Social Security, the federal government's largest program, consists of two parts: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). As of December 2006, OASI was paying benefits to 41 million people; another 9 million were receiving DI benefits. In 2006, benefits totaled $454 billion and $91 billion, respectively, for the two programs. Discretionary outlays, mainly for administrative costs, totaled about $5 billion last year.
Spending on OASI benefits has grown at an average annual rate of about 4 percent over the past few years (with annual cost-of-living adjustments accounting for roughly two-thirds of the increase); payments go mostly to retired workers and their spouses and to elderly widows. Although some younger people—chiefly the children of deceased workers—qualify for OASI, 95 percent of the payments go to people age 62 or older. Recipients of disability insurance are mainly in their 50s and early 60s. DI outlays have more than doubled over the past decade, fueled partly by the aging of the baby-boom generation, a phenomenon that will continue to cause increased spending over the next decade. Under current law, OASI outlays also will rise rapidly as people born after World War II begin to qualify for Social Security benefits.
Under current law, the Social Security trust funds will be exhausted in 2046, according to the Congressional Budget Office's most recent projections (see Updated Long-Term Projections for Social Security, June 2006). If the funds were exhausted, the Social Security Administration would not have the legal authority to provide the full benefits that are scheduled to be paid to future beneficiaries. In other publications, CBO has presented scenarios for scheduled and payable benefits, but for the sake of simplicity, this report discusses only scheduled outlays.
Base Social Security Cost-of-Living Adjustments on an Alternative Measure of Inflation
Each year, the Social Security Administration adjusts recipients' monthly Social Security benefits as specified by law. The 3.3 percent cost-of-living adjustment (COLA) that went into effect in January 2007 was based on the increase in the consumer price index for urban wage earners and clerical workers (CPI-W) between the third quarters of 2005 and 2006. (That index is calculated by the Bureau of Labor Statistics, or BLS.) The Social Security Administration starts raising the basic level of benefits to correspond to the percentage increase in the CPI-W when workers become eligible for benefits—for retired workers, at age 62.
The consumer price index, however, may overstate inflation because it does not fully account for changes in patterns of spending. This option would slow the growth of Social Security outlays by setting the COLA equal to an alternative measure of inflation that BLS also calculates—the chained CPI—beginning in 2008. In the Congressional Budget Office's estimation, the chained CPI is likely to grow 0.3 percentage points more slowly than the standard CPI. Setting the COLA equal to the growth in that alternative measure would reduce federal outlays by $1.3 billion in 2008 and by $26 billion over five years. (Using the same alternative measure for all benefit programs that are indexed for inflation would reduce federal spending by $34.5 billion over the five-year period and by nearly $140 billion through 2017.) By 2050, the use of the chained CPI in calculating the COLA would have reduced Social Security outlays by 4 percent—or, measured as a percentage of gross domestic product, from 6.5 percent to 6.2 percent. Most of that reduction (in percentage terms) would be achieved by 2030.
Several other options that would reduce Social Security outlays—such as raising the normal retirement age (Option 650-5) and constraining the increase in initial benefits (Option 650-6)—would affect only future beneficiaries. By contrast, this option would reduce benefits received by current beneficiaries so that the present generation and future generations would share more evenly in the reductions. Also, unlike other approaches that would permanently reduce the rate of growth of Social Security outlays, this option would reduce that growth rate only temporarily. Thereafter, spending would be lower, but it would grow at the same rate as average wages—as it would under current law.
A rationale for this option is that if the CPI-W overstates increases in the cost of living, as many analysts assert, then decreasing the COLA by a corresponding amount would reduce federal outlays but ensure that benefits did not fall any lower in real (inflation-adjusted) terms than they were when recipients became eligible for the program. Devising a "true" cost-of-living index is problematic, however, and collecting and compiling data for such an index is difficult because the types of goods that people buy change constantly. BLS attempts to account for the introduction of new products and for changes in the quality of existing products, but those efforts are necessarily imperfect and may systematically bias the agency's inflation estimates. The so-called substitution effect—when the price of one good increases faster than prices in general and consumers buy less of that good and purchase other goods instead—must also be taken into account. To better address that effect, BLS developed the chained CPI. However, the use of that alternative measure in setting the COLA would be a difficult change to implement because the chained index is subject to revision.
