Social Security

Memorandum Refer to : TCC

Date: March 3, 2000

To: Harry C. Ballantyne, Chief Actuary

From: Stephen C. Goss, Deputy Chief Actuary

Alice H. Wade, Actuary 

Subject: Estimated Long-Range OASDI Financial Effects of Two Proposals 

Developed by Senator Moynihan --INFORMATION 

This memorandum provides the estimated effects on the long-range OASDI financial 

status of two proposals designed to restore long-range solvency for the OASDI 

program. The proposals are closely related to the Social Security Solvency Act of 

1999 (S.21), proposed by Senators Moynihan and (Bob) Kerrey. However, the two 

proposals for which estimates are provided in this memorandum reflect several 

differences from the legislative language of S.21, which have been specified by 

David Podoff of Senator Moynihan's staff. All estimates are based on the 

intermediate assumptions of the 1999 Trustees Report.

Both proposals include specified payroll tax rates for future years designed to 

eliminate the long-range OASDI actuarial deficit (currently 2.07 percent of taxable 

payroll) and to eventually maintain a steady contingency reserve level of assets in the 

trust funds (between 125 and 150 percent of annual program cost). The proposals 

differ from one another in the size of the specified reduction in future automatic 

cost-of-living adjustments (COLAs)for OASDI monthly benefits.. Under Proposal 

A, the COLA is reduced by 0.8 percentage point from the percentage otherwise 

computed beginning with the COLA scheduled for December 2000. Under 

Proposal B, the COLA is reduced by 1.0 percentage point beginning with the COLA 

scheduled for December 2000. 

Long-Range OASDI Financial Effects

As designed, each of the proposals would each eliminate the estimated present-law 

OASDI actuarial deficit of 2.07 percent of taxable payroll. These proposals consist 

of several provisions that would modify the level of OASDI benefits, increase the 

amount of earnings subject to the payroll tax, and change the rules for taxing of 

OASDI benefits. In addition, specified annual payroll tax rates for the future would 
2

be varied so that, on a year-by-year basis, estimated income to the OASDI trust 

funds would be expected to more closely match estimated outgo from the OASDI 

trust funds. The annual payroll tax rates are specified so that the combined OASDI 

trust fund ratio (ratio of trust fund assets to annual outgo) is projected, based on the 

intermediate assumptions of the 1999 Trustees Report, to be between 125 and 150 

percent during about the last half of the long-range, 75-year period. Table A and

Table B provide a brief listing of the individual provisions of Proposal A and 

Proposal B, respectively. A more detailed description of the provisions is given 

below. For each individual provision and for the total proposed packages, Tables A 

and B provide the following estimates:

• The change, from present law, in the long-range OASDI actuarial balance. 

• The change, from present law, in the OASDI annual income rate in 2070.

• The change, from present law, in the OASDI annual cost rate in 2070.

• The change, from present law, in the OASDI annual balance in 2070.

Enactment of Proposal A would result in an improvement in the long-range 

actuarial balance for the 75-year period (1999-2073) that is estimated to produce a 

positive actuarial balance of +0.03 percent of taxable payroll. The OASDI trust fund 

ratio would increase from 194 percent of annual outgo for the beginning of 1999, to 

a projected level of 316 percent for the beginning of 2015. The projected trust fund 

ratio would then decrease to 132 percent for the beginning of 2042. As designed, the 

projected OASDI trust fund ratio would stay relatively stable (between 127 and 132 

percent of annual outgo) for the remainder of the long-range projection period (2043-

2073). 

Enactment of the Proposal B would also result in an estimated long-range actuarial 

balance for the 75-year period (1999-2073) of +0.03 percent of taxable payroll. The 

projected OASDI trust fund ratio would increase to 336 percent for the beginning of 

2016, then decline steadily until around 2035, and thereafter stay relatively stable 

(between 125 and 140 percent). 

