Source: https://www.everycrsreport.com/changes/20131021_RL33514_56bf9007f88393ec6da7e9af5013eeab7799adcb__20140828_RL33514_58ef95f3e5995fe41321f98eb0168ac030084acd.html
Timestamp: 2020-08-15 19:00:36
Document Index: 170845454

Matched Legal Cases: ['§401', '§401', '§1341', '§402', '§1304', '§401', '§1304']

Changes in Social Security: What Would Happen If the Trust Funds Ran Out? from October 21, 2013 to August 28, 2014 - EveryCRSReport.com
Changes from October 21, 2013 to August 28, 2014
Social Security: What Would Happen If the Trust Funds Ran Out? Christine Scott Specialist in Social Policy October 21, 2013 Congressional Research Service 7-5700 www.crs.gov RL33514 CRS Report for Congress Prepared for Members and Committees of Congress Social Security: What Would Happen If the Trust Funds Ran Out? Summary The Social Security trust funds are projected to become exhausted in 2033, according to the 2013 Social Security Trustees Report. If Congress does not act before then, the trust funds would be unable to pay full Social Security benefits on time. The Social Security Act does not specify what would happen to benefits if the trust funds became insolvent. However, it is clear that full Social Security benefits could not be paid on time because the Antideficiency Act prohibits government spending in excess of available funds. After insolvency, Social Security would continue to receive tax income, from which approximately 77% of benefits could be paid. Either full benefit checks would be paid on a delayed schedule or reduced benefits would be paid on time. In either case, Social Security beneficiaries and qualifying applicants would remain legally entitled to full benefits and could take legal action to claim the balance of their benefits. Social Security solvency could be restored by cutting Social Security’s spending, increasing its income, or some combination of the two. Over the long range (i.e., over the next 75 years), the Social Security trustees estimate that the trust funds have a shortfall of $9.6 trillion in present value terms, or 2.72% of taxable payroll. The sooner Congress acts to fill this gap, the smaller the changes to Social Security need to be, because earlier changes could be spread to a larger number of workers and beneficiaries over a longer period of time. If Congress waits until the moment of insolvency to act, the trust funds’ annual deficits could be eliminated with benefit cuts of about 23% in 2033 that will gradually rise to about 27% by 2087. Congress could also eliminate annual deficits by raising the Social Security payroll tax rate from 12.40% to 16.1% in 2033, then gradually increasing it to 17.2% by 2086. To maintain annual balance after 2086, larger benefit reductions or tax increases would be required. Prompt action to restore Social Security solvency would be advantageous. The combined trust funds began to run annual cash-flow deficits in 2010. Cash-flow deficits require the redemption of government bonds accumulated in earlier years. Cash-flow deficits do not affect Social Security directly. However, if the non-Social Security portion of the federal budget is in deficit, redemption of trust fund bonds puts additional pressure on the overall federal budget. Earlier changes would allow workers and beneficiaries time to adjust their retirement plans. Finally, if Congress were to act today, the benefit cuts or tax increases necessary to restore solvency until 2087 would be smaller than those needed if Congress waited until the trust funds became insolvent to act. Congressional Research Service Social Security: What Would Happen If the Trust Funds Ran Out? Contents Introduction...................................................................................................................................... 1 Background ...................................................................................................................................... 1 The Social Security Trust Funds................................................................................................ 1 How the Trust Funds Work.................................................................................................. 1 Historical Trust Fund Operations ........................................................................................ 3 The Trustees’ Projections .................................................................................................... 4 Legal Background on Trust Fund Insolvency............................................................................ 5 The Antideficiency Act........................................................................................................ 5 Legal Entitlement to Social Security Benefits .................................................................... 5 What Happens to Benefits in the Case of Insolvency?........................................................ 5 What If Congress Waits to Act? ....................................................................................................... 6 Benefit Cut Scenario.................................................................................................................. 7 Size of Benefit Cuts............................................................................................................. 7 Payroll Tax Increase Scenario ................................................................................................. 12 Size of Payroll Tax Rate Increases .................................................................................... 12 Impact of Payroll Tax Increases ........................................................................................ 12 Conclusion ..................................................................................................................................... 13 Figures Figure 1.Scheduled Benefits Payable at Current Law Payroll Tax Rates, 2013-2087 ..................... 8 Figure 2. Replacement Rates Under Benefit Cut Scenario, 2013-2087......................................... 10 Figure 3. Initial Annual Real Benefits Payable Under Benefit Cut Scenario, 2013-2087 ............ 11 Figure 4.Combined Payroll Tax Rate Needed To Fund Scheduled Benefits, 2013-2087 .............. 12 Tables Table 1. Current Social Security Benefit Payment Schedule ........................................................... 6 Contacts Author Contact Information........................................................................................................... 13 Acknowledgments ......................................................................................................................... 13 Congressional Research Service Social Security: What Would Happen If the Trust Funds Ran Out? Introduction Each year when the Social Security trustees release their annual report, attention is focused on the trustees’ latest projections of when the Social Security trust funds will become insolvent.1 Less attention is paid to what trust fund insolvency would mean. What would happen to benefits? What options would Congress have to restore solvency? How would policy changes at this point affect beneficiaries? There are many misconceptions about what would happen if the Social Security trust funds ran out. For example, some Americans may believe that if the trust funds were exhausted, Social Security will be completely broke and unable to pay any benefits. This is not the case. In fact, in 2033, the first year of projected insolvency, the program is projected to have enough income (from taxes) to pay about 77% of scheduled benefits. The percentage of scheduled benefits that could be paid with income (from taxes) would decline to 72% in 2087, at the end of the trustees’ 75-year projection period. Another myth is that the Social Security Act includes a specific “fail-safe” provision in case of trust fund exhaustion—for example, a formula for cutting benefits or raising taxes to eliminate annual deficits. This is also untrue. In fact, the act does not