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Issue Brief No. 

Social Security Ref

Strategies for Progressi

Benefit Adjustm

Introduct

This is the fifth in a series of Treasury issue briefs on topics related to Social Security reform. The fundamental reason Social Security must be reformed is that scheduled benefits under current law exceed the 

future revenues that the system is projected to take in. Specifically, scheduled benefits have a present 

value that is $13.6 trillion greater than the present value of the revenues that the system is projected to 

receive. Relative to scheduled benefits and taxes, therefore, the present value of benefits less taxes must 

be reduced by $13.6 trillion. This can be done by increasing revenues relative to what is provided for 

under current law and/or by lowering benefits relative to what are currently scheduled but not fully payable under current law.

This brief discusses the possible role that progressive reductions in scheduled benefits would play in 

Social Security reform. A progressive reduction in scheduled benefits would have high earners bear a 

relatively larger share of the burden of the adjustments needed to make Social Security permanently solvent, while workers with low earnings would be relatively shielded from the impact of benefit reductions. 

Under such a change, the reduction in scheduled benefits expressed as a share of wages while working 

would be higher for high-wage workers than it is for low-wage workers. While there is considerable 

disagreement about the precise nature and timing of the reforms that will ultimately make Social Security 

solvent, there is broad agreement that progressive benefit adjustments will be a key component of those 

reforms. Indeed, most proposed reforms to move Social Security toward permanent solvency call for 

benefit changes of this type.1

An important theme of this brief is that all plans that progressively reduce the growth rate of benefits 

operate in essentially the same way. Plans differ with regard to how rapidly and how progressively 

benefits are reduced, but the key levers used to slow the growth of benefits are the same.

Two points should be kept in mind in considering plans that involve changes to scheduled benefits. The 

first point is that currently scheduled benefits cannot actually be paid under current law since Social 

Security is projected to have insufficient funds to pay scheduled benefits from 2041 on. Paying currently 

scheduled benefits would require additional revenues. Comparing benefits in a solvent plan with an 

unpayable level of benefits in an insolvent plan is potentially misleading. The second point is that pro1 For example, this is true of plans proposed by Jeffrey Liebman, Maya MacGuineas, and Andrew Samwic

(http://www.nonpartisanssplan.com/pages/1/index.htm); by Peter Diamond and Peter Orszag

(http://www.ssa.gov/OACT/solvency/DiamondOrszag_20031008.pdf); and by Robert Pozen

(http://www.ssa.gov/OACT/solvency/RPozen_20050210.pdf).
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posals to reduce scheduled benefits typically do not actually cut benefits in either nominal or real terms; 

benefits of successive birth cohorts continue to grow over time, but at a slower rate than the benefits 

scheduled under current law. In other words, future retirees would receive benefits that are at least as 

large in real terms as what is received by current retirees; the benefits would just not be as large as what 

is now scheduled but not payable. 

Reforms that bring the system into balance by slowing benefit growth (that is, reducing scheduled benefits) have the potential to be fairer to future generations than comparable reforms that achieve solvency 

by raising taxes. This is because the tax approach would result in a much larger increase in attempted 

pre-funding as more resources are brought into the system in advance of when benefits are paid. As discussed in issue briefs 3 and 4, prefunding provides resources for future generations only if the increased 

revenues brought into the Social Security program do not give rise to higher spending and/or lower 

taxes in the rest of the budget. If the increased surplus revenues are offset by larger deficits in the rest 

of the budget, the surpluses would not increase the government’s capacity to pay future Social Security 

benefits and the attempt to make older workers pay a reasonable share of the reform burden through 

tax increases would be undone: While Social Security would be made fairer to future generations, that 

effect would be entirely offset by a non-Social Security fiscal policy that places a greater fiscal burden 

on future generations. A reduction in the growth rate of benefits, on the other hand, relies less on prefunding to make Social Security fair across generations and is therefore less subject to this problem.

Another reason why many Social Security reform plans propose reductions in scheduled growth of 

benefits is to ensure that all workers bear a reasonable portion of the burden of Social Security reform. 

