the 2000s cohort. 

Option 8: Tax All Earnings Above the Taxable 

Maximum at 4 Percent; Do Not Increase Benefits 

Under this option, starting in 2012, all covered earnings 

above the taxable maximum would be taxed at 4 percent. 

Because the currentlaw maximum would still be used for 

calculating benefits, this option would have no direct 

effect on scheduled benefits. This option is similar to 

Option 6, but the payroll tax rate above the taxable 

maximum would be substantially smaller, as would be the 

financial effects on the trust funds.

Social Security’s total revenues would increase by 

about 0.3 percentage points of GDP in 2040, or by about 

6 percent, relative to current law. The option would 

improve the 75year actuarial balance by 0.3 percentage 

points of GDP and would extend the trust fund exhaus

tion date by 12 years, to 2051. Although there would be 

no increase in scheduled benefits, higher payroll taxes 

would result in higher payable benefits in 2039 and later.

This option would primarily affect taxes paid by high 

earners. For high earners born in the 1960s, lifetime taxes 

would increase by about 6 percent; high earners born in 

the 2000s would see their taxes increase by about 9 per

cent. The increase would be greater for people with the 

very highest earnings.

Option 9: Tax All Earnings Above $250,000 at 

4 Percent; Do Not Increase Benefits 

Like Option 8, this option would institute a 4 percent tax 

on high earners, but the tax would apply only to covered 

earnings above $250,000. (The Social Security payroll tax 

would not apply to earnings between the taxable maxi

mum and $250,000.) That threshold would apply to less 

than 1 percent of people with earnings in 2012. In future 

years, the threshold would rise at the rate of average wage 

growth. The currentlaw taxable maximum would still be 

used for calculating benefits, so this option would have 

no direct effect on scheduled benefits. 

Social Security’s total revenues would rise by approxi

mately 0.1 percentage point of GDP in 2040, or by 

about 3 percent relative to current law. This option 

would improve the 75year actuarial balance by 0.1 per

centage point of GDP and would extend the trust fund 

exhaustion date by 4 years, to 2043. There would be no 

increase in scheduled benefits, but higher payroll taxes 

would result in higher payable benefits in 2039 and later. 

This option would primarily affect high earners, whose 

taxes would typically increase by a small percentage. The 

increase would be greatest for people with the very high

est earnings. 
20 SOCIAL SECURITY POLICY OPTIONS

CBO

Options That Would Change the 

Benefit Formula

The formulas for calculating earnings histories for Social 

Security and translating those amounts into initial 

monthly benefits could be changed in many ways. The 

options in this section either would make a single change 

that would affect all new beneficiaries or they would 

make gradual changes that would have larger effects for 

people born later rather than earlier. All options would be 

implemented beginning in 2017.

Some options would affect high earners more than low 

earners, for whom Social Security benefits generally 

constitute a larger percentage of lifetime earnings. CBO 

projects, for example, that under current law, scheduled 

lifetime benefits would be 15 percent of lifetime taxable 

earnings for low earners born in the 1960s and 8 percent 

of lifetime taxable earnings for high earners in the same 

birth cohort. 

All of the options in this section would produce small 

effects on revenues, in addition to their main effects on 

outlays, because changes in benefits would change the 

amount collected in taxes on those benefits. (See Table 2 

on page 33 for the effects of the options on Social 

Security finances, Table 3 on page 39 for effects on distri

butional outcomes assuming that scheduled benefits are 

paid, and Table 4 on page 43 for effects on distributional 

outcomes assuming that only payable benefits are paid.)

Option 10: Raise from 35 to 38 the Years of 

Earnings Included in the AIME

For a person who reaches age 62 after 1990, the calcula

tion of average indexed monthly earnings under current 

law incorporates the highest 35 years of indexed earnings 

in which that person paid Social Security taxes. This 

option would extend the period for the AIME calculation 

by 3 years, phased in between 2017 and 2019. Beginning 

in 2019, the calculation would take the average of the 

38 highest years of indexed monthly earnings. The new 

average would apply only to newly eligible retired work

ers, so there would be no effect on DI benefits.31

This option would reduce Social Security’s total outlays 

by about 0.1 percentage point of GDP in 2040, or by 

2 percent, relative to currently scheduled outlays. As a 

result, it would improve the 75year actuarial balance by 

0.1 percentage point of GDP; however, it would not 

significantly extend the trust fund exhaustion date. (That 

is, by CBO’s estimate, the option would change the 

exhaustion date by two years or less.) 

This option would reduce scheduled lifetime benefits by 

a similar amount for all birth cohorts. It would have the 

largest effect on people who worked for fewer than 

38 years, because they would have additional years with 

no earnings included in the calculation of their benefits. 

However, the option would reduce benefits even for 

workers who worked 38 or more years, because those 

people would almost always have had lower average earn

ings in the additional computation years than they would 

have had in the 35 years of their highest earnings. The 

reduction would, on average, be larger for women than 

for men, because women tend to spend more years out of 

the workforce. 

Option 11: Index Earnings in the 

AIME Formula to Prices

Under current law, as part of the computation of a retired 

worker’s average indexed monthly earnings, past earnings 

are indexed to total average earnings nationwide through 

the year that is two years prior to benefit eligibility, thus 

incorporating rising prices and growth in real earnings. 

Under this option, those earnings would be indexed to 

the growth in prices only.32 As a result, initial benefits 

would be lower than those calculated under current law.

This option would reduce Social Security’s outlays by 

0.1 percentage point of GDP in 2040, or by 2 percent 

compared with currently scheduled outlays. It would 

improve the 75year actuarial balance by 0.2 percentage 

points of GDP. The effects would be small initially, so the 

option would not significantly extend the trust fund 

exhaustion date. 

The magnitude of the reduction in benefits would 

increase over time, and by 2040, the average AIME 

31. For a more detailed analysis of this option, see Congressional 

Budget Office, Budget Options, Volume 2, p. 146.

32. Specifically, in computing the AIME, all earnings from 2016 and 

earlier would be increased by the growth in the average wage index 

from the earnings year to the year that is two years before the 

AIME computation year. Earnings from 2017 and later would be 

increased by the growth in the CPIW from the earnings year to 

the year that is two years before the AIME computation year. The 

bend points in the PIA formula would continue to be indexed to 

nominal wage growth. Beginning in 2017, this option would 

apply to newly eligible retired and disabled workers. 
SOCIAL SECURITY POLICY OPTIONS 21

CBO

Figure 6.

Calculating the PIA in 2010 Under the Current Social Security System

(PIA)

Source: Congressional Budget Office.

Notes: A bend point (represented by a dot on the line) is the threshold at which a PIA factor changes.

PIA = primary insurance amount; AIME = average indexed monthly earnings.

would be 7 percent lower than it would be under current 

law. After price indexing was in place for several decades, 

the scheduled lifetime benefits for people born in the 

2000s would be reduced by about 12 percent for low 

earners and by around 6 percent for high earners. The 

reduction in benefits would be smaller for high earners 

because the reduction in the AIME would be multiplied 

by the 90 percent replacement rate for most low earners 

but multiplied by the 15 percent replacement rate for a 

large fraction of earnings among high earners. Payable 

lifetime benefits would not fall as much as scheduled 

benefits because benefits before the exhaustion of the 

trust funds (and the gap between outlays and revenues 

that would have to be closed by reducing scheduled 

benefits) would be lower.

Option 12: Reduce All PIA Factors by 15 Percent

Under current law, the primary insurance amount factors 

used in calculating initial benefits are 90 percent (applied 

to the first $761 of the AIME in 2010), 32 percent 

(applied to the AIME between $761 and $4,586 in 

2010), and 15 percent (applied to the AIME over $4,586 

in 2010) (see Figure 6). This option would reduce the 

PIA factors for newly eligible beneficiaries, including dis

abled workers, by 15 percent in 2017 (to 77 percent, 

27 percent, and 13 percent), thus reducing initial benefits 

by 15 percent. For example, if the change was applied in 

2010, a worker with an AIME of $5,000 would have a 

monthly benefit of $1,672 instead of the current system’s 

benefit of $1,971.

Social Security’s total outlays would decline by 0.7 per

centage points of GDP in 2040, or by 12 percent relative 

to currently scheduled outlays. This option would 

improve the 75year actuarial balance by 0.5 percentage 

points of GDP and would extend the trust fund exhaus

tion date by 37 years, to 2076. 

Percentage reductions in scheduled lifetime benefits for 

people affected by the change would be similar. Payable 

lifetime benefits would be lower than under current law 

for people in older cohorts but higher for people who 

were born in the 1980s and 2000s.

Option 13: Reduce the Top Two PIA Factors by 

Roughly One-Third

Starting in 2017, this option would reduce the top two 

primary insurance amount factors for newly eligible 

retired and disabled workers from 32 percent to 20 per

cent and from 15 percent to 10 percent. In contrast to 

Option 12, the benefit reduction under this option 

would be greater for people with higher earnings. 

0

1,000

2,000

3,000

4,000

5,000

6,000

0 3,000 6,000 9,000 12,000 15,000

AIME

Benefits Rise $0.90 for

Each $1 Increase in the AIME

Benefits Rise $0.32 for

Each $1 Increase in the AIME

Benefits Rise $0.15 for

Each $1 Increase in the AIME

$761

$4,586
22 SOCIAL SECURITY POLICY OPTIONS

CBO

Social Security’s total outlays would decline by 1.0 per

centage point of GDP in 2040, or by 16 percent from 

currently scheduled outlays. This option would improve 

the 75year actuarial balance by 0.7 percentage points of 

GDP and extend the trust fund exhaustion date beyond 

the 75year projection period. As a result, payable life

time benefits would generally be higher than under 

current law for people other than high earners who 

receive benefits in 2039 and several decades thereafter. 

However, this option is not sustainably solvent because 

outlays would increase more rapidly than revenues after 

implementation.

Scheduled lifetime benefits would fall by 24 percent for 

high earners and by about 3 percent for low earners. Peo

ple with an AIME below the first bend point would not 

be affected.

Option 14: Reduce the Top PIA Factor by One-Third

This option would implement one part of Option 13: It 

would reduce the top primary insurance amount factor 

for newly eligible retired and disabled workers from 

15 percent to 10 percent in 2017. It would affect only 

those new beneficiaries whose AIMEs were above the 

second bend point (in 2010, $4,586; 29 percent of 

62yearolds). For example, under this option, in 2017 

that bend point would be $5,114 in 2010 dollars, and a 

worker with an AIME of $6,000 would receive monthly 

benefits that were $44 lower than under current law. 

Social Security’s total outlays would decline by 0.1 per

centage point of GDP in 2040, or by 2 percent from cur

rently scheduled outlays. This option would improve the 

75year actuarial balance by 0.1 percentage point of GDP, 

and it would not significantly extend the trust fund 

exhaustion date. 

This option would primarily affect high earners, whose 

scheduled lifetime benefits would be reduced by approxi

mately 6 percent. Payable lifetime benefits would be 

slightly lower than under current law for high earners 

and slightly higher for others who receive benefits in 

2039 or later.

Option 15: Reduce All PIA Factors by 

0.5 Percent Annually 

Beginning in 2017, this option would reduce the primary 

insurance amount factors for newly eligible retired and 

disabled workers by 0.5 percent annually. Specifically, 

each year’s PIA factors would equal the previous year’s 

factors multiplied by 0.995. By 2080, the PIA factors 

would be 65 percent, 23 percent, and 11 percent, equal 

to about threequarters of what they are now. In 2048, 

this option would match the reduction in initial benefits 

provided by Option 12 (which would cut benefits by 

15 percent in 2017), but it would provide for smaller cuts 

in earlier years and larger reductions in later years. 

Social Security’s total outlays would decline by about 

0.3 percentage points of GDP in 2040, or by about 

6 percent from currently scheduled outlays. This option 

would improve the 75year actuarial balance by 0.4 per

centage points of GDP and would extend the trust fund 

exhaustion date by 3 years, to 2042. 

Scheduled lifetime benefits would be reduced by about 

3 percent and 21 percent for people born in the 1960s 

and 2000s, respectively. This option would have little 

effect on lifetime payable benefits.

