[Senate Report 111-187]
[From the U.S. Government Publishing Office]


_______________________________________________________________________


111th Congress 
 2d Session                      SENATE                          Report
                                                                111-187
_______________________________________________________________________
 
                     SOCIAL SECURITY MODERNIZATION:

            OPTIONS TO ADDRESS SOLVENCY AND BENEFIT ADEQUACY



                               __________

                              R E P O R T

                                 of the

                       SPECIAL COMMITTEE ON AGING

                          UNITED STATES SENATE






                  May 13, 2010.--Ordered to be printed
                       Special Committee on Aging

                    HERB KOHL, Wisconsin, Chairman 

RON WYDEN, Oregon                    BOB CORKER, Tennessee, Ranking 
                                         Member
BLANCHE L. LINCOLN, Arkansas         RICHARD SHELBY, Alabama
EVAN BAYH, Indiana                   SUSAN COLLINS, Maine
BILL NELSON, Florida                 ORRIN HATCH, Utah
BOB CASEY, Pennsylvania              GEORGE LeMIEUX, Florida
CLAIRE McCASKILL, Missouri           SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island     LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado                 SAXBY CHAMBLISS, Georgia
MICHAEL BENNET, Colorado
KIRSTEN GILLIBRAND, New York
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
                 Debra Whitman, Majority Staff Director
                Michael Bassett, Minority Staff Director

                              Prepared by:
                     Debra Whitman, Majority Staff
                     Jason Holsclaw, Majority Staff
                       Jeff Cruz, Majority Staff
                      Neil Thakur, Majority Staff
                     Ashley Glacel, Majority Staff
                         LETTER OF TRANSMITTAL

                              ----------                              

                                                        U.S. Senate
                                         Special Committee on Aging
                                                    Washington, DC.
Hon. Joe Biden,
President, U.S. Senate,
Washington, DC.
    Dear Mr. President: Under authority of Senate Resolution 73 
agreed to March 10, 2009, I am submitting to you a report of 
the U.S. Senate Special Committee on Aging entitled: Social 
Security Modernization: Options To Address Solvency and Benefit 
Adequacy.

    Senate Resolution 4, the Committee Systems Reorganization 
Amendments of 1977, authorizes the Special Committee on Aging 
``to conduct a continuing study of any and all matters 
pertaining to problems and opportunities of older people, 
including but not limited to, problems and opportunities of 
maintaining health, of assuring adequate income, of finding 
employment, of engaging in productive and rewarding activity, 
of securing proper housing and, when necessary, of obtaining 
care and assistance.'' Senate Resolution 4 also requires that 
the results of these studies and recommendation be reported to 
the Senate annually.

    This Aging Committee report, together with the testimony 
received during a June 2009 hearing on the topic of Social 
Security, outlines the challenges currently facing Social 
Security's retirement program and highlights options for 
addressing program solvency, benefit adequacy, and retirement 
income security for economically-vulnerable groups. The options 
described in this report represent a range of proposals that 
are commonly considered and should not be construed as 
proposals that have been endorsed by the Committee or its 
members. Many members of the Committee, including myself, do 
not support and actively oppose many of the options. However, a 
full and informed debate begins with the collection of research 
and information, and it is our hope that this report will serve 
as a resource to Congress and policymakers as they discuss ways 
to ensure that Social Security will remain strong for another 
75 years.

    I am pleased to transmit this report to you.

            Sincerely,

                                               Herb Kohl, Chairman.
                                FOREWORD

    Since its inception, the Special Committee on Aging (Aging 
Committee) has examined various aspects of the Old-Age, 
Survivors, and Disability program--otherwise known as Social 
Security--in an effort to assist Congress in devising ways to 
strengthen this critical program for seniors. For nearly 75 
years, Social Security has served as the foundation of 
retirement income for American workers and their families, 
dramatically reducing poverty among our nation's elderly. 
Today, it is estimated that 44 percent of older Americans would 
be considered poor by federal standards if they did not receive 
Social Security benefits. And for the majority of retired 
Americans, Social Security serves as their primary source of 
income.
    Although Social Security remains a crucial benefit for 
millions of seniors, the program was designed to serve an 
American society of 75 years ago. Much has changed since its 
inception: Americans are living longer, women's participation 
in the labor force has significantly increased, and with a rise 
in the divorce rate, household composition has changed. In 
addition, the labor force is growing more slowly and the nature 
of work and compensation has altered in ways that affect 
workers' ability to save for retirement. As a result, under its 
current design, Social Security may not be as effective as it 
could be in addressing the needs of our society both now and in 
the future. Therefore, modernizing the program to reflect 
America's evolving demographics is vital to ensuring that 
benefits are adequate and equitable for generations to come.
    Social Security also faces fiscal challenges. The 2009 
report of the Social Security Board of Trustees projects that 
the program will continue to add tax revenue to its Trust Funds 
through 2016, after which it will need to subsidize its 
revenues by drawing from the Trust Funds in order to pay out 
full benefits. By 2037, the Trustees estimate that the reserves 
will be depleted. Since the Social Security program is 
prohibited from borrowing, tax revenues at that point would 
only be sufficient to pay out roughly 76 percent of benefits. 
Congress should enact modest changes to Social Security in the 
near future in order to bring its long-term financing into 
balance and improve benefits for those who need them most.
    This Aging Committee report, together with the testimony 
received during a June 2009 hearing on the topic of Social 
Security, outlines the challenges currently facing Social 
Security's retirement program and highlights options for 
addressing program solvency, benefit adequacy, and retirement 
income security for economically-vulnerable groups. The options 
described in this report represent a range of proposals that 
are commonly considered and should not be construed as 
proposals that have been endorsed by the Committee or its 
members. Many members of the Committee, including myself, do 
not support and actively oppose many of the options. However, a 
full and informed debate begins with the collection of research 
and information, and it is our hope that this report will serve 
as a resource to Congress and policymakers as they discuss ways 
to ensure that Social Security will remain strong for another 
75 years.
                                               Herb Kohl, Chairman.
                            C O N T E N T S

                              ----------                              
                                                                   Page
Foreword.........................................................     V
Committee Jurisdiction...........................................     1
Committee Background.............................................     2
Senate Committee Hearings........................................     2
Relevant Aging Committee Hearings................................     3
Executive Summary................................................     6
Introduction.....................................................    10
Background.......................................................    10
    How Does the Social Security Program Work?...................    11
        Retirement Benefits......................................    15
        Disability Benefits......................................    15
        Supplemental Security Income.............................    16
    How Are Social Security Benefits Determined?.................    17
        Benefits for the Worker's Family Members.................    18
        Benefit Adjustments for Retirement Before or After the 
          Full Retirement Age....................................    23
        Benefit Adjustments for the Government Pension Offset 
          (GPO) and Windfall Elimination Provision (WEP).........    24
        Benefit Adjustments for the Retirement Earnings Test.....    24
        Special Minimum Benefit..................................    26
    How is the Social Security Program Financed?.................    26
        Payroll Taxes............................................    26
        Taxation of Benefits.....................................    28
        Interest on Special U.S. Obligation......................    28
        The Social Security Trust Funds..........................    28
        Historical Status of the Trust Funds.....................    29
        Social Security and the Federal Budget...................    30
        Legacy Costs.............................................    30
    The Annual Report of the Board of Trustees...................    30
        Findings in the 2009 Trustees Report.....................    31
        The Congressional Budget Office Forecast.................    33
    Who Receives Benefits From Social Security?..................    34
    How Does Social Security Compare With Other Sources of Income    37
    Sources of Income by Income Quartile.........................    39
Social Security Modernization: Setting the Stage.................    43
Options To Raise Revenue To Address Program Solvency.............    44
    Options To Increase the Social Security Contribution Rate....    44
        Increase Worker and Employer Contributions by 1.1 Percent    44
        Increase Worker and Employer Contributions by One Percent 
          in 2022, and by an Additional One Percent in 2052......    44
        Increase Worker and Employer Contributions 1/20 Percent 
          Annually for 20 years..................................    44
        Raise Rates Based on the Trustees' Most Current 
          Intermediate Assumptions of the Tax Rate Needed To 
          Balance Revenues and Outlays...........................    45
        Enhance Collection of Existing Taxes.....................    45
    Options To Consider Broadening Revenue Base for Social 
      Security...................................................    45
        Options To Modify the Social Security Tax Cap............    46
            Eliminate the Cap--Do Not Count the Additional 
              Earnings Toward Benefits...........................    46
            Eliminate the Cap--Count the Earnings Toward Benefits    46
            Eliminate the Cap--Count Earnings Toward the Benefits 
              Using Different Formula............................    46
            Gradually Restore the Cap To Cover 90 Percent of 
              Earnings...........................................    47
            Gradually Restore the Cap To Cover 90 Percent of 
              Earnings for Workers and Eliminate the Contribution 
              Cap for Employers..................................    47
        Options To Extend Social Security Coverage to All Workers    47
            Extend Social Security Coverage to Newly-Hired Non-
              Covered State and Local Government Employees.......    48
            Option To Treat All Salary Reduction Plans Like 
              401(k)s............................................    48
        Options To Use Progressive Taxes To Cover Social 
          Security's Legacy Costs................................    49
            Dedicate Estate Tax Revenue at the 2009 Level to 
              Social Security....................................    49
            Three Percent Legacy Tax on Earnings Above the Tax 
              Cap................................................    49
            Three Percent Legacy Tax on AGI Over $250,000 for 
              Couples and $125,000 for Individuals...............    49
            Five Percent Legacy Tax on AGI over $250,000 for 
              Couples and $125,000 for Individuals...............    50
    Options To Maintain Reserves and Diversify Investments.......    50
        Gradually Invest 15 Percent of Trust Funds Assets in 
          Equities...............................................    50
        Gradually Invest 40 Percent of Trust Funds Assets in 
          Equities...............................................    50
    Options To Reduce Benefits To Address Program Solvency.......    51
        Options To Reduce the Cost-of-Living Adjustment..........    51
        Reduce the COLA by One Percent Each Year.................    51
        Reduce the COLA by One-Half Percent Each Year............    51
        Adopt the ``Chained'' Consumer Price Index (CPI).........    51
    Options To Raise the Age for Full Retirement Benefits........    52
        Accelerate the Increase to 67; Then Increase the Full 
          Benefit Age by One Month Every Two Years to Age 68.....    52
        Accelerate the Increase to 67; Then Increase the Full 
          Benefit Age by One Month Every Two Years to Age 70.....    52
        Gradually Index the Full-Benefits Age for Longevity 
          Indefinitely...........................................    53
    Options To Lengthen the Career-Earnings Averaging Period.....    53
        Increase the Averaging Period From 35 to 38 Years........    53
        Increase the Averaging Period From 35 to 40 Years........    53
    Options To Reduce Benefits for New Beneficiaries.............    53
        Reduce Benefits by Three Percent for New Beneficiaries in 
          2010 and Later.........................................    54
        Reduce Benefits by Five Percent for New Beneficiaries in 
          2010 and Later.........................................    54
        Price Index Benefits for Successive Generations Beginning 
          in 2013................................................    54
        Gradually Lower the Supplemental Spouse Benefit..........    54
Options To Protect Benefits for Vulnerable Groups................    55
    Option: Guaranteeing a Minimum Benefit.......................    55
    Option: Reducing Work Requirements for Eligibility...........    57
    Option: Supplementing Benefits for Low-Income Single Workers.    58
    Option: Adopting Earnings Sharing............................    59
    Option: Reducing the Marriage Duration Required for Spousal 
      Benefits...................................................    60
    Option: Providing Caregiver Credits..........................    61
    Option: Increasing Survivor Benefits.........................    62
    Option: Providing Longevity Insurance........................    63
Benefit Adequacy Options Could Reduce Other Benefits for 
  Vulnerable Groups, but Approaches To Mitigate These Effects Are 
  Available......................................................    64
    Supplemental Security Income.................................    64
    Medicaid.....................................................    65
    Supplemental Nutrition Assistance Program....................    66
Steps Could Be Taken To Mitigate Potential Benefit Reductions....    68
Conclusion.......................................................    69
Appendix.........................................................    71
Glossary of Key Terms............................................    73
Acknowledgments..................................................    81



111th Congress                                                   Report
                                 SENATE
 2d Session                                                     111-187

======================================================================

SOCIAL SECURITY MODERNIZATION: OPTIONS TO ADDRESS SOLVENCY AND BENEFIT 
                                ADEQUACY

                                _______
                                

                  May 13, 2010.--Ordered to be printed

                                _______
                                

 Mr. Kohl, from the Special Committee on Aging, submitted the following

                              R E P O R T

                         COMMITTEE JURISDICTION

    It shall be the duty of the special committee to conduct a 
continuing study of any and all matters pertaining to problems 
and opportunities of older people, including, but not limited 
to, problems and opportunities of maintaining health, of 
assuring adequate income, of finding employment, of engaging in 
productive and rewarding activity, of securing proper housing, 
and when necessary, of obtaining care or assistance.
    Source: SPECIAL COMMITTEE ON AGING, Jurisdiction and 
Authority, S. Res. 4, 104, 95th Cong., 1st Sess. (1977)\1\\1\ 
As amended by S. Res. 78. 95th Cong., 1st Sess. (1977), S. Res. 
376, 95th Cong., 2d Sess. (1978), S. Res. 274, 96th Cong., 1st 
Sess. (1979), S. Res. 389, 96th Cong., 2d Sess. (1980).
---------------------------------------------------------------------------
    \ 11\  
---------------------------------------------------------------------------
    A Committee is a panel of members elected or appointed to 
perform some service or function for its parent body. The 
legislative subjects and other functions are assigned to a 
committee by rule, precedent, resolution, or statute. In 
general, committees conduct investigations, make studies, issue 
reports, and make recommendations. Select or Special Committees 
are established by a resolution for a special purpose and, 
usually, for a limited time. Most select and special committees 
are assigned specific investigations or studies, but are not 
authorized to report measures to their chambers. Within the 
assigned areas, these functional subunits gather information; 
compare and evaluate legislative alternatives; identify policy 
problems and propose solutions; select, determine, and report 
measures for full chamber consideration; monitor executive 
branch performance (oversight); and investigate allegations of 
wrongdoing. While special committees have no legislative 
authority, they can study issues, conduct oversight of 
programs, and investigate reports of fraud and waste.

                          COMMITTEE BACKGROUND

    The Senate Special Committee on Aging was first established 
in 1961 as a temporary Committee of the U.S. Senate, and was 
granted permanent status on February 1, 1977. While special 
committees have no legislative authority, Congress relies on 
them to study issues, conduct oversight of programs, and 
investigate reports of fraud, waste, and abuse. Throughout its 
existence, the Aging Committee has served as a focal point in 
the Senate for discussion and debate on matters relating to 
older Americans, and often submits its findings and legislative 
recommendations to the Senate, as well as publishes materials 
of assistance to those interested in public policies related to 
the aging and elderly.
    The Aging Committee has a long and influential history, and 
has called the Congress' and the nation's attention to many 
problems affecting older Americans. The Aging Committee was 
exploring health insurance coverage of older Americans prior to 
the enactment of Medicare in 1965. Since the passage of that 
legislation, the Aging Committee has continually reviewed 
Medicare's performance on an almost annual basis. The Aging 
Committee has also regularly reviewed pension coverage and 
employment opportunities for older Americans. It has conducted 
oversight of the administration of major programs like Social 
Security and the Older Americans Act. Finally, it has crusaded 
against frauds targeting the elderly and federal programs on 
which the elderly depend.

                       SENATE COMMITTEE HEARINGS

    Committee hearings afford Senators an opportunity to gather 
information on, and draw attention to, legislation and issues 
within a committee's purview, conduct oversight of programs or 
agencies, and investigate allegations of wrongdoing.
    Hearings are committee or subcommittee meetings to receive 
testimony for legislative, investigative, or oversight 
purposes. Witnesses often include government officials, 
spokespersons for interested groups, experts, officials from 
the Government Accountability Office, and members of Congress. 
Committees may issue subpoenas to summon reluctant witnesses. 
Both houses require that the vast majority of hearings be open 
to the media and public and, if possible, publicly announced at 
least a week before they begin.
    Witnesses before Senate committees (except Appropriations) 
generally must provide a committee with a copy of their written 
testimony at least one day prior to their oral testimony [Rule 
XXVI, paragraph 4(b)]. It is common practice to request 
witnesses to limit their oral remarks to a brief summary of the 
written testimony. A question and answer period usually follows 
the witnesses' oral testimony. Following hearings, committees 
usually publish the transcripts of witness testimony and 
questions and answers.
    Congressional committee hearings may be broadly classified 
into four types: (1) legislative, (2) oversight, (3) 
investigative, and (4) confirmation. Hearings may be held on 
Capitol Hill or elsewhere, such as a committee member's 
district or state or a site related to the subject of the 
hearing. All hearings have a similar formal purpose, to gather 
information for use by the committee in its activities.

                   RELEVANT AGING COMMITTEE HEARINGS


                  http://aging.senate.gov/hearings.cfm


                             111TH CONGRESS

    Social Security: Keeping the Promise in the 21st Century, 
June 18, 2009

    Boomer Bust? Securing Retirement in a Volatile Economy, 
February 25, 2009

    Saving Smartly for Retirement: Are Americans Being 
Encouraged To Break Open The Piggy Bank?, July 16, 2008

    The Aging Workforce: What Does It Mean For Businesses And 
The Economy?, February 28, 2007

                             109TH CONGRESS

    Social Security: Do We Have To Act Now?, February 3, 2005

                             108TH CONGRESS

    Analyzing Social Security: GAO Weighs the President's 
Commission's Proposals, January 15, 2003

    Social Security: Whose Trust Will Be Broken?, July 29, 2003

    Strengthening Social Security: What Can We Learn From Other 
Nations?, May 18, 2004

    Strengthening Social Security: What Can Personal Retirement 
Accounts Do For Low-Income Workers?, June 15, 2004

                             107TH CONGRESS

    Straight Shooting on Social Security: The Trade-offs of 
Reform, December 10, 2001

                             106TH CONGRESS

    Inviting Fraud: Has the Social Security Administration 
Allowed Some Payees to Deceive the Elderly and Disabled?, May 
2, 2000

    Income Taxes: The Solution to the Social Security and 
Medicare Crisis?, March 27, 2000

    The Impact of Social Security Reform on Women, June 1, 1999

    Social Security Reform: Is More Money the Answer?, March 1, 
1999

    Women and Social Security Reform: Are Individual Accounts 
the Answer?, February 22, 1999

                             105TH CONGRESS

    2010 and Beyond: Preparing Social Security for the Baby 
Boomers, Omaha, NB, August 26, 1997

    A Starting Point for Reform: Identifying the Goals of 
Social Security, February 10, 1998

    The Stock Market and Social Security: The Risks and the 
Rewards, April 22, 1998

                             104TH CONGRESS

    Social Security Reform Options: Preparing for the 21st 
Century, September 24, 1996

    Problems in the Social Security Disability Programs: The 
Disabling of America, March 2, 1995

                             101ST CONGRESS

    New Directions for SSA: Revitalizing Service, May 18, 1990

    SSA's Toll-Free Telephone System: Service or Disservice?, 
April 10, 1989

                             100TH CONGRESS

    The Social Security Notch: Justice or Injustice?, February 
22, 1988

                             99TH CONGRESS

    The Closing of Social Security Field Offices, Pittsburgh, 
PA September 9, 1985

                             98TH CONGRESS

    Social Security Disability Reviews: The Human Costs: Part 
1: Chicago, IL, February 16, 1984; Part 2: Dallas, TX, February 
17, 1984; Part 3: Hot Springs, AR, March 24, 1984

    Social Security Reviews of the Mentally Disabled, April 7-
8, 1983

    Social Security: How Well Is It Serving the Public?, 
November 29, 1983

                             97TH CONGRESS

    Social Security Disability: The Effects of the Accelerated 
Review, Ft. Smith, AR, November 19, 1982

    Social Security Reform and Retirement Income Policy, 
September 16, 1981

    The Social Security System: Averting the Crisis, Evanston, 
IL, August 10, 1981

    Social Security Reform: Effect on Work and Income after Age 
65, Rogers, AR, May 18, 1981

    Social Security Oversight: Part 1: (Short-Term Financing 
Issues), June 16, 1981; Part 2: (Early Retirement), June 18, 
1981; Part 3: (Cost-of-Living Adjustments), June 24, 1981

                             96TH CONGRESS

    Social Security: What Changes Are Necessary?: Part 1: 
Washington, DC, November 21, 1980; Part 2: Washington, DC, 
December 2, 1980; Part 3: Washington, DC, December 3, 1980; 
Part 4: Washington, DC, December 4, 1980

    Adapting Social Security to a Changing Work Force, November 
28, 1979

                             94TH CONGRESS

    Future Directions in Social Security: Part 9: Washington, 
DC, March 18, 1975; Part 10: Washington, DC, March 19, 1975; 
Part 11: Washington, DC, March 20, 1975; Part 12: Washington, 
DC, May 1, 1975; Part 13: San Francisco, CA, May 15, 1975; Part 
14: Los Angeles, CA, May 16, 1975; Part 15: Des Moines, IA, May 
19, 1975; Part 16: Newark, NJ, June 30, 1975; Part 17: Toms 
River, NJ, September 8, 1975; Part 18: Washington, DC, October 
22, 1975; Part 19: Washington, DC, October 23, 1975; Part 20: 
Portland, OR, November 24, 1975; Part 21: Portland, OR, 
November 25, 1975; Part 22: Nashville, TN, December 6, 1975; 
Part 23: Boston, MA, December 19, 1975

    Future Directions of Social Security: Part 24: Providence, 
RI, January 26, 1976; Part 25: Memphis, TN, February 13, 1976

                             93RD CONGRESS

    Future Directions in Social Security: Part 1: Washington, 
DC, January 15, 1973; Part 2: Washington, DC, January 22, 1973; 
Part 3: Washington, DC, January 23, 1973; Part 4: Washington, 
DC, July 25, 1973; Part 5: Washington, DC, July 26, 1973; Part 
6: Twin Falls, ID, May 16, 1974; Part 7: Washington, DC, July 
15, 1974; Part 8: Washington, DC, July 16, 1974

                         AGING COMMITTEE REPORT

                              ----------                              


                           Executive Summary

    ----------------------------------------------------------------

                           ABOUT THIS REPORT

The Chairman and Ranking Members of the Aging Committee and its individual 
members do not support all of the options discussed in this report. In 
fact, many of the options are opposed by individual members of the 
Committee. Nevertheless, the report is written in the spirit of creating an 
open and informed debate on the range of options to improve both solvency 
and benefit adequacy.

The options presented represent a common, but by no means exhaustive, list 
of policies Congress could institute. There are therefore numerous 
combinations of changes to tax and benefit provisions that could be 
considered. Further, this report focuses on possible changes to the Social 
Security retirement program and does not offer proposals for reforming the 
Social Security Disability Insurance program.

This report uses estimates of the 2009 Social Security Trustees Report\1\ 
as a basis for analysis. The 2010 Trustees report, which will be issued in 
June of this year, will likely have different estimates of the Trust Funds' 
solvency due to the impact of the economic downturn reducing revenues and 
increasing the number of new beneficiaries.

    ----------------------------------------------------------------
---------------------------------------------------------------------------

    \1\The 2009 Annual Report of the Board of Trustees of the Federal 
Old-Age and Survivors Insurance and Disability Insurance Trust Fund, 
May 12, 2009, available at: http://www.ssa.gov/OACT/TR/2009/tr09.pdf 
(hereafter cited as the 2009 Social Security Trustees' Report).
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                                OVERVIEW

    Since its inception, the Senate Special Committee on Aging 
(Aging Committee) has examined various aspects of the Old-Age, 
Survivors, and Disability program--otherwise known as Social 
Security--in an effort to assist Congress in devising ways to 
strengthen this critical program for seniors. This Aging 
Committee report, together with the testimony received during a 
June 2009 hearing on Social Security, outlines the challenges 
currently facing Social Security's retirement program and 
highlights options for addressing program solvency, benefit 
adequacy, and retirement income security for economically-
vulnerable groups. It does not offer proposals for reforming 
the Social Security Disability Insurance program.
    Modernizing Social Security means ensuring the program is 
both solvent and effective, for all Americans, now and in the 
future. Efforts to improve solvency may enhance, weaken or have 
no impact on the ability of Social Security to provide 
retirement security for all Americans, whereas efforts to 
improve the adequacy of benefits will likely come at a cost to 
the system. Timing also plays a role in the decisions that must 
be made. Modernizing the program will become increasingly 
difficult as the Social Security Trust Funds diminish, 
therefore it will be easier and less costly to make changes 
now. So it is with some urgency that Congress should 
simultaneously address the twin challenges of solvency and 
effectiveness, and because the program is critical to every 
American family, it should be done in a bipartisan and 
transparent way.
    A full and informed debate on how to tackle these 
challenges begins with the collection of relevant options. It 
is our hope that this report will serve as a resource to 
Congress and policymakers as they discuss the future of the 
Social Security.

             THE PROMISE AND CHALLENGES OF SOCIAL SECURITY

    Social Security benefits, while not generous, provide an 
important source of income for retired Americans and serve as 
the foundation of retirement income for the majority of 
retirees. In 2009, the average monthly retirement benefit was 
$1,164. Although Social Security is not meant to be the sole 
source of income for retirees, in 2008 nearly one-quarter of 
beneficiaries age 65 and older lived in households that relied 
on it for at least 90 percent of household income. These 
individuals were mostly single women and Social Security's 
oldest beneficiaries.
    The Social Security program faces a modest long-term 
financing shortfall of tax revenue and interest on Trust Fund 
assets. The Social Security Trustees estimated in 2009 that the 
Old Age, Survivors, and Disability Insurance program will 
continue to add tax revenue to their Trust Funds up to 2016. 
The Trust Funds will continue to grow because of interest 
earned through 2023, at which time total assets will be $4.3 
trillion. Subsequently, Social Security will gradually draw 
down all reserves before the end of 2037, at which point it 
will have sufficient resources to pay about three-quarters of 
scheduled benefits. Congress could take steps to modify the 
program's financing and benefit structure in order to ensure 
that full benefits continue to be paid after 2037.
    The pressure on Social Security's finances comes primarily 
from the dramatic changes in birthrates and life expectancy 
that have taken place since the program's inception in the 
1930s, and the increase in income inequality over the last 
several decades. First, the aging of the baby boom generation 
and increases in life expectancy will continue to contribute to 
an older society, and between 2010 and 2030, the number of 
people aged 65 and older is estimated to increase by 75 
percent. At the same time, the number of workers whose taxes 
will finance future benefits is projected to increase by only 
14 percent.
    Program design features contribute to the projected growth 
in program spending and program revenues. For example, elements 
of the Social Security benefit formula are indexed to average 
wage growth, resulting in an increase in the real (inflation-
adjusted) value of benefits for future retirees. This feature 
ensures that benefits will replace a relatively constant share 
of a beneficiary's earnings in retirement, but it also means 
Social Security outlays increase over time as the number of 
beneficiaries grow. However, increasing wage growth has an 
offsetting positive effect of increasing revenues as payrolls 
rise over time.
    Finally, rising income inequality in the last several 
decades has caused the share of aggregate earnings that are not 
taxed to increase from 10 percent to 17 percent, as high-income 
workers have seen their salaries rise faster than the Social 
Security taxable earnings threshold. This means revenues for 
the Social Security Trust Funds are lower than they would have 
been if earnings were distributed more evenly among American 
workers as they were in previous decades.
    Economic and demographic changes are also having an impact 
on other sources of retirement income. Improvements in 
longevity have increased the likelihood that retirees will 
outlive their retirement savings, and the rise in the divorce 
rate and the shortening of average marriages have left more 
single individuals who will not benefit from spousal 
protections. Furthermore, the proportion of individuals who 
depend on Social Security for the majority of their income may 
grow over time due to the decline in defined benefit pensions, 
the recent decline the value of retirement accounts, and the 
relatively slow growth in wages for low and moderate income 
workers over the last several decades.