specify what would happen to benefits if the trust funds are exhausted. The most likely scenario seems to be that benefit checks would be delayed. This report explains what the Social Security trust funds are and how they work. It describes the historical operations of the trust funds and the Social Security trustees’ projections of future operations. It explains what could happen if Congress allowed the trust funds to run out. It also analyzes two scenarios that assume Congress waits until the moment of insolvency to act, showing the magnitude of benefit cuts or tax increases needed and how such changes would affect beneficiaries. Background The Social Security Trust Funds How the Trust Funds Work Social Security provides retirement, disability, and survivor benefits to qualifying workers and their families. These benefits are funded from two trust funds: the Old-Age and Survivors Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund. The two funds operate separately but are closely linked. This report generally assumes the merged operations of the OASI and DI trust funds, treating the two funds as if they were one collective OASDI fund. 1 The 2013 Trustees Report projected trust fund exhaustion in 2033. Social Security Administration, 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, May 31, 2013, at http://www.socialsecurity.gov/OACT/TR/2013. (Hereinafter cited as 2013 Social Security Trustees Report.) Congressional Research Service 1 Social Security: What Would Happen If the Trust Funds Ran Out? Income to the Trust Funds The trust funds receive income from several sources. Their primary income source is the Social Security payroll tax levied on wages and self-employment income.2 Social Security-covered employees and employers each pay 6.2% of wages up to the taxable maximum ($113,700 in 2013).3 By law, about 85% of Social Security payroll taxes are credited to the OASI trust fund and about 15% are credited to the DI trust fund.4 The trust funds also receive income from interest on the trust funds’ assets and from the taxation of Social Security benefits. In 2012, 83.8% of the trust funds’ income was from payroll taxes, 13.0% was from interest on trust fund assets, and 3.2% was from taxation of benefits.5 The proportion of income from each of these sources varies over time.6 Outgo from the Trust Funds Almost all of the trust funds’ spending is for benefit payments and a small amount goes toward administrative expenses. The trust funds are also party to a financial interchange with the Railroad Retirement Board.7 This annual exchange of funds places the Social Security trust funds in the same financial position in which they would have been if railroad service had been covered by Social Security. In 2012, approximately 98.6% of the trust funds’ spending was for benefits, less than 0.8% was for administrative costs, and approximately 0.6% was transferred to the Railroad Retirement Board (RRB).8 The trust funds spend essentially the same proportion of funds on each of these items each year. Annual Cash Flow If, in a given year, the trust funds take in more tax income (i.e., payroll taxes and federal income taxes paid on benefits) than they spend, the trust funds have a cash-flow surplus. By law, surplus revenues are invested in interest-bearing U.S. government securities—usually special issue 2 Payroll taxes are formally known as Federal Insurance Contributions Act (FICA) and Self-Employment Contributions Act (SECA) taxes. FICA and SECA taxes also include a 1.45% payroll tax on each employee and employer for Medicare Hospital Insurance (HI), and the additional HI tax for higher-income workers. 3 Self-employed individuals pay 12.4% of wages up to the taxable maximum. The taxable maximum is indexed to the Average Wage Index (AWI). Economists typically attribute both the employee and employer share of the payroll tax to workers since it is assumed that the employer portion of the tax is passed on to workers in the form of lower wages. For 2012, employees and the self-employed paid a lower rate of tax to reflect the 2% payroll tax holiday, with the trust funds being reimbursed for the amount of the payroll tax holiday from general funds. 4 42 U.S.C. §401. 5 For the OASI trust fund, 82.3% of income was from payroll taxes, 14.1% was from interest on trust fund assets, and 3.6% was from taxation of benefits in 2012. For the DI trust fund, 93.6% of income was from payroll taxes, 5.8% was from interest on trust fund assets, and 0.5% was from taxation of benefits in 2012. (Figures may not add to 100% due to rounding.) Payroll tax amount includes the General Fund transfer for the cost of the 2% payroll tax holiday. 6 The proportion of income from taxation of benefits is projected to increase over time as more people are subject to taxation of benefits. (See CRS Report RL32552, Social Security: Calculation and History of Taxing Benefits, by Christine Scott.) 7 See CRS Report RS22350, Railroad Retirement Board: Retirement, Survivor, Disability, Unemployment, and Sickness Benefits, by Scott D. Szymendera. 8 In 2012, about 98.8% of OASI trust fund spending was for benefits, less than 0.5% was for administrative costs, and less than 0.6% was transferred to the RRB. In 2012, about 97.6% of DI trust fund spending was for benefits and about 2.1% was for administrative costs. (Figures may not add to 100% due to rounding.) Congressional Research Service 2 Social Security: What Would Happen If the Trust Funds Ran Out? Treasury bonds.9 In other words, Social Security’s cash surpluses (like proceeds from all government bonds) are borrowed by the U.S. Treasury and can be used for tax cuts, spending, or repaying debt. The Treasury, in turn, incurs an obligation to repay the bonds with interest, which is also credited to the trust funds. If, in a given year, the trust funds spend more than the tax income they receive, they have a cashflow deficit. In deficit years, Social Security can redeem any bonds (including interest) accumulated in previous years. Treasury pays benefits with cash from general revenues and writes down an equivalent amount of the trust fund’s bond holdings. In other words, when the Treasury’s general fund is running a deficit, Congress would need to cut overall spending, raise taxes, or borrow during years in which Social Security also has cash-flow deficits. Trust Fund Solvency If the trust funds are not able to pay all of current expenses out of current tax income and accumulated trust fund assets, they are insolvent. Insolvency means that Social Security’s trust funds are unable to pay full benefits on time. It does not mean that Social Security will be completely broke and unable to pay any benefits. Historical Trust Fund Operations The OASI trust fund was established in 1937; the DI trust fund was established in 1957. Neither of the Social Security trust funds has ever become insolvent. In 2012, the OASI trust fund had a cash-flow deficit of about $17.2 billion, and the DI trust fund had a cash-flow deficit of $37.6 billion, for a combined cash-flow deficit of $54.7 billion. At the end of 2012, the combined trust funds held a total of about $2.7 trillion in Treasury bonds.10 Cash-Flow Surpluses and Deficits The trust funds have run annual cash-flow surpluses in most years. These annual surpluses were typically small relative to the size of the trust funds’ expenditures. The Social Security Amendments of 1983 (P.L. 98-21) increased Social Security trust fund income and reduced trust fund spending, resulting in the OASI trust fund beginning to run larger surpluses. Prior to 1984, the combined trust funds had run annual cash-flow deficits periodically, the last of which was in 1983.11 The trust funds made up the difference between income and outgo during these years by redeeming some of the bonds accumulated in earlier years. In other words, the Social Security trust funds received net transfers from the Treasury’s general fund. Near-Insolvency in the Early 1980s The Social Security trust funds have never been exhausted. However, in the early 1980s, a solvency crisis loomed for the OASI trust fund. The 1982 Social Security Trustees Report projected that in the absence of legislative changes the OASI trust fund would become insolvent 9 See CRS Report RS20607, Social Security: Trust Fund Investment Practices, by Dawn Nuschler. At the end of 2012, the OASI trust fund held $2.6 trillion and the DI trust fund held $122.7 billion. 