Securing Social Security

SOCIAL SECURITY POLICY PAPER
AUGUST 2014

SUMMARY
Social Security is an important program that provides the
foundation of retirement income for hundreds of millions
of Americans, as well as benefits for survivors and for
disabled workers and their dependents. It is arguably the
most successful federal anti-poverty program for senior
citizens.
Nearly 90% of those 65 or older receive some income
from Social Security, and without these benefits, more
than 40% would have incomes below the federal poverty
line.1 Because of Social Security, less than 10% of
seniors have incomes below the federal poverty line; it
has lifted 14 million out of poverty.2
As the foundation of retirement security weakens, with
lower participation in private pensions and a lower
personal savings rate, Social Security grows even more
important. Today, over half of retired married couples
and nearly three-quarters of retired individuals rely on
Social Security for the majority of their income.3 It is
critical that we take action to make Social Security
solvent and sustainable to ensure that current and future
retirees receive the benefits they earned. However, only 14% of the overall public expects that
Social Security will have sufficient resources to provide the current level of benefits.4
Social Security is often referred to as the third rail of politics, but it is possible to fix the program.
Social Security faced a short-term financing problem in the early 1980s so President Reagan
created the Greenspan Commission to devise legislative recommendations.5 A bill was drafted and
signed into law in 1983, which included changes such as the taxation of Social Security benefits,
the first coverage of federal employees, and an increase in the retirement age.6 Social Security has
faced problems before and it has been fixed before, but in order to do so again we must engage in
honest and serious conversations about solutions to strengthen it.
We need to make Social Security permanently financially secure, preserve benefits for current
seniors, and ensure adequate benefits will be available for future generations.7

                                                                                                               
1

Social Security Administration. 2010. “Income of the Population 55 or Older, Table 2.A1.”
Van de Water, Paul & Arloc Sherman. Center on Budget and Policy Priorities. Oct. 16, 2012. “Social Security Keeps 21 Million Americans Out of
Poverty: A State-by-State Analysis.”  
3
Social Security Administration. April 2, 2014. “Social Security Basic Facts.”
4
Pew Research. June 12, 2014. “Political Polarization in the American Public.”
5
Social Security Administration. “Historical Background and Development of Social Security.”
6
Ibid.
7
Diggles, Michelle & Lanae Erickson Hatalsky. Third Way. Oct. 2012. “Reframing the Case for Fixing Social Security and Medicare.”  
2

THE PROBLEM
According to the program’s Trustees, Social Security’s trust funds will run empty by 2033. If
nothing is done and we wait until then to take action, all beneficiaries will see an automatic,
across-the-board 23% benefit cut.8 Just as Social Security helps protect some of our most
vulnerable citizens, we must act to protect this vital program. The longer we wait to fix the
funding and benefit imbalance in Social Security, the larger the burden on young people will be.
The absolute worst option on the table is to do nothing.
Social Security has two components, the Old-Age and Survivors Insurance (OASI) program and
the Disability Insurance (DI) program. According to the Social Security Trustees Report, OASDI
faces a 75-year shortfall of $10.6 trillion.9 The DI program specifically is projected to reach
depletion in 2016, and if nothing is done there will be an across-the-board benefit cut of 19% for
disability insurance beneficiaries.10
Social Security is a pay-as-you-go system, meaning that current workers pay for the benefits of
current retirees. Currently, the system pays out more than it takes in; in 2013, costs exceeded tax
income by $76 billion, an amount that indirectly contributes to the federal deficit.11 While
everyone pays into the system and earns the benefits they receive, the money each individual paid
in during their working life does not actually sit in an account for he or she to collect in retirement.
Social Security’s projected insolvency can be tied to three main causes:12
1. Demographics. The number of Baby
Boomers retiring means that in the
coming years there will be even
fewer workers to support more
retirees. In 1950, there were 16.5
workers for each Social Security
beneficiary, but in 2013 the ratio had
fallen to 2.8 workers for each
beneficiary.13 In 2012, the number of
Americans over 65 years old was
estimated to be 43.1 million or
13.7% of the total population; this
figure is projected to almost double
to 83.7 million or 20.9% of the total
population in 2050.14 The CBO
projects that over the next decade the
number of people collecting Social
Security benefits will rise by almost
40%.15
                                                                                                               