 KEEPING THE PROMISE: OPTIONS TO ADDRESS SOLVENCY AND BENEFIT ADEQUACY

    Congress could implement a range of options to effectively 
modernize the Social Security retirement program, 
simultaneously improving the program's solvency and ensuring 
benefits remain adequate for the elderly and economically-
vulnerable beneficiaries. In an effort to highlight both types 
of options and their implications, this report presents 
information from the National Academy of Social Insurance 
(NASI), the Congressional Research Service (CRS), and the U.S. 
Government Accountability Office (GAO), and assessments of 
their fiscal impacts on solvency by the Social Security 
Actuaries. These options to improve solvency and benefit 
adequacy discussed in this report are summarized in the tables 
below:

 PROTECTING THE STABILITY OF SOCIAL SECURITY: OPTIONS TO ADDRESS PROGRAM
                                SOLVENCY
------------------------------------------------------------------------
                                    Income as
                                    percent of   Percentage
           Description               taxable    decrease in  Page number
                                     payroll     shortfall
------------------------------------------------------------------------
                   Raise Revenue for Program SolvencyIncrease the Social Security
 Contribution Rate:
    Increase Worker and Employer          2.09          104           44
     Contributions by 1.1 percent
    Increase Worker and Employer          2.06          103           44
     Contributions by One percent
     in 2022, and by an
     Additional One percent in
     2052........................
    Increase Worker and Employer          1.39           69           44
     Contributions 1/20 percent
     Annually for 20 years.......
    Raise Rates Based on the            varies          100           45
     Trustees' Most Current
     Intermediate Assumptions of
     the Tax Rate Needed to
     Balance Revenues and Outlays
    Enhance Collection of          No estimate  No estimate           45
     Existing Taxes..............              Broaden the Revenue Base for Social SecurityModify the Social Security Tax
 Cap:
    Eliminate the Cap--Do Not             2.32          116           46
     Count the Additional
     Earnings....................
    Eliminate the Cap--Count the          1.89           95           46
     Earnings toward Benefits....
    Eliminate the Cap--Count              2.17          108           46
     Earnings toward Benefits
     Using Different Formula.....
    Gradually Restore the Cap to          0.60           28           47
     Cover 90 percent of Earnings
    Gradually Restore the Cap to          1.37           69           47
     Cover 90 percent of Earnings
     for Workers and Eliminate
     the Contribution Cap for
     Employers...................
Extend Social Security Coverage
 to all Workers:
    Extend Social Security                0.17            9           48
     Coverage to Newly-Hired Non-
     covered State and Local
     Government Employees........
    Treat All Salary Reduction            0.25           12           48
     Plans Like 401(k)s..........
Use Progressive Taxes to Cover
 Social Security's Legacy Costs:
    Dedicate Estate Tax Revenue           0.40           20           49
     at the 2009 Level to Social
     Security....................
    Three percent Legacy Tax on           0.57           28           49
     Earnings Above the Tax Cap..
    Three percent Legacy Tax on           0.74           37           49
     AGI over $250,000 for
     Couples and $125,000 for
     tIndividuals................
    Five percent Legacy Tax on            1.23           62           50
     AGI over $250,000 for
     Couples and $125,000 for
     Individuals.................
Maintain Reserves and Diversify
 Investments:
    Gradually Invest 15 percent           0.27           14           50
     of Trust Fund Assets in
     Equities (with assumed
     nominal rate of return on
     equities of 9.4%)...........
    Gradually Invest 40 percent           0.67           33           50
     of Trust Fund Assets in
     Equities (with assumed
     nominal rate of return on
     equities of 9.4%)...........               Reduce Benefits To Address Program SolvencyReduce the Cost-Of-Living
 Adjustment:
    Reduce the COLA by One                1.55           78           51
     percent Each Year...........
    Reduce the COLA by One-half           0.81           40           51
     percent Each Year...........
    Adopt the ``Chained''                 0.49           24           51
     Consumer Price Index (CPI)..
Raising the Age for Full
 Retirement Benefits:
    Accelerate the Increase to            0.46           23           52
     67; Then Increase the Full-
     Benefit Age by One Month
     Every Two Years to Age 68...
    Accelerate the Increase to            0.62           31           52
     67; Then Increase the Full-
     Benefit Age by One Month
     Every Two Years to Age 70...
    Gradually Index the Full-             0.40           18           53
     benefit Age for Longevity
     Indefinitely................
Lengthen the Career-Earnings
 Averaging Period:
    Increase the Averaging Period         0.29           14           53
     from 35 to 38 Years.........
    Increase the Averaging Period         0.46           23           53
     from 35 to 40 Years.........
Reduce Benefits for New
 Beneficiaries:
    Reduce Benefits by Three              0.36           18           54
     percent for New
     Beneficiaries in 2010 and
     Later.......................
    Reduce Benefits by Five               0.61           30           54
     percent for New
     Beneficiaries in 2010 and
     Later.......................
    Price Index Benefits for              1.31           65           54
     Successive Generations
     Beginning in 2013...........
    Gradually Lower the                   0.12            6           54
     Supplemental Spouse Benefit.
------------------------------------------------------------------------


PROTECTING THE EFFECTIVENESS OF SOCIAL SECURITY:  GAO OPTIONS TO PROTECT
                            VULNERABLE GROUPS
------------------------------------------------------------------------
                           Option                            Page number
------------------------------------------------------------------------
Guaranteeing a Minimum Benefit--Guaranteeing a minimum                55
 benefit by increasing Social Security retirement benefits
 for those who have worked in low-wage jobs throughout
 their careers.............................................
Reducing Work Requirements for Eligibility--Reducing the              57
 work requirements for Social Security retirement benefit
 eligibility, allowing people who have shorter earnings
 histories to receive benefits.............................
Supplementing Benefits for Low-income Single Workers--                58
 Supplementing benefits for low-income single workers by
 adjusting the formula used to calculate Social Security
 retirement benefits.......................................
Adopting Earnings Sharing--Earnings sharing combines                  59
 married individuals' annual earnings and evenly divides
 them between the two spouses for each year of marriage
 when calculating individuals' Social Security retirement
 benefits. Each spouse accrues an individual benefit, even
 if only one of them worked................................
Reducing the Marriage Duration Required for Spousal                   60
 Benefits--Reducing the number of years a marriage needed
 for a divorced person to receive spousal benefits thereby
 increasing the number of people who are eligible to
 receive Social Security spousal benefits..................
Providing Caregiver Credits--Providing caregiver credits              61
 increases benefits for those who spend time out of the
 workforce to care for dependent children or elderly
 relatives.................................................
Increasing Survivor Benefits--Increasing benefits for                 62
 surviving spouses, often widowed women, by providing a
 Social Security retirement benefit equal to 75 percent of
 the combined amount the couple received...................
Providing Longevity Insurance--Longevity insurance seeks to           63
 reduce the risk that people fall into poverty at older
 ages by increasing Social Security retirement benefits for
 beneficiaries who reach an advanced age...................
------------------------------------------------------------------------

    These options described in this report demonstrate that the 
challenges facing Social Security, despite their size and 
complexity, can be resolved. However, it is important to 
provide some context to the information. The estimates on 
solvency are calculated by Social Security Administration 
actuaries with the assumption that all other elements of Social 
Security remain the same. Further, options to increase solvency 
may not impact everyone in the same way--some recipients may 
see their Social Security taxes and benefits change, while 
others may not--and the impacts of proposals should be examined 
for both current beneficiaries and future generations of 
retirees, as many options phase in over time. Combining options 
requires new estimates to predict their effects on solvency and 
the various sub-populations of beneficiaries. Importantly, 
Social Security solvency and effectiveness are separate 
factors, but should be analyzed together.
    Congress should act to ensure that Social Security will 
remain strong for another 75 years and provide future 
generations of Americans with economic security. The Aging 
Committee will support this effort by continuing to seek ideas 
and evaluate options for Social Security modernization.

                              INTRODUCTION

    Title II of the Social Security Act, as amended, 
established the Old-Age, Survivors, and Disability Insurance 
(OASDI) program, which is generally known as Social Security. 
Since the 1930s, many American seniors have depended on its 
benefits as a significant part of their retirement income, and 
the program has significantly decreased poverty among the 
elderly. However, the Social Security program will face 
increasing challenges in the future as an aging American 
population begins to strain the program financially. Even 
though the program is currently financially strong, 
Congressional action is needed to ensure fiscal stability for 
years to come. This Committee report highlights potential 
options for addressing the solvency and benefit adequacy of the 
Social Security retirement program.\2\
---------------------------------------------------------------------------
    \2\This report does not address options for strengthening 
disability insurance.
---------------------------------------------------------------------------

                               BACKGROUND

    The Social Security Act, signed into law by Franklin 
Roosevelt on August 14, 1935, formed the basis of an old-age 
insurance program by providing income security to workers aged 
65 and older in most commerce and industry. Although the Great 
Depression provided the catalyst for the landmark legislation, 
its principles were rooted in social insurance, which required 
payment of benefits based on contributions from workers. It 
became effective only in 1937 and therefore was not intended to 
provide immediate economic relief from the effects of the 
Depression. It was meant to smooth out large fluctuations in 
income typical in an industrial society.
    The Social Security program has evolved in significant ways 
over the past seven decades.\3\ With the 1939 amendments, it 
became more family-based by expanding the program from workers 
only to include dependents and survivors of workers. In 1950 
and later, amendments expanded the program to make it more 
universal. States could, under certain conditions, provide 
coverage to their employees. Also covered were regularly-
employed farm and domestic workers and, with some exceptions, 
most self-employed workers. The Disability program was added to 
the Social Security program in 1956. The 1983 amendments 
prohibited states from opting out of the system, and in 1990 
coverage for state employees became mandatory, if state and 
local employees did not have a state or local government 
pension plan.
---------------------------------------------------------------------------
    \3\`Social Security: A Program and Policy History,' by Patricia 
Martin and David Weaver, Social Security Bulletin, Vol. 66, No. 1, 
2005. http://www.ssa.gov/policy/docs/ssb/v66n1/v66n1p1.pdf.
---------------------------------------------------------------------------
    The expansionary period of the early four decades has been 
followed by a period where concerns have focused on the long-
range financing of the program. The 1977 amendments focused on 
stabilizing costs and addressing the revenue side of the 
program. The 1983 amendments addressed financial problems by 
extending coverage to bring more workers into the system, 
subjecting a portion of Social Security benefits to income 
taxation, scheduling changes in the payroll tax rate, and 
adopting a phased-in increase in the full retirement age 
starting for workers born in 1938 or later.
    Despite the evolution of the OASDI program over the 
decades, two core principles--contributory in nature and 
progressivity--continue to define the program. Benefits are 
determined by work in covered employment, and benefits replace 
a higher share of earnings for lower wage earners than for 
higher wage earners. This progressivity is in part to 
compensate for the shorter life expectancies of lower-wage 
earners, and in part to into account for the decreased ability 
low wage earners have to cope with income reductions or 
supplement their benefits with private savings. The success of 
the program in bringing about a sharp reduction in poverty 
among the elderly is well-documented. Any changes to the 
program today will need to address the dual challenges of 
meeting the adequacy needs of vulnerable groups and confronting 
the financing needs of the program, while ensuring that the 
program remains fair and effective for all Americans.

               HOW DOES THE SOCIAL SECURITY PROGRAM WORK?

    The Social Security program provides monthly cash benefits 
to retired and disabled workers and their dependents, and to 
the survivors of deceased workers. To qualify for benefits, 
individuals must work in Social Security-covered employment for 
a specified period of time. Generally, a worker needs 40 
credits to become ``insured'' for benefits (fewer credits are 
needed for disability and survivor benefits, depending on the 
worker's age at the time he or she became disabled or died).\4\ 
In 2010, a worker earns one credit for each $1,120 in covered 
earnings, up to a maximum of four credits for the year (based 
on annual earnings of $4,480 or more).\5\
---------------------------------------------------------------------------
    \4\A minimum of six earnings credits (or 1\1/2\ years of covered 
employment) is needed to qualify for benefits.
    \5\The amount of earnings needed for one credit is indexed to 
average wage growth.
---------------------------------------------------------------------------
    Most jobs in the United States are covered under Social 
Security. In 2010, 94 percent of workers in paid employment or 
self-employment are covered by Social Security.\6\ The major 
categories of workers who are exempt from Social Security 
coverage are:
---------------------------------------------------------------------------
    \6\Social Security Administration, 2010 Social Security/SSI/
Medicare Information, December 28, 2009. Available at http://
www.socialsecurity.gov/legislation/2010factsheet.pdf.
---------------------------------------------------------------------------
    1.  State and local government workers participating in 
alternative retirement systems (Medicare Hospital Insurance 
(HI) tax is mandatory for State and local government workers 
hired since April 1, 1986);
    2.  Election workers earning $1,500 or less in 2010;
    3.  Ministers who choose not to be covered, and certain 
religious sects;
    4.  Federal workers hired before 1984 (the HI portion is 
mandatory for all Federal workers);\7\
---------------------------------------------------------------------------
    \7\Elected office holders, political appointees, and judges are 
mandatorily covered by both Social Security and HI regardless of when 
their service began.
---------------------------------------------------------------------------
    5.  College students working at their academic 
institutions;
    6.  Household workers earning less than $1,700 in 2010, or 
those under age 18 for whom household work is not their 
principal occupation;
    7.  Self-employed workers with annual net earnings below 
$400;
    8.  Foreign students and exchange visitors who hold F-1, J-
1, M-1, Q1, and Q2 visas if the work is performed in connection 
with their studies or for the purpose of their visit to the 
United States;\8\ and
---------------------------------------------------------------------------
    \8\J-1 visa holders who are in the United States for 18 months or 
longer are required to pay Social Security payroll taxes.
---------------------------------------------------------------------------
    9. Foreign agricultural workers who hold H-2A visas.
    In 2008, of a total work force of approximately 173.6 
million workers, an estimated 162.4 million workers were 
covered under Social Security (see Table 1).

            TABLE 1: ESTIMATED SOCIAL SECURITY COVERAGE, 2008
------------------------------------------------------------------------
                                        Total     Non-covered   Percent
                                      (millions)   (millions)   covered
------------------------------------------------------------------------
Workers\1\.........................        173.6         11.2       93.6
Jobs:
    State and local government\2\..         23.1          5.6       75.8
    Federal civilian...............          3.7          0.5       86.5
    Students\3\....................          1.5          1.5       0.0
------------------------------------------------------------------------
\1\Includes both wage and salary and self-employed workers.
\2\Excludes students.
\3\Includes students employed at both public and private colleges and
  universities.Source: Office of the Chief Actuary, Social Security Administration.

    In 2008, an estimated 11.2 million workers were not covered 
under Social Security. The majority of non-covered positions 
were state and local government jobs. As shown in Table 2, 73 
percent of state and local government workers overall were 
covered under Social Security in 2007.

  TABLE 2: ESTIMATED SOCIAL SECURITY COVERAGE OF WORKERS WITH STATE AND
                    LOCAL GOVERNMENT EMPLOYMENT, 2007
                       [Based on 1-percent sample]
------------------------------------------------------------------------
                                       All        Covered      Percent
              State                  workers      workers      covered
------------------------------------------------------------------------
Alabama..........................      390,000      361,100         92.6
Alaska...........................       64,300       42,100         65.5
Arizona..........................      444,300      406,300         91.4
Arkansas.........................      203,300      182,500         89.8
California.......................    2,478,000    1,084,400         43.8
Colorado.........................      409,100      124,300         30.4
Connecticut......................      287,400      205,900         71.6
Delaware.........................       65,600       61,900         94.4
District of Columbia.............       75,400       58,600         77.7
Florida..........................    1,162,800    1,032,800         88.8
Georgia..........................      699,200      518,700         74.2
Hawaii...........................      113,400       79,700         70.3
Idaho............................      134,800      127,300         94.4
Illinois.........................      961,600      526,400         54.7
Indiana..........................      497,900      448,500         90.1
Iowa.............................      288,800      261,600         90.6
Kansas...........................      289,200      266,500         92.2
Kentucky.........................      373,300      279,000         74.7
Louisiana........................      329,700       92,700         28.1
Maine............................      118,000       63,900         54.2
Maryland.........................      458,300      415,700         90.7
Massachusetts....................      474,700       20,400          4.3
Michigan.........................      772,600      684,400         88.6
Minnesota........................      445,100      417,900         93.9
Mississippi......................      260,900      240,300         92.1
Missouri.........................      463,500      341,600         73.7
Montana..........................       95,700       83,500         87.3
Nebraska.........................      152,200      142,500         93.6
Nevada...........................      159,400       29,500         18.5
New Hampshire....................      108,100       95,400         88.3
New Jersey.......................      686,800      638,300         92.9
New Mexico.......................      197,400      177,400         89.9
New York.........................    1,734,700    1,681,800         97.0
North Carolina...................      713,100      659,700         92.5
North Dakota.....................       74,900       65,300         87.2
Ohio.............................      845,800       21,700          2.6
Oklahoma.........................      310,500      281,800         90.8
Oregon...........................      290,400      267,800         92.2
Pennsylvania.....................      808,600      749,400         92.7
Puerto Rico......................      257,700      222,700         86.4
Rhode Island.....................       65,200       55,300         84.8
South Carolina...................      375,800      352,700         93.9
South Dakota.....................       79,200       73,800         93.2
Tennessee........................      484,900      441,400         91.0
Texas............................    1,752,600      836,400         47.7
Utah.............................      222,000      202,800         91.4
Vermont..........................       60,700       59,300         97.7
Virginia.........................      677,200      641,400         94.7
Washington.......................      563,900      500,100         88.7
West Virginia....................      155,300      144,700         93.2
Wisconsin........................      484,400      429,900         88.7
Wyoming..........................       78,500       69,200         88.2
Other\1\.........................        6,400        1,300         20.3
                                  --------------------------------------
    Total........................   23,702,600   17,269,600        72.9
------------------------------------------------------------------------
These data are derived from the Social Security Administration, Office
  of Research, Evaluation and Statistics, 1% Continuous Work History
  Sample (CWHS) Employee Employer File.\1\Includes persons employed by American Samoa, Guam, Northern Marianas
  and Virgin Islands.Source: Office of Research, Evaluation and Statistics, Social Security
  Administration.

    Social Security coverage varies from state to state. For 
example, approximately 97 percent of state and local employees 
in New York and Vermont were covered by Social Security 
compared to approximately 3 percent in Ohio and 4 percent in 
Massachusetts. This disparity in coverage occurs because though 
Social Security originally did not cover any state and local 
government workers, over time the law has changed. Most state 
and local government employees became covered by Social 
Security through voluntary agreements between the Social 
Security Administration and individual states (these agreements 
are known as ``Section 218 agreements'' because they are 
authorized by Section 218 of the Social Security Act). 
Beginning in July 1991, state and local employees who were not 
members of a public retirement system were mandatorily covered 
by Social Security. Those public employees who were already 
members of a public retirement system through their employment 
were not mandatorily covered because their state pensions 
already fulfilled the social insurance functions of Social 
Security.
    Social Security is financed primarily by payroll taxes 
levied on the wages and self-employment income of covered 
workers. In 2010, covered workers and their employers are both 
required to pay 6.2 percent of earnings up to $106,800, or a 
maximum of $6,622 in individual payroll taxes per year. Self-
employed workers are required to pay 12.4 percent of net self-
employment income up to $106,800, or a maximum of $13,243 in 
self-employment taxes per year.\9\ The annual limit on covered 
earnings subject to payroll taxes is called the contribution 
and benefit base or the taxable earnings base. The taxable 
earnings base is indexed to average wage growth and is 
increased if a Social Security Cost of Living Adjustment (COLA) 
is payable.
---------------------------------------------------------------------------
    \9\Note: To reflect the fact that employees split payroll taxes on 
their salaries between themselves and their employers, the taxable base 
for the self-employment tax is adjusted downward by 7.65 percent and 
self-employed workers are allowed to deduct half of their self-
employment tax liability for income tax purposes.
---------------------------------------------------------------------------
    The maximum amount of annual earnings subject to payroll 
taxes from 1950 to 2008 is shown in Table 3. The payroll tax 
rate is fixed under current law. The percentage of covered 
earnings subject to Social Security payroll taxes has 
fluctuated over time. In 2008, about 84 percent of total 
earnings in covered employment were subject to Social Security 
payroll taxes.

                       TABLE 3: EARNINGS COVERED BY THE SOCIAL SECURITY SYSTEM, 1950-2008
----------------------------------------------------------------------------------------------------------------
                                       Earnings in covered employment                                  Taxable
                                  ---------------------------------------                            earnings as
                                                                          Contribution    Taxable     a percent
          Calendar year             Wages and      Self-                   and benefit    earnings     of total
                                     salaries    employment     Total        base\1\     (billions)  earnings in
                                    (billions)   (billions)   (billions)                               covered
                                                                                                      employment
----------------------------------------------------------------------------------------------------------------
1950.............................       $109.8           --       $109.8        $3,000        $87.5         79.7
1955.............................        171.6        $26.7        198.3         4,200        157.5         79.4
1960.............................        236.0         32.4        268.4         4,800        207.0         77.1
1965.............................        311.4         45.9        357.3         4,800        250.7         70.2
1970.............................        483.6         53.1        536.7         7,800        415.6         77.4
1975.............................        717.2         75.9        793.1        14,100        664.8         83.8
1980.............................      1,235.6        103.7      1,339.3        25,900      1,173.8         87.6
1985.............................      1,802.4        149.6      1,952.0        39,600      1,717.3         88.0
1990.............................      2,510.4        205.9      2,716.3        51,300      2,358.9         86.8
1991.............................      2,566.7        207.9      2,774.6        53,400      2,422.5         87.3
1992.............................      2,709.7        220.7      2,930.4        55,500      2,532.8         86.4
1993.............................      2,808.9        228.0      3,036.9        57,600      2,636.3         86.8
1994.............................      2,973.9        232.7      3,206.6        60,600      2,785.3         86.9
1995.............................      3,164.9        242.3      3,407.2        61,200      2,919.6         85.7
1996.............................      3,347.8        256.0      3,603.8        62,700      3,073.5         85.3
1997.............................      3,608.2        272.1      3,880.3        65,400      3,285.3         84.7
1998.............................      3,907.5        290.4      4,197.9        68,400      3,528.0         84.0
1999.............................      4,173.2        308.0      4,481.3        72,600      3,749.1         83.7
2000.............................      4,514.7        326.4      4,841.1        76,200      4,008.9         82.8
2001.............................      4,609.1        332.4      4,941.5        80,400      4,171.1         84.4
2002.............................      4,612.6        341.6      4,954.1        84,900      4,250.0         85.8
2003.............................      4,727.3        360.3      5,087.6        87,000      4,354.7         85.6
2004.............................      4,994.3        396.9      5,391.2        87,900      4,554.5         84.5
2005.............................      5,252.1        433.8      5,686.0        90,000      4,769.6         83.9
2006.............................      5,598.3        453.3      6,051.6        94,200      5,084.3         83.4
2007.............................      5,899.8        471.8      6,371.6        97,500      5,272.2         82.7
2008.............................      6,079.4        473.3      6,552.8       102,000      5,511.1        84.1
----------------------------------------------------------------------------------------------------------------
\1\Amounts for 1937-74 and for 1979-81 were set by statute. All other amounts were determined under automatic
  adjustment provisions of the Social Security Act.Source: Office of the Chief Actuary, Social Security Administration.

Retirement Benefits

    The Social Security program provides benefits to eligible 
workers and their family members. For retirement benefits, a 
worker generally needs 40 credits (10 years in covered 
employment). Full (unreduced) retirement benefits are first 
payable at the full retirement age (FRA), which ranges from age 
65 to age 67 depending on the person's year of birth. A worker 
may elect to receive retirement benefits as early as age 62; 
however, his or her benefits are permanently reduced to take 
into account the longer expected period of benefit receipt. In 
addition, a worker may elect to postpone benefit receipt until 
after the FRA, and receive an increase in benefits based on 
delayed retirement credits that are payable from the FRA, up to 
age 70.

Disability Benefits

    Although this report is not intended to address the 
disability insurance provided under Social Security, it is 
important to understand that such benefits are available under 
the larger program. To be eligible for disability benefits, a 
worker must be: (1) insured and (2) disabled according to the 
definition of disability. To be insured, a worker must have 
worked a minimum amount of time in employment covered by Social 
Security (similar to eligibility for retirement benefits). 
However, for disability benefits, if an individual does not 
have 40 credits, he or she must have one credit for each year 
after 1950 or from age 21 up to the onset of disability. In 
addition, a work test requires the worker to have 20 credits in 
the 40 quarters preceding the onset of disability (generally 
five years of covered employment in the last 10 years). Workers 
under age 31 need to have credit in one-half of the quarters 
during the period between when they attained age 21 and when 
they became disabled (a minimum of 6 credits is required). For 
disability benefits, ``disability'' is defined as the inability 
to engage in substantial gainful activity (SGA) by reason of a 
medically-determinable physical or mental impairment expected 
to result in death or last at least 12 continuous months.\10\ 
Generally, the worker must be unable to do any kind of work, 
taking into account age, education and work experience. An 
initial waiting period of five full months is required before 
disability benefits are paid.
---------------------------------------------------------------------------
    \10\In 2010, the SGA earnings level for non-blind beneficiaries is 
$1,000 a month (net of impairment-related work expenses). For blind 
beneficiaries, the SGA earnings level is $1,640 a month. Both limits 
are indexed to average wage growth. For more information, see CRS 
Report RS20479, Social Security: Substantial Gainful Activity for the 
Blind, available at http://www.aging.senate.gov/crs/
crs_social_security_policy.cfm.
---------------------------------------------------------------------------

Supplemental Security Income

    The Supplemental Security Income (SSI) Program is also 
administered by the Social Security Administration, but it is 
different and separate from Social Security. SSI is a means-
tested, federally administered, income assistance program 
authorized by Title XVI of the Social Security Act. Established 
in 1972 with benefits first paid in 1974, SSI provides monthly 
cash payments in accordance with uniform, nationwide 
eligibility requirements to needy aged, blind, and disabled 
persons.
    The SSI Program is funded by general revenues of the U.S. 
Treasury whereas Social Security benefits are funded by the 
Social Security taxes paid by workers, employers, and self-
employed persons. The programs also differ in other ways such 
as the conditions of eligibility and the method of determining 
payments. In addition, States have the option of supplementing 
the basic Federal SSI payment.
    To qualify for SSI payments, a person must satisfy the 
program criteria for age, blindness, or disability. The aged 
are defined as persons 65 years and older. Disabled individuals 
are those unable to engage in any substantial gainful activity 
by reason of a medically determined physical or mental 
impairment expected to last for a continuous period of at least 
12 months or result in death. Children may also qualify for SSI 
if they are under age 18 (or under age 22 if a full-time 
student), unmarried, and meet the applicable SSI disability\11\ 
or blindness, income, and resource requirements. Further, SSI 
recipients must have limited income, limited resources, 
(typically defined as $2000 for an individual and $3000 for a 
couple), and meet specific citizenship and residency 
requirements.\12\
---------------------------------------------------------------------------
    \11\For children, the definition of disability under the SSI 
program is different than the adult standard. Under Sec. 
1614(a)(3)(C)(i) of the Social Security Act, disabled means that the 
child has a medically determinable physical or mental impairment that 
results in severe functional limitations, and that can be expected to 
last 12 months or result in death.
    \12\For a full description of SSI Eligibility criteria, see Social 
Security Administration, ``Understanding Supplemental Security Income, 
SSI Eligibility Requirements,'' 2010 Edition, available at http://
www.socialsecurity.gov/ssi/text-eligibility-ussi.htm.
---------------------------------------------------------------------------

              HOW ARE SOCIAL SECURITY BENEFITS DETERMINED?