11 See CRS Report RL33028, Social Security: The Trust Fund, by Dawn Nuschler and Gary Sidor. 10 Congressional Research Service 3 Social Security: What Would Happen If the Trust Funds Ran Out? by July 1983.12 To relieve the pressure on the OASI trust fund temporarily, Congress permitted the fund to borrow from the DI and Medicare Hospital Insurance (HI) trust funds.13 Money was transferred to the OASI fund in 1982 and repaid by 1986.14 This temporary measure allowed policymakers time to develop a more sustainable solution to Social Security’s solvency problem—P.L. 98-21, which (as noted earlier) increased income from taxes and reduced benefits.15 Absent another act of Congress, the Social Security Act does not permit further interfund borrowing. The Trustees’ Projections The Social Security trustees issue an annual report in which they describe their short- and longrange projections of trust fund financial operations. The Trustees Report describes a range of possible outcomes using different sets of demographic and economic assumptions, including intermediate assumptions, high cost (pessimistic) assumptions, and low cost (optimistic) assumptions. Each set of assumptions results in different projections of when the trust funds will become insolvent.16 This CRS report focuses on the trustees’ long-range projections under their intermediate assumptions, which reflect their “best estimates” of future trends. However, it is important to note that the trustees’ projections—like all long-term projections—are uncertain. Cash-Flow Projections The combined trust funds began to have annual cash-flow deficits in 2010 that are projected to continue in future years. When cash-flow deficits emerge, the trust funds need to redeem the Treasury bonds accumulated during earlier years. Treasury pays benefits with cash from general revenues and writes down an equivalent amount of the trust fund’s bond holdings. Cash-flow deficits do not affect Social Security directly. However, if the non-Social Security portion of the federal budget is in deficit, redemption of trust fund bonds puts additional pressure on the overall federal budget. Trust Fund Solvency Projections According to the trustees’ intermediate projections, redemption of trust fund assets will allow the trust funds to pay full benefits on time until 2033, when the trust funds will become exhausted.17 At that time, the trust funds will continue to receive tax income (i.e., payroll taxes and federal income taxes on benefits). The trustees project that tax income will be sufficient to cover about 12 Social Security Administration, 1982 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, April 1, 1982. (Hereinafter cited as 1982 Social Security Trustees Report.) 13 P.L. 97-123. 14 The OASI trust fund borrowed $17.5 billion in November and December of 1982; about $5.1 billion was from the DI trust fund and $12.4 billion was from Medicare’s HI trust fund. 15 P.L. 98-21. 16 Under the intermediate assumptions, the combined trust funds are projected to become insolvent in 2033. Under the low cost assumptions, the trust funds are projected to become insolvent in 2068. Under the high cost assumptions, the trust funds are projected to become insolvent in 2027. (2013 Social Security Trustees Report, Table IV.B3.) 17 Under the trustees’ intermediate assumptions, the OASI trust fund is projected to become insolvent in 2035 and the DI trust fund is projected to become insolvent in 2016. Congressional Research Service 4 Social Security: What Would Happen If the Trust Funds Ran Out? 77% of scheduled benefits during the first year of trust fund insolvency in 2033. This will decline to 72% of scheduled benefits in 2087. Legal Background on Trust Fund Insolvency The Antideficiency Act The Social Security Act specifies that benefit payments shall be made only from the trust funds (i.e., accumulated trust fund assets).18 Another law, the Antideficiency Act, prohibits government spending in excess of available funds.19 Consequently, if the Social Security trust funds become insolvent—that is, if current tax income and accumulated assets are not sufficient to pay the benefits to which people are entitled—the law effectively prohibits full Social Security benefits from being paid on time. Legal Entitlement to Social Security Benefits The Social Security Act states that every individual who meets program eligibility requirements is entitled to benefits.20
August 28, 2014 (RL33514) Jump to Main Text of Report
Each year when the Social Security trustees release their annual report, attention is focused on the projection of the year that the Social Security trust funds will become insolvent. In their 2014 report, the Trustees projected that, under their intermediate assumptions and under current law, the Disability Insurance (DI) trust fund will become exhausted in 2016 and the Old-Age and Survivors Insurance (OASI) trust fund will do so in 2034.1 Although the two funds are legally separate, they are often described in combination. The trustees project that the combined Social Security trust funds will become exhausted in 2033.
The Social Security Trust Funds How the Trust Funds Work
Social Security provides retirement, disability, and survivor benefits to qualifying workers and their families. These benefits are funded from two trust funds: the OASI trust fund and the DI trust fund. The two funds operate separately but are closely linked. Several times in the past—most recently in 1994—Congress has reallocated the Social Security payroll tax rate to equalize the financial conditions of the two trust funds. In part because of those experiences, analysts often treat the two funds collectively.
The trust funds' primary source of income is the Social Security payroll tax, but they also receive income from income taxes on benefits and interest on the funds' balance. The payroll tax consists of a 12.4% tax on wages and self-employment earnings up to the taxable maximum, which is $117,000 in 2014 and increases annually with average wages in the economy. Of the 12.4% total, 10.6% is credited to the OASI trust fund and 1.8% to the DI trust fund.2 Some Social Security benefits paid to people with incomes above a certain threshold are subject to income tax. Most of the resulting revenue is credited to the Social Security trust funds, and some goes to the Medicare Health Insurance trust fund.3 In 2013, payroll taxes accounted for 84.9% of Social Security income, interest accounted for 12.0%, and income taxes on benefits accounted for 2.5%.4
In 2013, 98.7% of the trust funds' expenditures paid for benefits. Administrative expenses accounted for 0.7% of expenditures. The remaining 0.5% was transferred to the Railroad Retirement Board (RRB) as part of a financial interchange with the RRB.5 This annual exchange of funds places the Social Security trust funds in the same financial position in which they would have been if railroad service had been covered by Social Security.
In years when Social Security's total receipts, including interest, exceed expenditures, then the trust funds have a surplus. By law, that surplus is invested in special issue Treasury bonds.6 In other words, Social Security's cash surpluses are borrowed by the general fund of the U.S. Treasury. The Treasury, in turn, incurs an obligation to repay the bonds with interest.
When the trust funds spend more than they receive in taxes and interest, they have a deficit, which requires Social Security to redeem bonds accumulated in previous years. Treasury pays benefits with cash from general revenues and writes down an equivalent amount of the trust fund's bond holdings.
