Social Security:

Why Action Should Be Taken Soon

Social Security Advisory Board

December 2010
Social Security Advisory Board

Barbara B. Kennelly, Acting Chair

Dana K. Bilyeu*

Jagadeesh Gokhale

Dorcas R. Hardy

Marsha R. Katz

Mark J. Warshawsky

*term ended September 30, 2010

Social Security Advisory Board

An independent bipartisan Board created by the Congress and appointed by the President and the 

Congress to advise the President, the Congress, and the Commissioner of Social Security on matters 

related to the Social Security and Supplemental Security Income programs. 
Social Security:

Why Action Should Be Taken Soon

Social Security Advisory Board

December 2010

Introduction 1

Social Security Solvency 3

Background of Social Security Financing 3

Demographic and Economic Challenges as Baby Boomers Retire 6

Status of the Social Security Trust Funds 9

What Could Happen If Congress Takes No Action before 2037? 12

The Advantages of Acting Sooner Rather Than Later 15

The Reasons for Prompt Action 15

Illustrating the Effects of Acting Sooner Rather Than Later 15

Options to Address the Long-Range Solvency Problem and Their Impact 21

Options That Reduce Scheduled Benefits 23

Options That Reduce Benefits by Increasing the Retirement Age 26

Options That Increase Revenue 28

Other Options 32

Issues Raised by Proposals to Address the Long-Range Solvency Problem 35

Examples of Plans to Restore Social Security Solvency 37

Examples of Ways to Combine Options to Address Solvency 38

Examples of Standalone Social Security Reform Proposals 39

Reports of Commissions Addressing Long-term Fiscal Reform 41

Appendices 45

Appendix I: Options to Address OASDI Solvency 47

Appendix II: Recent Proposals for Which Detailed Estimates Have Been Published 

by the Social Security Administration’s Office of the Chief Actuary 51

Appendix III: Description of the 1983 Social Security Amendments 53

Social Security Advisory Board 55

Table Of Contents 

Social Security: Why Action Should Be Taken Soon 1

Introduction

Social Security benefits have been a foundational element of the nation’s economic security 

system for the last 75 years. In his statement at the 

signing of the Social Security Act in 1935, President 

Franklin Delano Roosevelt noted that the Act is a 

“law which will give some measure of protection 

to the average citizen and to his family...against 

poverty-ridden old age.”

Social Security is intended to be only the first 

of a three-pillar system of retirement income; 

it is expected to be supplemented by personal 

savings and employer pensions. Assuring a 

reasonable living standard during retirement 

requires adequate contributions from all three 

pillars. However, because of increasingly inadequate saving by households over their working 

lifetimes and declines in the provision of defined 

benefit pensions by employers, many Americans 

risk reduced living standards during retirement 

– a risk that is exacerbated by Social Security’s projected financial shortfall. Indeed, Social Security’s 

projected financial shortfall also threatens the 

economic security of other beneficiaries – the disabled, and dependents and survivors of deceased 

workers, who together constitute one third of the 

program’s 52 million beneficiaries – a share that is 

projected to increase in the future.

The Social Security Advisory Board notes with 

concern that it has been 12 years since it first 

issued a report urging prompt action on the question of Social Security’s long-term solvency. While, 

under current law, Trust Fund interest and assets 

will allow full benefits to be paid without legislative action until 2037, the severity of the nation’s 

current and projected fiscal situation could 

undermine the safety net that Social Security provides. The recession has already worsened Social 

Security’s financial outlook. Trust Fund outlays 

exceeded tax revenues this year instead of in 2016 

as projected in the 2009 Trustees’ Report. It is now 

clearer than ever before that the longer that Social 

Security’s projected insolvency remains unaddressed, the greater will be the risk of decline in 

the living standards of forthcoming generations 

of retirees, their dependents and survivors, and 

the disabled.

Many of the policy options for reforming 

Social Security are well known, and new ones have 

been proposed since our report was last published 

in 2005. This report updates the financial situation of the Social Security program with the most 

current data available and lists how several reform 

options would affect its solvency over the next 75 

years. While this report explains several proposals 

that address the Social Security solvency problem, 

the Advisory Board does not endorse any particular option. Instead, we present these proposals in a 

bipartisan manner.

We again recommend that Congress should 

act “sooner rather than later” to reform Social 

Security, mindful of the need for fair treatment of 

all – retirees, workers, and future generations.
2 Social Security: Why Action Should Be Taken Soon
Social Security: Why Action Should Be Taken Soon 3

Social Security Solvency

Background of Social Security Financing

Unlike most governmental programs that 

are funded though annual appropriations, Social 

Security is funded through earmarked taxes. A 

permanent provision of law that directs payroll 

taxes into the Social Security Trust Funds provides the legal basis that allows benefits to be 

paid without explicit annual appropriations by 

Congress. The program’s ability to meet its benefit 

obligations each year is dependent on having sufficient revenue to pay scheduled benefits and not on 

how well it competes with other programs in the 

annual appropriations process.1 The law requires 

the Trustees of the Social Security programs to 

report annually on the program’s ability to meet 

its obligations in the near term and to evaluate its 

actuarial status over the long term.2

Since the program’s inception in 1935, Social 

Security’s benefits have been based on insured 

workers’ lifetime earnings. The benefit formula is 

designed to provide a larger income replacement 

rate to those workers with lower career average 

earnings than those with higher earnings. During 

the first 30-plus years of the system, Congress 

adopted legislation periodically to increase benefits to reflect the impact of price inflation. These ad 

hoc changes also recognized wage growth through 

adjustments in the benefit tables or formulae. In 

addition, Congress increased payroll tax rates and 

1 Revenues to pay benefits are generated through payroll taxes, 

interest on Trust Fund assets, and income taxation of benefits.

2 This report is based on results from the 2009 and 2010 

Trustees Reports. Some projections in the report such as the financial impact of various reform provisions discussed in Section IV 

and Appendix 1 are only available based on the assumptions and 

methods used in the 2009 Trustees Report, released in May 2009. 

Although the 2010 Trustees Report, due by April 1, was not 

released until August 2010, the latest available data have been 

incorporated into this report.

the maximum amount of wage earnings subject to 

Social Security taxes and creditable toward benefits. These tax increases were designed to provide 

adequate revenues to meet growing projected benefit costs.

In 1972, Congress modified Social Security 

laws to ensure that benefits and financing kept 

pace with wage and price inflation. This was 

accomplished by enacting automatic annual 

changes to the benefit formulae and to the 

maximum earnings level for determining benefits 

and taxes. However, the new system was flawed 

and resulted in a form of double-indexation during 

a period of historically high inflation. The rapid 

benefit growth that resulted left the system with 

serious short and long-term financing shortfalls. 

Congress acted to fix the flaws in 1977, adopting 

another automatic system for adjusting benefits; 

one which would adjust financing in a way that 

was less dependent on accurate projections of the 

absolute level of wages and prices. This new system 

depended on wage growth exceeding inflation by 

about 2  percentage  points in the short run (and 

1.75 percentage points in the long run) in order to 

generate sufficient financing to meet benefit costs. 

In actuality, the realized real wage growth fell far 

short of those requirements.

Major demographic changes were also taking 

place during that time. Mortality at older ages 

declined so that beneficiaries received benefits for 

more years. Fertility rates had already dropped 

during the mid-1960s to levels that would produce 

a stable rather than the growing future workforce 

needed for paying benefits as scheduled under 

the benefit formulae. Although immigration rates 

were higher than projected, future projections 

revealed a net decline in the number of workers per 

Social Security beneficiary during coming decades. 

By late 1981, it was clear that payroll taxes would 
4 Social Security: Why Action Should Be Taken Soon

Chart 1: OASDI Payroll Tax Rates 1937-2010

be inadequate to pay benefits beginning in 1982. 

Congress adopted temporary legislation allowing 

Social Security to borrow funds from the Hospital 

Insurance program. It then enacted the 1983 Social 

Security Amendments, which changed benefits and 

revenues to re-establish Social Security’s actuarial 

financial balance over the next 75  years through 

2058 (Appendix III.)

The effect of the 1983 Amendments

The 1983 Amendments achieved actuarial balance with a combination of tax increases, benefit 

reductions and coverage expansions and they also 

caused the emergence of Trust Fund surpluses 

during the initial decades after 1983. Among 

other provisions, these Amendments extended 

Social Security coverage to federal employees and 

to elected members of Congress and accelerated 

already-scheduled OASDI payroll tax increases. 

The OASDI payroll tax rate was increased in stages 

between 1984 and 1990. Chart 1 below provides 

the full history of OASDI payroll tax rates from 

the time Social Security was enacted in 1937 to 

the present.

These same Amendments also gradually 

increased the eligibility age for unreduced benefits 

from 65 to 67 by 2027. Workers born in 1938 were 

the first group affected by the gradual increase in 

the full retirement age, with benefits still available at age  62 but with a larger reduction. This 

increase in the full retirement age has affected 

Social Security’s replacement rate – the share of 

annual pre-retirement earnings that are replaced 

by Social Security’s annual benefit.3 As illustrated 

in Chart 2, a low-wage earner retiring at age 65 in 

2010 has a replacement rate of about 55 percent; 

for a high-wage worker the replacement rate is 

about 34 percent. By 2035, low-wage earners can 

expect to have approximately 49 percent of their 

annual pre-retirement earnings replaced by Social 

Security benefits; higher wage workers will have 

about 30 percent of their wage earnings replaced.

When the increase in the full retirement 

age is fully phased in by the year 2023, covered 

workers will receive only 70 percent of full retirement benefits if they choose to begin collecting 

benefits at age 62, instead of the 80 percent that 

those born prior to 1938 received under similar 

circumstances. At age 65, individuals will receive 

86.7 percent of full benefits, rather than 100 percent because their full retirement age would be 

67. The net effect of increasing the full retirement 

age is for individuals who retire before their full 

retirement age, monthly benefits will represent a 

smaller percentage of their prior annual earnings. 

Because life expectancy is increasing, they will 

receive those smaller annual benefits over what is, 

on average, a longer lifetime. If replacement rates 

are calculated at the full retirement age, there is 

no decrease.

3 The portion of a worker’s earnings that Social Security replaces 

varies according to the worker’s wage level; low-wage workers 

have a higher portion replaced than do higher-wage workers.

0.0 

2.0 

4.0 

6.0 

8.0 

10.0 

12.0 

14.0 

1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 

1983 Amendments Passed 

Percent

Source: Social Security Administration, Annual Statistical Supplement of the Social Security Bulletin, 2009
Social Security: Why Action Should Be Taken Soon 5

Increasing the full retirement age has also 

affected the number of older workers filing for 

disability benefits. As the full retirement age 

increases, retirement benefits that are reduced at 

the earliest age of eligibility become less generous. 

Disability benefits, on the other hand, are not 

reduced. Disability benefits for those aged  62 

were 25  percent more generous than retirement 

benefits at age 62 when the full retirement age was 

65. When the full retirement age is 66, (for those 

born 1943-1954), disability benefits are 33 percent 

more generous, and when it increases to age 67 (for 

those born in 1960 and later), disability benefits 

at age  62 will be 43  percent more generous. This 

increase in relative disability benefits is permanent 

over the life of the beneficiary, not just until the 

full retirement age is reached. Research has shown 

that this incentive does change behavior and makes 

applying for disability benefits more likely for 

older workers.4 Indeed, the surge in applications to 

the Social Security Disability Insurance program 

by older workers during the recent recession may 

reflect growing public awareness of the more 

generous treatment of disabled beneficiaries 

compared to non-disabled early retirees.

Although benefits for people retiring before 

full retirement age will decline as a percentage of 

their prior wages, the actual dollar amount of benefits and their purchasing power are expected to 

continue to rise. (Table 1) If wages per worker continue to increase as worker productivity advances, 

future Social Security benefits will be based on 

higher wages. The Social Security Trustees expect 

4 Li, Xiaoyan and Nicole Maestas, Does the Rise in the Full 

Retirement Age Encourage Disability Benefits Applications? Evidence 

from the Health and Retirement Survey, University of Michigan 

Retirement Research Center Working Paper, WP 2008-198, 

September 2008.

Chart 2: Percent of Pre-retirement Income Replaced by Social Security Benefits for Workers Retiring 

at Age 65 Under Current Law in 2010 and 2035, by Lifetime Average Earnings

0.0 

10.0 

20.0 

30.0 

40.0 

50.0 

60.0 

2010 2035 

Low Earner Medium Earner High Earner 

Percent

Source: Trustees Report, 2010, Table VI.F.10

Table 1

Estimated Future Annual Benefits Payable to Workers Who 

Retire at Age 65 at Various Earning Levels (2010 Dollars) Year

Low 

Earner

Medium 

Earner High Earner

Annual Benefit 2010 $10,164 $16,752 $22,212

Annual Benefit 2035 $12,633 $20,817 $27,590

Source: Trustees Report, 2010, Table VI.F10 
6 Social Security: Why Action Should Be Taken Soon

that, on average, “real” wage growth (the amount 

by which wages are expected to grow relative to 

prices) will offset the reductions in benefits caused 

by the increase in the retirement age.

Long-term outcomes

Despite the changes made by the 1983 

Amendments, the projections of the actuarial deficit 

over 75  years began to rise almost immediately, 

growing steadily from 1983 through 2000 to reach 

a level of about 2 percent of payroll. A major reason 

was simply that with each succeeding year, the 

75 year projection window (or “valuation period”) 

included one additional year at the end of the period 

where expenditures greatly exceeded revenue. As 

shown in Chart 3, the projection of the cumulative 

75 year deficit (blue line) has held stable hovering 

around 2 percent of payroll since 1994. The annual 

deficit in the 75th  year of the projection (dotted 

line) increased steadily from 1983 until 2004 but 

has been falling in the projections of the last five or 

six years owing to changes in assumptions.5

Over the last two decades, the Social Security 

Advisory Board; its forerunners, the Social Security 

Advisory Councils; and expert panels appointed by 

the Board to evaluate the assumptions and methods 

5 More recently, alternate views – somewhat more optimistic 

and much more pessimistic – of the long-term financial status 

of Social Security projections have been developed. See CBO, The 

Long-Term Budget Outlook, Chapter 3, March 2010 and Jagadeesh 

Gokhale Social Security: A Fresh Look at Policy Alternatives, 

University of Chicago Press, 2010, respectively.

of the projections have all urged that future 

legislation should seek to achieve “sustainable 

solvency.” The long-term solvency of the system 

is thought to be sustainable when there is both a 

non-negative actuarial balance over the 75  year 

valuation period and a Trust Fund that is positive 

and is either stable or rising as a share of projected 

annual benefits at the end of the 75 year valuation 

period. For the past several years, the Trustees’ 

Reports have also noted the importance of this 

solvency measure for the Social Security system. 

In 2005, the U.S. Senate unanimously supported 

the goal of achieving “permanent solvency” for 

Social Security based on the measure of infinite 

horizon actuarial balance, which was reintroduced 

in the 2003 Trustees’ Report.

If the Trustees’ current projections hold, the 

1983 reforms will have extended the system’s 

solvency for 54 years with Trust Fund assets plus 

annual payroll tax revenues sufficient to pay the 

scheduled benefits during the subsequent year, but 

those reforms did not achieve sustainable solvency. 

The Trust Funds and revenue during 2038 will not 

be adequate to pay benefits as scheduled in current 

law during 2038.

Demographic and Economic Challenges as 

Baby Boomers Retire

Current 75  year projections of income and 

spending for Social Security indicate that there 

is insufficient revenue coming into the program 

to meet future obligations. Ongoing demographic 

Chart 3: Social Security Deficit Projections: 75-year Average and 75th Year: 1983-2010

-1.00 

0.00 

1.00 

2.00 

3.00 

4.00 

5.00 

6.00 

7.00 

1983 

1984 

1985 1986 1987 1988 1989 1990 1991 1992 1993 

1994 

1995 1996 1997 1998 1999 

2000 2001 2002 2003 

2004 

2005 2006 2007 2008 2009 2010 

Deficit as Percent of Payroll 

Year of Trustees Report 

75 Year Actuarial Deficit 75th Year's Actuarial Deficit 

Source: Trustees Reports, 1983-2010
Social Security: Why Action Should Be Taken Soon 7

Chart 4: Ratio of Population Age 65 and Over to Population Age 20 to 64: 1950-2085 

0.00 

0.05 

0.10 

0.15 

0.20 

0.25 

0.30 

0.35 

0.40 

0.45 

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 

Ratio 

Source: Trustees Report, 2010, Table V.A.2

changes in the United States imply a rapidly 

growing population of beneficiaries but relatively 

fewer workers to pay the payroll taxes needed to 

provide benefits as scheduled under current law. 

While expansions in coverage, increasing benefit 

generosity, and actual economic conditions, weaker 

than projected, have raised the costs of the program 

over time, the primary driver of the long-range 

shortfall is the significant change in the age structure 

of the population that has been anticipated since the 

late 1960s.

The shift in the relative size of working-aged and 

elderly populations will take place over the next 

20 years. (Chart 4) The large numbers of people born 

during the post-World War II “baby boom” currently 

make up a large part of the workforce paying Social 

Security taxes. But they are nearing retirement age; 

the oldest of the baby boomers (those born in 1946) 

reached age  62 in the year 2008. By 2030, about 

20 percent of the U.S. population is expected to be 

aged  65 and older compared to about 13  percent 

in 2009. When the baby boomers transition from 

working to retirement over the next two decades, 

the cost of the Social Security program will rise 

quickly – unless Congress intervenes to change the 

program’s rules.

Rising life expectancy

Another factor contributing to increasing 

retirement costs is that people are living longer. In 

1940, when the first Social Security benefits were 

paid, a man who reached age  65 could look forward to fewer than 13 years of life, and a woman 

had a life expectancy of fewer than 15  years. By 

2030, when nearly all the baby boomers will have 

reached the Social Security full retirement age, the 

Trustees project that life expectancy at age 65 will 

be over 19 years for men and more than 21 years 

for women. Longer lives for retirees mean more 

years receiving Social Security benefits. (Chart 5)

Chart 5: U.S. Cohort Life Expectancy at Age 65: 1940-2080 (projected)

12.7 

13.2 

14.7 

17.2 

18.8 

20.1 

21.2 

22.3 

14.7 

17.4 

18.8 

19.8 

21.1 

22.3 

23.5 

24.5 

0 5 10 15 20 25 30 

1940 

1960 

1980 

2000 

2020 

2040 

2060 

2080 

Year Attaining Age 65 

Women 

Men 

Source: Trustees Report, 2010, Table V.A.4
8 Social Security: Why Action Should Be Taken Soon

5.1 

3.2 3.4 

2.5 

2.1 2.1 2.0 

0.0 

1.0 

2.0 

3.0 

4.0 

5.0 

6.0 

1960 1980 2000 2020 2040 2060 2080 

Declining growth of the labor force

The significant demographic changes described 

above come at a time when the nation is also experiencing a slowdown in the growth of the labor 

force. The average rate of growth of the labor force 

slowed from the 2  percent per year it achieved 

during the 1970s and 1980s to 1.1 percent annually over the period from 1990 through 2008. 

Projections show this slowdown continuing – to 

0.7 percent from 2009 through 2018, 0.5 percent 

from 2018-2050, and 0.4 percent from 2050-2085.

The major reason for this slowdown is the 

decline in the birth rate that began in the 1960s. 

During the mid- to late-1960s, fertility began to 

decline dramatically. It decreased from above three 

children per  woman from 1947 to 1964 to a low 

of just 1.74 by 1976. Since then, it has increased 

somewhat and has been roughly stable at 2.05 

to 2.1 over the past decade. Over the long term, 

the Social Security actuaries project a total fertility rate of 2.0. These lower birth rates will mean 

smaller future working generations relative to the 

size of the retiree population.

Greater participation in the workforce by 

women has offset some of the costs of the growing 

number of Social Security beneficiaries, but this 

growth trend is not expected to continue. The historical rapid growth trend has actually leveled off. 

The female labor force participation rate increased 

from 34  percent in 1950 to 60  percent in 1996 

where it has remained up to the present.

Because most of the money used to pay benefits comes from the payroll taxes paid by workers 

and their employers, the number of workers relative to the number of beneficiaries affects Social 

Security’s ability to meet obligations to beneficiaries. With more beneficiaries and little growth 

in the number of workers, the ratio of workers to 

beneficiaries will decline substantially for several decades. In 2010 there were 2.9  workers for 

every beneficiary. This ratio will decline to about 

2.1 workers per beneficiary in 2035. After the year 

2035, this ratio will continue to decline slowly, 

reflecting the increasing numbers of beneficiaries due to assumed increases in life expectancy. 

(Chart 6)

Because there will be more beneficiaries per 

worker, there are two main options for balancing projected benefits and revenues. Continuing 

to meet the cost of currently scheduled benefits 

under the traditional pay-as-you-go financing 

arrangement would require a substantial increase 

in the revenues used to support the program after 

2037 – the date of Trust Fund exhaustion. Chart 7, 

drawn using the Trustees’ 2010 projections, indicates that the cost of the program as a percentage 

of current taxable earnings is projected to grow by 

33 percent between now and 2084 (from 13.1 percent to 17.4 percent). An exclusively revenue-side 

change would imply a corresponding increase in 

payroll tax rates or the level of taxable earnings. 

