Choosing the Nation's Fiscal Future (2010) / Chapter Skim
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6 Options for Social Security
6 Options for Social Security
Pages 105-128
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From page 105... ...
In the near term, Social Security's benefit payments will rise rapidly as the baby boomers retire, while its revenues will grow more slowly. In less than three decades the program's reserves will be depleted; from that time forward its sources of revenues will be sufficient to pay only about three-quarters of currently scheduled benefits.
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From page 106... ...
PROGRAM OVERVIEW Since its enactment in 1935, Social Security has helped protect people against economic insecurity in old age. The basic program structure since its inception has been to assess payroll taxes on current workers and use those revenues to pay benefits to retirees.2 Virtually all workers -- more than 160 million people -- pay Social Security taxes.
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From page 107... ...
Payroll tax rates were increased. For certain higher-income beneficiaries, benefits became subject to the income tax, with those proceeds dedicated to the trust fund.
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From page 108... ...
($106,800) Annual Benefit -- Left Axis Earnings Replacement Rate -- Right Axis FIGURE 6-1 Annual Social Security benefits and earnings replacement rates, for workers who retire at age 65, scheduled for 2010.
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From page 109... ...
or her or his own Social Security benefits, whichever is larger. It is important to keep in mind that currently scheduled benefits rise over time for successive cohorts of new retirees, even though replacement rates for those retiring at the full benefit age remain relatively constant.13 In order for future cohorts of retirees to have the same percentage of their covered earnings replaced by Social Security as current retirees, initial benefit levels have to rise over time with real wage growth.
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From page 110... ...
On the basis of such straightforward projections by the Social Security actuaries and others, it is widely agreed that financial reforms are required soon to ensure that the program's implicit promise is kept for the current generation of workers, as well as with future generations. What will soon become a growing discrepancy between Social Security's benefits and revenues will exhaust the trust fund and so threaten the program's solvency as well as the payment of currently scheduled benefits; see Figures 6-3 and 6-4.15 Box 6-1 sketches how the projected depletion of the Social Security trust fund relates to other indicators of the program's long-term financial prospects (see Social Security Administration 2009d; see also Appendix C)
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From page 111... ...
Trillions of Dollars 0 –1 Unfunded obligation –2 (negative) –3 –4 –5 –6 2008 2023 2038 2053 2068 2083 Ending Year of Valuation Period FIGURE 6-4 Cumulative Social Security revenue less spending under current-law tax rates and scheduled benefits.
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From page 112... ...
either a substantial increase in currently scheduled payroll tax revenues, a substantial reduction in currently scheduled lifetime benefits for future retirees, or some combination of the two. Commonly discussed changes to reduce the future growth of benefits include: raising the full-benefit retirement age and the earliest retirement age; reducing the additional benefit percentage for spouses; reducing the postretirement cost-of-living adjustment; increasing the number of years used to compute average earnings; and changing the way initial benefit levels (i.e., at retirement)
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From page 113... ...
• Option 1 would achieve fiscal balance for the program without any revenue increases, relying instead solely on program changes that would generally reduce the rate of growth of currently scheduled benefits for future retirees.17 • In contrast, Option 4 would maintain currently scheduled benefits for all future beneficiaries by relying solely on increases in the pay roll tax. Between these two, the other two options combine tax increases and benefit growth reductions in different mixes: • Option 2 would rely two-thirds on slower growth in benefits for future retirees and one-third on future increases in payroll tax revenues.
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From page 114... ...
of Monthly and Lifetime Benefits Does the option increase Accelerate by 5 years No No No the future age for the scheduled increase in retirement with full the full-retirement age, benefits and for early to 67, and then increase retirement? retirement age with longevity.
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From page 115... ...
Yes. payroll tax?
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From page 116... ...