For years through 2029, the specified payroll tax rates are the same for both 

proposals and are lower than the rate of 12.4 percent of taxable payroll specified 

under current law. After 2029, payroll tax rates under Proposal A are higher than 

under Proposal B. Specified payroll tax rates exceed the 12.4 percent rate in 

current law starting in 2030 under Proposal A and starting in 2034 under 

Proposal B.
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Description of Provisions

Provision 1: Reduce the COLA 

Under present law, monthly OASDI benefits are increased automatically each year, 

effective for December payments. The automatic increase is referred to as the costof-living adjustment (COLA) and is based on the percentage increase in the 

Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). 

Under both proposals, COLAs scheduled for December 2000 and later would be 

reduced. The specified reduction in COLA is 0.8 percentage point under Proposal 

A and 1.0 percentage point under Proposal B. The legislative language in S-21 for 

modification of COLAs differs from the specifications for these proposals.

Provision 2: Subject OASDI benefits to income tax in essentially the same 

manner as for the taxation of private pensions

This provision, when fully implemented, would subject OASDI benefits to income 

tax in essentially the same manner prescribed for private and government employee 

defined benefit pension plans. When fully implemented, the amount of OASDI 

benefits that is included in gross income for income tax purposes would be the total 

monthly benefits paid, less the exclusion amount. The income thresholds applicable 

under current law would not apply to the new provision. The monthly exclusion 

amount would be computed, as in current tax code, as the total amount of employee, 

after tax, contribution to OASDI divided by the estimates of single-life or joint-andsurvivor life expectancy, in months, provided in the tax code for private and 

government-employee, contributory, defined-benefit pensions. 

This provision would be phased in during the period 2000-2004, becoming fully 

effective for 2004 and later. During the phase-in period, an individual’s gross 

income for income tax purposes would include the greater of (1) the amount of 

OASDI benefits included in gross income under present law (reflecting income 

thresholds) and (2) the amount of OASDI benefits that would be included in gross 

income with this provision fully implemented, times a phase-in factor. The phasein factor would be 20 percent for 2000, 40 percent for 2001, 60 percent for 2002, 

80 percent for 2003, and 100 percent for 2004 and later.

Provision 3: Extend OASDI coverage to virtually all State and local government 

employees hired after 2001 

Employees of most State and local governments are covered under the OASDI 

program through voluntary, but irrevocable, agreements with the Federal 

government. In 1990, legislation extended, on a mandatory basis, OASDI coverage 

to all employees of State and local government not covered by a public employee 

retirement system, with the exception of full-time students and election workers. 
4

However, currently about 5 million State and local government employees, 

excluding students and election workers, are still not covered by OASDI. This 

provision would extend OASDI coverage, on a mandatory basis, to all employees 

newly hired by State and local governments after 2001, except for full-time students 

and election workers. 

Provision 4: Change in calculation of AIME

This provision would increase the maximum number of computation years used in 

determining an individual’s average indexed monthly earnings (AIME) from 35 

years to 38 years. The number of computation years would increase to 36 years for 

retired worker beneficiaries attaining age 62 in 2002, 37 years for retired worker 

beneficiaries attaining age 62 in 2003, and 38 years for retired worker beneficiaries 

attaining age 62 after 2003. The number of computation years would increase to 36 

years for workers who die or become disabled at age 63 after 2002, 37 years for 

workers who die or become disabled at age 64 after 2004, and 38 years workers 

who die or become disabled at age 65 after 2006.

In calculating the AIME for a retired worker under present law, a computation 

period of 35 years is used. Thus, the worker’s highest 35 years of indexed earnings 

are used in determining the numerator of the AIME and 35 X 12 (the number of 

months in 35 years) is used as the denominator. Under this provision, the number of 

benefit computation years used in determining the AIME for a retired worker

turning age 62 after 2003 would be 38. 

Under current law, the number of benefit computation years is determined by 

subtracting up to five dropout years from the number of elapsed years. Elapsed

years are determined as the number of years from age 22 through the year prior to 

the earlier of (1) year of death or (2) year of attaining age 62, excluding any calendar

years in a period of disability. Under this proposed provision, the calculation of 

elapsed years would change by increasing the age 62, ultimately to age 65. 

Provision 5: Retain the NRA at age 65 and modify the PIA formula 

This provision would restore and retain the normal retirement age (NRA) at age 65, 

thereby negating the increase in the NRA specified in current law. This part of the 

provision alone would increase benefits by about 15 percent for retired worker 

beneficiaries newly eligible after 2021. 