Alternatively, with no changes to projected revenues, benefits could be paid under current benefit 

Chart 6: Number of Workers per Social Security Beneficiary: 1960-2085

Source: Trustees Report, 2010, Table IV.B2
Social Security: Why Action Should Be Taken Soon 9

formulae only through 2037 – the year when the 

Trust Funds would be exhausted. Benefits would 

have to be reduced by about 22  percent in 2038 

to fit within available revenues. The percentage 

reduction would grow larger over time so that by 

2084 only 75 percent of currently scheduled benefits could be paid.

An uncertainty for the 21st century is whether 

the demand for labor in the economy will increase 

the number of jobs available for older workers. 

Older workers who continue to pay Social Security 

payroll taxes by remaining in the labor force would 

reduce the decline in the ratio of workers to beneficiaries and may also reduce the magnitude of the 

financing problem.6 In the last 15 years or so, labor 

force participation rates for older workers have 

increased noticeably.

Indeed, current data actually suggest that 

older Americans are increasing their labor force 

participation. The recent economic downturn has 

resulted in many workers losing value in their 

retirement savings accounts, housing, and other 

investments. This may be leading some individuals 

to work longer than anticipated in order to make up 

for the losses to their retirement assets. According 

6 An unexplored issue is the effect of globalization which is expected to increase offshore competition for low-wage workers in 

developed countries. It is possible that the same pressure would 

dampen demand for older workers with relatively obsolete skills. 

Testimony of Stephen C. Goss to the Senate Finance Committee, 

July 15, 2010.

to projections by the Social Security actuaries, an 

additional 10  percent increase in the labor force 

participation of individuals age  62 and older by 

2011 would improve the long-term OASDI actuarial deficit by 4.5 percent and extend the exhaustion 

date of the OASDI Trust Funds by one year. The 

actuaries also project that if the labor participation 

of both males and females increased in 2011 to the 

level of workforce participation of males in 1950 

(adjusted for corresponding increases in available 

disability benefits), the actuarial deficit would be 

reduced by 40 percent, and the date of Trust Fund 

exhaustion would be extended by 14 years.7

Status of the Social Security Trust Funds

The Social Security Trust Funds are the 

mechanisms used by the federal government 

to track income received through payroll taxes, 

interest and other payments as well as the 

expenditures made for benefits and administrative 

costs. Past contributions to the Trust Funds that 

are in excess of the income needed to pay current 

benefits, the accumulated assets of the Funds, are 

invested in “special issue” Treasury securities. The 

cash exchanged for the securities goes into the 

General Fund of the United States Treasury and is 

7 Testimony of Stephen C. Goss to Senate Finance Committee, 

July 15, 2010; estimates based on the assumptions in the 2009 

Trustees Report.

Chart 7: Scheduled and Payable Benefits as Percent of Taxable Payroll: 2005-2085 

(Intermediate Assumptions of 2010 Trustees Report)

0.00% 

5.00% 

10.00% 

15.00% 

20.00% 

25.00% 

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 

Cost: Scheduled and 

Payable Benefits Before 2037 

Cost: Scheduled But Not 

Payable Benefits, after 2037 

Income Expenditures: After Trust Fund Exhaustion 

in 2037, Payable Benefits = Income 

Source: Trustees Report, 2010, Figure II.D2
10 Social Security: Why Action Should Be Taken Soon

indistinguishable from other cash in the General 

Fund.8 Under current law, the government includes 

these Trust Fund securities as part of the overall 

national debt. The financial status of the Social 

Security program can be examined from two very 

different, but equally important perspectives; from 

a Trust Fund perspective or from the perspective of 

its relationship to the Unified Federal Budget.

As required by law, the current and future 

financial status of the Old Age Survivors Disability 

Insurance (OASDI) Trust Funds is reported 

annually by the Social Security Trustees. From 

this perspective, Social Security is evaluated in 

isolation of the effect that it has on the overall 

federal government or the entire federal budget. 

In contrast, other analysts examine the Social 

Security Trust Funds from the standpoint of 

how they fit into the budget of the entire federal 

government.

The federal government as a whole uses a 

Unified Budget concept that includes all federal 

activities without regard to fund-type or whether 

or not a program is categorized as “on-budget” or 

“off-budget” for reconciliation purposes. (Social 

Security was classified as “off-budget” by the 1983 

Social Security Amendments, with the intention 

8 Social Security Administration’s Office of the Chief Actuary, 

Trust Fund FAQ http://www.socialsecurity.gov/OACT/ProgData/

fundFAQ.html.

of protecting benefits from being reduced during 

Congressional budget reconciliation procedures.) 

The interest that accrues on Trust Fund bonds is 

paid out of general revenues. In addition, general 

revenues are used to redeem the securities held by 

the Trust Funds at maturity. Chart  8 illustrates 

the balance between revenue and costs under 

the two perspectives. From a Unified Budget 

perspective, the annual balances were negative 

in 2010 (because of the negative impact of slowed 

economic activity on payroll taxes) and by 2015 

will begin to show larger and larger deficits 

each year. The blue bar is roughly the amount of 

general revenue transfers that would be needed, 

absent other changes, to pay benefits as currently 

scheduled. But it should be noted that current 

Social Security laws contain no provisions for such 

general revenue financing of scheduled benefits. 

From a Trust Fund perspective, the inclusion of 

interest income from the Trust Fund assets means 

annual balances are positive until 2025, when they 

begin a sustained decline. In the past, cash flows 

from general revenues were relatively small. In 

the near future, they will begin to grow rapidly as 

Trust Fund assets are increasingly called upon to 

meet program costs in excess of tax revenues.

-300 

-250 

-200 

-150 

-100 

-50 

0 

50 

100 

150 

200 

2010 

2011 

2012 2013 

2014 

2015 2016 2017 2018 2019 2020 2021 2022 2023 

2024 

2025 

Annual Balance in Current Dollars 

($Billions) 

Unified Budget Perspective: 

Non-interest Income Minus Cost 

Trust Fund Perspective: 

Total Income Minus Cost 

Chart 8: Projected OASDI Annual Balances, 2010-2025: Trust Fund and Unified Budget 

Perspectives (Based on Trustees 2010 Intermediate Assumptions)

Source: Trustees Report, 2010
Social Security: Why Action Should Be Taken Soon 11

Trustees’ assessment

In their 2010 report, the Social Security 

Trustees note that the short term financial outlook for Social Security has been worsened by a 

deeper recession than was projected last year. The 

OASI Trust Fund and the combined OASI and DI 

Trust Funds meet the short-range test of adequate 

financing that covers the next 10 years. The DI Trust 

Fund, however, when evaluated independently 

of OASI, does not meet the short-range test for 

financial adequacy because its assets are projected 

to fall below 100 percent of annual expenditures 

by the beginning of 2013, and to be exhausted in 

2018. In 2037, when the combined OASI and DI 

Trust Funds are projected to be exhausted, OASDI 

tax income would finance only about 78 percent of 

scheduled benefits in that year.

The long-range outlook for Social Security 

has improved slightly since last year, but the 

combined OASDI Trust Funds still do not meet the 

long-range (75  year) test for financial adequacy. 

Under the Trustees intermediate assumptions, 

the combined OASDI Trust Funds have a projected 

75  year actuarial deficit equal to 1.92  percent of 

taxable payroll. This is 0.08 percent smaller than 

last year’s projection. The primary reason for the 

smaller deficit in 2010 is the expected effect that 

the Patient Protection and Affordable Care Act (ACA) 

will have on the rate of growth of the average 

wage level. The ACA is expected to slow the rate of 

decline in the share of employee compensation that 

is paid in wages and covered by Social Security. The 

introduction in 2018 of an excise tax on high-cost, 

employer-sponsored health insurance plans will 

spur employers to reduce compensation through 

non-payroll taxed health insurance premiums in 

favor of Social Security taxable wages, thereby 

increasing the projected growth in the average real 

wage and payroll taxes.

Implications for the Unified Federal Budget

When viewed from a Unified Budget 

perspective, monthly cash flows to the OASDI 

Trust Funds become more significant. When the 

2009 Trustees Report was released, income from 

payroll taxes and taxes on benefits was expected 

to be higher than spending for benefits and 

administrative expenses until the year 2016, thus 

the Social Security program was expected to be a 

net plus for the federal budget. The U.S. Treasury’s 

ability to borrow Social Security’s surplus of payroll 

taxes over benefit payments and use it for other 

government purposes helps reduce the projected 

Unified Budget deficit. The budget includes both the 

General Fund of the government and a number of 

Trust Funds designated for special purposes, such 

as the Social Security and Highway Trust Funds.

But in 2009 – due primarily to a deep recession – tax revenues to the OASDI Trust Funds fell 

below program costs. The Social Security Trustees 

now project that in 2010 and 2011, annual tax revenues will again fall below annual program costs. 

Tax revenues will again exceed program costs in 

2014, before permanently falling below program 

costs in 2015, one year sooner than projected 

in 2009. Unless benefit obligations are reduced 

before then, the federal government would have 

to find additional funds elsewhere to meet its obligations fully to Social Security beneficiaries after 

2014. In order to pay Social Security benefits that 

are due under current laws, the government will 

have to begin paying back sooner the principal of 

the funds it has borrowed from Social Security 

by redeeming the bonds held by the Trust Funds. 

Repaying these bonds requires the federal government to produce extra cash from elsewhere within 

the federal budget. This extra cash could come 

from higher non-Social Security taxes, reduced 

non-Social Security spending, or increased debt 

held by the public.

Despite the tax revenue shortfall after 2014, 

Social Security will be able to pay the full amount 

of scheduled benefits for several years by cashing 

in Treasury securities held in the Trust Funds, 

obviating explicit funding legislation by Congress. 

The exact year in which the currently large Trust 

Fund will be drawn down to zero depends heavily 

on prevailing interest rates and other short-range 

economic and program developments. In 1985, the 

Trust Fund exhaustion year was projected to be 

2049 by the Social Security Trustees. In 1995 the 

Trustees projected the exhaustion year to be 2030. 

By 2010, the exhaustion year was projected by 

the Trustees to be 2037 and by the Congressional 

Budget Office (CBO) to be 2039. While projections 

of the exact year of exhaustion may differ slightly, 

the various projections agree that revenues will 

begin to fall short of costs, eventually drawing 
12 Social Security: Why Action Should Be Taken Soon

down the Trust Funds to zero. From that point the 

program will not have income that is sufficient to 

pay benefits in full. (Table 2)

What Could Happen If Congress Takes No 

Action Before 2037?

The Social Security Act states that every individual who meets program eligibility rules is 

entitled to benefits. This means that the government is legally obligated to pay scheduled 

benefits that are currently due and payable – to 

beneficiaries in current payment status – those to 

whom benefits are due but whose checks are yet 

to be issued. The Congress has never allowed the 

finances of the Social Security program to reach 

the point where scheduled benefits due were not 

paid.9 As a way of gauging the significance of the 

projected financing shortfall, it is useful to look 

at what could happen in the event that Congress 

takes no action to modify Social Security by 2037. 

9 Congress has in the past and could in the future adjust 

scheduled benefits to meet existing revenue and/or adjust tax 

revenue to meet benefit obligations. In the event of Trust Fund 

exhaustion, the law is unclear whether the Social Security 

Commissioner or other Trustees have the authority to reduce 

scheduled benefit amounts in current law. Another possible 

scenario is that benefits could be delayed reducing the number 

of full benefit payments during the year. Social Security: What 

Would Happen If the Trust Funds Ran Out? Congressional Research 

Service Report RL33514, August 20, 2009.

At that point, there would be two basic alternatives – large immediate reductions in scheduled 

benefits or tax increases (or some combination 

of the two).

In the analysis that follows, we use the 

2009  Trustees Report intermediate projections; 

the overall outlook is the same under the CBO 

projections.

A hypothetical illustration of the impact of cutting 

benefits

As described above, the Social Security 

Trustees project that in 2037 current income to the 

system from taxes will be sufficient to pay about 

three quarters (78 percent) of the Social Security 

benefits that beneficiaries are entitled to receive 

under current law. This reduction would affect not 

only those becoming entitled to Social Security 

benefits in 2037 and later, but also those already 

receiving benefits at that time. To illustrate:

■ The projected monthly benefit for a mediumearning worker retiring at age 65 would fall from 

$1,642 in 2036 to $1,264 in 2037 (in constant 

2009  dollars). Benefits for a low earner would 

drop from $996 in 2036 to $767 in 2037.

■ Initial Social Security benefits awarded to 

workers who retired in 2037 and after would replace significantly less of these workers’ pre-retirement wages compared to the benefits awarded 

Table 2

Projections of Social Security Deficit

75 Year Deficit 

(Percent of 

Taxable 

Payroll)

Year of 

Exhaustion

Year Costs 

First Exceed 

Revenues

Revenue as a 

Percent of Costs

In 2040: In 2060:

2010 Trustees Report -1.92 2037 2015 78 percent 80 percent

2010 CBO -1.60 2039 2016 80 percent 82 percent

2009 Trustees Report -2.00 2037 2016 78 percent 82 percent

2009 CBO -1.30 2043 2017 82 percent 84 percent

2005 Trustees Report -1.92 2041 2017 76 percent 74 percent

2005 CBO (with Trustees' Long-range 

Economic Assumptions)

-1.69 2044 2019 75 percent 74 percent

2005 CBO (with CBO Assumptions) -1.05 2052 2020 78 percent 78 percent

1995 Trustees Report -2.17 2030 2013 75 percent 72 percent
Social Security: Why Action Should Be Taken Soon 13

to those who retired in prior years. As illustrated 

in Chart 9, this “replacement rate” for workers 

who retire at age 65 would immediately fall:

z from 49  percent to 37  percent for low 

earners;

z from 36 percent to 28 percent for medium 

earners; and

z from 30  percent to 23  percent for high 

earners.

■ Benefit cuts could mean that after 2037, 

the percentage of aged people living in poverty 

would rise and there would be greater reliance on 

means-tested or welfare programs, such as the 

Supplemental Security Income program, which 

are financed by general revenues.

A hypothetical illustration of the impact of 

increasing taxes

In order to continue paying full benefits in 

2037 and for another 38 years thereafter, Congress 

would have to change the law to increase the Social 

Security payroll tax from the current 12.4 percent 

(6.2  percent each for employers and employees) 

to about 16.5  percent (8.25  percent each for 

employers and employees).

In 2037, for a worker earning the estimated 

average wage of $57,112 (in 2009  dollars), this 

would mean an increase in Social Security taxes of 

$1,171 a year (from $3,541 to $4,712), levied on 

both the worker and the worker’s employer.

Enacting this higher tax rate in 2037 would not 

be sufficient to ensure that Social Security benefits 

could be paid for an indefinite period. To ensure 

that scheduled benefits could be paid in 2084 and 

beyond, the tax rate would need to be increased 

in 2084 by an additional 0.3  percentage  points 

(to 16.8  percent). As longevity continues to rise, 

Congress would need to enact additional tax 

increases to maintain the ability to pay benefits.

■ A tax increase enacted close to the point of 

Trust Fund exhaustion would have little or no 

effect on people who have already retired. Their 

benefits and replacement rates would remain at 

levels provided in present law.

■ However, a tax increase would significantly affect people in the labor force (a group about twice 

as large as the retired population in 2037). The 

younger the worker when the tax increase takes 

effect, the longer and larger the impact would be 

on lifetime resources and living standards.

Chart 9: Illustration of Decline in Replacement Rates for Workers Retiring at Age 65 if No Changes 

in Financing

0.0 

10.0 

20.0 

30.0 

40.0 

50.0 

60.0 

2009 

2011 

2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 2061 2063 2065 2067 2069 2071 2073 2075 2077 2079 2081 2083 2085 

Percent of Pre-retirement Income Replaced 

Low Earner 

Medium Earner 

High Earner 

Solid Lines = Payable Benefits 

Dashed Line = Scheduled Benefits in 2037 and Later 

Source: Social Security Administration’s Office of the Chief Actuary and Trustees Report, 2009, Table VI.F10
14 Social Security: Why Action Should Be Taken Soon
Social Security: Why Action Should Be Taken Soon 15

The Reasons for Prompt Action

As time goes by, the urgency of the Social 

Security problem grows, and the choices available 

to fix it become more limited. There are important 

reasons for making changes earlier.

■ Ensure confidence. Workers need to know 

what they can expect from Social Security. They 

must have confidence that the programs will remain financially sound and will continue to pay 

benefits in the future. According to a survey completed earlier this year, only 30 percent of workers polled were very or somewhat confident in 

the future financial viability of Social Security.10

A quicker resolution of the program’s financial 

imbalance would eliminate the uncertainty that 

is currently eroding confidence in the program.

■ Informed retirement planning. The longer 

Congress delays action, the harder it is for people 

to plan for retirement and make decisions that affect their financial well-being. Acting sooner gives 

people affected by the changes more advance notice so they can make alternative provisions for 

their retirement such as saving more, working 

longer, or earning more. If, for example, there 

is to be a cut in benefits, workers need to know 

as soon as possible in order to be able to make 

career and investment choices that will make up 

for the loss of a portion of their Social Security 

benefit. The decisions they make will help them 

avoid the possibility of a substantial reduction in 

their retirement living standard at a time when 

they may have fewer career and investment options. If there are to be tax changes, workers and 

their families may have to adjust their savings or 

10 Retirement Confidence Survey, Employee Benefit Research 

Institute, and Mathew Greenwald & Associates, Inc., 2010. See 

http://www.ebri.org/surveys/rcs/2010/.

postpone major purchases. Changes in either Social Security benefit levels or tax rates can affect 

the hiring decisions of employers. Payroll tax increases may cause employers to hire fewer workers and thus limit employment opportunities, 

including those for older workers.

■ Ability to phase in changes. Extreme 

change can be avoided. Implementing modifications to the benefit and/or tax structure can be 

done in more gradual ways. Smaller changes in 

Social Security benefits could be phased in over 

several decades. They would affect more people, 

but to a lesser degree. The cost of repairing Social Security can be spread more evenly over more 

generations of workers and beneficiaries. However, the possibilities for distributing this cost 

across generations will diminish as time passes 

and has, in fact, diminished considerably since 

1998 when the Board released its first edition 

of this report urging policy makers to act sooner 

rather than later.

■ Economic stability. Policy uncertainty creates a negative environment for financial markets in general. Resolving Social Security’s financial shortfalls through earlier policy reforms 

would enhance policy stability and boost economic growth by providing the stable economic 

environment in which markets operate best. This 

is particularly relevant in the current environment of massive budget deficits which are projected into the future.

Illustrating the Effects of Acting Sooner Rather 

Than Later

There are many ways to fix Social Security and 

their impact depends on timing. The examples in 

the following sections illustrate how the effects on 

both individuals and generations would differ if 

The Advantages of Acting Sooner Rather Than Later
16 Social Security: Why Action Should Be Taken Soon

certain basic changes were made effective in 2010 

or if they were postponed for the next generation 

to address in 2037.

Reduce the Social Security cost-of-living 

adjustment

In each year in which there is a cost-of-living 

adjustment (COLA),11 Social Security benefits rise 

to reflect increases in the Consumer Price Index 

for Urban Wage Earners and Clerical Workers 

(CPI-W).12 If a reduction in the annual COLA were 

introduced in 2010, Social Security benefits would 

be lower for everyone getting benefits at that time 

and for all future beneficiaries. Thus, both current 

and future beneficiaries would share in bearing 

the cost of fixing Social Security. Reducing the 

COLA in 2037, however, affects only those receiving benefits in and after that year. Most people 

born before 1945 would not bear any cost of fixing 

Social Security, and people born in 1975 and later, 

who could retire at age 62 beginning in 2037, would 

bear the heaviest costs throughout retirement.

If implemented in 2037, the annual reduction in the COLA would have to be nearly twice 

as large as the adjustment implemented in 2010 

in order to solve the same proportion of Social 

Security’s long-range (75  year) financing gap. 

More simply, to achieve a similar reduction in the 

75 year gap, a 1 percentage point reduction implemented in 2010 – a cut that would be at the very 

high end of reform suggestions under discussion 

today – would be needed, while in 2037, COLAs 

would have to be reduced by 2 percentage points. 

11 The Cost of Living Adjustment for a given year is based on the 

percentage increase in the Consumer Price Index for Urban Wage 

Earners and Clerical Workers measured in the third quarter of 

the previous year. If the level of prices in the third quarter of a 

given year is not higher than in the last year a COLA was made, 

then there is no increase in benefits for current beneficiaries. 

The level of the CPI was unexpectedly high in the third quarter 

of 2008 leading to a large COLA in 2009 of 5.8 percent. The level 

of the CPI in the third quarter of 2009 and 2010 had not yet 

returned to the level in 2008, so there was no COLA in 2010 and 

will not be one in 2011.