If Social Security were made solvent with tax increases alone, the tax increases would have to be large 

and abrupt if workers in the middle of their lives at the time of reform are to shoulder a reasonable share 

of the reform burden. For example, a worker aged 35 when reform is implemented would face higher 

payroll taxes for two-thirds of his working life, whereas a 20 year old would face higher payroll taxes for 

his entire working life. By contrast, these two workers would make the same contribution to a reform that 

involves reducing the benefits they are scheduled to receive in retirement so long as the benefit adjustments are fully phased in by time the older worker retires.

Treasury’s second and third issue briefs developed a practical framework for designing and evaluating Social Security reform plans that is built around specific metrics for assessing the effect that reforms 

would have on fairness across generations, fairness within generations, and benefit adequacy. Those 

metrics can be used to assess reforms that yield a permanently solvent system. Changes in scheduled 

benefits must typically be combined with other reforms to yield a permanently solvent system. As the other parts of a plan might be progressive or regressive, the overall plan must be evaluated to fully quantify 

the level of progressivity brought about from the reform. It could be, for example, that benefit changes in 

a plan improve progressivity but that this is offset by other provisions. 

This last observation highlights the value of the “top-down” approach to Social Security reform set forward 

in Treasury’s previous issue briefs. A “top-down” approach to Social Security reform begins by laying 

down high-level measurable goals relating to how the reform burden is allocated across and within generations, the level of benefits, and how pre-funding is to be attempted. Once those goals are defined, 

it is then possible to construct a package of reforms that achieves them. In general, it will be possible to 

find more than one package of reforms that achieves a particular set of high-level reform goals; the choice 

among such plans must therefore be made with reference to other, less essential considerations.
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In contrast, what might be called a “bottom-up” approach to Social Security reform would entail selecting reform elements from a list of specific modifications to benefits and revenues and then evaluating the 

impact of the choices on Social Security’s finances.2 A bottom-up reform plan would be devised by 

selecting enough items from such a list to reach a solvency target.

Benefit Deter

Before considering the various ways in which progressive adjustments to benefits can be implemented, it is 

useful to begin with a review of how Social Security retirement benefits are computed under current law.

There are three steps involved in computing initial benefits under Social Security. First, a special average 

of the individual’s taxable earnings while working is calculated; this average earnings measure is known as 

average indexed monthly earnings, or AIME.3 Second, a progressive formula is used to convert the AIME 

into a primary insurance amount, or PIA. Third, initial benefits are determined by adjusting the PIA for retirement before or after the normal retirement age and adjusting for price inflation between age 62 and the time 

the individual begins collecting benefits. After benefit payments commence, they are then adjusted for price 

inflation each January

Steps one and two of the benefit calculation involve indexing individual earnings and key parameters of the 

benefit formula to a measure of economy-wide average wages. First, in computing the AIME, an individual’s 

annual taxable earnings prior to age 60 are indexed to the growth of economy-wide average wages 

between the time the earnings were received and the time the individual is age 60. For example, if economy-wide average wages in the year an individual is age 40 are half as large as economy-wide average 

wages in the year the individual is age 60, then the individual’s age-40 earnings are scaled to be twice 

as large. Indexed earnings prior to age 60 and actual earnings after age 60 are referred to collectively 

as “indexed taxable earnings,” with the AIME computed as the average of the highest 35 years of indexed 

covered earnings divided by 12.

Second, the formula relating an individual’s AIME to his or her primary insurance amount changes every year 

in accordance with changes in the economy-wide average wage. This formula is illustrated in figure 1. It has 

three linear segments; specifically: 

• For AIME between zero and 22 percent of the economy-wide average wage in the year a new 

beneficiary is age 60, the PIA increases by 90 cents for each additional dollar of AIME;

• For AIME between 22 and 131 percent of the economy-wide average wage in the year a new beneficiary is age 60, the PIA increases by 32 cents for each additional dollar of AIME; and,

• For higher levels of AIME, the PIA increases by 15 cents for each additional dollar of AIME.4

2 For example, such a list can be found at the Social Security Administration’s web site: 

http://www.ssa.gov/OACT/solvency/provisions/index.html.

