Function 650 - Social Security
Set Social Security Benefits to a Flat Amount
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
|Change in Outlays
|Set Social Security benefits to 150 percent of the federal poverty guidelines
|Set Social Security benefits to 125 percent of the federal poverty guidelines
Social Security is the largest single program in the federal government's budget. It comprises two parts: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). OASI pays benefits to retired workers, their eligible dependents, and some survivors of deceased workers. DI pays benefits to disabled workers and their dependents until those workers are old enough to claim full retirement benefits under OASI.
To be eligible for Social Security benefits, a worker is required to have a sufficient history of earnings in employment subject to Social Security payroll taxes. Benefits for retired and disabled workers are based on past earnings. In particular, benefits are based on average indexed monthly earnings (AIME), a measure of taxable earnings over a worker's lifetime. In the computation of AIME, past taxable earnings are indexed using the average wage indexing series (AWI) to reflect the general rise in average wages in the economy that tends to occur over time. A progressive formula is then applied to the AIME to compute the primary insurance amount (PIA), an amount that is a key determinant of a worker's initial benefit. The progressive formula means that benefits replace a higher percentage of earnings for workers with lower earnings than for workers with higher earnings. In years after initial eligibility, a cost-of-living adjustment (COLA) is applied to the PIA to reflect annual growth in consumer prices. In September 2022, the average monthly benefit was $1,674 for retired workers and $1,363 for disabled workers.
For retired-worker beneficiaries, initial benefits depend on the age at which a recipient chooses to start claiming them. Those who claim benefits at their full retirement age (FRA), also called the normal retirement age, receive a benefit equal to their PIA. (The FRA varies by the year of birth of the worker and is 67 for workers who turn 62 in 2022 or later.) Retired-worker beneficiaries are eligible to begin receiving benefits when they turn 62. Those who claim benefits before their FRA receive a benefit that is smaller than their PIA, and those who claim after their FRA receive a benefit that is larger than their PIA. (That permanent increase in monthly benefits is called the delayed retirement credit.) For example, for workers with an FRA of 67, monthly benefits are 70 percent of the PIA for those who claim benefits at the age of 62 and 124 percent of the PIA for people who wait until age 70 to claim. (There are no additional benefit increases if people claim benefits after age 70.)
Benefits for eligible dependents and survivors of retired and disabled workers are based on the worker's PIA and may also be adjusted on the basis of the age at which benefits are claimed and other factors. Before any adjustments, a dependent spouse, a child of a retired worker, or a child of a disabled worker receives 50 percent of the worker's PIA. A child of a deceased worker receives 75 percent of the worker's PIA. A widow or widower receives 100 percent of the worker's PIA.
Under this option, the PIA for all retired or disabled workers would be the same; that amount would no longer depend on past earnings. Workers with high lifetime incomes would see reductions in benefits under this option compared with the benefits scheduled under current law. Some workers with low lifetime earnings would receive larger benefits than are scheduled under current law.
Key Design Choices
Several key design choices about a new flat benefit would have to be made, including the following:
- Where to set the new benefit level;
- What eligibility requirements to use for the benefit;
- Whether to retain claiming-age adjustments; and
- What benefits to provide for dependents and survivors.
Benefit Level. The amount of the flat benefit would have important implications for workers' benefits and the budgetary effect of the option. The size of the reduction in Social Security spending would depend on the benefit amount under this option relative to the average benefit under current law. The smaller the new flat benefit, the larger the resulting savings and the more beneficiaries who would face a benefit reduction relative to benefits scheduled under current law.
Eligibility Requirements. Whether to require earnings in employment subject to Social Security payroll taxes to be eligible for the flat benefit would affect the number of beneficiaries under this option. Keeping the same eligibility requirements as under current law would not change the population eligible to receive benefits. Waiving any requirement for an earnings history to receive the flat benefit would result in more beneficiaries than under current law, which would reduce the savings from the option.
Claiming-Age Adjustments. Under current law, retired-worker beneficiaries can claim benefits before their FRA, but their benefits are reduced. Eliminating that reduction would lead to beneficiaries claiming earlier than if they were only allowed to claim their full benefits at their FRA. It would therefore reduce savings from the option. In addition, eliminating the benefit reduction for early claiming would discourage work.
Under current law, retired-worker beneficiaries can receive benefit increases when they delay claiming after their FRA. Eliminating the delayed retirement credit would increase long-term savings from the option but would discourage work.