In addition, this provision would reduce the primary insurance amount (PIA) of 

beneficiaries who become eligible for benefits after 1999. These reductions are 

designed to roughly approximate the effect of increasing the NRA, beginning with 

individuals turning age 62 in 2000, by 2 months per year until reaching age 68 for 
5

individuals turning age 62 in 2017, and then indexing the NRA thereafter (at an 

estimated increase of 1 month every 2 years) until reaching an NRA of 70 for those 

first eligible for benefits in 2065 or later. Specifically, this provision would reduce 

each of the PIA-formula factors (90, 32, and 15 under current law) by 1.2 percent 

(multiply by 0.988) each year 2000-17, and by 0.3 percent (multiply by 0.997) each 

year 2018 through 2065. The ultimate reduction in the PIA level for beneficiaries 

newly eligible in 2065 and later would be about 30 percent. The combination of 

this reduction in PIA level and the retention of the NRA at age 65 would result in a 

reduction in benefits of about 19 percent for retired worker beneficiaries newly 

eligible in 2065 and later. 

This modified PIA formula would apply to benefits payable to retired worker 

beneficiaries newly eligible after 1999, and to their auxiliary beneficiaries. The

modified formula would not apply to benefits payable under the Disability 

Insurance program (for disabled worker beneficiaries and their dependents), or to 

benefits payable to child survivors or to a surviving spouse eligible due to having a 

child in care. For disabled worker beneficiaries who convert directly to retired 

worker beneficiary status upon attaining the “disability conversion age”, the 

modified benefit formula would continue to not apply to the worker and dependents 

benefits, for life. Benefits for aged surviving spouses would be equivalent to the 

benefits they would receive under the “equivalent” provision of increasing NRA 

(language for this needs to be developed). 

Under current law, the disability conversion age is equal to the NRA. The disability 

conversion age is the age up to which new disabled worker benefits may be awarded 

and at which all disabled worker beneficiaries are automatically converted to retired 

worker beneficiary status. Under the proposal the disability conversion age would 

be increased by 2 months per year, beginning with individuals who attain age 62 in 

the year 2000, until reaching age 68 for individuals turning age 62 in 2017, and then 

increased by 1 month every 2 years, until reaching an age of 70 for those who attain 

age 62 in 2065 and later.

As currently formulated, this provision provides some significant differences in 

benefit levels as compared with the roughly “equivalent” change in the NRA. 

These differences affect primarily (1) disabled workers and (2) aged surviving 

spouses. Our estimates assume that the intent of the legislation is to achieve the 

same effect as gradually increasing the NRA to age 70.

Provision 6: Eliminate the earnings test for beneficiaries 62+

Effective 1/1/2003, this provision would eliminate the earnings test for beneficiaries 

who are age 62 or older. The estimated long-range cost of this provision is small 

because months for which retirement benefits are withheld under current law result 
6

in later recomputation (increase) of the percent of PIA payable. Thus, the earnings 

test has very little effect on the expected amount of lifetime retirement benefits; it 

defers benefits from when individuals still have substantial earnings from work 

until substantial earnings have ceased.

Provision 7: Raise the OASDI contribution and benefit base 

The contribution and benefit base for Social Security (OASDI) was $72,600 for 

earnings in 1999 ($76,200 for 2000). Under current law, this base will be indexed 

in future years to increases in the level of the average annual wage as measured by 

the SSA average wage index (AWI). The contribution and benefit base serves the 

following two purposes:

• As a contribution base, it establishes the maximum annual amount of covered 

earnings per worker that are subject to OASDI payroll taxes.

• As a benefit base, it establishes the maximum annual amount of earnings 

creditable for each worker for the purposes of benefit computation.

Provision 7 would raise the contribution and benefit base to $87,000 in 2002, 

$94,000 in 2003 and $99,900 in 2004. After 2004, the contribution and benefit 

base would be indexed as specified in current law (using increases in the AWI). 

Increasing the base would result in an increase in the amount of payroll taxes for 

workers with earnings above the present-law base. Because the additional earnings 

subject to payroll tax would also be credited for the purpose of computing OASDI 

monthly benefit amounts, the income from additional taxes payable over the longrange (75-year) period would be partially offset by the cost of additional benefits. 