An argument against reducing the COLA is that Social Security beneficiaries may face prices that grow faster than those for the population as a whole. For example, beneficiaries are likely to spend more than younger people do for medical care, the price of which generally increases faster than overall inflation. BLS computes an experimental consumer price index for the elderly (the CPI-E), which aims to track inflation for the population ages 62 and older. From 1983 through September 2006, the CPI-E grew faster than the CPI-W by an average of 0.3 percentage points per year. The difference was mainly attributable to costs for medical care, which rose 2.6 percentage points faster than the CPI-W as a whole.
Another potential drawback of this option is that a reduction in the COLA would generally have a larger effect on the oldest beneficiaries and on those who initially became eligible for Social Security on the basis of a disability. For example, if benefits were adjusted every year by 0.3 percentage points less than the increase in the CPI-W, beneficiaries would face a reduction in benefits at age 75 of about 4 percent compared with what they could have received under current law; at age 95, they would face a reduction of about 9 percent. To protect vulnerable populations, lawmakers might choose to reduce the COLA only for beneficiaries whose income or benefits were greater than specified amounts. Doing so, however, would reduce the option's potential savings.
As required by law, the Social Security Administration calculates retirement benefits on the basis of a worker's wage history, using the average indexed monthly earnings, or AIME. The present formula computes the AIME on the basis of the beneficiary's highest 35 years of earnings that are subject to Social Security taxes.
This option would gradually lengthen the AIME computation period to 38 years of earnings for people who turn 62 in 2010 and beyond. The extended averaging period would generally reduce benefits by requiring that additional years of lower earnings be factored in to the benefit computation.
Lengthening the computation period by three years would reduce federal outlays by $50 million in 2008 and by $5.1 billion through 2012. By 2050, enacting such reforms would have reduced Social Security outlays by 1.9 percent—or, measured as a share of gross domestic product, from 6.5 percent to 6.4 percent.
An argument that supports expanding the computation period is based on continuing increases in life expectancy. Because people are now living longer, stretching the period would encourage them to remain in the labor force longer and would extend the amount of time they paid into the Social Security system. Extending the averaging period would also reduce the advantage currently enjoyed by some workers who postpone entering the labor force. For instance, workers who delay entering the workforce in order to pursue advanced education can generally count on higher annual wages than their counterparts who entered the labor force at a younger age but obtained jobs with lower annual wages. Because many years of low or no earnings can now be ignored in calculating the AIME, the former group experiences little or no loss of benefits for any additional years spent not working and thus not paying Social Security taxes.
An argument against this option is that some beneficiaries retire early because of circumstances outside of their control, such as poor health or job loss, and this option could adversely affect those recipients who were least able to continue working. Other workers who would be disproportionately affected include those who did not work for significant periods, such as parents who interrupted a career to raise children or workers who experienced long stretches of unemployment.
Social Security provides benefits not just to retirees but to their dependents as well. The unmarried children of retired workers, for instance, generally qualify for Social Security benefits under the following circumstances: if they are under age 18, if they are 18 and still in high school, or if they become disabled before age 22. A child's benefit is equal to one-half of his or her parent's basic benefit, subject to a dollar limit on the total amount that a given family may receive.
This option would eliminate benefits for children of retirees who have not yet reached the normal retirement age (NRA), beginning with retirees who will reach age 62 in January 2008. The option would reduce federal outlays by $100 million in 2008 and by $2.6 billion over the 2008-2012 period.
An advantage of this option is that it would encourage some would-be early retirees to remain in the labor force longer. At present, benefits for retired workers and their spouses are reduced if retirement occurs before the normal retirement age, but children's benefits are not reduced. An additional consideration is that younger workers are more likely than their older counterparts to have children under the age of 18. Thus, workers who have not yet reached the NRA currently have an incentive to retire while their offspring are still eligible for benefits. (That incentive is quite small for families in which spouses are also entitled to dependents' benefits. Because of the limit on total family benefits, any increase that is attributable to a family's eligible children in such cases may not exceed 38 percent of the amount on which a worker's benefits are based.)