    A worker's monthly Social Security retirement benefit is 
based on an average of his or her 35 highest-paid earnings 
years. The worker's entire record of Social Security earnings 
up through age 60 are indexed to historical wage growth in 
order to place older wage amounts on the same terms as current 
wage levels. Earnings after age 60 are not indexed but are 
included in the benefit computation. The 35 highest years of 
annual indexed earnings are averaged, and the resulting amount 
is divided again by 12 to determine the worker's average 
indexed monthly earnings, or AIME. Some workers do not have 35 
years of earnings as a result of unemployment, poor health, or 
caregiving: for these workers, the years of no earnings are 
entered as zeros.
    The worker's Primary Insurance Amount, or PIA, is found by 
applying a formula to the AIME. First, AIME is sectioned into 
three brackets, or levels, of earnings. Three progressive 
factors--90 percent, 32 percent, and 15 percent--are applied to 
the three different brackets of AIME. The three products of the 
factors and AIME are added together. For workers who reach age 
62 in 2010, the PIA is determined as follows:

  TABLE 4: SAMPLE CALCULATION OF A WORKER'S PRIMARY INSURANCE AMOUNT IN
                                  2010
------------------------------------------------------------------------
                                                              Benefit of
                                         Average indexed       a worker
               Factor                   monthly earnings      with AIME
                                             (2010)           of $5,000
------------------------------------------------------------------------
90 percent.........................  First $761, plus......      $684.90
32 percent.........................  Earnings over $761 and     1,224.00
                                      through $4,586, plus.
15 percent.........................  Over $4,586...........        62.10
                                    ------------------------------------
    Total..........................  $5000.................     1,971.00
------------------------------------------------------------------------

    The Social Security benefit formula is designed to be 
progressive. That is, workers with low average lifetime 
earnings receive a benefit that is a larger proportion of their 
pre-retirement earnings than do workers with high average 
lifetime earnings. Progressivity is affected through factors 
that decline as AIME increases, with the first $761 of AIME 
being replaced at a rate of 90 percent, while amounts over $761 
are replaced at rates of 32 percent or 15 percent. The 
replacement rate for the average earner who claims benefits at 
the full retirement age in 2010 is about 41 percent of pre-
retirement wages. For low-income workers, high income workers, 
and workers who have earned the maximum taxable amount 
throughout their careers, the replacement rates in 2010 are 
about 56 percent, 34 percent and 28 percent, respectively.\13\
---------------------------------------------------------------------------
    \13\2009 Social Security Trustees' Report, Table VI.F10, available 
at http://www.socialsecurity.gov/OACT/TR/2009/VI_OASDHI_ 
dollars.html#119381.
---------------------------------------------------------------------------
    The factors (90 percent, 32 percent and 15 percent) are the 
same each year, but the bracket amounts ($761 and $4,586) are 
indexed to growth in average wages. As noted earlier, as part 
of determining PIA, a worker's earnings history is brought up 
to current wage levels by indexing earnings in previous years 
to wage growth. The result of these provisions is that a 
worker's initial Social Security benefit is wage indexed. Wage 
indexation of the PIA calculation ensures that benefits replace 
a similar fraction of pre-retirement income for each successive 
cohort (as noted above, about 41 percent for a worker with 
average wages). In other words, wage indexation causes the 
dollar amount of workers' initial benefits (PIA) to increase 
from one generation to the next at the rate of increase in the 
national average wage or, generally, with living standards.
    After a worker becomes eligible to receive Social Security 
benefits, at age 62, the cash benefit amount is adjusted 
annually through retirement for changes in the Consumer Price 
Index (CPI). That is, the initial benefit is price indexed 
through retirement, to ensure that inflation does not erode the 
purchasing power of the individual's initial benefit. Due to 
increases in worker productivity, wages (and living standards) 
tend to rise faster than prices when measured over long periods 
of time.
    A worker's Social Security cash benefit may be more or less 
than PIA. An individual who claims benefits at his or her full 
retirement age (FRA) will receive the full amount of his or her 
PIA. The FRA is the earliest age at which unreduced retirement 
benefits can be received. The FRA is 65 for persons born before 
1938 and is rising gradually to 67 for persons born in 1960 or 
later.

      TABLE 5: SOCIAL SECURITY FULL RETIREMENT AGE BY YEAR OF BIRTH
------------------------------------------------------------------------
                                     Year age 62
         Year of birth                attained       Full retirement age
------------------------------------------------------------------------
1936 or earlier................  1986-98...........  65
1937...........................  1999..............  65
1938...........................  2000..............  65 and 2 months
1939...........................  2001..............  65 and 4 months
1940...........................  2002..............  65 and 6 months
1941...........................  2003..............  65 and 8 months
1942...........................  2004..............  65 and 10 months
1943-54........................  2005-2016.........  66
1955...........................  2017..............  66 and 2 months
1956...........................  2018..............  66 and 4 months
1957...........................  2019..............  66 and 6 months
1958...........................  2020..............  66 and 8 months
1959...........................  2021..............  66 and 10 months
1960 or later..................  2022 or later.....  67
------------------------------------------------------------------------
Source: Congressional Research Service.

Benefits for the Worker's Family Members

    Dependents and survivors of a worker, including surviving 
children, spouses, former spouses and dependent parents, may be 
eligible for benefits, as well as survivor benefits if a worker 
dies. These auxiliary benefits are based on the primary 
earner's benefit, subject to a maximum family amount. The basis 
for entitlement to dependents and survivors benefits are 
summarized in Table 6.
    Social Security pays a monthly benefit to the spouse of an 
entitled retired or disabled worker equal to 50 percent of a 
retired spouse's primary insurance amount. Qualifying spouses 
must be at least age 62 or have a qualifying child (a child who 
is under the age of 16 or who receives Social Security 
disability benefits) in their care. Spousal benefits are 
reduced when the spouse takes benefits before the FRA, unless 
the spouse has a qualifying child in his or her care. Based on 
a FRA of 66, a spouse who claims benefits as early as age 62 
may receive a benefit that is as little as 37.5 percent of the 
working spouse's PIA. Spousal benefits may also be reduced or 
fully offset by the dual entitlement provision or the 
government pension offset (described below) if the spouse is 
entitled to his/her own Social Security benefit based on work 
in covered employment or to a pension based on his or her own 
employment in certain federal, state or local government 
positions that are not covered by Social Security.
    A monthly survivor benefit equal to 100 percent of the 
deceased worker's PIA is payable to a widow(er) or divorced 
spouse of a deceased worker who was fully insured at the time 
of death. The surviving spouse must be age 60 (age 50 if 
disabled) and must not have remarried before age 60 (age 50 if 
disabled). As with spousal benefits, the surviving spouse's 
benefit may be reduced if he or she takes benefits before the 
FRA, or if the surviving spouse has a benefit from employment 
in certain federal, state or local government positions that 
are not covered by Social Security (see the discussion of the 
government pension offset, or GPO, below).
    Some spouses and widow(er)s are entitled to benefits based 
on both their own earnings record and their spouse's earnings 
record. These workers are known as dually-entitled 
beneficiaries. A beneficiary who is dually entitled will 
receive his or her own worker benefit plus the difference 
between the worker benefit and his or her spouse's benefit. The 
total benefit may not be greater than the highest single 
benefit amount to which he or she is entitled.
    Over time, more women have become entitled to Social 
Security benefits based on their own work records, either as 
workers or as dually-entitled workers, as shown in Figure 1. 
The number of women who were entitled to benefits based either 
on their own work records or as dually-entitled beneficiaries 
grew from 43 percent in 1960 to 72 percent in 2008. Within 
these numbers, however, most of the growth has been among 
dually-entitled beneficiaries. The percent of women who are 
entitled based solely on their own work records has fluctuated 
in a range between 39 percent and 44 percent between 1960 and 
2008. Reliance on spousal benefits as a wife or widow, whether 
from dual entitlement or from spousal benefits alone, has 
fallen slightly over the past five decades, from 61 percent in 
1960 to 56 percent in 2008. 


    Divorced spouses may qualify for spousal and/or survivor 
benefits if the marriage lasted at least 10 years before the 
divorce became final. To qualify for spousal benefits, a 
divorced spouse must be at least age 62 and not currently 
married. Survivor benefits are available to a divorced 
surviving spouse if he or she is age 60 or over (age 50 if 
disabled) and has not remarried before age 60 (age 50 if 
disabled). Divorced spouses who meet these criteria receive the 
same spousal and survivor benefits as spouses and widow(er)s. 
As with married and surviving spouses, a divorced spouse's 
benefit will be reduced if taken before the full retirement 
age, to offset a pension from non-covered federal, state or 
local government employment, or as a result of earnings above 
the retirement earnings test threshold. A dually-entitled 
divorced spouse (i.e., entitled to a benefit based on his or 
her own work record) will receive the higher of the spousal 
benefit or his or her own benefit. A divorced spouse may also 
become entitled on the worker's record if the worker has not 
yet filed for benefits, provided that the divorce has been in 
effect for at least 2 years and that both the worker and the 
divorced spouse are at least age 62.
    A monthly benefit is payable to the child (including 
biological, adopted, step- child) of a retired, disabled, or 
deceased worker who was fully or currently insured at the time 
of death. The child must be either: (1) under age 18; or (2) a 
full-time elementary or secondary student under age 19; or (3) 
a disabled person age 18 or older whose disability began before 
age 22. Prior to May 1985, certain children in college were 
also eligible for the benefit.\14\ The child of a deceased 
worker is eligible for 75 percent of the worker's PIA, subject 
to the family maximum benefit, as described below. The child of 
a disabled or retired worker is eligible for 50 percent of the 
worker's PIA, subject to the family maximum benefit.
---------------------------------------------------------------------------
    \14\Before May 1985, student's benefits were payable to certain 
postsecondary students aged 18-22. P.L. 97-35, The Omnibus Budget 
Reconciliation Act of 1981, phased out by May 1985 the child's benefit 
for students in postsecondary schools age 18 and older, except for 
full-time, unmarried elementary or secondary school students between 
ages 18 and 19 (known as a ``student's'' benefit). Student's benefits 
end at age 19 or at the end of the current semester or quarter, 
whichever is later.
---------------------------------------------------------------------------
    Social Security also provides a monthly mother's or 
father's benefit to a surviving parent of any age who cares for 
the deceased worker's child, when that child is either under 
the age of 16 or disabled. Mother's and father's benefits are 
75 percent of the worker's basic benefit, subject to the 
maximum family benefit. These mother's or father's benefit 
payments cease when the youngest entitled child being cared for 
reaches age 16, is no longer disabled, or if the mother or 
father remarries.
    A monthly survivor benefit is payable to a parent of a 
deceased fully insured worker if the parent is age 62 or older 
and has not married since the worker's death. The parent must 
have been receiving at least one-half of his or her support 
from the worker at the time of the worker's death or, if the 
worker had a period of disability which continued until death, 
at the beginning of the period of disability. Proof of support 
must be filed within 2 years after the worker's death or the 
month in which the worker filed for disability.
    Total benefits payable to a family based on a retired or 
deceased worker's record are capped by the maximum family 
benefit. The maximum family benefit varies from 150 percent to 
188 percent of the retired or deceased worker's PIA, and a 
family's total benefit cannot be exceeded regardless of the 
number of recipients entitled on that earnings record. If the 
total individual monthly benefits payable to all recipients 
entitled on one earnings record exceeds the maximum, each 
dependent's or survivor's benefit is reduced in equal 
proportion to bring the total within the maximum. For the 
family of a worker who turns 62 or dies in 2010 before reaching 
age 62, the total amount of benefits payable is limited to:
         150 percent of the first $972 of PIA, plus
         272 percent of PIA over $972 through $1,403, 
        plus
         134 percent of PIA over $1,403 through $1,830, 
        plus
         175 percent of PIA over $1,830.
    The dollar amounts in this benefit formula are indexed to 
average wage growth, as in the primary benefit formula.
    For the family of a worker who is entitled to disability 
benefits, the maximum family benefit is the lesser of 85 
percent of the worker's AIME or 150 percent of the worker's 
PIA. However, the family benefit cannot be lower than 100 
percent of the worker's PIA.
    Table 6 summarizes Social Security's auxiliary benefits to 
the spouses, divorced spouses, children and parents of a 
retired, disabled or deceased worker. As will be discussed 
below, the basic benefit may be reduced (or increased) for 
retirement below (or above) the full retirement age, for 
earnings above certain thresholds, for family maximums, and/or 
for receipt of a pension from work that was not covered by 
Social Security.

               TABLE 6: SOCIAL SECURITY AUXILIARY BENEFITS
------------------------------------------------------------------------
                                                         Basic benefit
      Basis for entitlement           Eligibility      amount before any
                                                          adjustments
------------------------------------------------------------------------
Spouse..........................  At least age 62...  50 percent of
                                  The worker on        worker's PIA
                                   whose record
                                   benefits are
                                   based must be
                                   receiving
                                   benefits.
Divorced Spouse (if divorced      At least age 62...  50 percent of
 individual was married to the    Generally, the       worker's PIA
 worker for at least 10 years      worker on whose
 before the divorce became final   record benefits
 and is currently unmarried).      are based must be
                                   receiving
                                   benefits.
                                   However, a
                                   divorced spouse
                                   may receive
                                   benefits on the
                                   worker's record
                                   if the worker is
                                   eligible for (but
                                   not receiving)
                                   benefits and the
                                   divorce has been
                                   final for at
                                   least 2 years.
Widow(er) & Divorced............  At least age 60...  100 percent of
                                                       worker's
Widow(er) (if divorced            ..................  PIA
 individual was married to the
 worker for at least 10 years
 before the divorce became final
 and did not remarry before age
 60).
Disabled Widow(er) & Divorced     At least age 50     100 percent of
 Disabled Widow(er).              The qualifying       worker's PIA
                                   disability must
                                   have occurred:
                                  (1) before or
                                   within 7 years of
                                   the worker's
                                   death;
                                  (2) within 7 years
                                   of having been
                                   previously
                                   entitled to
                                   benefits on the
                                   worker's record
                                   as a widow(er)
                                   with a child in
                                   his/her care; or
                                  (3) within 7 years
                                   of having been
                                   previously
                                   entitled to
                                   benefits as a
                                   disabled
                                   widow(er) that
                                   ended because the
                                   qualifying
                                   disability ended
                                   (whichever is
                                   later).*
Mothers and Fathers.............  Surviving parent    75 percent of the
                                   of any age who      deceased worker's
                                   cares for the       primary insurance
                                   deceased worker's   amount (subject
                                   child, when that    to the family
                                   child is either     maximum benefit*)
                                   under the age of
                                   16 or disabled.
                                   Eligibility
                                   generally ceases
                                   if the surviving
                                   mother or father
                                   remarries.
Parents.........................  At least age 62 or  82.5 percent of
                                   older and has not   the deceased
                                   married since the   worker's PIA if
                                   worker's death.     only one parent
                                   The parent must     is entitled to
                                   have been           benefits. If two
                                   receiving at        parents are
                                   least one-half of   entitled to
                                   his or her          benefits, then
                                   support from the    each parent
                                   worker at the       receives 75
                                   time of the         percent of the
                                   worker's death      deceased worker's
                                   or, if the worker   PIA. Subject to
                                   had a period of     the family
                                   disability which    maximum benefit.
                                   continued until
                                   death, at the
                                   beginning of the
                                   period of
                                   disability.
Child...........................  Children,           75 percent of the
                                   including           deceased worker's
                                   adopted, step-,     primary insurance
                                   or unmarried        amount to
                                   biological child    children of
                                   of a retired,       deceased workers
                                   disabled, or        (subject to the
                                   deceased worker     family maximum
                                   who was fully or    benefit*) 50
                                   currently insured   percent of the
                                   at the time of      worker's primary
                                   death. The child    insurance amount
                                   must be either:     to children of
                                  (1) under age 18;    disabled or
                                  (2) a full-time      retired workers
                                   elementary or       (subject to the
                                   secondary student   family maximum
                                   under age 19; or    benefit*)
                                  (3) a disabled
                                   person age 18 or
                                   older whose
                                   disability began
                                   before age 22.
------------------------------------------------------------------------
For a full description of Social Security eligibility, see http://
  www.socialsecurity.gov/retire2/yourspouse.htm and http://
  www.socialsecurity.gov/ww&os2.htm.*The maximum family benefit varies from 150 percent to 188 percent of a
  retired or deceased worker's PIA. For the family of a worker who is
  entitled to disability benefits, the maximum family benefit is the
  lesser of 85 percent of the worker's AIME or 150 percent of the
  worker's PIA, but no less than 100 percent of the worker's PIA. It
  does not apply with respect to a divorced spouse or surviving spouse's
  benefits.

    Social Security benefits are not particularly generous. 
Table 7 shows the number of Social Security beneficiaries in 
2008 as well as average monthly benefits by gender. In 2008, 
the average monthly retirement benefit was $1,299 for men 
($15,588 per year) and $1,001 for women ($12,012 per year). 
Spouses, who receive half of the worker's benefits, received on 
average $556 per month for women ($6,672 per year) and $324 for 
men ($3,888 per year). Widows received, on average, $1,115 per 
month ($13,380 per year) and widowers received $938 ($11,256 
per year).
    Since Social Security benefit levels are based on 
contributions up to the taxable maximum, benefits for even high 
earners are relatively modest. In 2010, the maximum Social 
Security retirement benefit that could be received would be 
$1,824 per month ($21,888 per year) if someone retired at the 
early eligibility age of 62, and $2,346 per month ($28,152 per 
year) if they retired at the full retirement age of 66. 
However, to receive this level of benefits, someone would have 
to earn the taxable maximum or more for at least 35 years of 
their career, which almost never occurs.

 TABLE 7: NUMBER AND AVERAGE MONTHLY BENEFIT IN DECEMBER 2008 BY BENEFIT
                            TYPE  AND GENDER
------------------------------------------------------------------------
                                                               Average
                                              Number (in       monthly
                                              thousands)       Benefit
------------------------------------------------------------------------
Retired Workers:
    Men.................................           16,455.8       $1,299
    Women...............................           15,817.8       $1,001
Disabled Workers:
    Men.................................            3,924.5       $1,191
    Women...............................            3,502.2         $920
Spouses:
    Wives...............................            2,472.3         $556
    Husbands............................               52.6         $324
Widowed Mothers and Fathers:
    Women...............................              149.2         $843
    Men.................................               10.4         $720
Nondisabled Widow(er)s:
    Women...............................            4,094.9       $1,115
    Men.................................               55.3         $938
Disabled Widow(er)s:
    Women...............................              220.3         $692
    Men.................................                9.7         $498
Parents:
    Women...............................                1.5         $988
    Men.................................                0.2        $910
------------------------------------------------------------------------
Source: Social Security Administration, Annual Statistical Supplement,
  2009, Washington, DC, tables 5.A1.1, 5.A1.2, 5.A1.3, 5.A1.5, 5.A1.6,
  5.A1.7 and 5.A1.8, http://www.socialsecurity.gov/policy/docs/statcomps/
  supplement/2009/5a.html#table5.a1.5.

Benefit Adjustments for Retirement Before or After the Full Retirement 
        Age

    For persons claiming benefits before (or after) their full 
retirement age (FRA), the monthly benefit amount is decreased 
(or increased) by an adjustment that is roughly actuarially 
fair. The actuarial adjustment ensures that, on average, an 
individual will receive the same total benefits over his or her 
expected lifetime, but the monthly benefit will be reduced (or 
increased) to account for the greater (or fewer) number of 
months that the person is expected to receive benefits.\15\ For 
persons with an FRA of 65 (i.e. somebody who was born in 1938 
or earlier), collecting benefits upon turning 62 would entail a 
20 percent cut in PIA. For a person with an FRA of 67, the 
decision to start collecting benefits upon turning 62 would 
result in a 30 percent cut to PIA. Benefits of workers who 
choose to retire after their FRA are increased by delayed 
retirement credits.
---------------------------------------------------------------------------
    \15\Retirement benefits are reduced by 5/9 of one percent (or 
0.0056) of the primary earner's benefit for each month of entitlement 
before FRA, for a reduction of about 6.7 percent a year, up to 36 
months. For each month of retirement in excess of 36 months for which 
the worker is below the FRA, retirement benefits are reduced by 5/12 of 
one percent (or 0.0042), for a reduction of 5 percent a year. Starting 
in 1990, the delayed retirement credit increased by .5 percent every 
other year until it reached 8 percent for workers who reached age 65 
after 2007. See Table 1-26 on page 1-60 of ``Background Material and 
Data on Programs within the Jurisdiction of the Committee on Ways and 
Means, 2004,'' The Green Book. House Ways and Means Committee Print, 
Washington, DC: Government Printing Office, available at http://
waysandmeans.house.gov/media/pdf/111/ssgb.pdf.
---------------------------------------------------------------------------

Benefit Adjustments for the Government Pension Offset (GPO) and 
        Windfall Elimination Provision (WEP)

    Two provisions reduce the Social Security benefits of 
workers and their spouses who may have pensions from employment 
that was not covered by Social Security.
    The windfall elimination provision reduces the benefit of 
workers who have pensions from work that was not covered by 
Social Security. The WEP is intended to remove an unintentional 
advantage for workers who have a pension from non-covered work 
in addition to qualifying for Social Security benefits. Before 
the WEP was introduced, workers who had short careers in Social 
Security-covered jobs received an unintended ``windfall'' 
because the Social Security formula recorded the many years in 
jobs not covered by Social Security as years of ``zero'' 
earnings. This made the employee appear to have had low 
lifetime earnings, and the worker benefited from the Social 
Security benefit formula's progressivity which is intended for 
workers who have had long careers at low wages.
    The government pension offset reduces Social Security 
spousal and survivor benefits that would be payable to spouses 
who also receive a public pension as a result of his or her own 
work in a government job (Federal, State, or local) not covered 
by Social Security. The amount of the reduction is equal to 
two-thirds of the government pension. This provision is 
intended to parallel the Social Security ``dual entitlement'' 
rule (discussed above), which imposes a dollar-for-dollar 
offset of spouses' Social Security retirement benefits.

Benefit Adjustments for the Retirement Earnings Test

    Social Security beneficiaries who are under the full 
retirement age and continue to work and have earnings above a 
threshold have their current benefits reduced and their future 
benefits increased. The retirement earnings test reduces 
benefits for workers under the FRA (age 67 for workers born in 
1960 or later) who earn income from work in excess of an 
``exempt'' amount. The exempt amount in 2010 is $14,160 in 
annual wages or self-employment income. Beneficiaries with 
earnings above this amount, who are also below the FRA, 
experience a benefit reduction of $1 of benefits for each $2 of 
earnings above the exempt amount.\16\
---------------------------------------------------------------------------
    \16\A different reduction factor and exempt amount apply in the 
year beneficiaries attain the FRA. In 2010, these individuals can earn 
up to $37,680 a year in the months before they attain the FRA. For 
earnings above these amounts, the RET results in a reduction of $1 in 
benefits for each $3 of excess earnings.
---------------------------------------------------------------------------
    The retirement earnings test does not apply to pensions, 
rents, dividends, interest, and other types of ``unearned'' 
income. The test also does not apply to beneficiaries at the 
FRA or older, or to those who are disabled (disabled recipients 
are subject to separate limits on earnings known as substantial 
gainful activity amounts). The exempt amounts rise each year at 
the same rate as average wages in the economy.
    Retired workers whose benefits are reduced by the 
retirement earnings test are compensated, once they retire, 
through increases in their benefit amount. The following 
example illustrates the effect of the retirement earnings test. 
The example worker is age 63 and has $12,000 in annual benefits 
before the test is applied:

                     Retirement Earnings Test, 2010

Earnings in 2010..............................................   $15,160
Exempt amount in 2010 for persons under FRA...................   $14,160
Excess over exempt amount.....................................    $1,000
Benefit reduction (50 percent of excess)......................      $500
Annual Benefits the worker will receive.......................   $11,500

    The rationale for the retirement earnings test was 
described in the 1935 report of the Committee on Economic 
Security, which recommended that no benefits be paid before a 
person had ``retired from gainful employment.'' The retirement 
earnings test has been changed many times over the years.
    Table 8 illustrates the number of retired workers by full 
retirement age (FRA), as affected by the Social Security 
Retirement Earnings Test (RET) in 2006, the latest year for 
which data are available.

TABLE 8: NUMBER OF RETIRED WORKERS WITH EARNINGS, BY FULL RETIREMENT AGE
                               (FRA), 2006
------------------------------------------------------------------------
                                                  Younger
                                                  than FRA   Attains FRA
                   Earnings                      for all of    in 2006
                                                    2006
------------------------------------------------------------------------
$1-4,999......................................      356,000      117,500
5,000-9,999...................................      226,500       69,900
10,000-14,999.................................      213,500       60,900
15,000-19,999.................................       72,800       35,800
20,000-24,999.................................       39,200       17,100
25,000-29,999.................................       17,600        9,700
30,000-34,999.................................       10,200        7,800
35,000-39,999.................................        6,300        6,000
40,000-44,999.................................        5,600        2,100
45,000-49,999.................................        3,600        1,700
50,000-54,999.................................        2,500        1,500
55,000-59,999.................................        2,100        1,300
60,000-64,999.................................        1,800          700
65,000-69,999.................................        1,300          800
70,000-74,999.................................        1,300          500
75,000-79,999.................................        1,000          700
80,000-84,999.................................          800          600
85,000-89,999.................................          900          400
90,000-99,999.................................          900          800
100,000 or more...............................        5,400        3,100
                                               -------------------------
    Total with Earnings.......................      969,300     338,900
------------------------------------------------------------------------
Sources: Office of Research, Evaluation and Statistics, Social Security
  Administration: 2007, 1 Percent Continuous Work History Sample and
  2006 Employee and Employer File.

Special Minimum Benefit

    The special minimum PIA is payable to some persons who 
worked in covered employment for many years but had low 
earnings. Unlike the retired worker's PIA described above, 
which is based on a worker's average earnings, the special 
minimum is based on the number of years of covered employment 
at a specified level of substantial earnings. The amount of the 
special minimum is determined by multiplying the number of 
years of substantial earnings in excess of 10 years and up to 
30 years by $11.50 for monthly benefits payable in 1979. 
Parameters used to determine the special minimum benefit are 
indexed to price inflation.
    A worker is awarded the special minimum benefit only if it 
exceeds the worker's regular benefit. However, the value of the 
special minimum benefit, which is indexed to prices, is rising 
more slowly than the value of the regular Social Security 
benefit, which is indexed to wages. Therefore, the number of 
beneficiaries of the special minimum benefit has declined with 
each year. In December 2008, there were 89,000 
beneficiaries\17\ who received the special minimum benefit. One 
study predicted that the special minimum benefit will disappear 
for workers reaching age 62 in 2013 and later.\18\
---------------------------------------------------------------------------
    \17\Annual Statistical Supplement to the Social Security Bulletin, 
2009, Table 5.A.8, available at http://www.socialsecurity.gov/policy/
docs/statcomps/supplement/2009/5a.html#table5.a8.
    \18\Kelly A. Olsen and Don Hoffmeyer, ``Social Security's Special 
Minimum Benefit,'' Social Security Bulletin, vol. 64, no. 2 (2002), p. 
6, available at http://www.ssa.gov/policy/docs/ssb/v64n2/v64n2p1.pdf.
---------------------------------------------------------------------------

              HOW IS THE SOCIAL SECURITY PROGRAM FINANCED?