Option 16: Index Initial Benefits to 

Changes in Longevity 

Under this option, benefits for newly eligible retired 

workers would be reduced in proportion to the increase 

in life expectancy at age 62; reductions would begin in 

2017. For example, life expectancy at age 62 in 2040 will 

be about 8 percent longer than in 2016, CBO projects, so 

initial benefits would be reduced by about 8 percent in 

2040. The option would not affect DI beneficiaries, but 

benefits would decline for disabled beneficiaries when 

they converted to OASI (conversion occurs automatically 

when a beneficiary reaches the full retirement age).33

Under this option, increases in average life expectancy 

would not result in higher average retirement benefits 

paid over a lifetime.34 However, the computation would 

be based on the average life expectancy of the entire 

33. Under this option, when a disabled beneficiary reached the full 

retirement age, DI benefits would be reduced by an amount 

proportional to the number of years between age 22 and age 62 

that the beneficiary was not entitled to receive benefits. For 

example, someone who became entitled to benefits at 62 without 

receiving any DI benefits would experience the full reduction, 

whereas the reduction for someone who became disabled at age 42 

would be half as large.

34. The reduction would not exactly equal the change in life 

expectancy after 2016 because it would be implemented by 

adjusting PIA factors by a ratio of the life expectancy at age 62 

for the birth cohort reaching age 62 in 2013 to the life expectancy 

at age 62 for the birth cohort reaching age 62 three years before 

the birth cohort in question. (The computation depends on life 

expectancy from three years before the year in question because 

of the lag in collecting and processing mortality data.) 
SOCIAL SECURITY POLICY OPTIONS 23

CBO

population. On average, low earners have shorter life 

expectancies than high earners do, and some evidence 

suggests that the gap is growing.35 If that trend continues, 

the reduction in lifetime benefits per percentage point of 

additional life expectancy would be greater for low earn

ers than for high earners (rather than equal, as it would be 

if low and high earners were to have the same increase in 

life expectancy).

Social Security’s total outlays would decline by 0.2 per

centage points of GDP in 2040, or by 3 percent from 

currently scheduled outlays. This option would improve 

the 75year actuarial balance by 0.2 percentage points of 

GDP. The early effects of the option would be too small 

to significantly extend the trust fund exhaustion date. 

The reduction in scheduled lifetime benefits would 

increase over time, reaching about 12 percent for people 

born in the 2000s. This option would have little effect on 

payable lifetime benefits. 

Option 17: Reduce PIA Factors to Index Initial 

Benefits to Prices Rather Than Earnings 

Under this option, often called “price indexing,” the bend 

points in the benefit formula would be indexed to earn

ings, as under current law, but the PIA factors would be 

reduced each year by measured growth in real earnings 

from two years earlier. Beginning in 2017, average initial 

benefits for newly eligible retirees would increase with 

prices rather than with prices and real earnings. Given 

CBO’s longterm projections for growth in real earnings, 

initial benefits would be 1.3 percent lower in the first year 

than under current law, the next year they would be 2.6 

percent lower, and they would decline in the same way in 

each succeeding year.36 In reality, however, the incremen

tal reduction would vary from year to year, depending on 

actual growth in real earnings. The reductions would be 

smaller during periods of slower earnings growth and 

larger when earnings grew more quickly. By 2060, sched

uled initial benefits would be 48 percent below those pro

jected under current law, CBO estimates. The percentage 

reductions in initial benefits for retired workers would be 

the same for all beneficiaries in a birth cohort.

This option is similar in structure to Option 15, but 

instead of reducing benefits at a fixed rate, the reduction 

relative to benefits scheduled under current law would 

vary each year with growth in real earnings. Under cur

rent law, average real scheduled benefits grow over time, 

and the ratio of initial scheduled benefits to average earn

ings (as measured by the AIME) remains roughly con

stant. Under this option, average real benefits would 

remain constant, and the ratio of initial scheduled bene

fits to the AIME would decline over time from an average 

of 0.44 for people retiring in 2010 to 0.29 for people 

who retire in 2060.37 This option would not affect people 

who collect DI benefits, but, as under Option 16, the 

decline in benefits upon conversion to OASI would be 

smaller for people who had received DI benefits for a 

longer period.

Social Security’s total outlays would decline by 0.9 per

centage points of GDP in 2040, or by 14 percent from 

currently scheduled outlays. The savings would continue 

to grow. This option would improve the 75year actuarial 

balance by 1.0 percentage point of GDP and would result 

in longterm sustainable solvency. 

For people born in the 1980s, scheduled lifetime benefits 

would decline by about 30 percent; later cohorts would 

face bigger reductions. Payable lifetime benefits also 

would be lower than those under current law, but the 

cuts would not be as large as under scheduled benefits 

because payable benefits are lower to begin with.

Option 18: Lower Initial Benefits for the Top 

70 Percent of Earners 

This option, often called “progressive price indexing,” is 

similar to Option 17. However, scheduled benefits for 

people in the bottom 30 percent of lifetime average earn

ings would not change relative to current law, and the 

reductions for people at the high end of the earnings dis

tribution would be greater than those for people closer to 

the low end. Under this option, the PIA factors applicable 

to the top 70 percent of earners would be gradually 

reduced so that initial benefits for such earners would 

decline over time relative to those scheduled under current 

law. Beginning in 2017, initial benefits for newly eligible 

Social Security beneficiaries who earned the taxable maxi

mum for 35 years—“maximum earners”—would increase 

from year to year with prices (as in Option 17) rather 

than with prices and real earnings. For beneficiaries 

35. See Congressional Budget Office, Growing Disparities in Life 

Expectancy, Issue Brief (April 17, 2008).

36. CBO projects that growth in real wages will average 1.3 percent 

annually (see Congressional Budget Office, CBO’s LongTerm 

Projections for Social Security: 2009 Update, p. 9). 

37. See Congressional Budget Office, Budget Options, Volume 2, 

p. 143.
24 SOCIAL SECURITY POLICY OPTIONS

CBO

whose lifetime earnings were between those two groups—

above the 30th percentile but below the taxable maxi

mum—average initial benefits would increase more rap

idly than prices but more slowly than earnings.38 This 

option would not affect people who collect DI benefits, 

but, as under Option 16, the decline in benefits upon 

conversion to OASI would be smaller for people who had 

received DI benefits for a longer time.

This option would be implemented by adding a third 

bend point to the PIA formula in 2017, initially set at the 

30th percentile (encompassing the lowest 30 percent) of 

earners. In 2040, the new bend point would be at about 

$2,560, between the first bend point at $1,130 and the 

highest bend point at $6,830 (see Figure 7). Between the 

first bend point and the new one, the PIA factor would 

remain at 32 percent. The PIA factors in the next two 

brackets initially would be 32 percent and 15 percent, 

but they would be reduced annually—at the rate needed 

to keep a maximum earner’s initial benefits growing with 

prices. 

The top two PIA factors would fall to zero by about 

2080, CBO projects, when monthly benefits for a worker 

with earnings at the new bend point (which would have 

increased at the rate of earnings growth) would be about 

$2,560, roughly the same as the benefits paid to maxi

mum earners (which would have increased at the rate of 

prices). Thereafter, scheduled initial benefits for all newly 

retired beneficiaries would increase with earnings, but 

benefits would effectively be capped at the amount 

received by workers with earnings at the new bend point. 

Social Security’s total outlays would decline by 0.4 per

centage points of GDP in 2040, or by 7 percent from 

currently scheduled outlays. This option would improve 

the 75year actuarial balance by 0.5 percentage points of 

GDP but would extend the trust fund exhaustion date 

only by five years, to 2044, because it would be phased in 

slowly. 

Lifetime scheduled benefits for low earners would be 

essentially unchanged; those for high earners born in the 

1980s would decline by approximately 30 percent; later 

cohorts would face bigger reductions. Lifetime payable 

benefits would be similar to those paid under current law 

for people in the middle of the earnings distribution but 

reduced for high earners and increased for low earners.

Option 19: Lower Initial Benefits for the 

Top 50 Percent of Earners

This option differs from Option 18 in that benefits 

would remain as scheduled under current law for benefi

ciaries in the bottom 50 percent of career average earn

ings, rather than for those in the bottom 30 percent. 

Under this option, the PIA factors applicable to the top 

50 percent of earners would be gradually reduced so that 

initial benefits would decline over time relative to those 

scheduled under current law. The change would be 

achieved by adding a bend point to the PIA formula 

between the first and second bend points. In 2017, the 

new bend point would be set initially at the 50th percen

tile of the lifetime earnings distribution, which CBO 

estimates would be 74 percent of the way between the 

original first and second bend points.

The top two factors would fall to zero in 2057, CBO 

estimates. The top two factors reach zero earlier than in 

Option 18 because the new second bend point occurs at a 

higher level of earnings. At that time, benefits for a 

worker with earnings at the new bend point (which 

would have increased at the rate of earnings) would equal 

the benefits received by maximum earners (which would 

have increased at the rate of prices). Thereafter, scheduled 

initial benefits for retired beneficiaries would be indexed 

to earnings, but those benefits would effectively be 

capped at the new bend point. This option would not 

affect people collecting DI benefits, but their benefits 

would decline upon conversion to OASI. That reduction 

would be smaller for people who had received DI benefits 

for a longer period, as under Option 16.

Social Security’s total outlays would decline by 0.4 per

centage points of GDP in 2040, or by 6 percent from 

currently scheduled outlays. This option would improve 

the 75year actuarial balance by 0.4 percentage points of 

GDP and would extend the trust fund exhaustion date by 

four years, to 2043. By 2060, the reduction in outlays 

would be about 40 percent of what it would be with 

indexing to prices (as in Option 17) and about 

80 percent of the amount it would be with progressive 

price indexing for the top 70 percent of earners (as in 

38. Ibid. Option 18). 
SOCIAL SECURITY POLICY OPTIONS 25

CBO

Figure 7.

Calculating Initial Benefits with Progressive Price Indexing

(PIA in 2010 dollars)

Source: Congressional Budget Office.

Notes: Progressive price indexing is the subject of Option 18: Lower Initial Benefits for the Top 70 Percent of Earners. In 2010, the bend 

points (represented by the dots on the lines) under current law are $761 and $4,586. In 2040, the bend points (in 2010 dollars) are 

$1,130 and $6,830 under current law and $1,130, $2,560, and $6,830 with progressive price indexing. In 2080, the bend points (in 

2010 dollars) are $1,890 and $11,380 under current law and $1,890, $4,270, and $11,380 with progressive price indexing. A bend 

point is the threshold at which a PIA factor changes.

PIA = primary insurance amount; AIME = average indexed monthly earnings.

0

1,000

2,000

3,000

4,000

5,000

6,000

0 3,000 6,000 9,000 12,000 15,000

AIME in 2010 Dollars

0

1,000

2,000

3,000

4,000

5,000

6,000

0 3,000 6,000 9,000 12,000 15,000

AIME in 2010 Dollars

2040

2080

Current Social Security System

Current Social Security System

Progressive Price Indexing

Progressive Price Indexing

$1,130

$1,130

$6,830

$6,830

$2,560

$1,890

$1,890

$11,380

$4,270

$11,380
26 SOCIAL SECURITY POLICY OPTIONS

CBO

Scheduled lifetime benefits for middle earners born in the 

2000s would decrease by about 9 percent; those for high 

earners would decline by around 36 percent. Payable 

benefits would be reduced for high earners but increased 

somewhat for low earners who receive benefits in 2039 

or later.

Option 20: Index the Bend Points in the 

PIA Formula to Prices 

Under this option, beginning in 2017, the bend points in 

the formula that determines the primary insurance 

amount would be indexed to prices rather than to average 

earnings, as they are under current law. (Because this 

option would change the bend points, it differs signifi

cantly from Options 17, 18, and 19, which would mod

ify the PIA factors.) This option would apply to newly 

eligible retired and disabled workers. (As under current 

law, workers’ earnings would still be indexed to nominal 

earnings in the computation of the AIME.) 

CBO projects that annual growth in real earnings will 

average 1.3 percent, so the bend points would increase 

1.3 percent more slowly under this option than under 

current law. By 2040, the bend points would be almost 

30 percent lower than they would be under current law 

(see Figure 8). By 2080, they would be almost 60 percent 

lower. The bend points would have remained the same in 

real terms (about $820 and $4,960 in 2010 dollars) from 

2017 to 2080, whereas the bend points under current law 

would have increased markedly, to about $1,890 and 

about $11,380 (in 2010 dollars). In 2080, the PIA under 

current law would be about $1,700 for a worker with an 

AIME of $2,000; under this option, the PIA would be 

$1,100, or 35 percent less.