If the trust funds are not able to pay all of current expenses out of current tax income and accumulated trust fund assets, they are insolvent. Insolvency means that Social Security's trust funds are unable to pay full benefits on time. It does not mean that Social Security will be completely broke and unable to pay any benefits.7
The OASI trust fund was established in 1937; the DI trust fund was established in 1957. Neither of the Social Security trust funds has ever become insolvent. In 2013, the OASI trust fund had a surplus of $64.3 billion, and the DI trust fund had a deficit of $32.2 billion, for a combined surplus of $32.1 billion, including interest. Interest income for the combined funds was $102.8 billion, so on a cash-flow basis, there was a combined 2013 deficit of $70.7 billion. At the end of 2013, the combined trust funds had total assets of $2.8 trillion.8
The trust funds have run annual surpluses in most years. Except for the first decades of the program and a few years beginning in the late 1960s, these annual surpluses were typically small relative to the size of the trust funds' expenditures. Beginning in 1975, the combined trust funds ran annual deficits.9 The trust funds made up the difference between income and outgo during these years by redeeming some of the bonds accumulated in earlier years. In other words, in those years, the Social Security trust funds received net transfers from the Treasury's general fund.
Near-Insolvency in the Early 1980s
The Social Security trust funds have never been exhausted. However, in the early 1980s, a solvency crisis loomed for the OASI trust fund. The 1982 Social Security Trustees Report projected that in the absence of legislative changes the OASI trust fund would become insolvent by July 1983.10 To relieve the pressure on the OASI trust fund temporarily, Congress permitted the fund to borrow from the DI and Medicare Hospital Insurance (HI) trust funds.11 Money was transferred to the OASI fund in 1982 and repaid by 1986.12 Interfund borrowing authority expired at the end of 1989.13
This temporary measure allowed policy makers time to develop a more sustainable solution to Social Security's solvency problem. The Social Security Amendments of 1983 (P.L. 98-21) increased Social Security income and reduced spending. As a result, the combined trust funds ran significant surpluses, which on average exceeded a quarter of outlays from 1987 to 2009.
The aging of the baby-boom population and the recent recession and subsequent weak economy have resulted in higher outlays and lower tax revenues for Social Security. Since 2010, the combined trust funds have run cash-flow deficits, which are projected to continue indefinitely under current law. However, because interest income has exceeded the cash-flow deficit, trust funds have continued to run surpluses, which averaged 7% of outlays from 2010 through 2013.
This CRS report focuses on the trustees' "intermediate" Social Security projections, which reflect their "best estimates" of future demographic and economic trends. Under that set of assumptions, the DI trust fund is exhausted in 2016 and the OASI trust fund is exhausted in 2034.14 Considered on a combined basis, the trust funds would become insolvent in 2033. However, the trustees' projections—like all long-term projections—are uncertain. They estimate that there is a 10% chance that the combined trust funds would become insolvent in 2029 or earlier and a 10% chance that insolvency would occur in 2038 or later.15 Using somewhat different assumptions and projection methods, the Congressional Budget Office projects that the combined trust funds will become insolvent in 2030.16
Even after insolvency, the trust funds will continue to receive income from payroll taxes and income taxes on benefits that will allow some benefits to be paid. The trustees project that, under their intermediate assumptions, tax income will be sufficient to cover about 77% of scheduled benefits following trust fund insolvency in 2033, declining to 72% in 2088.
To put the trust fund balance in context, analysts commonly consider the trust fund ratio: the balance in the trust funds at the beginning of a year divided by projected outlays for that year. The trust fund ratio thus represents the proportion of a year's cost that could be paid solely with the reserves at the beginning of the year. The ratio for the combined trust funds peaked at 358% at the end of 2008. They declined to 332% at the end of 2013 and are continuing to fall. By definition, the ratio will reach zero when the trust funds become exhausted.
Figure 1. Social Security Trust Fund Ratios Source: Social Security Trustees, 2014 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, July 28, 2014, Table IV.B3, at http://www.ssa.gov/oact/tr/2014/lr4b3.html.
Note: The trust fund ratio equals the fund balance at the beginning of a year expressed as a percentage of the cost during the year.
Legal Background on Trust Fund Insolvency The Antideficiency Act
The Social Security Act specifies that benefit payments shall be made only from the trust funds (i.e., accumulated trust fund assets).17 Another law, the Antideficiency Act, prohibits government spending in excess of available funds.18 Consequently, if the Social Security trust funds become insolvent—that is, if current tax income and accumulated assets are not sufficient to pay the benefits to which people are entitled—the law effectively prohibits full Social Security benefits from being paid on time.
Legal Entitlement to Social Security Benefits The Social Security Act states that every individual who meets program eligibility requirements is entitled to benefits.19 In other words, Social Security is an entitlement program, which means that the government is legally obligated to pay Social Security benefits to all those who are eligible for them as set forth in the statute.2120 If the government fails to pay the benefits stipulated by law, beneficiaries could take legal action. Insolvency would not relieve the government of its obligation to provide benefits. What Happens to Benefits in the Case of Insolvency? The Antideficiency Act prohibits government agencies from paying for benefits, goods, or services beyond the limit authorized in law for such payments. The authorized limit in law for Social Security benefits is the balance of the trust fund. The Social Security Act does not stipulate what would happen to benefit payments if the trust funds ran out. As a result, either full benefit checks may be paid on a delayed schedule or reduced benefits would be paid on time.22 21 In either case, total payable benefits would be lower than scheduled benefits. To see how a delay could affect beneficiaries, consider the current Social Security benefit payment schedule, shown in Table 1. (This schedule may be changed at the discretion of the Social Security Commissioner.) New beneficiaries’' payment dates are generally based on their day of birth—for example, if a retired worker was born on the first of the month (e.g., June 1); his 18 42 U.S.C. §401(h). 31 U.S.C. §1341. 20 42 U.S.C. §§402 and 423. 21 However, Congress retains the right to modify provisions of the Social Security Act at any time, which could affect the benefits current and future beneficiaries may receive. (42 U.S.C. §1304.) For more details, see CRS Report RL32822, Social Security Reform: Legal Analysis of Social Security Benefit Entitlement Issues, by Kathleen S. Swendiman and Thomas J. Nicola. 22 It seems most likely that benefits would be delayed (thus reducing the number of full benefit checks paid each month). It is unclear whether the Social Security Commissioner or the other trustees would have the authority to reduce the benefit amounts specified by law. The 1982 Trustees Report, which projected impending trust fund insolvency, stated that unless legislative changes were made, “inability to pay some benefits on time would result.” (1982 Trustees Report, p. 2, [emphasis added].) 19 Congressional Research Service 5 Social Security: What Would Happen If the Trust Funds Ran Out? day of birth—for example, if a retired worker was born on the first of the month (e.g., June 1); his or her benefit check is paid on the second Wednesday in the month.2322 If trust fund insolvency caused delays in the benefit payment schedule, benefit checks could be paid in the usual order— first to those who receive benefits on the third of the month, then to those on the second Wednesday of the month, and so on, until the remainder of the trust funds’' balance reached zero. At that point, no benefits could be paid until more tax receipts were credited to the trust funds. Then benefit payments could be picked up where they left off when the trust funds ran out. This cycle could continue indefinitely. The timing of these checks would be unpredictable. Table 1. Current Social Security Benefit Payment Schedule Benefits Paid On Third of every month Second Wednesday Third Wednesday Fourth Wednesday Birth Date of Worker on Whose Record Benefits are Paid Any birth date for: (1) Beneficiaries who receive both Social Security and SSI benefits;
(1) Social Security beneficiaries who also receive SSI benefits or who reside in a foreign country, and
(2) Most beneficiaries who began to receive benefits prior to May 1997. 1st to 10th day of the month 11th to 20th day of the month 21st to 31st day of the month Source: Social Security Administration. Note: June 1997.