Benefits for Dependents. Maintaining dependent and survivor benefits would mean that Social Security would continue to provide financial support to family members of worker beneficiaries. However, the reduction in Social Security outlays would be larger if those benefits were not provided.
This option consists of two alternatives, both of which would take effect in January 2024. Under both alternatives, in any given year, Social Security benefits for all newly eligible beneficiaries at their full retirement age would be the same—an amount that would be determined relative to the federal poverty guidelines (commonly known as the federal poverty level, or FPL) for a single person. The FPL is $1,133 per month in 2022.
The FPL is adjusted annually using the consumer price index for all urban consumers (CPI-U). In both alternatives, the initial benefit amount for workers who became eligible for Social Security would also be adjusted using the CPI-U instead of the AWI; after 2024, initial benefits would increase for newly eligible beneficiaries each year, but those increases would be smaller than under current law.
For both alternatives, eligibility criteria for Social Security benefits and adjustments to benefit levels for early and delayed claiming would remain unchanged from current law, and all disabled workers would be eligible for the flat dollar benefit upon entitlement. Additionally, both alternatives would provide benefits to dependents and survivors as under current law.
- Under the first alternative, the flat benefit amount would be set to 150 percent of the FPL, which would equal about $1,770 per month in calendar year 2024.
- Under the second alternative, the flat benefit amount would be set to 125 percent of the FPL, equaling about $1,480 per month in calendar year 2024.
For people with low earnings, benefits under this option would be greater than they would be under current law and would remain so for future cohorts in the coming decade, even though initial benefits would grow more slowly than under current law. For high earners who became eligible after the policy was implemented, a flat benefit amount set at 150 percent or 125 percent of the FPL would be smaller than what workers with comparable earnings histories would receive under current law, on the basis of their past earnings.
Effects on the Budget
If implemented, the first alternative would reduce Social Security outlays by a total of $270 billion through 2032, according to estimates by the Congressional Budget Office. The second alternative would reduce Social Security outlays by a total of $593 billion through 2032.
Under current law, the benefits that retired or disabled workers initially receive are indexed to the AWI, so average new benefits grow at the same rate as average economywide wages. Under this option, the flat benefits received at the FRA for each successive cohort would grow with prices, as measured by changes in the CPI-U, which tends to grow more slowly than average earnings. As a result, the estimated savings would depend in part on the projected growth of average real wages. In CBO's projections, average real wages grow by 1.1 percent annually, which indicates the reduction in the annual growth rate of new benefits under this option relative to that under current law.
The savings from such changes would depend on the amount of the flat benefit relative to PIAs under current law. If the benefit amount was set to an amount that is higher than the average under current law, a flat benefit would result in additional Social Security spending. Conversely, if the benefit amount was set to an amount lower than the average under current law, the flat benefit would yield budgetary savings. It would also lower the beneficiaries' income.
The increases or decreases in Social Security benefits and income would affect some beneficiaries' eligibility for, and benefits from, means-tested programs, such as Supplemental Security Income (SSI) and the Supplemental Nutrition Assistance Program (SNAP). Some people would collect larger Social Security payments and would, as a result, receive fewer benefits from those programs; others, whose Social Security benefits would be smaller, might receive more benefits from means-tested programs. The estimates for this option do not include effects on programs other than Social Security.
Uncertainty About the Budgetary Effects
The overall savings from this option could be larger or smaller than shown for at least two reasons. First, savings might differ from those projected here because average real wages could evolve differently than CBO currently projects. Second, the estimates of savings rely on a projection about when Social Security beneficiaries claim their benefits. If the option induced beneficiaries to change when they claimed benefits, the short-term reductions in Social Security outlays could be very different than projected because the number of beneficiaries would change.
Changes in when people began claiming benefits would not change their lifetime benefits significantly, and the uncertainty about those changes matters more in the short term than in the long term. People who claim before their FRA receive less than their full benefit amount but collect benefits for a longer time until they die, and people who claim after their FRA receive larger benefits because of the delayed retirement credit but collect benefits for fewer years.
Annual savings from both alternatives would continue to grow after 2032 as the new benefit structure applied to more beneficiaries and as average new benefits grew more slowly than they would under current law. The savings would continue to grow even after the new benefit structure applied to all beneficiaries as the effect of slower benefit growth compounded each year.