Social Security’s total outlays would decline by 0.4 per

centage points of GDP in 2040, or by 7 percent from 

currently scheduled outlays. This option would improve 

the 75year actuarial balance by 0.5 percentage points of 

GDP, but it would extend the trust fund exhaustion date 

only by five years, to 2044, because it would be phased in 

slowly. 

Lifetime scheduled benefits for low earners born in the 

2000s would decrease by about 18 percent; for high 

earners they would decrease by approximately 24 percent. 

Payable lifetime benefits would be about the same as 

under current law.

Option 21: Index Earnings in the AIME and 

Bend Points in the PIA Formula to Prices 

This option would combine Options 11 and 20 by 

switching from wage indexing to price indexing for com

puting average indexed monthly earnings and for calcu

lating the bend points in the formula for the primary 

insurance amount. Beginning in 2017, the option would 

apply to newly eligible retired and disabled workers.

Social Security’s total outlays would decline by 0.5 per

centage points of GDP in 2040, or by 8 percent, from 

currently scheduled outlays. This option would improve 

the 75year actuarial balance by 0.6 percentage points of 

GDP. Even though it would result in a positive 75year 

actuarial balance, the benefit reductions would be rela

tively small in the first few decades. This option therefore 

would extend the trust fund exhaustion date only by 

seven years, to 2046. 

Lifetime scheduled benefits for low earners born in the 

2000s would be reduced by around 27 percent; for high 

earners, those benefits would decline by about 30 percent. 

Lifetime scheduled benefits for people born earlier also 

would decline but by a smaller proportion. Payable bene

fits generally would be lower than those under current 

law.

Option 22: Replace the Current PIA Formula with a 

New Two-Part Formula

Beginning in 2017, this option would introduce a new 

formula for calculating the primary insurance amount for 

newly eligible retired workers. The PIA would equal the 

sum of two amounts: The first would provide each 

worker with a benefit based on the number of years of 

work, and the second would provide each worker with 

additional benefits proportional to the worker’s average 

indexed monthly earnings. 

The first part of the new formula would provide a fixed 

amount of benefits for every quarter of coverage accumu

lated by a worker, regardless of earnings. As under current 

law, a retired worker would need at least 40 quarters of 

coverage to receive benefits. A newly eligible retired 

worker in 2017 would receive a monthly benefit of $6 for 

each quarter up to 160 quarters of coverage accumulated. 

The amount would increase over time at the rate of aver

age wage growth. The second part of the formula would 

provide additional benefits proportional to earnings, cal

culated as 15 percent of the AIME. 
SOCIAL SECURITY POLICY OPTIONS 27

CBO

Figure 8.

Calculating Initial Benefits with Indexing of Bend Points to Prices

(PIA in 2010 dollars)

Source: Congressional Budget Office.

Notes: Price indexing of the bend points (represented by the dots on the lines) is the subject of two options, Option 20: Index the Bend Points 

in the PIA Formula to Prices and Option 21: Index Earnings in the AIME and Bend Points in the PIA Formula to Prices. In 2010, the 

bend points under current law are $761 and $4,586. In 2040, the bend points (in 2010 dollars) are $1,130 and $6,830 under current 

law and $820 and $4,960 with price indexing. In 2080, the bend points (in 2010 dollars) are $1,900 and $11,380 under current law 

and $820 and $4,960 with price indexing. A bend point is the threshold at which a PIA factor changes.

PIA = primary insurance amount; AIME = average indexed monthly earnings.

0

1,000

2,000

3,000

4,000

5,000

6,000

0 3,000 6,000 9,000 12,000 15,000

AIME in 2010 Dollars

2040

Current Social Security System

Bend Points Indexed to Prices

$1,130

$820

$6,830

$4,960

0

1,000

2,000

3,000

4,000

5,000

6,000

0 3,000 6,000 9,000 12,000 15,000

AIME in 2010 Dollars

2080

Current Social Security System

Bend Points Indexed to Prices

$820

$1,890

$11,380

$4,960
28 SOCIAL SECURITY POLICY OPTIONS

CBO

Under this option, in 2017, a worker with 160 quarters 

of coverage and an AIME of $5,000 would have a PIA of 

$1,710. Of that amount, $960 would be attributable to 

the 160 quarters of coverage and $750 would be 15 per

cent of the AIME. Under current law, in 2017, that 

worker would have a PIA of $2,150 (in 2017 dollars). 

Social Security’s total outlays would decline by 5 percent 

in 2040 under this option, or by 0.3 percentage points of 

GDP relative to current law. The option would improve 

the 75year actuarial balance by 0.2 percentage points of 

GDP and would extend the trust fund exhaustion date by 

six years, to 2045. 

Scheduled lifetime benefits would decrease by roughly 

9 percent for high earners. Scheduled lifetime benefits for 

low earners would decrease for people born in the 1960s 

but increase somewhat for people born later (because ear

lier cohorts of low earners have fewer years of work). 

Payable lifetime benefits would be slightly higher for low 

earners in later birth cohorts.

Options That Would Increase 

Benefits for Low Earners

One goal of Social Security is to ensure an adequate 

income for beneficiaries. In 2008, 8 percent of all Social 

Security beneficiaries over the age of 65 were considered 

poor. Only 3 percent of married beneficiaries over 65 

were poor, but 14 percent of beneficiaries who were not 

currently married and 16 percent of nevermarried bene

ficiaries in the same age group were poor. One reason for 

the higher poverty rates among those groups is that bene

ficiaries who never married (or, if divorced, who had been 

married for less than 10 years) are not eligible to receive 

auxiliary benefits for widows, widowers, or divorcees. A 

minimum benefit for workers could help provide a larger 

income for those beneficiaries and others. The options in 

this section would increase worker benefits for some peo

ple who worked and contributed to Social Security for 

many years yet had low average annual earnings and thus 

would receive low Social Security benefits under current 

law. (The options would not affect the benefits received 

by married people with low earnings if their own worker 

benefits remained less than half of their spouse’s benefits.)

Because the options in this group are based on earnings 

during a working lifetime, they would not necessarily 

benefit people who have low income during retirement. 

In addition, the options would not distinguish between 

workers who had low annual earnings because they 

earned low hourly wages and workers who had higher 

hourly wages but worked for only part of the year. (See 

Table 2 on page 33 for the effects of the options on Social 

Security’s finances, Table 3 on page 39 for effects on dis

tributional outcomes assuming that scheduled benefits 

are paid, and Table 4 on page 43 for effects on distribu

tional outcomes assuming that only payable benefits are 

paid.)

Option 23: Modify the Special Minimum Benefit and 

Index It to Growth in Earnings 

Current law includes a special minimum benefit, which 

currently can be as much as $763 a month, about 

85 percent of the federal poverty guideline for an individ

ual.39 Beneficiaries receive the larger of the standard bene

fit or the special minimum benefit. The special minimum 

benefit was created to increase payments to people who 

had low earnings over a long working lifetime. However, 

the benefit is indexed to prices, whereas regular Social 

Security benefits are indexed to earnings—and because 

earnings have grown faster than prices, regular Social 

Security benefits have increased in real terms, and few 

beneficiaries now qualify for the special minimum bene

fit. After 2010, benefits computed under the standard 

formula are projected to be greater than the special mini

mum benefit for all new beneficiaries. 

This option would restructure the primary insurance 

amount used in calculating the special minimum benefit, 

basing it on the number of years of qualifying work but 

not varying it otherwise with earnings. The effect would 

be to increase the benefit as the number of years of work 

(above the 10 needed to qualify for Social Security bene

fits) increased, up to 30 years. For example, in 2012, the 

monthly benefit for a single person age 65 or older in that 

year who has worked for 30 years or more would be 

about $1,170, which CBO projects would equal 125 per

cent of the poverty guideline. For someone with fewer 

than 30 years of work, the special minimum benefit 

would be reduced proportionately, down to zero for 

39. See Kelly A. Olsen and Don Hoffmeyer, “Social Security’s Special 

Minimum Benefit,” Social Security Bulletin, vol. 64, no. 2 (2001/

2002).
SOCIAL SECURITY POLICY OPTIONS 29

CBO

people with 10 or fewer years of work.40 In 2013 and 

later, the dollar thresholds would increase at the same rate 

as average earnings. 

Social Security’s total outlays under this option would 

increase by 0.2 percentage points of GDP in 2040, or by 

4 percent above currently scheduled outlays. This option 

would worsen the 75year actuarial balance by 0.2 per

centage points of GDP, and the trust funds would be 

exhausted two years earlier, in 2037. Payable benefits 

would generally be higher for the affected low earners, 

but high earners would be affected by the earlier trust 

fund exhaustion date and by the larger gap between 

outlays and revenues thereafter. 

Under this option, scheduled lifetime benefits for low 

earners born in the 2000s would increase by about 

30 percent. In 2040, about 50 percent of new OASI ben

eficiaries and about 35 percent of new DI beneficiaries 

would have higher initial benefits; about 45 percent of 

the group would be women.

Option 24: Introduce a New Poverty-Related 

Minimum Benefit 

This option would introduce a new benefit for workers 

who have relatively low earnings over a long period. For 

someone with 20 years of earnings, the minimum PIA 

would typically be 80 percent of the poverty guideline for 

a single person age 65 or older in 2016. (In most of the 

country, the 2009 poverty guideline for a single person 

was $10,830.) With 40 years of earnings, the amount 

would be 120 percent of the poverty guideline.41 Those 

PIAs would amount to $720 and $1,080, respectively, in 

2016 (in 2010 dollars). Beneficiaries would receive the 

higher of the regular benefit or the new minimum 

benefit. This option’s minimum benefits would be higher 

than those under Option 23 for workers with 

11 to 24 years of earnings and lower for those with 25 or 

more years of earnings; neither option would provide a 

minimum benefit to workers with 10 or fewer years of 

earnings. 

Social Security’s total outlays would increase by less than 

0.05 percentage points of GDP in 2040, or by less than 

1 percent from currently scheduled outlays. This option 

would worsen the 75year actuarial balance by less than 

0.05 percentage points of GDP and would not signifi

cantly change the trust fund exhaustion date. 

Scheduled and payable lifetime benefits for low earners 

would be roughly 6 percent higher than under current 

law. In 2040, about 13 percent of new OASI beneficiaries 

and about 18 percent of new DI beneficiaries would 

receive higher initial benefits than under current law; 

about 55 percent of those beneficiaries would be women.

Option 25: Enhance Low-Earners’ Benefits on the 

Basis of Years Worked

Under this option, beginning in 2012, benefits would 

increase for workers who have both low lifetime average 

earnings and at least 20 years of covered earnings. This 

option would raise the standard benefit for qualified 

workers by a specified percentage that would depend on 

the number of years worked and a worker’s AIME. The 

largest benefit increase would be 40 percent for someone 

with 35 or more years in the workforce and an AIME at 

or below the AIME of someone who had worked full 

time and earned the minimum wage for 30 years. The 

benefit increase would be smaller for people with fewer 

years of work or higher AIMEs, and there would be no 

increase for people whose AIME was above that of a 

worker who had worked for 35 years or who always 

earned an amount equal to or greater than the average

40. Under this option, a year of coverage for the special minimum 

benefit is defined as a year in which a worker earns four quarters 

of coverage. Years of coverage would accumulate after 10 years of 

coverage but not increase beyond 30 years. That is, someone who 

worked 30 or more years would be credited with benefits based on 

20 years of coverage. The additional PIA per year of coverage 

above 10 years would be 1/20 of the benefit for a 30year worker, 

or $58.50 in 2012. So, for example, the minimum monthly 

benefit for a worker with 15 years of coverage would be about 

$293 (5 × $58.50). 

41. To qualify for the new benefit, a beneficiary would need to have 

worked at least 10 years. Specifically, the minimum PIA would be 

2 percent of the poverty guideline for each quarter of coverage 

above 40 (10 years of earnings) and up to 80 quarters of coverage, 

and 0.5 percent of the poverty guideline for quarters of coverage 

above 80 and up to 160. (For disabled workers, fewer quarters 

would be required because of their shortened careers.) This new 

minimum benefit would be phased in from 2012 to 2016. 

