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 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Outlays  
  Use 90/32/5 PIA factors 0 * * -0.1 -0.3 -0.6 -0.9 -1.3 -1.9 -2.5 -0.4 -7.6
  Use 100/25/5 PIA factors 0 * -0.2 -0.7 -1.5 -2.7 -4.2 -6.2 -8.6 -11.6 -2.4 -35.7

This option would take effect in January 2022.
PIA = primary insurance amount; * = between -$50 million and zero.

The amount of the Social Security benefit 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 (SSA) calculates that amount using a formula applied to a worker’s average indexed monthly earnings (AIME), a measure of average taxable earnings over that worker’s lifetime. The benefit formula is progressive, meaning that the benefit is larger as a share of lifetime earnings for someone with a lower AIME than it is for a person with a higher AIME. To calculate the PIA, the SSA separates AIME into three brackets by using two threshold amounts, often called “bend points.” In calendar year 2020, the first bend point is $960 and the second bend point is $5,785. Average indexed earnings in each of the three brackets are multiplied by three corresponding factors to determine the PIA: 90 percent, 32 percent, and 15 percent. (Bend points rise each year with average wages, whereas the factors remain constant.)

This option would make the Social Security benefit structure more progressive by reducing benefits for people with higher average earnings relative to the benefits they are scheduled to receive under current law, while either holding constant or increasing benefits for people with lower earnings. Starting with people newly eligible in 2022, the first alternative in this option would affect only beneficiaries with an AIME above the second bend point. That alternative would reduce the 15 percent PIA factor by 1 percentage point per year until it reached 5 percent in 2031. It would reduce scheduled benefits for about 13 percent of all newly eligible beneficiaries—those with higher average monthly earnings.

The second alternative in this option would reduce scheduled benefits for more beneficiaries with higher lifetime earnings while increasing scheduled benefits for people with lower lifetime earnings. It would increase the 90 percent factor and lower both the 32 percent and 15 percent factors. The factors would change gradually over 10 years until they reached 100 percent, 25 percent, and 5 percent, respectively. (The 15 percent and 90 percent factors would change by 1 percentage point per year; the 32 percent factor would change by 0.7 percentage points per year.) About 45 percent of new beneficiaries—those with lower average monthly earnings—would receive larger benefits than they would be scheduled to receive under current law. About 55 percent of new beneficiaries—those with higher average monthly earnings—would receive benefits that are smaller than they are scheduled to receive under current law.

The Congressional Budget Office projects that under current law, the Disability Insurance trust fund would be exhausted in fiscal year 2026, and the Old-Age and Survivors Insurance trust fund would be exhausted in calendar year 2031. Under section 257 of the Deficit Control Act, in its projections CBO must assume that scheduled Social Security benefits would be paid even after the program’s trust funds were exhausted. However, the government’s legal authority to pay benefits would then be limited to the amount received in dedicated tax revenues, which would be insufficient to pay scheduled benefits in full. After trust-fund exhaustion, therefore, for the people whose benefits would be lower under this option, the reduction in payable benefits would be smaller than the reduction in scheduled benefits.