How Changing Social Security Could Affect Beneficiaries and the System's Finances

Social Security is the largest single program in the federal budget. In fiscal year 2018, outlays for Social Security benefits totaled $977 billion, or almost one-quarter of federal spending. The benefits are paid from two designated Social Security trust funds. On the basis of the analysis described in The 2018 Long-Term Budget Outlook, which incorporates the assumption that current law generally does not change, the Congressional Budget Office projects that those trust funds combined would be exhausted in calendar year 2031, requiring the amounts scheduled to be paid in 2032 to be reduced by 26 percent.

This interactive tool allows the user to explore seven policy options that could be used to improve the Social Security program’s finances and delay the trust funds’ exhaustion. Four options would reduce benefits, and three options would increase payroll taxes. The tool allows for any combination of those options. It also lets the user change implementation dates and choose whether to show scheduled or payable benefits. (Payable benefits are benefits that are limited to the annual revenues credited to Social Security once the trust funds are exhausted.) The tool also shows the impact of the options on different groups of people.

The estimates shown here could differ from more detailed future estimates developed by CBO or the staff of the Joint Committee on Taxation. (Learn more.)

Show Results With Scheduled or Payable Benefits [?]

Policy Options

Changes to Benefits

Benefit Structure (Primary insurance amount factors) [?]

Full Retirement Age [?]

Measure Used to Index Benefits [?]

Start Date for Benefit Options [?]

Changes to Taxes

Payroll Tax Rate [?]

Taxable Maximum [?]

Results

Policy Options in Depth

Show Results With Scheduled or Payable Benefits: Scheduled benefits are benefits as calculated under current law, regardless of the amounts available in the trust funds. Payable benefits are benefits as calculated under current law, reduced as necessary to conform to the limits imposed by the trust funds’ balance. If the trust funds’ balances declined to zero and current revenues were insufficient to cover benefits specified in law, the Social Security Administration would no longer be permitted to pay full benefits when they were due. The manner in which outlays would be reduced is not specified in law. In its analysis, CBO assumed that benefits paid to existing and new beneficiaries would be reduced by the percentage necessary to make the program’s total annual outlays equal its total available revenues once the combined trust funds were exhausted. When scheduled benefits are selected, the baseline values shown in the figures reflect scheduled benefits. When payable benefits are selected, the baseline values reflect payable benefits.

Back to Top

Options That Would Change Benefits

Make the benefit structure more progressive: 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 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 compute a worker’s PIA, the Social Security Administration separates that worker’s AIME into three brackets by using two bend points (or dollar threshold amounts). In calendar year 2018, the first bend point is $895, and the second bend point is $5,397. Average indexed earnings in each of the three brackets are multiplied by three corresponding factors to determine the PIA: 90 percent for the earnings in the lowest bracket, 32 percent for earnings in the middle bracket, and 15 percent for earnings in the highest bracket. (Bend points rise each year with average wages, whereas the factors remain constant.)

For example, a worker with an AIME of $6,000 would have a PIA of $2,337 because the 90 percent factor would apply to the first $895, the 32 percent factor would apply to the next $4,502 ($5,397 minus $895), and the 15 percent factor would apply to the remaining $603 ($6,000 minus $5,397).

These two options 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. The first option, 90/32/5 PIA factors, 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.

The more progressive second option, 100/25/5 PIA factors, would reduce benefits for a larger fraction of beneficiaries with higher lifetime earnings while increasing benefits for people with lower lifetime earnings. It would lower both the 15 percent and 32 percent 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.)

Raise the full retirement age: The age at which workers become eligible for full retirement benefits from Social Security—the full retirement age (FRA), also called the normal retirement age—depends on their year of birth. For workers born in 1937 or earlier, the FRA is 65. It increases in two-month increments for each successive birth year until it reaches 66 for workers born in 1943. For workers born between 1944 and 1954, the FRA holds at 66, but it then increases again in two-month increments and reaches age 67 for workers born in 1960 or later. The earliest age at which workers may start to receive reduced retirement benefits is 62 for all workers; however, benefit reductions at that age will be larger for workers whose FRA is higher. For example, workers born in 1954 (whose FRA is 66) will receive a permanent 25 percent benefit reduction in their monthly benefit amount if they claim benefits at age 62 rather than at their FRA, whereas workers born in 1960 (whose FRA is 67) will receive a 30 percent reduction if they claim benefits at 62.