12 Some experts believe that the CPI-W currently underestimates changes in the cost of living relevant to Social 

Security beneficiaries, while others believe that CPI-W 

overstates increases in the cost of living. Adopting a 

measure of inflation that reflects more rapid increases the 

average cost of living, such as the Consumer Price Index 

for the Elderly (CPI-E), would also increase the future 

financing deficit. Adopting a measure of inflation that 

reduces the average increase in cost of living adjustments 

would reduce the future financing deficit.

A 0.3 percentage point cut starting in 2010, which 

would eliminate 25  percent of the 75  year deficit 

and be roughly equivalent to basing COLAs on 

the so–called “chained CPI-U,” would have to be 

roughly 0.6 percentage points if first implemented 

in 2037. A larger cut is needed in 2037 because it 

would apply during fewer years of today’s 75 year 

projection window. Although the total reduction in 

the program’s 75 year financial imbalance would be 

the same when the policy is implemented in 2037 

rather than in 2010, its impact on today’s retirees 

would be smaller; the impact on younger and future 

generations would be much larger.

Because COLA cuts compound over time, they 

have a cumulative effect on benefit levels. They 

would have the greatest impact on those who 

receive benefits the longest: long-lived retirees and 

disabled beneficiaries who have non-life-threatening conditions.

Reduce scheduled benefits

One way to reduce program costs is to adjust 

the Social Security benefit formula for future 

beneficiaries by lowering the percentage of earnings 

that is replaced by benefits. A reduction in the 

formula for determining initial retirement benefits 

beginning in 2010 would lower the percentage of 

earnings replaced by benefits for everyone eligible 

to receive benefits in that year or later, that is, 

people born in 1948 and after. It would not affect 

people born earlier and already eligible for benefits.

An across-the-board benefit reduction of about 

5  percentage points beginning with individuals 

newly eligible in 2010 would solve 31  percent of 

the average shortfall over the next 75 years. If a 

similar benefit formula change is delayed until 

2037, the across–the–board reduction would 

have to be larger, about 10.5  percent, to have 

the same impact on the long-range (75  year) 

actuarial deficit. 

A cut for individuals newly eligible in 2037 

would reduce retirement benefits for people born 

in 1975 and later, and would cause them to have 

substantially lower replacement rates than earlier 

generations. Changes could be made to the benefit 

formula in ways that reduce benefits by the same 

percentage at all income levels or in ways that are 

not uniform across income levels. If the benefit 

formula is reduced uniformly across income 
Social Security: Why Action Should Be Taken Soon 17

levels, those with the fewest sources of retirement 

income outside of Social Security would tend to be 

impacted more heavily.

Increase the payroll tax rate

As with benefit cuts, the size of the tax increases 

necessary to fix the system would vary depending 

upon when they become effective. Charts  10.1-

10.3 describe three different scenarios based on 

current projections wherein tax increases would 

generate sufficient revenues to pay all scheduled 

benefits over the next 75  years and to continue 

paying full benefits for a number of years at the end 

of that period. If implemented in 2010, an increase 

of 2.2 percentage points from 12.4 to 14.6 percent 

(employers plus employees) in the current Social 

Security tax rate would resolve the Social Security 

funding shortfall until about 2084.13 (Chart 10.1)

If the tax change is implemented in 2037 

instead of immediately, the rate needed to continue paying benefits as scheduled through 2084 

would be 16.5  percent – an increase of 4.1  percentage points, from today’s rate of 12.4 percent. 

(Chart 10.2) By waiting until 2037, a larger increase 

is needed because it applies for fewer years. At the 

end of the 75 year period (in the absence of other 

program changes), meeting benefit costs in 2085 

and several years thereafter would require taxes to 

be increased again to nearly 16.8 percent.

Chart  10.3 illustrates the pay-as-you-go tax 

rate that matches revenues to outlays while maintaining a Trust Fund ratio of 100 percent. It would 

begin to be implemented in 2032.14

These three scenarios show that delaying policy 

changes is equivalent to shifting a larger share of 

the financial burden of paying for scheduled Social 

Security benefits onto future taxpayers. This 

shift occurs because the later a tax rate increase 

is implemented, there are fewer future taxpayers 

13 The calculations for Charts 10.1-10.3 were based on the 

assumptions in the 2009 Trustees Report. Based on the 2010 

Trustees assumptions the payroll tax rate would have to rise immediately to 14.24 percent to meet all scheduled benefits over the 

next 75 years, or to 14.38 percent to pay all benefits over 75 years 

and leave a balance in the Trust Fund equal to one additional 

year’s benefit costs. The latter rate is slightly higher than the 

assumed actuarial deficit of 1.92 because the Trustees assume 

that as taxes increase there would be some slight measure of tax 

avoidance by employers and employees.

14 The pay-as-you go tax rate would begin to increase in 2032 because that is when the Trust Fund ratio is projected to fall below 

100 percent on its way to exhaustion in 2037.

within the 75  year budget window to pay the 

higher tax rate, thus the tax rate needs to be 

higher to meet the benefit obligations scheduled 

under current law. One way of equalizing the 

prospective financial burden across all of today’s 

and tomorrow’s taxpayers would be to immediately 

implement a tax rate increase that would provide 

sufficient revenue for the indefinite future. That 

would require a payroll tax rate estimated at 

15.9 percent, (a 3.5 percentage point increase) to 

begin in 2010.15

Whether Congress decides to implement 

changes immediately or waits to implement tax 

rate and benefit changes in the future to achieve 

solvency, the choices do not alter the system’s 

total deficit over the 75  year estimating period. 

As noted previously, earlier action would spread 

the adjustment costs over a larger population, but 

each person affected would bear a smaller adjustment cost. Postponing policy action to balance 

Social Security’s taxes and benefits would concentrate adjustment costs on fewer future taxpayers, 

but each person would be affected more severely. 

Increasing Social Security tax rates in 2010 would 

allow the additional costs to be spread over many 

more generations – people born in the late 1940s 

who continue to work and earn today would pay 

more. On the other hand, postponing a Social 

Security tax increase until 2037 would mean that 

most of the people born before 1975, who would 

be at or near age  62 in that year, would avoid 

paying any of the additional taxes necessary to pay 

full benefits to them in retirement. If reductions 

in scheduled benefits were enacted today for all 

future retirees, individuals born in 1948 (age  62 

in 2010) and later would be affected. If the reductions were postponed until 2037, those born in 

1975 (age 62 in 2037) and later would be affected 

more severely because those born during the time 

span of 1948-1974 would bear none of the burden 

of adjustment.

Social Security tax increases also reduce takehome pay for everyone who is required to pay them 

at the time they become effective. Because payroll 

taxes apply only to earnings below a certain annual 

15 According to the Trustees: “[The] increase in the payroll 

tax rate is larger than the infinite horizon actuarial deficit of 

3.3 percent of payroll due to the assumed response of employers 

and employees to an increase in taxes.” That is, they assume that 

as taxes increase there would be some measure of tax avoidance, 

(See 2010 Trustees Report, page 61.)
18 Social Security: Why Action Should Be Taken Soon

CHARTS 10.1–10.3: Payroll Tax Rates to Meet 75 year Deficit and Continue Paying Benefits after 2084

Scenario 1 assumes that payroll taxes are increased immediately, in 2010, by 2.2 percentage points to 

14.6 percent. This would provide sufficient revenue to pay scheduled benefits until 2084 when the tax rate 

would have to rise by an additional 2.2 percentage points.

Scenario 2 assumes that no action is taken until the Trust Fund exhausts in 2037. At that point, payroll taxes would have to rise by 4.1 percentage points to 16.5 percent to meet scheduled benefits for the 

remainder of the 75 year period. In 2084 there would have to be a further increase to 16.8 percent.

Scenario 3 assumes that the current tax rate is maintained until the Trust Fund declines to about a 

one year reserve level (around 2032). Rates would then be increased on a pay-as-you-go basis sufficient to 

pay benefits and keep the Fund at a one year reserve: up to 13.8 in 2032, up to 16.3 percent from 2033 to 

2042; down to 15.7 percent from 2043 to 2067, up to 16.3 percent from 2068 to 2083, and up to 16.8 percent in 2084 and for a few years after, and further increases thereafter.

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

20 

2010 

2015 

2020 

2025 

2030 

2035 

2040 

2045 

2050 

2055 

2060 

2065 

2070 

2075 

2080 

2085 

2090 

OASDI Payroll Tax Rate 

2084 and After Rate Scenario 1: Immediate Increase Present Law 

2084 and After Rate Scenario 2: Increase in 2037 Present Law 

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

20 

2010 

2015 

2020 

2025 

2030 

2035 

2040 

2045 

2050 

2055 

2060 

2065 

2070 

2075 

2080 

2085 

2090 

OASDI Payroll Tax Rate 

2084 and After Rate Scenario 3: "Pay as You Go" Rate Present Law 

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

20 

2010 

2015 

2020 

2025 

2030 

2035 

2040 

2045 

2050 

2055 

2060 

2065 

2070 

2075 

2080 

2085 

2090 

OASDI Payroll Tax Rate 
Social Security: Why Action Should Be Taken Soon 19

limit ($106,800 in 2010), tax increases place a 

heavier burden on those earning below the limit 

than those earning above this limit. The Social 

Security benefits they will eventually receive, by 

contrast, are designed to replace a higher share of 

pre-retirement earnings for lower income earners than for higher income earners. No additional 

retirement benefits are credited to workers on any 

of their earnings above the taxable maximum limit.

As Chart 11 illustrates in the case of the three 

payroll tax increase scenarios described above, 

earlier action (Scenario 1)  could also build-up 

Trust Fund surpluses in an attempt to “prefund” future obligations. The economic impact 

of building up a Trust Fund surplus depends 

on whether it contributes to national savings 

and future economic growth or not. Trust Fund 

surpluses can contribute to national savings if 

the existence of the surpluses does not change 

government spending and tax rates. If Trust Fund 

surpluses cause government spending to be higher 

or non-Social Security taxes to be lower than they 

otherwise would have been, then those surpluses 

would not be contributing to national savings.16

To the extent that higher national savings boosts 

16 The buildup of Trust Fund surpluses can also affect private 

savings behavior. See Peter Diamond, “Social Security, the 

Government Budget and National Savings,” in Samuelsonian 

Economics and the Twenty-First Century, edited by Michael 

Szenberg, Lall Ramrattan and Aron A. Gottesman, Oxford 

University Press, 2006.

economic and earnings growth, building up a Trust 

Fund that increases savings would help to ease the 

burden of financing the total 75 year deficit.

Research on the topic has supported both conclusions, with a larger body concluding that the 

Social Security Trust Funds have not increased 

national savings.17 And there is considerable skepticism that future Congresses would implement 

strict budget discipline if policy changes to restore 

Social Security to 75 year solvency generated larger 

Trust Fund surpluses.18

From a strict empirical standpoint, however, it 

is impossible to observe what government spending or taxes would have been in the absence of a 

particular surplus, and thus to say definitively how 

much higher or lower national savings would have 

been had the Trust Fund surpluses not existed. This 

presents a significant challenge to policy makers 

who essentially confront an even chance that 

future Trust Fund surpluses would be dissipated. 

If they are to implement reforms that significantly 

build up the Trust Funds, policy makers will have 

to devise a better system for saving the surpluses.

17 Nataraj, Sita; John B. Shoven (2004). Has the Unified Budget 

Undermined the Federal Government Trust Funds? National Bureau 

of Economic Research, Inc, NBER Working Papers: 10953. http://

www.nber.org/papers/10953.; Samwick, Andrew A. (1999). 

“Social Security Reform in the United States.” National Tax 

Journal LII (4); Feldstein, Martin S.; Jeffrey B. Liebman (2001). 

Social Security. National Bureau of Economic Research Working 

Paper 8451 (September).

18 For example, see CBO long-term budget outlook for 2010 – the 

alternative baseline scenario, and 2010 Medicare Trustees Report.

Chart 11: Trust Fund Ratios for 3 Payroll Tax Increase Scenarios and Present Law, 2010-2084

0 

100 

200 

300 

400 

500 

600 

2010 2020 2030 2040 2050 2060 2070 2080 

Trust Fund Ratio 

Scenario 1: Increase 2.2% 2010-2084 

Scenario 2: Increase 4.1% 2037-2084 

Scenario 3: "Pay as You Go" Rate Starting 2032 

Present Law 

Source: Social Security Administration’s Office of the Chief Actuary calculations
20 Social Security: Why Action Should Be Taken Soon
Social Security: Why Action Should Be Taken Soon 21

To address the long-term financing shortfall in the Social Security program, policy makers 

really only have three choices: increase revenues, 

reduce scheduled benefits, or implement some 

combination of both. There are numerous ways to 

accomplish these objectives. Raising additional 

revenue, for example, could be accomplished by 

increasing payroll tax rates, expanding the tax base 

under existing rates, or devoting additional revenues from general revenues, among other options. 

Reducing program spending, for example, could be 

accomplished by reducing benefits for those with 

higher incomes, reducing annual cost of living 

adjustments for all beneficiaries, or increasing the 

full retirement age for future retirees, among other 

options. Numerous options are described below in 

some detail and summarized in Appendix I.

Legislative proposals to address Social Security’s 

solvency usually include a variety of provisions. 

Some are composed almost exclusively of different 

ways to increase revenue, some exclusively to reduce 

benefits, while others include combinations of revenue increases and benefit cuts. The next section of 

this report describes several recent proposals that 

include such combinations as well as provisions that 

address multiple objectives, such as benefit adequacy 

and equity that are achieved by reducing particular 

revenues and increasing particular benefits. Readers 

should bear in mind that because different policy 

changes interact with each other, the financial effect 

of multiple policy changes implemented together is 

not necessarily the same as the sum of the effect of 

individual policy changes.

Which options are included?

This section describes ideas proposed by 

numerous lawmakers, organizations and policy 

experts to reduce the financial shortfall of Social 

Security by varying degrees over the next 75 years. 

Some options included in previous versions of this 

report but which are rarely discussed in policy 

circles today have been dropped. Several new ideas 

and approaches developed since the 2005 report 

have been added and are highlighted below. We 

emphasize that inclusion on this list of policy 

options is not in any way an endorsement by the 

Advisory Board for adopting any specific proposal.

This list of options is not exhaustive. It only 

includes provisions that have been scored by the 

Social Security Administration’s Office of the Chief 

Actuary for the purpose of calculating their financial effects. Some are provisions that are included 

in larger proposals that are comprised of numerous 

changes, while others were submitted to the actuaries as a menu of individual options. Furthermore, 

some of the options included in this report were 

selected from what are often numerous variations 

of the same idea. Alternative specifications often 

vary the level of change, the date of implementation, the period in which changes are phased in, 

the duration they would last, or the populations to 

which they apply.19

Only provisions that improve the program’s 

solvency are included here. Readers should be aware 

that there are many policy reforms designed to 

address other objectives: to improve the adequacy 

of benefits for some or all beneficiaries, to resolve 

perceived inequities in how the program impacts 

various groups, to provide incentives for working 

19 For other lists of policy options see the website of the Social 

Security Administration’s Office of the Chief Actuary: http://

www.ssa.gov/OACT/solvency/provisions/index.html; CBO, 

Social Security Policy Options, July 2010; Special Committee 

on Aging United States Senate, Social Security Modernization: 

Options To Address Solvency and Benefit Adequacy, May 13, 2010; 

and, Virginia P. Reno and Joni Lavery, Fixing Social Security: 

Adequate Benefits, Adequate Financing, National Academy of Social 

Insurance (2009).

Options to Address the Long-Range 

Solvency Problem and Their Impact
22 Social Security: Why Action Should Be Taken Soon

longer, or saving more. One exception is that we 

describe, in general, proposals to restructure the 

Social Security system by creating individual 

investment accounts that would supplement or 

replace part of the present Social Security system.

Measuring the impact of policy changes

This section focuses, somewhat narrowly, on 

the financial impact of each policy option on the 

projected long-range gap between Social Security’s 

revenues and expenditures. Specifically, we report 

estimates by the Social Security Administration’s 

Office of the Chief Actuary of the impact each policy 

change would have on the cumulative 75 year deficit (known as the actuarial deficit)20 and the size 

of that deficit in the 75th  year of the projection. 

All of the estimates described below are based on the 

2009 intermediate assumptions of the Social Security 

Trustees and the projection methodology employed 

by the Social Security actuaries.

21 In 2009, the size 

of the 75  year (2009-2083) actuarial deficit was 

2.0  percent of taxable payroll, a measure of all 

earnings subject to the OASDI payroll tax. The size 

of the deficit in the 75th year of the projection gives 

an indication of the on-going direction of the system’s finances at the end of the projection horizon. 

In 2009, the deficit in 2083 was projected to be 

4.34 percent of taxable payroll, considerably larger 

than the average over the 75 year period, indicating 

that the deficit will still be growing at that time.

Focusing only on the results of the projection 

under the intermediate or best guess assumptions can give the mistaken impression that 

the projected outcome is more certain than it is. 

The Chief Actuary’s office does not publish such 

“range” calculations; however, its models could be 

used to inform policy makers of the chance that 

implementing a certain policy has of reaching its 

objective. For example, a given increase in the 

payroll tax rate may have a 50  percent chance of 

20 The actuarial deficit is the sum of (a) the initial Trust Fund 

balance, (b) the present value over 75 years of the stream of 

revenues minus the stream of outlays, and (c) the cost in present 

value of holding in reserve one year’s worth of benefits in the 

Trust Fund at the end of the period.

21 CBO also estimates the long-range financial impact of policy 

alternatives. Its projections are based on a somewhat different 

type of projection model and use economic assumptions that 

tend to be somewhat more optimistic than those used by the 

Trustees, but overall the results are similar.

resolving the entire 75 year deficit, but a higher tax 

rate would be necessary to have 90 percent confidence of resolving the entire deficit.

Although they are beyond the scope of this 

report, there are other important ways to evaluate the impact of changes proposed to improve the 

long-range solvency of the program that policy 

makers can and should consider. Most important 

are the ways that various groups in the population would fare under alternative reforms. Policy 

makers should consider how each change impacts 

workers and retired or disabled beneficiaries in 

successive generations, at various ages, by gender, 

race, income, and marital status among other 

attributes. Even if the main objective of policy is to 

achieve long-term solvency, those polices will also 

impact the adequacy of benefits or the equitable 

treatment of workers and beneficiaries, and before 

action is taken, the full set of tradeoffs each choice 

requires should be understood.

Many different tools and measures have been 

developed to evaluate the budgetary and distributional consequences of Social Security policy 

alternatives and several recent reports have 

described some of those consequences for some 

policy alternatives.22 We believe wider use of these 

tools is appropriate and necessary and that their 

further development and refinement within government, academia, and the private sector should be 

encouraged. In this report, however, we mainly use 

two standard metrics – the change in the 75  year 

actuarial deficit and the 75th year’s annual deficit – 

to describe the effects of alternative policy options.

Each of the policy options included in this report 

are scored and described in more detail on the website of the Social Security Administration’s Office of 

the Chief Actuary. The letter and number combinations at the end of the description of each option 

22 For a discussion of the distributional consequences of specific 

reforms, see Jagadeesh Gokhale Social Security: A Fresh Look at 

Policy Alternatives, University of Chicago Press, 2010; CBO, Social 

Security Policy Options, July 2010; CRS, Options to Address Social 

Security Solvency and Their Impact on Beneficiaries: Results from the 

Dynasim Microsimulation Model, Report RL33840, January 29, 

2007; Social Security Administration, Office of Retirement and 

Disability Policy, Policy Brief Series: Distributional Effects of 

Raising the Social Security Payroll Tax (April 2010); Distributional 

Effects of Raising the Social Security Taxable Maximum, (July 2009); 

Distributional Effects of Reducing the Cost-of-Living Adjustments

(November 2008) and Distributional Effects of Increasing the 

Benefit Computation Period (August 2008).
Social Security: Why Action Should Be Taken Soon 23

below reference the equivalent solvency provisions 

on the Actuary’s website. (See http://www.ssa.gov/

OACT/solvency/provisions/summary.html.)

Options That Reduce Scheduled Benefits

The formula for Social Security retirement benefits is based on a worker’s career earnings. First, 

the worker’s past earnings are indexed upward to 

account for past growth in average wages across 

the entire economy.23 Second, the highest 35 years 

of indexed earnings are used to calculate the worker’s averaged indexed monthly earnings or AIME. 

Third, the initial retirement benefit is calculated 

by adding together: 90 percent of AIME up to the 

(annually determined) first dollar threshold ($761 

in 2010); 32  percent of AIME between the first 

and second dollar threshold ($4,586 in 2010) and 

15  percent of AIME above the second dollar 

threshold until the (annually determined) taxable 

maximum. The dollar thresholds are called bend 

points and the final result is called the Primary 

Insurance Amount (PIA) which equals the initial 

retirement benefit if benefits are first claimed at 

full retirement age. (The worker’s PIA also is used 

to calculate benefits for dependents or survivors.) 