3 Under Social Security, annual earnings are taxed up to a maximum level ($102,000 in 2008); “taxable earnings” 

therefore refers to earnings that are below this level. This taxable maximum is indexed to the growth of economy-wide 

average wages.

4 Since only earnings below the taxable maximum are included in the AIME computation, there is a maximum PIA that 

can be obtained in any given year (it is the PIA that corresponds to the AIME of a worker whose earnings were at or 

above the taxable maximum for 35 or more years).
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The AIME level at which the slope of the PIA formula changes is referred to as a bend point, while the slope 

of a linear segment of the formula between bend points is referred to as a PIA multiplication factor. The fact 

that the multiplication factors get smaller for successive AIME ranges is what makes Social Security’s benefit 

formula progressive; specifically, each additional dollar of AIME starts out by yielding 90 cents in initial benefits, then 32 cents, and finally 15 cents. The absolute levels of the bend points are indexed to economy-wide 

average wages; hence, if the AIME and PIA values are expressed as a share of economy-wide average 

wages in the year that a new beneficiary is age 60—as is done in Figure 1 then the resulting benefit formula 

will be the same for every birth cohort.

Dirct Appr

A straightforward way to adjust benefits involves directly changing the parameters of the benefit formula. 

For example, reducing the multiplication factors used to translate average indexed monthly earnings into 

the primary insurance amount would lower initial benefits for any recipient, as each dollar of lifetime average earnings would make a smaller contribution to initial benefits. Moreover, changes to the multiplication factors can be done in such a way as to enhance the progressivity of the benefit formula by making larger proportional reductions to the factors that apply to higher levels of AIME, as this would imply 

that the reduction in the contribution of AIME to benefits would be largest for workers with high average 

lifetime earnings. For instance, a reform plan proposed by Peter Diamond and Peter Orszag includes a

reduction in the top multiplication factor in the PIA formula from 15 percent to 10 percent; this would reduce benefits for an individual with an AIME level greater than greater than the second bend point (131 

percent of the average wage in the year the individual turned 60) and would have lowered benefits for 

0.0

0.4

0.8

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

PIA/Average Wage

Source: Department of the Treasury 

AIME/Average Wage

PIA Increases $0.15 for 

Every $1Increase in AIME 

PIA Increases $0.32 for Every 

$1Increase in AIME 

PIA Increases $0.90 for Every $1 

Increase in AIME

Figure 1: Current-Law Primary Insurance Amount Formula
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roughly the top fifth of new retirees in 2007. Likewise, the Nonpartisan Reform Plan proposed by Jeffre

Liebman, Maya MacGuineas, and Andrew Samwick calls for cutting the top and middle factors in half

(from 15 percent and 32 percent to 7.5 percent and 16 percent, respectively), while the bottom PIA factor would only be reduced by a quarter (from 90 percent to 67.6 percent).

An assessment of whether the adjustments to the benefit formula in a particular reform plans result in a 

more progressive Social Security system depends on an analysis of a complete proposal that makes 

Social Security permanently solvent. This would include not only benefit adjustments, but also revenue 

changes and any benefits payable from potential personal retirement accounts. The Diamond-Orszag

and Liebman-MacGuineas-Samwick plans contain elements in addition to benefit adjustments—such as

increases in the maximum taxable earnings base (both plans) and personal retirement accounts (the latter 

only)—that will affect Social Security’s overall progressivity. 

Movin frm Wage t

Under the current-law benefit computation, new initial retirement benefits for successive birth cohorts tend 

to grow at the same rate as economy-wide average wages. Over time, nominal wage growth will tend 

to outpace price inflation: The growth rate of real wages (wages adjusted for price changes) tends to be 

positive, as productivity gains result in a higher real wage. Hence, one way to reduce the growth of benefits involves modifying the benefit computation so that new benefit awards for successive birth cohorts tend 

to grow with prices rather than with wages. This reform proposal is known as price indexing.