Beginning in 2016, the effective poverty guidelines would increase 

with average wages. 
30 SOCIAL SECURITY POLICY OPTIONS

CBO

wage index (AWI, the average amount of total earnings in 

the United States in a year).42

Social Security’s total outlays in 2040 would increase 

by 0.4 percentage points of GDP, or by 7 percent from 

currently scheduled outlays. This option would worsen 

the 75-year actuarial balance by 0.3 percentage points of 

GDP, and the trust funds would be exhausted in 2034, 

five years earlier than CBO anticipates otherwise. Payable 

benefits for high earners would be somewhat lower than 

under current law because of the earlier exhaustion of the 

trust funds and the larger gap between outlays and 

revenues thereafter.

Under this policy, scheduled lifetime benefits for low 

earners born in the 2000s would increase by about 

24 percent. For people in the same cohort and in 

the middle of the household earnings distribution, 

scheduled lifetime benefits would increase by 12 percent; 

they would receive larger benefits because many of them 

would have an AIME that was less than that of a worker 

who worked for 35 years and always earned an amount 

equal to the AWI. Under this option, about 57 percent of 

new OASI beneficiaries and about 65 percent of DI beneficiaries would receive an increase in their initial benefits 

in 2040; about 53 percent of those beneficiaries would be 

women. 

Options That Would Raise the 

Full Retirement Age

People who turn 65 today will, on average, collect Social 

Security benefits for significantly longer than retirees did 

in the past because the average life span in the United 

States has lengthened considerably. In 1940, life expectancy at age 65 was 11.9 years for men and 13.4 years for 

women. The Social Security trustees project that life 

expectancy has increased by more than 5 years for 65-

year-olds today, to 17.0 years for men and 19.4 years for 

women, and that those figures will increase to 18.7 years 

and 20.8 years by 2035. Therefore, a commitment to 

provide people with a specific monthly benefit for the rest 

of their lives would be more costly if made to those who 

will be 65 in 2035 than to 65-year-olds today.

Increasing the full retirement age is, in most ways, equivalent to cutting initial benefits. In particular, for people 

who claim benefits at any given age, a higher FRA results 

in lower benefits. (The options presented here would not 

change the early eligibility age, which under current law 

is fixed at 62 for retired workers.) Depending on the age 

at which the worker claims his or her benefits, a one-year 

increase in the FRA is equivalent to a reduction in a 

retired worker’s monthly benefit of between 5 percent 

and 8 percent.43 For example, under current law, benefits 

would be reduced by 30 percent for someone with a FRA 

of 67 (that is, someone born in 1960 or later) who 

claimed benefits at age 62. The reduction would be 

35 percent for the same worker if the FRA was set at 68. 

The options in this section would increase the full retirement age to different ages at different speeds. (See Table 2 

on page 33 for the effects of the options on Social Security’s finances, Table 3 on page 39 for effects on distributional outcomes assuming that scheduled benefits are 

paid, and Table 4 on page 43 for effects on distributional 

outcomes assuming that only payable benefits are paid.)

42. The standard benefit would be multiplied by 1 + (40 percent × 

AIME factor × coverage factor). The two factors range from 0 to 

1, so this option would increase benefits by as much as 40 percent. 

The AIME factor would be 1 for workers with an AIME equal to 

or less than the AIME of a full-time worker who earned the 

minimum wage for 30 years. It would be zero for workers with an 

AIME greater than the AIME of a worker who worked for 

35 years, always earning an amount equal to the AWI. For workers 

with earnings between those amounts the factor would be set 

proportionately: AIME factor for a given worker = (AIME of 

35-year AWI worker – AIME of given worker)/(AIME of 35-year 

AWI worker – AIME of minimum wage worker). The coverage 

factor would give a larger increase to workers with more quarters 

of coverage. For most retired workers the factor would be 1 if the 

worker had at least 35 years in covered employment. It would be 

zero if the worker had 20 years or less in covered employment. For 

workers whose employment was between 20 and 35 years, the 

formula would be as follows: Coverage factor = the minimum of 

1 or 1 – {[(3.5 × elapsed years) – quarters of coverage]/(1.5 × 

elapsed years)}. “Elapsed years” would be set to 40 for retired 

workers or equal to the number of years from age 22 to the age of 

entitlement for disabled workers (see Congressional Budget 

Office, Budget Options, Volume 2, p. 154).

43. When a worker claims benefits before the full retirement age, 

benefits are reduced by 5/9 of 1 percent for each month, or 

6-2/3 percent per year, before full retirement age, up to 

36 months. If the number of months exceeds 36, then the 

benefit is further reduced by 5/12 of 1 percent per month, or 

5 percent per year. People who claim benefits after reaching 

their FRA generally receive a delayed-retirement credit, which is 

8 percent for those born in 1943 and later. No additional credit 

is given after a person turns 70.
SOCIAL SECURITY POLICY OPTIONS 31

CBO

Option 26: Raise the FRA to 68 

This option would continue to increase the full retire

ment age after it reaches 67 in 2022 under current law. 

Specifically, the FRA would rise by an additional two 

months per birth year for another six years, reaching 68 

for workers born in 1966, who will turn 62 in 2028. 

Social Security’s total outlays would decline by 0.2 per

centage points of GDP in 2040, or by 3 percent from 

currently scheduled outlays. This option would improve 

the 75year actuarial balance by 0.1 percentage point of 

GDP and would not significantly extend the trust fund 

exhaustion date. 

After this option was fully phased in, scheduled lifetime 

benefits for people born in the 1980s and 2000s would 

be reduced by about 6 percent relative to current law. 

Payable benefits would not change significantly.

Option 27: Raise the FRA to 70 

Like Option 26, this option would continue to increase 

the full retirement age after it reaches 67 in 2022 under 

current law, but this option would ultimately make the 

age of full retirement later than would Option 26. Under 

this option, the FRA would rise by an additional two 

months per birth year for another 18 years, reaching age 

70 for workers who were born in 1978 and who will turn 

62 in 2040.44 That change, relative to Social Security’s 

original FRA of 65, would roughly match the increase in 

life expectancy that has occurred since 1940. 

Under this option, Social Security’s total outlays would 

decline by 0.4 percentage points of GDP in 2040, or by 

6 percent from currently scheduled outlays. This option 

would improve the 75year actuarial balance by 0.3 per

centage points of GDP and would not significantly 

extend the trust fund exhaustion date. 

After this option was fully phased in, scheduled lifetime 

benefits for people born in the 1980s and 2000s would 

be reduced by about 15 percent relative to current law. 

Payable benefits would decline by smaller percentages.

Option 28: Index the FRA to Changes in Longevity 

This option would maintain a constant ratio of projected 

years of benefit receipt to years of work—that is, the ratio 

of life expectancy at the full retirement age to the number 

of years from age 21 to the full retirement age would be 

held constant.45 Under current law, the FRA will be 67 

starting in 2022. Under Options 26 and 27, the FRA 

would increase at a rate of two months per birth year. 

Under this option, the increase would be more gradual: 

The FRA would rise by approximately half a month per 

birth year, and the rate of increase would vary depending 

on the actual rate of mortality improvement. Under this 

approach, CBO estimates, the FRA for people born in 

1979 would be 68, and the FRA for people born in 2003 

would be 69. The FRA would reach 70 for people born 

in 2026; that group would become eligible for retirement 

benefits in 2088, which is beyond the 75year projection 

period for this study.

Social Security’s total outlays in 2040 would decline by 

0.1 percentage point of GDP, or by just over 2 percent, 

relative to currently scheduled outlays. This option would 

improve the 75year actuarial balance by 0.2 percentage 

points of GDP and would not significantly extend the 

trust fund exhaustion date. 

Under this policy, scheduled lifetime benefits for people 

born in the 2000s would be reduced by roughly 12 per

cent. Payable benefits would be reduced by a smaller 

amount.

Options That Would Reduce 

Cost-of-Living Adjustments 

Current law requires that the benefits paid to existing 

beneficiaries generally rise each year with the application 

of a costofliving adjustment. At the end of each year, 

the Social Security Administration adjusts each benefi

ciary’s PIA by an amount that is equal to any increase in 

the consumer price index for urban wage earners and 

clerical workers from the third calendar quarter of the 

prior year to the third calendar quarter of the current 

year. (When prices decline, the COLA is set at zero, as 

occurred in 2010.)

Many analysts believe that the CPIW overstates increases 

in the cost of living because it does not fully account for 

the fact that consumers generally adjust their spending 

patterns as some prices change relative to others. Another 

44. CBO has examined the effects of increasing the FRA to 70 for 

people born in 1971 and then by 1 month every second year. See 

Congressional Budget Office, Budget Options, Volume 2, p. 145.

45. Because of the delay in the availability of mortality data, this 

option would be linked to life expectancy data from three years 

before the affected year.
32 SOCIAL SECURITY POLICY OPTIONS

CBO

consideration, however, is that the cost of living could 

grow faster for elderly people than for the rest of the pop

ulation. Inflation as measured by the CPIE, an experi

mental version of the CPI that reflects the purchasing 

patterns of older people, has been 0.3 percentage points 

higher than the CPIW over the past three decades. 

Because most proposals to reduce the size of COLAs 

would result in an annually compounding reduction dur

ing the course of a beneficiary’s receipt of benefits, the 

reduction in scheduled annual benefits would grow larger 

over time relative to current law. The difference in annual 

benefits would be most pronounced for beneficiaries who 

would receive benefits under a modified COLA option 

for long periods, such as very old retirees (who are more 

likely than younger retirees to be poor) and people who 

begin receiving DI benefits at an early age. 

A change in COLAs also would affect initial benefits 

claimed after the early eligibility age (currently set at 62), 

because COLAs are applied to the age 62 benefit every 

year, even for people who wait until after age 62 to 

claim benefits. Thus, a change in COLAs has a small 

effect on initial benefits at age 65. (See Table 2 on 

page 33 for the effects of the options on Social Security’s 

finances, Table 3 on page 39 for effects on distributional 

outcomes assuming that scheduled benefits are paid, and 

Table 4 on page 43 for effects on distributional outcomes 

assuming that only payable benefits are paid.)

Option 29: Reduce COLAs by 0.5 Percentage Points 

This option would reduce the annual costofliving 

adjustment by 0.5 percentage points. The reduction 

would begin in 2012.

Social Security’s total outlays would decline by 0.4 per

centage points of GDP in 2040, or by 7 percent from 

currently scheduled outlays. This option would improve 

the 75year actuarial balance by 0.3 percentage points of 

GDP and would extend the trust fund exhaustion date by 

nine years, to 2048. 

Scheduled lifetime benefits would be reduced by about 

6 percent for people born in the 1950s or later and would 

be smaller for older birth cohorts. For example, lifetime 

benefits would be reduced only slightly for people who 

turn 90 in 2012. Payable benefits would be slightly 

higher for people who will collect larger portions of their 

benefits in 2039 and later. 

Option 30: Base COLAs on the Chained CPI-U 

Beginning in 2012, this option would link Social Security 

costofliving adjustments to another measure of infla

tion—the chained CPIU (consumer price index for all 

urban consumers)—which takes into account that con

sumers generally adjust their spending patterns as some 

prices change relative to others. CBO projects that the 

chained CPIU will increase, on average, by 0.3 percent

age points more slowly per year than will the CPIW.46

Social Security’s total outlays would decline by 0.2 per

centage points of GDP in 2040, or by 4 percent, from 

currently scheduled outlays. This option would improve 

the 75year actuarial balance by 0.2 percentage points of 

GDP and would extend the trust fund exhaustion date by 

four years, to 2043. 

Compared with those scheduled under current law, life

time benefits for people in all earnings categories would 

be reduced by about 3 percent. Payable lifetime benefits 

would not change significantly.

46. The estimate of the effect of this option is based on CBO’s 

projection of the difference between growth in the CPIW and 

the chained CPIU, but the actual difference (and thus the effect 

of the option) would vary from year to year and could average 

more or less than 0.3 percent. For additional information, see 

Congressional Budget Office, Using a Different Measure of 

Inflation for Indexing Federal Programs and the Tax Code, Issue 

Brief (February 24, 2010), and Budget Options, Volume 2, p. 147. 
SOCIAL SECURITY POLICY OPTIONS 33

CBO

Table 2.

