Options to Address Social Security Solvency and Their Impact on Beneficiaries: Results from the Dynasim Microsimulation Model

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

The Social Security system is currently generating surplus tax revenues. However, under the
intermediate assumptions of the Social Security Board of Trustees, the trust funds are estimated to
be depleted in 2040, at which point 74% of benefits would be payable with incoming receipts.
The primary reason is demographics: between 2010 and 2030, the number of people aged 65 and
older is projected to grow by 76% while the number of workers supporting the system is
projected to grow by 6%. In addition, the trustees project that the system will begin running cash
flow deficits in 2017, at which point other federal receipts would be needed to meet benefit costs.
If there are no other surplus governmental receipts, policymakers would have three options: raise
taxes or other income, reduce spending, or borrow.
This report analyzes the effect of 12 Social Security solvency options on Social Security
beneficiaries. These 12 individual options fall into 6 categories of reform proposals. For some
reform options, we present two or more variations on how they could be approached. They
include the most commonly discussed or introduced proposals to improve cash flow and achieve
Social Security solvency:
• reducing the annual cost of living adjustment (COLA)
• increasing the number of computation years in the benefit formula
• increasing the full retirement age (FRA)
• longevity indexing initial Social Security benefits
• progressive price indexing initial Social Security benefits
• increasing earnings subject to Social Security payroll taxes by raising or eliminating
the taxable earnings base.
The primary rationale for all of these options is to help achieve solvency by either cutting benefits
(reducing spending) or increasing payroll taxes. There are also secondary reasons for most of the
options: for example, encouraging longer working careers, accounting for increased longevity,
making the payroll tax more progressive, etc. Each section of the report focuses on one reform
category and explains current Social Security policy, reasons why some policymakers propose
this particular type of reform, how the reform proposal works, the distributional effects of the
reform proposal on various types of Social Security beneficiaries, and legislation related to the
reform being analyzed. Distributional effects are presented in terms of Social Security
beneficiaries’ median payroll tax increase or benefit reduction and show the varied effect of these
reforms on beneficiaries along socio-economic lines (i.e., age, type of benefit received, and
income quintile).
CRS analysts used the Dynasim microsimulation model to project the effects of these reforms on
Social Security beneficiaries in 2035, assuming the reforms first take effect in 2013.
This report will not be updated.

Introduc tion ..................................................................................................................................... 1
Major Findings................................................................................................................................1
Reducing the Annual Cost-of-Living Adjustment (COLA)................................................2
Increasing the Number of Computation Years in the Benefit Formula...............................3
Increasing the Full Retirement Age (FRA).........................................................................3
Longevity Indexing Initial Social Security Benefits...........................................................4
Progressive Price Indexing Initial Social Security Benefits...............................................4
Raising or Eliminating the Taxable Earnings Base.............................................................5
Interpreting the Results...................................................................................................................6
Why These Options?...........................................................................................................6
When Would the Options Begin?........................................................................................6
How Far Into the Future Does This Analysis Look?...........................................................6
What Do the Figures Show?...............................................................................................7
Why Do Some of the Results Seem Counterintuitive?.......................................................9
How Much Would These Options Contribute to Solvency?.............................................10
Who Is Included in the Analysis?.....................................................................................10
How Does Dynasim Estimate Future Benefits?................................................................10
Where Can Readers Find Out More?................................................................................10
Reduce the Social Security Cost-of-Living Adjustment (COLA)..................................................11
Social Security COLA Under Current Law.......................................................................11
Reasons Some Policymakers Propose Reducing the Annual COLA.................................11
Options to Reduce the COLA...........................................................................................12
Distributional Effects in 2035...........................................................................................12
Legislation to Decrease the Annual COLA.......................................................................17
Increase the Number of Computation Years (Earnings Years Used to Calculate Social
Security Benefits).......................................................................................................................19
Number of Computation Years Under Current Law.........................................................19
Reasons Some Policymakers Propose An Increase in the Number of Computation
Years .............................................................................................................................. 19
Options to Increase the Number of Computation Years....................................................20
Distributional Effects in 2035...........................................................................................20
Legislation to Increase the Number of Computation Years..............................................25
Increase the Full Retirement Age (FRA).......................................................................................26
FRA Under Current Law...................................................................................................26
FRA for Survivors Under Current Law............................................................................27
Reasons Some Policymakers Propose an Increase in the FRA.........................................27
Option to Increase the FRA..............................................................................................28
Distributional Effects in 2035...........................................................................................29
Legislation Related to Changes in the FRA......................................................................33
Longevity Indexing: Reduce Initial Social Security Benefits Based on Increases in Life
Expectancy ................................................................................................................................. 34
Current Law......................................................................................................................34
Reasons Some Policymakers Propose Longevity Indexing..............................................35
Options to Reduce Benefits Based on Increases in Longevity.........................................36
Distributional Effects in 2035...........................................................................................37

Legislation Related to Longevity-Indexing Social Security Benefits...............................44
Progressive Price Indexing: Index Initial Social Security Benefits to Wage Growth and
Price Growth..............................................................................................................................45
Wage Indexing and Price Indexing Under Current Law...................................................45
Reasons Some Policymakers Propose Progressive Price Indexing...................................45
Option to Index Initial Social Security Benefits to Wage Growth and Price
Growth (Progressive Price Indexing).............................................................................46
Distributional Effects in 2035...........................................................................................47
Legislation Related to Progressive Price Indexing...........................................................49
Raising or Eliminating the Taxable Earnings Base.......................................................................50
Taxable Earnings Base Under Current Law......................................................................50
Reasons Some Policymakers Propose Raising or Eliminating the Taxable
Earnings Base................................................................................................................51
Options to Raise or Eliminate the Taxable Earnings Base................................................52
Distributional Effects in 2035...........................................................................................52
Legislation Related to the Taxable Earnings Base............................................................58
Figure 1. Median Percentage Change in Benefits Under Each Policy Option Compared
with Current Law Among Beneficiaries in 2035..........................................................................2
Figure 2. Median Percentage Change in Benefits Under COLA-0.5 Percentage Points
compared with Current Law Among Beneficiaries in 2035 by Age and Benefit Type..............14
Figure 3. Percentage Change in Benefits Under COLA-0.5 Percentage Points compared
with Current Law Among Beneficiaries in 2035 by Income Quintile........................................15
Figure 4. Median Percentage Change in Benefits Under COLA-1.0 Percentage Point
Compared with Current Law Among Beneficiaries in 2035 by Age and Benefit Type.............16
Figure 5. Percentage Change in Benefits Under COLA-1.0 Percentage Point Compared
with Current Law Among Beneficiaries in 2035 by Income Quintile........................................17
Figure 6. Median Percentage Change in Benefits Under 38 Computation Years Compared
with Current Law Among Beneficiaries in 2035 by Age and Benefit Type (All Benefit
Types Affected)..........................................................................................................................21
Figure 7. Percentage Change in Benefits Under 38 Computation Years Compared with
Current Law Among Beneficiaries in 2035 by Income Quintile (All Benefit Types
Affect ed)...................................................................................................................... ............... 22
Figure 8. Median Percentage Change in Benefits Under 38 Computation Years Compared
with Current Law Among Beneficiaries in 2035 by Age and Benefit Type (DI
Beneficiaries Not Affected)........................................................................................................24
Figure 9. Percentage Change in Benefits Under 38 Computation Years Compared with
Current Law Among Beneficiaries in 2035 by Income Quintile (DI Beneficiaries Not
Affect ed)...................................................................................................................... ............... 25
Figure 10. Median Percentage Change in Benefits Under Full Retirement Age Increase
Compared with Current Law Among Beneficiaries in 2035 by Age and Benefit Type.............30
Figure 11. Percentage Change in Benefits Under Full Retirement Age Increase Compared
with Current Law Among Beneficiaries in 2035 by Income Quintile........................................32

Figure 12. Median Percent Change in Benefits Under Longevity Indexing the PIA Factors
Compared with Current Law Among Beneficiaries in 2035 by Age and Benefit Type.............38
Figure 13. Percentage Change in Benefits Under Longevity Indexing the PIA Formula
Factors Compared with Current Law Among Beneficiaries in 2035 by Income Quintile.........40
Figure 14. Median Percent Change in Benefits Under Longevity Indexing the PIA Value
Compared with Current Law Among Beneficiaries in 2035 by Age and Benefit Type.............42
Figure 15. Percentage Change in Benefits Under Longevity Indexing the PIA Value
Compared with Current Law Among Beneficiaries in 2035 by Income Quintile......................43
Figure 16. Median Percentage Change in Benefits Under Progressive Price Indexing
Compared with Current Law Among Beneficiaries in 2035 by Age and Benefit Type.............48
Figure 17. Percentage Change in Benefits Under Progressive Price Indexing Compared
with Current Law Among Beneficiaries in 2035 by Income Quintile........................................49
Figure 18. Share of the Population with Earnings above the Taxable Wage Base over their
Lifetime ...................................................................................................................................... 53
Figure 19. Share of Beneficiaries in 2035 with Tax and Benefit Increases Compared with
Current Law if the Taxable Earnings Base is Eliminated, by Level of Increase........................54
Figure 20. Share of Beneficiaries in 2035 with Higher Payroll Taxes or Benefits
Compared with Current Law if the Taxable Earnings Base is Eliminated, by Highest
and Lowest Quintile...................................................................................................................55
Figure 21. Median Percent Increase in Lifetime Tax and Benefit Payments Compared
with Current Law from Eliminating the Taxable Wage Base, Among Individuals Who
Contributed Additional Taxes Over their Lifetime and Received Benefits in 2035...................56
Figure 22. Share of Beneficiaries in 2035 with Tax and Benefit Increases Compared with
Current Law if the Taxable Earnings Base is Raised to Cover 90% of All Earnings, by
Level of Increase........................................................................................................................58
Table C-1. Retirement Earnings Test Application Rules...............................................................64
Appendix A. Computation of the Primary Insurance Amount (PIA) Under Current Law............60
Appendix B. Interaction of Spouse and Aged Survivor Benefit Rules with Policy Options.........62
Appendix C. Interaction of the Retirement Earnings Test with Policy Options............................64
Appendix D. Technical Description of the Progressive Price Indexing Option............................67
Appendix E. Background on the Urban Institute’s Dynasim Microsimulation Model.................69
Appendix F. Glossary....................................................................................................................73

Author Contact Information..........................................................................................................78

The Social Security system is facing a long-term financing problem. Social Security is primarily a
pay-as-you-go system in which today’s workers pay for the benefits of today’s retirees. For every
dollar paid into the Social Security system, approximately 75 cents is immediately paid out in
benefits. Currently, the system is generating surplus tax revenues, which are invested in bonds
and credited to the Social Security trust funds. However, under the intermediate assumptions of
the Social Security Trustees, the system will begin running cash flow deficits in 2017, at which
point Social Security must redeem any bonds (including interest) accumulated in previous years.
Unless the government is running a surplus, redeeming the bonds would require cuts in overall
spending, payroll tax increases, and/or borrowing. The trustees project that the trust funds will be
depleted in 2040, at which point 74% of benefits would be payable with incoming receipts. The
primary reason is demographics: between 2010 and 2030, the number of people age 65 and older
is projected to grow by 76%, while the number of workers supporting the system is projected to
grow by 6%.
This report analyzes how 12 options to improve Social Security solvency would affect Social ¹
Security beneficiaries in 2035 compared with current law. They include the most commonly
discussed or introduced proposals to improve cash flow and achieve Social Security solvency.
CRS takes no position for or against any of the options presented in this report. The presentation
of options in the report moves from least complex to most complex. The ordering of the 12
options, and the assumptions used in their analysis, reflect no policy recommendations or
preferences on the part of CRS. For some reform options, two or more variations on how they
could be approached are presented. Each option would affect beneficiaries differently. This report
assumes that all of the options take effect in 2013 and shows the distributional impact of each ²
option in 2035 using results from the Dynasim microsimulation model. The following section
outlines some of the major findings on how each option would affect beneficiaries. The Dynasim
model is not an actuarial model and so cannot produce solvency estimates for these options.

As shown in Figure 1, the magnitude of the benefit change that beneficiaries would experience
varies greatly by policy option. Median benefit reductions for individuals receiving Social
Security benefits in 2035 range from -11% for reducing the Social Security COLA by 1
percentage point to no reduction for the options to eliminate or raise the taxable earnings base.