Labeling this strategy for reducing the benefit growth rate as “price indexing” is confusing in that it incorrectly suggests that the procedures for calculating benefits under current law that employ wage indexation 

would be modified to use price indexation instead. In fact, all aspects of current law that rely on wage 

indexation would be unchanged under price indexing. What would change is that benefits as defined 

by current law would be multiplied by the ratio of economy-wide average real wages in a base year to 

economy-wide average real wages in the year the individual turns 60—that is, benefits would simply be 

scaled down by the amount by which nominal wages have outpaced prices. Current projections are that 

economy-wide average real wages will grow at about 1.1 percent per year; thus, in this case price indexing reduces future benefits from scheduled current-law levels by 1.1 percent for the first birth cohort affected, 

by 2.2 percent for the second birth cohort affected, and so on.

For example, consider two people, A and B, whose wages in each year of working life are equal to 

economy-wide average wages and who retire and collect benefits at the same age. If A is a member 

of the 1925 birth cohort and B is a member of the 1930 birth cohort, then under current law B’s benefit 

would be 25 percent higher than A’s benefit, where 25 percent represents the growth in economy-wide 

average wages during the five-year period that extends from 1985 (when A is age 60) to 1990 (when B 

is age 60). Alternatively, if price indexing had been in effect for these two birth cohorts, B’s benefit would 

have been 21 percent higher than A’s, where 21 percent represents the growth in prices between 1985 

and 1990. These same calculations would apply if A and B were at any other point in the relative distribution of wages for their respective birth cohorts; for example, if they each earned 1-1/2 times economy-wide 

average earnings in each year of their working lives. 

Price Indexing Reduces Progressivity of the Lifetime Benefit Ra

As was discussed in Treasury’s second and third issue briefs, the within-generation fairness of a set of 

reforms can be assessed with reference to the effect that it has on the lifetime net benefit rate. For an 

individual, the lifetime net benefit rate is defined as the present value of net lifetime Social Security benefits 

(benefits less taxes) as a percentage of the present value of the individual’s lifetime wages. Social Security 

is progressive to the extent that the lifetime net benefit rate declines with the level of lifetime wages earned. 
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Because price indexing is an across-the-board proportional benefit reduction for each birth cohort, with the 

proportional reduction becoming ever larger for successive birth cohorts, making Social Security permanently solvent with price indexing alone would cause Social Security to become increasingly less progressive 

over time. This occurs because current-law scheduled benefits as a share of lifetime wages are larger the 

lower are lifetime wages, so a given proportional reduction in benefits from current-law levels represents a 

larger share of lifetime wages for a low-wage worker than for a high-wage worker. 

Price Indexing Provides a Way to Transition to a Solvent S

Under current law, benefits of successive birth cohorts tend to grow at the same rate as economy-wide average wages. As noted above, these scheduled benefits cannot be paid under current law. Nevertheless,

in the long run benefits would be expected to grow at the same rate as average wages under a reformed 

defined-benefit-only system that is fair, permanently solvent, and has a constant payroll tax rate. Taxes paid 

by successive birth cohorts in such a system grow with wages, so intergenerational fairness implies that 

benefits likewise would grow with wages once a reduction in benefits (compared to what was scheduled 

but not payable) that acheives solvency has fully phased in. 

Under price indexing and an unchanging payroll tax rate, the real present value of lifetime benefits for 

successive birth cohorts would tend to grow only because of increasing longevity (at about 0.2 percent per 

cohort) while the real present value of taxes paid into Social Security would grow at the same rate as real 

wages (1 percent or more per cohort). Maintaining price indexing indefinitely, therefore, would result in a 

declining lifetime net benefit rate for successive cohorts (benefits would be rising less rapidly than taxes), a 

situation that most would view as being unfair to distant future generations.

As a result, price indexing can be thought of as providing a way to transition to lower benefits so as to help 

make Social Security permanently solvent. This is why, when price indexing was examined in Treasury’s third 

issue brief, price indexing was assumed to be in place only between 2009 and 2036. To obtain a fair reform plan, price indexing was then combined with an additional reform that scaled down the benefit formula 

to offset the effect of increasing longevity (“longevity indexing”) after 2036. It is only during the first 28 years 

of the reform when pure price indexing is in effect that the lifetime net benefit rate by birth cohort declines; 

after that time, longevity indexing serves to maintain an unchanging lifetime net benefit rate.5 