8

Social Security Administration. July 28, 2014. “The 2014 Annual Report of the Board of Trustees of the Old-Age and Survivors Insurance and Federal Disability
Insurance Trust Funds.”
Ibid.
10
Ibid.
11
Ibid.  
12
Domenici, Pete & Dr. Alice Rivlin. Bipartisan Policy Center. Nov. 2010. “Restoring America’s Future.”  
13
Social Security Administration. July 28, 2014. “The 2014 Annual Report of the Board of Trustees of the Old-Age and Survivors Insurance and Federal Disability
Insurance Trust Funds.”
14
Ortman et al. U.S. Census Bureau. May 2014. “An Aging Nation: The Older Population in the United States.”
15
CBO. February 2014. “The Budget and Economic Outlook: 2014 to 2024.”
9

2. Longevity. Although people are working about the same number of years as in the past, they
are collecting benefits for much longer. In 1930, five years before Social Security was enacted,
average life expectancy was 60, while the retirement age was 65. In 1950, the average
remaining years after 65 was 14.65, and today it is 20.45.16
3. Smaller income base. Today, a smaller percentage of the nation’s income is subject to the
payroll tax due to the rising distributional disparity in wages.17 In 1983, almost 90% of all
wages were payroll taxable, below the wage cap, but today, only around 84% of all wages are
payroll taxable.18 If this trend continues, funding for the program will continue to erode.
The U.S. must act sooner rather than later to reform Social Security because the costs only
increase the longer we wait. Interest accumulates in the trust fund so making changes now will
have a greater impact on the balance of revenues and benefits. For example, if Social Security’s
shortfall were to be fixed through tax increases alone (which it should not be) the options would
be: (i) immediately raise everyone’s payroll taxes by over 2.8%; (ii) wait ten years and increase
everyone’s payroll taxes by 3.5%; or (iii) wait until 2033 and increase everyone’s payroll taxes by
4.3%.19 Another cost of delaying action is that it will put a greater share of the burden on future
generations and give everyone less time to prepare for necessary adjustments.

                                                                                                               
16

Social Security Administration. “Life Expectancy for Social Security.”; Social Security Administration. 2014. “Calculators: Life Expectancy.”
Domenici, Pete & Dr. Alice Rivlin. Bipartisan Policy Center. Nov. 2010. “Restoring America’s Future.”  
Urban Institute. Nov. 2013. “Raising the Taxable Maximum.”
19
Social Security Administration. July 28, 2014. “The 2014 Annual Report of the Board of Trustees of the Old-Age and Survivors Insurance and
Federal Disability Insurance Trust Funds.”
17
18

NICK’S PLAN
There are common sense solutions that can be enacted now and phased-in gradually to strengthen
Social Security and make it sustainable and solvent. By phasing in solutions we can continue to
protect those in and near retirement and ensure that these changes are not abrupt and disruptive to
beneficiaries’ current standard of living or retirement planning.
Similar to how the program was fixed in the
past with the Greenspan Commission; another
Social Security Commission should be
created. One proposal calls for Members of
Congress to either vote yes or no on the
establishment of a commission, and if
members vote no, they must offer an
amendment that would achieve 75-year
solvency.20
The Committee for a Responsible Federal
Budget created a Social Security reformer
tool that allows the user to experiment with
different policy options to close the 75-year
shortfall.21 The following options would close
102% of the 75-year shortfall (see figure at
right).

1. Achieve OASDI solvency
Increase retirement age
Increasing the retirement age to 69 and then indexing it to longevity would close 36% of the 75year shortfall. The normal retirement age will reach 67 in 2022 and under this option it would
continue to rise by two months every year until it reaches 69 in 2034 and then it would be indexed
to longevity. It would be a modest 2-year change in the normal retirement age over a gradual 12year period. The early eligibility age would remain 62. Of course, this change would not impact
anyone who is in retirement and can be designed to exclude those who are near retirement (above
age 55) as well.
Increase taxable maximum
Increasing the taxable maximum would allow Social Security to collect more revenue to fund
benefits. Currently, up to $117,000 is subject to the payroll tax, around 84%.22 This change would
subject 90% of wages to the payroll tax, which would increase the taxable maximum to about
$216,900.23 Doing so would close 30% of the 75-year shortfall.
                                                                                                               