The first alternative would reduce Social Security outlays by 4 percent in 2032, by 14 percent in 2042, and by 23 percent in 2052 from what would be scheduled to occur under current law, CBO estimates. When measured as a percentage of total economic output, the program's outlays would total 5.3 percent of gross domestic product (GDP) in 2042 and 4.9 percent of GDP in 2052, amounts that are 0.8 percentage points and 1.4 percentage points, respectively, lower than CBO projects under current law for those years.
Those projections reflect the assumption that Social Security will continue to pay benefits as scheduled under current law, regardless of the status of the program's trust funds. CBO projects that, combined, the Social Security trust funds will be exhausted in calendar year 2033. Beyond that point, trust fund balances would no longer be available to make up the gap between benefits specified in current law and annual trust fund receipts. If CBO were to analyze a scenario in which benefits were limited to the amounts payable from dedicated funding sources after trust fund exhaustion, those payable benefits would be smaller than scheduled benefits beginning in 2034.
Under the second alternative, Social Security outlays would be lower by 8 percent in 2032, by 22 percent in 2042, and by 33 percent in 2052 than what would be scheduled to occur under current law. Measured as a percentage of GDP, Social Security's outlays under the second alternative would be 1.4 percentage points lower in 2042 and 2.1 percentage points lower in 2052 than the agency currently projects under current law. As in the first alternative, those changes to Social Security outlays would be smaller if analyzed on a payable benefits basis.
Both alternatives would affect measures of Social Security's sustainability as well. The program has both dedicated revenue sources (in the form of payroll taxes paid by employees, employers, and self-employed people and income taxes on benefits) and trust funds. The sustainability of a program with those features is often measured by its estimated actuarial balance, which is the sum of the present value of annual income over a given period and the initial balance in the trust fund for that period, minus the sum of the present value of annual outlays over that period and the present value of a year's worth of benefits at the end of the period. For Social Security, that difference is traditionally presented as a percentage of the present value of taxable payroll or GDP over 75 years. A present value is a single number that expresses a flow of past and future income (in the form of tax revenues and other income) or payments (in the form of benefits and other outlays) in terms of an equivalent lump sum received or paid at a specific time. The value depends on the rate of interest, known as the discount rate, used to translate past and future cash flows into current dollars at that time.
The Social Security program is currently projected to have a negative actuarial balance (or an actuarial shortfall) over 75 years. Estimates of the actuarial balance do not account for revenues or outlays after that period. Under current law, outlays are projected to be larger than revenues at the end of that period, and the difference would grow thereafter, resulting in an increasing deficit for the trust funds after the 75th year.
Both alternatives would improve the 75-year actuarial balance. Under the first alternative, the actuarial shortfall would decline to 0.2 percent of GDP (an 88 percent improvement compared with an actuarial shortfall of 1.7 percent of GDP under current law), and Social Security tax revenues would exceed outlays by increasing amounts in the 2070s, leading to a growing surplus for the trust funds. That surplus would continue after the 75th year.
Under the second alternative, Social Security tax revenues would exceed outlays by increasing amounts starting around the 2050s, resulting in a growing annual surplus for the trust funds. As a result, the 75-year actuarial balance would be a positive 0.3 percent of GDP, compared with a negative 1.7 percent of GDP under current law. After the 75th year, under that alternative, outlays would continue to decline as a percentage of GDP, and the surplus would continue to rise.
Another common measure of Social Security's sustainability is the trust fund's date of exhaustion—the year in which its balance will reach zero. In CBO's projections, the combined Old-Age, Survivors, and Disability Insurance trust funds are exhausted in calendar year 2033. The first alternative would delay the combined trust funds' projected exhaustion date by two years. Under the second alternative, the combined trust funds would be exhausted in 2038, five years later than the projected exhaustion date under current law. However, under the second alternative, the trust funds' income would rise above the scheduled benefits later in the projection period. If scheduled benefits were paid in full throughout the period, as assumed for this analysis, and the trust funds operated with temporarily negative balances, the annual surpluses later in the projection period would result in a positive trust fund balance again in the 2060s.
Setting Social Security benefits to a flat amount would not affect all recipients equally. For instance, Disability Insurance beneficiaries tend to have smaller benefits, on average, than Old-Age Insurance (OAI) beneficiaries, so benefits would increase by more and for a larger share of DI beneficiaries than for OAI beneficiaries. This discussion focuses on two ways to examine the distributional effects of a change in Social Security benefits. One is to evaluate how the fully implemented changes would affect the distribution of household income in a given year. The other is to estimate the changes to the benefits people receive over their lifetime and how that would vary along the distribution of lifetime household earnings.