Price Indexing Versus Wage Indexi

Some critics of the current-law benefit calculation point out that it yields an AIME that is larger than it 

would be if it were simply computed as an average of real wages earned, and conclude that benefits 

are therefore “too high” in some sense. But this conclusion is not correct, because the PIA formula is itself 

calibrated to how the AIME is computed. Suppose, for example, that the AIME as currently computed 

is x percent higher on average than if it were instead computed as the simple average of real earnings 

(as would result if wages were indexed to prices when computing the AIME). In this case, imagine an 

alternative system in which the AIME is the simple average of the highest 35 years of earnings and the 

PIA formula is as depicted in Figure 1 except that the bend points as a share of the average wage are 

x percent smaller and the PIA multiplication factors are all x percent larger. Then benefits would be the 

same on average under this alternative system as they are under current law: AIME levels would be 

smaller than they are under current law, but recalibrating the PIA formula to take account of the new 

lower AIME levels would cause benefits to be the same on average.6

5 As was noted in Treasury’s third issue brief, this plan was intended to be used for illustration only.

6 While benefits under this scheme would be the same on average as they are under current law, there would be 

distributional consequences—in particular, wage indexing puts relatively more weight on early-life earnings in the AIME 

calculation than does price indexing.
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Moreover, this argument makes clear that the reliance on wage indexation under current law does not 

cause the benefits of successive birth cohorts to grow at the same rate as wages. This would remain true 

in the event that the AIME were calculated using price indexing rather than wage indexing.

To reinforce these points, imagine another possible benefit calculation. Suppose the AIME were calculated 

as the hypothetical account balance that would result if payroll taxes were invested at some fixed rate of 

return, and consider individuals who pay taxes at a 10.6 percent rate for exactly 35 years. If the annual 

rate of return credited to the hypothetical account were equal to the annual rate of economy-wide wage 

growth, it turns out that the resulting account balance would be close to 45 times the current-law AIME for 

all such individuals. If in addition the PIA bend points were made larger by a factor of 45 and the PIA 

multiplication factors were all made smaller by a factor of .022 (= 1 ÷ 45), then benefits in this alternative 

system would be close to current-law levels.7

Wage indexing is also used to update the PIA formula each year. In Figure 1, the bend points are constant 

as a share of economy-wide average wages in the year the cohort is age 60, which means that the bend 

points in absolute dollars are growing at the same rate as economy-wide average wages—the bend points 

are indexed to average wages. This is necessary in order to maintain Social Security’s progressivity. If the 

bend points were not indexed, then the share of AIMEs that receive the advantage of the high PIA multiplication factors would decline over time. Indeed, if the benefit formula were neither regressive nor progressive by 

wage level, there would be only one PIA multiplication factor and no bend points to index. 

Progressive 

Progressive price indexing is a modification of the price indexing proposal that preserves and possibly 

even enhances Social Security’s progressivity.

How Progressive Price Indexing Wo

Like pure price indexing, progressive price indexing represents a modification to Social Security’s PIA 

formula. It is therefore not fundamentally different from other reforms that reduce the rate of growth of 

defined benefits; it only implements the reductions in a particular way. Specifically, while most other 

plans simply dictate specific reductions in the PIA multiplication factors in specific years, progressive 

price indexing ties the reductions to the evolution of average economy-wide real wages. Given a path

of economy-wide real wages, therefore, it would be possible to exactly mimic the effects of progressive 

price indexing on benefits by making direct adjustments to the parameters of the benefit formula.

Figure 2 plots the PIA formula that would result under progressive price indexing for the 28th birth cohort 

subject to this proposal under the assumption that economy-wide average real wages grow at an annual 

rate of 1.1 percent. For comparison, the figure also includes the PIA formula under current law and under pure price indexing (again for the 28th birth cohort subject to pure price indexing). The 28th cohort 

is chosen for this illustration because it is the last cohort subject to pure price indexing under the illustrative reform plan in Treasury’s third issue brief (which involves pure price indexing between 2009 and 

2036 and longevity indexing after 2036).