Under present law, the percent of total covered earnings that is taxable is expected 

to decline from 85.3 percent in 1999, to a stable level of 84.3 percent for 2008 and 

later. This change results from expected increases in earnings levels that are greater 

than average for the most highly compensated workers over the next 10 years. 

Under the proposal with the specified higher dollar amounts for the contribution 

and benefit base during the period 2002-2004, the percent of total covered earnings 

that is taxable is expected to reach a stable level of 86.3 for 2008 and later.

Provision 8: Change the OASI and DI payroll tax 

This provision changes the OASDI payroll tax beginning in 2000. These payroll 

tax rates are different for Proposal A and Proposal B. There rates are determined 

so that the combined OASDI trust fund ratio (ratio of trust fund assets to annual 

outgo) is maintained between 125 and 150 percent during the last half of the longrange 75-year period. 
7

Payroll tax rates for Proposal A, which are listed in Table A (specified 0.8-

percentage-point reduction in COLA) are as follows: 

Calendar Years Payroll Tax Calendar Years Payroll Tax

2000-2001 11.4% 2051-2057 13.5%

2002-2029 10.4% 2058-2064 13.8%

2030-2043 12.8% 2065+ 14.0%

2044-2050 13.2%

Payroll tax rates for Proposal B, which are listed in Table B (specified 1.0-

percentage-point reduction in COLA) are as follows: 

Calendar Years Payroll Tax Calendar Years Payroll Tax

2000-2001 11.4% 2039-2052 12.9%

2002-2033 10.4% 2053-2062 13.3%

2034-2038 12.5% 2063+ 13.7%

The payroll tax rates above are different from the payroll tax rates currently 

specified in S-21.

Stephen C. Goss

Alice H. Wade

Attachments
1

Table A Proposal A: Estimated Long-Range OASDI Financial Effect of a Proposal by 

Senator Moynihan

Estimated Change (As a percent of taxable payroll) in 

 Actuarial

Provision Balance (75-year) 

Annual Measures: 2070

Income 

Rate

Cost 

Rate

Annual 

Balance

1 For December 2000 and later, reduce the OASDI automatic cost of living adjustment 

(COLA) by 0.8 percentage point. 1.16 -0.10 -1.99 1.89

2 Subject OASDI benefits to income tax in the same manner as prescribed for benefits 

received from private and government employee defined benefit pension plans, with all 

current threshold levels for taxing OASDI benefits eliminated. This provision is phased 

in over the period 2000-2004. 0.43 0.28 -0.00 0.28

3 Extend OASDI coverage to all State and local government employees hired after 2001. 0.21 -0.00 -0.02 0.02

4 Increase maximum computation period from 35 years to 38 years for retirement, survivor, 

and disability. The maximum computation period would increase to 36 years for those 

attaining age 62 in 2002, 37 years for those attaining age 62 in 2003, and 38 years for 

those attaining age 62 after 2003. 0.25 -0.02 -0.44 0.41

5 Retain the normal retirement age (NRA) at age 65. Multiply all benefit formula factors 

(90, 32, and 15) successively by 0.988 for 2000-2017 and by 0.997 for 2018-2065. The 

resulting factors for beneficiaries age 62 in 2065 are 62.70, 22.29, and 10.45. Disability 

beneficiaries, retired worker beneficiaries who convert from disability, and young 

survivor beneficiaries maintain the current formula PIA factors.1 0.79 -0.13 -2.08 1.95

6 Effective 1/1/2003, eliminate the retirement earnings test for beneficiaries age 62 and 

older. -0.01 -0.00 -0.08 0.08

7 Raise the OASDI contribution and benefit base to $87,000 in 2002, $94,000 in 2003, and 

$99,900 in 2004. After 2004, resume indexing the contribution and benefit base using the 

SSA average wage index. 0.22 -0.01 -0.21 0.20

Total for Provisions 1 through 7 (including interactions among provisions) 2.79 -0.04 -4.38 4.34