Under this option, the FRA would continue to increase from age 67 by two months per birth year until it reached age 70. (If the “sooner” start date is selected, that increase would begin with workers turning 62 in 2023; if the “later” start date is selected, the increase would begin with workers turning 62 in 2026.) As under current law, workers could still choose to begin receiving reduced benefits at age 62, but the reduction in their initial monthly benefit would be larger, reaching 45 percent when the FRA is 70.

An increase in the FRA would reduce lifetime benefits for every affected Social Security recipient, regardless of the age at which a person claims benefits. Workers could maintain the same monthly benefit by claiming benefits at a later age, but then they would receive benefits for fewer years.

Change the measure used to index benefits: Cost-of-living adjustments (COLAs) for Social Security and many other parameters of federal programs are indexed to increases in traditional measures of the consumer price index (CPI). The CPI measures overall inflation and is calculated by the Bureau of Labor Statistics. In addition to the traditional measures of the CPI, that agency computes another measure of inflation—the chained CPI—designed to account for changes in spending patterns and to eliminate several types of statistical biases that exist in the traditional CPI measures.

This option would use the chained CPI for indexing COLAs for Social Security. The chained CPI has grown an average of about 0.25 percentage points more slowly per year since 2001 than the traditional CPI measures have, and CBO expects that gap to persist. Therefore, the option would reduce federal spending, and savings would grow each year as the effects of the change compounded.

Unlike the estimates in CBO's report Options for Reducing the Deficit: 2019 to 2028, which account for the effects of using the chained CPI for indexing parameters of other federal programs, the estimates presented in this tool include only the effects of using the chained CPI to index COLAs for Social Security.

Specify the start date for benefit options: Many proposals to change Social Security protect initial benefits for workers who are age 55 or older because those workers would have less time than younger workers to adjust their plans for working or saving. Choosing to start the options “sooner” indicates a start date of 2020 for the options that would change the structure of benefits and the measure used to index them and 2023 for the option that would increase the full retirement age. For all of the benefit options, the “later” start date delays the changes until 2026, which ensures that initial benefits for people 55 or older in 2018 would not change. Delaying the start date for benefit options does not affect the tax options, which would apply to earnings people received after the start of 2019.

Back to Top

Options That Would Change Taxes

Increase the payroll tax rate: Social Security is financed primarily by payroll taxes on employers, employees, and the self-employed. Only earnings up to a maximum, which is $128,400 in calendar year 2018, are subject to the tax. The maximum usually increases each year at the same rate as average wages in the economy. The Social Security tax rate is 12.4 percent of earnings. Employees have 6.2 percent deducted from their paychecks, and the remaining 6.2 percent is paid by their employers. Self-employed individuals generally pay 12.4 percent of their net self-employment income.

This option would increase the Social Security payroll tax rate by 1.0 percentage point. That rate increase would be evenly split between employers and employees. Specifically, the rate for both employers and employees would increase by 0.5 percentage points, to 6.7 percent, resulting in a combined rate of 13.4 percent. The rate paid by self-employed people would also rise to 13.4 percent.

Raise the taxable maximum: Social Security is financed primarily by payroll taxes on employers, employees, and the self-employed. Only earnings up to a maximum, which is $128,400 in calendar year 2018, are subject to the tax. The Social Security tax rate is 12.4 percent of earnings.

During most of the Social Security program’s history, the taxable maximum was increased only periodically, so the share of covered earnings below that maximum varied greatly. Amendments to the Social Security Act in 1977 boosted the amount of covered taxable earnings, which reached 90 percent in 1983. Those amendments also specified that the taxable maximum be adjusted, or indexed, annually to match the growth in average wages. Despite those changes, the percentage of earnings that is taxable has slipped in the past decade because earnings for the highest-paid workers have grown faster than average earnings. Thus, in 2016, about 83 percent of earnings from employment covered by Social Security fell below the maximum taxable amount.