7 Benefits in this alternative system would not be exactly the same as they are under current law for two reasons. First, the hypothetical account balance would increase if taxes were paid for more than 35 years. Second, current law indexes only wages 

earned prior to age 60, which corresponds to a hypothetical account that receives no interest credit after age 60. 
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Under pure price indexing, the PIA multiplication factors become smaller at the rate of 1.1 percent per 

year (the rate of growth of real wages), or 26 percent in total over 28 years. Reducing all multiplication 

factors by 26 percent reduces everyone’s benefit by 26 percent relative to current-law scheduled benefits. Under progressive price indexing:

• A third PIA bend point is introduced between the first and second current-law bend points (at an 

AIME level equal to 57 percent of the average wage);

• The PIA multiplication factors for the first two AIME regions are held fixed at their current-law levels 

(0.90 and 0.32, respectively); and,

• The PIA multiplication factors for the third and fourth AIME regions (initially set equal to 0.32 and 

0.15, respectively) are both reduced proportionately so that an individual with maximum taxable 

earnings in 35 or more years (a “maximum” earner with AIME about 2.4 times as large as average 

earnings) receives the same benefit as would result under pure price indexing.

Relative to pure price indexing, progressive price indexing leads to higher real benefits over time for everyone 

except the less than one percent share of workers who are maximum earners. The bottom 30 percent of 

earners will not see changes in benefits from what is now scheduled. In between the bottom 30 percent 

and the top one percent, the reduction relative to scheduled benefits is larger as earnings rise so that people 

with higher lifetime earnings will bear more of the burden of reform than people with lower lifetime earnings. 

Progressive price indexing thus results in a more progressive benefit formula than pure price indexing.

Source: Department of the Treasury

Figure 2: Primary Insurance Amount Formula 

PIA/Average Wage

0.0

0.4

0.8

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

PIA Formula Under Current Law 

Scheduled Benefits 

PIA Formula for 28th Cohort Subject to 

Price Indexing

PIA Formula for 28th Cohort Subject to 

Progressive Price Indexing 

AIME/Average Wage

Figure 2: Primary Insurance Amount Formula
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The retirement benefits of the bottom 30 percent of earners would not be changed from what is now scheduled because it is estimated that 30 percent of recent new-benefit awards are to workers with an AIME level 

that is below the second bend point of the PIA formula under progressive price indexing. Hence, assuming 

the distribution of real wages across birth cohort members will remain about unchanged, progressive price 

indexing maintains current-law scheduled benefits for roughly the lowest 30 percent of workers, and reduces 

benefits relative to their current-law scheduled levels for about the top 70 percent of earners.

Progressive Price Indexing Does Not by Itself Make Social

Permanently Solv

As with pure price indexing, progressive price indexing is a means of phasing in a reduction in benefits 

(relative to what is scheduled but not payable) so as to help make Social Security permanently solvent. 

There is a limit, however, to how long progressive price indexing can be left in place without problematic consequences arising. If annual real wage growth were to average 1.1 percent, for example, this limit 

turns out to be 80 years. In that year, the PIA formula shown in Figure 3 is flat for levels of AIME that 

are greater than the second bend point. If progressive price indexing were continued after 80 years, 

the PIA would actually decline as AIME rises beyond the second bend point. Many would view this as 

an unacceptable outcome because it implies that increases in average indexed monthly earnings past 

the second bend point would actually result in a lower Social Security benefit.

Source: Department of the Treasury

0.0

0.4

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Current Law 

Scheduled Benets

Price Indexing 2009 to 2036,

Longevity Indexing Thereafter

Progressive Price Indexing Starting 2009

(2088 is First Year Formula is Completely Flat)

AIME/A verage W age Source: Department of Treasury

PIA/Average Wage

0.0

0.4

0.8

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

AIME/Average Wage

Figure 3: Primary Insurance Amount Formula For 

Cohort Turning 62 in 2088 

Progressive Price Indexing Starting 2009 

(2088 is First Year Formula is Completely Flat) 

Current Law 

Scheduled Benefits 

Price Indexing 2009 to 2036, 

Longevity Indexing Thereafter 

Figure 3: Primary Insurance Amount Formula 

For Cohort Turning 62 in 2088
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When the PIA formula becomes flat for levels of AIME above the second bend point, all workers whose 

