Social Security Policy Options

July 1, 2010

CBO anticipates that starting in 2016, if current laws remain in place, the program's annual spending will regularly exceed its tax revenues.

Note: A subsequent version of this report was published in December 2015.


Social Security, the federal government's largest single program, provides benefits to retired workers (through Old-Age and Survivors Insurance, OASI), to people with disabilities (through Disability Insurance, DI) and to their families as well as to some survivors of deceased workers. Those benefits are financed primarily by payroll taxes collected on people's earnings. In 2010, for the first time since the enactment of the Social Security Amendments of 1983, Social Security's annual outlays will exceed its annual tax revenues, the Congressional Budget Office (CBO) projects. If the economy continues to recover from the recent recession, those tax revenues will again exceed outlays, but only for a few years. CBO anticipates that starting in 2016, if current laws remain in place, the program's annual spending will regularly exceed its tax revenues.

Social Security's dedicated revenue stream sets it apart from most other federal programs in that the dedicated revenues are credited to trust funds that are used to finance the program's activities. Interest on the balances of those funds also is credited to the funds (which often are treated collectively as the OASDI trust funds). CBO estimates that, unless changes are made to the system, the trust funds combined will be exhausted in 2039. At that point, the resources available to the Social Security program will be insufficient to pay full benefits as they are currently structured.

This CBO study first provides an overview of Social Security and discusses some criteria for evaluating proposals to change the system. It then presents a variety of options for changing the Social Security system and analyzes the financial and distributional effects of those options--that is, how they would affect Social Security's finances and how they would alter the benefits paid to people in various earnings categories and people born in various decades.

The Outlook for Social Security's Finances

As the population of the United States continues to grow older, the number of Social Security beneficiaries will continue to rise, and the program's outlays will increase faster than its revenues. Long-term projections are unavoidably uncertain but, under a broad range of assumptions, benefits that are scheduled under current law will consistently exceed revenues.

CBO projects that beginning in 2039 the Social Security Administration will not be able to pay those scheduled benefits, however. If revenues were not increased, benefits would need to be cut by about 20 percent in 2040 to equalize outlays and revenues. Those proportionately lower payments, which would be made to all Social Security recipients once the trust funds were exhausted, are known as payable benefits.

A commonly used summary measure of the system's long-term financial conditions is the 75-year actuarial balance- a figure that measures the long-term difference between the resources dedicated to Social Security and the program's costs under current law. The actuarial balance is the value of Social Security's revenues over the 75-year period, discounted to their value in current dollars, plus the current balance in the OASDI trust funds, minus the present value of future Social Security outlays, minus the value of a year's worth of benefits as a reserve at the end of the period. CBO estimates the 75-year actuarial balance to be -0.6 percent of gross domestic product (GDP); that is, under current law, the resources dedicated to financing the program over the next 75 years fall short of the benefits that will be owed to beneficiaries by about 0.6 percent of GDP. That figure is the amount by which the Social Security payroll tax would have to be raised or scheduled benefits reduced for the system's revenues to be sufficient to cover scheduled benefits. In other words, to bring the program into actuarial balance over the 75 years, payroll taxes would have to be increased immediately by 0.6 percent of GDP and kept at that higher rate, or scheduled benefits would have to be reduced by an equivalent amount, or some combination of those changes and others would have to be implemented.

The actuarial balance averages the smaller deficits that would occur near the beginning of the projection period and the larger ones that would occur near the end. In 2084, scheduled outlays would exceed revenues by 1.4 percent of GDP.

Policy Options

In this study, CBO analyzes 30 options that are among those that have been considered by various analysts and policymakers as possible components of proposals to provide long-term financial stability for Social Security. The options follow the convention of not reducing initial benefits for people who are currently older than 55, and all would directly affect outlays for benefits or federal revenues dedicated to Social Security.

The options fall into five categories:

  • Increases in the Social Security payroll tax,
  • Reductions in people's initial benefits,
  • Increases in benefits for law earners,
  • Increases in the full retirement age, and
  • Reductions in the cost-of-living adjustments that are applied to continuing benefits.

Each option is analyzed in isolation, although most proposals to make substantial changes to Social Security combine several provisions. Many options would interact with one another, so combining them might cause changes to the overall finances of the system that are larger or smaller than would be produced by a simple sum of the effects of several discrete options.

This list of options is far from exhaustive. It does not include changes that would draw on general government revenues, create individual accounts, or change the trust funds' investments. Other than an increase in the Social Security payroll tax, changes to federal tax policy are not considered. The options do not include any that apply only to people who receive DI benefits, although some of the options would affect OASI and DI beneficiaries alike.

Effects of the Options

This study analyzes the overall effect of each option on the finances of the Social Security system. Some options, such as those that would apply the payroll tax rate to all earnings or those that would index initial benefits to prices, would more than eliminate Social Security's actuarial deficit; others would have far smaller financial effects (see Summary Figure 1).

This study also analyzes the options' effects on taxes that would be paid and benefits that would be received by various groups of program participants. For that distributional analysis, participants are grouped by the amount of their lifetime household earnings and by their birth cohort (that is, by the decade in which they were born). Those distributional effects of the options are measured relative to the outcomes that would result both from scheduled benefits and from payable benefits under current law.

Some options, such as an across-the-board increase in the payroll tax rate or a flat reduction in benefits, would affect all participants proportionately, but some options would have disparate effects on people in different earnings groups with higher lifetime earnings by placing an additional tax on earnings above a threshold or by increasing the progressivity of the Social Security benefit formula.

Many options with similar financial effects in the aggregate would affect older and younger generations differently. In particular, the timing of the changes would affect their impact on different generations (as well as the magnitude of the change necessary to bring the system into balance). Some options, such as one that would reduce benefits by a flat 15 percent, would take effect in a single year and would affect all future beneficiaries the same way. Others would be phased in and, initially, would have only small effects. For example, a policy that gradually reduced benefits would have a much larger effect on people whose benefits began in 2040 than it would on those whose benefits began in 2020. Raising tax rates would increase the amounts paid by younger people but make little difference in the sum of taxes paid over a lifetime by people who already have left or are about to leave the workforce.