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^f^o^llowⁱ^ng^r^e^por^ts^{: C}^R^S^R^e^p^o^r^t^R^L³³⁵⁴^4,^Socⁱ^a^{l Se}^c^u^r^ity^Re^for^m^:^C^u^r^r^e^{nt I}^s^s^u^e^s^a^nd^Le^gis^l^a^tioⁿ^,^b^y^D^a^wⁿ^N^u^s^c^hle^r^;
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^Szy^m^e^nde^r^a^.
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Figure 1. Median Percentage Change in Benefits Under Each Policy Option
Compared with Current Law Among Beneficiaries in 2035
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Notes:^Elim^{inating or raising the}^{taxable ear}^nings^{base would pro}^{duce a median c}^{hange in}^be^nefits^{of 0%}
^{compared with c}^urre^{nt law beca}^{use only 2}^{2% of}^bene^{ficiaries in 2}⁰³⁵^{would have}^bene^{fits affected}^{by the}^option.
^{The computation yea}^{r increa}^ses^{results s}^{hown are}^{for the o}^{ption to increase the}^nu^mbe^{r of comp}^u^{tation years}
^{from 35}^{to 38. This fig}^{ure does n}^{ot show the ef}^{fect of t}^{he two opt}^{ions to increase the}^computation^{years f}^rom
^{35 to 4}^0.
The key results for each of these policy options are summarized below.
In order to maintain purchasing power over time, Social Security benefits are increased annually
by a cost-of-living adjustment (COLA). The COLA is based on inflation (i.e., price growth) and
is applied starting in the year after an individual becomes eligible for benefits. This report
examines two options to reduce the annual COLA: (1) reducing the COLA by half a percentage
point and (2) reducing the COLA by one percentage point.
• Overall, an estimated 98% of beneficiaries in 2035 would be affected by a reduction
in the COLA.
• Among Social Security beneficiaries in 2035, a half percentage point reduction in the
COLA would result in a median benefit cut of approximately 6%; a one percentage point ³
reduction would result in a median benefit cut of approximately 11%.
• The longer a beneficiary has been eligible for benefits, the more his or her benefits
would be cut because of reductions to the COLA.

³^T^hⁱ^s^an^al^y^sⁱ^sⁱⁿ^cl^u^d^e^{s al}^l^S^o^ci^al^S^ecu^ri^t^y^b^eⁿ^e^fⁱ^ci^ari^e^{s i}ⁿ²⁰³⁵^,^re^gard^l^e^{ss o}^f^w^h^et^h^e^{r t}^h^ey^ar^{e recei}^viⁿ^g^retⁱ^r^ed^-
^w^o^r^k^e^r^{, s}^pous^a^l^{, s}^u^r^v^iv^or^,^or^dis^a^ble^d^-^w^or^k^e^r^be^ne^f^its^{. T}^h^e^aⁿ^a^l^y^sⁱ^s^pr^e^s^eⁿ^ts^r^e^s^u^lts^f^o^r^the^be^ne^fⁱ^cⁱ^a^r^y^a^t^the^m^e^diaⁿ^.
^T^h^is^m^e^aⁿ^s^tha^t^ha^lf^of^the^be^ne^fⁱ^cⁱ^a^r^y^popula^t^io^{n in}²⁰³⁵^w^ould^e^x^pe^rⁱ^eⁿ^c^e^la^r^g^e^r^be^ne^f^{it r}^e^duc^tion^s^a^nd^ha^lf^of^the
^be^ne^fⁱ^cⁱ^a^r^y^popula^tⁱ^onⁱⁿ²⁰³⁵^w^oul^{d e}^x^pe^rⁱ^eⁿ^c^e^s^m^a^lle^r⁽^o^r^no)^b^e^ne^f^{it r}^e^duc^tions^.

• Groups of beneficiaries with relatively long periods of eligibility for benefits would
be disproportionately affected by both COLA options since the effect of the COLA
reduction would be compounded for a longer period of time, including older
beneficiaries, women, survivors, disabled beneficiaries, and low-income beneficiaries.
Social Security benefits are calculated using the highest 35 years of a worker’s taxable earnings.
This report examines two options to increase the number of computation years from 35 to 38: (1)
where all newly eligible beneficiaries are affected and (2) where only newly eligible retirement
and survivor beneficiaries are affected, while disability beneficiaries are held harmless.
• Overall, an estimated 83% of all beneficiaries in 2035 would be affected by a change
in the number of computation years if every newly eligible beneficiary was subject to the
option; an estimated 67% of all beneficiaries in 2035 would be affected if disability
beneficiaries were exempt from the change.
• Among beneficiaries in 2035, increasing the number of computation years from 35 to
38 would result in a median benefit cut of approximately 2%, regardless of whether
disability beneficiaries are held harmless.
• The effects of increasing the number of computation years shown in this report are
driven mostly by the fact that some beneficiaries become eligible before the option is
assumed to take effect in 2013, and thus are not affected by the option.
• Some groups of beneficiaries are more likely to become eligible for benefits after the
option takes effect. This includes those who are younger, have higher incomes, are retired
worker beneficiaries, and are disability beneficiaries (unless they are held harmless).
Variations on the computation year options that would increase the number of computation years
from 35 to 40 were also analyzed. These options yielded greater benefit reductions with nearly
identical distributional effects.
Social Security’s full retirement age (FRA) is gradually increasing from 65 to 67 under current
law. This report examines an option that would accelerate the current-law increase in the FRA and
then further increase the FRA to age 70. This option would affect beneficiaries born in 1951 or
later. Increasing the FRA would create an incentive for individuals to work longer or to delay
taking up Social Security benefits.
• Overall, an estimated 64% of all beneficiaries in 2035 would be affected by
increasing the FRA under this option.
• Among beneficiaries in 2035, increasing the FRA would result in a median benefit
reduction of 2% overall.
• The FRA increase is phased in gradually over time. Thus, each successive cohort of
beneficiaries would have deeper benefit cuts until the option is fully phased in. As a
result, younger beneficiaries would have larger benefit reductions than would older
beneficiaries.

• Retired worker and spouse beneficiaries would be disproportionately affected by the
option to raise the FRA, since all disability and most survivor beneficiaries would be held
harmless under this option. A majority of beneficiaries in each income quintile would
receive a benefit reduction of less than 10%.
Despite the currently-scheduled increase in the Social Security full retirement age (FRA), the
FRA has not been adjusted to fully account for increasing longevity; people retiring today at the
FRA are receiving benefits for a longer period of time than those retiring at the FRA when the
system was designed. This report examines two options to index (i.e., link reductions in) initial
Social Security benefits to increases in longevity: (1) longevity indexing the primary insurance
amount (PIA) formula factors; and (2) longevity indexing the PIA value and holding DI
beneficiaries harmless until they reach the FRA.
• Overall, an estimated 84% of all beneficiaries in 2035 would be affected by longevity
indexing the PIA formula factors for all newly eligible beneficiaries; an estimated 71% of
beneficiaries in 2035 would be affected by longevity indexing the PIA value and
exempting disability beneficiaries until they reached the FRA.
• Among beneficiaries in 2035, longevity indexing the PIA formula factors would
result in a median benefit reduction of approximately 5%; longevity indexing the PIA
value and holding disabled beneficiaries harmless until they reached the FRA would
result in a median benefit reduction of about 2% compared with current law.
• The effects of longevity indexing increase over time. Thus, each successive cohort of
beneficiaries would have deeper benefit cuts. As a result, younger beneficiaries would
have larger benefit reductions than would older beneficiaries.
• Retired workers and higher-income beneficiaries would also be disproportionately
affected by both longevity indexing options due to interactions of the policy changes with
current-law Social Security program rules.
Currently, initial Social Security benefits are calculated based on an individual’s past earnings,
which are indexed (i.e., linked) to wage growth. Progressive price indexing would involve
indexing the initial Social Security benefits of newly eligible beneficiaries to a combination of
wage and price growth. Low-earning individuals would receive a benefit that is indexed closer to
wage growth and high-earning individuals would receive a benefit that is indexed closer to price
growth (i.e., inflation). Since wages have historically grown faster than prices, this change would
progressively cut benefits.
• Overall, an estimated 69% of all beneficiaries in 2035 would be affected by
progressive price indexing.
• Among beneficiaries in 2035, progressive price indexing would result in a median
benefit reduction of about 4% compared with current law.
• The effects of progressive price indexing increase over time. Thus, each successive
cohort of beneficiaries would have deeper benefit cuts. As a result, younger beneficiaries
would have larger benefit reductions than would older beneficiaries.

• Higher-income beneficiaries would also have proportionately higher benefit
reductions than lower-income beneficiaries since the option is designed to be progressive.
Social Security payroll taxes are levied on earnings up to a maximum dollar amount set each year, ⁴
called the taxable earnings base. The taxable earnings base serves as both a cap on contributions
to the system (i.e., payroll taxes) and a cap on benefits. This report examines the effects of (1)
raising the dollar amount of the taxable earnings base to 100% of aggregate covered earnings in
the U.S. (eliminating the taxable earnings base) and (2) raising the dollar amount of the taxable
earnings base to 90% of aggregate covered earnings in the U.S. (instead of the 85% currently
taxed).
• Overall, an estimated one in five beneficiaries would earn more than the current-law
earnings base at some point in their lifetimes and thus be affected by raising or
eliminating the base. However, in a given year, fewer than 8% of workers are projected to
earn more than the current-law taxable earnings base and only 1% of workers are
projected to earn more than a base that covered 90% of all earnings.
• Looking only at beneficiaries in 2035 who ever earn more than the current base, the
median increase in payroll taxes would be 3% and the median increase in benefits would
be 2% compared with current law if the base were completely eliminated.
• Eliminating the taxable earnings base would affect primarily high-income
beneficiaries. Half of all beneficiaries in the highest income quintile in 2035 would see
their payroll taxes and benefits rise, although most would have relatively small increases.
For example, in the highest quintile, 12% of beneficiaries would have payroll tax
increases of 10% or more and 8% of beneficiaries would have benefit increases of 10%
or more.
• Since each year only 1% of the population earns 10% of all earnings, the
distributional effects of raising the taxable earnings base to cover 90% of earnings is
nearly identical to eliminating the base entirely. The only difference between the options
is that the share of individuals who have large payroll tax and benefit changes declines if
the base is capped at 90% of earnings.
Policymakers could also raise or eliminate the taxable earnings base for tax purposes only and not
credit the additional earnings toward an individual’s benefits. Under this variation, the estimates
of payroll tax increases would be the same as the options above, but benefits would be
unchanged.

⁴^S^o^ci^al^S^ecu^ri^t^y^pay^r^o^ll^t^a^{xes are l}^e^vi^ed^oⁿ^co^vered^earnⁱⁿ^g^s.^Up^{on b}^eⁿ^e^fⁱ^t^recei^p^t^,ⁱⁿ^dⁱ^vi^du^al^{s w}ⁱ^t^hⁱⁿ^cert^aⁱⁿⁱⁿ^co^m^e
^b^r^acket^{s m}^a^y^p^a^y^inc^o^me^ta^x^e^{s on the}ⁱ^r^Socⁱ^a^l^Se^c^u^rity^be^ne^f^{it pa}^y^m^eⁿ^{ts. T}^h^e^aⁿ^a^l^y^s^{is in this re}^port^f^o^c^u^se^s
^e^x^c^l^us^iv^e^l^y^{on the}^dis^t^rⁱ^but^io^na^{l e}^f^f^e^c^t^s^of^r^a^is^ing^{or e}^lim^ina^ting^the^le^v^e^{l of}^e^a^r^ning^{s subje}^c^t^to^pay^r^o^ll^ta^x^e^s.

The primary rationale for all of the options in this report is to improve the solvency of the Social
Security system. All of the options would enhance long-range solvency by either cutting benefits
or increasing payroll taxes. There are also secondary rationales behind most of the options—for
example, some would reward longer working careers or account for increases in longevity.
The options in this report include the most commonly discussed or introduced proposals to ⁵
improve cash flow and achieve Social Security solvency. Each option in this report is analyzed in
isolation, but it is important to note that the options are typically proposed in combination with
one another and/or with other Social Security reform features (such as individual accounts or ⁶
benefit enhancements for low earners). The options analyzed in this report can be viewed as a set
of building blocks for comprehensive Social Security reform.
All of the options in this report are assumed to be implemented starting in 2013. The year 2013
was chosen since many policymakers have indicated a desire to leave the benefits of individuals
who are currently age 55 or older unchanged, since they would have little time to alter their
savings, work, or retirement plans. With the exception of the option to increase the full retirement
age, none of the options presented in this report are phased in gradually over time. Any of the
options could be implemented before or after 2013, or could be phased in gradually.
This analysis aims to compare all of the reform options using consistent assumptions and under
identical circumstances. However, for some options, all beneficiaries would be affected starting
in 2013, including those who became eligible for benefits before 2013 (e.g., reducing the COLA).
For other options, only new beneficiaries—those who become eligible for benefits in 2013 or
later—would be affected (e.g., progressive price indexing initial Social Security benefits). These
differences are dictated by the nature of the reform options themselves and the particular Social
Security program rules affected by these reform options.
This report focuses on the effects of policy changes on beneficiaries in 2035. The figures and
accompanying analysis are essentially a snapshot of the projected beneficiary population in this
single year. Focusing on a different year would lead to different results.