The initial benefit amount is adjusted downward 

for those who claim retirement benefits before 

their full retirement age. Alternatively, benefits 

may be adjusted upward if the worker delays retirement by not claiming benefits until after reaching 

full retirement age. Individuals of any age who continue to work after they begin to receive benefits 

may have their monthly benefit amount recalculated if the additional year’s earnings are higher 

than any annual amount previously included 

in their 35  year average. The dollar thresholds 

(bend points) are increased each year according to 

growth of average wages across the entire economy. Once an individual begins collecting benefits, 

the monthly amount may be increased each year to 

keep pace with inflation through an annual cost of 

living adjustment (COLA).

23 An individual’s earnings up to two years before eligibility (currently age 60) are indexed to average wage growth to ensure that 

a worker’s future benefits reflect the general rise in the standard 

of living that occurred during his or her working lifetime years 

with no earnings are entered into the average as 0s. After age 60 

nominal earnings are used in the benefit formula without any 

indexation.

Options to reduce the shortfall in Social 

Security systems long-term financing can alter 

benefit formulae at any and all of the computation 

steps described above.

Options to increase the career earnings 

averaging period

At the present time, benefits are calculated 

based on a worker’s highest 35  years of earnings 

up to a certain maximum. Adding additional years 

of lower earnings to the calculation will reduce 

future benefits for most workers. Lengthening the 

averaging period could serve as an incentive for 

workers to lengthen their working careers.24 It is 

also fairer to those who start work at younger ages, 

for example, without college education, and who 

typically have longer working careers.

OPTION 1: Increase the career averaging period to 

38 years

A gradual increase of the averaging period by 

three years, from 35 to 38, used to calculate retirement and survivor benefits (but not for disability 

benefits) would eliminate 15 percent of the 75 year 

actuarial deficit and 10 percent of the 75th year’s 

deficit. [OACT B4.125]

OPTION 2: Increase the career averaging period to 

40 years

A gradual increase in the averaging period by 

five years, from 35 to 40, used to calculate retirement and survivor benefits, (but not for disability 

benefits) would eliminate 23 percent of the 75 year 

actuarial deficit and 17 percent of the 2084 deficit. 

[OACT B4.2]

OPTION 3: Increase the career averaging period to 

40 years and also apply to disabled worker benefits

A gradual increase in the averaging period 

by five years, from 35 to 40, used to calculate all 

24 Many workers experience higher than lifetime average earnings during the latter part of their careers. If those workers 

postpone retirement and benefit collection to offset the benefit 

reducing effects of this change, the system’s solvency could be 

enhanced by more than is reported here because of additional 

payroll tax revenues.

25 Each of the policy options included in this report are scored 

and described in more detail on the website of the Social Security 

Administration’s Office of the Chief Actuary. The letter and number combination reference the equivalent solvency provision on 

the Actuary’s website. See http://www.ssa.gov/OACT/solvency/

provisions/summary.html.
24 Social Security: Why Action Should Be Taken Soon

benefits would reduce the 75 year actuarial deficit 

by 32  percent and the 75th  year’s shortfall by 

24 percent. [OACT B4.3]

The effect on individual benefits of extending the career earnings averaging period beyond 

35 years would depend on the worker’s earnings history. For some workers with long careers and steady 

earnings, it would have no effect. For others, benefits could be reduced by up to 8 percent. On average, 

it would likely reduce benefits by about 3  percent. 

Workers with fewer years of earnings than average 

(including women who may have care-giving years 

outside of the paid workforce) would tend to have a 

larger reduction on their own earnings record.

Options to reduce initial scheduled benefits 

across-the-board

OPTION 4: Reduce initial benefits by 3 percent

An across-the-board benefit reduction of 

3  percent for new beneficiaries starting in 2010 

would eliminate 18 percent of the 75 year actuarial deficit and 12 percent of the 75th year’s deficit. 

[OACT B6.1]

OPTION 5: Reduce initial benefits by 5 percent

An across-the-board benefit reduction of 5 percent for new beneficiaries starting in 2010 would 

eliminate 31 percent of the 75 year actuarial deficit 

and 19 percent of the deficit for 2084. [OACT B6.2]

Options to the change the rules for indexing initial 

benefits 

Initial benefit levels for those reaching eligibility each year are automatically modified by a 

set of “wage-indexing” rules that have the effect of 

maintaining an approximately constant percentage replacement of career pre-retirement earnings. 

Such wage indexing incorporates higher wage 

levels, on average, thereby increasing AIMEs at the 

average rate of long-term wage growth. Allowing 

initial benefits to grow with average wages in 

the economy is intended to maintain a constant 

standard of living in retirement relative to one’s 

working years.26 These rules could be modified in 

26 Prior to 1972, no automatic increases were provided so both 

replacement rates and the purchasing power of benefits would deteriorate over time, and the system would become over-financed 

as earnings levels increased until Congress would take action to 

raise benefit levels on an ad hoc basis.

any number of ways to provide smaller increases in 

initial benefit levels. Earnings for all workers could 

be indexed to a growth rate that is smaller than the 

growth of average wages, for example, somewhere 

between the growth rates of wages and prices. In 

addition, larger reductions could be made in the 

indexing growth rate applicable for higher earners 

than for lower earners.

OPTION 6: Indexing initial benefits to prices rather 

than wages

One alternative to the present system would 

be indexing initial Social Security benefits to price 

inflation rather than to wage growth. This would 

freeze the purchasing power of benefits at the 

level in effect at the time of the change and would 

result in a continual decline in the percentage of 

pre-retirement earnings that benefits replace. 

Price indexing would more than eliminate the 

present 75  year actuarial deficit, accumulating 

to 114 percent of that deficit, and would result in 

65 percent more than the amount needed to close 

the shortfall in the 75th year. If this were the only 

reform enacted, it would result in an over-financed 

system. [OACT B1.1]

OPTION 7: Progressive price indexing

This is a hybrid approach. For individuals in 

the lowest part of the earnings distribution, benefits would be indexed according to wage growth 

as in the current law. For those at the highest 

earnings level, benefits would be indexed by the 

growth of prices. For those at intermediate earnings levels benefits would be indexed on a sliding 

scale between wage and price indexing. These 

approaches would affect the deficit by somewhat 

less than shifting to price indexing for all workers 

depending on how much progressivity is introduced. Maintaining current law wage indexing 

for all workers at the 30th  percentile of lifetime 

earnings and below, price indexing earnings for 

the highest earners, and a sliding scale for those in 

between would reduce the 75 year actuarial deficit 

by 66 percent and the 2084 shortfall by 91 percent 

if implemented beginning with those workers first 

eligible in 2016. [OACT B1.2]

The relative earnings threshold below which 

workers would be exempted from benefit reductions is changeable. Exempting workers with 

career average earnings below the 40th percentile 

from some measure of price indexing would reduce 
Social Security: Why Action Should Be Taken Soon 25

the 75 year actuarial deficit by 55 percent and the 

75th  year’s shortfall by 76  percent. [OACT  B1.3] 

Exempting workers with career average earnings 

below the 60th  percentile from some measure of 

price indexing would reduce the 75 year actuarial 

deficit by 31 percent and the 75th year’s shortfall 

by 36 percent. [OACT B1.5]

OPTION 8: Progressive reduction of initial benefits 

for top 70 percent of earners

Under this proposal the highest earners would 

have the largest benefit reductions while workers with lifetime earnings below some threshold 

would not be affected. Rather than anchor the 

reduction to changes in the indexing of workers’ 

wages, the reduction in benefits for those with the 

highest earnings is held constant. 

One such proposal would maintain currentlaw benefits for earners at the 30th percentile and 

below and reduce the upper two PIA formula factors (32 percent and 15 percent) such that workers 

with highest earnings (at the taxable maximum 

for 35 years) would have their benefit reduced by 

1.1  percent per year as compared to current law 

benefits. Note that for some workers with intermediate earnings only the 32 percent bend point 

applies. Hence, the reduction of their benefits 

would be less than 1.1 percent per year. Disability 

benefits are not affected by the proposal. Disabled 

worker beneficiaries, upon attaining normal 

retirement age, would be subject to a proportional 

reduction in benefits based on the worker’s years 

of disability. If the reduction is applied to individuals who become newly eligible for benefits in 2012 

through 2061, the 75 year actuarial deficit would 

be reduced by 67 percent and the 75th year’s deficit 

by 77 percent. [OACT B3.6]

OPTION 9: Index initial benefits to life expectancy

Reductions in scheduled benefits could also 

be implemented by altering the benefit formula 

according to improvements in life expectancy.27

Indexing benefits to longevity for workers who 

become eligible for early retirement benefits at 

age 62 in 2019 (born in 1957) and younger would 

27 The PIA factors in the benefit formula would be multiplied by 

the ratio of life expectancy at 67 for 2014 to the life expectancy 

at age 67 for the fourth year prior to the year of benefit eligibility. Unisex life expectancies, based on period life tables, would be 

used as projected by the Social Security Administration’s Office 

of the Chief Actuary.

reduce the 75 year actuarial deficit by 28 percent 

and the 75th  year’s deficit by 44  percent. If life 

expectancy increased more rapidly than expected, 

scheduled benefits would be reduced at a faster 

pace. If life expectancy improved less rapidly than 

expected the reductions would occur more slowly. 

But this approach would automatically regulate 

total lifetime benefits of successive retiree generations in favor of maintaining the system’s solvency. 

[OACT B2.1]

Options to gradually reduce initial scheduled 

benefits by reducing PIA factors

OPTION 10: Gradually reduce top two PIA formula 

factors for new beneficiaries

For each year from 2010-2040, multiply the 32 

and 15 percent formula factors by 0.987, reducing 

the factors to 21  percent and 10  percent respectively, for those newly eligible for benefits in 2040 

and later. This provision would reduce the 75 year 

actuarial deficit by 76 percent and the annual deficit in the 75th year by 68 percent. [OACT B3.1]

OPTION 11: Gradually reduce all three PIA factors

Gradually reducing all three benefit formula 

factors by 0.991 in each year 2013 through 2041 

for beneficiaries newly eligible in 2013 and later 

would reduce the 75  year actuarial deficit by 

73  percent and the 75th  year’s deficit by 72  percent. For workers first eligible (at age 62) for OASI 

benefits in 2041 and later the formula factors 

would be reduced by 23 percent to 69.2, 24.6 and 

11.5  percent respectively. Upon conversion from 

disabled worker to retired worker benefits, benefit 

levels would be proportionally reduced based on 

the fraction of years the individual was not disabled between ages 22 and 62. [OACT B3.4]

If the upper formula factor were reduced at a 

constant rate over the period of 2012 to 2049 and 

the lower and middle formula factors were reduced 

at a constant rate between 2017 to 2054 such 

that the formula factors fell from 90  percent to 

67.6 percent, 32 percent to 16 percent, and 15 percent to 7.5 percent, it would eliminate the 75 year 

actuarial deficit, and more than all of the shortfall 

in the 75th year. [OACT B3.2]
26 Social Security: Why Action Should Be Taken Soon

Options to reduce the Social Security cost-ofliving adjustment

Social Security benefits are protected against 

increases in the cost of living. Typically, all those currently receiving benefits will see their dollar benefit 

amount increase each year by the increase in the 

Consumer Price Index for Urban Wage Earners and 

Clerical Workers (CPI-W).28 Some experts believe 

that the CPI-W overstates inflation, so some proposals would reduce the COLA by a set amount or 

base it on an inflation index that rises more slowly 

than CPI-W. Others believe that the CPI-W does 

not adequately measure the importance of certain 

goods and services that increasingly dominate the 

budgets of older Americans, such as health care 

costs and propose that COLAs should actually be 

increased.29

OPTION 12: Reduce COLA by 1 percent

A reduction in the cost-of-living increase 

of 1  percentage point below the CPI beginning 

in 2010 would eliminate 78  percent of the average 75 year actuarial deficit and 50 percent of the 

75th year’s deficit. [OACT A1]

OPTION 13: Reduce COLA by 0.5 percent

A COLA reduction of 0.5  percentage point 

below CPI would eliminate 41  percent of the 

75  year actuarial deficit and 26  percent of the 

75th year’s deficit. [OACT A2]

OPTION 14: Adopt “chained” CPI as basis for COLA

An alternative measure known as the “chained” 

CPI is based on the observation that rising prices 

lead consumers to substitute similar but cheaper 

goods and services in their purchases. Under the 

chained CPI measured annual priced increases 

on which the COLA would be based would tend, 

on average, to be smaller by roughly 0.3 percentage points than under the current CPI-W. Basing 

28 There was no COLA in 2010 and 2011. See footnote 11. 29 Rudolph Penner, Adjusting Social Security Benefits for Changes 

in the Cost of Living, Urban Institute, July 2010; CBO, Using a 

Different Measure of Inflation for Indexing Federal Programs and 

the Tax Code, February, 2010. The experimental Consumer Price 

Index for the Elderly has risen roughly 0.2 percentage points 

faster than the CPI-W. If implemented in 2012, basing the COLA 

on the CPI-E would increase the 75 year actuarial deficit by about 

0.34 percent of taxable payroll according to recent estimates by 

the Social Security Administration’s Office of the Chief Actuary 

based on assumptions in the 2010 Trustees Report.

the annual COLA on the “chained” CPI, would 

eliminate about 25 percent of the 75 year actuarial 

deficit and 16  percent of the 75th  year’s deficit. 

[OACT A3]

OPTION 15: Adopt “chained” CPI as basis for COLA, 

but do not apply to disabled worker benefits

The new COLA would apply to all OASI benefits. This would not apply to disabled workers 

who convert to retired workers at the full retirement age. This would eliminate about 18 percent of 

the 75 year actuarial deficit and 12 percent of the 

75th year’s shortfall. [OACT A4]

These changes in the COLA would reduce costof-living increases for all individuals who receive 

benefits after the changes are effective, including 

both current and future beneficiaries. Because the 

changes would be cumulative, their effect would 

grow over time. The impact would be greatest for 

those who receive benefits the longest: Long-lived 

retirees, and those who had been on disability at 

early ages. After 10 years, a reduction in the COLA 

of 1 percent per year would reduce benefits below 

those provided in current law by 10.5 percent, and 

after 20  years, by 22  percent. For a COLA reduction of 0.3 percent, after 10 years benefits would 

be 3  percent lower than currently provided, and 

after 20 years, 6.2 percent lower.

Options That Reduce Benefits By Increasing 

the Retirement Age

Under current law, full retirement benefits 

are payable if taken at or after the full retirement 

age (FRA), which is now scheduled to increase to 

age  67 for those born in 1960 (first eligible for 

benefits at age  62 in 2022). Benefits may now 

be taken as early as age 62, but are permanently 

reduced so that, on average, the same total 

lifetime benefits are payable regardless of whether 

benefits are taken at 62, at the FRA, or somewhere 

in between.30 Increasing the full retirement age, 

therefore, has the effect of reducing the level of 

benefits. Future beneficiaries who claim benefits 

before FRA receive smaller benefits, and those 

who claim at FRA receive them for fewer months 

during retirement. Because life expectancy is 

30 Benefits are increased for each year that a worker delays claiming retirement benefits after the full retirement age up to age 70.
Social Security: Why Action Should Be Taken Soon 27

increasing, the lifetime benefits payable for any 

given full retirement age will continue to increase, 

increasing the cost of the program.

OPTION 16: Speed up the scheduled increase in 

FRA to 67

Speeding up the scheduled increase in the full 

retirement age so that it is fully in effect for those 

who turn age  62 in 2010 (born in 1948 or later) 

would eliminate 4  percent of the 75  year actuarial deficit. It would have no impact on the annual 

deficit in the 75th  year. The currently scheduled 

increase in the normal retirement age to 67 will 

lower the benefit payable at age  62 to 70  percent 

of the full retirement age benefit compared to an 

80 percent reduction when full benefits were payable at age 65. [OACT C1.1]

OPTION 17: Speed up the increase to 67 and 

gradually increase the FRA to 68

If in addition to speeding up the increase to 

age 67, the age was further increased to 68 at a rate 

of one month every two years, the 75  year actuarial deficit would be reduced by 23  percent, and 

the 75th year’s annual shortfall would be 17 percent smaller. The full retirement age of 68 would 

be fully in effect for those reaching age 62 in 2039 

(born in 1977). [OACT C1.2]

OPTION 18: Speed up the increase to 67 and 

gradually increase the FRA to 70

At a rate of one month every two years, 

increasing the full retirement age to 70 would be 

fully in effect for those reaching 62 in 2087 (born 

in 2025). This would eliminate 31  percent of the 

75 year actuarial deficit and 33 percent of the 2084 

shortfall. [OACT C1.3]

OPTION 19: Index retirement ages to life 

expectancy

One way to offset the additional cost of paying 

benefits over longer life spans would be to gradually and automatically increase the full retirement 

age to keep pace with longevity increases. Speeding 

up the increase to age  67 by one year (to 2021), 

and indexing the full retirement age to longevity 

such that the ratio of expected retirement years 

to potential work years remains constant, would 

reduce the 75 year actuarial deficit by 21 percent, 

and the 75th  year’s deficit by 28  percent. Under 

the current assumptions of future improvements 

in life expectancy, this proposal would have 

roughly the same effect on the system’s long-term 

financing as increasing the full retirement age by 

one month every two years. [OACT C1.6]

CHART 12: Illustrating Alternative Trajectories for the Normal Retirement Age

66.0 

66.5 

67.0 

67.5 

68.0 

68.5 

69.0 

69.5 

70.0 

2010 2020 2030 2040 2050 2060 2070 2080 

Current Law 

Option 16-Speed up Increase to 67 

Option 17-Raise to 68 

Option 18-Raise to 70 

Option 19-Index to Longevity 

Source: Calculation by the Social Security Advisory Board based on memos from the Social Security Administration’s Office of 

the Chief Actuary
28 Social Security: Why Action Should Be Taken Soon

OPTION 20: Increase the earliest eligibility age 

(EEA) along with the FRA

As the full retirement age rises, one possibility to prevent a decline in benefit levels for early 

retirees would be to increase the earliest eligibility 

age along with increases in the full retirement age.

One proposal would begin in 2012 to increase 

both the EEA and FRA applied to retired worker 

benefits until the EEA reaches age 63 and the FRA 

reaches age 67 for those attaining age 62 in 2017. 

Both the EEA and FRA would then be indexed to 

maintain the then estimated ratio of life expectancy to potential working years (roughly a pace 

of one month every two years, under the Trustees 

current assumptions). This would reduce both 

the 75  year actuarial deficit and the 75th  year’s 

deficit by 28 percent. [OACT C2.2] By comparison, 

increasing only the early eligibility, but not the 

full retirement age would have almost no effect 

on future deficits because forcing a delay in benefit collection in this manner would be fully offset 

by an actuarially fair increase in benefits awarded. 

Indeed, this policy might increase the deficit very 

slightly as more workers apply for disability instead 

of early retirement after attaining age 62.31

Increasing the full retirement age and the initial eligibility age could induce workers to extend 

their careers or to accumulate additional resources 

to cover their income needs in the years prior to 

Social Security eligibility. It would also affect many 

employment-based pension plans that include 

early retirement incentives and pension offsets 

against Social Security benefits. Such a change 

would also affect individuals with disabilities who 

might have difficulty working at older ages. Some 

of the savings from increasing the full retirement 

age could be offset by expenditures resulting from 

increased disability benefits. To the extent that 

these changes would motivate more people to work 

longer than they otherwise would have, federal 

and state income tax revenue would also increase.

OPTION 21: Convert disability to retirement at 

the EEA

To limit the incentive to apply for disability 

benefits as retirement ages increase, one proposal 

would convert disabled beneficiaries to retired 

31 The exact amount of the impact would depend on what conforming changes were made to the benefit computation rules. 

[See http://www.ssa.gov/OACT/solvency/provisions/summary.

html OACT solvency provision C2.1.]

status upon attainment of their EEA (rather than 

their FRA) starting in 2012. The applicable early 

retirement reduction at EEA (currently 25 percent) 

would be phased in over 40 years for those converting from disability. Medicare eligibility for those 

who are still medically disabled would continue. 

After 2011, disability applications would not be 

accepted for those who would start benefits at ages 

higher than EEA. This would reduce the 75  year 

actuarial deficit by 18 percent and the 75th year’s 

deficit by 17 percent. [OACT C2.3]

Options That Increase Revenue

Social Security benefits are primarily financed 

on a pay-as-you-go basis by payroll taxes on covered 

workers’ earnings. Workers and employers each 

pay payroll taxes at a rate of 6.2  percent, while 

the self-employed pay full 12.4  percent on their 

labor earnings.32 Social Security payroll taxes are 

only collected on wages up to a maximum amount 

set by law and indexed each year to increase with 

the national average of all wages in the economy. 

For 2010, the taxable maximum level of earnings 

is $106,800.33 Approximately 85  percent of all 

earnings are covered by the payroll tax, and about 

6 percent of all workers have wages that exceeds 

the maximum in a given year.34 Social Security 

benefits are also subject to income taxes above 

certain income thresholds, and the proceeds 

from those taxes are credited to the Social 

Security Trust Funds. The options to increase 

Social Security’s revenue include alternatives that 

32 In competitive labor markets employers would pass on almost 

the entire cost of payroll taxes to employees through lower 

wages, resulting in employees ultimately paying the full 12.4 percent payroll tax.