AIME falls in this region of the benefits formula (about 70 percent of workers under current projections) 

would receive the same benefit despite the fact that the present value of lifetime payroll taxes paid tends 

to be higher the higher is one’s AIME.8 

After progressive price indexing has run its course, one possibility would be to leave the PIA formula 

(shown in Figure 3) unchanged except that benefits would be reduced proportionately for successive 

birth cohorts so as to offset the effect of increasing longevity on the value of lifetime benefits. Unfortunately, this plan—progressive price indexing plus longevity indexing—would not make Social Security 

permanently solvent. Over 75 years, this plan has been estimated to close about 80 percent of Social 

Security’s financial shortfall.9 Those estimates show Social Security’s deficit in the 75th and final year 

of the projection period equaling about 1.1 percent of covered payroll, or 7 percent of benefits paid. If 

the imbalance in all later years were to persist at 1.1 percent of covered payroll, which is a reasonable 

assumption given that longevity indexing would be in place, then the infinite-horizon imbalance would 

also be reduced by about 80 percent. 

Why progressive price indexing cannot by itself make Social Security permanently solvent can be 

understood by considering the lifetime net benefit rate by birth cohort. As was explained in Treasury’s 

first issue brief, current and future workers must pay into Social Security about $13.6 trillion more than 

they get back in benefits in order to finance the net benefits (benefits less taxes) that the system has paid 

or promised to earlier birth cohorts. The implication is that making Social Security permanently solvent 

requires that the lifetime net benefit rate be substantially negative for current and future workers. 

Figure 4 shows estimates of the lifetime net benefit rate by birth cohort under progressive price indexing 

plus longevity indexing, as well as under pure price indexing plus longevity indexing (which was judged 

to be about permanently solvent in Treasury’s third issue brief). The fact that the plan with progressive 

price indexing conveys a larger lifetime net benefit rate for all cohorts subject to reform (henceforth, the 

“reform cohorts”) implies that it levies less net tax from reform cohorts than does the plan with pure price 

indexing. This reflects the fact that progressive indexing involves a smaller reduction in scheduled benefits 

for nearly all retirees than pure price indexing—the 30 percent of earners at the bottom would see no 

change at all, while nearly all of the rest would have a smaller reduction than under pure price indexing. 

Hence, if the plan with pure price indexing is just solvent, the plan with progressive price indexing must 

be less than solvent.

8 The present value of lifetime taxes paid would tend to be proportional to AIME if there were no systematic relationship 

between average lifetime earnings and the timing of earnings over working life. Alternatively, if people with relatively high 

lifetime earnings tend to earn a relatively larger portion of those earnings late in life, then the present value of lifetime payroll 

taxes would increase less than proportionately with the AIME. In either case, there would be a positive association between 

AIME and the present value of taxes paid.

9 Social Security’s score of progressive price indexing beginning in 2012 is at http://www.ssa.gov/OACT/solvency/provisions/benefitlevel.html. The scoring assumes progressive indexing of both retirement benefits and disability benefits. If 

progressive indexing were applied to only retirement benefits, it would close less of Social Security’s financial shortfall.
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Both of these plans result in a lifetime net benefit rate that is flat in the long run, which many would 

consider fair. Moreover, the long-run lifetime net benefit rate is about the same under either plan. What 

makes the plan with progressive price indexing less potent is its relatively slow phase-in: The first cohort 

subjected to the full brunt of reform is the 2026 birth cohort, while the 1974 birth cohort is fully subject to 

reform under the plan with pure price indexing.

Could the plan with progressive price indexing be modified to make it permanently solvent by phasing 

in its benefit reductions more rapidly? For example, one could imagine accelerating the evolution of 

the PIA formula by doubling the rate at which the PIA multiplication factors were reduced, in which case 

the PIA formula changes would be complete in the 40th year of the reform rather than after 80 years. 

However, this would lead to declining real benefits levels for successive cohorts of workers in much of 

the upper part of the wage distribution in future birth cohorts. For example, consider a maximum earner. 