⁵^S^o^m^e^so^l^v^en^c^y^o^p^tⁱ^oⁿ^s^,^su^{ch as i}ⁿ^creasiⁿ^{g t}^h^{e S}^o^ci^al^S^ecu^ri^t^y^co^v^e^{rage o}^f^st^at^{e an}^d^l^o^cal^go^vern^m^eⁿ^t^w^o^rkers,
^a^lte^ring^the^ta^x^a^tion^of^Socⁱ^a^l^Se^c^u^rity^be^ne^f^{its, or inv}^e^sting^a^p^o^rti^on^of^the^So^cⁱ^a^l^Se^c^u^rity^{surplus i}ⁿ^e^q^u^itie^{s, c}^aⁿⁿ^o^t
^c^u^r^r^e^ntly^be^m^ode^le^{d in t}^h^is^v^e^r^s^ion^of^Dy^na^sⁱ^m^.^T^h^e^r^ef^or^e^,^the^s^e^opti^ons^a^r^e^not^inc^l^u^d^e^d^a^m^ong^th^e^opti^ons^aⁿ^a^l^y^z^e^d
^{in t}^h^{is re}^p^o^rt.
⁶^C^o^m^b^ining^aⁿ^y^of^the^opt^io^ns^w^{ith o}ⁿ^e^aⁿ^othe^r^or^w^{ith o}^t^he^r^f^e^a^t^ur^e^s^c^{ould s}ⁱ^gⁿⁱ^fⁱ^c^aⁿ^tl^y^a^lte^r^theⁱ^r^dis^t^rⁱ^b^u^ti^ona^l
^im^pa^c^t^s^.^T^hus^{, it is}^no^{t p}^o^s^sⁱ^ble^t^o^s^u^m^the^r^e^s^u^lts^of^aⁿ^y^c^o^m^b^ina^tion^of^opti^ons^s^how^{n i}ⁿ^th^is^r^e^por^{t s}ⁱ^nc^e^the^opti^ons
^co^u^l^{d i}ⁿ^t^e^ractⁱⁿ^un^exp^ect^ed^w^a^ys^.

The year 2035 was selected for this analysis because it balances two competing goals. The first
goal is to allow a sufficient amount of time to pass for the differing effects of the policy options to
become clear once the new policies are implemented. Since all of the options are assumed to
begin in 2013, by 2035 most beneficiaries would be affected. An earlier date may not capture the
disparate effects of the options, particularly for those options with relatively small annual
changes. The second goal is to provide the most reliable information possible. Since it is
impossible to accurately predict the future, all projection models contain some level of
uncertainty. The further into the future one projects, the greater the estimates may ultimately
deviate from reality. The most accurate data are the actual observations that exist when the
projection period began. The youngest individuals eligible to receive retirement benefits in 2035
would have been born in the early 1970s, and so actual data would be included in the model’s
projection of their retirement benefits. Extending the analysis to periods much later than 2035
would rely more heavily on the model’s assumptions about future trends.
Under some of the options, not all beneficiaries in 2035 would be affected. This is because some
of the options apply only to beneficiaries who become eligible for benefits in 2013 or later (e.g.,
progressive price indexing). For these options, the analysis in 2035 will show a sizable group of
beneficiaries who are not subject to the change since they became eligible for benefits before
2013. Because the proportion of beneficiaries who become eligible for benefits before 2013
varies significantly by socio-economic characteristics, the date of implementation drives many of
the results in 2035, particularly the results by age.
Results shown for 2035 also do not reflect the full impact of the options over time. The effect of
some options increases over time (e.g., longevity indexing). Under these options, each successive
cohort of beneficiaries would be affected more than the last, so that a beneficiary who becomes
eligible 50 years after implementation would be affected much more than a beneficiary who
becomes eligible in the first year, all other things being equal. For other options, the magnitude of
the benefit change does not increase over time (e.g., increasing the number of computation years).
Under these options, each successive cohort of beneficiaries would be subject to the same rules,
so that a beneficiary who becomes eligible 50 years after implementation would experience the
same magnitude of change as a beneficiary who becomes eligible in the first year, all other things
being equal. Since the analysis in this report focuses on a single year, these distinctions are not
shown.
The analysis for each option includes a figure that breaks down the effect of the policy change on
beneficiaries in 2035 by benefit type, age group, and/or other categories. These figures show the ⁷
median percentage difference between benefits under current law and benefits under the option.
The median is the midpoint in a group of values, such that half the values are above the median
and half are below. Unlike a mean (or average), a median will not be skewed by a small number
of extremely large or extremely small values. For example, consider five beneficiaries affected by
a policy option. One loses her entire benefit under the option (meaning she has a change of

⁷^T^h^{e rep}^o^r^t^co^m^p^{ares b}^eⁿ^e^fⁱ^t^s^uⁿ^d^e^{r each}^o^p^tⁱ^oⁿ^t^o^sch^e^du^led^be^ne^f^its^unde^r^c^u^r^r^e^nt^la^w^.^Som^e^othe^r^aⁿ^a^l^y^s^e^s
^c^o^m^p^a^r^e^be^nef^its^unde^r^pol^ic^y^options^to^pay^a^b^le^be^ne^f^its^{, or}^t^h^e^le^v^e^{l of}^be^ne^f^its^tha^t^c^ould^be^f^uⁿ^d^e^{d w}^{ith c}^u^r^r^e^nt
^f^unding^le^v^e^ls^{. H}^o^w^e^v^e^{r, the}²⁰⁰^{5 T}^r^us^te^e^s^Re^{port (}^{on w}^h^ic^{h t}^h^is^aⁿ^a^l^y^s^is^is^ba^s^e^{d) proje}^c^t^s^t^h^a^t^t^h^e^trus^{t f}^uⁿ^d^s^w^ill
^re^m^a^{in solv}^eⁿ^{t u}ⁿ^til²⁰⁴¹^{. Si}^nc^e^t^h^e^aⁿ^a^l^y^s^{is in this re}^p^o^rt^f^o^c^u^se^{s on}²⁰^35,^sc^he^du^le^d^be^ne^f^{its a}^{nd p}^a^y^a^ble^be^ne^f^its
^w^{ould be}^t^h^e^s^a^m^e^am^ount.

-100%). The other four beneficiaries have benefit changes of -3%, -2%, -2%, and -1%, compared
with current law. The median percentage change for this group would be -2% because -2% is the
third value of the five values arranged from least to greatest. The mean percentage change would
be -22% because it is the sum of all five values divided by five. Since policy changes sometimes
result in very large benefit changes (such as beneficiaries gaining or losing a benefit) for a few
beneficiaries, the median is a good measure of how a policy would affect a typical beneficiary.
The analysis for each option also includes a figure that shows the magnitude of the change for all
beneficiaries, broken down by income quintile to show whether an option is progressive or
regressive. (For more information on income quintiles, please see the subsection below called
“Breakdowns by Income Quintile.”) These figures show how beneficiaries at different levels of
income would be affected. For example, the figures show what proportion of beneficiaries in each
of the five quintiles have benefit reductions of up to 10%, reductions from 10% to 19%, etc. If
low-income beneficiaries would receive deeper cuts under an option relative to high-income
beneficiaries, that option is regressive. If high-income beneficiaries would receive deeper cuts
under an option relative to low-income beneficiaries, that option is progressive.
Every attempt has been made to be consistent in the presentation of the results of the analysis.
The same benefit reduction scale has been used in all figures across the various reform options so
as not to visually skew the results. Furthermore, the figures for all of the options include the
entire Dynasim population, with one exception due to the nature of the results from the policy
option. Most of the figures for the options to raise or eliminate the taxable earnings base include
only beneficiaries who would be affected by the option. (Since a relatively small share of
beneficiaries would be affected by the options to raise or eliminate the taxable earnings base,
including the entire Dynasim population in the figures for these options would show only that the
average beneficiary in each subgroup was not affected.)
Most of the policy options include figures in the report that break down the beneficiary
population by the type of Social Security benefits they receive. Four types of Social Security
beneficiaries are analyzed in this report: retired worker beneficiaries who receive a Social
Security benefit based on their own earnings; disabled worker beneficiaries who receive a Social
Security disability benefit based on their own earnings; spouse beneficiaries who receive a Social
Security retirement benefit based on their working spouse’s earnings; and, survivor beneficiaries
who receive Social Security survivor benefits based on their deceased spouse’s earnings. Some
individuals may qualify for more than one type of benefit.
In the analysis that follows, the retirement benefits only category and the disability benefits only
category are made up of beneficiaries who receive solely a retired or disabled worker benefit, not
a spouse or survivor benefit. The survivor benefits category and the spouse benefits category
include both beneficiaries who receive solely spouse or survivor benefits as well as those who
receive both a spouse or survivor benefit and a retired or disabled worker benefit (i.e., dually
entitled beneficiaries). The disability benefit only category includes both beneficiaries receiving
disability benefits in 2035 and those who originally received disability benefits but automatically
converted to retirement benefits at the full retirement age (as required by law).

Most of the policy options include figures in the report that break down the beneficiary
population by age group. These categories reflect beneficiaries’ ages as of 2035. It is important to
note that beneficiaries in the age 61 and younger category are primarily disability beneficiaries
but also include some aged survivor beneficiaries who began to receive benefits at age 60 or 61.
(Other Social Security beneficiaries who are eligible to receive benefits before age 60—such as
young widow(er)s, children of retired, disabled, or deceased workers—are not included in the
analysis in this report.) For retirement beneficiaries, the earliest age of eligibility is age 62. Thus,
no retirement beneficiaries are included in the age 61 and younger category.
All of the policy options include figures in the report that break down the beneficiary population
by income quintile. In other words, they separate the Dynasim population into five equal parts—
the one-fifth with the highest incomes, the one-fifth with the second-highest incomes, etc., down
to the one-fifth with the lowest income. For the purposes of this analysis, income includes Social
Security benefits, Supplemental Security Income (SSI) benefits, pension payments, earnings, and
the annuitized value of financial assets. Income is calculated on a per capita basis, which means
that for married couples the income of both spouses is averaged together.
It is important to note the distinction between income levels and Social Security benefit amounts.
Some beneficiaries with relatively low Social Security benefit amounts may be included in one of
the higher income quintiles and vice versa. For example, a beneficiary married to a person with a
high income may be in one of the higher income quintiles despite receiving a small Social
Security benefit. Similarly, a beneficiary with a relatively large Social Security benefit but with
no other income may be in one of the lower income quintiles.
Sometimes the results shown in this report may be unexpected. For example, an option to cut
Social Security benefits could result in a small number of beneficiaries receiving an increase in
their benefits. Such counterintuitive results are not errors, but interactions between the option and
the current law Social Security rules. For example, the interaction between the current law
retirement earnings test (RET) and certain options to reduce benefits leads to benefit increases for
some beneficiaries who were subject to the RET before reaching the full retirement age, but are
currently older than the full retirement age. (For a full explanation of how this interaction works,
please see Appendix C.)
One of the advantages of a microsimulation model such as Dynasim is that it brings unexpected
interactions between policy options and program rules to light. Social Security is a complex
program, and changes to its structure could result in unintended consequences. Where relevant,
these issues are highlighted in the report.