Source: Social Security Administration, Cyclical Payment of Social Security Benefits, at http://ssa.gov/OACT/ProgData/cyclicalpay.html. Note: For beneficiaries scheduled to receive payments on the third of the month, benefits may be paid earlier if the third is on a weekend or holiday. What If Congress Waits to Act? There are many options to restore Social Security solvency, which could be combined or targeted in a variety of ways. For example, Congress could decrease Social Security spending. Because almost 99% of Social Security spending is on benefits, this essentially means cutting benefits. benefits.23 Benefit cuts could be applied proportionately to all beneficiaries or structured to protect certain beneficiaries (e.g., people, such as disabled or low-income beneficiaries). Congress could also increase Social Security’s income by raising tax revenue (e.g., raising payroll tax rates or the amount of wages taxed), boosting income (e.g., changing trust fund investment practices to increase interest income), or adding a new source of revenue (e.g., Security's income by raising payroll or other taxes or by transferring funds from the Treasury’'s general fund). Tax fund. Payroll tax increases could be applied proportionately to all workers or targeted to certain workers (e.g.,, such as those who earn more than the taxable maximum). Over the long range (i.e., 75 years), the Social Security trustees project a shortfall of $9.6 trillion in present value terms, or 2.72% of taxable payroll. The next section presents two of the policy options Congress could choose to fill this gap: • The benefit cut scenario assumes that Congress covers the annual cash-flow deficit by cutting benefits across the board. • The tax increase scenario assumes that Congress covers the annual cash-flow deficit by raising the payroll tax rate. 23 For beneficiaries who receive Social Security benefits based on another person’s work record (e.g., spouse benefits), their payment date depends on the birth date of the worker on whose record they receive benefits. The current benefit payment schedule was first implemented for new beneficiaries in May 1997. By 2033, the number of beneficiaries being paid each week of the month will be approximately equal. Congressional Research Service 6 Social Security: What Would Happen If the Trust Funds Ran Out? Both scenarios assume that Congress waits until the trust funds become insolvent to make changes. If made sooner, the changes could be smaller, since earlier changes could be spread to a larger number of workers and beneficiaries over a longer period of time.24 Either scenario would essentially convert Social Security to a pure pay-as-you-go system, in which income and outgo are equal on an annual basis and there are no trust fund assets. These scenarios are only two of a wide range of possibilities. Benefit Cut Scenario Size of Benefit Cuts If the trust funds were allowed to run out, Congress could eliminate annual cash-flow deficits by cutting benefits so that spending equals tax income on an annual basis. According to the trustees, achieving annual balance would require benefit cuts of 23% in 2033, the first year of insolvency, rising to 28% by 2087. To maintain balance after 2087, the Social Security trustees project that larger benefit reductions would be needed, because the aging of the U.S. population, among other factors, is causing the cost of Social Security to grow over time. Figure 1 shows the percentage of scheduled benefits that are payable each year with scheduled revenues. 24 The trustees estimate that 75-year solvency could be restored through an immediate payroll tax increase of 2.665 percentage points (split between employers and employees) or benefit reduction of about 16.5% (for all current and future beneficiaries). These changes are about half as large as those that would be required in 2033. (2013 Social Security Trustees Report.) Congressional Research Service 7 Social Security: What Would Happen If the Trust Funds Ran Out? Figure 1.Scheduled Benefits Payable at Current Law Payroll Tax Rates, 2013-2087 120% Percentage of Scheduled Benefits 100% 80% 60% 40% 20% 0% Calendar Year Source: Social Security Administration memorandum by Chris Chaplain and Daniel Nickerson, “Present-Law OASDI Payable Percentages: Present-Law Revenue as a Percent of the Cost of Providing Scheduled Benefits through Year 2087,” July, 2, 2013. (Hereinafter cited as SSA Payable Benefits Memo.) Notes: The trustees project that 100% of scheduled benefits could be payable prior to 2033. There are several ways to measure how beneficiaries would be affected under the benefit cut scenario. This report analyzes projected replacement rates and real benefit amounts for a series of hypothetical workers developed by the actuaries at the Social Security Administration (SSA). Replacement Rates One way to illustrate the effect of across-the-board benefit cuts on beneficiaries is to use replacement rates. A replacement rate is a comparison between a person’s earnings before and after retirement; it is one way of measuring the adequacy of a person’s post-retirement income. Replacement rates can be calculated in different ways. This report uses the same methodology as SSA’s actuaries, which is to calculate a worker’s initial Social Security benefit as a percentage of his or her average indexed monthly earnings, thus showing the proportion of earnings replaced by benefits.25 Benefits replace a higher proportion of lower earners’ wages than of higher earners’ wages since the Social Security benefit formula is progressive. In 2013, the estimated replacement rate for a medium earner retiring at the age of 65 is 41.7%. Under current law, beneficiaries’ replacement rates at the age of 65 are gradually decreasing as the full retirement age 25 This formula uses the highest 35 years of earnings covered by Social Security, indexed to wage growth using the SSA’s Average Wage Index (AWI). Congressional Research Service 8 Social Security: What Would Happen If the Trust Funds Ran Out? (FRA) gradually increases from 65 to 67. Although benefits are available between the ages of 62 and FRA, the benefit amount is reduced. Replacement rates are an important measure of the adequacy of Social Security benefits. Social Security was established to replace income lost to a family as a result of the retirement, death, or disability of a worker. To ensure that benefit levels keep up with increases in wages over time— thus providing a steady replacement rate to beneficiaries—initial Social Security benefits are indexed to wage growth. Historically, wages have generally risen faster than prices, which have allowed the standard of living to rise from one generation to the next.26 Indexing initial Social Security benefits to wages has allowed beneficiaries to reap the benefits of rising living standards. Replacement rates show the extent to which initial Social Security benefits keep up with wage growth and with rising standards of living. Figure 2 shows projected replacement rates under the benefit cut scenario for a hypothetical low, medium, and high earner claiming retirement benefits at the age 65 of beginning in years 2013 through 2087.27 The low earner is assumed to have earned 45% of the national average wage during each year of his or her career (about $20,172 in 2013) and to receive a monthly Social Security benefit of about $922 in 2013.28 The medium earner is assumed to have earned the average wage during each year of his or her career (about $44,826 in 2013) and to receive a monthly Social Security benefit of about $1,519 in 2013. The high earner is assumed to have earned 160% of the average wage during each year of his or her career (about $71,722 in 2013) and to receive a monthly Social Security benefit of about $2,016 in 2013. Each year in the graph shows the projected replacement rate for each beneficiary if he or she turned 65 years old and retired in January of that year. Replacement rates for the beneficiaries in this example are projected to decline in the near term. Between 2013 and 2033, replacement rates are projected to decrease about 13%.29 This decline is mostly due to the increase in the full retirement age over the period. Combining the projected percentage of benefits that will be payable (the benefit cut scenario) with the replacement rates results in an effective (payable) replacement rate in 2033, the first year of insolvency, being 23% lower than if the trust funds were solvent. 