A potential disadvantage of this option is that for workers whose retirement was not voluntary—who, for example, retired because of poor health but did not qualify for disability benefits—the loss of family income under the option might result in financial hardship. Moreover, because spouses who are younger than age 62 receive benefits only if they have children who are under age 16 or are disabled, eliminating children's benefits for families of early retirees would result in a total loss of benefits for spouses in those families. In such cases, the loss of income generally would be significant. (The option could be adjusted so that those spouses continued to receive benefits, but in that case, the reduction in outlays would be slightly smaller.)
A modified approach to this option would apply the same actuarial reduction to children's benefits that was applied to workers' benefits. Thus, the child of a worker who retired three years before the normal retirement age would receive a maximum of 40 percent of the parent's basic benefit instead of the 50 percent that is currently allowed. The total reduction in outlays would, depending on the year being considered, represent a quarter to a half of the potential savings from eliminating benefits for children of early retirees. Although such a modified approach would have a smaller effect on federal outlays than the elimination of benefits would have, it would protect workers who had young children from experiencing large losses in benefits. However, that approach would also retain most of the incentive for workers to retire early.
Require Children Under Age 18 to Attend School Full Time as a Condition of Eligibility for Social Security Benefits
Unmarried children of retired, disabled, or deceased workers may qualify for Social Security benefits if they are less than 18 years of age, regardless of their educational status. Once children turn 18, benefits generally continue only for those who are enrolled in secondary school.
Such children continue to be eligible for benefits until the second month after they turn 19 or until they complete the school year in which they celebrate their 19th birthday—whichever comes first. To qualify for benefits before that cutoff date, those older children must provide the Social Security Administration (SSA) with a statement by a school official certifying their attendance. (A student is not required to attend school during summer breaks if he or she plans to return to school in the fall.) Students who are being homeschooled or are participating in GED (General Education Development) programs may qualify for benefits, depending on the laws in their state. In December 2005, SSA paid benefits to about 127,000 student beneficiaries. (Fifty percent of those students were survivors of deceased beneficiaries, about 40 percent were children of disabled workers, and the remainder were children of retired workers.)
This option, which is included in the President's 2008 budget request, would extend the attendance requirement to child beneficiaries who are age 16 or 17 and who have not graduated from high school. No benefits would be paid for any month in which the child did not meet the requirement of full-time school attendance.
In 2005, 785,000 16- and 17-year-olds received a total of about $4.5 billion in Social Security benefits. About 5 percent of those beneficiaries did not attend school. The Congressional Budget Office's estimates of the reductions in outlays under this option incorporate the assumption—which is highly uncertain—that the option would reduce the number of those dropouts by one-quarter. Under that assumption, outlays would fall by about $25 million in 2008 and by $700 million over five years.
Proponents of this option note that it would encourage children who are eligible for the benefit to remain in school. However, an argument against the option is that by requiring SSA to collect attendance information on 16- and 17-year-old beneficiaries, the option would increase the agency's administrative costs as well as the costs to schools and affected beneficiaries. In addition, opponents say, the option could reduce benefits for families with children who do not attend school because of mental or emotional disabilities. SSA could make exceptions in such cases, but doing so would increase administrative costs and could entail delays in benefits. Another argument against the option is that it would reduce the income of affected families, who might already be facing financial pressures because of a parent's death or disability.
Under current law, the age at which workers become eligible for full retirement benefits—known as the normal retirement age, or NRA—varies, depending on the individual's year of birth. For workers born before 1938, the NRA is 65. For workers born in subsequent years, the eligibility age increases in two-month increments until it reaches 66 for workers born in 1943. For workers born between 1944 and 1954, the NRA remains at 66 but rises, again in two-month increments, until it reaches 67 for workers born in 1960 or later. Workers can still receive benefits at age 62, but the benefit they receive at that age will represent a smaller share of what they could have qualified for if they had waited until the normal retirement age to claim benefits.1
Under this option, the NRA would begin to increase for workers born in 1946 (who turn 62 in 2008) and would reach 67 for workers born in 1951. Thereafter, the retirement age would increase by two months a year until it reached 70 for workers born in 1969. After that, it would increase by one month every other year. As under current law, workers would still be able to begin receiving reduced benefits at age 62, but the amount of the reductions would be larger. For most purposes, this approach to constraining the growth of benefits is equivalent to reducing earnings-replacement rates. (See Option 650-6 for a more direct method of reducing those rates.) However, the benefits of workers who qualify for disability insurance would not be reduced under this approach.