Dynasim is a microsimulation model that cannot calculate the solvency impact of the options ⁸
analyzed in this report. To allow readers to gauge approximately how much these options might
contribute to solvency, this report includes official estimates of the long-term solvency impact of
similar provisions published by the Office of the Chief Actuary at the Social Security
Administration, where available. These figures should be interpreted as “ball-park estimates” and
do not represent the impact of the options modeled in this report. In all cases, the provisions the
actuaries have estimated vary somewhat from the options analyzed in this report. For example, in
many cases the actuaries have assumed that a provision was first implemented in 2006 or phased
in gradually, while all of the options in this report are assumed to be implemented in 2013 with no
phase-in.
The analysis in this report focuses on individuals who are projected to receive Social Security
retired worker, spouse, aged survivor and/or disability benefits in 2035. However, the Dynasim
population does not include individuals who are projected to receive other types of Social
Security benefits, including the children of retired, disabled, or deceased workers, surviving
spouses under age 60 with a child in care, and the aged parents of deceased workers.
The Dynasim model estimates future Social Security benefits by using a mix of historical data
and projections. The historical data—which include actual beneficiaries’ earnings, marital
histories, Social Security benefits, and more—come from the Survey of Income and Program
Participation (SIPP), the Current Population Survey (CPS), the Panel Study of Income Dynamics
(PSID), and other sources. Using the historical data as a base, Dynasim projects future economic
and demographic patterns by using the 2005 Social Security Trustees’ official assumptions about
future trends as well as statistical methods that take into account individual beneficiaries’
characteristics. When interpreting the results of Dynasim or any other model, it is important to
note that projections are inherently imprecise; the further into the future one looks, the wider the
range of possible outcomes. (For a full explanation, please see Appendix E.)
In analyzing the options, this report refers to some Social Security program rules, technical
details, and terminology that may be unfamiliar to readers. Detailed explanations of Social
Security program rules and their potential interactions with policy options, along with an
explanation of how the Dynasim model works and a glossary of Social Security and technical
terms may be found in the following appendices of the report:
• Appendix A, “Computation of the Primary Insurance Amount (PIA) Under Current
Law”

⁸^P^l^ease^see^A^p^pe^nd^ix^E^f^o^{r a}^d^diti^ona^l^de^ta^{ils o}ⁿ^the^Dy^na^sim^m^ode^l.

• Appendix B, “Interaction of Spouse and Aged Survivor Benefit Rules with Policy
Options”
• Appendix C, “Interaction of the Retirement Earnings Test with Policy Options”
• Appendix D, “Technical Description of the Progressive Price Indexing Option”
• Appendix E, “Background on the Urban Institute’s Dynasim Model”
• Appendix F, “Glossary.”
Readers who are interested in seeing full distributional results of the options analyzed in this
report may access a complete set of tables for each option in CRS Report RL33841, Options to
Address Social Security Solvency and Their Impact on Beneficiaries: Results from the Dynasim ⁹
Microsimulation Model—Detailed Distributional Tables. These tables include breakdowns by
sex, race and ethnicity, educational attainment, age category, marital status, benefit type, and
income quintile. These tables show the mean and median percentage change in benefits for each
subgroup as well as the distribution of the changes for each subgroup.

After a person becomes eligible to receive Social Security benefits, his or her monthly benefit
amount is increased each year to maintain purchasing power over time. At the end of each year,
the Social Security Administration (SSA) announces the cost-of-living adjustment (COLA) used
to increase benefits payable beginning in January of the following year. The amount of the COLA
is based on inflation as measured by changes in the Consumer Price Index-Urban Wage Earners ¹⁰
and Clerical Workers (CPI-W).
Reducing the annual COLA would reduce Social Security expenditures and help restore solvency.
Some economists believe that the CPI-W, on which the COLA is based, tends to overstate the ¹¹
amount of overall inflation. If true, this overstatement would mean that the COLA is increasing

⁹^Se^e^C^R^S^R^e^por^{t R}^L³³⁸⁴¹^,^O^p^tⁱ^oⁿ^s^to^Ad^dr^e^s^s^Soc^ia^{l Se}^c^u^r^ity^Solv^e^nc^y^and^Theⁱ^r^I^m^pac^t^on^Be^ne^fic^iarⁱ^e^s^:^Re^s^u^lts
^fr^om^the^D^yⁿ^a^sⁱ^m^Mⁱ^c^r^os^im^ula^tio^{n M}^ode^l—D^e^t^a^ile^{d D}ⁱ^s^t^rⁱ^bu^tio^nal^Ta^ble^s^,^b^y^L^a^u^r^{a Hal}^t^zel^et^al^.
¹⁰^T^o^m^e^a^s^ur^e^inf^l^a^{tion, t}^h^e^C^P^I^-^W^tr^a^c^k^s^the^pr^ic^e^s^of^a^fⁱ^x^e^d^m^a^r^k^e^t^ba^s^k^e^t^of^g^oods^aⁿ^d^s^e^r^v^ic^e^s^ov^er^tim^e^.^Socⁱ^a^l
^S^ecu^ri^t^y^{’s CO}^L^Aⁱ^s^cal^cu^l^a^t^e^d^as^t^h^{e ch}^an^{ge i}ⁿ^t^h^{e C}^P^I-W^f^r^o^m^t^h^{e t}^hⁱ^r^d^qu^art^e^{r o}^f^t^h^e^p^rⁱ^o^r^cal^en^d^a^r^{year t}^o^t^h^{e t}^hⁱ^r^d
^q^u^a^rt^{er o}^f^t^h^{e cu}^r^r^en^t^cal^en^d^a^{r y}^ear.^If^t^h^{e CP}^I-Wⁱⁿ^{creases d}^u^rⁱⁿ^g^t^hⁱ^s^p^e^ri^o^d^,^S^o^ci^al^S^ecu^ri^t^y^b^eⁿ^e^fⁱ^t^s^f^o^{r t}^h^{e n}^e^xt^y^ear
ⁱⁿ^{crease p}^r^o^p^o^r^tⁱ^oⁿ^a^t^e^l^y^.^If^t^h^{e CP}^I-W^d^ecreases,^S^o^ci^al^S^ecu^ri^t^y^ben^e^fⁱ^t^s^st^a^y^t^h^{e sa}^me.^F^o^{r m}^o^{re i}ⁿ^f^o^r^m^atⁱ^oⁿ^oⁿ^t^h^e
^C^O^LA^{, s}^e^e^C^R^S^R^e^por^t^94-⁸⁰^3,^So^ci^a^l^S^ecu^ri^t^y^{: T}^h^{e Co}^st^-of^-^Lⁱ^vi^ng^A^d^j^u^st^men^tⁱⁿ^J^a^nu^a^r^{y 20}⁰⁹^,^by^G^a^r^y^{Sidor. For}
^m^o^r^e^inf^o^r^m^a^{tion on}^the^C^P^I^-^W^,^s^e^e^C^R^S^R^e^por^{t R}^L³⁰⁰⁷^4,^T^h^{e C}^oⁿ^s^u^m^{er P}^rⁱ^{ce Ind}^{ex: A}^B^rⁱ^e^f^Overvi^ew^{, by}^B^r^ia^{n W}^.
^Ca^she^ll.
¹¹^For^e^x^a^m^ple^,^{in 1}⁹⁹⁶^{, t}^h^e^B^o^s^kⁱⁿ^C^o^m^m^is^sⁱ^{on to s}^t^udy^the^C^P^I^e^s^tⁱ^m^a^t^e^{d tha}^t^t^h^e^C^P^I^ov^e^r^s^t^a^t^e^d^inf^l^a^tion^by^a^bout
^1.1^pe^r^c^eⁿ^ta^g^e^poi^nts^pe^r^y^e^a^r^{. (}^T^o^wa^{rd A Mo}^{re Accu}^ra^{te Mea}^s^u^r^e^{Of T}^h^{e C}^o^{st Of L}ⁱ^vin^g^{, Fi}^na^{l Re}^p^o^{rt t}^o^the^Se^na^te
^Fina^nc^e^C^o^m^m^itte^e^f^r^o^m^the^A^dvis^o^r^y^C^o^m^m^is^sⁱ^{on to S}^t^u^d^y^the^C^ons^um^e^r^P^r^ic^e^I^nde^x^,^D^e^c^e^m^b^e^r^{4, 19}⁹⁶^{, a}^t
^http:^//www^.ssa^.g^ov^/^h^istory^/re^ports/boskⁱ^nrp^t^.h^tm^{l). Af}^te^{r th}^e^B^o^s^kⁱⁿ^C^o^m^mⁱ^ss^{ion r}^e^por^{t, t}^h^e^B^u^r^e^a^u^of^L^a^bor^Sta^tis^tic^s
⁽^c^onti^nue^d.^..)

the purchasing power of Social Security benefits over time instead of maintaining purchasing
power. However, others argue that the CPI-W understates the amount of inflation for the elderly, ¹²
who make up the substantial majority of Social Security beneficiaries. If true, this
understatement would mean that the COLA is ineffective in maintaining the purchasing power of
Social Security benefits for elderly beneficiaries.
This report examines two options to reduce the annual COLA:
• Reducing the annual COLA by 0.5 percentage points and
• Reducing the annual COLA by 1.0 percentage point.
Projected future COLA increases are taken from the 2005 Social Security Trustees Report. To
model the first policy option above, the annual projected COLA increase in 2013 of 2.8% is
reduced by 0.5 percentage points to be 2.3% (i.e., 2.8% minus 0.5%). To model the second policy
option above, the projected current-law COLA in 2013 of 2.8% would be reduced to 1.8% (i.e.,
2.8% minus 1.0%). Since the 0.5 percentage point and 1.0 percentage point reductions would also
apply each year after 2013, the size of the reduction would be compounded over time so with ¹³
each additional year of eligibility, the reduction would increase. For both options, the changes
are assumed to begin in 2013 and to affect all Social Security beneficiaries, including disabled
beneficiaries and those who began to receive benefits before the change was implemented.
The longer a beneficiary is eligible for Social Security benefits, the more he or she would be
affected by reductions to the COLA, since the effects of the option compound over time. For
example, the first year after an individual becomes eligible for benefits, his or her benefit would
be 0.5% lower than current law if the COLA were reduced by half a percentage point and 1.0%
lower than current law if the COLA were reduced by one percentage point. Each year, the ^th
difference between benefits under the COLA option and current law increases, so that by the 10
year of benefit eligibility, benefits would be 5% lower than current law if the COLA were reduced
by half a percentage point and 9% lower than current law if the COLA were reduced by one ^th
percentage point. By the 30 year of benefit eligibility, benefits would be 14% lower than current
law if the COLA were reduced by half a percentage point and 25% lower than current law if the
COLA were reduced by one percentage point.

^(...c^on^tin^ue^d)
^ch^an^ged^t^h^{e w}^a^y^t^h^{e CP}^Iⁱ^s^cal^cu^l^a^t^e^d^,^red^u^cⁱⁿ^{g t}^h^{e gro}^w^t^h^o^f^t^h^e^CP^I^b^y^an^estⁱ^m^at^ed⁰^.^{7 p}^e^rcen^t^a^{ge p}^oⁱⁿ^t^s.
^(Coⁿ^g^ressi^oⁿ^a^l^B^u^d^g^et^Of^fⁱ^ce,^“C^h^aⁿ^g^{es i}ⁿ^Cal^c^u^l^atⁱⁿ^{g t}^h^{e Con}^s^{umer P}^rⁱ^{ce Ind}^e^xes,^”^The^Ec^on^omⁱ^c^and^Bu^dge^t
^O^u^tlo^ok^:^Fis^c^al^Ye^ar^s²⁰⁰⁰^-²⁰⁰⁹^{, J}^a^nua^ry¹⁹⁹⁹^{, a}^t^http^://w^w^w^.^c^bo.g^o^v^/^s^how^doc^.c^fm^?ⁱ^nde^x⁼^1059&^s^e^queⁿ^ce=1¹^.⁾
¹²^F^o^{r exam}^p^l^e,^so^{me an}^al^y^s^t^s^su^gg^est^u^sⁱⁿ^{g t}^h^{e E}^x^p^e^ri^m^eⁿ^t^al^P^rⁱ^{ce I}ⁿ^d^e^{x f}^o^{r Ameri}^can^{s 6}²^{Years o}^f^{Age o}^r^Ol^d^e^r
^(CP^I^-^E^{) rat}^h^{er t}^h^an^t^h^{e C}^P^I-W^.^A^m^oⁿ^g^o^t^h^e^{r d}ⁱ^f^f^e^ren^c^e^s^,^t^h^{e C}^P^I-^E^t^a^{kes i}ⁿ^t^o^acco^un^t^t^h^{e ri}^siⁿ^g^cost^o^f^h^eal^t^h^{care f}^o^r
^olde^r^c^o^ns^um^e^r^s^.^B^e^tw^e^eⁿ^D^e^c^e^m^b^e^r^{1982 a}^{nd D}^ecem^b^e^r²⁰⁰⁵^{, t}^h^e^C^P^I^-^E^g^r^e^w^aⁿ^a^v^e^r^ag^e^of^{0.3 pe}^r^c^eⁿ^ta^g^e^points
^f^a^st^{er p}^e^{r year t}^h^an^t^h^{e C}^P^I-W^.^(S^{ee CRS}^Rep^o^r^t^R^S²⁰⁰⁶⁰^,^{A Se}^pa^r^a^te^C^ons^um^e^r^Pr^ic^e^I^nde^x^for^th^e^Elde^r^l^y^?^{, by}
^Bria^{n W}^.^Ca^she^ll.)
¹³^{For e}^x^a^m^ple^,^af^te^{r 21 y}^e^a^r^s^o^f^be^ne^f^{it e}^lig^ibility^{, the}^re^duc^tio^{n i}ⁿ^b^e^ne^f^its^unde^{r a}ⁿ^opt^io^{n tha}^t^c^u^{t t}^h^e^CO^LA^b^y^a
^ha^lf^pe^r^c^eⁿ^ta^g^e^{point w}^oul^{d be}^ju^s^t^ov^e^r^10%^{, s}ⁱ^nc^e^the⁰^.⁰^{05 r}^e^du^c^{tion w}^oul^d^be^c^o^m^poun^de^d^ov^e^r^tim^e⁽ⁱ^.e^.,²¹
⁽⁰^.9⁹⁵⁾^=.⁹⁰⁾^.^W^ith^each^ad^d^iti^oⁿ^{al y}^{ear o}^f^elig^ib^ility^{, th}^{e red}^u^c^ti^oⁿ^w^o^u^l^dⁱⁿ^crease.