33 The taxable maximum is not increased in years in which there 

is no COLA. The taxable maximum in 2010, therefore, was the 

same as in 2009.

34 According to the 2010 Trustees Report (section V.C.3, 

page 116): “The portion of covered earnings that is taxable (i.e., 

at or below the base) was about 89.5, 86.8, and 82.8 percent for 

1983, 1994, and 2000, respectively. This ratio of taxable earnings 

to covered earnings rose to about 85.8 for 2002, and then fell in 

subsequent years to reach 82.3 for 2007. The average annual rate 

of change in the ratio was about -0.4 percent between 1983 and 

2007. Most of this decline was due to a relative increase in wages 

for high earners. The ratio rose to 83.5 percent for 2008 and 

further to 85.3 for 2009, largely due to a recession-induced reduction in the relative amount of wages of high earners. The taxable 

earnings ratio is projected to decline as the economy recovers, 

reaching levels for 2019 of 83.6, 82.8, and 82.1 percent for the 

low-cost, intermediate, and high-cost assumptions, respectively. 

After 2019, the taxable-to-covered earnings ratio is approximately constant.”
Social Security: Why Action Should Be Taken Soon 29

enhance existing revenue streams – payroll taxes 

and income taxes on benefits – as well as proposals 

to add new revenue sources. As discussed in the 

next section, the addition of new revenue sources 

could even accommodate reductions of payroll 

tax rates.

Options to increase Social Security payroll tax rates

Increasing payroll tax rates would not affect 

those already retired and receiving benefits and 

would have a limited effect on those close to retirement. It would have the greatest effect on young 

workers and those not yet in the workforce who 

would pay increased taxes over most or all of their 

working lifetime. All employers of covered workers would also contribute. In all of the options 

described below, in order to sustain positive Trust 

Fund balances beyond the 75  year horizon, tax 

rates would have to be increased again slightly in 

the 76th year. By comparison, a tax rate increase 

of 3.3 percent of taxable payroll starting this year, 

would provide just enough revenue to pay scheduled benefits indefinitely but it would create very 

large balances in the Trust Fund during the next 

few decades.

 OPTION 22: Increase payroll tax rates by 

2.2 percent in 2010

An increase from the current 12.4 percent of 

taxable earnings (6.2 percent each for workers and 

their employers) to 14.6  percent in 2010 would 

eliminate the 75  year actuarial deficit and close 

50  percent of the 75th  year gap between income 

and outgo. [OACT E1.1]

OPTION 23: Increase payroll tax rates by 2 percent 

in 2022 and again in 2052

An increase in the tax rate of 2.0  percentage 

points to 14.4 percent in 2022 with an additional 

increase of 2.0 percentage points to 16.4 percent in 

2052 would eliminate the 75  year actuarial deficit and close 90 percent of the 75th year’s deficit. 

[OACT E1.2]

OPTION 24: Increase tax rates by 0.1 percent per 

year for 20 years

Gradually increasing the payroll tax rate by 

a total of 0.1  percent (employees and employers 

combined) per year for 20 years would result in a 

total rate of 14.4 percent by 2034. This provision 

would reduce the 75  year actuarial deficit by 

70  percent and the deficit in the 75th  year by 

46 percent. [OACT E1.4]

OPTION 25: Return to pay-as-you-go financing with 

100 percent Trust Fund ratio

If payroll tax rates were adjusted to maintain 

a balance in the Trust Fund just sufficient to pay 

100  percent of expected benefits the following 

year (a Trust Fund ratio of 100 percent), those rates 

would increase to 13.8 in 2032, to 16.3  percent 

from 2033 to 2042; decrease to 15.7 percent from 

2043 to 2067, and increase again to 16.3 percent 

from 2068 to 2083, and to 16.8 percent in 2084. By 

definition, these payroll tax rates would eliminate 

the 75 year actuarial deficit and the deficit in the 

75th year.

Options to increase the cap on earnings subject to 

the Social Security tax

In 2010, earnings in employment covered by 

Social Security that exceed $106,800 are neither 

subject to payroll tax nor considered for calculating benefits. This limit that determines the payroll 

tax and benefit base is increased each year by 

law to keep pace with increases in economy-wide 

average wages. Currently, about 85  percent of all 

covered earnings are below the taxable base, but 

this percentage has declined from about 90  percent in 1983. The share of workers with earnings 

over the cap has stayed steady at about 6 percent 

since 1983.

These provisions would raise additional 

revenues from higher-paid workers and their 

employers. Subjecting the top portion of earnings 

to higher marginal tax rates might induce behavioral responses such as reduced work hours and 

changes to the form of high earners compensation (e.g., from earnings to fringe benefits). How 

significant these behavioral responses would be in 

practice is open to debate.35

OPTION 26: Eliminate the taxable maximum, but do 

not count additional earnings toward benefits

Making all earnings covered by Social Security 

subject to the payroll tax beginning in 2010, but 

35 See CRS Report RL33944, Increasing the Social Security Payroll 

Tax Base: Options and Effects on Tax Burdens, by Thomas L. 

Hungerford and Martin Sullivan; “Budget Magic and the Social 

Security Tax Cap,” Tax Notes, March 14, 2005.
30 Social Security: Why Action Should Be Taken Soon

retaining the current law limit for benefit computations (in effect removing the link between 

earnings and benefits at higher earnings levels), 

would eliminate 116 percent of the 75 year actuarial deficit and 57  percent of the deficit in the 

75th year. [OACT E2.1]

OPTION 27: Eliminate the taxable maximum, and 

count additional earnings toward benefits

Eliminating the taxable maximum and counting all earnings toward benefit calculations would 

increase both revenue and benefits for the highest 

earning workers. It would reduce projected deficits 

by less than the previous option. If benefits were 

to be paid on the additional earnings, 95 percent 

of the 75  year actuarial deficit and 38  percent of 

the 2084 deficit would be eliminated. [OACT E2.2]

OPTION 28: Eliminate the taxable maximum, and 

count a smaller fraction of additional earnings 

toward benefits

Currently earnings above a certain dollar 

threshold but below the taxable maximum are 

credited to benefits at a rate of 15 cents for each 

dollar in earnings. This proposal would create a 

new threshold at the current taxable maximum 

and credit only 3  percent of earnings above the 

threshold.36 This provision would more than eliminate the 75  year actuarial deficit and eliminate 

50 percent of the 75th year’s deficit. [OACT E2.9]

36 All thresholds in the benefit formula increase when increases 

in the average wage index increases.

OPTION 29: Increase the taxable maximum to 

include 90 percent of all covered earnings, but do 

not count additional earnings toward benefits

Phased in over 10  years, this would increase 

the estimated maximum amount of earnings subject to Social Security taxes in 2019 to $315,000, 

compared to the projected level of $150,900 under 

present law (in current dollars). Making 90  percent of total earnings covered by Social Security 

subject to the payroll tax but not paying benefits 

on the additional earnings, phased in from 2010 

to 2019, would eliminate 47 percent of the 75 year 

actuarial deficit, and 25  percent of the deficit in 

the 75th year. [OACT E2.4]

OPTION 30: Increase the taxable maximum to 

include 90 percent of all covered earnings, and 

count additional earnings toward benefits

Setting the taxable maximum such that 

90  percent of total earnings covered by Social 

Security are subject to the payroll tax and paying 

benefits on the additional earnings, phased in 

from 2010 to 2019, would eliminate 37 percent of 

the 75 year actuarial deficit, and 14 percent of the 

deficit in the 75th year. [OACT E2.3]

OPTION 31: Eliminate cap for employers, raise to 

include 90 percent of earnings for employees and 

include additional earnings in benefit calculations

In this specification, the tax cap for employees 

would be increased by 2 percent over the current 

average wage index until 90  percent of covered 

earnings were under the cap. Employers would 

pay taxes on all earnings. This provision would 

0 

20 

40 

60 

80 

100 

120 

140 

Option 27

Eliminate Cap, 

Do Not Count Toward Benefits

Option 28

Eliminate Cap,

Count Toward Benefits 

Option 29

Raise Cap to 90%,

 Do Not Count Toward Benefits 

Option 30

Raise Cap to 90%, 

Count Toward Benefits

Option 33

Apply 3% Tax Above Cap, Do 

Not Count Toward Benefits 

Percent Reduction of 75 Year 

Actuarial Deficit 

Percent Reduction of 75th Year's 

Actuarial Deficit 

CHART 13: Impact of Raising the Cap on Earnings Subject to the Social Security Tax
Social Security: Why Action Should Be Taken Soon 31

eliminate 70 percent of the 75 year actuarial deficit, and 32 percent of the deficit in the 75th year. 

[OACT E2.11]

OPTION 32: Raise cap to apply to all earnings of 

95 percent of covered workers

Since the taxable maximum was indexed 

to the average growth in wages, the share of the 

employed population with earnings below the cap 

in a given year has remained relatively stable at 

roughly 94 percent. Raising the taxable maximum 

from $106,800 to $115,200 (in 2009 average wage 

indexed dollars) over three years would mean the 

earnings of about 95  percent of covered workers 

would fall below the cap. Implementing further 

changes to the average wage index and crediting additional earnings for benefit calculation 

purposes reduce the 75  year actuarial deficit by 

6 percent and the 75th year’s deficit by 2 percent. 

[OACT E2.7]

OPTION 33: Apply an additional payroll tax on 

earnings above the current taxable maximum

Another option is to apply a payroll tax rate 

smaller than the current 12.4 percent rate to covered earnings above the current taxable maximum. 

Some proposals would apply the tax only to wages 

well in excess of the current maximum. Applying a 

payroll tax of 3 percent on earnings above the current taxable maximum starting in 2010 and not 

crediting those earnings to benefits would reduce 

the 75 year actuarial deficit by 29 percent and the 

75th  year’s shortfall by 14  percent. [OACT  E2.6] 

Increasing the levy to 6 percent on earnings above 

the current taxable maximum would reduce the 

75 year actuarial deficit by 56 percent, and reduce 

the 75th year’s shortfall by 28 percent. [OACT E2.8]

Options to extend Social Security coverage of 

employment or earnings

Social Security coverage is virtually universal, 

with the largest excluded group being employees 

of a number of state and local governments who 

are covered by their own pension system. About 

25 percent of state and local government employees are not now covered by Social Security.

OPTION 34: Cover newly hired state and local 

government workers

A proposal to cover non-student state and 

local employees hired after January  1, 2010, 

would eliminate 9 percent of the 75 year actuarial 

deficit. Because the newly covered workers would 

ultimately qualify for benefits, the proposal adds 

slightly to deficits in the 75th year and beyond. The 

impact of this change would fall on those state and 

local governments whose employees are currently 

outside the Social Security system and on all individuals hired by these entities after the effective 

date of the change. [OACT F1]

OPTION 35: Subject employer provided group 

health benefits to OASDI payroll tax

The cost of employer provided group health 

– to employees and employers – is not subject to 

OASDI payroll taxes. Eliminating the deductibility of employees’ costs and counting the employer 

costs as if it is part of an employee’s wages for 

purposes of calculating taxes and benefits, would 

reduce the 75 year actuarial deficit by 57 percent 

and the 75th  year’s deficit by 22  percent. Both 

employees and employer taxes would be affected 

by this provision, and the size of the impact would 

depend in part of the growth in health care costs. 

Workers with more expensive health insurance 

plans would be impacted more than those with less 

expensive plans. [OACT F2]

Option to increase the portion of Social Security 

benefits subject to the income tax

OPTION 36: Tax Social Security benefits like private 

pensions

Under current law, Social Security benefits are 

taxable only if income is above specified thresholds. One alternative would be to phase out the 

thresholds and tax benefits in a manner similar 

to that for contributory private pension income. 

Phasing out the lower thresholds from 2010 to 

2019, taxing benefits similar to private pensions, 

and putting all additional revenue raised into 

the Social Security Trust Funds would eliminate 

14  percent of the 75  year actuarial deficit and 

4 percent of the 75th year’s deficit. Most beneficiaries would pay increased income taxes. However, 

because the income tax is structured to protect 

very low income people from paying taxes, beneficiaries with low income would still not pay any 
32 Social Security: Why Action Should Be Taken Soon

income tax on their benefits. [OACT H1] Phasing in 

the same changes over a 20 year period would have 

a very similar effect on Social Security’s finances. 

[OACT H2]

Other Options

Options to invest Social Security reserves in 

marketable securities

Since the 1983 reforms, the Social Security 

Trust Funds have accumulated large positive balances currently held entirely in non-marketable 

special issue Treasury bonds. Some advocate maintaining significant reserves and investing a portion 

in marketable bonds or equities in order to achieve 

a higher long-term rate of return. Existing government pension plans, such as for employees of 

the Federal Reserve System, the Tennessee Valley 

Authority, and the U.S. railroads and many plans 

at state and local levels of government already 

do make direct investments in stocks. Because 

the Social Security Trust Funds are so large, (and 

potentially larger if other options are enacted), 

adopting this strategy would require that the government’s role in managing investments in the 

stock market be addressed.

The financial impact of this proposal 

depends critically on methods of accounting for 

the riskiness of such investments. The Social 

Security actuaries evaluate the gains of investing 

in marketable securities using a variety of rates 

of return. In estimating proposals, the standard 

assumption is that the real interest rate on longterm Treasury bonds is about 2.9 percent and that 

investment in stocks would yield a 6.4 percent real 

rate of return, slightly below the average over the 

20th century of 7 percent (equivalent to an “equity 

premium” of 3.5  percent). They also estimate the 

accumulation of assets based on a rate of return of 

2.5 percent above the Treasury bond rate.

Many financial economists believe the proper 

way to account for these assets, however, is to 

recognize that higher returns are only available 

at the cost of higher risk. Trust Fund assets correspond to liabilities on the general government’s 

account and those liabilities are properly valued 

on a risk-adjusted basis. On a risk adjusted basis, 

future expected returns from investing in equities 

should be valued the same as investing in risk free 

Treasury bonds. There would be no impact on the 

long-term deficit. In other words, investment in 

higher return/higher risk securities does not provide a “free lunch.”

Another way of explaining this is if the value 

of Trust Fund equities was eroded significantly 

because of a future capital market collapse, the 

financial cost of continuing benefit payments 

as scheduled may have to be borne by workers’ through higher payroll taxes. Under equity 

investments by the Trust Fund, the cost of that 

risk to future taxpayers is increased compared to 

continuing Trust Fund investments in Treasury 

securities. The increased taxpayer risk is paid for 

in terms of the risk premium earned on the Trust 

Fund’s equities. But that risk premium should 

be credited toward counteracting the increased 

risk to future taxpayers and not, as some believe, 

toward a net improvement in the program’s longterm financial  condition.

The scoring of these types of reforms by Social 

Security’s actuaries (as listed below) suggest that 

they would reduce Social Security’s 75  year actuarial deficit and future annual deficits. However, 

for the reasons discussed earlier – such scoring 

incorporates an unwarranted “free lunch” into the 

estimated improvement in those two Trust Fund 

solvency metrics.

OPTION 37: Invest 40 percent of Trust Fund in 

equities

If in the future the return on stocks were 

3.5  percentage points higher than the rate of 

return for Treasury bonds, then a 40  percent 

investment in stocks phased in between 2010 and 

2024 would eliminate 34  percent of the 75  year 

deficit. [OACT G1] If the return on stocks averages 

2.5 percentage points higher than for bonds, then 

a 40  percent investment in stocks would eliminate 24 percent of the 75 year deficit. [OACT G2] 

Because the proposal does not fully eliminate the 

deficit under either assumption, it would, by itself, 

have no impact on the deficit in the 75th  year 

(by which time the Trust Funds would have 

been exhausted). On a risk-adjusted basis, such 

investments would be valued at the same rate as 

investment in Treasury bonds and would therefore 

have no expected impact on the long-term deficit. 

[OACT G3]
Social Security: Why Action Should Be Taken Soon 33

OPTION 38: Invest 15 percent of Trust Fund in 

equities

Under this proposal, Trust Fund assets would 

gradually (1.5  percent per year for 10  years) be 

invested in a broad index of equity market securities (such as the Wilshire  5000). Assuming a 

real rate of return of 6.4 percent would reduce the 

75 year deficit by 14 percent. Because the proposal 

does not fully eliminate the deficit under either 

assumption, it would, by itself, have no impact on 

the deficit in the 75th year (by which time the Trust 

Funds would have been exhausted). [OACT G4] On 

a risk-adjusted basis, such investments would be 

valued at the same rate as investment in Treasury 

bonds and would therefore have no expected 

impact on the long-term deficit. [OACT G5]

Options to create individual investment accounts

Social Security was designed and continues 

to operate as a defined benefit social insurance 

program. Monthly benefits are paid using a 

formula based on each worker’s lifetime earnings. 

The system is financed largely on a pay-as-you-go 

basis: today’s beneficiaries are paid benefits 

financed directly out of today’s payroll taxes 

levied on today’s workers and income taxes levied 

on the benefits of high-income Social Security 

beneficiaries, (and from assets in the Trust Funds 

when tax revenues fall below benefit obligations 

and the Trust Fund balance is positive). Some 

reform plans propose to re-structure the program 

so that it resembles a defined contribution plan. 

In a defined contribution plan, benefits are paid 

based solely on each worker’s contributions and 

accumulated earnings from investing those 

contributions. Defined contribution plans are 

savings programs, so the benefits can be said to be 

pre-funded.

There are two distinct forms of individual 

account plans that are distinguished by how they 

are funded. In the context of this report, it is 

important to note that neither type of plan would 

directly affect the long-term shortfalls in Social 

Security finances.37 So-called “carve-out” accounts 

redirect a portion of each worker’s current payroll 

37 Although establishing individual investment accounts does 

not address the systems solvency, past versions of this report 

have included a discussion of these proposals because of the 

prominence they have played in public policy debates over the 

past decade.

taxes into an individual account. So-called “addon” accounts would contribute funds from general 

revenues and/or require additional contributions 

from workers on top of current payroll taxes. 

Reform proposals include voluntary or mandatory participation and some proposals would allow 

additional contributions by workers. Estimating 

expected gains from either form of individual 

account should be on a risk-adjusted basis as 

described in the section on investing Trust Fund 

balances in marketable securities.

OPTION 39: Carve-out individual investment 

accounts

Some amount of current payroll taxes would 

be re-directed to an individual’s account where 

accumulated balances could be invested at the 

direction of the worker. Future benefits are paid 

from accumulated account balances and reduced 

traditional Social Security benefits. Because Social 

Security must continue to pay benefits to individuals who have already contributed to the current 

pay-as-you-go system, any transfer of payroll 

taxes from the Social Security Trust Funds into 

individual accounts would have to be offset from 

increases in other taxes, reductions in other government expenditures, or increased government 

borrowing from the public. These offsetting financial arrangements are sometimes referred to as 

“transition costs.”

OPTION 40: Add-on individual investment accounts

The current defined benefit system would 

remain as it is. Individual accounts would be 

funded by contributions from general revenues 

and/or from additional payroll taxes imposed on 

top of the current payroll taxes used to pay current 

beneficiaries. These proposals would not directly 

impact any revenues dedicated to the traditional 

system, and benefits from accumulated balances 

would be entirely in addition to traditional Social 

Security benefits.

Proponents of creating individual accounts 

believe it would provide risk diversification in 

retirement resources, increase private ownership 

of retirement assets, and enable individuals to 

control how their retirement funds are invested. 

Because balances would tend to increase the longer 

they are allowed to accumulate and the longer 

contributions are made, a defined contribution 

system may provide stronger incentives for longer 
34 Social Security: Why Action Should Be Taken Soon

working lives. During times of net accumulations 

in individual accounts (net of withdrawals for 

personal consumption), individual accounts would 

provide a mechanism to prevent surplus funds 

from being spent in the regular federal budget 

process, rather than saved. The flow of funds into 

individual accounts increases national savings and 

investment, increasing capital per worker which in 

turn increases labor productivity and ultimately 

expands the payroll tax base. Proponents of 

individual accounts also believe that the retirement 

system should be pre-funded by savings and not 

redistribute income within and across generations 

as under the traditional Social Security system.

Those who oppose creating (primarily 

“carve-out”) individual accounts maintain that 

the essential defined benefit social insurance 

character of Social Security works well and suits 

the needs of the American people. They oppose 

placing the additional burden of investment risk 

on individuals, especially as the private employer 

pension system is increasingly dominated by 

defined contribution plans. Opponents also believe 

that managing individual accounts will make more 

people vulnerable to fraud or mismanagement or 

poor decision-making. Protecting people from 

those risks would add to the administrative expense 

of an investment-based retirement system. Some 

maintain that the transition costs of a “carve-out” 

plan would be too high. Opponents also believe 

that individual accounts would disproportionately 

favor higher income investors.