Changes to Social Security’s Finances Under Various Options with Scheduled Benefits

(Percentage of GDP)

Continued

2020 2040 2060 2080 Annual Finances

Revenues and Outlays

b

Revenues 4.9 4.9 4.9 5.0 5.2 14.4

Outlays 5.2 6.2 6.0 6.3 5.8 16.0

Balance -0.3 -1.3 -1.1 -1.3 -0.6 -1.6

Change the Taxation of Earnings Change in Annual Balancec

1 Revenues 0.4 0.4 0.3 0.3 0.3 1.0

Outlaysd **** * *

Balance 0.4 0.4 0.4 0.4 0.3 1.0

2 Revenues 0.3 0.7 0.7 0.7 0.5 1.6

Outlaysd **** * *

Balance 0.3 0.7 0.7 0.8 0.6 1.6

3 Revenues 0.2 0.5 0.8 1.0 0.5 1.5

Outlaysd **** * *

Balance 0.2 0.5 0.9 1.1 0.5 1.4

4 Revenues 0.8 0.9 0.9 0.9 0.9 n.a.

Outlays * 0.3 0.5 0.5 0.3 n.a.

Balance 0.8 0.6 0.4 0.4 0.6 n.a.

5 Revenues 0.3 0.4 0.4 0.4 0.4 n.a.

Outlays * 0.1 0.2 0.2 0.1 n.a.

Balance 0.3 0.3 0.2 0.2 0.2 n.a.

Raise the Taxable 

Maximum to Cover 90% of 

Earningse

75-Year 

Taxable 

Percentage-Point Change from Current Lawa

Increase the Payroll Tax 

Rate by 1 Percentage Point 

in 2012 

Current Lawa

Percentage of

GDP

Present Value as a

Payroll

Eliminate the Taxable 

Maximume

Increase the Payroll Tax 

Rate by 2 Percentage 

Points Over 20 Years

Increase the Payroll Tax 

Rate by 3 Percentage 

Points Over 60 years
34 SOCIAL SECURITY POLICY OPTIONS

CBO

Table 2. Continued

Changes to Social Security’s Finances Under Various Options with Scheduled Benefits

(Percentage of GDP)

Continued

2020 2040 2060 2080 Annual Finances

Change the Taxation of Earnings (Continued) Change in Annual Balancec

6 Revenues 0.8 0.9 0.9 0.9 0.8 n.a.

Outlaysd * * * * * n.a.

Balance 0.9 0.9 0.9 0.9 0.9 n.a.

7 Revenues 0.5 0.5 0.5 0.5 0.5 n.a.

Outlaysd * * * * * n.a.

Balance 0.5 0.6 0.6 0.6 0.5 n.a.

8 Revenues 0.3 0.3 0.3 0.3 0.3 n.a.

Outlaysd * * * * * n.a.

Balance 0.3 0.3 0.3 0.3 0.3 n.a.

9 Revenues 0.1 0.1 0.1 0.1 0.1 n.a.

Outlaysd * * * * * n.a.

Balance 0.1 0.1 0.1 0.1 0.1 n.a.

Change the Benefit Formula

10 Revenues * * * * * *

Outlays * -0.1 -0.1 -0.1 -0.1 -0.2

Balance * 0.1 0.1 0.1 0.1 0.2

11 Revenues * * * * * *

Outlays * -0.1 -0.4 -0.6 -0.2 -0.5

Balance * 0.1 0.4 0.5 0.2 0.5

Tax Covered Earnings Up to 

$250,000; Do Not Increase 

Benefitse

Tax All Earnings Above 

$250,000 at 4%; Do Not 

Increase Benefitse

Raise from 35 to 38 the 

Years of Earnings Included 

in the AIME

Tax Covered Earnings 

Above the Taxable 

Maximum; Do Not Increase 

Benefitse

Percentage of

GDP Payroll

Percentage-Point Change from Current Lawa (Continued)

Tax All Earnings Above the 

Taxable Maximum at 4%; 

Do Not Increase Benefitse

Taxable 

Present Value as a

Index Earnings in the AIME 

Formula to Prices
SOCIAL SECURITY POLICY OPTIONS 35

CBO

Table 2. Continued

Changes to Social Security’s Finances Under Various Options with Scheduled Benefits

(Percentage of GDP)

Continued

2020 2040 2060 2080 Annual Finances

Change the Benefit Formula (Continued) Change in Annual Balancec

12 Revenues * -0.1 -0.1 -0.1 * -0.1

Outlays -0.2 -0.7 -0.9 -0.9 -0.6 -1.6

Balance 0.2 0.7 0.8 0.8 0.5 1.5

13 Revenues * -0.1 -0.1 -0.1 -0.1 -0.2

Outlays -0.2 -1.0 -1.1 -1.2 -0.8 -2.1

Balance 0.2 0.9 1.0 1.1 0.7 2.0

14 Revenues * * * * * *

Outlays * -0.1 -0.1 -0.1 -0.1 -0.2

Balance * 0.1 0.1 0.1 0.1 0.2

15 Revenues * * -0.1 -0.1 * -0.1

Outlays * -0.3 -0.8 -1.3 -0.5 -1.3

Balance * 0.3 0.8 1.2 0.4 1.2

16 Revenues * * * -0.1 * -0.1

Outlays * -0.2 -0.4 -0.7 -0.2 -0.6

Balance * 0.2 0.4 0.6 0.2 0.6

17 Revenues * -0.1 -0.2 -0.3 -0.1 -0.2

Outlays * -0.9 -1.9 -2.9 -1.1 -2.9

Balance * 0.8 1.7 2.6 1.0 2.7

Percentage of

Payroll

Taxable 

GDP

75-Year 

Present Value as a

Percentage-Point Change from Current Lawa (Continued)

Reduce the Top PIA Factor 

by One-Third

Reduce All PIA Factors by 

0.5% Annually

Reduce All PIA Factors 

by 15%

Reduce the Top Two 

PIA Factors by Roughly 

One-Third

Reduce PIA Factors to 

Index Initial Benefits to 

Prices Rather Than 

Earnings 

Index Initial Benefits to 

Changes in Longevity
36 SOCIAL SECURITY POLICY OPTIONS

CBO

Table 2. Continued

Changes to Social Security’s Finances Under Various Options with Scheduled Benefits

(Percentage of GDP)

Continued

2020 2040 2060 2080 Annual Finances

Change the Benefit Formula (Continued) Change in Annual Balancec

18 Revenues * * -0.1 -0.1 -0.1 -0.1

Outlays * -0.4 -1.0 -1.5 -0.5 -1.5

Balance * 0.4 0.9 1.4 0.5 1.4

19 Revenues * * -0.1 -0.1 0 -0.1

Outlays * -0.4 -0.8 -1.1 -0.4 -1.2

Balance * 0.3 0.7 1.0 0.4 1.1

20 Revenues * * -0.1 -0.1 * -0.1

Outlays * -0.4 -0.9 -1.5 -0.5 -1.5

Balance * 0.4 0.9 1.4 0.5 1.3

21 Revenues * * -0.1 -0.2 -0.1 -0.1

Outlays * -0.5 -1.2 -1.9 -0.7 -1.9

Balance * 0.5 1.1 1.7 0.6 1.7

22 Revenues * * * * * *

Outlays -0.1 -0.3 -0.2 -0.3 -0.2 -0.6

Balance 0.1 0.3 0.2 0.2 0.2 0.5

Increase Benefits for Low Earners

23 Revenues * * * 0.1 * 0.1

Outlays 0.1 0.2 0.5 0.5 0.3 0.7

Balance -0.1 -0.2 -0.4 -0.5 -0.2 -0.7

Earnings

Lower Initial Benefits for 

the Top 70% of Earners

75-Year 

Present Value as a

Percentage of

Taxable 

GDP Payroll

Percentage-Point Change from Current Lawa

 (Continued)

Index Earnings in the AIME 

and Bend Points in the PIA 

Formula to Prices

Modify the Special 

Minimum Benefit and 

Index It to Growth in

Replace the Current 

PIA Formula with a New 

Two-Part Formula

Index the Bend Points in 

the PIA Formula to Prices 

Lower Initial Benefits for 

the Top 50% of Earners
SOCIAL SECURITY POLICY OPTIONS 37

CBO

Table 2. Continued

Changes to Social Security’s Finances Under Various Options with Scheduled Benefits

(Percentage of GDP)

Continued

2020 2040 2060 2080 Annual Finances

Increase Benefits for Low Earners (Continued) Change in Annual Balancec

24 Revenues * * * * * *

Outlays * * 0.1 * * 0.1

Balance * * * * * -0.1

25 Revenues * * * * * 0.1

Outlays 0.2 0.4 0.5 0.5 0.4 1.0

Balance -0.2 -0.4 -0.4 -0.4 -0.3 -0.9

Raise the Full Retirement Age

26 Revenues 0 * * * * *

Outlays 0 -0.2 -0.3 -0.3 -0.2 -0.4

Balance 0 0.2 0.2 0.2 0.1 0.4

27 Revenues 0 * -0.1 -0.1 * -0.1

Raise the FRA to 70f Outlays 0 -0.4 -0.7 -0.7 -0.4 -1.0

Balance 0 0.3 0.6 0.6 0.3 0.9

28 Revenues 0 * * -0.1 * -0.1

Outlays 0 -0.1 -0.4 -0.6 -0.2 -0.5

Balance 0 0.1 0.3 0.5 0.2 0.5

GDP Payroll

Percentage-Point Change from Current Lawa (Continued)

Raise the FRA to 68f

Index the FRA to Changes 

in Longevityf

75-Year 

Present Value as a

Percentage of

Taxable 

Introduce a New PovertyRelated Minimum Benefit

Enhance Low-Earners' 

Benefits on the Basis of 

Years Worked
38 SOCIAL SECURITY POLICY OPTIONS

CBO

Table 2. Continued

Changes to Social Security’s Finances Under Various Options with Scheduled Benefits

(Percentage of GDP)

Source: Congressional Budget Office.

Notes: Scheduled benefits are full benefits as calculated under current law, regardless of the amounts available in the Social Security trust 

funds.

The 75-year period is 2010 through 2084. Revenues consist of payroll taxes and income taxes on benefits (but not interest credited to 

the trust funds) in the specified year. Outlays consist of Social Security benefits and administrative costs. The balance is the surplus or 

deficit, which is the difference between revenues and outlays. Details of specific options are contained in the text. 

GDP = gross domestic product; AIME = average indexed monthly earnings; PIA= primary insurance amount; 

FRA = full retirement age; COLA =cost-of-living adjustment; CPI-U = consumer price index for all urban consumers; 

* = between -0.05 and 0.05 percentage points, but not exactly zero; 0 = exactly zero, with no rounding; n.a. = not applicable.

a. “Current law” refers to current Social Security provisions for calculating benefits and payroll taxes. See Congressional Budget Office, 

The Long-Term Budget Outlook (June 2010).

b. The line graph shows projected revenues (lower line) and outlays (upper line) as a percentage of GDP over the period from 2020 to 2080. 

The range is from 3.5 percent to 7.0 percent of GDP.

c. The area graphs depict the change in the annual trust fund balance over the period from 2020 to 2080. The range is from -1.0 percent to 

3.0 percent of GDP.

d. For options that would increase payroll taxes but not benefits, the ratio of outlays to GDP would be slightly reduced because GDP would 

increase slightly. Although CBO’s model generally keeps GDP growth steady, adjustments in response to reduced budget deficits occur 

with a lag, allowing small variations.

e. Under this option, the size of the tax base would change, so the changes in the 75-year present values of revenues, outlays, and the 

actuarial balance are more clearly represented as a percentage of GDP.

f. Because this option would take effect after the FRA reaches age 67 under current law in 2022, no system finance changes are reported for 

2020.

2020 2040 2060 2080 Annual Finances

Reduce Cost-of-Living Adjustments Change in Annual Balancec

29 Revenues * * * -0.1 * -0.1

Outlays -0.2 -0.4 -0.4 -0.4 -0.3 -0.8

Balance 0.2 0.4 0.4 0.4 0.3 0.8

30 Revenues * * * * * *

Outlays -0.1 -0.2 -0.2 -0.3 -0.2 -0.5

Balance 0.1 0.2 0.2 0.2 0.2 0.5

Reduce COLAs by 

0.5 Percentage Points

Base COLAs on the Chained 

CPI-U

75-Year 

Present Value as a

Percentage of

Taxable 

GDP Payroll

Percentage-Point Change from Current Lawa

 (Continued)
SOCIAL SECURITY POLICY OPTIONS 39

CBO

Table 3.