20

Kessler, Jim & David Brown. Third Way. May 31, 2013. “How to Save Social Security.”
The Committee for a Responsible Federal Budget. “The Reformer: An Interactive Tool to Fix Social Security.”
22
 
The Urban Institute. Nov. 2013. “Raising the Taxable Maximum.”  
23
Ibid.  
21

Means-test benefits for higher earners
In today’s tough budget environment, there is no compelling reason that the wealthiest in our
society, like Bill Gates and Warren Buffet, should receive a Social Security check. Means-testing
benefits for the top 1% of earners would close 8% of the 75-year shortfall. The phase out of
benefits for the top 1% would be based on current earnings, rather than lifetime wages.
Modify cost of living adjustments (COLAs)
Current beneficiaries receive a COLA based on a measure of inflation known as CPI-W, but many
experts believe that this measure overstates cost-of-living changes. This change would instead
index COLAs to “Chained CPI” and would close 20% of the 75-year shortfall. Chained CPI is
considered a more accurate measure of inflation because it takes into account “substitution bias.”
This economic principle is based on the idea that if the prices for certain items rise, consumers
would buy less expensive items, rather than paying the higher price.24
Switching to chained CPI is not a benefit cut; it is a modest change in the growth of benefits,
which will still increase, just at a more accurate rate of inflation.25 Chained CPI should be enacted
as part of other comprehensive policy options that would include protections for the least
advantaged and oldest among us.26
Cover newly hired state and local workers
Another way to collect additional revenue is to cover newly hired state and local workers.
Currently, some state and local government employees are exempt from Social Security, but
requiring new hires to participate in the system would close 6% of the 75-year shortfall, when
done in conjunction with other options.
Reform disability benefits
Disability benefits would be improved in two ways. First, by reducing fraud and overpayments,
which would close 4% of the 75-year shortfall. Some measures that would be enacted include
funding anti-fraud investigations and reducing the allowed collection of unemployment, workers
compensation, or other benefits, while also collecting disability benefits. Second, tightening DI
eligibility requirements, which would also close 4% of the 75-year shortfall. Currently, the
requirement is for disabled beneficiaries to have worked for 5 of the past 10 years. Under this
option, it would be changed to require disabled beneficiaries to have worked for 4 of the past 6
years.
2. Create a minimum benefit
Benefits would be enhanced by the creation of a minimum benefit at 125% of poverty. Currently,
some Social Security recipients receive benefits that are below poverty level. By establishing a
minimum benefit, we would protect the most vulnerable and ensure a higher quality of life than
some currently experience. Retirees who have worked at least 30 years will be guaranteed benefits
equal to 125% of the poverty line. It would be indexed to wage growth, meaning it would grow as
a percentage of the poverty line over time. While this option would actually increase the 75-year
                                                                                                               
24

Bureau of Labor Statistics. U.S. Department of Labor. April 6, 2005. “Consumer Price Index: Frequently Asked Questions about the Chained
Consumer Price Index for All Urban Consumers (C-CPI-U).
25
Goldwein et al. Moment of Truth Project. March 19, 2013. “Measuring Up: The Case for Chained CPI.”
26
Ibid.

shortfall by 5%, it is an important and necessary element to include in fixing Social Security.
Another proposal recommended by the National Commission on Fiscal Responsibility and Reform
that should be adopted is adding a new “20-year benefit bump up” to protect those retirees who
have potentially outlived their personal retirement resources. Data is not available on the
percentage by which this proposal would increase the 75-year shortfall, but it is imperative that we
protect our most vulnerable citizens.
3. Establish “add-on” accounts
This proposal does not affect the current Social Security system; it would not change revenue or
benefit levels. It would be a voluntary system whereby workers could contribute an additional 2%
in payroll taxes to an individually owned retirement account. Individuals need to save more for
retirement on their own, rather than relying solely on traditional Social Security. In 2013, 34% of
the workforce had no savings set-aside for retirement.27
While the investments can be volatile, as people near retirement their investments would have
reduced risk. This voluntary option should be offered for those who want to take advantage of it.
According to a Pew poll, when faced with the status quo, 86% of young workers support this
idea.28

                                                                                                               
27
28

Social Security Administration. April 2, 2014. “Social Security Basic Facts.”  
Pew Research Center. Nov. 2, 2011. “The Generation Gap and the 2012 Election.”