Because of the compounding nature of COLA reductions, between 2013 and 2035, groups of
beneficiaries with relatively long periods of eligibility would be disproportionately affected by
both COLA options. These groups include older beneficiaries, women, survivors, disabled
beneficiaries, and low-income beneficiaries. The oldest beneficiaries tend to receive benefits for
long periods because of their longevity. Women have longer life expectancies than men. Survivor
beneficiaries may become eligible for benefits at a younger age and tend to live longer than other ¹⁴
types of beneficiaries. Disability beneficiaries also become eligible for benefits at younger ages.
Low-income beneficiaries are more likely to be female and also to receive disability and survivor ¹⁵
benefits.
Among beneficiaries in 2035—22 years after the option to reduce the COLA by half a percentage
point is assumed to be implemented—the median benefit reduction would be 6%.
The size of the benefit reduction under the COLA options increases the longer a beneficiary is
eligible for benefits. Thus, the oldest beneficiaries have the greatest reductions compared with
current law, as shown in Figure 2. For example, in 2035, beneficiaries between the ages of 62 and
66 are projected to have a median benefit cut of about 1% under the option to reduce the COLA
by half a percentage point. Among the beneficiaries analyzed in this report, those under age 62
are almost all disability beneficiaries. In 2035, 96% of beneficiaries in this category are projected
to receive disability benefits and 4% are projected to have taken up survivor benefits at age 60 or

61. In contrast, beneficiaries over age 85 are projected to have median benefit cuts of about 11%.

Surviving spouses, who receive benefits longer, on average, than other beneficiaries, would
receive the largest reductions of any benefit type under the option to reduce the COLA by half a
percentage point. In 2035, survivor beneficiaries are estimated to have a median benefit reduction
of about 10% compared with current law.

¹⁴^W^o^m^e^{n m}^a^k^e^{up the}^s^u^bs^ta^ntia^l^m^a^jor^ity^of^s^u^r^vⁱ^v^or^be^ne^fⁱ^cⁱ^a^r^ie^{s. (}^C^R^S^R^e^p^o^r^t^R^S²²²⁹^4,^S^o^cⁱ^a^l^Secu^ri^t^y^S^u^r^vi^vo^rs
^Be^ne^fits^{, by}^K^a^thle^eⁿ^R^o^mⁱ^g^a^nd^Sc^{ott Sz}^y^m^e^nde^r^a^.)
¹⁵^F^o^{r exam}^p^l^e,ⁱⁿ²⁰³⁵^,⁵⁷^%^o^f^b^eⁿ^e^fⁱ^ci^ari^e^{s i}ⁿ^t^h^{e l}^o^w^e^stⁱⁿ^co^m^e^q^uⁱⁿ^tⁱ^l^{e are exp}^ect^ed^t^o^b^e^f^e^mal^e^(co^m^p^a^red^wⁱ^t^h
⁵⁰^%ⁱⁿ^th^e^hⁱ^g^h^{est q}^uⁱⁿ^{tile) an}^d⁴⁰^%^o^f^b^eⁿ^e^fⁱ^{ciaries in}^th^{e lo}^w^e^{st q}^uⁱⁿ^{tile are ex}^p^ected^to^receiv^e^dⁱ^sab^ility^o^r
^surv^iv^{or be}^ne^f^{its (c}^om^pa^re^d^w^ith^22%ⁱⁿ^the^hig^h^e^s^{t q}^uⁱⁿ^tile^).

Figure 2. Median Percentage Change in Benefits Under COLA-0.5 Percentage Points
compared with Current Law Among Beneficiaries in 2035 by Age and Benefit Type
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^P^{lease see the section on}^{“What Do the Figures Show?” in}^{the re}^{port “Int}^{roduction.”}
The large majority of beneficiaries in all income quintiles would experience benefit reductions of
up to 10% compared with current law under an option that reduced the COLA by half a
percentage point. However, lower-income beneficiaries are more likely to have cuts in the range
of 10% to 19% under the option, as shown in Figure 3. Thus, this proposal would be regressive in
nature. About 23% of those in the lowest income quintile are estimated to have benefit cuts in the
range of 10 to 19% in 2035, compared with about 16% of beneficiaries in the highest quintile. A
small number of beneficiaries in each income group (roughly 2%) would experience no change in ¹⁶
benefits.

¹⁶^Du^rin^g^t^h^{e f}ⁱ^{rst y}^{ear o}^f^b^eⁿ^e^f^{it elig}^ib^ility^{, n}^o^COL^A^is^ap^p^lied^,^s^oⁿ^e^w^b^eⁿ^e^fⁱ^ci^aries^w^o^u^l^d^receiv^e^th^{e same a}^m^ount
^{in be}^ne^f^its^unde^r^t^h^e^C^O^L^A^optio^ns^a^s^un^de^r^c^u^r^r^e^nt^la^w^.

Figure 3. Percentage Change in Benefits Under COLA-0.5 Percentage Points
compared with Current Law Among Beneficiaries in 2035 by Income Quintile
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^{Categories may not add t}^o¹⁰⁰^{% due to rou}^{nding. Please see the section on}^{“What Do the}^Figures
^{Show?” in the re}^{port “I}^ntroducti^on.”
Differences in the number of years of eligibility explain almost all of the variance between
income groups. Low-income beneficiaries tend to have received benefits for longer periods of
time. One reason for this discrepancy is that the lowest income quintile includes a
disproportionate number of disability beneficiaries, who are eligible to receive benefits earlier
than retired worker beneficiaries. Thus, under this proposal, low-income beneficiaries would have
deeper benefit cuts than would high-income beneficiaries. For beneficiaries who have been
eligible for benefits for at least 20 years, the benefit cut from a half percentage point reduction in
the COLA would be expected to exceed 10%. About four-fifths of the beneficiaries with benefit
reductions of 10% or more under this option have been eligible for benefits for at least 20 years,
including a disproportionate share of the lowest income quintile.
After accounting for years of eligibility, a small number of beneficiaries in each quintile have
larger-than-expected reductions under the policy option (for example, 4% of beneficiaries in the
lowest quintile and 2% in the highest quintile). In the lowest quintile, the primary reason for
larger-than-expected cuts is beneficiary type. The majority of the beneficiaries in this quintile
whose reductions of 10% or more are unexplained by years of eligibility receive spouse or ¹⁷
survivor benefits. Thus, their COLA amount is based on their spouse’s years of eligibility, not
their own. A disproportionate number of beneficiaries in the lowest income quintile receive
spouse or survivor benefits. In the highest quintile, the primary reasons for larger-than-expected

¹⁷^Fo^{r m}^o^{re in}^f^o^rm^atioⁿ^,^see^A^p^p^e^ndi^x^B^.

cuts are beneficiary type and the retirement earnings test (RET). The RET magnifies the effect of ¹⁸
benefit cuts for beneficiaries who are younger than the full retirement age and continue to work.
The distributional results for the second COLA option, which would reduce the annual COLA by
one percentage point, are similar to those for the first COLA option. The primary difference
between the two proposals is the size of the benefit reduction; the option to reduce the COLA by
one percentage point would cut benefits by about twice as much as the option to reduce the
COLA by half a percentage point. In 2035—22 years after the option to reduce the COLA by one
percentage point is assumed to be implemented—the median benefit reduction would be about

11% compared with current law.

As in the first COLA option, the size of the benefit reduction increases the longer a beneficiary
receives benefits. For example, as shown in Figure 4, in 2035, beneficiaries between age 62 and
66 are projected to have a median benefit reduction of about 3% under the option to reduce the
COLA by one percentage point, compared with current law. In contrast, beneficiaries over age 85
are projected to have a benefit reduction of 20%. Survivor beneficiaries would receive the
greatest reduction of any beneficiary type, about 19%.
Figure 4. Median Percentage Change in Benefits Under COLA-1.0 Percentage Point
Compared with Current Law Among Beneficiaries in 2035 by Age and Benefit Type
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^P^{lease see the section on}^{“What Do the Figures Show?” in}^{the re}^{port “Int}^{roduction.”}

¹⁸^Fo^{r m}^o^{re in}^f^o^rm^atioⁿ^,^see^A^p^p^e^ndi^x^C^.

As in the first COLA option, median benefit reductions under the option to reduce the COLA by
one percentage point do not vary significantly by income group, but lower-income beneficiaries
are more likely to have deeper benefit cuts because of their longer periods of eligibility. As shown
in Figure 5, about 21% of those in the lowest income quintile are estimated to have benefit cuts
of 20% or more in 2035, compared with about 14% of beneficiaries in the highest quintile. A
small number of beneficiaries in each income group (roughly 2%) would experience no change in ¹⁹
benefits.
Figure 5. Percentage Change in Benefits Under COLA-1.0 Percentage Point
Compared with Current Law Among Beneficiaries in 2035 by Income Quintile
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^{Categories may not add t}^o¹⁰⁰^{% due to rou}^{nding. Please see the section on}^{“What Do the}^Figures
^{Show?” in the re}^{port “I}^ntroducti^on.”
The most recent Congressional bill to include a fixed reduction to the Social Security COLA was ^th
S. 1792, introduced by Senator Moynihan in the 105 Congress. This bill would have, among
other things, reduced the COLA for Social Security benefits by one percentage point.
While no bill proposing a fixed reduction to the Social Security COLA has been introduced since ^th
the 105 Congress, the most recent bill which would reduce the COLA was H.R. 440, the
Bipartisan Retirement Security Act of 2005, introduced by Representatives Kolbe and Boyd in the

¹⁹^Du^rin^g^t^h^{e f}ⁱ^{rst y}^{ear o}^f^b^eⁿ^e^f^{it elig}^ib^ility^{, n}^o^COL^A^is^ap^p^lied^,^s^oⁿ^e^w^b^eⁿ^e^fⁱ^ci^aries^w^o^u^l^d^receiv^e^th^{e same a}^m^ount
^{in be}^ne^f^its^unde^r^t^h^e^C^O^L^A^optio^ns^a^s^un^de^r^c^u^r^r^e^nt^la^w^.

109^th Congress.²⁰ This bill would, among other things, reduce the COLA by using the chained ²¹

CPI rather than the CPI-W to calculate the amount of the annual COLA. The Social Security
actuaries estimate that using the chained CPI would reduce the COLA by about 0.22 percentage ²²
points per year, on average, compared with current law. H.R. 440 does not correspond directly
to any of the options analyzed in this report.
While there is no recent legislation proposing a fixed reduction to the COLA, the Social Security
actuaries have recently estimated the solvency effects of several proposals which would reduce
the annual COLA, including a half percentage point reduction and a one percentage point ²³
reduction similar to those analyzed in this report. In calculating the solvency effects of these
options, the actuaries assume the reduced COLA would be applied to Social Security benefits in
January 2007, which is six years earlier than the start date assumed for the COLA options in this
report. Thus, the solvency effect of the COLA reduction proposals in this report could be ²⁴
somewhat smaller than the actuaries’ estimates.
The actuaries’ estimates were prepared using the assumptions of the 2005 Social Security
Trustees Report, which estimated Social Security’s long-range solvency gap as -1.92% of payroll
and projected trust fund insolvency in 2041. According to the actuaries:
• Reducing the COLA by 0.5 percentage point would reduce Social Security
expenditures by an estimated 0.76% of payroll, solving about 40% of the program’s long-
range funding gap and extending solvency for about nine years.
• Reducing the COLA by 1.0 percentage point would reduce Social Security
expenditures by an estimated 1.49% of payroll, solving about 78% of the program’s long-
range funding gap and extending solvency for about 26 years.