Changes to Social Security’s Scheduled Benefits and Payroll Taxes for 

Different Groups Under Various Options

Continued

Lifetime

Household

 Earnings

Quintilea 1960 1980 2000 1960 1980 2000 1960 1980 2000

Low 11 14 18 110 130 180 90 110 140

Middle 20 24 32 250 300 420 320 370 490

High 31 38 50 400 500 680 670 780 1,070

Change the Taxation of Earnings

1 Low 0 0 0 0 0 0 3 6 6

Middle 0 0 0 0 0 0 3 6 9

High 000 000 3 6 6

2 Low 0 0 0 0 0 0 3 6 15

Middle 0 0 0 0 0 0 3 9 15

High 0 0 0 0 0 0 3 12 15

3 Low 0 0 0 0 0 0 * 3 12

Middle 0 0 0 0 0 0 * 6 15

High 0 0 0 0 0 0 3 6 15

4 Low * * * * * * * * *

Middle * * * * * * * * *

High 3 6 9 9 15 15 12 15 18

5 Low * * * * * * * * *

Middle * * * * * * * * *

High 3 6 6 3 9 9 6 12 15

6 Low 0 0 0 0 0 0 * * *

Middle 0 0 0 0 0 0 * * *

High 0 0 0 0 0 0 12 15 18

7 Low 0 0 0 0 0 0 * * *

Middle 0 0 0 0 0 0 * * 3

High 0 0 0 0 0 0 12 15 18

8 Low 0 0 0 0 0 0 * * *

Middle 0 0 0 0 0 0 * * *

High 0 0 0 0 0 0 6 6 9

Median Initial Benefits

 for Retired Workers by Benefits by 10-Year Payroll Taxes by

Median Lifetime Median Lifetime 

10-Year Birth Cohortb Birth Cohortc 10-Year Birth Cohortc

Increase the Payroll Tax Rate by 

1 Percentage Point in 2012

Eliminate the Taxable Maximum 

Current Lawd (Thousands of 2010 dollars)

Increase the Payroll Tax Rate by 

2 Percentage Points Over 20 Years 

Increase the Payroll Tax Rate by 

3 Percentage Points Over 60 Years

Percentage Change from Current Lawd

Raise the Taxable Maximum to 

Cover 90% of Earnings

Tax Covered Earnings Above the 

Taxable Maximum; Do Not Increase 

Benefits

Tax Covered Earnings Up to 

$250,000; Do Not Increase Benefits

Tax All Earnings Above the Taxable 

Maximum at 4%; Do Not Increase 

Benefits 
40 SOCIAL SECURITY POLICY OPTIONS

CBO

Table 3. Continued

Changes to Social Security’s Scheduled Benefits and Payroll Taxes for 

Different Groups Under Various Options

Continued

Lifetime

Household

 Earnings

Quintilea 1960 1980 2000 1960 1980 2000 1960 1980 2000

Change the Taxation of Earnings (Continued)

9 Low 0 0 0 0 0 0 * * *

Middle 0 0 0 0 0 0 * * *

High 0 0 0 0 0 0 3 3 3

Change the Benefit Formula

10 Low -3 -3 -3 -3 -3 -3 0 0 0

Middle -3 -3 -3 -3 -3 -3 0 0 0

High -3 -3 -3 -3 -3 -3 0 0 0

11 Low * -6 -12 * -6 -12 0 0 0

Middle * -9 -12 * -9 -12 0 0 0

High * -6 -6 * -3 -6 0 0 0

12 Low -15 -15 -15 -12 -12 -12 0 0 0

Middle -15 -15 -15 -12 -15 -15 0 0 0

High -15 -15 -15 -15 -12 -15 0 0 0

13 Low -3 -3 -3 -6 -3 -3 0 0 0

Middle -18 -18 -18 -18 -18 -18 0 0 0

High -24 -24 -24 -24 -24 -24 0 0 0

14 Low * * * * * * 0 0 0

Middle * * * * * * 0 0 0

High -3 -3 -3 -6 -6 -6 0 0 0

15 Low -6 -15 -21 -3 -12 -18 0 0 0

Middle -6 -15 -21 -3 -15 -21 0 0 0

High -6 -15 -21 -6 -12 -21 0 0 0

16 Low -3 -9 -12 -3 -6 -12 0 0 0

Middle -3 -9 -12 -3 -9 -12 0 0 0

High -3 -9 -12 -3 -9 -12 0 0 0

17 Low -15 -33 -48 -12 -27 -39 0 0 0

Middle -15 -33 -48 -12 -30 -45 0 0 0

High -15 -33 -48 -12 -33 -48 0 0 0

Reduce the Top PIA Factor by 

One-Third 

Reduce All PIA Factors by 0.5% 

Annually 

Index Earnings in the AIME 

Formula to Prices

Reduce All PIA Factors by 15% 

Tax All Earnings Above $250,000 at 

4%; Do Not Increase Benefits

Raise from 35 to 38 the Years of 

Earnings Included in the AIME 

Reduce the Top Two PIA Factors by 

Roughly One-Third

Median Initial Benefits

 for Retired Workers by

Index Initial Benefits to Changes in 

Longevity 

Reduce PIA Factors to Index Initial 

Benefits to Prices Rather Than 

Earnings 

Median Lifetime Median Lifetime 

Birth Cohortc 10-Year Birth Cohortc

Benefits by 10-Year Payroll Taxes by

 Percentage Change from Current Lawd

 (Continued)

10-Year Birth Cohortb
SOCIAL SECURITY POLICY OPTIONS 41

CBO

Table 3. Continued

Changes to Social Security’s Scheduled Benefits and Payroll Taxes for 

Different Groups Under Various Options

Continued

Lifetime

Household

 Earnings

Quintilea 1960 1980 2000 1960 1980 2000 1960 1980 2000

Change the Benefit Formula (Continued)

18 Low * * * * * * 0 0 0

Middle -6 -15 -21 -6 -15 -21 0 0 0

High -12 -30 -45 -12 -30 -45 0 0 0

19 Low * * * * * * 0 0 0

Middle * * -3 -3 -6 -9 0 0 0

High -12 -27 -36 -12 -30 -36 0 0 0

20 Low -9 -21 -27 -6 -12 -18 0 0 0

Middle -6 -12 -21 -3 -12 -21 0 0 0

High -9 -18 -27 -6 -15 -24 0 0 0

21 Low -9 -24 -36 -6 -18 -27 0 0 0

Middle -6 -21 -30 -6 -18 -30 0 0 0

High -9 -24 -36 -9 -21 -30 0 0 0

22 Low -15 -6 -6 -6 3 3 0 0 0

Middle -15 -15 -15 -9 -6 -9 0 0 0

High -21 -21 -21 -9 -9 -12 0 0 0

Increase Benefits for Low Earners

23 Low * 15 24 6 24 30 0 0 0

Middle * * * 6 9 9 0 0 0

High * * * * * * 0 0 0

24 Low 3 6 6 3 6 6 0 0 0

Middle * * * * * * 0 0 0

High * * * * * * 0 0 0

25 Low 15 21 24 18 21 24 0 0 0

Middle 9 15 15 9 12 12 0 0 0

High * * * * * * 0 0 0

Raise the Full Retirement Age

26 Low -6 -9 -9 -3 -6 -6 0 0 0

Raise the FRA to 68 Middle -6 -9 -9 -3 -6 -6 0 0 0

High -6 -9 -9 -3 -6 -6 0 0 0

Index the Bend Points in the PIA 

Formula to Prices 

Lower Initial Benefits for the 

Top 50% of Earners

Index Earnings in the AIME and 

Bend Points in the PIA Formula to 

Prices 

Replace the Current PIA Formula 

with a New Two-Part Formula

Introduce a New Poverty-Related 

Minimum Benefit 

Enhance Low-Earners' Benefits on 

the Basis of Years Worked

Modify the Special Minimum 

Benefit and Index It to Growth in 

Lower Initial Benefits for the 

Top 70% of Earners 

10-Year Birth Cohortb Birth Cohortc 10-Year Birth Cohortc

Median Initial Benefits Median Lifetime Median Lifetime 

 Percentage Change from Current Lawd

 (Continued)

 for Retired Workers by Benefits by 10-Year Payroll Taxes by
42 SOCIAL SECURITY POLICY OPTIONS

CBO

Table 3. Continued

Changes to Social Security’s Scheduled Benefits and Payroll Taxes for 

Different Groups Under Various Options

Source: Congressional Budget Office.

Notes: Scheduled benefits are full benefits as calculated under current law, regardless of the amounts available in the Social Security trust 

funds. Percentage changes are rounded to 3 percentage points to give a sense of the likely effects on benefits and payroll taxes 

without showing numerous small differences in outcomes that are not analytically meaningful. Median values are within a group; half 

of the people in each group (defined by lifetime household earnings category and birth cohort) would have a lower value and half 

would have a higher value. Details of specific options are contained in the text.

AIME = average indexed monthly earnings; PIA = primary insurance amount; FRA = full retirement age; COLA = cost-of-living 

adjustment; CPI-U = consumer price index for all urban consumers; * = between -1.5 percent and 1.5 percent, but not exactly zero; 

0 = exactly zero, with no rounding.

a. The lowest fifth, middle fifth, and highest fifth of people ranked by lifetime household earnings, within a 10-year birth cohort.

b. Assumes that all workers claim benefits at age 65.

c. Lifetime benefits and lifetime taxes are present values discounted to age 62.

d. “Current law” refers to current Social Security provisions for calculating benefits and payroll taxes. See Congressional Budget Office,

The Long-Term Budget Outlook (June 2010).

Lifetime

Household

 Earnings

Quintilea 1960 1980 2000 1960 1980 2000 1960 1980 2000

Raise the Full Retirement Age (Continued)

27 Low -6 -18 -18 -3 -15 -15 0 0 0

Raise the FRA to 70 Middle -6 -18 -18 -3 -15 -15 0 0 0

High -6 -18 -18 -6 -15 -15 0 0 0

28 Low -3 -9 -15 * -6 -9 0 0 0

Middle -3 -9 -15 -3 -9 -12 0 0 0

High -3 -9 -15 -3 -6 -12 0 0 0

Reduce Cost-of-Living Adjustments

29 Low * * * -6 -6 -6 0 0 0

Middle * * * -6 -6 -6 0 0 0

High * * * -6 -6 -6 0 0 0

30 Low * * * -3 -3 -3 0 0 0

Base COLAs on the Chained CPI-U Middle * * * -3 -3 -3 0 0 0

High * * * -3 -3 -3 0 0 0

Index the FRA to Changes in 

Longevity 

Reduce COLAs by 0.5 Percentage 

Points 

 Percentage Change from Current Lawd (Continued)

10-Year Birth Cohortb Birth Cohortc 10-Year Birth Cohortc

Median Initial Benefits

 for Retired Workers by Benefits by 10-Year Payroll Taxes by

Median Lifetime Median Lifetime 
SOCIAL SECURITY POLICY OPTIONS 43

CBO

Table 4.