    The Social Security program is financed through three 
sources of funds. These sources are: (1) payroll taxes 
collected under the Federal Insurance Contributions Act (FICA) 
and the Self Employment Contributions Act (SECA); (2) federal 
income taxes on the benefits of certain beneficiaries; and (3) 
interest on special U.S. government obligations held by the 
Trust Funds.

Payroll Taxes

    Payroll taxes (i.e., social-insurance contributions as 
stipulated by the Federal Insurance Contributions Act (FICA) 
and Self-Employment Contributions Act (SECA)) are levied on the 
wages and net self-employment income of workers covered by 
Social Security. The FICA tax is levied at a rate of 15.3 
percent, with employees and their employers each paying half of 
the total amount. Of the total 15.3 percent FICA tax, 12.4 
percent is used to finance the Social Security program, and 2.9 
percent is used to finance the Medicare program. The Social 
Security portion of the tax is levied on earnings up to 
$106,800 in 2010.\19\ The Medicare portion of the tax is levied 
on all earnings.
---------------------------------------------------------------------------
    \19\The ``taxable wage base'' increases annually with average wage 
growth in the economy.
---------------------------------------------------------------------------
    The SECA tax also is levied at a rate of 15.3 percent, with 
the same 12.4 percent and 2.9 percent split between Social 
Security and Medicare as the FICA tax. However, to reflect the 
fact that employees do not pay FICA taxes on the employer's 
portion of the FICA tax, the taxable base for the SECA tax is 
adjusted downward by 7.65 percent and self-employed workers are 
allowed to deduct half of their SECA tax liability for income 
tax purposes.
    Table 9 and Table 10 show FICA and SECA tax rates and 
maximum taxable earnings for 1937-2010, respectively.

       TABLE 9: FICA TAX RATES, AVERAGE WAGE INDEX, AND MAXIMUM TAXABLE EARNINGS, SELECTED YEARS 1937-2010
                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                Rate paid by employee and employer
                                        -------------------------------------------------- Average     Maximum
             Calendar year                        Disability            Hospital             wage      taxable
                                           OASI    insurance   OASDI   insurance   Total    index    earnings\1\
                                                     (DI)                 (HI)
----------------------------------------------------------------------------------------------------------------
1937...................................     1.00         NA        NA        NA      1.00   $1,138      $3,000
1950...................................     1.50         NA        NA        NA      1.50    2,544       3,000
1960...................................     2.75       0.25      3.00        NA      3.00    4,007       4,800
1970...................................     2.75       0.55      4.20      0.60      3.65    6,186       7,800
1980...................................     4.52       0.56      5.08      1.05      6.13   12,513      25,900
1990...................................     5.60       0.60      6.20      1.45      7.65   21,028      51,300
1995...................................     5.26       0.94      6.20      1.45      7.65   24,706      61,200
2000...................................     5.30       0.90      6.20      1.45      7.65   32,155      76,200
2005...................................     5.30       0.90      6.20      1.45      7.65   36,953      90,000
2008...................................     5.30       0.90      6.20      1.45      7.65   41,335     102,000
2009...................................     5.30       0.90      6.20      1.45      7.65        *     106,800
2010...................................     5.30       0.90      6.20      1.45      7.65        *    106,800
----------------------------------------------------------------------------------------------------------------
\1\OASDI; no limit on HI.
NA--Not applicable.
*--Not available.
Note--Until 1991, the maximum taxable earnings for HI were the same as for OASDI. In 1991, 1992, and 1993
  maximum taxable earnings were $125,000, $130,200, and $135,000 respectively, with no limit after 1993. Only
  92.35 percent net self-employment earnings are taxable and half of the SECA taxes so computed is deductible
  for income tax purposes. Source: Social Security Administration.


                    TABLE 10: OASDI AND HI TAX RATES FOR SELF-EMPLOYED INDIVIDUALS, 1980-2010
                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                                                                        Total
                 Calendar year                       OASI          DI         OASDI          HI       (OASDI and
                                                                                                         HI)
----------------------------------------------------------------------------------------------------------------
1980...........................................       6.2725       0.7775         7.05         1.05         8.10
1981...........................................       7.0250       0.9750         8.00         1.30         9.30
1982...........................................       6.8125       1.2375         8.05         1.30         9.35
1983...........................................       7.1125       0.9375         8.05         1.30         9.35
1984...........................................      10.4000       1.0000        11.40         2.60     \1\14.00
1985...........................................      10.4000       1.0000        11.40         2.70     \1\14.10
1986-1987......................................      10.4000       1.0000        11.40         2.90     \1\14.30
1988-1989......................................      11.0600       1.0600        12.12         2.90     \1\15.02
1990-1993......................................      11.2000       1.2000        12.40         2.90        15.30
1994-1996......................................      10.5200       1.8800        12.40         2.90        15.30
1997-1999......................................      10.7000       1.7000        12.40         2.90        15.30
2000 and later.................................      10.6000       1.8000        12.40         2.90       15.30
----------------------------------------------------------------------------------------------------------------
\1\Tax credits for the self-employed equaled 2.7 percent in 1984, 2.3 percent in 1985, and 2.0 percent in 1986-
  1989. The tax rate is not reduced for these credits.Source: Social Security Administration.

Taxation of Benefits

    Social Security beneficiaries with incomes\20\ above 
certain thresholds are required to include a portion of their 
Social Security benefits in their federal taxable income. The 
Social Security Amendments of 1983 required beneficiaries with 
incomes of more than $25,000 if single, and $32,000 if married 
filing jointly,\21\ to include up to 50 percent of their 
benefits in taxable income, beginning in 1984. Revenues from 
taxing up to 50 percent of Social Security benefits are 
credited to the Social Security Trust Funds. The Omnibus Budget 
Reconciliation Act of 1993 required beneficiaries with modified 
incomes of more than $34,000 if single, and $44,000 if married 
filing jointly, to include up to 85 percent of their benefits 
in their taxable income, beginning in 1994. Revenues from 
taxing 51 percent to 85 percent of Social Security benefits are 
credited to the Medicare Hospital Insurance Trust Fund. These 
income thresholds are specified in the law and by design are 
not indexed. Thus over time, an increasing number of 
individuals will be subject to federal income tax on a portion 
of Social Security benefits. When taxes on benefits were first 
imposed, eight percent of recipients were affected. The 
Congressional Budget Office (CBO) estimates that for tax year 
2005, 39 percent of recipients were affected.
---------------------------------------------------------------------------
    \20\Income is defined as adjusted gross income plus tax-exempt bond 
interest plus one-half of Social Security benefits.
    \21\There is no separate threshold for married persons who live 
together and file separately.
---------------------------------------------------------------------------

Interest on Special U.S. Obligation Bonds

    The Social Security Trust Funds earn interest because it 
holds Special US Obligation Treasury Bonds to which it is 
legally entitled interest, as prescribed in the Social Security 
Act: ``Special issues . . . will pay a rate of interest equal 
to the average market yield on all marketable interest-bearing 
obligations of the United States which are not due or callable 
(redeemable) for at least 4 years.'' The interest on the 
special U.S. obligations thus is equal to the prevailing 
average rate on outstanding Federal securities with a maturity 
of four years or longer. This interest is credited to the Trust 
Funds twice a year (on June 30 and December 31) by issuing more 
special securities to the Trust Funds.

The Social Security Trust Funds

    Social Security is funded through dedicated payroll taxes 
and taxation of benefits which legally may only be used to pay 
current benefits or to invest in a Social Security Trust Fund 
reserve for payment of future benefits. The securities issued 
to the Trust Funds, like those sold to the public, are legal 
obligations of the U.S. Government.
    Technically, there are two separate Trust Funds: the Old-
Age and Survivors Insurance (OASI) Trust Fund, which holds in 
trust those funds that the federal government intends to use to 
pay future benefits to retirees and their survivors; and, the 
Disability Insurance (DI) Trust Fund, which holds in trust 
those funds that the federal government intends to use to pay 
benefits to those who are judged by the federal government to 
be disabled and incapable of productive work, as well as to 
their spouses and dependents.
    To the extent that payroll taxes exceed benefit payouts in 
a given year, participants in the Social Security program are 
in effect saving for their future retirement, disability or 
survivor benefit needs, or for those of other participants in 
the program. These pre-funded amounts earn interest, which 
accrues to the Trust Funds. In 2008, the Trust Fund's assets 
earned interest at an effective annual rate of 5.1 percent.\22\
---------------------------------------------------------------------------
    \22\2009 Social Security Trustees' Report, available at http://
www.ssa.gov/OACT/TR/2009/II_cyoper.html#94983.
---------------------------------------------------------------------------
    The long-range status of the Trust Funds is often expressed 
in terms of percent of taxable payroll rather than in dollar 
amounts. This permits a direct comparison between the tax rate 
in the law and the cost of the program. For example, if the 
program is projected to have a deficit of two percent of 
taxable payroll as it was in 2009, the OASDI tax rates now in 
the law would have to be increased by one percentage point each 
for employee and employer (a total of two percent) in order to 
pay for the benefits due. Alternatively, the program could be 
brought back into balance by an equivalent reduction in 
benefits. For example, if the program is projected to have a 
deficit of two percent of taxable payroll, and expenditures are 
projected to be 10 percent of taxable payroll, then a 20 
percent (2 divided by 10) reduction in benefits would be needed 
to bring the program into long-range fiscal balance. Finally, 
fiscal balance could also be met through a combination of 
revenue increases and benefit reductions.

Historical Status of the Trust Funds

    For more than three decades after Social Security taxes 
were first levied in 1937, the system's income routinely 
exceeded its outgo, and its Trust Funds grew. The situation 
changed, however, in the early 1970s.
    Beginning in 1973, the program's income fell below 
expenditures, and the Trust Funds declined rapidly. Congress 
stepped in five times during the late 1970s and early 1980s to 
keep the Trust Funds from being exhausted. Although major 
changes enacted in 1977 greatly reduced the program's long-run 
deficit, they did not eliminate it, and the short-run changes 
made by the legislation were not sufficient to enable the 
program to withstand back-to-back recessions in 1980 and 1982, 
coupled with high inflation and low wage growth. A Social 
Security disability bill in 1980 and temporary fixes in 1980 
and 1981 were followed by another major reform package in 1983. 
The 1983 changes, along with improved economic conditions, 
dramatically improved the short- and long-range fiscal outlook 
for Social Security. Income began to exceed outgo in 1983 and 
the Trust Funds grew substantially. By the end of calendar year 
2008, the balance in the Trust Funds reached $2.4 trillion, an 
amount equivalent to 354 percent of expenditures in 2008 
(between three and four years' worth of benefits).

Social Security and the Federal Budget

    By law, the receipts and disbursements of the Social 
Security Trust Funds are excluded from the President's budget 
and the Congressional budget resolution (in other words, the 
Trust Funds are ``off-budget''). The off-budget status of the 
Social Security Trust Funds has meant that legislation 
affecting the receipts and disbursements of the Trust Funds is 
excluded from the general budget constraints associated with 
the annual Congressional budget resolution, resulting in the 
need for separate rules to ensure that legislation considered 
by Congress does not negatively affect the Social Security 
Trust Funds balances. For example, Social Security is 
prohibited from borrowing funds, going into debt, and 
contributing to the federal deficit. Social Security will only 
pay benefits if it has the dedicated funds. Social Security's 
monies are kept in a trust apart from the general fund, and the 
Budget Act expressly prohibits changes made to Social Security 
as part of any budget reconciliation process (see Appendix for 
House and Senate Procedures that protect Social Security 
balances).

Legacy Costs

    In initial years of Social Security, retirees received 
benefits that far exceeded the value of contributions that they 
and their employers had been able to make in the short time 
Social Security had been operational. Social Security 
contributions were first collected from workers and employers 
in 1937 and benefits were first paid in 1940. This created a 
deficit of contributions or ``legacy cost''. Some people 
advocate for a revenue source outside current workers payroll 
to pay for this legacy cost. Economists have estimated that 
Social Security's legacy cost is roughly $13 trillion.\23\
---------------------------------------------------------------------------
    \23\Munnell, Alicia H., ``Should Social Security Rely Solely on the 
Payroll Tax?,'' Center for Retirement Research at Boston College, Brief 
Number 9-16, Boston, MA: Center for Retirement Research, 2009, 
available at http://crr.bc.edu/briefs/
should_social_security_rely_solely_ on_the_payroll_tax_.html.
---------------------------------------------------------------------------

               THE ANNUAL REPORT OF THE BOARD OF TRUSTEES

    The Social Security Act requires that the Board of 
Trustees\24\ report to the Congress annually on the financial 
status of the Social Security Trust Funds. The Social Security 
Trustees report short-range (10-year) projections and long-
range (75-year) projections of the financial status of the 
Social Security system. Projections are made separately for 
each of the two Social Security Trust Funds (the Old-Age and 
Survivors Insurance (OASI) Trust Fund and the Disability 
Insurance (DI) Trust Fund) and for the Trust Fund on a combined 
basis (the OASDI Trust Fund).
---------------------------------------------------------------------------
    \24\The Board of Trustees is comprised of the Secretary of Treasury 
(who is the Managing Trustee), the Secretary of Labor, Health and Human 
Services, the Commissioner of Social Security and two representatives 
of the public.
---------------------------------------------------------------------------
    Because the Social Security program is designed as a 
contributory system in which workers who pay payroll taxes to 
support the system are considered to be earning the right to 
future benefits, Congress has traditionally required long-range 
estimates of the program's actuarial balance. Under current 
procedures, the traditional long-range actuarial analysis of 
the program covers a 75-year period, which generally would be 
sufficient to cover the anticipated retirement years of persons 
currently in the work force.
    The long-range projections are affected by three types of 
factors: (1) demographic factors, such as rates of fertility, 
life expectancy, and immigration, which determine the number of 
workers in relation to recipients; (2) economic factors, such 
as unemployment, productivity, interest rates and inflation; 
and (3) factors specifically related to the Social Security 
program, such as eligibility rules, benefit levels, and the 
categories of covered employment.
    Given the uncertainty surrounding the long-range 
projections, the actuaries at the Social Security 
Administration (SSA) employ three sets of alternative economic 
and demographic assumptions: Alternative I, based on optimistic 
assumptions; Alternative II, based on intermediate assumptions; 
and Alternative III, based on pessimistic assumptions. 
Alternative II generally is considered the ``best guess'' of 
long-term solvency and is the most frequently cited.

Findings in the 2009 Trustees Report

    The latest report of the Social Security Board of Trustees 
was released on May 12, 2009.\25\ Projections\26\ show the Old 
Age, Survivors, and Disability Insurance program will continue 
to add tax revenue to their Trust Funds up to 2016. The Trust 
Funds will continue to grow because of interest earned through 
2023. After 2023, the Trust Funds' assets will begin to be 
tapped to help pay for the retirement of the unusually large 
baby boomer cohort. By 2037, the reserves are expected to be 
exhausted, and current revenues will only be sufficient to 
finance 76 percent of benefits.\27\
---------------------------------------------------------------------------
    \25\2009 Social Security Trustees' Report, available at http://
www.ssa.gov/OACT/TR/2009/tr09.pdf 26 The 2009 Social Security Trustees' 
Report, Table VI.F7, available at http://www.ssa.gov/OACT/TR/2009/
tr09.pdf.
    \26\The 2009 Social Security Trustees' Report, Table VI.F7, 
available at http://www.ssa.gov/OACT/TR/2009/lr6f8.html.
    \27\The term ``exhausted'' is commonly used to indicate that the 
Trust Fund balance plus payroll taxes and other revenues would be 
insufficient to pay all benefits when they are due.
---------------------------------------------------------------------------
    On average, over the next 75 years (2009-2083), the 
system's projected actuarial deficit is 2.00 percent of taxable 
payroll. In present value terms, over the next 75 years the 
system's projected unfunded obligation is $5.3 trillion, an 
amount equivalent to 0.7 percent of Gross Domestic Product 
(GDP). In the 75th year of the period, the cost of the system 
is projected to exceed income by 4.34 percent of taxable 
payroll.
    Social Security has always been structured primarily as a 
pay-as-you-go system, with current benefits mostly funded out 
of current tax revenues. However, Social Security is currently 
running a surplus. In 2009, an estimated 94 percent of Social 
Security tax revenues were spent to meet current expenditures 
(benefits and administrative costs). The surplus tax revenues, 
along with interest credited to the Trust Fund, contribute to a 
growing Trust Fund balance. For OASDI, interest income will 
first be needed to pay a portion of benefits in 2016, although 
the Trust Fund will continue to accumulate assets until around 
2025, when Social Security begin drawing down the Trust Fund.
    Long-range projections for the Social Security Trust Fund 
are based on many demographic, economic, and program-specific 
factors. In large part, however, the system's projected long-
range funding shortfall is related to demographic changes in 
the United States. According to the Social Security actuaries, 
lower birth rates are the principal reason that the cost of the 
Social Security program will increase over the next quarter 
century. The ``total fertility rate,'' or the average number of 
children women have, was about 3.3 children per woman during 
the baby boom years from 1946 through 1965. By 1972, however, 
the total fertility rate dropped to two children per woman and 
has stayed at about that level ever since.
    Moreover, the first wave of the 80 million member baby boom 
generation reached age 62 in 2008, the age at which reduced 
Social Security retirement benefits are first payable. In 
addition, projected increases in life expectancy will 
contribute to an older society. The Trustees intermediate 
assumptions project that, between 2010 and 2030, the number of 
beneficiaries will increase by 59 percent, while the number of 
workers whose taxes will finance future benefits will increase 
by 14 percent. As a result, the number of workers supporting 
each Social Security recipient is projected to decline from 3.0 
today to 2.2 in 2030. After the baby boomer retirement, 
however, the ratio is projected to stabilize at approximately 
two, with only a very gradual decline due to projected 
increases in life expectancy.
    An increase in older Americans participating in the 
workforce can increase the solvency of Social Security.\28\ The 
65-and-over labor force participation rate had been at historic 
lows during the 1980s and early 1990s, but has increased 
steadily over the past decade. In 2008, 20.5 percent of men 
over the age of 65 and 11.9 percent of women over 65 were in 
the labor force, for a total workforce participation of 15.5 
percent.
---------------------------------------------------------------------------
    \28\Bureau of Labor Statistics, ``Older Workers,'' July 2008, 
available at http://www.bls.gov/spotlight/2008/older_workers/
---------------------------------------------------------------------------
    The aging of the U.S. population will continue to be an 
important factor after the baby boomers have died. Forecasts of 
continuing increases in life expectancy mean that Social 
Security recipients will receive benefits for longer periods in 
the future. Projected increases in life expectancy and low 
fertility rates, mean that persons age 67 and older will 
continue to represent a growing share of the U.S. population.
    The long-range intermediate projections assume that GDP 
will increase at an ultimate rate of 2.1 percent annually; the 
average wage is assumed to increase at an ultimate rate of 3.9 
percent annually; inflation is assumed to increase at an 
ultimate rate of 2.8 percent annually; and the unemployment 
rate is assumed to average 5.5 percent.\29\ Details on the 
demographic assumptions are available in the 2009 Trustees 
report. The 2010 Trustees report, which will be issued in June 
of this year, will likely have different estimates of the Trust 
Funds' solvency due to the impact of the economic downturn in 
reducing revenues and increasing the number of new 
beneficiaries.
---------------------------------------------------------------------------
    \29\Ultimate values are assumed to be reached within the first 25 
years of the projection period. The ultimate economic assumptions are 
unchanged from the 2007 report.
---------------------------------------------------------------------------

The Congressional Budget Office Forecast

    The Congressional Budget Office (CBO) generates projections 
of the Social Security Trust Funds independent of the Social 
Security Trustees. In January 2010,\30\ the CBO projected that, 
excluding the interest from its surplus, the Social Security 
Trust Funds will have a cash flow deficit (income excluding 
interest will be less than outlays) in fiscal years 2010 
through 2013 and in fiscal years 2016 through 2020. CBO 
projects that only in fiscal years 2014 and 2015 will the 
Social Security Trust Funds have a cash flow surplus (income 
excluding interest will be greater than outlays).
---------------------------------------------------------------------------
    \30\Congressional Budget Office, The Budget and Economic Outlook: 
Fiscal Years 2010 to 2020, January 2010, available at: http://
www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf. In addition, see 
the CBO supplemental data table, available at http://www.cbo.gov/
budget/ factsheets/2010/oasdi.pdf.
---------------------------------------------------------------------------
    When total income of the Trust Funds (Social Security tax 
revenues plus interest income) is taken into account, CBO 
projects that the Social Security Trust Funds will have a 
surplus in each fiscal year from 2010 to 2020. When the Social 
Security Trust Funds operate with a cash flow deficit, a 
portion of the U.S. government bonds held by the Trust Funds 
must be redeemed to cover benefit payments and administrative 
costs. The money needed to redeem these bonds, like all 
Treasury bonds, comes from the U.S. Treasury's general fund.
    CBO attributes the increase in outlays between fiscal years 
2010 and 2020 to three factors: (1) an increase in those 
claiming benefits; (2) changes in benefits including the effect 
of projected wage growth on benefit levels for future retirees; 
and (3) automatic cost-of-living adjustments to benefits. In 
the CBO forecast, almost half of the change in spending (48.2 
percent) between fiscal years 2010 and 2020 is due to an 
increase in the number of people claiming benefits. This 
increase\31\ is due both to the rise in the number of people 
eligible for benefits and the economic downturn, which 
increased the unemployment rate for workers aged 62-64 from 3.9 
percent in 2008 to 6.2 percent in 2009.\32\
---------------------------------------------------------------------------
    \31\The Office of the Chief Actuary SSA estimated last year that, 
even in the absence of an economic recession, applications for retired 
worker benefits under the OASI program during FY 2009 would be about 15 
percent higher than the number of applications during FY 2008, solely 
due to increase in numbers of insured workers reaching the retirement 
ages of 62 to 70. This increase was expected due to the aging of the 
baby boomers and the increasing percentages of women reaching 
retirement ages having attained insured status enabling them to receive 
retired worker benefits.
    The actual data for applications for retired worker benefits in FY 
2009 (for October 2008 through September 2009) show an increase of 21 
percent over the number of applications in FY 2008. Thus, retired 
worker benefit applications were about 5 percent higher (1.21/1.15) 
than had been expected in the absence of a recession for the entire 
fiscal year 2009.
    While retired worker benefit applications for FY 2009 were clearly 
above the levels expected in the absence of a recession, this does not 
mean that fewer workers of retirement age are working or seeking 
employment. In fact, based on data from the ``household survey'' 
published by the Bureau of Labor statistics, we see that the average 
number of people at ages 60 to 69 who were employed or seeking 
employment (in the civilian labor force) during FY 2009 (October 2008 
through September 2009) was 7.1 percent higher than for the same months 
in FY 2008. In the 2008 Trustees Report, where no recession had been 
expected, an increase in the labor force at these ages of 4.5 percent 
had been expected for the same period. Thus, 2.5 percent more 
individuals at ages 60 to 69 were working or seeking employment in FY 
2009 than had been expected without a recession. This rise might be, in 
part, a reflection of a desire of some older workers to work longer to 
rebuild the level of their personal retirement assets. (Stephen Goss, 
Chief Actuary of the Social Security Administration, 10/14/2009)
    \32\Labor Force Statistics from the Current Population Survey, 
provided by the Bureau of Labor Statistics on April 16, 2010.
---------------------------------------------------------------------------

              WHO RECEIVES BENEFITS FROM SOCIAL SECURITY?

    In June, 2009, 51.9 million people--17 percent of the U.S. 
population--received Social Security benefits. Social Security 
is an important source of retirement income, but it also 
protects workers and their families against the loss of income 
that occurs due to a worker's death or disability. The majority 
of Social Security beneficiaries are retired workers, but more 
than one-third of persons who received Social Security benefits 
in 2009 qualified on the basis of disability or as the spouse, 
widow or widower, parent, or child of a retired, deceased, or 
disabled worker.
    In June, 2009, 63.7 percent of Social Security 
beneficiaries (33.1 million people) were retired workers who 
had earned benefits on the basis of retirement from covered 
employment\33\ (See figure 2). The next largest category of 
beneficiaries was disabled workers, comprising 14.6 percent of 
all beneficiaries. More than 7.5 million people received Social 
Security Disability Insurance (SSDI) in 2009. Widows and 
widowers of workers and retirees were 8.7 percent of all 
beneficiaries. More than 4.2 million people, comprising 8.1 
percent of all Social Security beneficiaries, received 
children's benefits from Social Security in 2009. Most children 
qualified for Social Security because they were the dependents 
of retired, deceased, or disabled workers. About one-fifth of 
child beneficiaries were adults who had been disabled since 
childhood. Spouses of retired or disabled workers were 4.8 
percent of all beneficiaries in 2009.
---------------------------------------------------------------------------
    \33\Some beneficiaries are ``dually entitled'' to benefits as both 
a retired worker and as the spouse of a retired or disabled worker. In 
Figure 2, dually-entitled beneficiaries are classified as retired 
workers.


    Of the 51.9 million individuals who received Social 
Security benefits in June, 2009, 80.7 percent were aged 60 or 
older (See figure 3). Almost one-third of all beneficiaries 
were 60 to 69 years old. This age group included disabled 
workers, retired workers, spouses, widows and widowers, and 
parents. Individuals who receive Social Security Disability 
Insurance are re-classified as retired workers at the full 
retirement age (66 in 2009). Retired-worker benefits are first 
available at age 62, but the benefit is permanently reduced for 
workers who claim it before they have reached the full 
retirement age. Widows and widowers are eligible for benefits 
at age 60. Disabled widows and widowers are eligible for Social 
Security at age 50.
    Almost half of Social Security beneficiaries (49.2 percent) 
in June 2009 were aged 70 or older. Twenty-nine percent of 
beneficiaries were 70 to 79 years old and 20 percent were aged 
80 and older. Social Security's role in providing income 
support to disabled workers and to the dependents of disabled 
and deceased workers is illustrated by the fact that 19.2 
percent of beneficiaries in 2009 were children under the age of 
21 or adults under age 60. Together, these two age groups 
accounted for nearly 10 million of the 51.9 million people who 
received Social Security benefits in 2009. 


    More than half of all Social Security beneficiaries in 2009 
were women (see figure 4). Forty percent of beneficiaries were 
men and eight percent were children, including adults whose 
disability had been present since childhood. Women are the 
majority of adult Social Security beneficiaries in part because 
they have a longer average life expectancy than men. Men are a 
slight majority of disabled worker beneficiaries (53 percent in 
2009), but this is more than offset by the higher mortality 
rates among men at all ages compared to women. Because of their 
longer average life expectancy, 57 percent of all Social 
Security beneficiaries aged 60 and older were women in 2009, as 
were 64 percent of all beneficiaries aged 80 and older. 


    In June 2009, the average monthly benefit for a man 
receiving a Social Security retired worker benefit was $1,305, 
while the average retired worker benefit for a woman was 
$1,006. Men had higher benefits because they had both higher 
average wages and a higher average number of years of earnings. 
The pattern was similar for disabled workers. The average 
monthly benefit in June 2009 for a man receiving SSDI was 
$1,188, while for a woman receiving SSDI, the average monthly 
benefit was $921. The average benefit for a widow(er) or parent 
was $1,086. Benefits for spouses and children are typically 
about half of an insured worker's PIA. In 2009, the average 
Social Security spousal benefit was $553 and the average 
child's benefit was $548.


