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The Social Security program faces financing problems in both the short and the long run, and the Congress will be considering ways to mitigate those problems over the next year. This paper, prepared at the request of the Senate Budget Committee, focuses on the long-run problem, and analyzes a number of options for improving the financial status of the trust funds over the next 75 years. In keeping with the mandate of the Congressional Budget Office (CBO) to provide objective and impartial analysis, this study offers no recommendations.
Patricia Ruggles and Paul Cullinan of the CBO's Human Resources and
Community Development Division prepared the paper under the supervision
of Nancy M. Gordon and Paul B. Ginsburg. Many people, both outside of CBO
and on the CBO staff, provided useful information and helpful comments.
The authors especially wish to thank the Social Security Administration's
Office of the Actuary, which provided most of the estimates that appear
in the paper; particularly helpful were Stephen Goss, Steven McKay, Orlo
Nichols, and Wilfredo Cruz. In addition, Robert M. Ball and Robert J. Myers
of the National Commission on Social Security Reform, Michael Carozza,
John Nelson, and Richard N. Brandon of the Senate Budget Committee staff,
James A. Rotherham of the House Budget Committee staff, and Wendell Primus
of the House Ways and Means Committee Staff all made useful comments. Within
CBO, the authors would like to thank Paul Van de Water, Robert W. Hartman,
Richard Mudge, Wilhelmina A. Leigh, and Bruce Vavrichek for their assistance
and their comments. The estimates appearing in Appendix C were prepared
by Stephen Chaikind and James M. Nason, who also provided useful comments.
The manuscript was edited by Francis Pierce and Robert L. Faherty. Norma
A. Leake typed the paper and prepared it for publication; Mary V. Braxton
typed several early drafts.
Alice M. Rivlin
Director
November 1982
SUMMARY
CHAPTER I. INTRODUCTION
CHAPTER II. THE LONG-RUN FINANCING PROBLEM: BASIC APPROACHES
CHAPTER III. HOW SOCIAL SECURITY BENEFITS ARE COMPUTED
CHAPTER IV. CHANGES IN THE COMPUTATION OF INITIAL SOCIAL SECURITY BENEFITS
CHAPTER V. CHANGING THE AGE OF RETIREMENT
CHAPTER VI. ADJUSTING BENEFITS FOR COST-OF-LIVING CHANGES
CHAPTER VII. INCREASING TRUST FUND REVENUES
CHAPTER VIII. IMPLICATIONS
APPENDIX A. EXAMPLE BENEFIT COMPUTATIONS
APPENDIX B. LONG-RANGE COST PROJECTIONS
APPENDIX C. SHORT-TERM FINANCING PROBLEMS AND OPTIONS
| TABLES | |
| 1. | OASDI TAX RATES, COST RATES, AND RATIOS OF BALANCES TO OUTLAYS |
| 2. | OASDI TAX REVENUES AND COSTS IN RELATION TO GROSS NATIONAL PRODUCT |
| 3. | AVERAGE INDEXED MONTHLY EARNINGS AND PRIMARY INSURANCE AMOUNTS AT THREE EARNINGS LEVELS FOR EARNERS BECOMING 62 IN 1982 |
| 4. | LONG-RUN SAVINGS OF SEVERAL FORMULA CHANGE OPTIONS, RELATIVE TO CURRENT LAW: CURRENT LAW AND FOUR OPTIONS |
| 5. | REPLACEMENT RATES FOR THREE WORKERS AGE 62 IN 1995: CURRENT LAW AND FOUR OPTIONS |
| 6. | EFFECTS (RELATIVE TO CURRENT LAW) OF DIFFERENT INDEXING METHODS FOR EARNINGS AND BEND POINTS |
| 7. | LONG-RUN SAVINGS RELATIVE TO CURRENT LAW OF SEVERAL OPTIONS TO DELAY RETIREMENT |
| 8. | LONG-RUN SAVINGS OF SEVERAL INDEXING OPTIONS, RELATIVE TO CURRENT LAW |