²⁰^A^t^th^{e tim}^{e o}^f^th^{is rep}^o^r^{t’s p}^u^b^lic^atioⁿ^,^th^o^s^{e b}^{ills m}^o^{st recen}^tlyⁱⁿ^tro^d^u^ced^th^{at c}^oⁿ^t^aiⁿ^e^d^v^e^rsioⁿ^s^o^f^th^{ese g}^eⁿ^e^ric
^o^p^tⁱ^oⁿ^s^w^e^{re u}^s^ed^t^oⁱ^l^l^u^s^t^r^at^{e p}^o^s^si^b^l^{e vari}^atⁱ^oⁿ^sⁱⁿ^each^o^f^t^h^e^o^p^tⁱ^oⁿ^s^an^al^y^zed^,^regard^l^e^{ss o}^f^w^hⁱ^c^h^Coⁿ^g^{ress t}^h^ey
^re^pre^s^eⁿ^te^{d. A}^s^the^inteⁿ^t^of^{this r}^e^{port is}^to^hig^h^lig^ht^the^e^f^f^e^c^t^of^g^e^ne^ric^optio^ns,^not^pa^rtic^ula^r^bill^{s, the}^re^p^o^{rt w}^ill
^not^be^u^pda^te^d^to^r^e^f^l^e^c^t^s^ubs^e^que^{nt le}^gⁱ^s^l^a^tion^tha^t^m^a^y^c^ontaⁱ^{n s}ⁱ^m^ila^r^pr^ov^is^ions^.
²¹^For^m^o^r^e^inf^o^r^m^a^{tion, s}^e^e^C^R^S^R^e^por^{t R}^L³²²⁹^3,^The^Ch^ai^ne^{d C}^onsume^r^Pric^e^In^de^x^:^{How Is It D}^iffe^re^nt?^{, by}
^Bria^{n W}^.^Ca^she^ll.
²²^A^c^co^rdⁱⁿ^{g t}^o^t^h^{e s}^o^l^v^en^cy^estⁱ^ma^t^e^f^o^{r H.}^R.⁴⁴⁰^p^r^ep^ared^b^y^t^h^{e S}^o^ci^al^S^ecu^ri^t^y^act^u^a^ri^es,^t^h^{e i}ⁿ^t^e^nt^o^f^t^h^{e b}ⁱ^l^l^w^a^s
^t^o^redu^{ce t}^h^{e COL}^A^b^y⁰^.⁴^p^e^rcen^t^a^{ge p}^oⁱ^nt^{s p}^e^{r y}^ear.^F^o^{r m}^o^{re i}ⁿ^f^o^r^m^atⁱ^oⁿ^,^{see S}^o^ci^al^S^ecu^ri^t^y^A^d^mⁱⁿⁱ^st^ratⁱ^oⁿ
^m^e^m^o^r^a^ndum^{to R}^e^pr^e^s^eⁿ^ta^tiv^e^s^Jⁱ^m^K^o^lbe^a^{nd A}^lle^{n B}^o^y^d^f^r^o^m^Ste^pheⁿ^C^.^G^o^s^s^,^C^h^ie^f^A^c^tua^r^y^,^A^lic^e^H^.^W^a^de^,
^Dep^u^t^y^Chⁱ^e^f^A^c^t^u^ar^y^,^an^d^Ch^ri^s^Ch^ap^l^aⁱⁿ^,^A^c^t^u^ar^y^,^“E^stⁱ^m^at^ed^O^A^S^D^{I F}ⁱⁿ^aⁿ^cⁱ^a^l^E^f^fect^{s o}^f^t^h^{e Bi}^p^a^rtⁱ^s^an^Retⁱ^r^emen^t
^Se^c^u^r^ity^A^c^{t of}^2005—^Iⁿ^f^o^r^m^a^tion,”^N^o^v^e^m^b^e^r^{4, 20}⁰⁵^{, a}^t^h^ttp:^//w^w^w^.s^sa^.g^ov^/^O^A^C^T^/^s^o^lv^eⁿ^c^y^/^K^olbe^_2⁰⁰⁵¹¹⁰^4.p^d^f^.
²³^Socⁱ^a^l^Se^c^u^rⁱ^ty^A^d^mⁱ^nis^t^r^a^tion^m^e^m^o^r^a^ndum^{to Ste}^p^he^{n C}^.^G^o^s^s^,^C^h^ie^f^A^c^tua^r^y^f^r^o^m^C^h^rⁱ^s^C^h^a^p^l^a^{in, A}^c^tua^r^y^,^a^nd
^A^lic^e^H^.^W^a^de^{, D}^e^puty^C^h^ie^f^A^c^tua^r^y^,^“^E^s^tⁱ^m^a^t^e^d^O^A^SD^I^L^ong^-^R^aⁿ^g^e^Fina^nc^ia^{l Ef}^f^e^c^t^s^of^Se^v^e^r^a^{l P}^r^ov^is^ions
^R^e^que^s^t^e^d^by^the^Socⁱ^a^l^Se^c^u^r^ity^A^d^vⁱ^s^o^r^y^B^o^a^r^d,”^A^u^g^u^s^t^10,²⁰⁰^{5; h}^ttp:^//w^w^w^.s^s^a^b.g^o^v^/^doc^um^eⁿ^ts^/
^a^d^vⁱ^s^o^r^y^boa^r^d^m^e^m^o^—²⁰⁰⁵^tr^—⁰⁸¹⁰²⁰⁰⁵^.p^df^.
²⁴^T^h^e^C^ong^r^e^s^sⁱ^ona^{l B}^u^dg^e^t^O^f^fⁱ^ce⁽^C^B^O⁾^e^s^tim^a^t^e^s^tha^t^m^o^s^t^of^the^c^o^s^t^s^a^vⁱ^ng^s^of^a^C^O^LA^r^e^duc^{tion w}^oul^{d oc}^c^u^r
^d^u^rⁱⁿ^{g t}^h^{e f}ⁱ^rst²⁵^y^ear^{s a}^f^t^e^{r a ch}^an^ge.^(Coⁿ^g^ressi^oⁿ^a^l^Bud^g^et^Offⁱ^ce,^B^u^dg^et^Op^tⁱ^oⁿ^s^{, F}^e^b^r^ua^{ry 200}⁵^{, p. 23}^4,^a^t
^http:^//w^w^w^.c^bo.g^o^v^/^f^t^pdoc^s^/^60x^x/doc⁶⁰⁷⁵^/^02-^15-^B^udg^e^t^O^p^ti^ons^.^p^df^.)

A worker’s Social Security benefit is based on his or her average taxable earnings, adjusted for
wage growth over time. In the formula for calculating Social Security retirement benefits, the
highest 35 years of earnings are used as computation years in the Social Security benefit ²⁵
formula. For disability and survivor benefits, the number of computation years depends on the
age when the wage earner became disabled or died; for these workers, the number of computation ²⁶
years varies from 2 to 35.
Social Security beneficiaries receive benefits for a longer period of time today than in the past. ²⁷
Current beneficiaries receive benefits sooner and live longer than did previous generations.
Increasing the number of years of work for the purpose of calculating Social Security benefits is
intended to reward longer working careers and to provide an incentive for people to stay in the
workforce longer—thus paying into the Social Security system for more years and collecting ²⁸
benefits for fewer years.
However, increasing the number of computation years would primarily affect retired worker and
disability beneficiaries, not spouse and survivor beneficiaries. Since the total amount of spouse
and survivor beneficiaries’ benefits is based on their spouses’ earnings histories, not their own
earnings histories, changes to the number of computation years would affect their benefits only ²⁹
indirectly. The length of their own careers would not affect the total amount of their benefits.
Thus, increasing the number of computation years would not reward spouse and survivor
beneficiaries for additional years worked.

²⁵^F^o^{r m}^o^{re i}ⁿ^f^o^rm^atⁱ^oⁿ^on^t^h^e^S^o^cⁱ^al^S^ecu^ri^t^y^b^eⁿ^e^fⁱ^t^f^o^r^m^u^l^a,^see^A^p^pe^ndi^x^A^.
²⁶^For^dis^a^bili^ty^be^ne^f^its^{, the}^num^be^r^of^c^o^m^puta^{tion y}^e^a^r^s^e^qua^ls^the^num^be^r^of^y^e^a^r^s^o^f^e^a^r^ning^s^be^tw^ee^{n a}^g^e^{22 a}^nd
^the^oⁿ^se^{t of}^disa^bili^ty^{, re}^duc^e^d^by^the^dⁱ^sa^bility^drop^ou^{t f}^a^c^t^or^{. T}^h^e^disa^bili^ty^dropo^{ut f}^a^c^t^{or is e}^q^ua^l^{to t}^h^eⁿ^u^m^b^e^r^of
^e^l^a^p^s^e^{d y}^e^a^r^s^af^te^r^ag^e^{22 div}ⁱ^de^d^by^fⁱ^v^e^a^{nd r}^o^u^nde^d^d^o^wⁿ^the^ne^a^r^e^s^t^w^holeⁿ^u^m^b^e^r^{. For}^e^x^a^m^{ple, a}^pe^r^s^on^w^{ith 2}⁰
^e^l^a^p^se^{d y}^e^a^r^s^w^ould^ha^v^e^a^disa^bi^lity^dropo^{ut f}^a^c^t^{or of}^f^our^aⁿ^d¹⁶^tota^{l c}^o^m^puta^tio^{n y}^e^a^r^{s. For surv}ⁱ^v^{ors be}^ne^f^{its, the}
^num^be^{r of}^c^o^m^puta^{tion y}^e^a^r^{s is e}^qua^{l t}^o^t^h^eⁿ^u^m^b^e^r^of^y^e^a^r^{s tha}^t^h^a^v^e^e^l^a^p^se^{d f}^r^o^m^the^tim^e^the^w^o^r^k^e^r^turne^d²²^un^til
^he^or^s^h^e^die^d^{, r}^e^d^u^c^e^d^by^fⁱ^ve^{. For}^e^x^am^ple^,^a^w^o^r^k^e^r^w^{ho die}^d^a^t^the^a^g^e^of^{32 w}^oul^{d ha}^v^e¹⁰^e^l^a^p^s^e^{d y}^e^a^r^s^a^{nd f}ⁱ^v^e
^c^o^m^puta^{tion y}^e^a^r^s^.
²⁷^{CRS Rep}^o^r^{t 9}⁴^-6²²^,^So^ci^a^l^S^ecuri^t^y^{: R}^aⁱ^sⁱⁿ^g^t^h^{e R}^e^tⁱ^r^emen^t^A^g^e^B^a^ckg^ro^un^{d an}^d^Iss^u^es^{, b}^y^Geo^ffre^y^{C. Ko}^llm^anⁿ^.
²⁸^T^h^e^Dy^na^sⁱ^m^m^ode^{l doe}^sⁿ^o^{t s}ⁱ^m^u^la^te^c^h^aⁿ^g^e^s^{in indiv}ⁱ^d^u^a^l^s^’^be^ha^vⁱ^or^d^u^e^to^po^lic^y^c^h^aⁿ^g^e^s^.
²⁹^In²⁰³⁵^,^ab^ou^t^a^q^u^a^rt^{er o}^f^al^l^aged^S^o^ci^al^S^ecu^ri^t^y^b^eⁿ^e^fⁱ^ci^ari^e^{s a}^r^{e p}^r^o^j^ect^ed^t^o^recei^{ve s}^pous^e^or^s^u^r^v^iv^or^be^ne^f^its^.
^Fo^{r m}^o^{re in}^f^o^rm^atioⁿ^,^see^Ap^p^eⁿ^d^ix^B^.