26 The standard of living is usually measured in terms of income and reflects the quality of life that people enjoy, including factors such as the quality of housing, medical care, transportation, and communication. 27 For information on the development of the hypothetical workers, see Social Security Administration, Office of the Chief Actuary, Actuarial Note Number 144, “Internal Rates of Return Under the OASDI Program for Hypothetical Workers,” by Orlo R. Nichols, et al., June 2001, at http://www.ssa.gov/OACT/NOTES/note2000s/note144.html. 28 The average wage is defined by SSA’s Average Wage Index. 29 Initial replacement rates, for individuals retiring at the age of 65, are estimated to be 56.3% for the low earner, 41.7% for the medium earner, and 34.6% for the high earner in 2013. Congressional Research Service 9 Social Security: What Would Happen If the Trust Funds Ran Out? Figure 2. Replacement Rates Under Benefit Cut Scenario, 2013-2087 0.6 Initial Replacement Rate 0.5 0.4 0.3 0.2 0.1 0 Calendar Year Source: Congressional Research Service calculations, using figures from the 2013 Social Security Trustees Report and the SSA Payable Benefits Memo. Notes: The hypothetical earners in this figure are assumed to claim retirement benefits at age 65. The age at which workers may receive full Social Security benefits is currently rising from 65 to 67. The early retirement increases for workers born after 1937. Real Benefit Levels Another way to illustrate the effect of across-the-board benefit cuts is to look at projected initial annual benefit amounts in real terms (i.e., after adjusting for inflation). Since benefits are based on workers’ lifetime earnings, higher earners tend to receive higher benefit amounts than lower earners. The change in real benefit levels over time illustrates how well Social Security benefits are projected to keep up with inflation (i.e., price growth). Figure 3 shows future initial real benefit amounts in 2013 dollars—in other words, they illustrate the extent to which future beneficiaries could afford today’s living standards. Wages are expected to grow faster than prices over the long term, which would allow living standards to rise. Real benefit levels do not show the extent to which future beneficiaries could afford these rising living standards. Congressional Research Service 10 Social Security: What Would Happen If the Trust Funds Ran Out? The trustees project that initial Social Security benefits will rise as a result of growing wages, causing initial real benefit amounts for individuals claiming retirement benefits at the age of 65 to increase about 15.7% between 2013 and 2033.30 Under the benefit cut scenario, real payable benefit levels are projected to drop significantly after the trust funds become insolvent, then to rise gradually. Between 2032, the last full year of projected trust fund solvency, and 2033, the first year of projected insolvency, payable real benefit levels are projected to decline by 23%.31 Figure 3. Initial Annual Real Benefits Payable Under Benefit Cut Scenario, 2013-2087 $40,000 $35,000 Annual Real Benefits Payable $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Calendar Year Source: Congressional Research Service calculations, using figures from the 2013 Social Security Trustees Report and the SSA Payable Benefits Memo. Note: Please see notes for Figure 2. 30 Annual real benefits for individuals retiring at age 65 are estimated to be $11,070 for the low earner, $18,234 for the medium earner, and $24,196 for the high earner in 2013. 31 In 2033, annual scheduled real benefits for individuals retiring at age 65 are projected to be $12,809 for the low earner, $21,108 for the medium earner, and $27,968 for the high earner. The annual payable real benefits would be 77% of these amounts. Congressional Research Service 11 Social Security: What Would Happen If the Trust Funds Ran Out? Payroll Tax Increase Scenario Size of Payroll Tax Rate Increases Congress could also eliminate cash-flow deficits by raising the payroll tax rate so that the trust funds’ tax income would equal spending each year. The trustees project that taking such an action at the point of insolvency would require combined employee and employer payroll taxes to increase from their current rate of 12.4% to 16.1% in 2033, the year in which the trust funds are projected to be exhausted, rising to 17.2% by 2087, the last year of the 75-year projection period. To maintain balance after 2087, the Social Security trustees project that the payroll tax rate would likely need to increase further. This is because the cost of Social Security is expected to grow, due to U.S. population aging and the design of the Social Security system. Figure 4 shows the payroll tax rates needed to pay scheduled benefits each year from 2013 to 2087. Figure 4.Combined Payroll Tax Rate Needed To Fund Scheduled Benefits, 2013-2087 20.00% Combined Social Security Payroll Tax Rate 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Calendar Year Source: CRS calculations, using figures from the 2013 Social Security Trustees Report. Note: The trustees project that more than 100% of scheduled benefits could be payable prior to 2033. Impact of Payroll Tax Increases Raising the payroll tax rate would increase most workers’ taxes by the same proportion. However, because covered wages are taxable only up to a specified maximum ($113,700 in 2013), the effective increase in the payroll tax would be smaller for people who earn more than the taxable maximum than for other workers. Unlike the federal income tax, the Social Security payroll tax is levied at a flat rate starting at the first dollar of wages. Congressional Research Service 12 Social Security: What Would Happen If the Trust Funds Ran Out? Conclusion The consequences of allowing the trust funds to become insolvent can be avoided if Congress makes changes to Social Security. The sooner Congress acts, the smaller the changes need to be. If Congress acted today, the benefit cuts or tax increases necessary to restore solvency until 2087 would be about half as large as those needed if Congress waited until the trust funds became insolvent. Prompt action would also allow Congress to gradually phase in changes, rather than abruptly cutting benefits or raising taxes, thus allowing workers to plan in advance for their retirements. Although the combined trust funds began to run annual cash-flow deficits each year beginning in 2010, requiring the trust funds to redeem the bonds that they have accumulated in surplus years, the cash-flow deficits do not affect Social Security directly. However, if the nonSocial Security portion of the federal budget is in deficit, redemption of the trust fund bonds puts additional pressure on the overall federal budget. Author Contact Information Christine Scott Specialist in Social Policy cscott@crs.loc.gov, 7-7366 Acknowledgments An earlier version of this report was written by Kathleen Romig, a former CRS analyst. All questions should be directed to the current author. Congressional Research Service 13 .