This option would shrink federal outlays by $50 million in 2008 and by $6.2 billion over five years. By 2050, the option would have reduced Social Security outlays by 14 percent—or, measured relative to the size of the economy, from 6.5 percent of gross domestic product to 5.6 percent.
A rationale for this option is that people who turn 65 today will, on average, live to collect Social Security benefits for significantly longer than retirees did in the past, and life expectancy is projected to continue to increase. For example, over the next 25 years, the Social Security trustees project that life expectancy at age 65 will increase from 18.4 years to 19.9 years. Therefore, a commitment to provide retired workers with a certain monthly benefit at age 65 in 2030 is more costly than that same commitment made to today's recipients.2 Linking the normal retirement age to future increases in life expectancy is one way of dealing with that source of the program's rising costs.
An argument against this option is that it would create a somewhat stronger incentive for older workers nearing retirement to apply for disability benefits as a way to receive a higher monthly benefit amount. For instance, under current law, workers who retired at age 62 in 2029 would receive 70 percent of their primary insurance amount, or PIA (the benefit they would have received if they had claimed benefits at their normal retirement age); if they qualified for disability benefits, however, they would receive 100 percent of their PIA. Under this option, workers who retired at 62 in 2031 would receive only 55 percent of their PIA, but they would still receive 100 percent if they qualified for disability benefits. To eliminate that added incentive to apply for disability benefits, policymakers could narrow that difference by also reducing scheduled disability payments—for example, by setting the benefits for disabled workers at the level they would have received upon retiring at age 65.
Social Security benefits for retired and disabled workers are based on those individuals' average level of earnings over their working lifetime. The Social Security Administration (SSA) uses a formula to compute a worker's initial benefit; in that computation, it adjusts the benefit formula to take into account the average economywide growth of wages—a process known as wage indexing. As a result of that indexing, average benefits for Social Security recipients grow at the same rate as do average wages, and such benefits replace a constant portion of those wages. (After people become eligible for benefits, their monthly payment is also adjusted each year to take into account increases in the cost of living.)3
One way to constrain the growth of Social Security benefits would be by changing the initial benefit computation so that the real (inflation-adjusted) value of average initial benefits would no longer rise over time. Under such an approach, which is often called price indexing, increases in real wages would still result in higher real Social Security payroll taxes but would no longer result in higher real benefits. Specifically, this option would link the growth of initial benefits to the growth of prices (as measured by changes in the consumer price index) rather than to the growth of average wages, beginning with participants who became eligible for benefits in 2008. (Under the option, the formula would actually continue to be indexed to wages. The benefit generated by that formula would then be reduced by the ratio of the price level to the average wage level.) Such a switch to indexing initial benefits on the basis of prices rather than wages—a so-called pure price-indexing approach—would reduce federal outlays by $150 million in 2008 and by $13.6 billion over five years. By 2050, the option would have reduced Social Security outlays by 31 percent—or, measured relative to the size of the economy, from 6.5 percent of gross domestic product to 4.5 percent.
Under pure price indexing, the reduction in payments relative to those that are scheduled to be paid under current law would be larger for each successive cohort of beneficiaries after 2008, and the extent of the reduction would be determined by the growth of real wages in future years. For example, if real wages grew by 1.2 percent annually (which is approximately the assumption incorporated in the Congressional Budget Office's long-term Social Security projections), workers who were first eligible for benefits in 2030 would receive 24 percent less than they would have received under the current rules; those eligible for benefits in 2050 would receive 40 percent less.