More specifically, the age to retire with full benefits would increase by a projected 1 month every 2 years. The age for the earliest retirement with Social Security retirement benefits would increase the same way.18 In addition to changes in retirement age, the other two provisions that affect monthly benefits under Option 1 are "progressive indexing" of the preretirement benefit-entitlement formula and a change in the cost-of-living adjustment during retirement.21 First, under the benefit formula in current law, improvements in average wages before a worker's retirement generally increase future benefits for that worker (and all others)
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From page 117... ...
Fig6-6.eps show the option's effects on monthly benefits, the replacement of individual earnings by benefits, and on payroll taxes paid.) Although it leads to more years of benefits, early retirement makes a big reduction in monthly benefits, under both current law and this option.
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From page 118... ...
Payroll Tax Under this option there are no changes in the payroll taxes for Social Security; for illustrations of payroll taxes under this option, see discussion below. Option 2: Two-Thirds Benefit Growth Reductions, One-Third Payroll Tax Increases The committee's second option would achieve long-term actuarial balance with smaller cuts in benefit growth and an increase in the payroll tax.
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From page 119... ...
for steady maximum earners who are new retirees would decrease slightly in 2050 in comparison with 2010. Real benefits would continue to grow -- but at a reduced rate -- for all but about the highest-earning one-fifth of workers.25 Reflecting an increase in the payroll tax that would permit higher benefit levels than in Option 1, replacement rates for Option 2 are higher than for Option 1: compare Figure 6-6 with Figure 6-8, which shows replacement rates under Option 2 in comparison with current law.
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From page 120... ...
$40,000 $30,000 $20,000 $10,000 $0 Average High- Worker at Very High Wage Wage Taxable Wage Worker Worker Maximum Worker Current Law 2010 Current Law 2050 Option 2 2050 FIGURE 6-9 Annual Social Security payroll tax projected for 2010 and for 2050 under current law and under Option 2 (in 2009 dollars)
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From page 121... ...
Benefit growth would be slowed by a milder version of progressive indexing than is proposed in Options 1 and 2. Under Option 3 two provisions affect taxes: the current tax rate of 12.4 percent would be raised in stages to 14.5 percent in 2075, and a new, second tier of Social Security payroll taxation would be added to the existing tax.
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From page 122... ...
$40,000 $30,000 $20,000 $10,000 $0 Average High- Worker at Very High Wage Wage Taxable Wage Worker Worker Maximum Worker Current Law 2010 Current Law 2050 Option 3 2050 FIGURE 6-12 Annual Social Security payroll tax projected for 2010 and for 2050 under current law and under Option 3 (in 2009 dollars)
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From page 123... ...
For the benefit levels and earnings replacement rates, see the bars for the current law in the figures above. Payroll Tax Sustaining the benefits scheduled under the current law will require substantially higher revenue from payroll taxes; see Figure 6-13.
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From page 124... ...
Future retirees will confront increasing uncertainty about what they can expect from Social Security in their old age; and low-earning workers, who rely far more than others on Social Security benefits for retirement income, will be particularly vulnerable to sudden or unexpected benefit reductions. The four illustrative reform options outlined in this chapter would all retain Social Security's familiar program structure, avoid sudden or unexpected increases in payroll taxes and benefit cuts, and place the program on a solid financial footing for both the standard 75-year projection period and beyond.
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From page 125... ...
2. In addition to payroll taxes, which account for most Social Security revenue, small amounts come from the personal income taxes paid by upper-income individuals and families on their Social Security benefits and from interest earned on trust fund reserves.
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From page 126... ...
take a generally similar path, although its projections of the gap between spending and revenue are somewhat smaller and, as a result, it projects the exhaustion of the trust fund slightly later. For consistency with the rest of the study, the baseline for the overall budget and the analysis of our paths use the Congressional Budget Office projections for Social Security.
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From page 127... ...
24. We present Social Security earnings replacement rates to gauge the degree to which beneficiaries -- especially those without pensions or savings -- can rely on Social Security benefits.
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From page 128... ...
Because payroll taxes do not apply to nonwage income, such as business profits, interest, and capital gains, options that increase payroll tax rates disproportionately affect the people who are most reliant on wage income.
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