To extend the solvency of the DI trust fund, Congress could consider a variety of legislative changes to increase program revenues and reduce program costs. For example, the DI trust fund could be authorized to borrow from the OASI fund, or part of the Social Security payroll tax currently allocated to the OASI fund could be reallocated to the DI trust fund. Such action would hasten the insolvency of the OASI trust fund, however. For additional information, see CRS Report R43318, Social Security Disability Insurance (DI) Trust Fund: Background and Solvency Issues, by [author name scrubbed].
the benefit cut scenario, under which benefits would be cut across the board and
Both scenarios assume that current law would remain in place until the combined trust funds became insolvent. If changes were made sooner, they could be smaller, since the burden of lower benefits or higher taxes would be shared by more beneficiaries or workers over a longer period.24 Either scenario would essentially convert Social Security to a pure pay-as-you-go system, in which income and outgo are equal on an annual basis and there are no trust fund assets. These scenarios are only two of a wide range of possibilities.
Benefit Cut Scenario Size of Benefit Cuts If the trust funds were allowed to run out, Congress could eliminate annual cash-flow deficits by cutting benefits so that spending equals tax income on an annual basis. According to the trustees, achieving annual balance would require benefit cuts of 23% in 2033, the first year of insolvency, rising to 28% by 2088. To maintain balance after 2088, the Social Security trustees project that larger benefit reductions would be needed, because people would continue to live longer and therefore collect benefits for longer periods. Figure 2 shows the percentage of scheduled benefits that are payable each year with scheduled revenues. Figure 2. Payable Benefits as a Share of Scheduled Benefits at Current Law Payroll Tax Rates, 2014-2088
Source: CRS, based on 2014 Social Security Trustees Report and Social Security Administration memorandum by Chris Chaplain and Daniel Nickerson, "Present-Law OASDI Payable Percentages: Present-Law Revenue as a Percent of the Cost of Providing Scheduled Benefits through Year 2087," July 2, 2013 (hereinafter cited as SSA Payable Benefits Memo).
One way of measuring the adequacy of Social Security benefits is the replacement rate, the ratio of a person's benefit to pre-retirement earnings. Replacement rates can be calculated in different ways. This report uses the methodology used by SSA's actuaries, which is to calculate a worker's initial Social Security benefit as a percentage of the worker's average indexed monthly earnings.25 Social Security was established to replace income lost to a family as a result of the retirement, death, or disability of a worker. To ensure that average benefit levels grow along with average wages—thus keeping replacement rates generally steady—initial Social Security benefits are indexed to wage growth. Historically, wages have generally risen faster than prices, allowing the standard of living to rise from one generation to the next.
Figure 3 shows projected replacement rates under the benefit cut scenario for hypothetical low, medium, and high earners who claim retirement benefits at the age of 65 from 2014 through 2088.26 The Social Security benefit formula is progressive, so the replacement rate is higher for people with lower earnings than for people with higher earnings. In 2014, the estimated rates are 55% for low earners, 40% for medium earners, and 34% for high earners.27
Between 2014 and 2025, replacement rates for people aged 65 are projected to decrease by about 10% because of the scheduled increase in the full retirement age (FRA). Thereafter, the FRA would remain 67, and scheduled replacement rates would remain steady. But when the trust funds become exhausted, payable benefits and replacement rates would fall immediately by 23%.
Because lower earners have higher replacement rates, the 23% reduction would result in a larger percentage point reduction in replacement rates for low earners than for high earners. The replacement rate for low earners would fall from 49% in 2032 to 37% in 2033, a decline of 12 percentage points. In contrast, the replacement rate for high earners would fall from 30% in 2032 to 23% in 2033, a 7 percentage point drop.
Figure 3. Replacement Rates Under Benefit Cut Scenario, 2014-2088
Source: CRS, based on Social Security Administration, Office of the Chief Actuary, Replacement Rates For Hypothetical Retired Workers, Actuarial Note 2014.9, July 2014, and SSA Payable Benefits Memo.
Notes: Replacement rates are for hypothetical earners who claim retirement benefits at the age of 65.
Another measure of benefit adequacy is initial annual benefit amounts. Since benefits are based on workers' lifetime earnings, higher earners tend to receive higher benefit amounts than lower earners. In 2014, a hypothetical low earner is estimated to receive an annual Social Security benefit of $11,077, a medium earner a benefit of $18,251, and a high earner a benefit of $24,198 in 2014.28
Figure 4 shows future initial real benefit amounts in 2014 dollars (i.e., after adjusting for inflation), which illustrates how the purchasing power of benefits will change over time. Because average real earnings generally grow over time, scheduled real benefits also grow. The trustees project that scheduled initial real benefit amounts for hypothetical individuals claiming retirement benefits at the age of 65 will increase by 19% between 2014 and 2033.
Under the benefit cut scenario, real payable benefit levels are projected to drop by 23% after the trust funds become insolvent in 2033, then to once again rise gradually.29 Under the trustees' projections, benefits in 2034 would be 8% lower than they are today, but by 2042 they would again exceed today's levels and would continue to increase thereafter.
Figure 4. Initial Real Annual Payable Benefits Under Benefit Cut Scenario, 2014-2088 Source: CRS, based on 2014 Social Security Trustees Report, table V.C7, at http://www.ssa.gov/oact/tr/2014/lr5c7.html, and SSA Payable Benefits Memo.
Note: Benefits are for hypothetical earners who claim retirement benefits at the age of 65. After insolvency, scheduled benefits would continue to increase because average real earnings are projected to continue to grow. Payable benefits would therefore also grow over time following the drop upon insolvency, though they would be permanently lower than scheduled benefits. For clarity, scheduled benefits are shown only for high earners.
Upon trust fund exhaustion, the system could also be balanced by raising the payroll tax rate so that the tax income would be sufficient to pay scheduled benefits each year.
Size of Payroll Tax Rate Increases The trustees project that paying scheduled benefits after exhaustion in 2033 would require an increase in the combined employee and employer payroll tax rate from the current 12.4% to 16.2% after insolvency in 2033. To sustain balance, the payroll tax rate would have to reach 17.3% by 2088, the last year of the 75-year projection period, and it would likely need to increase further in later years. Figure 5 shows the payroll tax rates needed to pay scheduled benefits from 2014 to 2088. Figure 5. Combined Payroll Tax Rate Needed To Fund Scheduled Benefits, 2014-2088
Source: CRS based on the 2014 Social Security Trustees Report.