Under an individual account system retirement 

resources would be exposed to additional market 

uncertainty, but it is not clear whether the total 

degree of uncertainty would increase or decrease 

upon shifting toward a defined contribution-type 

of Social Security system. That is because the 

need to resolve the current system’s outstanding 

financial imbalance through policy changes 

introduces “policy” uncertainty that may be no 

smaller than the market uncertainty facing Social 

Security individual account participants.

Chart 14 compares the impact on long-term 

solvency of several commonly discussed reform 

options.

0 

20 

40 

60 

80 

100 

120 

Percent Reduction of Actuarial Deficit 

Percent Reduction of 75 Year 

Actuarial Deficit 

Percent Reduction of 75th Year's

Actuarial Deficit 

Option 2

Increase the Career 

Averaging Period to 

40 Years 

Option 7a

Progressive Price

Indexing of Initial 

Benefits for Top 70% 

of Earners 

Option 13

Reduce the COLA 

by 0.5% 

Option 17

Raise the Retirement 

Age to 68 

Option 22

Raise Payroll Taxes 

by 2.2% in 2010 

Option 30

Raise the Cap to 90% 

of All Covered Earnings, 

Do Not Count Additional 

Earnings Toward Benefits 

Chart 14: The Impact of Selected Reform Options on the Long-range Actuarial Deficit
Social Security: Why Action Should Be Taken Soon 35

Over the 75  years that Social Security has 

been in place, many changes have been made 

to this important program. But it has remained 

grounded in the principles of social insurance; that 

is, that benefits should be adequate and equitable. 

Proposals to address long-range solvency should 

ensure continued protection from the “hazards 

and vicissitudes of life.”38 Benefits should be generous enough to provide a foundation for economic 

security and should be equitable relative to the 

level of contributions made. The challenge for 

policy makers will be striking a balance between 

adequacy and equity.

Many among policy makers and the public 

appreciate that Social Security is one leg of the 

“three-legged stool” for providing workers with 

undiminished living standards during retirement 

and ensuring economic support to dependents, 

survivors, and people with disabilities. However, 

savings contributed by the other two legs (private 

defined benefit pension plans and personal savings) 

appear inadequate for ensuring that those objectives could be met in the future. In this context, the 

projected insolvency of Social Security compounds 

the risk of inadequate living standards for future 

generations of retirees and other beneficiaries. The 

longer that Social Security reforms to restore the 

program’s financial solvency are delayed, the larger 

the risk not only of reduced retirement living standards but also of policy makers’ inability to strike 

the desired balance between the equity and adequacy of Social Security benefits. The questions 

that follow highlight the issues that that are likely 

to be raised in the ongoing discussion around the 

future of Social Security.

38 What is Social Insurance? Volume IX, Committee Publications, 

Committee on Economic Security, 1933.

Will benefits be adequate?

■ Do the benefits, combined with private savings and employer pensions, provide adequate 

retirement income protection for workers and 

their families?

■ Is there adequate benefit protection for workers who become disabled?

■ What benefits are provided for dependents 

and survivors when a worker retires, dies, or becomes disabled?

■ Are beneficiaries adequately protected against 

inflation?

■ Will there be more or fewer people living in 

poverty?

Will costs and benefits be fair?

■ Are individuals in equal circumstances treated 

equally?

■ Are particular groups, like working spouses 

(especially women) and workers who engage in 

arduous labor, adversely affected?

■ Will lower wage workers receive proportionally higher benefits relative to their contributions 

than higher wage workers?

■ How will the burden of program changes 

be shared by current and future workers and 

beneficiaries?

How do the changes affect an individual’s behavior?

■ Does the benefit and tax structure encourage 

work effort or participation in the labor force?

■ Are there sufficient incentives to encourage 

increased individual savings?

■ Does the proposed change promote flexibility 

in life-cycle choices such as acquiring more education or deciding when to retire?

Issues Raised by Proposals to Address 

the Long-Range Solvency Problem
36 Social Security: Why Action Should Be Taken Soon

How will the economy be affected?

■ What will happen to national savings? Will we 

save more or less than we do now?

■ What will happen to economic growth? Will 

the economy grow faster or slower than it does 

now?

What is the effect on the financial obligations of 

the federal government?

■ Does the proposal contribute to a budget surplus or a budget deficit?

■ What is the impact on total obligations?

■ What is the impact on Medicare?

What will be the effect on program efficiency and 

integrity?

■ How will the proposal affect administrative 

efficiency?

■ How will it affect the accuracy of benefit 

payments?

What will be the effect on public confidence, 

understanding, and acceptance?

■ Will the proposal enhance or diminish public 

confidence in Social Security?

■ How will the changes affect public understanding of the program?

■ Are the changes consistent with maintaining 

broad public acceptance of the program?
Social Security: Why Action Should Be Taken Soon 37

In practice, concrete proposals to address the 

shortfalls in Social Security’s long-term finances 

are not limited to single policy options, but combine several types of changes. Although achieving 

solvency is usually the primary goal, many reform 

proposals also try to address other goals such as 

benefit adequacy and equity, and are mindful of 

the incentives implicit in certain types of changes. 

For example, the previous section of this report did 

not describe any provisions that would increase 

benefits or reduce revenues, because by themselves 

they would not improve Social Security’s solvency. 

But as part of larger packages that do achieve solvency, these types of provisions may help address 

adequacy or equity concerns.

Below we describe several examples of integrated proposals as an illustration of how policy 

alternatives might be fashioned into comprehensive reform packages. We have grouped them 

into three categories. First, we describe examples 

of how various provisions can be combined to 

achieve solvency and other objectives. Second, we 

describe examples of specific legislative proposals from across the political spectrum, including 

two that have been submitted as legislation in 

the 111th  Congress (2010). Third, we include the 

proposals of two very recent commissions that 

recommended ways to accomplish Social Security 

solvency alongside a much larger set of recommendations for reducing the national debt over the 

long-term.39 Inclusion in this list is not in any way 

an endorsement by the Advisory Board of any particular plan.

39 In both cases, the commissions stated that restoring longterm solvency to Social Security was important in its own right 

independent of need to address the United States’ long-term 

fiscal debt.

All the plans described below have been submitted to the Social Security Administration’s 

Office of the Chief Actuary for the purposes of estimating their effects on Social Security finances. 

Because the plans were submitted in various 

years, however, the Actuary’s financial estimates 

were made under slightly different assumptions. 

For that reason we do not compare the financial 

impact of the various plans. In addition, the reader 

should be aware that the impact of several options 

integrated into one package is not necessarily the 

same as adding up the impact of the individual 

constituent provisions. The reason is that various provisions can interact, partially offsetting or 

magnifying the impact of other provisions. The net 

effect of an integrated proposal could be greater or 

less than the sum of the constituent elements.40

The plan descriptions below are meant to illustrate how proposals combine the various options 

and other alternatives described in Section  IV of 

this report. In order for the policy makers and the 

general public to adequately compare the likely 

outcomes of each plan, however, they need to be 

evaluated across a variety of dimensions using 

a common set of widely agreed upon metrics. 

Proposals can be evaluated not only by their impact 

on the summarized 75 year actuarial balance, but 

also, for example, by their impact on annual revenue and benefit flows, the Unified Budget, and the 

incomes of workers and beneficiaries, over time 

and across various socio-demographic characteristics and generations. Recommending a broad set 

of evaluation metrics is beyond the scope of this 

40 For a more detailed explanation of potential interactions see 

the Social Security Administration’s Office of the Chief Actuary’s 

website page entitled, “Understanding Interaction among 

Individual Provisions that Would Change the Social Security 

Program,” http://www.ssa.gov/OACT/solvency/provisions/interaction.html.

Examples of Plans to Restore Social Security Solvency
38 Social Security: Why Action Should Be Taken Soon

report, but as we emphasized in Section  IV they 

must continue to be developed and refined within 

government, academia, and the private sector.41

Examples of Ways to Combine Options to 

Address Solvency

Reno & Lavery (2009)

In their 2009  report, Fixing Social 

Security: Adequate Benefits, Adequate Financing, 

Virginia  Reno and Joni  Lavery, of the National 

Academy of Social Insurance (NASI), describe 

many options that address both the adequacy of 

Social Security benefits and the program’s longterm solvency. In the report they provide one 

example of how various options could be combined to address both goals (see Box 1, page 7 of 

their report). The package they describe should be 

understood as an illustration of how a proposal 

could be put together. It is not a formal proposal on 

behalf of NASI or an endorsement of any proposal 

by the authors and NASI. Many variations of their 

package are possible. It should be noted that their 

specific example contains multiple provisions that 

increase benefits and thus was not discussed in the 

previous section of this report.

Provisions to achieve solvency. The package 

would increase revenue in several different ways 

and reduce one type of benefit. In descending 

order of their impact on finances: (1)  The payroll 

tax rate would be increased by 1/20th of 1  percent per year (for employees and employers) for 

20  years beginning in 2015 and ending in 2034. 

(2) The taxable maximum would be raised gradually (over 36  years) to include 90  percent of all 

covered earnings. (3)  Revenues from the estate 

tax, at 2009  levels, would be dedicated to Social 

Security to provide a progressive source of tax 

41 For an example of one author’s recent development of metrics 

that would facilitate the evaluation of alternative reform packages see Jagadeesh Gokhale, Social Security: A Fresh Look at Policy 

Alternatives, University of Chicago Press, 2010. Some observers 

have also proposed that in addition to a Trust Fund perspective, 

proposals should be evaluated on a more comprehensive federal 

budget perspective.

revenue to cover the system’s “legacy costs.”42

(4)  For the purposes of payroll taxation, salary 

reduction plans such as flexible spending accounts 

for dependent care, health care or qualified commuting costs would be treated like contributions 

to 401(k) plans; that is, they would be deductible 

from income taxes but counted as part of wages for 

the purpose of payroll taxes. (5) The spousal benefit would be reduced from 50 percent to 33 percent 

at a rate of 1 percent per year over 17 years.

Provisions to improve benefit adequacy. In 

descending order of their cost, the provisions to 

improve benefit adequacy are: (1)  Increase benefits by 2 percent for all those eligible for benefits 

as of 2010 and for anyone becoming eligible after 

2010. (2) Increase the special minimum benefit to 

pay 125 percent of poverty for anyone who worked 

under Social Security at least 30 years and claimed 

benefits at full retirement age. Up to eight years in 

which a parent had a child under age 5, could count 

as a year of coverage. (3) Continue benefits for children of disabled or deceased workers until age 22 

if the child is in high school, college, or vocational 

school. (4)  Pay a new capped benefit to widowed 

spouses equal to 75 percent of the sum of worker 

benefits received by the two spouses if such a benefit would be higher than payable under current law.

National Research Council/National Academy of 

Public Administration (NRC/NAPA) (2010)

The National Research Council and the National 

Academy of Public Administration Committee on 

“Choosing the Nation’s Fiscal Future” produced 

alternative ways to achieve sustainable solvency 

for Social Security. The packages differ in the 

shares of overall changes that would come from tax 

revenues or benefit reductions. Proposal  1 would 

eliminate the Social Security long-term deficit 

solely through reduction in the growth of benefits. 

Proposal  2 would be composed of 2/3s benefit 

42 According to Reno and Lavery: “The decision to pay benefits 

to retirees in the early years that far exceeded the value of the 

contributions that they and their employers had had time to 

make created a deficit of contributions or ‘legacy costs’ that future generations would have to face.... In essence, Social Security 

costs can be divided into two parts – the funds necessary to pay 

for current benefits and the funds required to cover legacy costs. 

While workers’ and employers’ contributions from wages are 

designed to cover the first type of costs, more progressive taxes 

on a broader tax base could be justified to cover ‘legacy costs’ that 

were incurred to provide for the common good in the early years.” 

(See page 20.)
Social Security: Why Action Should Be Taken Soon 39

reductions and 1/3 revenue increases. Proposal 3 

would be composed of 1/3 benefit reductions and 

2/3s revenue increases. Proposal 4 would eliminate 

the deficit entirely through increasing revenue.

Proposal 1. (1) Progressively index the PIA formula factors from 2012 through 2049 such that 

those with lifetime average earnings at the 30th percentile and below would be unaffected, but for the 

remaining 70 percent, the top two PIA factors (32 

and 15) would be reduced so that a steady maximum earner’s benefit would be reduced each year 

that progressive indexing applies by 1.1  percent. 

Disability benefits are unaffected. (2)  Accelerate 

the scheduled increase in the full retirement age 

to 67 by five years, and then index it to maintain 

the ratio of expected average retirement years to 

potential work years, roughly equivalent to an 

increase of one month every two years. Raise the 

earliest eligibility age along with the NRA starting 

in 2012. Relax the vocational standards for disability for those ages 60 and over. (3) Compute cost of 

living adjustments (COLAs) using a “chained” version of the Consumer Price Index for Urban Wage 

Earners and Clerical Workers (CPI-W), a reduction 

of approximately 0.3  percent per year compared 

to the existing COLA. Disability benefits are not 

affected until conversion to retired worker status.

Proposal  2. (1)  Progressively index the PIA 

formula factors from 2012 through 2061 such 

that those with lifetime average earnings at the 

30th  percentile and below would be unaffected, 

but for the remaining 70 percent, the top two PIA 

factors (32 and 15) would be reduced so that a 

steady maximum earner’s benefit would be reduced 

each year that progressive indexing applies by 

1.1  percent. (2)  Raise the payroll tax (currently 

12.4  percent)  to 12.6  percent in 2012, 12.9  percent in 2020, 13.1  percent in 2030, 13.9  percent 

in 2040, 13.5 percent in 2050, and 13.3 percent in 

2060.

Proposal  3. (1)  Progressively index the PIA 

formula factors from 2012 through 2021 such 

that those with lifetime average earnings at the 

30th percentile and below would be unaffected, but 

for the remaining 70 percent, the top two PIA factors (32 and 15) would be reduced so that a steady 

maximum earner’s benefit would be reduced each 

year that progressive indexing applies by 1.1 percent. (2)  Raise the payroll tax rate (currently 

12.4  percent)  to 12.6  percent in 2012, 12.9  percent in 2020, 13.3  percent in 2030, 13.8  percent 

in 2040, 14.4  percent in 2060, and 14.5  percent 

in 2075. (3)  Apply a payroll tax rate on earnings 

above the taxable maximum with no credit toward 

benefits, of 2 percent starting in 2012 and 3 percent starting in 2060.

Proposal 4. (1) Increase the taxable maximum 

(contribution and benefit base) by an additional 

2 percent over normal indexing starting in 2012, 

until 90  percent of OASDI covered earnings are 

taxable (achieved in 2048). The current-law taxable maximum is retained for benefit purposes; no 

benefit credit is given for earnings above the present-law taxable maximum. (2) Increase the payroll 

tax rate (currently 12.4 percent) to 12.7 percent in 

2012, 13.0 percent in 2025, 13.3 percent in 2040, 

14.0  percent in 2060, 14.5  percent in 2070, and 

14.7 percent in 2080. (3) Apply a payroll tax rate 

on earnings above the taxable maximum with no 

credit toward benefits of 2.0  percent starting in 

2012, 3.0  percent starting in 2025, 3.5  percent 

starting in 2040, 4.5 percent starting in 2050, and 

5.5 percent starting in 2060.

Examples of Standalone Social Security Reform 

Proposals 

“A Reform Proposal to Make Social Security 

Financially Sound, Fairer, and More Progressive” 

(2008)

Mark Warshawsky, former Assistant Treasury 

Secretary for Economic Policy and current member 

of the Social Security Advisory Board, developed 

“A Reform Proposal to Make Social Security 

Financially Sound, Fairer, and More Progressive” 

in 2008. The package contains a number of provisions to address solvency, equity, and rewards and 

incentives for longer working lives. The plan aims 

to return the system to a pay-as-you-go financing 

basis, and provides add-on individual investment 

accounts for lower income workers. It includes provisions that both increase and decrease revenues 

and makes various reforms to private pensions.

Provisions that affect revenues. (1) Immediately 

and permanently reduce the payroll tax rate from 

12.4  percent to 11.4  percent. (2)  Exempt workers (and their employers) who have 40  years (or 

180  “quarters”) of covered earnings from any 

future payroll taxes. Future earnings would not 

be credited for benefit calculations. (3)  To make 

the system more progressive, raise the taxable 
40 Social Security: Why Action Should Be Taken Soon

maximum over 10 years so that 95 percent of all 

workers would have earnings entirely below the 

cap, and credit the additional earnings for computation of benefits. (4) Tax Social Security benefits 

in a manner similar to private pension income and 

credit the increased revenues to the Trust Funds. 

(4) Broaden the tax base by covering all new state 

and local workers.

Provisions that affect benefits. (1)  Increase the 

averaging period for career earnings from 35 years 

to 40  years, phased in over 10  years. (2)  To slow 

increases in benefits while still allowing a slight 

increase in the real value of benefits, reduce all 

three PIA formula factors (90, 32, and 15) by 

.9  percent per year between 2012 until 2041. 

(3) Accelerate by five years the scheduled increase 

in the full retirement age to 67 and subsequently 

index the retirement age to hold constant the ratio 

of expected lifetime in retirement to the length 

working careers (a rate of about one month every 

two years). Apply the rate of change to the earliest 

eligibility age (now 62) as well as to the maximum 

claiming age (now 70), and the eligibility age for 

aged and disabled widow benefits. (4) To discourage unwarranted applications for disability as the 

retirement age increases, disability benefits would 

be converted (on a prorated basis) to retirement 

benefits at the earliest eligibility age instead of the 

full retirement age.

To help make up for the reduction in scheduled benefits for low wage and disabled workers, 

and to increase national savings, the plan would 

establish add-on individual investment accounts. 

Participation would be voluntary with a default 

automatic enrollment (with an opt-out provision) for all low and moderate wage earners up to 

$40,000 annually. The accounts would be funded 

by 3  percent of pay and a government match, 

financed by general revenues for low wage workers. 

In the case of disabled workers, general revenues 

would be used to provide both the worker contribution (3 percent) and the matching contribution. 

The accounts would have the same tax treatment 

as Roth IRAs.

Preserving Our Promise to Seniors Act of 2010

Representative Ted  Deutch of Florida introduced H.R. 5834, Preserving Our Promise to Seniors 

Act, on July  22, 2010. The legislation has three 

main provisions that directly affect the Social 

Security Trust Funds. First, base the Cost of Living 

Adjustment (COLA) for Social Security benefits on 

the Consumer Price Index for the Elderly (CPI-E), 

which is currently an experimental measure maintained by the Department of Labor. As discussed 

earlier in this report the CPI-E tends to rise faster 

than the currently used CPI-W and thus would be 

expected to result in larger annual COLAs. Second, 

apply the payroll tax to all covered earnings, 

phased in from 2011 to 2017. This would remove 

the current cap on earnings subject to the Social 

Security payroll tax known colloquially as the taxable maximum and officially as the “contribution 

and benefit base.” Third, for the purposes of calculating benefits, earnings above the current law 

“contribution and benefit base” now subject to 

payroll tax would be credited for the purpose of 

calculating benefits according to a new formula. 

Monthly benefits would include 3  percent of the 

first $11,933 of average indexed monthly earnings 

(AIME) above the current taxable maximum, and 

0.25  percent of any earnings above that threshold. The threshold would be indexed to the average 

wage index (AWI) in the same way as is done for 

the current law table maximum. An additional 

provision of the legislation would establish special 

relief payments of $250 (indexed to CPI-E) in years 

when there is no COLA, but these funds would not 

come from the OASDI Trust Funds.

Social Security Personal Savings Guarantee and 

Prosperity Act of 2010, Title IV of the Roadmap for 

America’s Future Act of 2010

Representative Paul Ryan of Wisconsin introduced H.R. 4529 on January 27, 2010. Title IV of 

that legislation would modify both benefit and 

revenue provisions of Social Security and establish 

voluntary carve-out individual accounts.

Provisions that affect benefits. (1) Alter the PIA 

benefit formula with progressive price indexing for 

all earners above the 30th percentile of the AIME. 

This would reduce benefit growth for future generations and the gap between the new (post policy) 

benefits and currently scheduled benefits would 

become larger for successive birth cohorts. In addition, within each birth cohort, reductions in benefit 

growth would be largest for those earning at or 

above the taxable maximum, with the reductions 

becoming smaller for workers with smaller careeraverage earnings, and smallest for those just above 
Social Security: Why Action Should Be Taken Soon 41

the 30th  percentile of career-average earners. 

Below the 30th  percentile of career earners, the 

current benefit formula would be unaltered. The 

reduction would not apply to disability or auxiliary 

benefits, but would apply on a proportional basis 

to disabled worker beneficiaries upon their conversion to retired worker status at the attainment 

of their full retirement age. (2)  Increase benefits 

for low earners. Specifically, increase benefits due 

at the full retirement age to 120  percent of the 

federal poverty line for workers with 30  years of 

earnings at an average wage-indexed level equivalent to the full-time annual minimum wage for 

2009. (3)  Accelerate the current-law increase in 

the full retirement age to 67 by one year. The full 

retirement age would reach 67 for those attaining 

age 62 in 2021 instead of 2022. After 2021 index 

the retirement age for longevity, raising it at the 

rate necessary to maintain the ratio of life expectancy at the full retirement age to the difference 

between the full retirement age and 20.