An alternative approach, progressive price indexing, would retain the current formula for workers who had lower earnings, reducing the growth of initial benefits only for workers who had higher earnings. The President indicated support for that idea in his 2008 budget submission.4
Currently, the formula for calculating initial Social Security benefits is structured so that workers who have higher earnings receive higher benefits, but the benefits paid to workers who have lower earnings replace a larger share of their earnings. Under progressive price indexing, benefits for the 30 percent of workers who had the lowest lifetime earnings would grow with average wages, as they are currently slated to do. Initial benefits for higher-income workers would grow more slowly, at a rate that corresponded to their position in the distribution of earnings. For example, for workers whose earnings put them at the 31st percentile of the distribution, benefits would grow only slightly more slowly than wages, whereas for the highest earners, benefits would grow with prices—as they would under pure price indexing. The benefit formula would gradually become flatter, and after about 70 years, the top 70 percent of earners would all be receiving the same monthly benefit.
Under progressive price indexing, initial benefits for the majority of workers would grow more quickly than prices but more slowly than average wages. A switch to progressive price indexing would reduce federal outlays by $25 million in 2008 and by $7 billion over five years. By 2050, outlays for Social Security would have been reduced by 20 percent, or from 6.5 percent of gross domestic product to 5.2 percent.
An advantage of both price-indexing approaches is that they would reduce outlays for Social Security compared with those scheduled to be paid under current law but real average benefits in the program would not decline. If the pure price-indexing approach was followed, future beneficiaries would generally receive not only the same real monthly benefit paid to current beneficiaries but also, as average longevity increased, a larger total lifetime benefit. However, a disadvantage of that approach is that benefits would replace a smaller portion of workers' earnings than they do today.5
Progressive price indexing would reduce scheduled Social Security outlays by a smaller amount than would pure price indexing, and beneficiaries who had lower earnings would not be affected. Real annual average benefits would still increase for all but the highest-earning beneficiaries. Benefits would replace a smaller portion of affected workers' earnings than they do today but a larger portion than they would under pure price indexing.
Under both price-indexing approaches, the reductions in benefits relative to current law would be greatest for beneficiaries in the distant future. Those beneficiaries, however, would have had higher real earnings during their working years and thus a greater ability to save for retirement.
Require State and Local Pension Plans to Share Data with the Social Security Administration
Two provisions of Social Security law—the government pension offset and windfall elimination—reduce benefits for individuals who receive pension income resulting from work that was not covered by Social Security—for example, some jobs in state and local government.6 To accurately apply those provisions, the Social Security Administration (SSA) must know which Social Security beneficiaries are receiving pension income based on noncovered employment. The Office of Personnel Management provides data to SSA that identify workers who receive pension benefits from the federal government, but SSA relies largely on beneficiaries to report any such income they receive from state or local governments.
This option, which is included in the President's 2008 budget request, would require state and local governments to inform SSA of pension benefits from noncovered employment that they are providing to retirees or other beneficiaries. Developing and implementing a system to collect and administer that information would take several years, but when it was fully phased in, it would result in lower Social Security payments for about 60,000 individuals annually, reducing federal outlays by about $150 million in 2011 and by $450 million through 2012. A substantial portion of that estimated change in spending—about half of it in 2011, declining to 15 percent by 2017—would stem from recovering past overpayments of benefits through reductions in future payments to beneficiaries who had state and local pension income they had not reported.
The standard formula for Social Security benefits is structured to replace a larger portion of earnings for workers whose career earnings were low than the portion it replaces for higher-earning workers. But that formula does not differentiate between workers whose career earnings are actually low and workers who appear to have low career earnings only because a portion of their past employment was in a job that was not covered by Social Security. If the standard formula was applied without an adjustment for that circumstance, recipients of government pension income would receive benefits that, relative to their Social Security payroll taxes, would be larger than those received by other workers with similar lifetime earnings. The windfall elimination provision offsets that extra benefit.
Under the standard benefit formula, some beneficiaries—known as dependent spouses—collect retirement benefits that are based on the earnings of their spouses or ex-spouses. If the primary earner is retired or disabled, the dependent spouse may generally receive benefits equal to half the primary earner's benefits; if the primary earner is deceased, the dependent spouse may generally receive benefits equal to the primary earner's. In both cases, spousal benefits are effectively reduced dollar for dollar by any Social Security benefits that the dependent spouse has earned on his or her own. Under the government pension offset, spousal benefits are also reduced but by $2 for every $3 in pension benefits from government employment not covered by Social Security. That approach effectively treats two-thirds of the pension income from noncovered employment as equivalent to Social Security benefits.