Changes to Social Security’s Payable Benefits and Payroll Taxes for 

Different Groups Under Various Options

Continued

Lifetime

Household

 Earnings

Quintilea 1960 1980 2000 1960 1980 2000 1960 1980 2000

Low 11 11 14 100 110 150 90 110 140

Middle 20 20 25 230 250 320 320 370 490

High 30 31 40 370 410 530 660 790 1,070

Change the Taxation of Earnings

1 Low * 21 9 3 12 9 3 6 9

Middle * 21 12 9 15 9 3 6 9

High * 21 9 9 12 9 3 6 6

2 Low * 21 27 3 15 21 3 6 15

Middle * 21 27 6 21 24 3 9 15

High * 21 24 9 21 21 3 12 15

3 Low * 21 21 6 15 21 * 3 12

Middle * 21 24 9 21 24 * 6 15

High * 21 21 9 18 21 3 6 15

4 Low * 21 27 3 15 18 * * *

Eliminate the Taxable Maximum Middle * 21 27 6 18 21 * * *

High 3 30 36 21 39 42 12 15 18

5 Low * 15 6 3 6 6 * * *

Middle * 15 9 9 9 9 * * *

High 3 21 12 12 15 15 6 12 15

6 Low * 21 27 3 18 24 * * *

Middle * 21 27 6 21 27 * * *

High * 21 24 9 21 27 12 15 18

7 Low * 21 27 3 18 18 * * *

Middle * 21 27 9 21 21 * * 3

High * 21 27 9 21 18 12 15 18

8 Low * 18 9 6 9 9 * * *

Middle * 18 9 9 9 9 * * *

High * 18 9 9 9 6 6 6 9

 Current Lawd (Thousands of 2010 dollars)

 Percentage Change from Current Lawd

Median Initial Benefits Median Lifetime Median Lifetime 

for Retired Workers by Benefits by Payroll Taxes by

10-Year Birth Cohortb 10-Year Birth Cohortc 10-Year Birth Cohortc

Raise the Taxable Maximum to Cover 

90% of Earnings

Increase the Payroll Tax Rate by 

1 Percentage Point in 2012

Tax All Earnings Above the Taxable 

Maximum at 4%; Do Not Increase 

Benefits

Tax Covered Earnings Up to 

$250,000; Do Not Increase Benefits 

Increase the Payroll Tax Rate by 

2 Percentage Points Over 20 Years 

Increase the Payroll Tax Rate by 

3 Percentage Points Over 60 Years

Tax Covered Earnings Above the 

Taxable Maximum; Do Not Increase 

Benefits
44 SOCIAL SECURITY POLICY OPTIONS

CBO

Table 4. Continued

Changes to Social Security’s Payable Benefits and Payroll Taxes for 

Different Groups Under Various Options

Continued

Lifetime

Household

 Earnings

Quintilea 1960 1980 2000 1960 1980 2000 1960 1980 2000

Change the Taxation of Earnings (Continued)

9 Low * 3 3 3 3 3 * * *

Middle * 3 3 3 3 3 * * *

High * 3 3 3 3 3 3 3 3

Change the Benefit Formula

10 Low -3 -3 * -3 -3 * 0 0 0

Middle -3 -3 -3 * * * 0 0 0

High -3 * * * * * 0 0 0

11 Low * -3 -6 * -3 -3 0 0 0

Middle * -6 -6 * -3 -3 0 0 0

High * -3 * * * 3 0 0 0

12 Low -15 3 9 -9 3 6 0 0 0

Reduce All PIA Factors by 15% Middle -15 3 9 -6 6 6 0 0 0

High -15 3 9 -6 6 3 0 0 0

13 Low -3 18 24 * 15 21 0 0 0

Reduce the Top Two PIA Factors by Middle -18 * 3 -12 3 6 0 0 0

Roughly One-Third High -24 -9 -6 -18 -6 -3 0 0 0

14 Low * * 3 * 3 3 0 0 0

Middle * 3 3 3 3 3 0 0 0

High -3 -3 -3 -3 -3 -3 0 0 0

15 Low -6 -6 -6 * * * 0 0 0

Middle -6 -6 -6 * * * 0 0 0

High -6 -6 -6 * * * 0 0 0

16 Low -3 -6 -6 * -3 -3 0 0 0

Middle -3 -6 -6 * -3 * 0 0 0

High -3 -6 -6 * -3 -3 0 0 0

17 Low -15 -18 -33 -9 -15 -27 0 0 0

Middle -15 -18 -33 -6 -15 -30 0 0 0

High -15 -18 -33 -6 -18 -33 0 0 0

10-Year Birth Cohortb 10-Year Birth Cohortc 10-Year Birth Cohortc

Percentage Change from Current Lawd (Continued)

Median Initial Benefits

for Retired Workers by Benefits by Payroll Taxes by

Median Lifetime Median Lifetime 

Tax All Earnings Above $250,000 at 

4%; Do Not Increase Benefits 

Raise from 35 to 38 the Years of 

Earnings Included in the AIME 

Reduce All PIA Factors by 0.5% 

Annually 

Index Initial Benefits to Changes in 

Longevity 

Index Earnings in the AIME Formula 

to Prices

Reduce the Top PIA Factor by 

One-Third

Reduce PIA Factors to Index Initial 

Benefits to Prices Rather Than 

Earnings 
SOCIAL SECURITY POLICY OPTIONS 45

CBO

Table 4. Continued

Changes to Social Security’s Payable Benefits and Payroll Taxes for 

Different Groups Under Various Options

Continued

Lifetime

Household

 Earnings

Quintilea 1960 1980 2000 1960 1980 2000 1960 1980 2000

Change the Benefit Formula (Continued)

18 Low * 12 24 3 12 27 0 0 0

Middle -6 -3 -3 * * * 0 0 0

High -12 -24 -33 -6 -18 -30 0 0 0

19 Low * 9 18 3 12 18 0 0 0

Middle * 6 15 3 6 9 0 0 0

High -12 -24 -24 -9 -21 -24 0 0 0

20 Low -9 -12 -12 * -3 * 0 0 0

Middle -3 * * * * * 0 0 0

High -9 -12 -12 * -3 -3 0 0 0

21 Low -9 -12 -21 -3 -3 -9 0 0 0

Middle -6 -6 -9 3 -3 -9 0 0 0

High -9 -12 -18 * -6 -9 0 0 0

22 Low -15 * -3 -3 6 9 0 0 0

Replace the Current PIA Formula Middle -15 -9 -12 -3 -3 -3 0 0 0

with a New Two-Part Formula High -21 -18 -21 -6 -9 -9 0 0 0

Increase Benefits for Low Earners

23 Low * 9 12 3 15 21 0 0 0

Middle * -6 -6 * 3 3 0 0 0

High * -6 -9 -3 -6 -9 0 0 0

24 Low 3 6 6 3 6 6 0 0 0

Middle * * * * * * 0 0 0

High * * * * * * 0 0 0

25 Low 15 12 12 9 12 12 0 0 0

Middle 9 6 6 * 6 3 0 0 0

High * -6 -9 -9 -6 -9 0 0 0

Raise the Full Retirement Age

26 Low -6 -6 -3 * -3 * 0 0 0

Raise the FRA to 68 Middle -6 -6 -3 -3 * * 0 0 0

High -6 -6 -3 * -3 -3 0 0 0

10-Year Birth Cohortb 10-Year Birth Cohortc 10-Year Birth Cohortc

Percentage Change from Current Lawd (Continued)

Median Initial Benefits

for Retired Workers by Benefits by Payroll Taxes by

Median Lifetime Median Lifetime 

Modify the Special Minimum Benefit 

and Index It to Growth in Earnings 

Index the Bend Points in the PIA 

Formula to Prices 

Lower Initial Benefits for the 

Top 70% of Earners 

Lower Initial Benefits for the 

Top 50% of Earners

Index Earnings in the AIME and 

Bend Points in the PIA Formula to 

Prices 

Introduce a New Poverty-Related 

Minimum Benefit 

Enhance Low-Earners' Benefits on 

the Basis of Years Worked
46 SOCIAL SECURITY POLICY OPTIONS

CBO

Table 4. Continued

Changes to Social Security’s Payable Benefits and Payroll Taxes for 

Different Groups Under Various Options

Source: Congressional Budget Office.

Notes: Payable benefits are benefits as calculated under current law, reduced as necessary to make outlays equal the Social Security system’s 

revenues. Percentage changes are rounded to 3 percentage points to give a sense of the likely effects on benefits and payroll taxes 

without showing numerous small differences in outcomes that are not analytically meaningful. Median values are within a group; half 

of the people in each group (defined by lifetime household earnings category and birth cohort) would have a lower value and half 

would have a higher value. Details of specific options are contained in the text.

AIME = average indexed monthly earnings; PIA = primary insurance amount; FRA = full retirement age; COLA = cost-of-living 

adjustment; CPI-U = consumer price index for all urban consumers; * = between -1.5 percent and 1.5 percent, but not exactly zero; 

0 = exactly zero, with no rounding.

a. The lowest fifth, middle fifth, and highest fifth of people ranked by lifetime household earnings, within a 10-year birth cohort.

b. Assumes that all workers claim benefits at age 65.

c. Lifetime benefits and lifetime taxes are present values discounted to age 62.

d. “Current law” refers to current Social Security provisions for calculating benefits and payroll taxes. See Congressional Budget Office, 

The Long-Term Budget Outlook (June 2010). 

Lifetime

Household

 Earnings

Quintilea 1960 1980 2000 1960 1980 2000 1960 1980 2000

Raise the Full Retirement Age (Continued)

27 Low -6 -12 -9 * -6 -3 0 0 0

Raise the FRA to 70 Middle -6 -12 -9 * -6 -6 0 0 0

High -6 -12 -9 * -9 -6 0 0 0

28 Low -3 -6 -9 * -3 -3 0 0 0

Middle -3 -6 -9 * -3 -3 0 0 0

High -3 -6 -9 * -3 -6 0 0 0

Reduce Cost-of-Living Adjustments

29 Low -3 12 6 * 3 3 0 0 0

Middle * 12 6 * 3 * 0 0 0

High * 12 6 3 * * 0 0 0

30 Low * 3 3 * * 3 0 0 0

Middle * 3 6 * * * 0 0 0

High * 3 3 * * * 0 0 0

Percentage Change from Current Lawd (Continued)

10-Year Birth Cohortb 10-Year Birth Cohortc 10-Year Birth Cohortc

Median Initial Benefits

for Retired Workers by Benefits by Payroll Taxes by

Median Lifetime Median Lifetime 

Reduce COLAs by 0.5 Percentage 

Points

Base COLAs on the Chained CPI-U 

Index the FRA to Changes in 

Longevity
CBO

Appendix: 

Distributional Effects of Options with 

Similar Effects on the System’s Finances 

The 30 policy options discussed in the main portion 

of this study would have a variety of effects on the Social 

Security system’s finances. The distributional tradeoffs 

become clearer, however, if the options are compared 

while their overall effects on the system’s finances are 

held constant. Therefore, in another exercise, the 

Congressional Budget Office compared the distributional 

effects of 8 additional policy options it derived from the 

original 30 with the objective of producing a single effect 

on the actuarial balance—each would reduce the 75year 

actuarial deficit, relative to current law, by about one

quarter, or by 0.15 percent of gross domestic product (see 

Table A1 on page 49).

B Option 1a: Increase the payroll tax rate by 0.42 per

centage points in 2012 (Option 1 calls for an increase 

of 1 percentage point in the payroll tax).

B Option 5a: Raise the taxable maximum to cover 

87 percent of earnings (Option 5 would raise the 

taxable maximum to cover 90 percent of earnings).

B Option 7a: Apply the payroll tax to covered earnings 

between the taxable maximum and $136,000 with no 

additional benefits (Option 7 would cap earnings 

subject to tax at $250,000).

B Option 8a: Apply a 1.9 percent tax to all covered earn

ings above the taxable maximum with no additional 

benefits (Option 8 would apply a 4.0 percent tax).

B Option 12a: Reduce all of the primary insurance 

amount (PIA) factors by 4 percent (Option 12 would 

reduce them by 15 percent).

B Option 14a: Reduce the top PIA factor from 15 per

cent to 4 percent (Option 14 would reduce the top 

factor from 15 percent to 10 percent).

B Option 26a: Increase the full retirement age to 

68 years and 1 month (Option 26 would increase 

the age to 68 years). 

B Option 29a: Reduce costofliving adjustments 

(COLAs) by 0.25 percentage points (Option 29

would reduce them by 0.5 percentage points).

The first four options listed here (Options 1a, 5a, 7a, and 

8a) would primarily affect payroll taxes. (The increase in 

the taxable maximum also results in higher benefits.) In 

general, increasing taxes in 2012 would have less of an 

effect on workers born before the 1980s than on workers 

born in the 1980s and later because most of the younger 

groups’ earnings would be subject to higher taxes. Raising 

the payroll tax rate (Option 1a) would increase lifetime 

taxes by a similar proportion for all workers with earnings 

below the taxable maximum (in 2010, $106,800). The 

other three payroll options, by contrast, would raise life

time taxes mainly for high earners, and the effects of the 

tax on all earnings above the taxable maximum would be 

more concentrated among the very highest earners.

The remaining four options (Options 12a, 14a, 26a, and 

29a) would affect benefits but not tax rates. Reducing all 

of the PIA factors in various ways or reducing COLAs 

would have proportionately similar effects on lifetime 

benefits, regardless of when people were born or how 

much they earned. The lower PIA factors would reduce 

initial benefits; lower COLAs would diminish benefits 

over time and therefore cause greater reductions in 
48 SOCIAL SECURITY POLICY OPTIONS

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benefits for people who receive benefits for long periods. 

In addition, changes in COLAs would reduce benefits for 

existing beneficiaries; changes to the benefit formula 

would affect future beneficiaries only. An increase in the 

full retirement age, phased in over time, would lead to 

a greater reduction in benefits for people born later. By 

contrast, reducing just the top PIA factor would reduce 

benefits only for high earners and would result in similar 

reductions for everyone who was born after 1954 and has 

sufficiently high earnings.
APPENDIX SOCIAL SECURITY POLICY OPTIONS 49

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Table A-1. 