Provisions that affect revenues. (1)  Applying 

the OASDI payroll tax to the total premium cost 

of employer sponsored health insurance. Any 

cost toward such group health insurance borne 

by employees would cease to be deductible, and 

the cost borne by employers would now be allocated to employees as if it had been wages, for 

the purpose of payroll tax (and later, benefit) calculations. Both employee and employer OASDI 

payroll taxes would be affected by this proposal. 

(2)  Provide special general revenue transfers as 

needed to assure Trust Fund solvency, and provide 

for special transfers back to the General Fund of 

the Treasury that would offset any prior general 

revenue transfers as long as Trust Fund solvency 

is maintained. 

The plan would establish voluntary, progressive individual accounts by allowing workers who 

are under age 55 on January 1, 2011 (those born 

in 1956 or later) to have a portion of their payroll 

taxes transferred to a personal savings account. 

At retirement, the participating worker would 

be required to purchase a life annuity with CPIindexed payments using the portion of account’s 

accumulated assets necessary to provide a total 

monthly payment (including any OASDI monthly 

benefit under the plan) that is at least equal to 

150  percent of the federal poverty level. Social 

Security retired worker benefits of individual 

account participants would be reduced with the 

reduction reflecting the degree of participation 

over their entire career. Individuals who participate in the personal savings account would be 

guaranteed that their account balance at annuitization would not be less than their contributions 

accumulated by the rate of inflation, as measured 

by the CPI-W, with any shortfall between the 

account balance and the guaranteed amount provided from the OASI Trust Fund. 

Reports of Commissions Addressing Long-term 

Fiscal Reform

As this report was being finalized several 

organizations released reports recommending 

ways to address the long-term fiscal challenges 

of the United States, including ways to address 

the long-term solvency of the Social Security program. For the benefit of our readers, but without 

any implication that the Advisory Board endorses 

either proposal, we outline, below, the major provisions included in the final report of the National 

Commission on Fiscal Responsibility and Reform, 

and the report of the Debt Reduction Task Force of 

the Bipartisan Policy Center.

The report of the National Commission on 

Fiscal Responsibility and Reform (December 2010) 

contains eight separate provisions that have significant effects on the OASDI program financial 

operations and actuarial status.43

1. “After 2022, index the normal retirement age 

(NRA) to maintain a constant ratio of (a)  life 

expectancy at NRA to (b) potential work years 

(NRA-20). Maintain the earliest eligibility age 

(EEA) at NRA-5. Increases in the EEA and NRA 

would be limited. Consistent with this intent, 

the following provision is included as a potential limitation. For individuals who have earned 

four quarters of coverage in 25  years before 

age 62, retain the EEA and NRA at 62 and 67, 

respectively, if the AIME is under 250 percent 

of aged poverty (wage indexed from 2009), with 

this limitation phased out completely if AIME 

is over 400 percent of aged poverty.

43 For a copy of the memo from the Social Security 

Administration’s Office of the Chief Actuary that describes and 

estimates the financial impact of the provisions of the National 

Commission on Fiscal Responsibility and Reform’s proposals 

on Social Security see http://www.ssa.gov/oact/solvency/

FiscalCommission_20101201.pdf. The Commission’s final report 

can be found at http://www.fiscalcommission.gov/.
42 Social Security: Why Action Should Be Taken Soon

2. Create a new bend point in the PIA formula at 

the AIME for the 50 percentile of new retired 

worker awards. Over the period 2017-2050, 

gradually reduce the 32 percent PIA factor that 

applied below the new bend point to 30 percent, 

the 32 percent PIA factor that applies above the 

new bend point to 10 percent, and the 15 percent PIA factor to 5 percent.

3. Change the OASDI cost of living adjustment 

(COLA) to be based on a chained version of 

the Consumer Price Index (CPI-W) starting for 

December 2011.

4. Beginning in 2017, increase the special minimum benefit by making the following changes. 

(a)  A year of coverage is defined as a year in 

which four quarters of coverage are earned. 

(b) The minimum PIA for 30 years of coverage 

is equal to 125 percent of the monthly poverty 

level (indexed by chained CPI from 2009 to 

2017 and by average wage thereafter, for successive cohorts). (c)  The minimum PIA is zero 

for 10 or fewer years of coverage, and increases 

linearly for 11 through 30  years of coverage. 

(d) Scale year of coverage requirements for disabled workers based on years of potential work.

5. Effective for all beneficiaries in 2011 and later, 

provide a 5  percent increase in PIA phased in 

over the 20th through 24th years after initial 

benefit eligibility. The total increase in PIA is 

5 percent of the PIA for a worker of the same 

age with earnings at the average (AWI)  at 

ages 22 through 61.

6. Increase the OASDI contribution and benefit 

base (taxable maximum) by an additional 2 percent each year starting in 2012, until 90 percent 

of covered earnings are taxable. Additional 

increases are expected for 38  years, reaching 

90 percent taxable for 2049 and later. Establish 

starting in 2013 a new PIA bend point at the 

monthly equivalent of the taxable maximum 

that would be determined without regard to 

this provision, with a benefit formula factor of 

5 percent for AIME above this new bend point.

7. Allow retirees to start receiving up to one-half 

of their benefits at age 62, with applicable actuarial reductions. The remainder is not available 

for take-up until EEA and actuarial reduction 

is applied.

8. Cover earnings of all state and local government employees hired in 2021 and later.”

The report of the Bipartisan Policy Center’s 

Debt Reduction Task Force (November 2010)44

contains 11  separate provisions that have significant effects on the OASDI program financial 

operations and actuarial status:

1. “Increase the OASDI contribution and benefit 

base over 38  years starting in 2012, so that 

90 percent of covered earnings will be taxable 

for 2049 and later.

2. Change the OASDI cost of living adjustment 

(COLA) to be based on a chained version of 

the Consumer Price Index for Urban Wage and 

Clerical Workers (CPI-W) starting for December 

2012.

3. Cover earnings of all state and local government employees hired in 2020 and later under 

OASDI.

4. Eliminate the excise tax on premiums for 

employer sponsored group health insurance 

and make all such premiums subject to OASDI 

payroll tax, phased in between 2018 and 2028.

5. Reduce the 15  percent PIA formula factor to 

10 percent, phased in gradually between 2023 

and 2052.

6. Starting in 2012, enhance the special minimum benefit to provide a PIA level at benefit 

eligibility equivalent to 133 percent of the 2009 

Federal Aged Poverty threshold for individuals 

with earnings of at least 20 percent of the “oldlaw taxable maximum” in at least 30 years. The 

minimum would be reduced for fewer qualifying years, to zero for less than 20  years. The 

target poverty level would be wage indexed 

from the 2009 level to two years before the year 

of initial benefit eligibility. Up to eight childcare creditable years would be allowed if caring 

for a child under age  6. The earnings requirement and number of child care creditable years 

allowed would be scaled for workers becoming 

disabled or dying before attaining age 62.

7. Subject contributions to all voluntary salary 

reduction plans to OASDI payroll tax in the 

same manner as for 401(k)s.

44 For a copy of the memo from the Social Security 

Administration’s Office of the Chief Actuary that describes 

and estimates the financial impact of the provisions of the 

Bipartisan Policy Center’s Debt Reduction Task Force proposals 

on Social Security see http://www.ssa.gov/oact/solvency/

BipartisanTaskForce_20101117.pdf. The Task Force’s final report 

can be found at http://www.bipartisanpolicy.org/.
Social Security: Why Action Should Be Taken Soon 43

8. Index the PIA formula for OASI benefits to longevity by reducing the factors starting in 2023 

by the change in the ratio of (a) the period life 

expectancy at 67 for 2018 to (b) the period life 

expectancy at 67 for the fourth year before initial benefit eligibility. For disabled workers at 

conversion to retirement at NRA, the reductions would apply based on the proportion 

of years not disabled from 22 to 61.

9. Increase benefits gradually between ages  81 

and 85 reflecting an increase in PIA equal to 

5 percent of the average retired worker PIA in 

the year age 80 is reached.

10.Tax Reform for Business: Establish a value 

added tax of 3.0 percent for 2012 and 6.5 percent for 2013 and later. Reduce the corporate 

income tax from 35 to 27 percent.

11.Tax Reform for Individuals: Modify the personal income tax to make two brackets with 

marginal rates of 15 and 27  percent. OASDI 

benefits are included as regular income with 

no thresholds. Capital gains are included as 

regular income. A non-refundable credit for 

low income tax filers age 65 and older is established. A non-refundable credit of 7.5  percent 

of OASDI benefit is established. Thus, revenue 

to OASDHI is based on 7.5 and 19.5  percent 

marginal rates on all OASDI  benefits.”
44 Social Security: Why Action Should Be Taken Soon
Social Security: Why Action Should Be Taken Soon 45

Appendices
46 Social Security: Why Action Should Be Taken Soon
Social Security: Why Action Should Be Taken Soon 47

Each of the policy options included in this report have been scored and described in more detail on the 

website of the Social Security Administration’s Office of the Chief Actuary. The letter and number combination in the column labeled “OACT #” references the equivalent solvency provision on the Actuary’s website. 

(See http://www.ssa.gov/OACT/solvency/provisions/summary.html.)

Appendix I

Options to Address OASDI Solvency

OPTIONS TO ADDRESS 

OASDI SOLVENCY

Impact of Proposal On

Cumulative 75 Year 

Deficit (2009-2084)

Annual Balance in the 

75th Year (2084)

-2.00% of taxable payroll -4.34% of taxable payroll

As percent 

of taxable 

payroll

As percent 

of 2.00% 

deficit

As percent 

of taxable 

payroll

As percent 

of 4.34% 

deficit

OACT #

OPTIONS THAT REDUCE BENEFITS

Options to increase the career earnings averaging period

OPTION 1: Increase the career averaging period to 38 years 0.29 15% 0.43 10% B4.1

OPTION 2: Increase the career averaging period to 40 years 0.46 23% 0.72 17% B4.2

OPTION 3: Increase the career averaging period to 40 years and apply to 

disabled worker benefits 0.63 32% 1.02 24% B4.3

Options to reduce initial benefits across the board

OPTION 4: Reduce initial benefits by 3 percent 0.36 18% 0.50 12% B6.1

OPTION 5: Reduce initial benefits by 5 percent 0.61 31% 0.84 19% B6.2

Options to the change the rules for indexing initial benefits

OPTION 6: Index new benefits to prices rather than wages 2.28 114% 7.16 165% B1.1

OPTION 7a,b,c: Progressive price indexing 

7a For top 70 percent of earners 1.31 66% 3.97 91% B1.2

7b For top 60 percent of earners 1.10 55% 3.32 76% B1.3

7c For top 40 percent of earners 0.61 31% 1.57 36% B1.5

OPTION 8: Progressive indexing for top 70 percent of earners 1.34 67% 3.33 77% B3.6

OPTION 9: Index initial benefits to life expectancy 0.56 28% 1.93 44% B2.1

Options to gradually reduce initial benefits by reducing PIA factors

OPTION 10: Gradually reduce top two PIA formula factors for new beneficiaries to 21 and 10 percent 1.51 76% 2.94 68% B3.1

OPTION 11a,b: Gradually reduce all three PIA factors

11a Reduce to 69.2, 24.6 and 11.5 by 2041 1.45 73% 3.11 72% B3.4

11b Reduce to 67.6, 24.6 and 11.5 by 2054 2.03 102% 5.31 122% B3.2
48 Social Security: Why Action Should Be Taken Soon

OPTIONS TO ADDRESS 

OASDI SOLVENCY

Impact of Proposal On

Cumulative 75 Year 

Deficit (2009-2084)

Annual Balance in the 

75th Year (2084)

-2.00% of taxable payroll -4.34% of taxable payroll

As percent 

of taxable 

payroll

As percent 

of 2.00% 

deficit

As percent 

of taxable 

payroll

As percent 

of 4.34% 

deficit

OACT #

Options to reduce the Social Security cost-of-living adjustment (COLA)

OPTION 12: Reduce COLA by 1 percent 1.55 78% 2.19 50% A1

OPTION 13: Reduce COLA by 0.5 percent 0.81 41% 1.15 26% A2

OPTION 14: Adopt “chained” CPI as basis for COLA 0.49 25% 0.70 16% A3

OPTION 15: Adopt “chained” CPI as basis for COLA, but do not apply to 

disabled worker benefits 0.36 18% 0.50 12% A4

OPTIONS THAT INCREASE RETIREMENT AGES

OPTION 16: Speed up the scheduled increase in FRA to 67 0.09 4% 0.00 0% C1.1

OPTION 17: Speed up increase to 67 then raise the FRA to 68 0.46 23% 0.73 17% C1.2

OPTION 18: Speed up increase to 67 then raise the FRA to 70 0.62 31% 1.43 33% C1.3

OPTION 19: Index retirement ages to life expectancy 0.41 21% 1.23 28% C1.6

OPTION 20: Increase the EEA along with FRA 0.56 28% 1.23 28% C2.2

OPTION 21: Convert disability benefits to retirement at the EEA 0.36 18% 0.73 17% C2.3

OPTIONS THAT INCREASE REVENUES

Options to raise Social Security payroll tax rates

OPTION 22:Raise payroll taxes by 2.2 percent in 2010 2.09 105% 2.19 50% E1.1

OPTION 23: Raise payroll taxes by 2 percent in 2022 and 2052 2.06 103% 3.92 90% E1.2

OPTION 24: Raise taxes rates by 0.1 percent per year for 20 years 1.39 70% 1.98 46% E1.4

OPTION 25: Return to pay-as-you-go financing with 100 percent 

Trust Fund ratio 100% 100%

Options to raise the cap on earnings subject to the Social Security tax

OPTION 26: Eliminate cap, but do not count earnings 2.32 116% 2.49 57% E2.1

OPTION 27: Eliminate the cap, and count earnings 1.89 95% 1.65 38% E2.2

OPTION 28: Eliminate the cap, and count smaller fraction earnings 2.17 109% 2.19 50% E2.9

OPTION 29: Raise the cap to 90 percent of earnings, do not count earnings 0.94 47% 1.07 25% E2.4

OPTION 30: Raise the taxable maximum to include 90 percent of all covered earnings, and count additional earnings towards benefits 0.75 38% 0.62 14% E2.3

OPTION 31: Eliminate cap for employers, raise to include 90 percent of 

earnings for employees and benefit calculations 1.41 71% 1.39 32% E2.11

OPTION 32: Raise cap to apply to all earnings of 95 percent of 

covered workers 0.11 6% 0.08 2% E2.7

OPTION 33a,b: Apply an tax on earnings above the cap

a Tax earnings above cap at 3 percent, do not increase benefits 0.57 29% 0.61 14% E2.6

b Tax earnings above cap at 6 percent, do not increase benefits 1.12 56% 1.20 28% E2.8

Options to extend Social Security coverage of employment or earnings

OPTION 34: Cover newly hired State and local government workers 0.17 9% -0.17 -4% F1

OPTION 35: Subject employer provided group health benefits to OASDI 

payroll tax 1.13 57% 0.97 22% F2

Option to increase the portion of Social Security benefits subject to the 

income tax

OPTION 36: Tax Social Security benefits like private pensions 0.28 14% 0.16 4% H1/H2
Social Security: Why Action Should Be Taken Soon 49

OPTIONS TO ADDRESS 

OASDI SOLVENCY

Impact of Proposal On

Cumulative 75 Year 

Deficit (2009-2084)

Annual Balance in the 

75th Year (2084)

-2.00% of taxable payroll -4.34% of taxable payroll

As percent 

of taxable 

payroll

As percent 

of 2.00% 

deficit

As percent 

of taxable 

payroll

As percent 

of 4.34% 

deficit

OACT #

OTHER OPTIONS

Options to invest Social Security reserves in marketable securities

OPTION 37a,b,c: Invest 40 percent of Trust Fund in equities

a Assuming real return of 6.4 0.67 34% 0.00 0% G1

b Assuming real retun of 5.4 0.48 24% 0.00 0% G2

c Assuming real return of 2.9 equal to Treasury Bonds 0.00 0% 0.00 0% G3

OPTION 38a,b: Invest 15 percent of Trust Fund in equities

a Assuming real return of 6.4 0.27 14% 0.00 0% G4

b Assuming real return of 2.9 equal to Treasury Bonds 0.00 0% 0.00 0% G5

Options to create individual investment accounts

OPTION 39: Carve-out individual investment accounts 0.00 0% 0.00 0%

OPTION 40: Add-on individual investment accounts 0.00 0% 0.00 0%
50 Social Security: Why Action Should Be Taken Soon
Social Security: Why Action Should Be Taken Soon 51

October  30, 2009. National Academy of Social 

Insurance – Estimated financial effects of several Social Security reform options requested by 

the National Academy of Social Insurance for its 

report, Fixing Social Security: Adequate Benefits, 

Adequate Financing.

July 2, 2009. Wexler – Estimated financial effects 

of the Social Security Forever Act of 2009 – legislation introduced as H.R. 1863 (111th Congress) on 

April 1, 2009 by Representative Robert Wexler.

February  12, 2009. Bennett – Estimated financial effects of the Social Security Solvency Act 

of 2009 – legislation introduced as S.  426 

(111th Congress) on February 12, 2009 by Senator 

Robert Bennett.

September  17, 2008. Warshawsky – Estimated 

financial effects of “A Reform Proposal to Make 

Social Security Financially Sound, Fairer, and 

More Progressive” – a proposal  developed by 

Mark Warshawsky.

June 19, 2008. AARP estimated financial effects of 

several reform options.

May 21, 2008. Ryan – Estimated financial effects 

of the Social Security Personal Savings Guarantee and 

Prosperity Act of 2008 – legislation introduced as 

Title IV of H.R. 6110 (110th Congress) on May 21, 

2008 by Representative Paul Ryan.

March  16, 2006. Bennett – Estimated financial 

effects of a proposal to Restore Sustainable Solvency 

for the Social Security Program – legislation introduced as S.  2427 (109th  Congress) on March  16, 

2006 by Senator Robert Bennett.

See full text of estimates at http://www.ssa.gov/

OACT/solvency/index.html

December 1, 2010. Estimates of the OASDI financial effects of the plan developed by the National 

Commission on Fiscal Responsibility and Reform.

November  17, 2010. Estimates of the OASDI 

Financial Effects of Restoring America’s Future – 

a plan developed by the Bipartisan Policy Center’s 

Debt Reduction Task Force.

October 8, 2010. Deutch – Preserving Our Promise 

to Seniors Act – legislation introduced as H.R. 5384 

(111th Congress) on July 22, 2010 by Representative 

Ted Deutch.

May  18, 2010. Estimated financial effects of two 

Social Security reform options requested by the 

Senate Special Committee on Aging for inclusion in 

its committee report, Social Security Modernization: 

Options to Address Solvency and Benefit Adequacy.

April 27, 2010. Ryan – Estimated financial effects 

of Title  IV of The Roadmap for America’s Future 

Act of 2010 – legislation introduced as Title IV of 

H.R. 4529 (111th Congress) on January 27, 2010 

by Representative Paul Ryan.

January 13, 2010. National Research Council and 

the National Academy of Public Administration 

– Estimated financial effects of four comprehensive proposals to restore Social Security to 

sustainable solvency requested by the National 

Research Council and the National Academy of 

Public Administration for their committee report, 

Choosing the Nation’s Fiscal Future.

Appendix II

Recent Proposals for Which Detailed Estimates Have Been Published by 

the Social Security Administration’s Office of the Chief Actuary
52 Social Security: Why Action Should Be Taken Soon

November  17, 2005. Liebman, MacGuineas, 

Samwick – Estimated financial effects of “A 

Nonpartisan Approach to Reforming Social 

Security” – a proposal developed by Jeffrey 

Liebman, Maya MacGuineas and Andrew Samwick.

November 4, 2005. Kolbe, Boyd – Estimated OASDI 

financial effects of the Bipartisan Retirement 

Security Act of 2005 – legislation introduced as 

H.R.  440 (109th  Congress)  by Representative 

Jim Kolbe and Representative Allen Boyd.
Social Security: Why Action Should Be Taken Soon 53

■ Eliminated windfall Social Security benefits 

for workers who are first eligible after 1985 for 

both a pension from non-covered employment 

and Social Security retirement or disability benefits.

■ Provided for cost-of-living increases based on 

prices or wages – whichever is less – if the Trust 

Funds fall below a specified level.

■ Made up to one half of Social Security benefits 

taxable for those taxpayers whose adjusted gross 

income, plus any nontaxable interest income, 

plus half their Social Security benefit that exceeds $25,000 for a single taxpayer and $32,000 

for married taxpayers filing jointly, beginning in 

1984. Benefits received by married taxpayers filing separately were made taxable without regard 

to other income. Appropriated amounts equal to 

estimated tax liability to the Social Security Trust 

Funds.