Although beneficiaries subject to the government pension offset or windfall elimination provision are required to inform SSA if they receive pension benefits from noncovered jobs, SSA does not obtain that information in about 4 percent of cases. Under this option, state and local governments would be required to provide the necessary data in electronic form—which would give SSA access to the same data on state and local government pension income that they currently have for federal pension benefits.
An advantage of this option is that it would allow SSA to compute benefits more accurately. Federal pensioners and state and local pensioners are typically subject to the government pension offset and windfall elimination provision; however, state and local pensioners who fail to accurately report their pension information to SSA may receive larger benefits than they are legally eligible for.
A disadvantage of this option is that it would increase the administrative burden of state and local governments. Those agencies, however, already provide data on individuals' pension income to the Internal Revenue Service on Form 1099R, so the additional costs for administering the option would be relatively small.
When a Social Security beneficiary who is living with a spouse dies, the spouse receives a lump-sum death benefit of $255. The payment may also go to a spouse who was not living with the deceased beneficiary but was eligible for Social Security benefits on the basis of the beneficiary's earnings record. If the deceased beneficiary had no spouse but did have a child who was eligible for dependent benefits, the death benefit is paid to the child. (No payment is made if there is no eligible spouse or child.) The Social Security Administration (SSA) pays a lump-sum death benefit about 45 percent of the time when an insured individual dies. In calendar year 2005, it made about 830,000 payments, which accounted for outlays of $211 million.
This option would eliminate lump-sum death payments for beneficiaries who died after September 30, 2007, which would reduce federal outlays by $175 million in 2008 and by $1.0 billion through 2012.
Although the original 1935 Social Security Act did not provide for survivors' benefits, it included a lump-sum benefit to be paid if a worker died before the statutory retirement age.7 When monthly survivors' benefits were introduced in 1939, the lump-sum death benefit was changed and paid only in cases in which no one was entitled to survivors' benefits on the basis of the deceased person's earnings. The lump-sum death benefit went either to a family member or to an individual who helped pay burial expenses. The amount of the payment was linked to the monthly benefit that the deceased worker would have received had he lived.
In 1950, lawmakers expanded eligibility for the lump-sum benefit, which was provided even when survivors' benefits were also paid. As a result, the SSA paid the benefit in the case of nearly every death, sometimes to distant relatives or funeral homes. In 1954, policymakers capped the benefit at $255. That limit applied more and more frequently, as monthly benefits increased, and by the mid-1970s, virtually all payments were $255. In 1981, legislation narrowed eligibility for the benefit to its current status. (Although the payment is still frequently referred to as a "burial" benefit, it is no longer linked to burial expenses.)
Supporters of eliminating the lump-sum death benefit note that because the payment is small, the cost of administering it, measured as a percentage of the payment, is relatively high: Administrative expenses account for 1 percent of total Social Security outlays but about 7 percent of outlays for the lump-sum death benefit.
Opponents of the option maintain that although the benefit is relatively small, it is of value to many survivors, who receive it at a time of extra financial pressures. If the lump-sum benefit is to be eliminated, opponents argue that such action should be taken as part of a set of broader changes to Social Security that would protect lower-income participants from reductions in their total benefits.
Under current Social Security law, the husband or wife of a worker is entitled to a spousal benefit that is equal to 50 percent of the worker's benefit—if that amount is higher than the spouse's own earned benefit. In such cases, a couple's combined benefit would be 150 percent of the higher earner's benefit. Otherwise, the couple's benefit would be between 150 percent and 200 percent of the higher earner's benefit. (The 200 percent applies only if both spouses earn the same benefit.) Upon the death of either spouse, the survivor's benefit is generally set equal to 100 percent of the higher earner's benefit.