This report examines a proposal to increase the number of computation years from 35 to 38 ³⁰
years. The change would begin in 2013 and would affect only new beneficiaries who became
eligible for benefits in 2013 or after, not beneficiaries who became eligible before 2013. Two
versions of this option are analyzed:
• Increasing the number of computation years to 38 for all newly eligible beneficiaries,
including disability beneficiaries; and
• Increasing the number of computation years to 38 for newly eligible retirement and
survivor beneficiaries only (and holding disability beneficiaries harmless).
Variations on these options which would increase the number of computation years from 35 to 40
were also analyzed. These options yielded greater benefit reductions with nearly identical
distributional effects. While the focus of the analysis below is the option to increase the number
of computation years from 35 to 38, the results of the two options to increase the number of
computation years to 40 will be discussed briefly. Full distributional results for the 40
computation year options are available in CRS Report RL33841, Options to Address Social
Security Solvency and Their Impact on Beneficiaries: Results from the Dynasim Microsimulation ³¹
Model—Detailed Distributional Tables.
The addition of more computation years would generally reduce benefits by adding years with
lower earnings or with no earnings into the Social Security benefit calculation. Some
beneficiaries would not be affected by the change, since they (and, in some cases, their spouses)
are projected to become eligible for benefits before 2013. The distributional analysis in 2035
shows that this group of beneficiaries is more likely to be older, to receive survivor benefits, and
to have lower incomes than beneficiaries who become eligible for benefits in 2013 or later.
In 2035—22 years after the option to increase the number of computation years to 38 for all
newly eligible beneficiaries would be implemented—Social Security beneficiaries are projected
to receive a median benefit cut of 2% compared with current law. For the option to increase the
number of computation years to 40, beneficiaries are projected to receive a median reduction in
benefits of 4% compared with current law.
The effects of changing the number of computation years would vary depending on a
beneficiary’s age. In 2035, younger beneficiaries would have larger benefit cuts compared with
older beneficiaries, since the new formula is assumed to apply only to people who become

³⁰^For^dis^a^bili^ty^a^{nd s}^u^r^v^iv^or^s^be^ne^f^its^{, the}^c^h^aⁿ^g^e^{in t}^h^eⁿ^u^m^b^e^r^of^c^o^m^puta^{tion y}^e^a^r^s^w^ould^be^pr^o^p^o^r^tio^na^te^to^the
^ch^an^{ge f}^o^{r ret}ⁱ^r^ed^w^o^{rker b}^eⁿ^e^fⁱ^t^s^.^F^o^r^exa^m^p^l^e,ⁱⁿ^t^h^{e p}^r^o^p^o^s^al^t^oⁱⁿ^{crease t}^h^{e n}^u^m^b^e^{r o}^f^co^m^p^u^t^atⁱ^oⁿ^y^ear^{s f}^r^o^m³⁵
^{to 3}⁸^f^o^{r a}^ll^be^ne^fⁱ^cⁱ^a^r^ie^{s, the}^nu^m^b^e^r^of^c^o^m^puta^{tion y}^e^a^r^s^f^o^{r disa}^bility^a^{nd surv}^iv^{or be}^ne^fⁱ^cⁱ^a^r^ie^s^w^{ould be}
^c^a^l^c^u^la^te^{d a}^s^theⁱ^r^c^o^m^puta^tio^{n y}^e^a^r^s^unde^r^c^u^r^r^eⁿ^t^la^w^tim^e^s^1.09⁽^t^ha^{t is}^,³⁸^divⁱ^de^{d by}³⁵⁾^,^theⁿ^r^o^unde^{d t}^o^t^h^e
ⁿ^earest^y^ear.
³¹^Se^e^C^R^S^R^e^por^{t R}^L³³⁸⁴¹^,^O^p^tⁱ^oⁿ^s^to^Ad^dr^e^s^s^Soc^ia^{l Se}^c^u^r^ity^Solv^e^nc^y^and^Theⁱ^r^I^m^pac^t^on^Be^ne^fic^iarⁱ^e^s^:^Re^s^u^lts
^fr^om^the^D^yⁿ^a^sⁱ^m^Mⁱ^c^r^os^im^ula^tio^{n M}^ode^l—D^e^t^a^ile^{d D}ⁱ^s^t^rⁱ^bu^tio^nal^Ta^ble^s^,^b^y^L^a^u^r^{a Hal}^t^zel^et^al^.

eligible for Social Security benefits in 2013 or later. For example, beneficiaries between the ages
of 62 and 66 would have a median benefit reduction of 3% relative to current law if the number
of computation years was increased to 38 for all beneficiaries, as shown in Figure 6. This is
because over 98% of beneficiaries in this age group would have been subject to the new ³²
formula. In contrast, beneficiaries over the age of 85 would have no median change, since 90%
of these beneficiaries would not have been subject to the new formula because they became
eligible for benefits before 2013.
Figure 6. Median Percentage Change in Benefits Under 38 Computation Years
Compared with Current Law Among Beneficiaries in 2035 by Age and Benefit Type
(All Benefit Types Affected)
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^P^{lease see the section on}^{“What Do the Figures Show?” in}^{the re}^{port “Int}^{roduction.”}
The effects of changing the number of computation years would also vary depending on the type
of benefits a person receives. One reason is that the proportion of beneficiaries who become
eligible for benefits before 2013 varies significantly by benefit type. Thus, the proportion of
beneficiaries subject to the new rules would also vary by benefit type. For example, as shown in
Figure 6, survivor beneficiaries would have a median reduction of about 1% compared with
current law, while retired worker beneficiaries would have a median reduction of about 3%. The
primary reason for this difference is that fewer survivor beneficiaries would be subject to the new
rules: about a third of survivor beneficiaries in 2035 are projected to become eligible for benefits
before 2013 compared with fewer than 6% of retired worker beneficiaries. (Survivors are eligible
for Social Security benefits at age 60, two years earlier than retired workers.) Among

³²^T^h^e^re^m^a^ining^2%^of^be^ne^fⁱ^cⁱ^a^rⁱ^e^{s be}^tw^e^e^{n a}^g^e^s^{62 a}^nd⁶⁶^w^{ho h}^a^v^e^{no be}^ne^f^{it re}^duc^ti^{on w}^e^re^disa^bility
^b^eⁿ^e^fⁱ^ci^ari^e^s^w^h^o^w^e^r^e^elⁱ^gⁱ^b^l^e^t^o^recei^{ve b}^eⁿ^e^fⁱ^t^s^b^e^f^o^{re 2}⁰¹³^.

beneficiaries who become eligible for benefits in 2013 or later, spouse and survivor beneficiaries
are also likely to experience smaller benefit reductions because of the current-law Social Security ³³
rules governing these types of benefits. For example, some spouse and survivor beneficiaries
receive benefits based on the earnings record of a spouse who became eligible for benefits before

2013, and thus would not be affected by the new formula.

Figure 7. Percentage Change in Benefits Under 38 Computation Years Compared
with Current Law Among Beneficiaries in 2035 by Income Quintile (All Benefit
Types Affected)
¹⁰^0%
¹⁴^%¹⁴^%⁹⁰^%
²²^%¹⁸^%¹⁵^%
⁸⁰^%
⁷⁰^%
⁶⁰^%
⁵⁰^%
⁸⁵^%⁸⁵^%⁴⁰^%
⁷⁸^%⁸²^%⁸⁴^%
³⁰^%
²⁰^%
¹⁰^%
^1%^1%
^1%^1%^0%
^Lo^wes^t^Seco^nd^Thⁱ^r^d^F^our^th^Hi^g^hest
^Q^uⁱⁿ^tⁱ^le^Q^uⁱⁿ^tile^Q^uⁱⁿ^tile^Q^uⁱⁿ^tile^Q^uⁱⁿ^tile
^-2^0%^o^r^m^o^re^-1^{9% t}^o^-1^0%^up^to^-¹⁰^%^no^c^h^an^ge
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^{Categories may not add t}^o¹⁰⁰^{% due to rou}^{nding. Please see the section on}^{“What Do the}^Figures
^{Show?” in the re}^{port “I}^ntroducti^on.”
The effect of the changes in the number of computation years would vary by income group. As
Figure 7 shows, about 78% of beneficiaries in the lowest income quintile would receive a benefit
cut under the option to increase the number of computation years to 38, and 22% would
experience no change relative to current law. Among beneficiaries in the highest income quintile,
a higher proportion of beneficiaries (87%) would receive a benefit cut under the option and a
lower proportion (14%) would experience no change.
The variance by income group can be explained by the disproportionate number of beneficiaries
in each quintile who become eligible for benefits before 2013, the year in which the proposal is
assumed to begin. For example, more beneficiaries in the lowest income quintile were eligible to
receive benefits before 2013 than in the highest income quintile (19% compared with 12%,
respectively). One reason for this discrepancy is that the lowest income quintile includes a

³³^Fo^{r m}^o^{re in}^f^o^rm^atioⁿ^,^see^A^p^p^e^ndi^x^B^.

disproportionate number of disability beneficiaries, who are eligible to receive benefits earlier ³⁴
than retired worker beneficiaries.
Some individuals’ benefits are not changed under the option even though they began to receive
benefits in 2013 or later. The explanation for this result depends on the type of benefits received.
Among beneficiaries who are projected to take up benefits in 2013 or later but whose benefits are
unchanged by the proposal, 85% are spouse or survivor beneficiaries, 14% are disability
beneficiaries, and the remaining 1% are retired worker beneficiaries. Spouse and survivor
beneficiaries are less likely to be affected by any benefit reduction because their benefit amounts
are based on the work records of their spouses, who may not be subject to the change, or may
experience a change that is smaller than the spouse or survivor would have received based on his ³⁵
or her own work record. Disability beneficiaries are less likely to be affected by changes in the
number of computation years, because increases in the number of computation years are applied
proportionately; under current law, many disability beneficiaries have a smaller number of ³⁶
computation years. Finally, all of the retired worker beneficiaries who are unaffected by this
proposal despite becoming eligible for benefits in 2013 or later were affected by the retirement
earnings test (RET) early in their retirements, but in 2035 would be older than the full retirement
age. These individuals’ benefits are adjusted upward at the full retirement age and the adjustments ³⁷
tend to eliminate or mitigate the effects of benefit reductions.
The option to increase the number of computation years to 38 for all but disability beneficiaries
would have the same impact as the other computation year option, except that disability
beneficiaries (and, in some cases, their spouses and survivors) would not be subject to the ³⁸
change. Under the option that would increase the number of computation years to 38 and hold
disability beneficiaries harmless, beneficiaries in 2035 are projected to have a median benefit cut
of 2% compared with current law. Under the option that would increase the number of
computation years to 40 and hold disability beneficiaries harmless, beneficiaries in 2035 are
projected to have a median benefit cut of 3% compared with current law.

³⁴^T^h^e^r^e^a^r^e^ne^a^r^l^y^thre^e^ti^m^e^{s a}^s^m^a^ny^disa^bility^be^ne^fⁱ^cⁱ^a^r^ie^{s in the}^low^e^{st inc}^o^m^e^quin^tile⁽^28%^{) a}^sⁱⁿ^the^hig^h^e^s^t
^inc^o^m^e^quinti^l^e⁽¹^0%⁾^.
³⁵^Fo^{r m}^o^{re in}^f^o^rm^atioⁿ^,^see^A^p^p^e^ndi^x^B^.
³⁶^In^othe^{r w}^o^rds,^un^de^{r the}^ne^w^f^o^rm^ula^,^disa^bility^be^ne^fⁱ^cⁱ^a^r^ie^s^m^a^y^ha^v^e^be^twe^eⁿ^z^e^r^{o a}^{nd tw}^{o a}^d^dⁱ^tiona^l
^co^m^p^u^t^atⁱ^oⁿ^y^{ears i}ⁿ^cl^u^d^e^dⁱⁿ^t^h^eⁱ^{r b}^eⁿ^e^fⁱ^t^co^m^p^u^t^atⁱ^o^n,^co^m^p^ared^wⁱ^t^h^t^w^o^y^ear^{s f}^o^{r al}^l^retⁱ^r^ed^w^o^rkers.
³⁷^Fo^{r m}^o^{re in}^f^o^rm^atioⁿ^,^see^A^p^p^e^ndi^x^C^.
³⁸^Ot^h^e^{r f}^a^mⁱ^l^y^m^e^m^b^ers^w^h^o^recei^{ve b}^eⁿ^e^fⁱ^t^s^b^a^sed^oⁿ^t^h^{e reco}^rd^o^f^{a d}ⁱ^sab^l^edⁱⁿ^dⁱ^vi^d^u^a^l^’^{s w}^o^rk,ⁱⁿ^cl^u^dⁱⁿ^g^t^h^e
^w^o^r^k^e^r^’^s^c^h^ildr^e^{n a}ⁿ^d^pa^r^e^nts^,^w^{ould a}^l^s^o^be^he^ld^ha^r^m^le^s^s^.^H^o^w^e^ve^r^,^the^s^e^be^ne^fⁱ^cⁱ^a^r^ie^s^a^r^e^{not a}ⁿ^a^l^y^z^e^d^{in D}^y^na^sⁱ^m^.

Figure 8. Median Percentage Change in Benefits Under 38 Computation Years
Compared with Current Law Among Beneficiaries in 2035 by Age and Benefit Type
(DI Beneficiaries Not Affected)
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^P^{lease see the section on}^{“What Do the Figures Show?” in}^{the re}^{port “Int}^{roduction.”}
All age groups, except persons over the age of 85 or under the age of 62 would see a reduction in
benefits under this proposal as shown in Figure 8. Persons aged 61 or younger would not see a
benefit reduction because almost all of these younger beneficiaries receive disability benefits, ³⁹
which are not affected under the proposal.
For retired worker only beneficiaries, the median benefit reduction compared with current law
under this option would be 3%, as shown in Figure 8. Disability beneficiaries’ benefits would not
be subject to reductions under this option. Spouse beneficiaries would receive a median benefit
reduction of 2% under the hold harmless option and survivor beneficiaries would receive no ⁴⁰
reduction under the hold harmless option.