■ Changed the earnings test for beneficiaries 

age  65 and over so that $1 in benefits will be 

withheld for each $3 of earnings above the annual exempt amount, beginning in 1990 (subsequent legislation in 2000 eliminated the earnings 

test entirely for beneficiaries after attainment of 

the full retirement age).

■ Increased the delayed retirement credit in 

gradual steps from 3 percent for workers reaching full retirement age before 1990, to 8 percent 

for workers reaching full retirement age after 

2008.

■ Reauthorized inter-fund borrowing among 

the three Social Security Trust Funds for calendar years 1983 through 1987 with repayment by 

the end of 1989.

■ Provided for crediting the OASDI and HI 

Trust Funds at the beginning of each month with 

revenues to be received during the month and for 

special reports by the Boards of Trustees in the 

In late 1981, President Ronald Reagan and 

the Congress created the National Commission 

on Social Security – known as the Greenspan 

Commission after its chairman, Alan Greenspan 

– to study the program’s financial problems and 

make recommendations for legislative reforms. 

Based on the recommendations of the Greenspan 

Commission, Congress passed the Social Security 

Amendments of 1983 (P.L. 98-21). This legislation, 

signed into law on April  20, 1983, made comprehensive changes in Social Security coverage, 

financing, and the structure of benefits, including 

the following provisions:

■ Raised the eligibility age for unreduced retirement benefits in two stages to 67 by the year 

2027. Workers born in 1938 were the first group 

affected by the gradual increase. Benefits are still 

available at age 62, but with greater reduction.

■ Advanced scheduled increases in Social Security payroll tax rates (including the Hospital Insurance (HI) tax rate) for employers and employees 

to 7.0 percent in 1984, to 7.05 percent in 1985, to 

7.15 percent in 1986-87, to 7.51 percent in 1988-

89 and to 7.65  percent in 1990 and thereafter. 

Also increased tax rates on self-employment income equal to the combined employee-employer 

rates and provided credits against tax liability to 

offset part of the increase.

■ Extended Social Security coverage to federal employees and employees of the legislative 

branch not participating in the Civil Service Retirement System, all Members of Congress, the 

President and the Vice-President, federal judges, 

and other executive-level political appointees 

of the federal government, effective January  1, 

1984.

■ Also extended Social Security coverage on a 

mandatory basis to all employees of tax-exempt 

nonprofit organizations as of January 1, 1984.

Appendix III

Description of the 1983 Social Security Amendments
54 Social Security: Why Action Should Be Taken Soon

event the Trust Fund assets fall below 20 percent 

of annual expenditures; and

■ Required operations of the four Social Security Trust Funds to be shown as a separate function within the federal budget for FY 1985-1992 

and removed operation of the OASDI and HI 

Trust Funds from the Unified Budget beginning 

in FY 1993.
Social Security: Why Action Should Be Taken Soon 55

Business Administration and a Master’s Degree in 

Government from Trinity College, Hartford. Term 

of office: January 2006 to September 2011.

Dana K. Bilyeu*

Dana K. Bilyeu is the Executive Officer of the 

Public Employees’ Retirement System of Nevada. 

As the Executive Officer of the $21  billion pension trust she is responsible for all aspects of fund 

management including analysis of plan funding, 

investment oversight, operational and strategic 

planning, and fiduciary and governance issues. 

Mrs. Bilyeu is principally responsible for the relationship with the System’s independent actuary 

and oversees the data reconciliation process for 

actuarial valuations of the System. In her capacity 

as the Executive Officer, Mrs. Bilyeu provides information and analysis to the Nevada Legislature in 

consideration of pension policy issues affecting 

State and local government. Prior to her appointment as the Executive Officer, Mrs. Bilyeu served 

for eight years as the System’s Operations Officer, 

overseeing all aspects of benefit administration, 

including survivor, disability, and retirement benefit programs. Mrs. Bilyeu also was responsible for 

cost effectiveness measurement for all activities 

of the System. She was accountable for technology oversight as well as policy issues related to the 

public safety sector of public employment. Prior to 

her employment at the System, Mrs. Bilyeu was the 

System’s legal counsel, representing the System in 

a variety of aspects from benefits litigation, contracts analysis, to Board governance. Mrs.  Bilyeu 

is a member of the National Association of State 

Retirement Administrators, the National Council 

on Teacher Retirement, the National Conference 

of Public Employee Retirement Systems, and the 

National Association of Public Pension Attorneys. 

She also serves on the Public Employee Advisory 

Members of the Social Security Advisory Board

Barbara B. Kennelly, Acting Chair

Barbara  B. Kennelly became President and 

Chief Executive Officer of the National Committee 

to Preserve Social Security and Medicare in April 

2002 after a distinguished 23-year career in elected 

public office. Mrs. Kennelly served 17 years in the 

United States House of Representatives representing the First District of Connecticut. During her 

Congressional career, Mrs. Kennelly was the first 

woman elected to serve as the Vice Chair of the 

House Democratic Caucus. Mrs. Kennelly was also 

the first woman to serve on the House Committee on 

Intelligence and to chair one of its subcommittees. 

She was the first woman to serve as Chief Majority 

Whip, and the third woman in history to serve on 

the 200-year-old Ways and Means Committee. 

During the 105th  Congress, she was the ranking 

member of the Subcommittee on Social Security. 

Prior to her election to Congress, Mrs.  Kennelly 

was Secretary of State of Connecticut. After serving in Congress, Mrs.  Kennelly was appointed to 

the position of Counselor to the Commissioner 

at the Social Security Administration (SSA). As 

Counselor, Mrs.  Kennelly worked closely with 

the Commissioner of Social Security Kenneth  S. 

Apfel, and members of Congress to inform and 

educate the American people on the choices 

they face to ensure the future solvency of Social 

Security. She served on the Policy Committee 

for the 2005 White House Conference on Aging. 

Mrs. Kennelly received a B.A. in Economics from 

Trinity College, Washington, D.C. She earned a 

certificate from the Harvard Business School on 

completion of the Harvard-Radcliffe Program in 

Social Security Advisory Board
56 Social Security: Why Action Should Be Taken Soon

of Social Security (1986 to 1989) and was 

appointed by President George  W. Bush to chair 

the Policy Committee for the 2005 White House 

Conference on Aging. Ms. Hardy has launched and 

hosted her own primetime, weekly television program, “Financing Your Future,” on Financial News 

Network and UPI Broadcasting, and “The Senior 

American,” an NET political program for older 

Americans. She speaks and writes widely about 

domestic and international retirement financing 

issues and entitlement program reforms and is the 

co-author of Social Insecurity: The Crisis in America’s 

Social Security System and How to Plan Now for Your 

Own Financial Survival, Random House, 1992. A 

former CEO of a rehabilitation technology firm, 

Ms. Hardy promotes redesign and modernization 

of the Social Security, Medicare, and disability 

insurance systems. Additionally, she has chaired 

a Task Force to rebuild vocational rehabilitation 

services for disabled veterans for the Department 

of Veterans Affairs. She received her B.A. from 

Connecticut College, her M.B.A. from Pepperdine 

University, and completed the Executive Program 

in Health Policy and Financial Management at 

Harvard University. Ms. Hardy is a Certified Senior 

Advisor and serves on the Board of Directors of 

Wright Investors’ Service Managed Funds, and 

First Coast Service Options of Florida. First term 

of office: April  2002 to September  2004. Current 

term of office: October 2004 to September 2010.

Marsha Rose Katz

Marsha Rose Katz is a Project Director at 

the University of Montana Rural Institute in 

Missoula, where her work has concentrated on 

assisting persons with disabilities to utilize Social 

Security work incentives to start their own businesses or engage in wage employment. Since 

coming to the Rural Institute in 1999, Ms.  Katz 

has focused on providing training and technical 

assistance on both employment and SSI/SSDI to 

rural, frontier and tribal communities across the 

country. Previously, she worked for nearly 20 years 

in a disability rights community based organization, the Association for Community Advocacy 

(ACA), a local Arc in Ann Arbor, Michigan. She 

served as both Vice President of ACA, and Director 

of its Family Resource Center. It was at ACA that 

Ms.  Katz began her nearly 30 years of individual and systems advocacy regarding programs 

administered by SSA, especially the SSI and SSDI 

Board for the International Foundation of 

Employee Benefit Plans. She received her juris 

doctor from California Western School of Law and 

her B.A. from the University of Arizona. Term of 

office: December 2006 to September 2010.

*term expired September 30, 2010

Jagadeesh Gokhale

Jagadeesh Gokhale is a senior fellow at the 

Cato Institute. He earlier worked at the American 

Enterprise Institute as a visiting scholar (2003), 

the U.S. Treasury Department as a consultant 

(2002), and the Federal Reserve Bank of Cleveland 

as a senior economic advisor (1990-2003). An 

economist by training, his main research fields 

are macro and public economics with a special 

focus on the effects of fiscal policy on future generations. During 2008, he served as a member of 

the Task Force on Sustainability Issues for the 

Federal Accounting Standards Advisory Board. 

Dr.  Gokhale has written extensively on policy 

issues including Social Security and Medicare 

reform, national saving, private insurance, financial planning, wealth inequality, generational 

accounting, and public intergenerational transfers 

and he has testified several times before Congress 

on these topics. He has published several papers 

in such top-tier journals as the American Economic 

Review, Journal of Economic Perspectives, Quarterly 

Journal of Economics, Review of Economics and 

Statistics; in publications of the National Bureau 

of Economic Research and the Cleveland Federal 

Reserve; in the US Budget report’s Analytical 

Perspectives; and in popular newspapers and online 

media such as the Wall Street Journal, The Financial 

Times, The Washington Post, American Spectator, 

and Forbes. Dr.  Gokhale is a co-author of Fiscal 

and Generational Imbalances that revealed the U.S. 

fiscal imbalance to be in the tens of trillions of dollars. Another book by him entitled Social Security: 

A Fresh Look at Policy Alternatives is forthcoming 

from the University of Chicago Press in 2010. Term 

of Office: November 2009 to September 2015.

Dorcas R. Hardy

Dorcas R. Hardy is President of DRHardy & 

Associates, a government relations and public 

policy firm serving a diverse portfolio of clients. 

After her appointment by President Ronald Reagan 

as Assistant Secretary of Human Development 

Services, Ms. Hardy was appointed Commissioner 
Social Security: Why Action Should Be Taken Soon 57

setting of the macroeconomic forecasts, which 

underlie the administration’s budget submissions 

to Congress. Dr. Warshawsky’s research has been 

influential in the 2001-2002 regulatory reform 

of minimum distribution requirements for qualified retirement plans, the increasing realization 

of the importance of financial protection against 

outliving one’s financial resources in retirement, 

and a product innovation to integrate the immediate life annuity and long-term care insurance. 

For the latter research, he won a prize from the 

British Institute of Actuaries in 2001 for a professional article he co-authored. Favorable tax 

treatment for this integrated product was also 

included in PPA due to Dr.  Warshawsky’s advocacy. Dr.  Warshawsky has also held senior-level 

economic research positions at the Internal 

Revenue Service, the Federal Reserve Board in 

Washington, D.C. and TIAA-CREF, where he established the Paul A. Samuelson Prize and organized 

several research conferences. A native of Chicago, 

he received a Ph.D. in Economics from Harvard 

University and a B.A. with Highest Distinction 

from Northwestern University. Term of office: 

December 2006 to September 2012.

programs. Ms. Katz has written numerous articles 

and created many widely distributed user-friendly 

general handouts on SSI and SSDI, the majority of 

which focus on the impact of work on benefits, and 

utilizing work incentives. She is the author of Don’t 

Look for Logic; An Advocate’s Manual for Negotiating 

the SSI and SSDI Programs, published by the Rural 

Institute. Her Bachelor’s and Master’s Degrees are 

from the University of Michigan. Ms. Katz’s many 

years of experience as a trainer, technical advisor, 

and advocate have been guided and informed by 

her partnership with people with disabilities, from 

her husband, Bob Liston, to the people she assisted 

in her work with ACA and the Arc Michigan, her 

current work at the Rural Institute, and her longstanding participation in ADAPT, the nation’s 

largest cross-disability, grassroots disability rights 

organization. Term of office: November  2006 to 

September 2012.

Mark J. Warshawsky

Mark J. Warshawsky is Director of Retirement 

Research at Towers Watson, a global human capital 

consulting firm. He conducts and oversees research 

on employer-sponsored retirement programs and 

policies. A frequent speaker to business and professional groups, Dr. Warshawsky is a recognized 

thought leader on pensions, social security, insurance and healthcare financing. He has written 

numerous articles published in leading professional journals, books and working papers, and has 

testified before Congress on pensions, annuities 

and other economic issues. A member of the Social 

Security Advisory Board for a term through 2012, 

he is also on the Advisory Board of the Pension 

Research Council of the Wharton School. From 

2004 to 2006, Dr. Warshawsky served as assistant 

secretary for economic policy at the U.S. Treasury 

Department. During his tenure, he played a key 

role in the development of the Administration’s 

pension reform proposals, particularly pertaining 

to single-employer defined benefit plans, which 

were ultimately included in the Pension Protection 

Act (“PPA”) of 2006. He was also involved extensively in the formulation of Social Security reform 

proposals, and oversaw the Department’s comprehensive 2005 study of the terror risk insurance 

program. In addition, Dr.  Warshawsky led the 

efforts to update and enhance substantially the 

measures and disclosures in the Social Security 

and Medicare Trustees’ Reports, as well as the 
58 Social Security: Why Action Should Be Taken Soon

The Board’s Mandate

Public Law 103-296 as amended gives the 

Board the following functions;

12. Analyzing the nation’s retirement and disability systems and making recommendations 

with respect to how the Old-Age, Survivors, and 

Disability Insurance (OASDI) programs and the 

Supplemental Security Income (SSI) program, supported by the other public and private systems, 

can most effectively assure economic security; 

13. studying and making recommendations 

relating to the coordination of programs that provide health security with programs described in 

paragraph (1);

14. making recommendations to the President 

and to the Congress with respect to policies that 

will ensure the solvency of the old-age, survivors, 

and disability insurance program, both in the 

short-term and the long-term;

15. making recommendations with respect to 

the quality of service that the Administration provides to the public;

16. making recommendations with respect to 

policies and regulations regarding the old-age, survivors, and disability insurance program and the 

supplemental security income program;

17. increasing public understanding of the social 

security system;

18. making recommendations with respect to a 

long-range research and program evaluation plan 

for the Administration; and 

19. reviewing and assessing any major studies of 

social security as may come to the attention of the 

Board; and 

20. making recommendations with respect to 

such other matters as the Board determines to be 

appropriate.

Legislation that Established the Social 

Security Advisory Board

In 1994, when Congress passed Public 

Law 103-296 establishing the Social Security 

Administration as an independent agency, it also 

created an independent, bipartisan Advisory Board 

to advise the President, the Congress, and the 

Commissioner of Social Security on matters related 

to the Social Security and Supplemental Security 

Income programs. Under this legislation, appointments to the Board are made by the President, the 

Speaker of the House of Representatives, and the 

President pro tempore of the Senate.

Advisory Board members are appointed to 

staggered six year terms, made up as follows: three 

appointed by the President (no more than two 

from the same political party); and two each (no 

more than one from the same political party) by 

the Speaker of the House (in consultation with the 

Chairman and the Ranking Minority Member of 

the Committee on Ways and Means) and by the 

President pro tempore of the Senate (in consultation with the Chairman and Ranking Minority 

Member of the Committee on Finance). Presidential 

appointments are subject to Senate confirmation. 

The President designates one member of the Board 

to serve as Chairman for a four year term, coincident with the term of the President, or until the 

designation of a successor.
Social Security: Why Action Should Be Taken Soon 59

financing issues, reform proposals, and empirical research. He previously worked as a research 

consultant and policy analyst in Washington 

D.C. and Chicago specializing in the economic, 

demographic and statistical analysis of social 

policy issues including welfare policy, drug control policy, environmental health and HIV/AIDS 

prevention. He holds a B.S. in Economics from 

The Wharton School, University of Pennsylvania 

and a Masters in Public Policy Studies from the 

University of Chicago.

Beverly Rollins Sheingorn, Executive Officer

Beverly Rollins Sheingorn began her career 

with the Federal Government as a claims representative for the Social Security Administration in the 

Rockville, Maryland field office. She held a number 

of jobs with SSA, including senior executive analyst 

for both the Associate Commissioner of Hearings 

and Appeals and the Deputy Commissioner for 

Programs. In 1995, she worked with the National 

Commission on Childhood Disability, serving 

as an executive assistant to the Staff Director. 

Prior to working for the Federal Government, 

Ms.  Rollins  Sheingorn worked as a social worker 

for the Head Start program and the West Virginia 

Department of Welfare. Since joining the Board 

staff in 1996, she has served as Executive Officer. 

She holds a Bachelor’s degree in Social Work from 

West Virginia University and a Master’s degree in 

General Administration from the University of 

Maryland.

George Schuette, Professional Staff

Before joining the Advisory Board staff in 

1999, George Schuette worked for the Kentucky 

Department for Human Resources and the Social 

Security Administration, taught in colleges, and 

served in the U.S. Army. He began working for SSA 

as a generalist claims representative in Cincinnati 

in 1977. In 1980 he moved to Baltimore to work 

in the Office of Training. He worked in staff and 

management positions in a variety of areas, 

including analyst training, management training, 

programmatic training, evaluation, and career 

development. He was involved in the introduction 

of new technologies to the agency, including personal computers, computer-based training, and 

interactive video. He has a Ph.D. in history from 

Duke University.

Social Security Advisory Board Staff Members

Katherine Thornton, Staff Director

Katherine Thornton joined the Advisory Board 

as the Deputy Staff Director in 2005. Before coming 

to the Board, she held several senior management 

positions in the Social Security Administration. 

From 1995-2002, she was the Director of the 

Center for Disability Programs in the Philadelphia 

region before relocating to SSA’s Baltimore headquarters. While in headquarters, Ms.  Thornton 

was a member of the Senior Executive Service 

candidate development program, and had a series 

of assignments including a leadership role for 

the Agency’s eDib project, as well as serving as a 

program manager with the International Social 

Security Association in Geneva Switzerland. She 

holds a Bachelor’s Degree in Sociology and Social 

Work from Western Michigan University.

Deborah Sullivan, Deputy Staff Director

Deborah (Debi) Sullivan joined the Social 

Security Advisory Board staff in September 2007 

as the Deputy Staff Director. Before joining the 

Board staff, she was a participant in the Social 

Security Administration’s (SSA’s) Senior Executive 

Service Candidate Program and did extensive 

work on the agency’s most recent disability service 

improvement initiatives. Ms. Sullivan began working for SSA as a claims representative in Columbus, 

Indiana in 1978 and has held increasingly more 

responsible supervisory and managerial positions 

throughout her career. She worked in a number 

of SSA field offices and the Regional Offices in 

both Chicago and Atlanta. In 2002, she relocated 

to SSA’s headquarters in Baltimore to become 

the Executive Officer of SSA’s strategic planning 

component, which was responsible for the publication of the agency’s annual planning documents 

and periodic strategic plans. During her tenure at 

the Social Security Administration, Ms.  Sullivan 

was the recipient of many awards including 

five Commissioner’s Citations and a National 

Performance Award. She holds a Bachelor’s Degree 

in History and Political Science from Ball State 

University and has completed additional graduate 

work at Emory University in Atlanta.

Joel A. Feinleib, Staff Economist

Joel Feinleib joined the Advisory Board as 

Staff Economist in 2005 focusing on long-term 
60 Social Security: Why Action Should Be Taken Soon

Roberta (Robin) Walker, Staff Assistant

Robin Walker joined the Advisory Board staff 

in December 2009 after spending many years as 

an Executive Assistant in the public sector. Most 

recently she supported the work of the President 

and Vice President of a D.C. construction firm. 

Ms.  Walker has years of experience in managing 

all aspects of a corporate office.

David Warner, Professional Staff

David Warner began his career with the 

Federal Government in 1988 as a budget and program analyst for the Office of the Secretary of the 

Department of Health and Human Services in 

Washington, D.C. He worked principally on the 

administrative budget for the Medicare program 

and the program and administrative budgets for 

Medicaid and the Social Security Administration. 

Mr.  Warner transferred to the Social Security 

Administration in 1995. Until 1998, he served 

as a senior social insurance specialist and executive officer for the Deputy Commissioner for 

Legislation and Congressional Affairs. In 1998, 

Mr.  Warner completed a developmental assignment as professional staff to the Social Security 

Subcommittee of the House Committee on 

Ways and Means. Since joining the staff of the 

Social Security Advisory Board in 1999, he has 

served as professional staff to the Board. He 

holds a Bachelor’s degree in psychology from the 

University of Wisconsin and a Master’s degree in 

public sector and non-profit financial management from the University of Maryland.

Social Security Advisory Board

400 Virginia Avenue, S. W.

Suite 625

Washington, D.C. 20024

TEL: (202) 475-7700

FAX: (202) 475-7715

E-mail: info@ssab.gov

www.ssab.gov