This option would reduce the spousal benefit to 33 percent of the higher-earning spouse's benefit for workers who become eligible for Social Security benefits in 2008 or later. Such an approach would reduce federal outlays by $25 million in 2008 and by $1.9 billion over five years. In the future, those reductions would decline as a portion of total Social Security benefits with the continued narrowing of the gap between the earnings of male and female workers. By 2050, the implementation of this option would have reduced Social Security outlays by 1.1 percent—or, measured as a percentage of gross domestic product, from 6.5 percent to 6.4 percent.
A rationale for implementing this option is that it would strengthen the connection between taxes paid and benefits received. When the current rules for the spousal benefit were established, households in which only the husband worked were considered typical, and the spousal benefit was designed to ensure adequate benefits for such couples. However, those rules weaken the link between the Social Security taxes that are paid and the benefits that are received. Relative to Social Security taxes paid, a one-earner couple currently receives substantially higher benefits than either a single worker who has the same earnings history or a two-earner married couple.
Reducing the couple's benefit has been proposed in combination with increasing the benefit paid to surviving spouses (see Option 650-10); implementing the two changes together would effectively transfer income from couples to survivors. With the death of a spouse, a survivor faces not only reduced Social Security benefits but potentially lost pension and wage income as well. As a result, widows and widowers are more likely than married couples to be poor. In 2004, 4.5 percent of married people over the age of 65 were poor, compared with 14.5 percent of widows and widowers in the same age group.8
Moreover, larger households benefit from economies of scale. (For example, the cost of housing that is suitable for two people is usually less than twice that for two people living separately.) Consequently, a two-person household can achieve the same standard of living as two single-person households at less total cost. The Census Bureau's poverty measures, created many years ago, imply that the cost of living for a two-person elderly household is only 26 percent higher than that for a one-person elderly household. If that is correct, a 33 percent spousal benefit would more accurately account for the cost of supporting a two-person household.
An argument against this option is that the economies of household size are hard to compute and may be smaller than the Census Bureau's estimate. A National Research Council panel in 1995 estimated that the costs for a two-person household are about 60 percent higher than a one-person household's costs.9 That estimate would support retaining the current 50 percent spousal benefit. Another argument against this option is that it would reduce benefits for spouses who stay home to raise children.
Under the laws that currently govern the Social Security program, a surviving spouse is eligible for between one-half and two-thirds of the total Social Security benefit that would have been paid to the couple if the deceased spouse were still alive.
If the lower-earning spouse qualified for a worker benefit that was less than half of the benefit earned by the higher-earning spouse, the couple's total benefit would be 150 percent of the higher earner's benefit. Upon the death of either spouse, the benefit would generally be reduced to 100 percent of the higher earner's benefit—that is, the survivor's benefit would equal 67 percent of the couple's benefit. If the lower earner's benefit was greater than 50 percent of the higher earner's, the couple's total benefit would simply be the sum of the two benefit amounts. Upon the death of either spouse, however, the survivor's benefit would equal the greater of the two individual benefits. In that case, the survivor's benefit would be less than 67 percent of the couple's benefit and could be as low as 50 percent.
Under this option, the benefit of a surviving spouse would amount to at least 75 percent of the couple's benefit. That change, if implemented, would increase federal outlays by $18 billion in 2008 and by $119 billion over five years. By 2050, the option would have increased Social Security outlays by 3.3 percent—or, measured relative to the size of the economy, from 6.5 percent of gross domestic product to 6.7 percent.
Widows and widowers are more likely than married couples to be poor. In 2004, for example, 4.5 percent of married people over the age of 65 were poor, compared with 14.5 percent of widows and widowers in the same age group.10 Increasing the survivor's benefit has been proposed in combination with a reduction in the couple's benefit (see Option 650-9). Implementing the two changes together would effectively transfer income from couples to survivors.
A rationale for this option is that it would make the Social Security program more equitable. Although single-earner couples benefit greatly from the spousal benefit, two-earner couples may not benefit at all. The greatest beneficiaries of this approach would be the surviving spouses of two-earner couples in which the two individuals had relatively equal benefit amounts. Under this option, those survivors' benefits would increase by 50 percent. Survivors of single-earner couples—who gain the most from the spousal benefit—would gain less under the option. Their benefit would increase from 67 percent to 75 percent of the couple's benefit.