     HOW DOES SOCIAL SECURITY COMPARE WITH OTHER SOURCES OF INCOME?

    Social Security provides a substantial proportion of total 
income among households in which one or more residents is a 
Social Security beneficiary, and its importance as a source of 
income increases as people age. In 2008, Social Security 
provided more than 25 percent of the total income of households 
in which at least one household resident was a Social Security 
beneficiary and the household head and his or her spouse (in 
married-couple households) were both under 65 years old (See 
Table 11). Earnings were the largest share of income among 
these households, primarily because in many instances there 
were other household members who worked. Pensions were the 
third largest share of income in Social Security beneficiary 
households in which both the household head and spouse were 
under age 65, accounting for 8.3 percent of total household 
income in 2008.
    Social Security is the largest share of income among Social 
Security beneficiary households headed by persons aged 75 and 
older, providing 46.2 percent of all income received by these 
households in 2008. Pensions were the second largest share of 
income among these households, accounting for 19.3 percent of 
their total income. Although earnings were a substantial source 
of income, the portion of total income received as earnings in 
2008 (16.6 percent) was much lower among households headed by 
persons aged 75 and older than among beneficiary households 
headed by persons aged 65 to 74 (36.7 percent) and beneficiary 
households headed by persons under age 65 (56.2 percent). 
Social Security beneficiary households headed by persons aged 
75 and older received 14.8 percent of their total income from 
assets in 2008.

     TABLE 11: SHARES OF HOUSEHOLD INCOME IN 2008 AMONG BENEFICIARY
                    HOUSEHOLDS, BY AGE OF HOUSEHOLDER
------------------------------------------------------------------------
                                           Age of household head
                                  --------------------------------------
         Source of income                                       75 and
                                     Under 65     65 to 74      older
------------------------------------------------------------------------
Social Security..................        25.5%        33.1%        46.2%
Earnings.........................        56.2%        36.7%        16.6%
Pensions.........................         8.3%        16.6%        19.3%
Assets...........................         4.3%        11.2%        14.8%
Public Assistance................         1.2%         0.4%         0.4%
Other............................         4.5%         2.0%         2.7%
                                  --------------------------------------
    Total........................         100%         100%        100%
------------------------------------------------------------------------
This table illustrates the sources of income of beneficiary households
  in the aggregate. Many households receive income from two or more of
  the sources. Source: CRS analysis of the March 2009 Current Population Survey.

    Some households that receive Social Security have no other 
source of income. Figure 6 shows the percentage of total 
household income received by Social Security beneficiary 
households headed by persons under age 65 and age 65 and older 
in 2008. Among Social Security beneficiary households in which 
both the household head and spouse (in married-couple 
households) were under age 65, 14 percent had no income other 
than Social Security. Among beneficiary households in which 
either the household head or spouse was 65 or older, 17 percent 
had no income other than Social Security. Including the 
households that received all of their income from Social 
Security, 37 percent of beneficiary households headed by 
persons under age 65, and 57 percent of beneficiary households 
headed by persons aged 65 and older, received more than half of 
their total income from Social Security. 


                  SOURCES OF INCOME BY INCOME QUARTILE

    Figure 7 shows the percentage of total income received from 
each source by all households with any income in 2008, in which 
either the householder or householder's spouse was 65 or older. 
For example, among elderly households in the top 25 percent of 
total income, 17 percent of income came from Social Security, 
and 81 percent of total income came from earnings, pensions, 
and assets. In contrast, among elderly households whose income 
was in the lowest quartile, the ratio of Social Security to 
other income sources was inverted. Figure 7 shows 84 percent of 
income for households in the lowest quartile came from Social 
Security, and 11 percent of total income came from earnings, 
pensions, and assets. Elderly households in the second and 
third income quartiles in 2008 drew 42 percent and 67 percent 
of their income from Social Security, respectively.


    The percentage of older Americans living in poverty fell 
sharply from the late 1950s through the mid-1970s and then 
continued a slow, steady decline until the early 1990s, when it 
leveled off at about 10 percent. In 1959, 35.0 percent of 
Americans aged 65 and older had family incomes below the 
federal poverty threshold, which was more than double the 
poverty rate among adults 18 to 64 years old. (See figure 8.) 


    By the early 1990s, the poverty rate among people 65 and 
older had fallen below the poverty rate among adults aged 18 to 
64. The poverty rate of 9.7 percent among Americans aged 65 and 
older in 2008 was two percentage points lower than the poverty 
rate among adults aged 18 to 64, and it was just half the 19 
percent poverty rate among children under 18 years old. 
However, while the proportion of persons aged 65 and older in 
poverty has fallen over the past 50 years, the number of poor 
elderly has remained relatively constant since the mid-1970s 
due to the growth in the total number of elderly persons. In 
2008, 3.6 million people aged 65 and older had incomes below 
the federal poverty thresholds of $10,326 for single elderly 
persons and $13,014 for elderly couples.
    The reduction in the proportion of older Americans living 
in poverty from 35 percent in 1959 to 10 percent in 2008 is one 
of the most significant economic developments to occur in the 
last 50 years. Without the decline in elderly poverty, the 
economic burden of supporting those who can no longer work in 
old age would weigh that much more heavily on their adult 
children, and many millions of older Americans would likely 
have to apply for public assistance or give up their homes to 
live with their children. Both the increase in the proportion 
of older persons who receive Social Security and increases in 
average monthly benefits contributed to the decrease in the 
proportion of older Americans whose income falls below the 
federal poverty threshold.
    The decline in poverty among the elderly is also due to the 
fact that the poverty threshold is adjusted each year by the 
rate of inflation as measured by the percentage change in the 
Consumer Price Index (CPI). The federal poverty threshold 
represents the amount of income necessary to maintain a 
minimally adequate standard of living. Because the poverty 
threshold is adjusted annually by the rate of inflation as 
measured by the consumer price index, the real (inflation-
adjusted) value of income at the poverty threshold remains 
constant over time. In contrast, growth in wages from year to 
year reflects both the rising general level of prices and gains 
in labor productivity.
    Over long periods of time, wages and salaries grow faster 
than prices because labor becomes more productive as a result 
of better education and training, improved methods of 
production and distribution, and new technologies. Over the 
past 50 years, the ratio of the poverty threshold to the median 
income of the population has fallen because earnings (which are 
the largest source of income for most non-elderly households) 
have risen faster than prices. As a consequence, the gap 
between the official poverty threshold and the median household 
income has grown, and persons with incomes at or below the 
poverty threshold have become relatively poorer compared to 
households with incomes at the median.
    In 1968, the poverty threshold for an individual 65 or 
older ($8,308 in 2008 dollars) was equal to 93 percent of the 
median individual income ($8,962 in 2008 dollars) of all 
persons aged 65 and older. In 2008, the poverty threshold for a 
single person 65 or older ($10,326) was only 57 percent of the 
real median income of individuals aged 65 and older ($18,208). 
In the future, other things being equal, the disparity between 
rising real incomes and a fixed real poverty threshold will 
lead to a decreasing proportion of the elderly having incomes 
below the federal poverty threshold. This means that the income 
gap between those with incomes below the poverty threshold and 
those with incomes at the median will grow larger. As a result, 
the proportion of the elderly who are in poverty will shrink, 
but those who are in poverty will be relatively poorer compared 
to those who have average incomes.
    Due to these problems with a fixed poverty measure, 
Congress requested the National Academy of Sciences to convene 
a group of experts to update and improve the measurement of 
poverty. Its 1995 report\34\ recommended a broader definition 
of necessary expenditures (that includes food, housing, out-of-
pocket health care expenses, child support expenses, and work-
related expenses such as transportation and childcare) and a 
more refined measure of income (that takes into account taxes, 
tax credits, and in-kind benefits such as such as food stamps 
and housing subsidies). When this more realistic measure is 
used, poverty among seniors is much higher than it appears as 
calculated by traditional means,\35\ e.g. from 10 to 19 percent 
in 2008, due in large part to recognition of out-of-pocket 
health spending as a basic necessity.
---------------------------------------------------------------------------
    \34\Citro, C. F., & R. T. Michaels, eds., Measuring Poverty: A New 
Approach, Washington, DC: National Academy Press, 2005, available at 
http://www.nap.edu/catalog.php?record_id=4759.
    \35\Reno, Virginia P. and Ben Veghte, ``Economic Status of the Aged 
in the United States'', in Robert Binstock et al., ed., Handbook of 
Aging in the Social Sciences. (Maryland Heights, MO: Elsevier, 
forthcoming).
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            SOCIAL SECURITY MODERNIZATION: SETTING THE STAGE

    The Social Security program is not currently on a long-term 
path of fiscal stability. According to the 2009 Trustees 
Report, without Congressional action the program will exhaust 
the Trust Funds beginning in 2037, and thereafter only collect 
enough revenue to pay out 76% of promised benefits. To restore 
long-term solvency, policymakers face three basic options: 
raise contributions, cut benefits, or add revenues to the 
system. The following section will outline several alternatives 
for improving solvency, derived from NASI's October 2009 report 
entitled Fixing Social Security: Adequate Benefits, Adequate 
Financing.\36\ The solvency impact of the reforms are estimated 
by the Social Security Administration's Office of the 
Actuary\37\ and, where appropriate, CRS estimates of the impact 
of these changes on future beneficiaries are included.\38\
---------------------------------------------------------------------------
    \36\Reno, Virginia P. and Joni Lavery, Fixing Social Security: 
Adequate Benefits, Adequate Financing, National Academy of Social 
Insurance, October, 2009, available at http://www.nasi.org/research/
2009/fixing-social-security.
    \37\All estimates of the solvency impact of individual proposals 
are based on the 2009 Trustee's Reports, available at: http://
www.ssa.gov/OACT/TR/2009/index.html.
    \38\Haltzel, Laura, Dawn Nuschler, Kathleen Romig, Gary Sidor, 
Scott Szymendera, Mikki Waid, and Debra Whitman, ``Options to Address 
Social Security Solvency and Their Impact on Beneficiaries: Results 
from the Dynasim Microsimulation Model,'' Congressional Research 
Service Report RL33840, January 29, 2007, available at http://
www.aging.senate.gov/crs/crs_social_security_policy.cfm.
---------------------------------------------------------------------------
    As Congress explores potential reforms to Social Security, 
it should not only strive to improve the fiscal health of the 
program, but also ensure that it will meet the needs of 
beneficiaries in years to come. The Committee requested that 
GAO review options to strengthen the program for the most 
vulnerable populations and their findings are included 
herein.\39\
---------------------------------------------------------------------------
    \39\GAO, Social Security: Options to Protect Benefits for 
Vulnerable Groups When Addressing Program Solvency, GAO-10-101R 
(Washington, D.C.: December 7, 2009), available at http://www.gao.gov/
new.items/d10101r.pdf.
---------------------------------------------------------------------------
    It is important to note that the policy alternatives 
described in the subsequent sections of this report by no means 
represent an exhaustive list and are limited to Social Security 
retirement and survivor benefit programs. Rather, they 
illustrate the more commonly considered proposals for restoring 
the program's fiscal alignment and improving the protections of 
vulnerable groups. Variations or combinations of these 
proposals could also prove useful to Congress as they consider 
Social Security reform.\40\
---------------------------------------------------------------------------
    \40\For example, see Committee on the Fiscal Future of the United 
States, ``Choosing the Nation's Fiscal Future,'' National Academies 
Press 2010, available at http://www.ourfiscalfuture.org/wp-content/
uploads/fiscalfuture_full_report.pdf.
---------------------------------------------------------------------------
    The projected actuarial impacts of these reforms are 
provided on the assumption that each reform was to be 
implemented now or as described under the option, and that no 
other changes were made. Projecting the impacts of combinations 
of options and/or different implementation timeframes would 
require a new and thorough analysis. Further, these analyses 
should be detailed enough to understand how they would impact 
vulnerable groups and protect the adequacy of Social Security 
benefits.

             OPTIONS TO RAISE REVENUE FOR PROGRAM SOLVENCY


       OPTIONS TO INCREASE THE SOCIAL SECURITY CONTRIBUTION RATE

    The Federal Insurance Contributions Act of 1939 (FICA) 
authorized the Social Security program to be financed largely 
by mandatory contributions from workers and employers. This 
established a link between funding and insuring against 
economic insecurity when wages are lost due to old age, death 
of a family worker, and, later, disability. Some options for 
adjusting the contribution rate are:
           Increase Worker and Employer Contributions 
        by 1.1 percent. If the contribution rate were raised in 
        2010 so that workers contribute 7.3 percent instead of 
        6.2 percent of their earnings, the program's projected 
        deficit would decline by 2.09 percent of taxable 
        payroll. It is estimated that this change would 
        eliminate all of the deficit and make the program 
        solvent for 75 years. For example, a medium-wage 
        worker, making $43,451 in 2010, would face a tax 
        increase of $478 a year, or $9.19 a week, and the 
        employer would face an identical increase. However, 
        because the program will have surplus funds for the 
        next decade, an immediate rate increase would add to 
        the surpluses that are invested in Treasury securities.
           Increase Worker and Employer Contributions 
        by one percent in 2022, and by an Additional one 
        percent in 2052. Because the Social Security program 
        has sufficient resources to pay benefits in the near 
        future, contribution rates could be designed to 
        increase as funds are needed. If determined by future 
        policymakers that funds are not needed, the rates could 
        be reduced or rescinded. As one example of this 
        approach, policymakers could act now to schedule a two-
        step increase in the Social Security rate: from 6.2 
        percent to 7.2 percent for workers and employers in 
        2022, and to 8.2 percent in 2052. This option would 
        reduce the program's projected deficit by 2.06 percent 
        of payroll, eliminating the projected 75-year 
        shortfall. By 2022, workers' real wages--that is, their 
        purchasing power after adjusting for inflation--is 
        estimated to be about 16 percent higher than in 2009. 
        If two percent more of workers' wages went to support 
        Social Security, workers would still be 14 percent 
        wealthier than today's workers. By 2052, wages are 
        projected to have 56 percent greater buying power than 
        in 2009.
           Increase Worker and Employer Contributions 
        1/20 percent Annually for 20 years. To avoid abrupt 
        changes in Social Security contribution rates, this 
        option would schedule gradual increases in the Social 
        Security contribution rate (i.e., one-twentieth of one 
        percent per year over 20 years for employees and 
        employers, each) beginning in 2015, increasing the rate 
        to 7.2 percent by 2035. In 2015, the increase for an 
        average earner making $53,085 then would be $26.50 a 
        year, or about 50 cents a week. It is estimated that 
        this approach would reduce the 75 year shortfall by 
        1.39 percent of taxable payroll or about 69 percent.
           Raise Rates Based on the Trustees' Most 
        Current Intermediate Assumptions of the Tax Rate Needed 
        to Balance Revenues and Outlays. This option would 
        increase Social Security contribution rates in order to 
        correct future estimates of insolvency. The balancing 
        rate would be based on the Trustees' most current 
        intermediate assumptions of the tax rate needed to 
        balance revenues and outlays over the entire 75 year 
        projection period, and would take effect automatically 
        if Congress did not adjust revenues and costs. When 
        long-range forecasts change, the future fail-safe rate 
        would be automatically adjusted to maintain financing 
        for the next 75 years.
           Enhance Collection of Existing Taxes. The 
        tax gap is the amount of taxes that are legally owed, 
        but not collected, by the federal government in a 
        timely fashion or at all. The IRS estimates the total 
        tax gap at about $345 billion a year, of which 
        approximately $58 billion is in Social Security and 
        Medicare payroll taxes (most of the $58 billion is from 
        Social Security payroll taxes).\41\ Increasing the 
        collection of unpaid Social Security payroll taxes 
        could significantly reduce the funds needed to make 
        Social Security solvent over the next 75 years.
---------------------------------------------------------------------------
    \41\The Internal Revenue Service estimates that in 2001 there were 
$39 billion in underreported self-employment taxes, $14 billion in 
underreported FICA, and five billion dollars in underpaid employment 
taxes. United States Department of the Treasury, ``Update on Reducing 
the Federal Tax Gap and Improving Voluntary Compliance,'' July 2009, 
available at http://www.irs.gov/pub/newsroom/
tax_gap_report_final_version.pdf.
---------------------------------------------------------------------------

  OPTIONS TO CONSIDER BROADENING THE REVENUE BASE FOR SOCIAL SECURITY

    As of 2009, workers' wages subject to Social Security 
contributions amount to 39 percent of national income, or gross 
domestic product (GDP).\42\ Some have argued that almost 
everyone benefits from Social Security; therefore, broadening 
sources of income would be more equitable. For example, many of 
the sources of non-taxed income disproportionately benefit 
upper income individuals. The sources of income not currently 
taxed include:
---------------------------------------------------------------------------
    \42\2009 Social Security Trustees' Report, available at http://
www.ssa.gov/OACT/TR/2009/tr09.pdf.
---------------------------------------------------------------------------
           Earnings above the tax cap (about 17 percent 
        of aggregate earnings);
           Earnings of workers not covered by Social 
        Security (about 25 percent of state and local 
        government employees do not participate in Social 
        Security);
           Non-taxable fringe benefits paid by 
        employers, such as health insurance premiums, pensions, 
        and most other employee benefits;
           Employees' tax-favored contributions to 
        ``salary reduction'' plans for purposes other than 
        retirement (such as out-of-pocket spending for health 
        care, child care, or work expenses);
           Income from capital, such as interest on 
        investments, stock dividends, and rental income from 
        real estate; and
           Realized increases in the value of property 
        (capital gains) and transfers of property (through 
        gifts and inheritance).

Options to Modify the Social Security Tax Cap

    In 2010, only earnings up to $106,800 are taxed and counted 
toward workers' future Social Security benefits. The cap is 
indexed to keep pace with the growth in average earnings of all 
workers. In the past, Congress set the level of the cap to 
cover 90 percent of the aggregate wages of all workers.\43\ 
Today, it covers only about 83 percent of such earnings.\44\ 
The decline occurred because those at the top of the income 
distribution (the roughly six percent of workers who make more 
than the cap) have had more growth in earnings than those who 
make less than the cap. In 2010, the maximum Social Security 
retirement benefit that could be received would be $2,346 per 
month ($28,152 per year) if they retired at the full retirement 
age of 66.\45\
---------------------------------------------------------------------------
    \43\Altman, Nancy J, ``Tier II Supplement to Social Security: The 
Retirement-USA Plus Plan,'' presented at the Retirement-USA Symposium 
(October 21, 2009).
    \44\Janemarie Mulvey, ``Social Security: Raising or Limiting the 
Taxable Earnings Base,'' Congressional Research Service, February 17, 
2010. (RL32896). Available at http://www.aging.senate.gov/crs/
crs_social_security_policy.cfm.
    \45\2009 Social Security Trustees' Report, Table VI.F10, http://
www.ssa.gov/OACT/TR/2009/tr09.pdf.
---------------------------------------------------------------------------
    Eliminate the Cap--Do Not Count the Additional Earnings 
toward Benefits. If all earned income above $106,800 a year 
were subject to Social Security contributions but did not count 
toward benefits, Social Security would be solvent throughout 
the long-range projection period. Making this change in 2010 
would reduce the program's projected deficit by 2.32 percent of 
payroll, thereby eliminating the 75-year deficit. However, with 
this change, workers who earn more than the tax cap would pay 
considerably more in taxes in a given year. For example, a 
person making $400,000 per year would pay $18,178 more per year 
and his or her employer would pay a matching amount, for a 
total increase of $36,356. CRS projects that eliminating the 
cap on contributions would impact roughly one in five 
beneficiaries over his or her lifetime. As workers do not 
generally have high earnings over their entire careers, the 
total increase in taxes paid by individuals over their working 
lives would be relatively small with a median increase in 
lifetime contributions of three percent. Notably, under this 
option the worker's maximum benefit would be no higher than 
under current law changing the historic relationship between 
contributions and benefits.
    Eliminate the Cap--Count the Earnings toward Benefits. If 
all wages above $106,800 in 2009 were taxed and counted toward 
benefits, the change would almost make Social Security solvent 
through the long-range period, reducing the payroll deficit by 
1.89 percent and eliminating about 95 percent of the 75-year 
shortfall. While high earners and their employers would pay 
considerably more, these top earners would also receive much 
higher benefits. For example, one who had paid taxes on 
lifetime annual earnings of $400,000 would get a benefit of 
about $6,000 per month, or $72,000 per year, which would 
replace about 18 percent of the worker's average earnings.
    Eliminate the Cap--Count Earnings toward Benefits Using 
Different Formula. If all earnings above the cap were taxed and 
counted toward benefits, policymakers could decide to change 
the benefit formula to replace a smaller portion of earnings 
above the old cap as a way to avoid paying very high Social 
Security benefits. As previously noted, the Social Security 
programs' formula is based on workers' average indexed monthly 
earnings (AIME) in three brackets. In 2009, Social Security 
paid:
           90 percent of AIME up to $744, plus
           32 percent of AIME between $744 and 
        $4,483, plus
           15 percent of AIME over $4,483
    A modified formula might apply the 15 percent bracket only 
up to the old cap, and then provide a smaller replacement, say 
three percent of earnings, above that. For example, the third 
part of the above formula could be modified to:
            15 percent of AIME between $4,483 and 
        $8,900 ($106,800 divided by 12), plus 3 percent of AIME 
        over $8,900
    This option, starting in 2010, is estimated to eliminate 
the 75-year deficit, resulting in savings of 2.17 percent of 
payroll.
    Gradually Restore the Cap to Cover 90 percent of Earnings. 
Gradually increase the taxable earnings base to include 90 
percent of earnings by increasing the base by two percent per 
year above the growth in average wages. For example, the 
maximum taxable base in 2010 would rise to $2,136 (two percent 
of $106,800) beyond the automatic increase. In practice, the 
deductions from earnings for the highest-paid six percent of 
workers would continue for a few days longer into the year (and 
for their additional contributions they would receive somewhat 
higher benefits). For the 94 percent of covered workers with 
earnings below the cap, there would be no change at all. The 
change would bring the taxable maximum to the 90-percent level 
in about 36 years and is projected to reduce the 75-year 
deficit by 28 percent, or 0.60 percent of taxable payroll. 
Similar to current law, the roughly one percent of the 
population with earnings above the 90 percent cap would not pay 
taxes on earnings above the new threshold.
    Gradually Restore the Cap to Cover 90 percent of Earnings 
for Workers and Eliminate the Contribution Cap for Employers. 
Similar to the proposal above, the taxable earnings base would 
be gradually increased until it covered 90 percent of aggregate 
earnings, however it would only apply to the worker's share 
(6.2 percent) of the payroll tax. In addition, employers would 
pay their share of the payroll tax (6.2 percent) on the full 
wages of their employers with no maximum amount. Self-employed 
individuals, who currently pay the full 12.4 percent payroll 
tax, would have a mixed basis for calculating their 
contributions. Retirement benefits would be based only on the 
workers earnings below the revised taxable maximum. This option 
would reduce the 75-year deficit by 69 percent, or 1.37 percent 
of taxable payroll.

Options to Extend Social Security Coverage to all Workers

    As described previously, almost all workers pay into Social 
Security, with the exception of the roughly 25 percent of state 
and local government employees who are covered by alternative 
pension systems.\46\ When Congress last extended coverage in 
1983, it brought all newly hired federal employees into Social 
Security but did not extend that requirement to non-covered 
State and local employees.\47\ However, Congress no longer 
allowed states that provide Social Security coverage to drop 
that coverage.
---------------------------------------------------------------------------
    \46\U.S. Committee on Ways and Means, ``Background Material and 
Data on Programs within the Jurisdiction of the Committee on Ways and 
Means, 2004,'' The Green Book, House Ways and Means Committee Print, 
Washington, DC: Government Printing Office, available at 
http://waysandmeans.house.gov/media/pdf/111/ssgb.pdf.
    \47\Following the 1983 legislation, a new Federal Employees 
Retirement System was set up to supplement Social Security coverage for 
newly-hired federal employees. Employees hired before 1984 could elect 
to join the new system and be covered by Social Security or to remain 
in the older Civil Service Retirement System. The number of federal 
employees not covered by Social Security is gradually declining.
---------------------------------------------------------------------------
    Extend Social Security Coverage to Newly-Hired Non-covered 
State and Local Government Employees. In order to achieve more 
universal coverage under Social Security, newly hired state and 
local government workers could be required to participate in 
Social Security. Under this proposal, these workers would be 
required to pay Social Security taxes and be eligible to 
receive benefits. This change may also impact the funding of 
the state and local government of pension systems. State and 
local governments would need time to modify their pension 
systems to fit with the Social Security program, as was done 
for newly-hired federal employees after 1983. If, over a five 
year period, all newly-hired state and local employees were 
brought into Social Security coverage, this change is projected 
to reduce the 75-year deficit by about nine percent, or 0.17 
percent of payroll. The slight increase in revenue occurs 
because the newly-covered workers and employers start to pay 
into Social Security immediately, but claim benefits in the 
future.
    Option to Treat All Salary Reduction Plans Like 401(k)s. 
Under the 1983 amendments to Social Security, employees pay 
Social Security and Medicare taxes on their contributions to 
retirement accounts, such as section 401(k), 403(b) and 457 
plans, but they do not pay Social Security and Medicare taxes 
on their payments into other types of salary reduction plans, 
or ``flexible spending accounts.'' These are accounts that 
employers set up to allow their workers to exclude from taxable 
income out-of-pocket spending for health care, dependent care, 
or qualified commuting costs for parking, van pooling, or 
transit fares (Joint Committee on Taxation 2005).\48\ Employee 
contributions to both 401(k)s and other flexible spending 
accounts are exempt from personal income taxes for employees.
---------------------------------------------------------------------------
    \48\Joint Committee on Taxation, Testimony of George K. Yin, Chief 
of Staff of the Joint Committee on Taxation at a Hearing of the Senate 
Committee on Finance on ``Social Security: Achieving Sustainable 
Solvency,'' JCX-38-05, May 25, 2005, available at http:// 
finance.senate.gov/imo/media/doc/gytest052505.pdf.
---------------------------------------------------------------------------
    The legislative rationale for keeping 401(k) contributions 
subject to Social Security and Medicare taxes was to ensure 
that such plans are not used to avoid Social Security tax 
liability and that employees receive Social Security protection 
based on those wages.\49\ This rationale applies equally to 
salary reduction plans used for other purposes.\50\ Exempting 
employee payments into flexible spending accounts from Social 
Security and Medicare taxes means that the respective Trust 
Funds are deprived of both the employee contributions and the 
employers' matching share of Social Security and Medicare 
contributions. If all employee contributions into salary 
reduction plans were treated like 401(k) contributions and 
subject to the payroll tax, it is projected that the 75-year 
deficit in the Social Security program would be reduced by 
about 12 percent, or 0.25 percent of taxable payroll.
---------------------------------------------------------------------------
    \49\Social Security Administration. 2009. Social Security 
Amendments of 1983; H.R. 1900.
    \50\Joint Committee on Taxation, 2005.
---------------------------------------------------------------------------

Options to Use Progressive Taxes to Cover Social Security's Legacy 
        Costs

    As described in the previous section, one reason the Social 
Security program faces fiscal deficits is due to the estimated 
$13 trillion in intergenerational transfers,\51\ or ``legacy 
costs'', that arose from current generations of retirees 
providing for their parents' and grandparents' retirement 
income security during the early years of the program. Some 
have argued that revenue to pay for these costs should be 
raised in ways other than the Social Security payroll tax and 
have proposed dedicating revenue from the estate tax to the 
Social Security Trust Funds or levying a new legacy tax on 
earnings above the tax cap on high-income households.
---------------------------------------------------------------------------
    \51\Diamond, Peter A. and Peter R. Orszag, ``Saving Social 
Security: A Balanced Approach,'' Washington, DC: Brookings Institution 
Press, 2004.
---------------------------------------------------------------------------
     Dedicate Estate Tax Revenue at the 2009 Level to 
Social Security. Revenue from the estate tax could be used to 
cover part of Social Security's legacy cost. In 2009, the 
estate tax applied only to the value of an estate in excess of 
$3.5 million if it is not left to a surviving spouse, who can 
inherit all assets tax-free.\52\ Values above that level not 
inherited by a spouse are taxed at 45 percent, with 55 percent 
going to non-spouse heirs. The estate tax is slated to fall to 
zero in 2010, and then revert to the higher tax rates 
applicable in 2001 (a 55 percent tax on estates over $1 million 
for individuals and $2 million for couples). Preserving the 
estate tax into the future, and dedicating the revenue from the 
tax with the 2009 level of exclusion and tax to Social 
Security, would reduce the long-term deficit by 0.51 percent of 
payroll, thereby eliminating about one fourth of the 
deficit.\53\ This estimate assumes that the estate tax 
threshold for Social Security revenue will remain $3.5 million 
for all future years. If the amount of the estate tax exemption 
rose with the consumer price index, this option would reduce 
the 75-year deficit by 0.40 percent of payroll or about one-
fifth of the deficit.
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    \52\Each member of a couple can leave $3.5 million to non-spouse 
heirs without incurring any tax liability, thus shielding from taxation 
married couples' estates valued up to $7 million.
    \53\If Congress allowed the estate tax to return to its higher 2001 
level in 2011, then this option would use part of estate tax revenue to 
pay for Social Security and part would go to general revenues.
---------------------------------------------------------------------------
     Three percent Legacy Tax on Earnings Above the Tax 
Cap. A legacy tax on earnings above the taxable earnings cap 
could be raised as a way to ensure that very high earners 
contribute to financing Social Security's legacy cost in 
proportion to their full earnings. If a three percent legacy 
tax on earnings above the tax cap began in 2010 (1.5 percent 
for workers and employers each) and the higher earnings did not 
count toward benefits, the long-term deficit would be reduced 
by 0.57 percent of taxable payroll, or by just over one-fourth.
     Three percent Legacy Tax on Adjusted Gross Income 
(AGI) over $250,000 for Couples and $125,000 for Individuals. 
The legacy tax threshold could be raised to eliminate increases 
on the middle class. Dedicating to Social Security a three 
percent legacy tax on AGI over $250,000 for couples and 
$125,000 for individuals starting in 2010 is projected to 
reduce the 75-year deficit by 0.74 percent of taxable payroll, 
thereby reducing the deficit by just over one-third, assuming 
thresholds indexed by average wage growth.
     Five percent Legacy Tax on Adjusted Gross Income 
over $250,000 for Couples and $125,000 for Individuals. 
Dedicating to Social Security a five percent legacy tax on AGI 
over $250,000 for couples and $125,000 for individuals is 
projected to reduce the 75-year deficit by 1.23 percent of 
taxable payroll, thereby eliminating roughly three-fifths of 
the deficit.

