Title II of the Social Security Act, as amended, establishes the Old-Age, Survivors, and Disability Insurance (OASDI) program, which is generally known as Social Security. It provides cash benefits to retired and disabled workers and their dependents and survivors. Workers become eligible when they have enough years of earnings covered under Social Security; they and their employers pay payroll taxes on those covered earnings. In 1999, about 96 percent of all U.S. jobs are covered , and over 40 million people received $386 billion in benefits, which averaged about $800 per month or $9600 per year. The benefit formula takes into account the lifetime history of earnings and replaces a higher percentage of earnings for lower earners than for higher earners. In contrast, the Supplemental Security Income (SSI) program provides income support to eligible aged and disabled persons regardless of their earnings history. Funds for SSI benefits come from general revenues, not payroll taxes. Persons with income or assets that exceed certain thresholds are not eligible for SSI. In 2001, the maximum federal SSI monthly benefit is $531 for an individual and $796 for a couple and is reduced to reflect receipt of other income, including OASDI benefits. In December 1999, over 6.5 million people received federally-administered SSI benefits; of these about 6.3 million received a federal benefit and about 2.4 million received an SSI state supplemental benefit. In December 1999, the average monthly federal benefit was $342; the average monthly federally-administered state supplement was $111. Medicare’s Hospital Insurance benefits are generally provided automatically and free of premiums to persons aged 65 or older who are eligible for Social Security or Railroad Retirement benefits. Similarly, individuals who have been entitled to Social Security or Railroad Retirement disability benefits for at least 24 months are entitled to such benefits. In addition, Supplementary Medical Insurance benefits are available on a voluntary basis with a monthly premium to cover doctors’ services, tests, and a variety of over medical services. In 1999, Medicare paid a total of $210 billion in benefits and covered nearly 40 million enrollees. According to current estimates, the Hospital Insurance trust fund will be exhausted in 2029. Medicare beneficiaries and others who have low incomes and limited resources may also receive help from the Medicaid program. In 1998, Medicaid made $142 billion in payments for medical services for 41 million recipients, of which about 4 million were aged 65 or older and 6.6 million were disabled. Average payments were about $10,200 for the aged and $9,100 for the disabled. Roughly $32 billion was paid for nursing facilities. According to the OASDI Trustees’ 2001 intermediate, or best-estimate, assumptions, Social Security’s cash flow is expected to turn negative in 2016. In addition, all of the accumulated Treasury obligations held by the trust funds are expected to be exhausted by 2038. Social Security’s long- term financing shortfall stems primarily from the fact that people are living longer while having fewer children. As a result, the ratio of workers paying into the system to beneficiaries has been falling and is projected to decline from 3.3 today to about 2 by 2030. To address the program’s long-term financing shortfall, a variety of proposals have been offered. In choosing among proposals, we have suggested that policymakers should consider three basic criteria: the extent to which the proposal achieves sustainable solvency and how the proposal would affect the economy and the federal budget; the balance struck between the twin goals of individual equity (rates of return on individual contributions) and income adequacy (level and certainty of benefits); and how readily such changes could be implemented, administered, and explained to the public. Moreover, as we have said, reform proposals should be evaluated as packages that strike a balance among individual reform elements and important interactive effects. Overall evaluation of each proposal depends on the weight individual policymakers place on each criterion. From its inception, Social Security was intended to help reduce the extent of dependency on public assistance programs. As it has evolved, the program’s design has reflected that objective. Over time, that objective has come to be stated more broadly as helping ensure adequate incomes. While the Congress has never explicitly defined what constitutes an adequate level of benefits, it stated as early as 1939 that its objective was to “afford more adequate protection.” However, individual savings and other resources were also expected to play a significant role. In response to the grave economic problems of the Great Depression, President Franklin Roosevelt created the Committee on Economic Security in 1934 to study the economic insecurity that individuals faced and to make recommendations on how to address it. The committee’s recommendations became the basis of the Social Security Act of 1935, which created several programs to meet the needs of different population groups, including the aged. Two programs specifically addressed the aged population—Title I’s Old-Age Assistance (OAA) program and Title II’s Old- Age Insurance (OAI) program. OAA benefits, administered by the states with both state and federal funds, were intended to provide immediate cash income for millions of elderly persons without sufficient income for a decent subsistence. OAI