If average real wages were to grow 1.1 percent annually, real benefits for a maximum earner would 

decline at a 1.1 percent rate for the first 40 reform cohorts and would then increase at a 0.9 percent annual rate (the assumed growth rate of real wages less 0.2 percentage point per year for longevity indexing) for later cohorts. A similar but less severe pattern would be evident for other earners in the upper 

part of the wage distribution. As a result, a more rapid phase in of progressive price indexing would 

require reductions in actual real benefit levels between successive cohorts over much of the income 

distribution—an outcome not envisioned in most Social Security reform proposals.

-6

-4

-2

0

Percent

Date of Birth

Source: Department of the Treasury

 * Estimates include only OASI payroll taxes and benets. OASI taxes on benets are not included. 

1940 1960 1980 2000 2020 2040 2060 2080 2100

Figure 4: OASI Lifetime Net Benefits As Percent of 

Lifetime Wages (Lifetime Net Benefit Rate) by Birth 

Cohort 

Current Law Scheduled Benefits and Taxes 

Progressive Price Indexing 2009-2088, 

Longevity Indexing Thereafter 

Price Indexing 2009-2036, 

Longevity Indexing Thereafter 

Figure 4: OASI Lifetime Net Benefits As Percent of Lifetime 

Wages (Lifetime Net Benefit Rate) by Birth Cohort
SOCIAL SECURITY REFORM:  St

13

U . S . E PA R T M EN  O  T H  T R E A S U R 

A plan with progressive price indexing would naturally phase in more rapidly if real wage growth were 

more rapid. For example, if real wage growth were to average 2 percent per year rather than 1.1 

percent, the plan would be completely phased in after 44 years rather than after 80 years. Even in this 

unlikely event, however, the plan would not phase in as rapidly as a plan with pure price indexing, and 

so would not achieve permanent solvency.10

Because progressive price indexing cannot by itself make Social Security permanently solvent, it is not 

a complete plan and hence cannot be fully evaluated with respect to fairness and benefit adequacy. 

Before any such evaluation can be done, it would be necessary to specify the additional reforms that 

would be combined with progressive price indexing to make Social Security permanently solvent. 

Again, however, a key point to note about progressive price indexing is that it represents a way to adjust 

benefits that is quite similar to the approaches used in other reform plans.

Conclus

There is widespread agreement that any reform to Social Security will involve adjustments to reduce 

benefits relative to what is currently scheduled but unpayable, and that these adjustments will fall relatively 

more heavily on high-income workers. There is likewise a consensus that workers with low lifetime earnings will be shielded from the burden of reform. While there are many ways to implement progressive 

benefit adjustments of this sort, the essential mechanics of any benefit adjustment are the same. In some 

proposals these mechanics are obvious because they make specific adjustments to the parameters of the 

benefit formula. It is less obvious—but no less true—for reform proposals such as progressive price indexing, where adjustments to the parameters of the benefit formula are tied changes to to economic variables 

such as wage and price growth. 

While progressive benefit adjustments will represent an important component of some future reform plan, 

they are unlikely to be the entire plan—that is, progressive adjustments to benefits will be combined with 

other reforms. Because these other reforms can also influence Social Security’s overall progressivity, a 

meaningful assessment of the effect that proposed changes to benefits would have on Social Security’s 

fairness across and within generations will need to specify those additional reforms.

10 The effect of real wage growth on real benefits while progressive price indexing is in effect can be understood with reference 

to three earnings groups: maximum earners, earners with AIME levels that are less than or equal to the second bend point, 

and earners with AIME levels that fall between the second bend point and the maximum AIME. Higher real wage growth 

has no effect on the absolute real benefits received by a maximum earner of any given birth cohort, but the real benefit 

expressed as a share of the average real wage will be smaller the higher is real wage growth. For earners with AIME levels 

that are less than or equal to the second bend point, absolute real benefits increase in lockstep with real wages, so the real 

benefit as a share of average real wages is unaffected. For earners with AIME levels that are between the second bend 

point and the maximum AIME, higher real wage growth increases real benefits, but the proportionate increase is less than 

the proportionate increase in real wages. Hence, higher real wage growth increases real benefits of all workers except 

maximum earners, but real benefits as a share of average real wages fall on average. And because real payroll taxes are 

proportional to real wages, higher real wage growth in any given year that progressive indexing is in effect will act to improve 

Social Security’s long-term finances.