         OPTIONS TO MAINTAIN RESERVES AND DIVERSIFY INVESTMENTS

    As part of a Social Security financing strategy, the 
federal government could increase and maintain large reserves 
so that the investment income would remain as a permanent 
source of support for Social Security. A portion of these 
Social Security funds could be invested in equities as is done 
by most other public and private pension plans. Several other 
government pension programs, such as those for employees of the 
Federal Reserve System, the Tennessee Valley Authority, and the 
Railroad Retirement Board, already make such direct investments 
in stocks, as does the Canadian social insurance system.
    Investing in equities would add risk to the investment 
portfolio and exposes the Trust Funds to increased liabilities 
in times of economic downturn. The impact on program solvency 
depends on the assumptions about the long term rates of return 
of equities relative to Treasury bonds. If they are equal, then 
diversifying investments will have no impact on solvency. The 
rate of return on equities has traditionally outpaced the 
return on bonds, however, some economists argue that the 
difference in the returns corresponds to the difference in risk 
between these assets. The following are proposed options for 
investing a portion of these funds in the equity markets, with 
projected impacts based on high, medium, and low rates of 
return.
     Gradually Invest 15 percent of Trust Fund Assets 
in Equities. The government could gradually invest Trust Fund 
assets in a broad index of equity market securities, such as 
the Wilshire 5000. If the Trust Funds' investments in equities 
increased by 1.5 percent a year for 10 years and equity 
investments were maintained at 15 percent thereafter, it would 
reduce the long-range deficit by about 14 percent, or 0.27 
percent of taxable payroll. These calculations assume that 
Trust Funds invested in equities earn a constant nominal 9.4 
percent return (or 6.4 percent real return over 2.8 percent 
inflation) this is 3.5 percentage points over the expected 
average yield on long-term Treasury bonds. If one assumes that 
the investment earns the same return as Treasury bonds (2.9 
percent real), there would be no impact on the 75-year deficit.
     Gradually Invest 40 percent of Trust Fund Assets 
in Equities. Alternatively, a larger portion of Trust Fund 
assets could be invested in equities. If 40 percent of the 
Trust Funds' assets were invested in equities, phased in over 
15 years (between 2010 and 2024), and invested in a broad index 
of equity markets which earned a 9.4 percent nominal return (or 
a real return of 6.4 percent on top of inflation), it would 
eliminate one third of the long-range deficit and reduce the 
long-term deficit by 0.67 percent of payroll. If, instead, the 
same investment policy ended up producing a smaller return of 
8.4 percent (or a real return of 5.4 percent on top of 
inflation), the policy could reduce the long-term deficit by 
0.48 percent of taxable payroll, thereby eliminating about one-
fourth of the long-term deficit. If one assumes that the 
investment earns the same return as Treasury bonds (2.9 percent 
real), there would be no impact on the 75-year deficit.

         OPTIONS TO REDUCE BENEFITS TO ADDRESS PROGRAM SOLVENCY

    Options that would lower future benefits to balance long-
term finances include those that would reduce the annual cost-
of-living adjustment (COLA), increase the age for receiving 
full retirement benefits, lengthen the average period used to 
calculate lifetime earnings, lower benefits for new 
beneficiaries, and lower the benefit payable to spouses of 
retired workers.

Options to Reduce the Cost-Of-Living Adjustment

    Under current law, Social Security benefits are 
automatically adjusted each year to keep up with the cost of 
living, as measured with the Consumer Price Index for Urban 
Wage Earners and Clerical Workers (CPI-W). Some proposals would 
lower Social Security benefit costs by changing the way in 
which Social Security benefits are adjusted to keep pace with 
inflation. Some proposals would pay less than the full COLA by 
adjusting benefits by the COLA minus one percent, or minus half 
of one percent. Another proposal would shift to a new index. 
Groups of beneficiaries with relatively long periods of 
eligibility for benefits, including older beneficiaries, women, 
survivors, disabled beneficiaries, and low-income 
beneficiaries, would face the most significant impacts on their 
benefits from COLA reductions. These categories of 
beneficiaries also have the highest rates of poverty and are 
the most reliant on income from Social Security.
     Reduce the COLA by one percent each year. If the 
annual COLA increase for Social Security beneficiaries were 
reduced by one percentage point, the long-term deficit would 
decline by 1.55 percent of taxable payroll, or about 78 
percent. If inflation were 2.8 percent per year (as assumed by 
the Trustees), the annual increase for beneficiaries would be 
1.8 percent per year. This change would impose the greatest 
burden on the oldest beneficiaries because the reductions 
accumulate over time. For example, a 92-year-old beneficiary 
would have the purchasing power of her or his benefits eroded 
by 25 percent if the cost of living went up by 2.8 percent 
every year, but he or she received only a 1.8 percent increase 
each year.
     Reduce the COLA by one-half percent each year. If 
policymakers reduce the COLA by half a percentage point, this 
could potentially reduce the long-range deficit by 0.81 percent 
of taxable payroll, thereby eliminating about 40 percent of the 
shortfall. In this scenario, a 92-year-old beneficiary would 
see the purchasing power of his or her benefits eroded by 14 
percent if inflation were 2.8 percent per year, but she or he 
received only a 2.3 percent annual increase.
     Adopt the ``Chained'' Consumer Price Index (CPI). 
Social Security benefits are now automatically adjusted by 
changes in the CPI-W, as measured by the Bureau of Labor 
Statistics (BLS). The BLS has developed a new ``chained'' CPI. 
It differs from the CPI-W in that it takes into account 
purchasing substitutions across broad categories of goods and 
services (such as spending less on food to pay for higher-
priced gasoline). Because the ``chained'' CPI is expected to 
increase about 0.3 percent slower each year than the CPI-W, 
this change would reduce the long-run deficit by 0.49 percent 
of taxable payroll, thereby shrinking the shortfall by nearly 
one-fourth. Proponents of this approach argue that the chained 
CPI is a more accurate and up-to-date measure of the cost of 
living. Opponents point out that while it may be more accurate 
for the general population, it may be less accurate for seniors 
who spend a larger share of their incomes on health care. To 
the extent that the chained CPI understates increases in the 
cost of living for beneficiaries and is lower than the CPI-W, 
the oldest beneficiaries could have significant reductions in 
their benefits, as would be the case with all COLA reductions.

Options to Raise the Age for Full Retirement Benefits

    The age at which retirees can collect full Social Security 
benefits is now 66 years for people born in 1944 (who reach 65 
in 2009). It is scheduled to rise to 67 for those born in 1960 
or later. Increasing the full benefit age would improve Social 
Security's long-range finances because such a change would 
further lower benefits for all future retirees. For example, 
when the full benefit age was 65, benefits starting at age 62 
were reduced by 20 percent; when the full benefit age reaches 
67, benefits starting at 62 will be reduced by 30 percent, 
while benefits taken at age 65 will be reduced by 13.3 percent.
    Proponents of increasing the full benefit age believe that 
retirement ages should rise as people are living longer and 
that a reduction in benefits would encourage individuals to 
work longer. Opponents point out that Social Security's full-
benefit age (67 in the near future) is already much older than 
eligibility ages in private or public pension plans, which 
remain 65 or earlier, and that working longer may not be an 
option for those in physically demanding jobs or for those who 
cannot find work. Moreover, the full-benefit age is older than 
the ages for penalty-free withdrawals from 401(k)s or IRAs 
(59\1/2\). As under current law, benefits for the disabled will 
be unaffected.
     Accelerate the Increase to 67; then Increase the 
Full-Benefit Age by One Month Every Two Years to Age 68. If 
policymakers speed up the increase in the full-benefit 
retirement age to reach 67 for those born in 1953 or later, and 
raise the age one month every two years until it reaches age 68 
for people born in 1977 and later, these changes are estimated 
to reduce the long run deficit by 0.46 percent of taxable 
payroll. This would eliminate just under one-fourth of the 
long-term deficit. Under this change, when the full benefit age 
is 68, benefits starting at age 65 would be reduced by 20 
percent and benefits starting at age 62 would be reduced by 
about a third.
     Accelerate the Increase to 67; Then Increase the 
Full-Benefit Age by One Month Every Two Years to Age 70. This 
option would continue to increase the full-benefit age to 70. 
If policymakers speed up the increase in the full-benefit 
retirement age to reach age 67 for those born in 1953, and then 
extend it one month every two years until it reaches age 70 for 
people born in 2025, these changes would reduce the long-term 
deficit by 0.62 percent of taxable payroll. This would 
eliminate just under one-third of the long-range shortfall. 
With this change, the benefit reduction for early retirement 
would be larger. When the full-benefit age reached 70, benefits 
starting at age 65 would be reduced by 30 percent and benefits 
starting at age 62 would be reduced by 45 percent.
     Gradually Index the Full-Benefit Age for Longevity 
Indefinitely. After the full-benefit age reaches 67 for those 
born in 1960, the full-benefit age would increase by one month 
every two years for those born after 1960. It would increase to 
age 68 for those born in 1984, to 69 for those born in 2008 and 
to about age 70 for individuals born in 2032. This schedule 
roughly matches assumptions about increasing life expectancy 
for people reaching age 65 in the future. This change would 
reduce the long-run deficit by 0.40 percent of taxable payroll, 
thereby eliminating about 18 percent of the long-term 
shortfall.

Options to Lengthen the Career-Earnings Averaging Period

    As described previously, Social Security benefits are based 
on a formula that uses a worker's highest 35 years of earnings. 
Increasing the number of work years for calculating average 
lifetime earnings will lower future benefits because the 
additional years of earnings included in a worker's average 
lifetime earnings will be lower than each of the 35 years now 
used. This reduction would have the greatest impact on 
individuals, especially those who are less educated, low-income 
workers and women, with gaps in their paid work or individuals 
who spent part of their working lives not covered by Social 
Security because the additional years included would likely be 
years with zero earnings. It would have a small impact on 
individuals who had steady and consistent covered work records 
of 38 or 40 or more years of work.
     Increase the Averaging Period from 35 to 38 Years. 
An increase in the number of years used to calculate average 
lifetime earnings for retirement and survivor benefits (but not 
for disabled workers) from 35 to 38, phased in from 2010 
through 2014, would reduce the long-term deficit by 0.29 
percent of taxable payroll, thereby shrinking the shortfall by 
about 14 percent.
     Increase the Averaging Period from 35 to 40 Years. 
Lengthening the averaging period to 40 years, phased in between 
2010 and 2018, for retirement and survivor benefits (but not 
for disabled workers) would reduce the long-term shortfall by 
0.46 percent of taxable payroll. It would shrink the shortfall 
by about one-fourth.

Options to Reduce Benefits for New Beneficiaries

    Two options below illustrate the impact of immediate 
across-the-board reductions in benefits for new beneficiaries, 
while a third option gradually phases in reductions that exempt 
those with very low lifetime earnings. A fourth option 
gradually scales back benefits for dependent spouses (but not 
widowed spouses) of retired workers.
     Reduce benefits by Three Percent for New 
Beneficiaries in 2010 and Later. If benefits were reduced by 
three percent for everyone newly eligible in 2010 or later, 
this change would reduce program costs by 0.36 percent of 
taxable payroll, thereby reducing the 75- year deficit by just 
under one-fifth. This change would lower benefits for all new 
recipients, including retirees and their dependents, widowed 
spouses, disabled workers and their families, and families with 
children whose working father or mother died.
     Reduce Benefits by Five Percent for New 
Beneficiaries in 2010 and Later. If benefits were reduced by 5 
percent for everyone newly eligible for benefits in 2010 or 
later, it is projected that it would reduce program costs by 
about 0.61 percent of taxable payroll, thereby lowering the 
long-range deficit by about three-tenths.
     Price Index Benefits for Successive Generations 
Beginning in 2013. Under current law, benefits for each 
successive age cohort (or generation) of new beneficiaries are 
indexed to keep pace with average-wage growth. The rationale 
for doing so is to provide stable replacement rates for future 
retirees across generations so that benefits for an average 
earner retiring at full-benefit age in any future year would 
replace the same portion of career earnings as for today's 
retirees. After entitlement, benefits are automatically 
adjusted to keep pace with price growth (inflation), with the 
aim of maintaining beneficiaries' purchasing power. A variety 
of options would gradually lower future benefit levels by 
indexing benefits for newly eligible retirees across 
generations by price growth instead of the higher average-wage 
growth. Many such plans would exempt the lowest earning 
retirees from the benefit reductions and are sometimes referred 
to as ``progressive price indexing''.\54\ These proposals would 
make the largest benefit cuts for those who earned more and 
paid higher contributions over their careers. After a period of 
time under progressive price indexing, the majority of 
beneficiaries would receive the same flat benefit with little 
relation to what contributions they had made. The Social 
Security Actuaries have estimated that one progressive price 
indexing proposal that exempted the bottom 30 percent of 
earners would be projected to reduce long-range costs by about 
1.31 percent of taxable payroll, or by just under two-thirds of 
the long-range deficit.
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    \54\Patrick Purcell, Neela K. Ranade, and Laura Haltzel, ``Indexing 
Social Security Benefits: The Effects of Price and Wage Indexes,'' 
Congressional Research Service, May 12, 2005 (RL32900), available at 
http://www.aging.senate.gov/crs/crs_social_security_policy.cfm.
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     Gradually Lower the Supplemental Spouse Benefit. 
Under current law, the spouse (age 62 or older) of a retired or 
disabled worker can receive a benefit of up to 50 percent of 
the primary worker's benefit, but only to the extent the 
benefit exceeds what the spouse is entitled to on the basis of 
her or his own work record. One such option would gradually 
lower the supplemental spouse benefit for persons newly 
eligible in 2010 and later. The reduction from 50 to 33 percent 
of the primary worker's benefit would phase in by one 
percentage point a year over 17 years--from 49 percent for the 
newly eligible in 2010, to 33 percent for the newly eligible in 
2026 and later. The change is estimated to lower the 75-year 
average costs by 0.12 percent of taxable payroll and reducing 
the long term deficit by about six percent. Reductions to the 
spousal benefits could also be combined with improving benefits 
for widowed spouses and/or for providing credit for caring for 
young children as part of the benefit that workers earn based 
on their own work records. However, depending on how the 
benefits are balanced, it could have a positive or negative 
effect on program solvency. Also, a reduction in supplemental 
spouse benefit applied to the benefits of divorced spouses 
could reduce benefits for a group already more likely to be 
poor.

           OPTIONS TO PROTECT BENEFITS FOR VULNERABLE GROUPS

    In order to modernize the Social Security, any proposal for 
reform must ensure benefits remain adequate for current and 
future vulnerable Americans who rely on Social Security the 
most. At the request of the Aging Committee, the Government 
Accountability Office (GAO) identified proposals for improving 
benefits for lifetime low earners, low-income women, and the 
oldest beneficiaries.\55\ In certain cases, an option targeting 
one group may also address concerns about other groups due to 
the overlap in certain demographic groups. In addition to 
examining an option's impact on improving benefit adequacy, GAO 
examined the implications on program solvency and 
administration. Therefore, GAO's assessment is categorized as 
follows:
---------------------------------------------------------------------------
    \55\GAO, Social Security: Options to Protect Benefits for 
Vulnerable Groups When Addressing Program Solvency, GAO-10-101R 
(Washington, D.C.: December 7, 2009), available at 
http://www.aging.senate.gov/letters/gaossreform.pdf.
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    Adequacy: Retirement security experts and agency 
officials\56\ had mixed views about the potential effectiveness 
of these options. While experts told GAO that several of these 
options could help address concerns about benefit adequacy, 
agency officials said they may not have the expected effects 
because of the complex rules governing Social Security 
benefits. An option's design will play an important role in 
determining its effectiveness.
---------------------------------------------------------------------------
    \56\See GAO, Social Security: Options to Protect Benefits for 
Vulnerable Groups When Addressing Program Solvency, GAO-10-101R 
(Washington, D.C.: December 7, 2009) for methodology, available at 
http://www.aging.senate.gov/letters/gaossreform.pdf.
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    Solvency: Because these options increase benefits, they 
have cost implications that affect the solvency of the Social 
Security system. The cost of a given option will depend on the 
number of people affected by it and the amount of the benefit 
increase. Additionally, cost will be affected by interactions 
with other elements of an overall Social Security modernization 
proposal. Key factors that influence cost are described for 
each of the options.
    Administration: Implications for program administration 
vary among the options. Retirement security experts and agency 
officials said that some options could be fairly easy to 
administer, while others could be very complex. Even the less 
complex options could create additional work for SSA, such as 
monitoring eligibility for additional benefits. Options that 
increase the number of people eligible for benefits could add 
to SSA's administrative workload.
    GAO identified and assessed the following modernization 
options:

                 OPTION: GUARANTEEING A MINIMUM BENEFIT

    Guaranteeing a minimum benefit by increasing Social 
Security retirement benefits for those who have worked in low-
wage jobs throughout their careers addresses concerns about 
benefit adequacy. A ``special minimum benefit'' provision 
intended to increase benefit adequacy for low-earning steady 
workers was enacted in 1972.\57\ However, because its 
eligibility threshold has not kept pace with wage growth, few 
people still qualify for the benefit. A number of proposals 
include a new minimum benefit option. The amount and structure 
of the benefit varies among proposals, but most minimum benefit 
options are designed to address benefit adequacy by providing a 
retirement benefit equal to some multiple of the federal 
poverty line, with the multiple based on years worked in 
covered employment. For example, one option would provide a 
minimum benefit equal to 120 percent of the poverty line for a 
minimum wage earner who had worked for 30 years. Another option 
would provide a minimum benefit equal to 100 percent of the 
poverty line for a 30-year worker and 111 percent of the 
poverty line for a 40-year worker.\58\
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    \57\The Social Security Amendments of 1972 added the ``special 
minimum benefit'' provision. (42 U.S.C. Sec. 415(a)(1)(c)(i)).
    \58\Other options would provide benefits ranging from 75 percent of 
the federal poverty line for those meeting the standard Social Security 
eligibility requirements (about 10 years of covered employment) up to 
125 percent of the poverty line for a 30-year worker.
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    Adequacy: The guaranteed minimum benefit option targets 
lifetime low earners, a vulnerable group that relies heavily on 
Social Security benefits for its retirement income. Retirement 
security experts said that this option targets a broader group 
of beneficiaries than proposals that focus on specific 
subgroups of low earners. SSA officials said that, depending on 
how this option is designed, it could work well, but it is 
difficult to target lifetime low earners effectively. For 
example, some officials and experts said that requiring a long 
work history is problematic because low earners often have 
recurring periods of unemployment and cannot satisfy such a 
requirement. Thus, the target population may not be reached if 
a lifetime of work is required to earn the benefit. However, 
other experts said that if a lifetime of work is not required, 
some people outside the target population would also benefit. 
For example, higher-wage workers who worked for a short period 
of time may also receive benefits.
    The impact of this policy would likely decline over time, 
as the federal poverty line tends to grow slower than wages. 
Therefore, tying the minimum benefit to the federal poverty 
line could cause these benefits to lose value over time 
relative to the growth in the standard of living, similar to 
the current special minimum benefit. Future generations would 
have to find new benchmarks to ensure a minimum benefit remains 
adequate.
    Solvency: Cost implications of this option depend on the 
number of work years required for eligibility, since that 
requirement will directly influence the number of people who 
would qualify for benefit increases. A shorter work requirement 
will result in more people being eligible, and thus costs will 
be higher. Additionally, most of the options reviewed set the 
benefit amount at some multiple of the poverty line.\59\ The 
multiple used can have a significant impact on cost. For 
example, a guaranteed minimum benefit equal to 75 percent of 
the 2009 federal poverty guidelines would be $677 per month, 
whereas a benefit equal to 125 percent of the guidelines would 
be $1,128 per month.\60\
---------------------------------------------------------------------------
    \59\How the initial benefit level increases for beneficiaries newly 
eligible in succeeding years would also influence costs. For example, 
over time, indexing the benefit to wages would be more costly than 
indexing to prices.
    \60\This is a GAO calculation based on the 2009 federal poverty 
guideline of $902.50 per month for a single-person home in all states, 
except Alaska and Hawaii, and the District of Columbia.
---------------------------------------------------------------------------
    Administration: For the most part, experts and SSA 
officials did not raise concerns about implementing and 
administering a minimum benefit option, although one expert 
said that policy makers would have to consider how to phase it 
into the Social Security system.

           OPTION: REDUCING WORK REQUIREMENTS FOR ELIGIBILITY

    Reducing the work requirements for Social Security 
retirement benefit eligibility enables people who have shorter 
earnings histories to receive benefits. While some people who 
do not have 40 credits are still eligible for benefits based on 
the earnings of an eligible spouse, others do not qualify for 
any benefits. For example, a small number of unmarried 
individuals fail to qualify for benefits due to short earnings 
records. A reduced work requirement would allow people with 
shorter earnings records, potentially as short as a single 
credit of covered employment depending on how it is designed, 
to receive benefits. Benefit amounts would be calculated under 
the existing formula, which uses the worker's average indexed 
monthly earnings during the 35 years in which he or she earned 
the most, even if there were no earnings from covered 
employment during some of those years. SSI benefits exist 
outside of OASDI benefits to help those with shorter earning 
histories.
    Adequacy: Reducing the Social Security work requirement is 
an option that targets workers with low lifetime earnings due 
to short work histories, as opposed to those with long 
histories of low earnings. SSA officials told GAO there are 
many people who fall just short of the 40 credits requirement 
because they have intermittent work histories. However, 
officials also said many of those people may already be 
eligible for spousal benefits, resulting in few people 
benefiting from this option. Other retirement security experts 
expressed similar opinions about the limited number of people 
who would be helped by reduced work requirements. In addition, 
agency officials and experts said benefits based on such short 
work histories are likely to be very low and questioned the 
effectiveness of this option in addressing benefit adequacy. A 
proposal that includes this option simulated its potential 
effect and found similar limitations.\61\ This option could 
also expand eligibility to those who receive benefits from a 
pension for work in non-covered employment for state and local 
governments, but an offset, such as the Windfall Elimination 
Provision\62\ with some modifications, could be applied to 
those benefits.\63\
---------------------------------------------------------------------------
    \61\Andrew G. Biggs, ``Enhancing Social Security benefits for low 
earners: Effects of reducing eligibility requirements for Social 
Security retirement benefits,'' National Academy of Social Insurance 
(Nov. 14, 2008), available at http://www.nasi.org/sites/default/files/
research/ Andrew_Biggs_January_2009_Rockefeller.pdf.
    \62\42 U.S.C. Sec. 415(a)(7).
    \63\The Windfall Elimination Provision is an existing Social 
Security provision that reduces Social Security benefits for those who 
also receive pensions from employment that is not covered by Social 
Security. Noncovered workers do not pay Social Security taxes on their 
noncovered earnings. This provision is intended to treat such 
beneficiaries in a manner that parallels treatment of beneficiaries who 
paid Social Security taxes on all of their lifetime earnings.
---------------------------------------------------------------------------
    Solvency: Because this option increases the number of 
people receiving benefits, it has cost implications for Social 
Security's solvency. The number of credits required will 
directly influence the number of people who would be newly 
eligible for benefits. A shorter work requirement will result 
in more people being eligible. However, because few people are 
actually expected to receive benefits under this option, and 
those who do are expected to receive modest benefits, the 
impact of a reduced work requirement on program solvency is 
unlikely to be very large.
    Administration: Because few people are expected to gain 
eligibility under this option, the impact on SSA's workload is 
likely to be small.