| 9. | PAYROLL TAX RATES UNDER CURRENT LAW, 1982-1990 |
| 10. | LONG-RUN REVENUE INCREASES RELATIVE TO CURRENT LAW UNDER SEVERAL OPTIONS |
| 11. | LONG-RUN IMPACT OF SELECTED SOCIAL SECURITY OPTIONS, RELATIVE TO CURRENT LAW |
| 12. | SUMMARY OF DISTRIBUTIONAL EFFECTS OF SELECTED SOCIAL SECURITY OPTIONS, RELATIVE TO CURRENT LAW |
| 13. | PERCENTAGE REDUCTIONS IN MONTHLY BENEFITS FOR BENEFICIARIES BECOMING 62 IN 2020 WITH LIFETIME EARNINGS AT THREE WAGE LEVELS UNDER A COMBINATION OF PROPOSALS TO REDUCE BENEFITS |
| A-1. | EARNINGS HISTORIES FOR HYPOTHETICAL WORKERS AGE 62 IN 1982 |
| A-2. | MONTHLY AUXILIARY BENEFITS AS A PERCENTAGE OF THE WORKER'S PRIMARY INSURANCE AMOUNT FOR SELECTED BENEFICIARIES |
| B-1. | SELECTED DEMOGRAPHIC ASSUMPTIONS BY ALTERNATIVE, 1960-2060 |
| B-2. | SELECTED ECONOMIC ASSUMPTIONS, 1960-2060 |
| C-1. | TRUST FUND ASSETS AT THE BEGINNING OF THE YEAR AS A PERCENTAGE OF ANNUAL OUTLAYS, 1972-1982 |
| C-2. | COMPARISON OF ANNUAL BENEFIT INCREASES BASED ON ALTERNATIVE INDEXES, 1975-1982 |
| C-3. | PROJECTIONS OF SOCIAL SECURITY TRUST FUND OUTLAYS, INCOMES, AND BALANCES, 1982-1991 |
| C-4. | PROJECTED SAVINGS RELATIVE TO CURRENT LAW OF FOUR PROPOSALS TO REDUCE THE COLAS IN SOCIAL SECURITY, 1983-1985 |
| C-5. | ADDITIONAL OASDHI REVENUES UNDER VARIOUS TAX CHANGES |
| FIGURES | |
| 1. | PRIMARY INSURANCE AMOUNTS IN RELATION TO AVERAGED INDEXED MONTHLY EARNINGS UNDER CURRENT LAW, 1982 |
| 2. | PRIMARY INSURANCE AMOUNTS IN RELATION TO AVERAGE INDEXED MONTHLY EARNINGS UNDER CURRENT LAW AND TWO OPTIONS, 1985 |
Under current projections, the Social Security system will face major financing problems early in the next century. These problems will result from an expected decline in the number of workers contributing to Social Security relative to the number of people receiving Social Security benefits. In 1980, there were about five people of working age for every person age 65 or older. By 2030, when the "baby boom" generation has retired, there are expected to be only about two and a half people between 20 and 64 years old for each person 65 or over. As the number of workers declines relative to the number of beneficiaries, those of working age will have to contribute a larger proportion of their earnings to Social Security than is now required, if benefits are maintained at current law levels and no other major changes in the program take place.
This paper discusses the size and the timing of the long-run financing problems of the Social Security system, and analyzes a variety of options to mitigate those problems. It concentrates on the Old Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds, the two Social Security trust funds that provide cash benefits for retirees, disabled workers, and their families and survivors.
Although the OASDI funds also face some short-run financing problems, these are chiefly economic rather than demographic in nature, and are not discussed in this paper. 1 In addition, although there have been many proposals over the years to make fundamental changes in the Social Security system, this paper discusses only incremental changes that would improve trust-fund balances over the long run while maintaining the current structure of the system.
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