Note: Under the trustees' projections, the current 12.4% payroll tax is sufficient to pay scheduled benefits prior to 2033.
Raising the payroll tax rate would increase most workers' taxes by the same proportion. However, because covered wages are taxable only up to a specified maximum ($117,000 in 2014), the effective increase in the payroll tax would be smaller in percentage terms for people who earn more than the taxable maximum than for other workers. Unlike the federal income tax, the Social Security payroll tax is levied at a flat rate starting at the first dollar of wages.
Earlier versions of this report were written by former CRS analysts [author name scrubbed], [author name scrubbed], and Noah Meyerson. All questions should be directed to the current authors.
Social Security Administration, 2014 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, July 28, 2014, at http://www.socialsecurity.gov/OACT/TR/2014. (Hereinafter cited as 2014 Social Security Trustees Report.)
42 U.S.C. §401. Both the total rate and the allocation between OASI and DI have changed many times; for historical rates, see Social Security Administration, Annual Statistical Supplement, 2013, February 2014, "Table 2.A3: Annual maximum taxable earnings and contribution rates, 1937–2013," at http://www.ssa.gov/policy/docs/statcomps/supplement/2013/2a1-2a7.html#table2.a3.
Social Security Administration (SSA), Trust Fund Data, at http://www.ssa.gov/OACT/ProgData/funds.html. The remaining 0.6% came from transfers from the federal government's general fund, which occurred for several different reasons. See tablenote a in SSA, Old-Age, Survivors, and Disability Insurance Trust Funds Receipts, at http://www.ssa.gov/OACT/STATS/table4a3.html.
See CRS Report RS22350, Railroad Retirement Board: Retirement, Survivor, Disability, Unemployment, and Sickness Benefits, by [author name scrubbed].
See CRS Report RS20607, Social Security: Trust Fund Investment Practices, by [author name scrubbed].
Different terminology can be used to refer to the same phenomenon. For example, instead of "insolvency" or "exhaustion," the Social Security trustees refer to "reserve depletion."
At the end of 2013, the OASI trust fund had assets of $2.7 trillion and the DI trust fund had assets of $90 billion. For detailed data, see Social Security Administration, "Social Security Trust Fund Data," at http://www.ssa.gov/OACT/ProgData/funds.html.
See CRS Report RL33028, Social Security: The Trust Fund, by [author name scrubbed] and [author name scrubbed].
Social Security Administration, 1982 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, April 1, 1982. (Hereinafter cited as 1982 Social Security Trustees Report.)
The OASI trust fund borrowed $17.5 billion in November and December of 1982; about $5.1 billion was from the DI trust fund and $12.4 billion was from Medicare's HI trust fund.
For more information, see "Interfund Borrowing" in CRS Report R43318, Social Security Disability Insurance (DI) Trust Fund: Background and Solvency Issues, by [author name scrubbed].
2014 Social Security Trustees Report, Table IV.B3.
2014 Social Security Trustees Report, Table VI.E1.
Congressional Budget Office, The 2014 Long-Term Budget Outlook, July 2014, at http://cbo.gov/sites/default/files/cbofiles/attachments/45471-Long-TermBudgetOutlook.pdf, p. 51.
However, Congress retains the right to modify provisions of the Social Security Act at any time, which could affect the benefits current and future beneficiaries may receive. (42 U.S.C. §1304.) For more details, see CRS Report RL32822, Social Security Reform: Legal Analysis of Social Security Benefit Entitlement Issues, by [author name scrubbed] and [author name scrubbed].
The 1982 Trustees Report, which projected impending trust fund insolvency, stated that unless legislative changes were made, "inability to pay some benefits on time would result." (1982 Trustees Report, p. 2 [emphasis added].) That language suggests that after insolvency, full benefit payments would have been made on a delayed schedule. The 2014 report uses more neutral language, stating that after insolvency, the trust funds would be "unable to pay scheduled benefits in full on a timely basis." (2014 Trustees Report, p. 4.)
For beneficiaries who receive Social Security benefits based on another person's work record (e.g., spouse benefits), their payment date depends on the birth date of the worker on whose record they receive benefits. The current benefit payment schedule was first implemented for new beneficiaries in May 1997.
The trustees estimate that 75-year solvency could be restored through an immediate payroll tax increase of 2.83 percentage points (from the current 12.40% to 15.23%) or a benefit reduction of 17.4% for all current and future beneficiaries.
This formula uses the highest 35 years of earnings covered by Social Security, indexed to wage growth using the SSA's Average Wage Index (AWI). Other ways to measure replacement rates are discussed in Andrew G. Biggs and Glenn R. Springstead, "Alternate Measures of Replacement Rates for Social Security Benefits and Retirement Income," Social Security Bulletin, vol. 68, no. 2, 2008, at http://www.ssa.gov/policy/docs/ssb/v68n2/v68n2p1.html, and in Social Security Administration, Office of the Chief Actuary, Replacement Rates For Retirees: What Makes Sense For Planning And Evaluation?, Actuarial Note 155, July 2014, at http://www.ssa.gov/OACT/NOTES/pdf_notes/note155.pdf.
The low earner is assumed to have earned 45% of the national average wage ($21,054 in 2014) when working and to receive an annual Social Security benefit of $11,077 in 2014. The medium earner is assumed to have earned the average wage ($46,787 in 2014) and to receive a benefit of $18,251 in 2014. The high earner is assumed to have earned 160% of the average wage ($74,859 in 2014) and to receive a benefit of about $24,198 in 2014. For information on the development of the hypothetical workers, see Social Security Administration, Office of the Chief Actuary, Internal Rates of Return Under the OASDI Program for Hypothetical Workers, Actuarial Note 144, June 2001, at http://www.ssa.gov/OACT/NOTES/note2000s/note144.html.
See Social Security Administration, Office of the Chief Actuary, Replacement Rates For Hypothetical Retired Workers, Actuarial Note 2014.9, July 2014, at http://www.ssa.gov/OACT/NOTES/ran9/an2014-9.pdf.
2014 Social Security Trustees Report, Table V.C7, at http://www.ssa.gov/oact/tr/2013/lr5c7.html.
Immediately before the trust funds become insolvent in 2033, annual scheduled real benefits for individuals retiring at the age of 65 are projected to be $13,146 for the low earner, $21,670 for the medium earner, and $28,712 for the high earner. The annual payable real benefits would be 77% of these amounts.