These two options would increase the share of earnings subject to payroll taxes. The first option would increase the taxable maximum so that the taxable share of earnings from jobs covered by Social Security was 90 percent. (That increased taxable maximum would grow at the same rate as average wages, as it would under current law.) The second option would apply the payroll tax to earnings over $250,000 in addition to earnings below the maximum taxable amount under current law. The taxable maximum would continue to grow with average wages, but the $250,000 threshold would not change, so the gap between the two would shrink. CBO projects that the taxable maximum would exceed $250,000 in calendar year 2037; after that, all earnings from jobs covered by Social Security would be subject to the payroll tax. The current-law taxable maximum would still be used for calculating benefits, so scheduled benefits would not change under this option.

FAQs

How did CBO arrive at these numbers? CBO’s analysis is based on the agency’s long-term projections of trends in a host of demographic and economic variables, which are the same as those underlying The 2018 Long-Term Budget Outlook. In particular, CBO used its long-term microsimulation model, which starts with data on a 1-in-1,000 sample of the U.S. population and projects demographic and economic outcomes for that sample through time. (For more detail, see An Overview of CBOLT: The Congressional Budget Office Long-Term Model.)

How do the findings shown here differ from the projections published in Options for Reducing the Deficit: 2019 to 2028? This interactive tool contains five of the nine policy options related to Social Security that were published in Options for Reducing the Deficit: 2019 to 2028, along with several extensions of those options. To complement the analysis shown in that publication, the tool provides information on the status of the Social Security trust funds, annual outlays and revenues for the Social Security program, and the effect of the options on people in different income groups and birth cohorts. Moreover, the tool illustrates the effects of both earlier and later start dates for benefit options and enables the user to view effects on both scheduled and payable benefits. In addition, the values shown in the tool apply to calendar years, whereas the values published in the report apply to fiscal years.

Why do the effects of combined policies differ from the summed effects of the individual policies? The combined effects of policy changes do not always equal the sum of the individual policies’ effects because those individual policies can interact with one another. In some cases, combining options will amplify their individual effects. For example, increasing the payroll tax rate while also increasing the taxable maximum will have an effect larger than the summed effects of those two individual options because the increase in the tax rate applies to a larger tax base. In other cases, combining options will dampen their individual effects. For example, decreasing PIA factors while also implementing the chained CPI for calculating cost-of-living adjustments will have an effect smaller than the summed effects of those two individual options because the reduced adjustments apply to smaller benefit amounts.

How might the results of a more detailed CBO analysis of Social Security policy reforms differ from those shown here? The estimates presented in this interactive tool could differ from future estimates developed by CBO or the staff of the Joint Committee on Taxation. One reason is that the proposals on which those estimates are based might not precisely match the options presented here. Another is that the baseline budget projections against which such proposals would be measured might have changed and thus would differ from the projections used for this interactive tool.

In addition, the estimates presented here include the primary effects of the options—that is, the direct effects of changing benefits paid or the payroll taxes collected—but do not include all secondary effects, such as behavioral changes (for example, in benefit claiming or labor force participation) that would be caused by the options. Although the secondary effects would probably be considerably smaller in magnitude, they might not be negligible.

It is also important to note that the estimates presented here are based on CBO’s long-term analysis, which differs from the analysis used in the production of CBO’s short-term cost estimates. Furthermore, although these options could change CBO’s projections of federal debt, this analysis does not include any economic effects that might result from changes to federal debt.

Back to Top

Definitions

75-year actuarial balance. A measure of the Social Security program’s solvency over a 75-year period, calculated as the sum of the present value of annual tax revenues over the period and the initial balance in the trust fund, minus the sum of the present value of annual outlays over the period and the present value of a year’s worth of benefits at the end of the period. (That measure is presented as a percentage of the present value of gross domestic product over the same period.) A negative actuarial balance indicates that the long-term cost of the program is greater than the income to the program.