      OPTION: SUPPLEMENTING BENEFITS FOR LOW-INCOME SINGLE WORKERS

    Supplementing benefits for low-income single workers by 
adjusting the formula used to calculate Social Security 
retirement benefits addresses concerns about benefit adequacy 
for that group. In one proposal, the first threshold in the 
benefit formula would be adjusted or supplemented so that it 
increased by one-half, from $744 to $1,116 in 2009, for 
eligible beneficiaries. The benefit amount would be capped to 
prevent eligible workers from receiving higher benefits than 
those who just miss qualifying for the supplement.
    To be eligible for the supplement, a worker's AIME\64\ must 
be lower than a multiple of the existing formula's first 
threshold, such as 150 percent or 300 percent. For example, if 
the multiple were set at 300 percent, a worker whose AIME was 
less than $2,232 (3  $744) in 2009 would qualify. To 
receive the supplement, a worker must have at least 30 years of 
covered employment and the worker cannot be eligible for 
spousal benefits, nor can anyone else claim spousal benefits 
based on that worker's earnings record.
---------------------------------------------------------------------------
    \64\A worker's AIME is calculated based on a worker's highest 35 
years' earnings, after earnings have been indexed for wage growth over 
time.
---------------------------------------------------------------------------
    Adequacy: The benefit supplement option targets lifetime 
low earners, generally women, who never married or were not 
married long enough to qualify for spousal benefits. Low-income 
single and divorced women are expected to benefit most from 
this option. While some retirement experts are supportive of 
this option because it focused on the needs of low-income 
women, others questioned the rationale for basing eligibility 
on marital status and said either that eligibility for the 
supplement should be expanded to a broader group of 
beneficiaries or that the needs of low-income single women 
could be addressed through another option, such as a guaranteed 
minimum benefit.
    Solvency: Because a benefit supplement for low-income 
single workers increases benefits, it has cost implications for 
Social Security's solvency. The extent to which this option 
affects solvency will depend largely on the number of people 
who would be eligible for it. A key factor that directly 
influences the number of eligible beneficiaries is the multiple 
that would be applied to a worker's AIME, ranging from 150 
percent to 300 percent. Another factor that could influence 
cost is the way ``single'' is defined for purposes of 
determining eligibility.\65\
---------------------------------------------------------------------------
    \65\One proposal that includes this option defines marital status 
at the time when a person first applies for Social Security retirement 
benefits and includes a provision to address changes in status after 
that time. See Patricia E. Dilley, ``Restoring Old Age Income Security 
for Low Wage Single Workers,'' National Academy of Social Insurance 
(2009), available at http://www.nasi.org/sites/default/files/research/
Patricia_Dilley_January_2009_Rockefeller.pdf.
---------------------------------------------------------------------------
    Administration: Agency officials and retirement security 
experts told GAO that determining an individual's single status 
could be administratively complex because people's marital 
statuses change over time and could change after an initial 
determination is made, for example, from single to married.

                   OPTION: ADOPTING EARNINGS SHARING

    Earnings sharing combines married individuals' annual 
earnings and evenly divides them between the two spouses for 
each year of marriage when calculating individuals' Social 
Security retirement benefits. Each spouse accrues credits 
toward an individual benefit, even if only one of them worked. 
An earnings sharing approach is often proposed as an 
alternative to or an adjustment of existing spousal and 
survivor benefits. For example, under earnings sharing, 
divorced spouses whose marriages lasted less than 10 years 
would be entitled to the individual benefits accrued during the 
marriage. This option is also seen as a way to equalize 
benefits received by dual-earner married couples with those of 
single-earner couples. Currently, a single-earner couple 
receives higher total benefits than a dual-earner couple with 
the same total lifetime earnings. Under some earnings sharing, 
the total benefit amount a single-earner couple receives would 
be the same as the amount received by a dual-earner couple who 
makes the same total income, rather than 150 percent of the 
worker's benefit. Over the years, analysts have proposed an 
extremely wide range of earnings sharing proposals, which treat 
spouse and survivor benefits in markedly different ways (some 
eliminate these benefits altogether, others develop various 
survivor adjustments, others impose self-financing of survivor 
benefits, and others direct cost savings toward higher worker 
benefits). Such details make large differences in the 
proposals' costs and distributional effects.
    Adequacy: Earnings sharing targets divorced spouses, 
generally women, whose marriages were too short to qualify them 
for spouse or survivor benefits and whose incomes while married 
were lower than their spouses' incomes. Some retirement 
security experts and agency officials said earnings sharing 
could increase benefits for divorced women. Proponents of this 
option also focus on it as a means to improve equity between 
single earner and dual-earner married couples. However, other 
experts said this option would not do much to improve benefits 
for economically vulnerable beneficiaries, in part, because it 
is not well targeted. For example, SSA's simulations found that 
earnings sharing would decrease benefits for the majority of 
future retirees, although benefits for some would increase.\66\ 
Specifically, benefits would decrease for about 50 percent of 
divorced women and increase for about 40 percent of divorced 
women. Benefits would also increase for over one-third of 
married individuals, but decrease for the vast majority of 
widow(er)s.
---------------------------------------------------------------------------
    \66\Benefit reductions would be more widespread for married 
individuals in single-earner couples, and benefit increases would be 
more prevalent for those in dual-earner couples. See Iams, et al., 
``Earnings Sharing in Social Security: Projected Impacts of Alternative 
Proposals Using the Mint Model,'' Social Security Bulletin, vol. 69, 
no. 1 (2009), available at http://www.ssa.gov/policy/docs/ssb/v69n1/
v69n1p1.pdf.
---------------------------------------------------------------------------
    Solvency: Because earnings sharing would increase benefits 
for some but decrease them for others, its net impact on Social 
Security's solvency is unclear. Its cost would depend on the 
relative numbers of people whose benefits increase or decrease 
and the amounts of those changes. In addition, cost will be 
affected by future demographic trends regarding marriage, 
workforce participation, and related variables.
    Administration: The extent to which this option increases 
SSA's workload depends on the number of newly eligible people 
who would receive benefits, which will be influenced by future 
trends in marriage and workforce participation. Some additional 
administrative effort and cost would also be required to 
transition from the current system's spousal benefit to an 
earnings sharing approach, in part because of the need to 
verify marriage and divorce data.

          OPTION: REDUCING THE MARRIAGE DURATION REQUIRED FOR
                            SPOUSAL BENEFITS

    Reducing the number of years a marriage must have lasted 
for a divorced person to receive spousal benefits addresses 
benefit adequacy by increasing the number of people who are 
eligible to receive Social Security spousal benefits. 
Proponents of this option note that reducing the marriage 
requirement from ten to seven years would reflect current 
trends for shorter marriages.\67\ One Social Security proposal 
suggests that reducing the required marriage duration could be 
combined with a minimum work requirement for the divorced 
spouse. Combining at least seven years of marriage with a 
minimum of three years of work would mimic the standard 10-year 
work requirement for Social Security retirement benefits.
---------------------------------------------------------------------------
    \67\According to the Census Bureau, the median duration of first 
marriages that ended in divorce was eight years in 2001.
---------------------------------------------------------------------------
    Adequacy: Reducing the marriage duration required for 
spousal benefits is an option that targets divorced spouses, 
generally women, whose marriages were too short to qualify them 
for benefits. One retirement security expert said that this 
option would be an improvement over the current 10-year 
requirement and other experts and agency officials said it 
would help address benefit adequacy for women. However, experts 
also said they do not expect this option to effectively target 
economically vulnerable groups. This option would not benefit 
women who were never married but could benefit higher-income 
women who are not economically vulnerable.
    Solvency: The extent to which this option affects solvency 
depends on how many people would become eligible with a shorter 
marriage requirement.\68\ Increased eligibility will depend on 
the way the option is designed. For example, not including a 
corresponding work requirement would increase costs more 
because people who have no work history would also be eligible. 
In addition, cost will be affected by future demographic trends 
regarding marriage.
---------------------------------------------------------------------------
    \68\In prior work, GAO found that very few people would be newly 
eligible for benefits if the marriage duration were reduced to 7 years. 
See GAO, Retirement Security: Women Face Challenges in Ensuring 
Financial Security in Retirement, GAO-08-105 (Washington, D.C.: Oct. 
11, 2007), available at http://www.gao.gov/new.items/d08105.pdf.
---------------------------------------------------------------------------
    Administration: The extent to which this option increases 
SSA's workload depends on the number of newly eligible people 
who would receive spousal benefits, which will be influenced by 
future trends in marriage and workforce participation.

                  OPTION: PROVIDING CAREGIVER CREDITS

    Providing caregiver credits increases benefits for those 
who spend time out of the workforce to care for dependent 
children or elderly relatives. Time spent out of covered 
employment as a caregiver may reduce benefits for workers, and 
others may not work enough to earn the required 40 credits to 
be eligible for benefits.
    A caregiver credit option can be designed in different 
ways. One design allows a specified amount of caregiving time, 
such as three or four years, to count as covered employment, 
and assigns a wage to that time. For example, an average wage 
for all workers could be assigned or a wage linked to an 
individual beneficiary's prior earnings could be used. Another 
design excludes a limited number of caregiving years from the 
benefit calculation so that instead of averaging earnings over 
35 years, earnings are averaged over fewer years. A final 
design supplements caregivers' retired worker benefits 
directly, regardless of whether they took time out of the 
workforce for caregiving. For example, an income-tested 
supplement could be given to increase retired worker benefits 
by 75 percent for those who have one child and 80 percent for 
those with two or more children. Both parents of a child would 
be eligible for this supplement, as long as the total household 
income did not exceed 125 percent of the federal poverty 
line.\69\
---------------------------------------------------------------------------
    \69\The credit would remain income tested if the parents are living 
apart.
---------------------------------------------------------------------------
    Adequacy: Caregiver credits seek to improve benefit 
adequacy for workers, primarily women, who have shorter 
earnings records because they spent time providing care for 
children or elderly relatives and do not qualify for spousal 
benefits because they never married or were not married long 
enough to qualify for them. Retirement security experts said 
this option recognizes the societal value of caregiving, but 
experts also said that, for various reasons, it may not reach 
its target population. For example, some low-income people are 
unable to take time off from work. Therefore, people who have 
relatively higher incomes may benefit more from the creation of 
caregiver credits. Effects would vary greatly based on the 
credits' design. For example, capping the credit at half the 
average wage for caregiving years would provide more benefits 
for high income families.
    Solvency: Because caregiver credits increase benefits they 
have cost implications for Social Security's solvency. The 
extent to which this option affects solvency depends largely on 
who would be eligible to receive the credit: one or both 
parents, all caregivers, or just those who have low incomes. 
Extending eligibility to a greater number of people will 
increase costs. In addition, the number of years that credits 
may be received and the wage assigned to those years will 
impact costs.
    Administration: Retirement security experts and SSA 
officials told GAO that caregiver credits would be complex to 
administer. A key issue is how to verify that care was provided 
to a qualifying person. Experts said a birth certificate could 
be used to document child care, but elder care would be more 
burdensome to document. Measuring time off and verifying that 
caregiving actually occurred would also be difficult.

                  OPTION: INCREASING SURVIVOR BENEFITS

    Increasing benefits for surviving spouses, often widowed 
women, by providing a Social Security retirement benefit equal 
to 75 percent of the combined amount the couple received 
addresses concerns about benefit adequacy. The current benefit 
structure decreases household income upon widowhood by one-
third if the couple's benefits had been based on one spouse's 
work history and up to 50 percent if both spouses had been 
receiving retired worker benefits. Increasing survivor benefits 
would lessen the magnitude of this change.
    Adequacy: Increasing survivor benefits is an option that 
targets widowed women, although widowed men could also benefit. 
Retirement security experts and agency officials said this 
option could address benefit adequacy for a vulnerable group 
and would be an improvement over the current system. They also 
said that this option can be targeted specifically toward low-
income survivors, for example, by including a cap. Experts and 
agency officials also said this option addresses equity 
concerns by increasing benefits for dual-earner couples. Under 
the current system, dual-earner couples experience a 
proportionally greater decrease in benefits upon the death of a 
spouse than single-earner couples experience. However, as some 
experts noted, this option could increase the disparity between 
benefits for women who do not qualify for spousal or survivor 
benefits relative to those that do qualify.
    Solvency: Increasing survivor benefits will have 
implications for Social Security's solvency. The extent to 
which this option increases costs depends on how much greater 
the benefit amount is across all eligible survivors. Capping 
the amount of the increase based on income could help moderate 
costs. Some proposals also combine this option with a reduction 
in spousal benefits to help finance the increase in survivor 
benefits so it is cost neutral or has a very small affect on 
solvency.
    Administration: Agency officials told GAO that this option 
could be complex to administer, in part because it uses a 
``couple's benefit'' as a baseline for calculating survivor 
benefits. Since such a benefit does not currently exist in the 
Social Security system this could be problematic, for example, 
in cases where one of the spouses dies before retiring. In 
addition, officials said there are many complicated rules for 
survivors because of an existing provision, called the 
widow(er)'s limit, that caps benefit amounts for some 
survivors.\70\ Benefit increases expected under this option 
could be negated by this provision. To avoid this result, one 
proposal\71\ would use the deceased spouse's full PIA in the 
calculation of the couple's benefit, without any reduction 
because the deceased spouse claimed benefits before the FRA, 
and would increase disparities.
---------------------------------------------------------------------------
    \70\42 U.S.C. 402(f)(2); (f)(3) and (q).
    \71\Joan Entmacher, ``Strengthening Social Security Benefits for 
Widow(er)s: The 75 Percent Combined Worker Benefit Alternative,'' 
January 2009, available at http://www.nasi.org/ research/2009/
strengthening-social-security-benefits-widowers-75-percent.
---------------------------------------------------------------------------

                 OPTION: PROVIDING LONGEVITY INSURANCE

    Providing longevity insurance addresses concerns about 
benefit adequacy by increasing Social Security retirement 
benefits for beneficiaries who reach an advanced age, such as 
80 or 85. As people grow older, they risk outliving their other 
resources, become less able to work, and become more dependent 
on Social Security benefits for their income. Longevity 
insurance seeks to reduce the risk that they fall into poverty 
at older ages by increasing their Social Security benefits.
    This option could be targeted specifically toward low-
income beneficiaries, or provided to all those who reach an 
advanced age. Work history could be an additional condition for 
eligibility. For example, one longevity insurance proposal 
increases benefits for people who have low benefits at age 82 
and have at least 20 years of covered employment. It would 
provide a minimum benefit equal to 70 percent of the federal 
poverty line for a 20-year worker and increases the benefit for 
each additional year of work. Another proposal increases 
benefits by 10 percent at age 85 for 30-year workers whose 
benefits are lower than 75 percent of the average benefit all 
workers receive.\72\
---------------------------------------------------------------------------
    \72\This proposal presents different options for implementing the 
increase, for example, adding the supplement to the cost-of-living 
adjustment each year.
---------------------------------------------------------------------------
    Adequacy: Providing longevity insurance targets the oldest 
Social Security beneficiaries. Retirement security experts 
believe this could be an effective option for addressing 
concerns about benefit adequacy for the very old, especially 
the oldest widows, because women generally live longer than 
men. However, some experts also said that unless this option is 
specifically targeted toward low-income beneficiaries, most of 
the benefits would accrue to higher-income people because they 
tend to live longer. In addition, agency officials said this 
option could create disincentives to save for retirement or 
incentives to spend down resources before beneficiaries become 
old enough to qualify for the longevity increase. By doing so, 
those whose assets would be too high to satisfy the means test 
could become eligible for the increase.
    Solvency: Providing longevity insurance would increase 
Social Security program costs. Key factors that influence costs 
include the age at which the benefit increases, the amount of 
the increase, and whether all beneficiaries or only low-income 
ones are eligible to receive the benefit. Providing the benefit 
at an earlier age, for example, at 80 instead of 85, would 
increase costs, as would providing it to all 80-year-olds 
instead of only those who are low income. Unless the proposal 
adjusts to increases in life expectancy, costs would increase 
in the future. A proposal that increased benefits by one 
percent for each year a beneficiary lived beyond their average 
life expectancy, so that beneficiaries who lived 10 years 
longer than life expectancy would have a 10 percent higher 
benefit, would cost 0.08 percent of taxable payroll.
    Administration: This option would not increase the number 
of beneficiaries SSA serves and could use existing information 
to determine eligibility, and retirement security experts and 
agency officials said that this option would be easy to 
administer. However, one expert said adding measures to improve 
targeting would increase administrative complexity.

  BENEFIT ADEQUACY OPTIONS COULD REDUCE OTHER BENEFITS FOR VULNERABLE 
     GROUPS, BUT APPROACHES TO MITIGATE THESE EFFECTS ARE AVAILABLE

    Many Social Security retirement beneficiaries receive 
benefits from other federal programs. Nine percent of Social 
Security beneficiaries age 65 or older, or more than 2.7 
million people, also receive Supplemental Security Income 
(SSI), Medicaid, or Supplemental Nutrition Assistance Program 
(SNAP) benefits.\73\ Increasing Social Security benefits to 
address concerns about adequacy for vulnerable groups of 
beneficiaries could result in a decline in benefits from these 
other programs. In fact, some beneficiaries could lose 
eligibility for benefits from the other programs altogether. On 
the other hand, some beneficiaries may not be affected because 
their incomes, even with increased Social Security benefits, 
would stay within the other programs' eligibility limits.
---------------------------------------------------------------------------
    \73\For purposes of this analysis, GAO specifically examined Social 
Security beneficiaries who receive retirement, spousal, or survivor 
benefits.
---------------------------------------------------------------------------

                      SUPPLEMENTAL SECURITY INCOME

    An increase in Social Security retirement benefits could 
cause some SSI recipients to receive lower SSI benefits, 
although the total amount from both sources could remain 
constant or even increase. Some recipients would lose SSI 
eligibility altogether if their income, including their 
enhanced Social Security benefits, exceeded the SSI income 
eligibility standards. Every additional dollar of Social 
Security benefits, beyond the first $20,\74\ results in a 
dollar-for-dollar reduction in SSI benefits. This trade-off 
results in no net loss of benefits from these two sources. 
However, there could be a loss of SSI eligibility if the Social 
Security benefit increase causes earned and unearned income, 
after disregards, to exceed the maximum allowable SSI benefit, 
or $674 per month in 2010.\75\ Assuming no other sources of 
income, an SSI recipient who currently receives $693 per month 
from Social Security alone or both programs combined retains 
SSI eligibility, but an SSI recipient whose Social Security 
benefit exceeds $693 per month loses SSI eligibility (see Table 
12).
---------------------------------------------------------------------------
    \74\The $20 amount is a general SSI income exclusion that was set 
in the original law, and has not been updated.
    \75\For couples receiving SSI, the maximum allowable payment in 
2010 is $1,011. Some states offer supplements to the federal SSI 
payment, which allow those with incomes above federal limits to qualify 
for SSI.

   TABLE 12: EXAMPLE OF HOW SSI ELIGIBILITY RELATES TO AN INDIVIDUAL'S
                                 INCOME
------------------------------------------------------------------------------------------------------------------------------------------------
Social Security Benefits.........       $620         $693         $694
Less income disregard............        -20          -20          -20
Total countable income for SSI...        600          673          674
SSI eligible?....................        Yes          Yes           No
SSI benefits.....................         74            1            0
    Total income.................        694          694         694
------------------------------------------------------------------------
Source: GAO analysis of SSI eligibility requirements.

    Losing SSI eligibility also closes one pathway to Medicaid 
eligibility for some individuals, although individuals may be 
able to keep their Medicaid coverage under other rules. Many 
experts said losing Medicaid eligibility is more detrimental to 
beneficiaries than losing SSI eligibility. Some beneficiaries 
would be harmed rather than helped because the loss of Medicaid 
coverage and the subsequent increase in out-of-pocket health 
care costs could significantly outweigh the Social Security 
benefit increase. Similarly, losing SSI eligibility also 
eliminates a pathway to SNAP eligibility for some households, 
but these households may still qualify for SNAP benefits based 
on net income.
    There are also reasons why some beneficiaries may prefer 
Social Security benefits to SSI benefits. Several retirement 
security experts said there may be a stigma associated with SSI 
that deters people from participating because it is viewed as 
welfare, while Social Security is tied to income earned through 
work. In addition, Social Security benefits do not require the 
income and asset testing that SSI benefits do, reducing the 
application burden for beneficiaries. SSA officials said 
applicants may consider that burden a deterrent to applying, 
especially if their potential SSI benefit is small. Because 
people may choose not to apply for SSI, some experts suggest 
that Social Security may more effectively target vulnerable 
populations.

                                MEDICAID

    For some beneficiaries, Medicaid coverage is linked to 
their receipt of SSI, which puts them at risk of losing 
Medicaid if they lose SSI because their Social Security 
benefits increase.\76\
---------------------------------------------------------------------------
    \76\Medicaid is a joint state and local means tested program that 
finances health care coverage for certain categories of low-income 
individuals, including those age 65 and older.
---------------------------------------------------------------------------
However, those who lose their SSI benefits may be able to 
retain their Medicaid coverage under alternative state 
eligibility criteria.\77\ For example, they may still be 
eligible to retain Medicaid coverage if their income is low 
enough or if they qualify under state rules as ``medically 
needy.'' In 2007, about one-fifth of the more than 2 million 
Social Security beneficiaries who received Medicaid also 
received SSI benefits, and the other four-fifths were eligible 
for Medicaid under other criteria (see figure 9).
---------------------------------------------------------------------------
    \77\Because eligibility standards for Medicaid can vary by state, 
an individual's option for coverage may be affected by where he or she 
lives. 


    Medicaid beneficiaries whose income increases to the level 
where they are no longer eligible for all Medicaid benefits may 
still qualify for assistance with Medicare premiums, cost-
sharing, or both. However, under these circumstances, certain 
benefits that may be covered by Medicaid, such as dental, 
vision and long-term care services, would no longer be 
covered.\78\ The amount of assistance with Medicaid premiums 
and cost-sharing for which beneficiaries may qualify is based 
on several factors, including income levels and states' 
policies. For example, states are required to provide 
assistance for Medicare premiums and cost-sharing to 
beneficiaries with incomes at or below 100 percent of the 
federal poverty line.\79\ For individuals with higher incomes, 
states may vary in the amount of premium and cost sharing 
assistance they provide.
---------------------------------------------------------------------------
    \78\Medicare does not provide coverage for these services.
    \79\Beneficiaries must also have resources that are at or below an 
established level to qualify for this assistance.
---------------------------------------------------------------------------
    In general, because Medicaid eligibility requires 
beneficiaries to meet some sort of income test, an increase in 
Social Security benefits could cause those near these income 
limits to lose their Medicaid benefits entirely. The amount of 
the increase that would result in a loss of Medicaid may vary 
among states, because they have discretion to set income limits 
above federal mandatory minimums and other eligibility 
criteria.
    While Social Security beneficiaries who lose Medicaid would 
still have Medicare coverage, some beneficiaries could still 
incur significant out-of-pocket health care expenses.\80\ 
Researchers have found that individuals who qualify for both 
Medicare and Medicaid tend to have very low incomes and 
experience serious and costly health conditions, such as heart 
disease.
---------------------------------------------------------------------------
    \80\In 2007, all Social Security beneficiaries age 65 and older 
received Medicare benefits.
---------------------------------------------------------------------------

               SUPPLEMENTAL NUTRITION ASSISTANCE PROGRAM

    An increase in Social Security benefits could cause a loss 
of Supplemental Nutrition Assistance Program (SNAP) eligibility 
for some beneficiaries.\81\ In all states except California, 
households in which all members receive SSI qualify for SNAP 
without meeting an income test.\82\ If SSI eligibility is lost, 
beneficiaries may still qualify under SNAP's income eligibility 
rules. In 2007, about 81 percent of Social Security 
beneficiaries who received SNAP benefits qualified for them 
under the program's rules, rather than through SSI, as 
illustrated in Figure 10.
---------------------------------------------------------------------------
    \81\Supplemental Nutrition Assistance Program, formerly known as 
the Food Stamp Program, is a means-tested food assistance program 
designed to help low-income households with food purchases.
    \82\California converted SNAP benefits to cash included in state 
supplementary payments. 


    SNAP's eligibility rules are based on income limits that 
are generally higher than those of SSI, and SNAP limits vary by 
household size, as shown in Table 13.\83\ Households with an 
elderly person must meet net income limits but not gross income 
limits to qualify for SNAP. Under current rules, an elderly 
individual living alone whose net monthly income exceeds $903 
would not be eligible for SNAP benefits.\84\ Therefore, if an 
elderly individual whose net monthly income is close to the 
income limit receives a large enough increase in Social 
Security benefits he or she may no longer meet the income test 
for SNAP and lose all SNAP benefits. For example, if Social 
Security benefits are increased by $104 for an individual 
currently receiving $800, total income would increase to $904, 
and they would lose SNAP eligibility.
---------------------------------------------------------------------------
    \83\Households where all members receive Temporary Assistance for 
Needy Families, or in some places, general assistance (benefits for 
low-income individuals who are not eligible for federal assistance) do 
not need to meet separate income limits to qualify for SNAP.
    \84\Net income limits are higher in Alaska and Hawaii. In 
determining net income, households in all states are allowed to make 
certain deductions.

                                   TABLE 13: FISCAL YEAR 2010 SNAP INCOME LIMITS FOR HOUSEHOLDS WITH AN ELDERLY MEMBER
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                            Additional
                        Size of household                           One      Two     Three     Four     Five     Six     Seven    Eight       members
--------------------------------------------------------------------------------------------------------------------------------------------------------
Net monthly income..............................................     $903   $1,215   $1,526   $1,838   $2,150   $2,461   $2,773   $3,085     +$312 each
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: U.S. Department of Agriculture, Food and Nutrition Service.
Note: Households with an elderly person must meet net income limits, whereas other households must meet net and gross income limits. Income limits are
  higher in Alaska and Hawaii.

    Although an increase in Social Security benefits could 
prompt a reduction in SNAP benefits, the total benefits 
received would increase. SNAP benefits are reduced by 30 cents 
for every additional dollar of Social Security, unless the 
increase becomes large enough to raise total income above the 
SNAP eligibility limit. For example, an individual whose net 
monthly income is $500 could currently qualify for $50 in SNAP 
benefits (see Table 14). If the individual's monthly Social 
Security income increased by $100, raising net monthly income 
to $600, SNAP benefits would decline to $20 per month. However, 
total monthly income would increase by $70, from $550 to $620 
per month.

  TABLE 14: EXAMPLE OF HOW SNAP ELIGIBILITY RELATES TO AN INDIVIDUAL'S
                                 INCOME
------------------------------------------------------------------------------------------------------------------------------------------------
Monthly net income............................       $500         $600
(A) Maximum monthly SNAP allotment............        200          200
(B) Net monthly income multiplied by 30               150          180
 percent......................................
SNAP benefits (A-B)...........................         50           20
    Total Income..............................       $550        $620
------------------------------------------------------------------------
Source: GAO analysis of SNAP eligibility requirements.

    As with SSI, beneficiaries may prefer to receive benefits 
through Social Security instead of SNAP. Several retirement 
security experts said there may be a stigma associated with 
SNAP because it is viewed as a welfare program, while Social 
Security is tied to income earned through work, though stigma 
may be mitigated when SNAP benefits are provided via debit 
card. Additionally, unlike Social Security, SNAP benefits are 
subject to income and asset tests, which can create a burden 
for applicants and deter participation. Finally, beneficiaries 
may prefer the flexibility of Social Security, a cash benefit, 
to SNAP benefits, which are provided as grocery credits and 
restricted to food purchases.