8 Change the combined OASI and DI payroll tax rate beginning in 2000 as follows 

(including interactions among provisions) : 

 Payroll Tax 

OASDI Years OASDI Years OASDI Years

11.4% 2000-2001 12.8% 2030-2043 13.5% 2051-2057

10.4% 2002-2029 13.2% 2044-2050 13.8% 2058-2064

 14.0% 2060+

-0.69 1.60 0.00 1.60

Total for Provisions 1 through 8 (including interactions among provisions) 2.10 1.56 -4.38 5.94

Based on the intermediate assumptions of the 1999 Trustees Report under present law, the long-range actuarial balance for the 75-year 

period (1999-2073) is estimated to be –2.07 percent of taxable payroll. For 2070, the annual income rate, annual cost rate, and annual 

balance are 13.34, 19.63, and -6.29 respectively.

1 This provision is assumed to achieve the same cost effect of gradually increasing the normal retirement age (NRA) to age 70. 

Office of the Actuary, Social Security Administration March 3, 2000
2

Table B Proposal B: Estimated Long-Range OASDI Financial Effect of a Proposal by 

Senator Moynihan 

Estimated Change (As a percent of taxable payroll) in 

 

 Actuarial

Provision Balance (75-year) 

Annual Measures: 2070

Income 

Rate

Cost 

Rate

Annual 

Balance

1 For December 2000 and later, reduce the OASDI automatic cost of living adjustment 

(COLA) by 1.0 percentage point. 1.43 -0.12 -2.44 2.32

2 Subject OASDI benefits to income tax in the same manner as prescribed for benefits 

received from private and government employee defined benefit pension plans, with all 

current threshold levels for taxing OASDI benefits eliminated. This provision is phased 

in over the period 2000-2004. 0.43 0.28 -0.00 0.28

3 Extend OASDI coverage to all State and local government employees hired after 2001. 0.21 -0.00 -0.02 0.02

4 Increase maximum computation period from 35 years to 38 years for retirement, survivor, 

and disability. The maximum computation period would increase to 36 years for those 

attaining age 62 in 2002, 37 years for those attaining age 62 in 2003, and 38 years for 

those attaining age 62 after 2003. 0.25 -0.02 -0.44 0.41

5 Retain the normal retirement age (NRA) at age 65. Multiply all benefit formula factors 

(90, 32, and 15) successively by 0.988 for 2000-2017 and by 0.997 for 2018-2065. The 

resulting factors for beneficiaries age 62 in 2065 are 62.70, 22.29, and 10.45. Disability 

beneficiaries, retired worker beneficiaries who convert from disability, and young 

survivor beneficiaries maintain the current formula PIA factors.1 0.79 -0.13 -2.08 1.95

6 Effective 1/1/2003, eliminate the retirement earnings test for beneficiaries age 62 and 

older. -0.01 -0.00 -0.08 0.08

7 Raise the OASDI contribution and benefit base to $87,000 in 2002, $94,000 in 2003, and 

$99,900 in 2004. After 2004, resume indexing the contribution and benefit base using the 

SSA average wage index. 0.22 -0.01 -0.21 0.20

Total for Provisions 1 through 7 (including interactions among provisions) 3.02 -0.06 -4.76 4.70

8 Change the combined OASI and DI payroll tax rate beginning in 2000 as follows 

(including interactions among provisions) : 

 Payroll Tax 

OASDI Years OASDI Years OASDI Years

11.4% 2000-2001 12.5% 2034-2038 13.3% 2053-2062

10.4% 2002-2033 12.9% 2039-2062 13.7% 2063+ -0.92 1.30 0.00 1.30

Total for Provisions 1 through 8 (including interactions among provisions) 2.10 1.24 -4.76 6.00

Based on the intermediate assumptions of the 1999 Trustees Report under present law, the long-range actuarial balance for the 75-year 

period (1999-2073) is estimated to be –2.07 percent of taxable payroll. For 2070, the annual income rate, annual cost rate, and annual 

balance are 13.34, 19.63, and -6.29 respectively.

1 This provision is assumed to achieve the same cost effect of gradually increasing the normal retirement age (NRA) to age 70. 

Office of the Actuary, Social Security Administration March 3, 2000