Mandatory Spending

Function 650 - Social Security

Make Social Security's Benefit Structure More Progressive

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Outlays                        
  Implement 90/32/5 PIA factors 0 * * -0.2 -0.3 -0.6 -0.8 -1.3 -1.9 -2.5 -0.5 -7.6
  Implement 100/25/5 PIA factors 0 * -0.3 -0.8 -1.5 -2.7 -4.2 -6.2 -8.6 -11.5 -2.6 -35.8

This option would take effect in January 2018.

PIA = primary insurance amount; * = between –$50 million and zero.

The amount of Social Security benefits paid to a disabled worker or to a retired worker who claims benefits at the full retirement age is called the primary insurance amount (PIA). The Social Security Administration calculates the PIA by applying a progressive benefit formula to a worker’s average indexed monthly earnings (AIME), a measure of average taxable earnings over that worker’s lifetime. That amount is separated into three brackets (or portions) by using two bend points. In calendar year 2016, the first bend point is $856 and the second bend point is $5,157. The PIA consists of any average indexed earnings in each of the three brackets multiplied by three corresponding PIA factors: 90 percent, 32 percent, and 15 percent. (Bend points grow each year with average wages, whereas PIA factors remain constant.)

For example, a worker with an AIME of $1,000 would have a PIA of $816 because the 90 percent rate would apply to the first $856, and the 32 percent rate would apply to the remaining $144. A worker with an AIME of $6,000 would have a PIA of $2,273 because the 90 percent rate would apply to the first $856, the 32 percent rate would apply to the next $4,301 ($5,157 minus $856), and the 15 percent rate would apply to the remaining $843 ($6,000 minus $5,157). Because the PIA formula is progressive, it replaces a larger share of lifetime earnings for the worker with a lower AIME than it does for the worker with a higher AIME. (For an AIME of $1,000, the PIA would be 82 percent of the worker’s AIME; for $6,000, the PIA would be 38 percent.)

This option would make the Social Security benefit structure more progressive by cutting benefits for people with higher average earnings while either preserving or expanding benefits for people with lower earnings. Starting with people newly eligible in 2018, the first approach in this option would affect only beneficiaries with an AIME above the second bend point. That approach would reduce the 15 percent PIA factor by 1 percentage point per year until it reached 5 percent in 2027.

The more progressive second approach in this option would reduce benefits for a larger fraction of beneficiaries with relatively high lifetime earnings while increasing benefits for people with lower lifetime earnings. The second approach would lower both the 15 percent and 32 percent PIA factors and would increase the 90 percent factor. The factors would change gradually over 10 years until they reached 5 percent, 25 percent, and 100 percent, respectively. (The 15 percent and 90 percent factors would change by 1 percentage point per year, while the 32 percent factor would change by 0.7 percentage points per year.)

The first approach in this option would affect about 13 percent of all newly eligible beneficiaries, the Congressional Budget Office estimates, and would reduce total federal outlays for Social Security over the 10-year period by about $8 billion. The second approach would increase benefits for about 45 percent of new beneficiaries and reduce benefits for about 55 percent, achieving total federal savings of $36 billion over the 10-year period. In 2046, the first and second approaches would reduce Social Security outlays from what would occur under current law by 3 percent and 7 percent, respectively. When measured as a percentage of total economic output, the reduction in Social Security outlays under the two approaches would be 0.2 percentage points and 0.4 percentage points as the outlays would fall from 6.3 percent to 6.1 percent and to 5.8 percent of gross domestic product, respectively.

An argument in favor of this option is that it would protect or expand Social Security benefits for people with low average earnings while trimming payments to higher-income beneficiaries. This option would help make the Social Security system more progressive at a time when growing disparities in life expectancy by income level are making the system less progressive. (Beneficiaries with higher income typically live longer and experience larger improvements in their life expectancy than lower-income beneficiaries. As a result, higher-income groups receive benefits for more years than lower-income beneficiaries.) The second approach in this option would increase progressivity more than the first approach by boosting benefits to lower-income people.

A disadvantage of this option is that it would weaken the Social Security system’s link between earnings and benefits. In addition, the second approach would reduce benefits for beneficiaries with an AIME above the 45th percentile. In particular, CBO projects that in 2018 the second approach would reduce benefits for people with an AIME higher than about $2,200, or approximately $26,000 in annual indexed earnings.