In a given year after implementation, both alternatives would tend to increase income after transfers and taxes for households with low income and to reduce such income for households with high income, when compared with incomes under current law. Most Social Security beneficiaries are age 65 or older. In CBO's baseline distribution of household income after transfers and taxes, income includes Social Security benefits. As a result, people in that age group are slightly more likely than others to be in higher-income households. Moreover, within that group, both alternatives described here would tend to increase benefits and income after taxes and transfers for lower-income beneficiaries and reduce benefits and income after taxes and transfers for higher-income beneficiaries.
The second alternative would provide a smaller benefit amount than the first alternative. Thus, it would increase income after transfers and taxes for fewer beneficiaries and by less than the first alternative would, and it would reduce income after transfers and taxes by more and for a larger number of beneficiaries than the first alternative would.
The Social Security program, on net, is progressive: the benefits received from the system measured relative to taxes paid into the system over a person's lifetime tend to be higher for lower-income households than for higher-income households. This option would increase that progressivity.
When considered in isolation, the Social Security tax is regressive—that is, people with higher earnings (in particular, those with earnings above the taxable maximum) pay a smaller percentage of their total earnings in payroll taxes than those with lower earnings. However, the regressivity of the Social Security tax is counterbalanced by the progressivity of Social Security benefits: People with lower earnings during their lifetime tend to receive a larger share of their earnings in benefits over their lifetime. Two factors contribute to the progressivity of benefits. One, the benefit formula replaces a larger share of earnings for people with lower lifetime earnings and, two, people with low lifetime earnings are more likely than average to receive disability benefits. Those factors are partially offset by the fact that people with higher lifetime earnings tend to live longer than average, which means that they collect retired-worker benefits for more years.
This option would increase the progressivity of the program over the course of a person's lifetime because it would increase benefits for people with relatively low lifetime earnings and decrease benefits for those with higher lifetime earnings (see the table below). CBO expects that, under both alternatives, the ratio of average lifetime benefits to average lifetime earnings would be higher than or roughly the same as under current law for people in the lowest quintile of the lifetime household earnings distribution. (Lifetime benefits in this analysis include the present value of all Social Security benefits except those received by young widows, young spouses, and children. The values of benefits are net of income taxes that some recipients pay on their benefits.)
|Changes to Social Security Benefits Relative to Earnings for Different Groups If Benefits Were Set to a Flat Amount
|Lifetime Household Earnings Quintilea
|Average Lifetime Benefits Relative to Lifetime Earnings for Beneficiaries, by 10-Year Birth Cohort
|Under Current Law
|Percentage Change From Current Lawb
|Set Social Security benefits to 150 percent of the federal poverty guidelines
|Set Social Security benefits to 125 percent of the federal poverty guidelines
For example, for such people born in the 1970s and 1980s, that measure would increase by about one-third under the first alternative and by 12 percent to 14 percent under the second one. For people in the middle and highest quintiles of the earnings distribution, that ratio would be lower under both alternatives than under current law, and the reduction relative to current law in lifetime benefits as a percentage of lifetime earnings would be larger for people born later than for those born earlier. That is because benefits would grow more slowly over time under this option than under current law for each successive cohort of beneficiaries.
Benefits would be smaller under the second alternative than under the first alternative. Thus, under the second alternative, low earners would receive a smaller benefit increase and relatively higher earners would face larger benefit reductions compared with current law than they would under the first alternative.
In addition to having the behavioral effects reflected in conventional budget estimates, such as the ones shown above, setting Social Security benefits to a flat amount could affect the labor supply of Social Security beneficiaries. Because additional work would no longer result in larger benefits by increasing the taxable earnings that could be counted in the calculation of the PIA (as it does in some cases under current law), people might have less incentive to work under this option. However, people who would receive smaller benefits under this option than under current law could have more incentive to work or to delay retirement to maintain the same standard of living. In addition, those beneficiaries would probably save more while they were working to offset the reduction in Social Security benefits under this option relative to current law.
For beneficiaries who claim benefits at or after their FRA, the flat benefits under this option would be greater than the federal poverty guidelines for a single-person household, thus reducing poverty for that group. Some beneficiaries who received larger benefits from Social Security could have those increases partially offset by a reduction in benefits from means-tested support programs because the benefits provided by those programs generally decline as overall income increases.
Because benefits would grow with prices rather than average wages, Social Security would replace an increasingly smaller share of earnings, leading beneficiaries to rely more on other sources of retirement income to maintain their preretirement standard of living.