     STEPS COULD BE TAKEN TO MITIGATE POTENTIAL BENEFIT REDUCTIONS

    Retirement security experts suggested several ways to 
mitigate the potential loss of benefits from other programs as 
a result of an increase in Social Security benefits for 
vulnerable groups. Each of these approaches would entail trade-
offs, including additional costs and administrative effort for 
the affected programs. Depending on the scope and provisions of 
each option when implemented, these approaches could also 
increase states' Medicaid caseloads and have a significant 
effect on their budgets.
     Increasing the SSI general income disregard of $20 
would let SSI recipients receive more Social Security before 
losing SSI eligibility.
     Increasing the maximum allowable SSI benefit would 
also enable SSI recipients to receive more Social Security 
before losing SSI eligibility.
     Creating a Social Security exclusion in SSI would 
allow income from Social Security to be disregarded when 
calculating SSI benefits.
     Deeming those who qualify for SSI under current 
rules to be eligible for Medicaid would also allow those who 
would otherwise lose SSI eligibility to retain Medicaid 
coverage. The so-called ``Pickle Amendment'' allows those 
formerly eligible for SSI to maintain SSI eligibility, at a 
benefit level of zero dollars, for the purpose of receiving 
Medicaid if they become ineligible as a result of Social 
Security cost-of-living adjustments.\85\ A similar approach 
could be used if beneficiaries become ineligible for Medicaid 
as a result of an increase to Social Security benefits for 
vulnerable groups.
---------------------------------------------------------------------------
    \85\Pub. L. No. 94-566, Sec. 503 codified at 42 U.S.C. Sec. 1396a.
---------------------------------------------------------------------------
     Disregarding increased Social Security benefits in 
determining Medicaid eligibility would allow those who would 
otherwise lose Medicaid to retain their coverage. There is some 
precedent for this approach: individuals who meet certain 
criteria currently can continue to receive Medicaid even if 
their earned income becomes too high to qualify for SSI 
benefits. However, this existing provision applies only to 
those who need Medicaid to work.\86\
---------------------------------------------------------------------------
    \86\42 U.S.C. Sec. 1382h(b). To qualify, a person must have been 
eligible for SSI for at least 1 month, still meet the disability and 
nondisability requirements, need Medicaid in order to work, and have 
gross earned income that is either below a predetermined state 
threshold or below an individualized threshold.
---------------------------------------------------------------------------
     Although Medicaid already has other eligibility 
pathways that are income-based and not linked to SSI, breaking 
the direct link between SSI and Medicaid eligibility would 
prevent a loss of SSI from affecting Medicaid benefits. One 
expert suggested using a program with a higher income limit 
than SSI, such as SNAP, to test income eligibility for 
Medicaid. Other experts said that if the income limit for 
Medicaid were tied to some multiple of the federal poverty 
line, such as 100 percent or 133 percent, more Medicaid 
beneficiaries would retain coverage, despite increases in 
Social Security benefits.

                               CONCLUSION

    For nearly 75 years, the Social Security program has served 
as the foundation of retirement income for American workers and 
their families. Yet Social Security is much more than just a 
retirement program; it provides benefits to survivors and other 
dependents as well as to disabled workers. Even though the 
program currently boasts large Trust Funds, an aging American 
population, a decline in the birthrate, and an increase in life 
expectancy will soon place a financial strain on Social 
Security. Congress should tackle this issue soon, while only 
minor changes to the system are needed.
    This report presents several options for increasing the 
long term solvency of Social Security, and provides estimates 
of the impacts of these efforts on the Social Security Trust 
Funds. However, these estimates have several limitations that 
deserve careful consideration. First, these estimates are 
provided with the assumption that all other elements of Social 
Security remain the same. Because many of the reforms would 
interact with each other, the estimated impacts on solvency of 
two or more options cannot simply be summed to estimate their 
impact if they were to be implemented simultaneously, and need 
to be recalculated. Similarly, these estimates are based on a 
particular timing of their implementation. Combining options or 
changing the timing would require new estimates to predict 
their effects on solvency. Further, options to increase 
solvency may not impact everyone in the same way--some 
recipients may see their Social Security taxes and benefits 
change, while others may not. The impacts of proposals should 
be examined for both current beneficiaries and future 
generations of retirees, as many options phase in over time.
    Social Security solvency and effectiveness are separate 
factors, but should be analyzed together. Efforts to improve 
solvency may enhance, weaken, or have no impact on Social 
Security's current level of effectiveness in providing 
retirement security for all Americans. Improving the adequacy 
of benefits for vulnerable populations may also have a cost to 
implement. In short, a full consideration of any group of 
options requires a thorough analysis to predict their effects 
on solvency and adequacy.
    Modernizing Social Security means ensuring that the program 
is both solvent and effective, for all Americans, now and in 
the future. This is a complex task that will become 
increasingly difficult as the Social Security Trust Funds 
diminish. Congress will have to address the twin challenges of 
solvency and effectiveness simultaneously, and because the 
program is critical to every American family, it should be done 
in a bipartisan and transparent way.

                                APPENDIX

 House and Senate Budget Procedures to Protect Social Security Balances

    The rules to ensure that legislation considered by Congress 
does not negatively affect the Social Security Trust Funds 
balances differ between the House and the Senate.
    In the House, a point of order (i.e., a floor objection) 
may be raised against a bill that proposes more than $250 
million in Social Security spending increases or tax cuts over 
five years (counting the fiscal year it becomes effective and 
the following four years) unless the bill also contains 
offsetting changes to bring the net impact within the $250 
million limit. Costs of prior legislation that fall within the 
five-year period must be counted. A point of order also may be 
raised against a measure that would increase long-range (75-
year) average costs or reduce long-range revenues by at least 
0.02 percent of taxable payroll.
    In the Senate, the annual congressional budget resolution 
must include separate amounts for Social Security Trust Fund 
revenues and outlays for each year covered by the resolution 
(i.e., separate from the budget totals). These amounts must 
reflect surpluses of the Social Security Trust Funds that are 
not less than those projected under current law. Once the 
resolution is adopted by Congress, subsequent measures that 
would be projected to cause Social Security Trust Funds' 
surpluses to be lower (or deficits to be higher) than those 
reflected in the amounts in the budget resolution are subject 
to a point of order. A motion to waive the point of order 
requires an affirmative vote of three-fifths of Senators (i.e., 
60 Senators if there are no vacancies).
    These rules do not prevent Congress from considering 
legislation that is projected to increase or reduce the 
receipts and disbursement levels of the Social Security Trust 
Fund. Instead, the rules require that the net effect of such 
changes do not negatively affect the balances of the Social 
Security Trust Funds. Congress, however, is prohibited from 
including any changes to the Social Security program in 
reconciliation legislation, which is considered under expedited 
procedures. As a result, Congress must consider changes to the 
Social Security program separate from other budgetary 
legislation.
    In addition, both the House and Senate have ``pay-as-you-
go'' (PAYGO) requirements for revenue and mandatory spending 
legislation (Social Security disbursements are a form of 
mandatory spending). The House and Senate PAYGO rules prohibit 
the consideration of revenue and direct spending legislation 
that would have the net effect of increasing the deficit over 
either a six-year period or an 11-year period, respectively. 
The House PAYGO rule applies to legislation affecting the 
unified budget deficit, which includes the receipts and 
disbursements of the Social Security Trust Funds. The Senate 
PAYGO rule, however, applies to legislation affecting the on-
budget deficit, which excludes the Social Security Trust Funds.

                         GLOSSARY OF KEY TERMS

    Annuity--an insurance product that provides a stream of 
payments for a pre-established amount of time in return for a 
premium payment. For example, a life annuity provides payments 
for as long as the annuitant lives. Only insurance companies 
can underwrite annuities in the United States. Other financial 
intermediaries, such as banks and stock brokerage firms, may 
sell annuities issued by insurance companies.
    Average Indexed Monthly Earnings--the average monthly 
earnings received over a worker's career, adjusted yearly by 
the change in national average earnings. It is the dollar 
amount used to calculate Social Security benefits for 
individuals who attain age 62 or become disabled (or die) after 
1978. To arrive at the AIME, SSA adjusts a person's actual past 
earnings using an ``average wage index,'' so he or she does not 
lose the value of past earnings in relation to more recent 
earnings. For people who attained age 62 or became disabled (or 
died) before 1978, SSA uses Average Monthly Earnings (AME).
    Baseline--a measurement that serves as a basis against 
which all following measurements are compared.
    Consumer Price Index (CPI)--a measure of the change over 
time in the prices, inclusive of sales and excise taxes, paid 
by urban households for a representative market basket of 
consumer goods and services. The CPI is prepared by the U.S. 
Department of Labor and used to compute COLA increases.
    Contribution and Benefit Base--the cap on taxable earnings 
used to fund Social Security. The cap, also called the taxable 
maximum wage or taxable wage base, limits the earnings that can 
be used in the benefit formula and, therefore, limits the size 
of benefits. The cap limits the program's costs and the payroll 
taxes that pay for them. Limiting the size of benefits reflects 
the program's role of only providing for a floor of protection.
    Cost-of-Living Adjustment (COLA)--an increase or decrease 
in wages or benefits according to the change in the cost-of-
living as measured by some statistical measure, often the 
Consumer Price Index (CPI). Social Security benefits and 
Supplemental Security Income payments are increased each year 
to keep pace with increases in the cost-of-living (inflation), 
as measured by the CPI.
    Covered Earnings--earnings from a job which requires 
contributions to the Social Security program. (See covered 
worker for more information.) All covered earnings below the 
taxable wage base--that is, taxable earnings--are subject to 
Social Security payroll taxes. Covered earnings above the 
taxable wage base are exempt from the Social Security payroll 
tax.
    Covered Worker--workers in covered employment, that is, 
jobs through which the workers have made contributions to 
Social Security.
    Credits--to be insured for retired worker benefits, an 
individual must accumulate at least 40 credits in the Social 
Security system, which is equivalent to at least 10 years of 
covered employment. In 2006, a worker received one credit (up 
to a total of four per year) for each $970 in covered earnings. 
Fewer credits may be required in some survivor and disability 
cases; in these cases, benefits may be granted with as few as 
six credits. The amount of earnings required for a credit is 
wage indexed.
    Deficit--the amount by which the government's spending 
exceeds its revenues in a given period, usually a fiscal year. 
The federal deficit is the shortfall created when the federal 
government spends more in a fiscal year than it receives in 
revenues. To cover the shortfall, the government sells bonds to 
the public.
    Defined Benefit--a type of retirement plan that guarantees 
a specified retirement payment at a certain age and after a 
specified period of service. Defined benefit plans promise 
their participants a steady retirement income, generally based 
on years of service, age at retirement, and salary averaged 
over some number of years. Defined benefit plans express 
benefits as an annuity, but may offer departing participants 
the opportunity to receive lump sum distributions. Defined 
benefit plans are one of two basic types of employer-sponsored 
pension plans.
    Defined Contribution--a type of retirement plan that 
establishes individual accounts for employees to which the 
employer, participants, or both make periodic contributions. 
Defined contribution plan benefits are based on employer and 
participant contributions to and investment returns (gains and 
losses) on the individual accounts. Employees bear the 
investment risk and often control, at least in part, how their 
individual account assets are invested. Defined contribution 
plans are one of two basic types of employer-sponsored pension 
plans.
    Delayed Retirement Credit--an increase to the primary 
insurance amount (PIA) if a beneficiary delays claiming Social 
Security benefits beyond his or her full retirement age (FRA). 
The amount of the increase varies depending on the 
beneficiary's date of birth and how long a beneficiary delays 
benefit take-up beyond his or her FRA. However, the increase 
stops when a person reaches age 70, even if he or she continues 
to delay taking up benefits.
    Dependent--a person who is eligible for benefits or care 
because of his or her relationship to an individual. Under the 
Social Security Act, ``dependent'' means the same as it does 
for federal income tax purposes; i.e., someone for whom the 
individual is entitled to take a deduction on his personal 
income tax return, generally an individual supported by a tax 
filer for over half of a calendar year.
    Disabled--disability under Social Security is based on the 
inability to work. The definition of disability under Social 
Security is different than under other programs. SSA considers 
a person disabled under Social Security rules if the person 
cannot do work that he or she did before and SSA decides that 
the person cannot adjust to other work because of his or her 
medical condition(s). A person's disability must also last or 
be expected to last for at least 1 year or to result in death. 
Social Security pays only for total long-term disability. No 
benefits are payable for partial disability or for short-term 
disability. Social Security program rules assume that working 
families have access to other resources to provide support 
during periods of short-term disabilities, including workers' 
compensation, insurance, savings, and investments.
    Dually Entitled--workers who qualify for Social Security 
benefits from both their own work and their spouses'. Such 
workers do not receive both the benefits earned as a worker and 
the full spousal benefit; rather, the worker receives the 
higher amount of the two.
    Early Retirement Age (early eligibility age)--the age at 
which individuals qualify for reduced retirement benefits if 
they choose to collect benefits before the normal retirement 
age; the current early retirement age for Social Security is 
62. Individuals who choose to take retirement benefits early 
will have their monthly benefits permanently reduced, based on 
the number of months they receive checks before they reach full 
retirement age.
    Earnings--Wages or self-employment income. Also see covered 
earnings and taxable earnings.
    Eligibility--conditions that must be met for participation. 
To be eligible for Social Security retirement benefits, 
everyone born in 1929 or later needs 40 credits. Since a worker 
can earn 4 credits per year, he or she needs at least 10 years 
of work that is subject to Social Security to become eligible 
for Social Security retirement benefits. Each year, the amount 
of earnings needed for a credit rises as the average earnings 
levels rise. In 2005, a worker receives 1 credit for each $920 
of earnings, up to the maximum of 4 credits per year.
    Entitlement--a federal program or provision of law that 
requires payments to any person or unit of government that 
meets the eligibility criteria established by law. Social 
Security, Medicare, Medicaid, and veterans' compensation are 
examples of entitlement programs. Entitlements leave no 
discretion with Congress on how much money to appropriate, and 
some entitlements carry permanent appropriations.
    Equity, including Intergenerational--the goal to ensure 
that the costs and benefits of Social Security bear some 
relationship to contributions and that a much greater burden is 
not placed on certain specific groups, including certain 
generations of workers.
    Federal Insurance Contributions Act (FICA) taxes--see 
payroll tax.
    Full Retirement Age (FRA) (Also called normal retirement 
age.)--the age at which individuals qualify for full, or 
unreduced, retirement benefits from Social Security and 
employer-sponsored pension plans. The normal retirement age for 
Social Security was 65 for many years. Beginning with year 2000 
for workers and spouses born 1938 or later and widows/widowers 
born 1940 or later, the normal retirement age increases 
gradually from age 65 until it reaches age 67 in the year 2022.
    Fully Funded--a system that is fully funded, or ``advance 
funded,'' is one in which sufficient contributions are put 
aside each year to pay for future benefits when they come due. 
Defined contribution pensions and individual retirement 
accounts are fully funded by definition.
    Gross Domestic Product--a commonly used measure of total 
domestic national income. GDP measures the market value of 
total output of final goods and services produced within a 
country's territory, regardless of the ownership of the factors 
of production involved, i.e., local or foreign, during a given 
time period, usually a year. Earnings from capital invested 
abroad (mostly interest and dividend receipts) are not counted, 
while earnings on capital owned by foreigners but located in 
the country in question are included. GDP may be expressed in 
terms of product--consumption, investment, government purchases 
of goods and services, and net exports--or it may be expressed 
in terms of income earned-wages, interest, and profits. It is a 
rough indicator of the economic earnings base from which 
government draws its revenues.
    Income Adequacy--in Social Security's history, ``adequacy'' 
has never been explicitly defined. However, the Congress 
expected that Social Security benefits would eventually provide 
more than a ``minimal subsistence'' in retirement for full-
time, full-career workers. Various measures help examine 
different aspects of this concept, but no single measure can 
provide a complete picture. Such measures include poverty 
rates, replacement rates, and the proportion of the population 
that depends on others for income support.
    Inflation (Prices)--a rate of increase in the general price 
level of all goods and services. The official measure of 
inflation in the United States is the Consumer Price Index.
    Indexation (See Price Indexation, Wage Indexation.)
    Insolvency--in the context of Social Security, the 
inability of the Trust Funds to pay all current expenses out of 
current tax income and accumulated Trust Fund assets. 
Insolvency would mean that Social Security's Trust Funds were 
unable to pay full benefits on time. (Insolvency would not mean 
that Social Security would be completely broke and unable to 
pay any benefits.)
    Insured--in the context of Social Security, having enough 
credits to meet eligibility requirements for retired or 
disabled worker benefits, or to permit the worker's spouse and 
children or survivors to establish eligibility for benefits in 
the event of the worker's retirement, disability, or death.
    Intermediate Assumptions--the Social Security 
Administration actuaries' ``best estimate'' of future 
demographic and economic trends. The actuaries also produce 
high cost (pessimistic) assumptions and low cost (optimistic) 
assumptions. These assumptions are published annually in the 
Social Security Trustees Report.
    Life Expectancy--an estimate of the average remaining 
number of years expected prior to death for a given cohort. In 
the context of Social Security, life expectancy at age 65 is 
most commonly used.
    Long Range--in the context of Social Security, the next 75 
years. Long-range actuarial estimates are made for this period 
because it is approximately the maximum remaining lifetime of 
workers currently covered by Social Security. The annual Social 
Security Trustees Report includes long-range projections of 
Social Security's financial status. (See also short range.)
    Microsimulation model--in the context of policy analysis, a 
statistical model that simulates how a government program would 
operate under policy changes and how participants would be 
affected. This report relies on a CRS analysis of the Dynasim 
microsimulation model.
    Off-Budget--refers to the status of transactions of the 
government (either federal funds or Trust Funds) that belong 
on-budget according to generally accepted budget concepts, but 
which are required by law to be excluded from the budget. The 
budget documents routinely report the on-budget and off-budget 
amounts separately and then add them together to arrive at the 
consolidated government totals.
    Old-Age, Survivors, and Disability Insurance (OASDI)--the 
two Social Security programs--Old-Age and Survivors Insurance 
(OASI) and Disability Insurance (DI)--that provide monthly cash 
benefits to beneficiaries and their dependents when the 
beneficiaries retire, to beneficiaries' surviving dependents, 
and to disabled worker beneficiaries and their dependents.
    On-Budget--refers to transactions that are included within 
the budget.
    Pay-As-You-Go--in the context of Social Security, a system 
of financing in which contributions that workers make in a 
given year fund the payments to beneficiaries in that same 
year, and the system's Trust Funds are kept to a relatively 
small contingency reserve.
    Payroll Tax--tax imposed on some or all of workers' 
earnings that can be imposed on employers, employees, or both. 
Payroll taxes are used to finance the Social Security and 
Medicare programs. Employers and employees each pay Social 
Security taxes equal to 6.2 percent of all employee earnings up 
to a cap and pay Medicare taxes of 1.45 percent, with no cap. 
Payroll taxes are also known as FICA (Federal Insurance 
Contributions Act) taxes or SECA (Self-Employment Contributions 
Act), if self-employed.
    Poverty--Americans are considered ``poor'' or ``in 
poverty'' if they reside in a household with income below the 
U.S. poverty threshold, as defined by the U.S. Office of 
Management and Budget. Poverty thresholds differ by family size 
and are updated annually for inflation using the Consumer Price 
Index. Median Social Security benefits have historically been 
close to the poverty threshold. Social Security has contributed 
to reducing poverty among the elderly.
    Primary Insurance Amount (PIA)--the monthly Social Security 
benefit amount payable to a retired worker who begins to 
receive benefits at the full retirement age (FRA) or, 
generally, to a disabled worker. This amount, which is based on 
the worker's average indexed monthly earnings (AIME), is also 
used to calculate benefits payable on the worker's earnings 
record--for example, benefits paid to his or her spouse or 
survivors. Also referred to as a basic benefit amount.
    Primary Insurance Amount (PIA) Bend Points--dollar amounts 
used to break a worker's average indexed monthly earnings 
(AIME) into discrete brackets to help calculate the PIA. For 
example, if there are three bend points, first $761, earnings 
over $761 and through $4,586, and over $4,586, an income of 
$5,000 will be broken into three values, $761, $3825 and $414, 
to be multiplied by the specific PIA factor in accordance with 
the PIA formula. The specific dollar values of the bend points 
are indexed to growth in average wages.
    Primary Insurance Amount (PIA) Factors--the factors by 
which the dollar amounts in the primary insurance amount (PIA) 
formula are multiplied. The PIA factors are 90 percent, 32 
percent and 15 percent; each is applied to a worker's average 
indexed monthly earnings (AIME) amounts between the bend points 
in the PIA formula.
    Primary Insurance Amount (PIA) Formula--the formula to 
calculate the primary insurance amount (PIA) for workers who 
attain age 62, become disabled, or die after 1978. The PIA is 
equal to 90 percent of a worker's average indexed monthly 
earnings (AIME) up to the first bend point, plus 32 percent of 
AIME between the first and second bend points, plus 15 percent 
of AIME above the second bend point.
    Progressive--a system in which high earners pay a larger 
portion of their income in taxes or receive a lower portion of 
their income in benefits relative to low earners. To help 
ensure that beneficiaries have adequate incomes, Social 
Security's benefit formula is designed to be progressive, that 
is, to provide disproportionately larger benefits, as a 
percentage of earnings, to lower earners than to higher 
earners.
    Purchasing Power--the amount of goods and services that a 
given amount of money can buy. In the context of Social 
Security, beneficiaries receive an annual cost-of-living 
adjustment (COLA) in which benefits are adjusted according to 
the growth in prices (i.e., inflation) as a way to maintain the 
purchasing power of benefits over the course of a beneficiary's 
lifetime.
    Quarters of Coverage--see credits.
    Rate of Return--the gain or loss generated from an 
investment over a specified period of time; also referred to as 
total return. Calculated as the (value now minus value at time 
of purchase) divided by value at time of purchase, expressed as 
a percentage. In the context of Social Security, the implicit 
rate of return on Social Security contributions would be the 
constant discount rate that equates the present discounted 
value of contributions with the present discounted value of 
benefits.
    Regressive--a system in which lower earners pay 
proportionately higher taxes (or receive proportionately lower 
benefits) than do higher earners. The Social Security payroll 
tax is regressive, since the tax rate is flat and the amount of 
taxable earnings is capped.
    Replacement Rate--the ratio of retirement benefits (from 
Social Security or employer-sponsored plans) to pre-retirement 
earnings. Analysts often compare current benefits to a 
recipient's previous wages to judge the adequacy of Social 
Security payments. In the context of Social Security, the 
implicit rate of return on Social Security contributions would 
be the constant discount rate that equates the present 
discounted value of contributions with the present discounted 
value of benefits.
    Retirement Earnings Test (RET)--a provision of the law 
which reduces Social Security benefits on account of earnings 
from work before the full retirement age (FRA).
    Spouse Benefits--Social Security benefits payable to the 
spouse or divorced spouse of a retired or disabled worker, 
based on the worker's earnings record. The primary insurance 
amount (PIA) for a spouse beneficiary is generally 50 percent 
of his or her spouse's PIA.
    Social Insurance--under a social insurance program, the 
society as a whole insures its members against various risks 
they all face, and members pay for that insurance at least in 
part through contributions to the system. Social insurance 
programs, including Social Security, are designed to achieve 
certain social goals.
    Social Security Administration (SSA)--the federal agency 
that administers all Social Security related programs, 
including the Supplemental Security Income (SSI) and the 
Disability Insurance (DI) programs.
    Solvency--for Social Security, a condition of financial 
viability in which the program can meet its full financial 
obligations as they come due. Specifically, the ability to pay 
full benefits using existing revenue sources and Trust Fund 
balances. When a program does not meet these conditions, it is 
said to be insolvent.
    Solvency, Sustainable--for Social Security, to achieve 
sustainable solvency is to maintain the program's solvency 
beyond Social Security's Board of Trustees' 75-year forecast 
and make Social Security permanently solvent. Also defined as 
having a stable and growing Trust Fund ratio with program 
revenues increasing faster than outlays at the end of the 75-
year period.
    Supplemental Security Income (SSI)--a federal supplemental 
income program funded by general tax revenues (not Social 
Security taxes) that helps aged, blind, and disabled people who 
have little or no income, by providing monthly cash payments to 
meet basic needs for food, clothing, and shelter.
    Supplementary Medical Insurance (SMI)--Medicare SMI, also 
referred to as Part B, is a voluntary insurance program that 
covers physician services (in or outside of the hospital), 
outpatient hospital services, ambulatory services, and certain 
medical supplies and other services, for all persons age 65 or 
older and persons eligible for Part A because of disability or 
chronic renal disease.
    Survivor (Survivor Benefits)--after a beneficiary's death, 
Social Security survivor benefits are paid to the beneficiary's 
survivors, which include (1) the beneficiary's widow/widower 
age 60 or older, 50 or older if disabled, or any age if caring 
for a child under age 16 or who became disabled before age 22; 
(2) the beneficiary's children, if they are unmarried and under 
age 18, under 19 but still in school, or 18 or older but 
disabled before age 22; (3) the beneficiary's parents, who are 
at least aged 62, if the beneficiary provided at least one-half 
of their support. A special one-time lump sum payment of $255 
may be made to a spouse or minor children. An ex-spouse could 
also be eligible for a widow/widower's benefit on the 
beneficiary's record.
    Social Security Trust Fund--Technically, there are two 
separate Trust Funds: the Old-Age and Survivors Insurance 
(OASI) Trust Fund, which holds in trust those funds that the 
federal government intends to use to pay future benefits to 
retirees and their survivors; and, the Disability Insurance 
(DI) Trust Fund, which holds in trust those funds that the 
federal government intends to use to pay benefits to those who 
are judged by the federal government to be disabled and 
incapable of productive work, as well as to their spouses and 
dependents.
    Taxable Earnings--in the context of Social Security, wages 
and/or self-employment income earned in covered employment that 
is less than the taxable earnings base.
    Taxable Earnings Base (See Contributions and Benefit Base.)
    Transition Costs--refers to the additional revenue required 
to implement substitute individual account plans. Under some 
individual account plans, portions of Social Security 
contributions would be diverted to the accounts. However, under 
Social Security's pay-as-you-go financing, some of those 
contributions would also be needed to pay for current benefits. 
Making account deposits while also meeting current benefit 
costs requires additional revenue, which we refer to as 
transition costs.
    Trust Fund--an account, designated as a ``Trust Fund'' by 
law, that is credited with income from earmarked collections 
and charged with certain outlays. Collections may come from the 
public (for example, from taxes or user charges) or from 
intrabudgetary transfers. The federal government has more than 
150 trust funds. The largest and best known finance major 
benefit programs (including Social Security and Medicare) and 
infrastructure spending (the Highway and the Airport and Airway 
Trust Funds). These trust funds are essentially sub-accounts of 
the federal government's accounting and budgeting processes.
    Unified Budget--the present form of the budget of the 
federal government in which receipts and outlays from federal 
funds and trust funds are consolidated into a single total. The 
unified budget includes trust fund receipts as income and trust 
fund payments as expenditures. As a result, any Social Security 
surpluses serve to reduce the overall, or unified, federal 
budget deficit.
    Wage Indexation (Compare Price Indexation.)--a method by 
which benefits are adjusted at periodic intervals. Under its 
current formula, SSA uses the national average wage indexing 
series to index a person's lifetime earnings when computing 
that person's Social Security benefits.
    Worker Benefits--Social Security benefits payable to a 
retired or disabled worker, based on his or her own earnings 
record.

                            ACKNOWLEDGMENTS

    The Aging Committee would like to thank the following 
individuals who made key contributions to this report through 
their research and technical assistance:

    Seung An, Social Security Administration
    Sharmila Choudhury, Congressional Research Service
    Michael Clingman, Social Security Administration
    Michael Collins, U.S. Government Accountability Office
    Steven Goss, Social Security Administration
    Joni Lavery, National Academy of Social Insurance
    Annamarie Lopata, U.S. Government Accountability Office
    Charles A. Jeszeck, U.S. Government Accountability Office
    Kristen Jones, U.S. Government Accountability Office
    Dawn Nuschler, Congressional Research Service
    Patrick Purcell, Congressional Research Service
    Virginia Reno, National Academy of Social Insurance
    Christine Scott, Congressional Research Service
    Alison Shelton, Congressional Research Service
    Gary Sidor, Congressional Research Service
    Scott Szymendera, Congressional Research Service
    Alice Wade, Social Security Administration

    Copyright--Reprinted information in this report was done so 
with the expressed permission and consent of the cited authors.

                                  
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