benefits, administered by the federal government and funded by equal contributions from both employees and employers, were designed for younger workers to build up their rights to annuities in old age gradually. In effect, the contributions would purchase insurance to protect workers against lost wages when they became too old to work. In debating the creation of OAI, proponents made a variety of arguments in its favor and mentioned several objectives that it would serve. Of these, helping reduce dependency on public assistance was arguably the most fundamental. The Congress was clearly concerned that an increasing number of people were becoming dependent upon the public for their well-being; Social Security would eventually provide benefits that workers and their employers would pay for. Other objectives that were discussed in the debate included stimulating the economy by providing cash income that people would spend and opening up jobs for younger workers by freeing older workers to retire. Implicitly, the Congress designed Social Security benefits with a focus on replacing lost wages. The original formula computed benefits as a percentage of lifetime wages covered under the program in a way that favored lower earners, reflecting a special concern for their benefit levels. Social Security’s framers had targets in mind for benefit levels, but these targets did not appear to be based on any type of scientific research or data analysis. While the Congress made no assertions concerning whether the resulting benefits would be adequate, Senate and House reports stated respectively that under Social Security it would be possible to provide “more than reasonable subsistence” and “not merely subsistence but some of the comforts of life.” The House report also noted that the “benefits provided for workers who have been employed during substantially all their working life will probably be considerably larger than any Federal-aided State pensions could be.” As time passed, the Social Security program grew and evolved. Even before the first monthly benefits were paid in 1940, the Congress enacted amendments in 1939 to “afford more adequate protection to more of our people,” as House and Senate committee reports put it. Changes to benefit levels, coverage of earnings, and eligibility are especially relevant to the program’s adequacy goals. In addition, the introduction of new programs addressed specific needs, such as covering health care costs, promoting retirement saving, and promoting and protecting employer-sponsored pensions. Changes to monthly benefit levels came in different forms at different times. From 1939 until 1950, there were no changes to the benefit formula, and benefit levels, after adjusting for inflation, fell as a result. The 1948 Trustees’ Report expressed concern that inflation was diminishing the adequacy of Social Security benefits and presented a chart showing the decline in inflation-adjusted benefit levels. The 1950 amendments to the Social Security Act increased benefit levels substantially. Then, until 1972, periodic amendments made various ad hoc adjustments to benefit levels. Economic prosperity, along with actuarial methods that often left the Trust Funds with substantial surpluses, facilitated gradual growth of Social Security benefit levels through these ad hoc adjustments. In light of the steady growth of benefit levels, the 1972 amendments instituted automatic adjustments to constrain the growth of benefits as well as to ensure that they kept pace with inflation. Parameters of the benefit formula were automatically adjusted to reflect inflation, and the adjustments affected levels of benefits for both existing and new beneficiaries. However, wages grew more slowly and prices grew more quickly in the 1970s than they had historically. As a result, initial benefit levels grew faster than intended. The program’s first benefit reductions in 1977 attempted to correct for those unintended consequences of the 1972 amendments, and the resulting pattern of increasing and then declining benefit levels has become known as the “notch.” In the process, the benefit formula was redesigned so that initial benefits would generally increase with wages for each new group of beneficiaries. As individuals aged, annual cost-of-living adjustments would then increase benefits to keep pace with inflation. In effect, the new formula’s design would generally replace pre-retirement wages for similar individuals at a consistent rate across age groups. Implicitly, this episode illustrates the focus of the Congress on replacing wages and also identifies benefit levels that the Congress considered higher than they intended. The only other significant benefit reductions came in 1983 when the Congress delayed cost-of-living adjustments primarily to address short-term financing problems and gradually increased the retirement age to address long-term financing problems. In addition, a variety of other types of program changes had effects on the extent to which the program helped ensure income adequacy. As amendments extended Social Security coverage to more jobs, more workers would eventually receive benefits. Initially, Social Security only covered the roughly 60 percent of workers in “commerce and industry” whose wages could most easily be taxed and tracked. As the program matured, coverage was gradually extended to new groups of workers, such as farm workers, domestic workers, self-employed workers, and some federal and state government workers.