An argument against this option is that it would not target beneficiaries who were most in need. For instance, even survivors with relatively high Social Security benefits or with substantial income from other sources would benefit. However, to help reduce costs, the option could be limited to certain beneficiaries. For example, in 2001, the President's Commission to Strengthen Social Security proposed that a surviving spouse receive 75 percent of the couple's benefit, but if that amount was greater than the individual benefit earned by the average worker, it would be reduced to the average benefit amount. Such an approach would reduce the cost of this option by almost 90 percent.
Increase Social Security Benefits for Workers Who Have Low Earnings Over a Long Working Lifetime
Social Security benefits are generally calculated on the basis of a worker's average wages over the course of his or her career. Under the standard formula, benefits are the same regardless of whether recipients had low lifetime earnings because they were out of the workforce for many years or because they consistently received low earnings over many years of work. Recognizing that workers with consistently low annual earnings are more likely to be in financial need, policymakers established a second formula—the "special minimum benefit"—in Social Security in 1972.11
Under that provision, participants receive the higher of the standard benefit or the special minimum benefit. Unlike the standard formula, in which average benefits grow with average wages, the special minimum formula is indexed to prices. As a result, the gap between the two formulas is continually shrinking. Each year, fewer people gain from the minimum benefit; those who do, gain less. The special minimum is projected to provide no benefit to workers who become eligible in 2010 and later.
This option, which was an element of Plan 2 of the President's 2001 Commission to Strengthen Social Security, would replace the special minimum benefit with an enhancement for participants who worked many years but had low average wages. The provision would apply to workers who become eligible to claim benefits in 2008 and later. All benefits would be based on the standard formula, but benefits for some workers would be multiplied by an additional factor. The option would increase federal outlays by $400 million in 2008 and by $22.8 billion over five years, amounts that include offsetting saving sin the federal share of the Supplemental Security Income and Medicaid programs. By 2050, the option would have increased Social Security outlays by 5.5 percent—or, measured relative to the size of the economy, from 6.5 percent of gross domestic product to 6.9 percent.
This option would increase the standard benefit for workers who had more than 20 years of work to their credit but whose average indexed monthly earnings were below those of workers who earned twice the minimum wage for 35 years of full-time work. The effect of the option would be greater for those beneficiaries who had more years of work and for those who had lower average indexed monthly earnings. For example, the benefit for workers who worked full time for 30 years but never earned more than the minimum wage would be increased by 40 percent.
Although a rationale for this option is that it would help those workers whom the special minimum benefit was also designed to assist—workers who had a history of consistently low annual earnings—a drawback to the enhanced benefit is that it would not distinguish between those who had low annual earnings because they earned low hourly wages and those who had higher hourly wages but elected to work for only part of the year.
See www.ssa.gov/OACT/ProgData/ar_drc.html for a table of NRAs by birth year and details of how the age at which benefits are first claimed affects monthly benefit amounts.
For a fuller explanation of how benefits are computed, see Congressional Budget Office, Social Security: A Primer (September 2001), pp. 19-24.
See Congressional Research Service, Social Security: The Government Pension Offset (GPO), CRS Report for Congress RL32453 (updated April 8, 2005), and Social Security: The Windfall Elimination Provision (WEP), CRS Report for Congress 98-35 (updated January 3, 2006).
The description that follows draws mostly from Larry DeWitt, The History & Development of the Lump Sum Death Benefit, Research Note No. 2 (Social Security Administration, Historian's Office, June 1996), available at www.ssa.gov/history/lumpsum.html.
Social Security Administration, Income of the Population 55 or Older, 2004 (May 2006), Table 8.1.
National Research Council, Measuring Poverty: A New Approach (Washington, D.C.: National Academy Press, 1995), pp. 58-60.
Social Security Administration, Income of the Population 55 or Older, 2004 (May 2006), Table 8.1.
See Kelly A. Olsen and Don Hoffmeyer, "Social Security's Special Minimum Benefit," Social Security Bulletin, vol. 64, no. 2 (2001/2002), pp. 1-15.