75-year cost rate. A measure of the long-term cost of the Social Security program, calculated as the present value of annual outlays plus the present value of a year’s worth of benefits as a reserve at the end of the period divided by the present value of gross domestic product over the period. Outlays consist of scheduled benefits and administrative costs.

75-year income rate. A measure of the long-term income of the Social Security program, calculated as the present value of annual tax revenues plus the trust fund’s balance at the beginning of the period divided by the present value of gross domestic product over the period. Tax revenues consist of payroll taxes and income taxes on benefits.

Average taxes paid and benefits received, by lifetime household earnings quintile and birth cohort. CBO calculates lifetime benefits as the present value of all benefits that a person receives from the Social Security program (with some small exceptions), and it measures those benefits in relation to the present value of lifetime earnings, with all values adjusted to account for growth in prices. Lifetime Social Security taxes are calculated as the present value of the employer’s and employee’s payroll taxes combined. Scaling taxes and benefits by lifetime earnings accounts for economic growth over time and provides context for benefit amounts. In this analysis, CBO shows taxes and benefits relative to lifetime earnings by quintile of lifetime household earnings. (When the sample is divided into five groups that are ranked according to those earnings, a quintile is one of those five groups.)

Extended baseline with scheduled benefits. The Congressional Budget Office’s extended baseline shows the budget’s long-term path under most of the same assumptions that the agency uses, in accordance with statutory requirements, in constructing its 10-year baseline. Both baselines incorporate the assumptions that current law generally remains unchanged but that some mandatory programs are extended after their authorizations lapse and that spending for Medicare and Social Security continues as scheduled even if their trust funds are exhausted.

Extended baseline with payable benefits. The extended baseline with payable benefits incorporates the assumption that benefits paid to existing and current beneficiaries would be reduced by the percentage necessary to make the program’s total annual outlays equal its total available revenues once the combined Social Security trust funds are exhausted. (The combined Social Security trust funds are projected to be exhausted in 2031.)

Lifetime benefits. The present value at age 65 of benefits received over a lifetime for a person who lives at least to age 45, net of income taxes paid on those benefits. Lifetime benefits include retired-worker benefits, disabled-worker benefits, and benefits paid to dependents and survivors of workers. Because there are insufficient data on benefits received by young widows and children for years before 1984, benefits paid to young widows, young spouses, and child beneficiaries are excluded from this measure.

Lifetime earnings. The present value at age 65 of inflation-adjusted earnings over a lifetime, including earnings above the taxable maximum, for a person who lives at least to age 45.

Lifetime household earnings. For someone who is single in all years, the present value of his or her inflation-adjusted earnings over a lifetime, including earnings above the taxable maximum. In any year in which a person is married, the measure of that person’s earnings is the average of the couple’s earnings, with adjustments to account for economies of scale in household consumption.

Lifetime payroll taxes. The present value at age 65 of Social Security payroll taxes paid by the employer and the employee over a lifetime for a person who lives at least to age 45.

Payroll tax. A tax on people’s earnings that is credited to the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund. Under current law, 12.4 percent of people’s earnings up to a maximum amount each year—$128,400 in calendar year 2018—are subject to the payroll tax. Workers and their employers each pay half; self-employed people pay the entire amount.

Present value. A present value is a single number that expresses a flow of past and future income (in taxes) or payments (in benefits) 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.

Social Security outlays. Outlays consist of scheduled benefits and administrative costs.

Social Security revenues. Revenues consist of payroll taxes and income taxes on benefits.

Trust fund exhaustion date. The date of exhaustion is the year in which the combined Social Security trust funds’ balance will reach zero.

Trust fund ratio. The trust fund ratio—the ratio of the combined Social Security trust funds’ balances at the beginning of a calendar year to that year’s projected outlays—can be used to approximate the number of years’ worth of benefits that could be financed by a given balance if annual outlays remained constant.

Back to Top

What if I have other questions, comments, or issues?

CBO continually seeks feedback to make its work as useful as possible. Please send any feedback to communications@cbo.gov.