Changes to Social Security’s Scheduled Benefits and Payroll Taxes for 

Different Groups Under Various Options That Have Similar Effects on the 

System’s Finances

Continued

Lifetime

Household

 Earnings

Quintilea 1960 1980 2000 1960 1980 2000

Low 110 130 180 90 110 140

Middle 250 300 420 320 370 490

High 400 500 680 670 780 1,070

Change Taxation of Earnings

1a Low 0 0 0 * 3 3

Middle 0 0 0 * 3 3

High 0 0 0 * 3 3

5a Low * * * * * *

Middle * * * * * *

High 3 3 6 3 9 9

7a Low 0 0 0 * * *

Middle 0 0 0 * * *

High 0 0 0 3 6 6

8a Low 0 0 0 * * *

Middle 0 0 0 * * *

High 0 0 0 3 3 3

Tax All Earnings Above the Taxable 

Maximum at 1.9%; Do Not Increase 

Benefits

Increase the Payroll Tax Rate by 0.42 

Percentage Points in 2012 

Raise the Taxable Maximum to Cover 

87% of Earnings

Tax Covered Earnings Up to $136,000; 

Do Not Increase Benefits

10-Year Birth Cohortb

Median Lifetime Benefits by Median Lifetime Payroll Taxes by

 10-Year Birth Cohortb

Current Lawc (Thousands of 2010 dollars) 

Percentage Change from Current Lawc
50 SOCIAL SECURITY POLICY OPTIONS

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Table A-1. Continued

Changes to Social Security’s Scheduled Benefits and Payroll Taxes for 

Different Groups Under Various Options That Have Similar Effects on the 

System’s Finances

Source: Congressional Budget Office.

Notes: Scheduled benefits are full benefits as calculated under current law, regardless of the amounts available in the Social Security trust 

funds. Percentage changes are rounded to 3 percentage points to give a sense of the likely effects on benefits and payroll taxes 

without showing numerous small differences in outcomes that are not analytically meaningful. Median values are within a group; half 

of the people in each group (defined by lifetime household earnings category and birth cohort) would have a lower value and half 

would have a higher value. Details of specific options are contained in the text.

PIA = primary insurance amount; FRA = full retirement age; COLA = cost-of-living adjustment; * = between -1.5 percent and 

1.5 percent, but not exactly zero; 0 = exactly zero, with no rounding.

a. The lowest fifth, middle fifth, and highest fifth of people ranked by lifetime household earnings, within a 10-year birth cohort.

b. Lifetime benefits and lifetime taxes are present values discounted to age 62.

c. “Current law” refers to current Social Security provisions for calculating benefits and payroll taxes. See Congressional Budget Office,

The Long-Term Budget Outlook (June 2010).

Lifetime

Household

 Earnings

Quintilea 1960 1980 2000 1960 1980 2000

Change the Benefit Formula

12a Low -3 -3 -3 0 0 0

Middle -3 -3 -3 0 0 0

High -3 -3 -3 0 0 0

14a Low * * * 0 0 0

Middle * * * 0 0 0

High -12 -9 -12 0 0 0

26a Low -3 -6 -6 0 0 0

Middle -3 -6 -6 0 0 0

High -3 -6 -6 0 0 0

29a Low -3 -3 -3 0 0 0

Middle -3 -3 -3 0 0 0

High -3 -3 -3 0 0 0

10-Year Birth Cohortb 10-Year Birth Cohortb

Reduce the Top PIA Factor from 15% 

to 4%

Raise the FRA to 68 and 1 month 

Reduce COLAs by 0.25 Percentage 

Points

Reduce All PIA Factors by 4.0%

Percentage Change from Current Lawc (Continued)

Median Lifetime Benefits by Median Lifetime Payroll Taxes by
CBO

Glossary 

actuarial balance: The present value over a specified 

period of the stream of projected trust fund revenues plus 

the trust funds’ initial balance minus the stream of 

projected outlays minus the value of a year’s worth of 

benefits as a reserve at the end of the period, expressed as 

a percentage of the present value of gross domestic 

product or taxable payroll over the same period. 

average indexed monthly earnings (AIME): For retired 

workers who attain age 62 after 1990, the AIME is 

calculated on the basis of the highest 35 years of earnings 

on which someone paid Social Security taxes (up to the 

taxable maximum, which is $106,800 in 2010). Earnings 

before age 60 are indexed to compensate both for 

inflation and for real (inflationadjusted) growth in 

earnings; earnings after age 59 enter the computations at 

actual amounts. (For disabled workers, earnings in the 

two years before the initial benefit computation enter at 

their actual amounts, and earlier earnings are indexed.) 

Dividing the total earnings (after indexing) by 420 

(35 years multiplied by 12 months) yields the AIME for 

retired workers. For disabled workers, total earnings are 

divided by a number of months that is linked to the age 

at which benefits begin.

average wage index (AWI): The average amount of total 

wages in the United States in a year, including earnings in 

employment not covered by Social Security. Several 

automatic adjustments in Social Security are based on the 

AWI.

babyboom generation: People born between 1946 and 

1964. 

bend point: An element in the formula for calculating 

initial benefits—namely, the threshold at which a PIA 

(primary insurance amount) factor changes. Under 

current law, there are two: in 2010, $761 and $4,568. 

Bend points change each year to keep pace with changes 

in the average earnings of the workforce as a whole. 

Therefore, bend points occur at approximately the same 

place in the distribution of average indexed monthly 

earnings each year and average initial benefits rise at a 

pace that matches the increase in average earnings over 

time.

birth cohort: A group of people born during a given 

period. This analysis places people into 10year birth 

cohorts: The 1960s birth cohort consists of people born 

between 1960 and 1969, the 1980s cohort includes those 

born between 1980 and 1989, and so on.

costofliving adjustment (COLA): An annual increase 

in benefits tied to the increase in the cost of living. Under 

current law, the COLA for Social Security benefits is 

equal to the percentage increase in the consumer price 

index for urban wage earners and clerical workers from 

the third calendar quarter of the prior year to the third 

calendar quarter of the current year, provided that there is 

an increase. 

covered earnings: Total earnings (from wages and 

selfemployment income) for employment covered by 

Social Security.

Disability Insurance Trust Fund: One of two Social 

Security trust funds, it is used to finance the activities of 

the Disability Insurance (DI) program. See trust funds.

full retirement age (FRA): Also called the normal 

retirement age. The age at which a person becomes 

entitled to unreduced retirement benefits (benefits that 

are equal to the primary insurance amount). Currently 

age 66, the FRA is being increased gradually so it will be 

67 for people born in 1960 or later.
52 SOCIAL SECURITY POLICY OPTIONS

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gross domestic product (GDP): The total market value 

of goods and services produced domestically in a given 

period. 

initial benefits for retired workers: Benefits that would 

be received by workers eligible to claim OldAge 

Insurance benefits at age 62 who have not yet claimed any 

other benefit. In this study, benefits are computed 

assuming that all workers claim benefits at age 65 and are 

based only on earnings through age 61. Values are net of 

income taxes paid on benefits and credited to the Social 

Security trust funds.

initial replacement rate: The initial benefit as a 

percentage of average career annual earnings.

lifetime benefits: In this study, the present value at age 62 

of benefits received by a person over a lifetime, net of 

income taxes paid on those benefits and credited to the 

Social Security trust funds. Lifetime benefits include 

payments received by people in the following beneficiary 

classes: oldage workers, disabled workers, oldage 

spouses, and oldage widows. Because there are 

insufficient historical data on benefits for young widows 

and children for years before 1984, young widows, 

spouses of disabled workers, and child beneficiaries are 

not considered in this study.

lifetime household earnings: For someone who is single 

in all years, the sum of real (inflationadjusted) earnings 

over a lifetime. In any year a person is married, the 

earnings measure is a function of his or her earnings plus 

those of his or her spouse (adjusted for economies of scale 

in household consumption). A person’s lifetime earnings 

consist of the present value of those annual amounts. In 

this study, for the initial benefits for retired workers and 

for the present value of lifetime benefits and payroll taxes, 

the values shown are changes in benefits or taxes for 

people in the lowest, middle, and highest onefifth 

(quintile) of lifetime household earnings. 

lifetime payroll taxes: The present value at age 62 of Old

Age, Survivors, and Disability Insurance taxes paid by the 

employer and the employee over a lifetime; under current 

law, the tax is 12.4 percent of taxable earnings. This 

measure includes taxes paid by people who receive 

benefits from the OldAge and Survivors Insurance 

program (except young widows, spouses of disabled 

workers, and child beneficiaries).

OldAge and Survivors Insurance Trust Fund: One of 

two Social Security trust funds, it is used to finance the 

activities of the OldAge and Survivors Insurance (OASI) 

program. See trust funds.

payable benefits: Benefits as calculated under current law, 

reduced as necessary to make outlays equal the Social 

Security system’s revenues. Upon exhaustion of the Social 

Security trust funds, the Social Security Administration 

would reduce all scheduled benefits—those paid to 

existing beneficiaries and to new beneficiaries—by the 

percentage necessary to make the program’s total annual 

outlays equal its total available revenues. That percentage 

would vary each year. 

present value: A single amount that expresses a flow of 

current and future revenues or outlays in terms of an 

equivalent lump sum received or spent at one time, 

calculated by discounting future cash flows using a given 

interest rate. (The Congressional Budget Office projects a 

longterm interest rate of 3 percent above price growth, 

which is used as the discount rate.)

primary insurance amount (PIA): The monthly amount 

payable to a worker who begins receiving Social Security 

retirement benefits at the age at which he or she is eligible 

for full benefits, or the amount payable to a disabled 

worker who has never received a retirement benefit 

reduced for age. For workers who turn 62 or become 

disabled in 2010, for all of their dependents, and for 

dependents of workers who die in 2010, the PIA formula 

is 90 percent of the first $761 of the average indexed 

monthly earnings (AIME), plus 32 percent of the AIME 

between $761 and $4,586, plus 15 percent of the AIME 

above $4,586.

primary insurance amount (PIA) factor: The percentage 

of the average indexed monthly earnings replaced in the 

PIA formula. Under current law, the PIA factors are 

90 percent below the first bend point, 32 percent 

between the two bend points, and 15 percent above the 

second bend point. 

quarter of coverage: The basic unit of measurement for 

determining insured status. In 2010, a worker receives 
GLOSSARY SOCIAL SECURITY POLICY OPTIONS 53

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one quarter of coverage (up to a total of four quarters in 

the year) for each $1,120 of annual covered earnings. The 

basic amount of earnings required for a quarter of 

coverage is increased annually at the same rate as the 

increase in the average wage index. 

replacement rate: The percentage of a worker’s past 

average earnings that his or her benefits represent.

scheduled benefits: Full benefits as calculated under 

current law, regardless of the amounts available in the 

Social Security trust funds. 

sustainable solvency: A condition under which positive 

trust fund ratios are maintained throughout the 75year 

projection period and ratios are stable or rising at the end 

of the period.

taxable maximum: The maximum covered earnings 

upon which the Social Security payroll tax is levied each 

year. In 2010, that amount is $106,800. The taxable 

maximum amount is increased annually at the same rate 

as the increase in the average wage index.

taxable payroll: The total earnings (from wages and self

employment income) for employment covered by Social 

Security that is below the applicable annual taxable 

maximum. 

trust funds: Accounts to which Social Security taxes are 

credited. Interest on the balances in the funds also is 

credited to the trust funds, and Social Security benefits 

and administrative expenses are drawn from the funds. 

Social Security has two trust funds: the OldAge and 

Survivors Insurance (OASI) Trust Fund and the 

Disability Insurance (DI) Trust Fund. They are often 

treated collectively as the OASDI trust funds.

trust fund balance: The amount credited to the Social 

Security trust funds; the balance determines the 

program’s current spending authority. The balance is held 

in the form of special Treasury securities, and the cash 

that generates the balance is used by the Treasury for 

other operations and activities of the government.

trust fund exhaustion: The combined OASDI trust 

funds are exhausted if outlays in any given year are greater 

than the balance (including interest credited to the trust 

funds) at the beginning of the year.

trust fund ratio: The balance in the Social Security trust 

funds at the beginning of the year, divided by projected 

outlays in that year. 

trust fund solvency: The combined OASDI trust funds 

are said to be solvent if the actuarial balance, calculated 

over 75 years, is greater than zero.