³⁹^Am^ong^the^be^ne^fⁱ^cⁱ^a^r^ie^{s a}ⁿ^a^l^y^z^e^dⁱⁿ^this^re^port^,^t^hose^u^nde^{r a}^g^e⁶²^a^r^e^a^l^m^o^{st a}^{ll disa}^bility^be^ne^fⁱ^cⁱ^a^r^ie^{s. In 2}⁰³⁵^,
⁹⁶^%^o^f^b^eⁿ^e^fⁱ^{ciaries in}^th^{is categ}^o^r^y^{are p}^r^o^j^ected^to^receiv^e^dⁱ^sabⁱ^lity^b^eⁿ^e^f^{its an}^d⁴^%^{are p}^r^o^j^ected^to^h^a^v^e^tak^eⁿ^u^p
^s^u^r^v^iv^or^be^ne^f^its^a^t^a^g^e^{60 or}⁶¹^.
⁴⁰^Iⁿ^a^ll,^a^b^o^u^t^55%^of^s^u^r^v^iv^or^beⁿ^e^fⁱ^cⁱ^a^r^ie^s^w^{ould s}^e^eⁿ^o^c^h^aⁿ^g^eⁱⁿ^be^ne^f^its^unde^r^t^h^e^h^o^l^d^ha^r^m^le^s^s^opti^oⁿⁱⁿ²⁰³⁵^.
^S^o^m^e^o^f^t^h^{ese b}^eⁿ^e^fⁱ^ci^ari^e^{s recei}^{ve b}^eⁿ^e^fⁱ^t^s^b^a^sed^oⁿ^t^h^{e reco}^rd^o^f^{a sp}^ou^{se w}^h^o^w^a^{s d}ⁱ^sab^l^ed^(an^d^t^h^u^s^w^o^u^l^d^h^a^ve
^be^eⁿ^he^l^d^ha^r^m^le^s^s^unde^r^t^h^e^op^ti^on)^.^O^t^he^r^s^be^g^a^{n t}^o^r^ecei^{ve b}^eⁿ^e^fⁱ^t^s^b^e^f^o^re^2013,^w^h^eⁿ^the^ne^w^f^o^r^m^ula^is^a^s^s^u^m^e^d
^{to ta}^k^e^e^f^f^e^c^t^.

Figure 9. Percentage Change in Benefits Under 38 Computation Years Compared
with Current Law Among Beneficiaries in 2035 by Income Quintile (DI Beneficiaries
Not Affected)
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^{Categories may not add t}^o¹⁰⁰^{% due to rou}^{nding. Please see the section on}^{“What Do the}^Figures
^{Show?” in the re}^{port “I}^ntroducti^on.”
Because a disproportionate number of DI beneficiaries have low incomes, the contrast between
the highest and lowest income quintiles is pronounced for this option that would hold DI
beneficiaries harmless. As Figure 9 shows, about 59% of beneficiaries in the lowest income
quintile are affected by the option to increase the computation years for all but DI beneficiaries,
compared with 77% in the highest income quintile.
A bill to increase the number of computation years for Social Security benefits, H.R. 3315, was
introduced in 2001 by Representative DeFazio. This bill would have, among other things, ^th
gradually phased in an increase in the number of computation years from 35 to 38. In the 109
Congress, Representatives Kolbe and Boyd introduced H.R. 440, which would, among other
things, increase the number of computation years to 40 for most beneficiaries. Because the
mechanics of how this provision would be implemented in H.R. 440 are very different from the ⁴¹
approach analyzed in this report, the solvency estimate for that provision is not included here.

⁴¹^T^h^e^inc^r^e^a^s^e^{in the}ⁿ^u^m^b^e^r^of^c^o^m^puta^{tion y}^e^a^r^s^w^{ould be}^g^r^a^dua^l^l^y^pha^s^e^{d in a}ⁿ^d^,^f^o^r^m^a^r^rⁱ^e^d^c^o^u^p^le^s^,^w^ould
^a^pply^only^{to the}^hig^h^e^r^-^e^a^r^ning^s^pous^e^.^For^m^o^r^e^inf^o^r^m^a^{tion, s}^e^e^Socⁱ^a^l^Se^c^u^r^ity^A^d^mⁱ^nis^t^r^a^{tion m}^e^m^o^r^a^ndum^to
^R^e^pr^e^s^eⁿ^ta^tiv^e^s^Jⁱ^m^K^o^lbe^a^{nd A}^lle^{n B}^o^y^d^f^r^om^Ste^phe^{n C}^.^G^o^s^s^,^C^h^ie^f^A^c^tua^r^y^,^A^lic^e^H^.^W^a^de^{, De}^puty^C^h^ie^f
^A^c^t^u^ar^y^,^an^d^Ch^ri^{s Ch}^ap^l^aⁱⁿ^,^A^c^t^u^ary^,^“E^stⁱ^m^at^ed^OA^S^D^{I F}ⁱⁿ^aⁿ^cⁱ^a^l^E^f^f^ect^{s o}^f^t^h^{e Bi}^p^a^rtⁱ^s^an^Retⁱ^r^emen^t^S^ecu^ri^t^y^A^c^t
^of²⁰⁰^5—Inf^o^rm^a^tion,”^Nov^e^m^b^e^r^{4, 2}⁰⁰⁵^{, a}^t^htt^p^://w^ww^.ss^a^.g^ov^/^O^A^C^T^/^solv^eⁿ^c^y^/Kolbe^_2⁰⁰⁵¹¹⁰^4.p^d^f^.

In response to a request from the Social Security Advisory Board, the Social Security actuaries
estimated the solvency effects of increasing the number of computation years for retirees and
survivors, but did not prepare any estimates for an increase in computation years which affects
disability beneficiaries. The actuaries’ estimates for the proposal to increase the number of
computation years from 35 to 38 assumes the proposal is phased in from 2006 to 2010, and the
proposal to increase the number of computation years from 35 to 40 is phased in from 2006 to

2014. The options in this report are assumed to begin in 2013 with no phase-in.

The actuaries’ estimates for the Advisory Board were prepared using the 2005 Social Security
Trustees Report, which estimated the long-range solvency gap as 1.92% of payroll and projected ⁴²
trust fund insolvency in 2041. According to the actuaries:
• Increasing the number of computation years for retirement and survivor beneficiaries
from 35 to 38 would reduce Social Security expenditures by an estimated 0.28% of
payroll, solving about 15% of the program’s long-range funding gap and extending
solvency for about two years.
• Increasing the number of computation years for retirement and survivor beneficiaries
from 35 to 40 would reduce Social Security expenditures by an estimated 0.46% of
payroll, solving about 24% of the program’s long-range funding gap and extending
solvency for about four years.

The Social Security full retirement age (also referred to as the normal retirement age) is the age at ⁴³
which individuals may begin receiving full (or unreduced) retirement benefits. Retired workers
and spouses are treated differently under FRA rules than are survivors.

The full retirement age (FRA) for workers and spouses is increasing gradually from age 65 to age ⁴⁵
67 over a 22-year period that began in January 2000. Specifically, the FRA will increase from
age 65 to age 66 in two-month increments for individuals born in 1938 through 1943. The FRA
will remain age 66 for individuals born in 1944 through 1954. It will increase again from age 66

⁴²^Socⁱ^a^l^Se^c^u^rⁱ^ty^A^d^mⁱ^nis^t^r^a^tion^m^e^m^o^r^a^ndum^{to Ste}^p^he^{n C}^.^G^o^s^s^,^C^h^ie^f^A^c^tua^r^y^f^r^o^m^C^h^rⁱ^s^C^h^a^p^l^a^{in, A}^c^tua^r^y^,^a^nd
^A^lic^e^H^.^W^a^de^{, D}^e^puty^C^h^ie^f^A^c^tua^r^y^,^“^E^s^tⁱ^m^a^t^e^d^O^A^SD^I^L^ong^-^R^aⁿ^g^e^Fina^nc^ia^{l Ef}^f^e^c^t^s^of^a^Se^v^e^r^a^{l P}^r^ov^is^io^ns
^Re^que^ste^d^by^the^Socⁱ^a^l^Se^c^u^rity^A^d^vⁱ^sor^y^Boa^r^d,”^A^u^g^u^{st 10,}²⁰⁰^{5, a}^t^http^://w^ww^.^ssa^b.g^o^v^/^doc^um^eⁿ^ts/
^a^d^vⁱ^s^o^r^y^boa^r^d^m^e^m^o^—²⁰⁰⁵^tr^—⁰⁸¹⁰²⁰⁰⁵^.p^df^.
⁴³^T^h^e^f^u^{ll r}^e^tir^em^eⁿ^{t a}^g^e^is^the^a^g^{e a}^t^w^h^ic^{h r}^e^tir^e^m^eⁿ^{t be}^ne^f^its^a^r^e^e^qua^{l t}^o^t^h^e^w^o^r^k^e^r^’^s^pr^im^a^r^y^ins^u^r^a^nc^e^am^ount.
^For^m^o^r^e^inf^o^r^m^a^{tion on}^the^c^o^m^puta^tⁱ^on^of^the^pr^im^a^r^y^ins^u^r^a^nc^e^am^ount^un^de^r^c^u^r^r^e^nt^la^w^,^ple^a^s^e^r^e^f^e^r^to^A^ppeⁿ^dⁱ^x
^A^.
⁴⁴^Disab^l^ed^w^o^rk^{ers recei}^v^e^Disab^ility^In^su^ran^{ce (DI) b}^eⁿ^e^f^{its u}ⁿ^til^t^h^ey^re^ach^th^{e FRA}^,^an^d^so^{are h}^e^l^d^-h^arm^l^ess^f^r^o^m
^an^yⁱⁿ^creas^{e i}ⁿ^t^h^{e F}^R^A^.
⁴⁵^T^h^{e i}ⁿ^{crease i}ⁿ^t^h^{e F}^R^A^sch^e^d^u^l^ed^uⁿ^d^e^{r cu}^rrent^l^a^w^{was en}^act^ed^{as p}^a^rt^o^f^t^h^{e S}^o^ci^al^S^ecu^ri^t^y^Am^en^d^m^en^t^s^o^f
¹⁹⁸^{3 (}^P^.L^{. 98-}²¹⁾^.

to age 67 in two-month increments for individuals born in 1955 through 1960. The FRA will
remain age 67 for individuals born after 1960.
For example, workers born in 1945 would have an FRA of age 66. They would therefore be ⁴⁶
eligible for full Social Security retirement benefits in 2011.
Under current law, workers and their spouses may choose to receive reduced retirement benefits
as early as age 62. This reduction is designed to provide beneficiaries with equal benefits, on
average, over their lifetime regardless of the age at which they elect to receive benefits. Although
the FRA is increasing under current law, the earliest eligibility age will remain age 62. The
maximum reduction for workers who elect to receive benefits at age 62 ranges from 20% (based ⁴⁷
on an FRA of 65) to 30% (based on an FRA of 67). The reduction for spouses is slightly higher
than that for retired workers.
Continuing the example above, workers born in 1945 would reach age 62 in 2007. These workers
would be eligible for early (or reduced) retirement benefits beginning in 2007 (assuming all other
eligibility requirements are met). If they opted to begin benefits at that time, their Social Security
benefits would be permanently reduced by 25%.
Under current law, aged survivors may begin receiving benefits as early as age 60 (two years
earlier than retired workers and spouses). If disabled, aged survivors may begin receiving benefits
as early as age 50. As such, the scheduled increase in the FRA under current law affects survivors ⁴⁸
born in 1940 or later (rather than 1938 or later as for retired workers and spouses).
The maximum reduction in survivor benefits for early retirement remains 28.5% as the FRA
increases from age 65 to age 67, with a proportionate monthly reduction based on the number of ⁴⁹
months between age 60 and the FRA.
Life expectancy has increased and is projected to continue to increase for future generations. For
example, the Social Security Administration’s actuaries estimate that, in 1950, a 65-year-old male
had a remaining life expectancy of approximately 13 years. By comparison, in 2000, a 65-year-⁵⁰
old male had a remaining life expectancy of 16 years. The pattern is similar for females. The
actuaries estimate that a 65-year-old female in 1950 had a remaining life expectancy of 15 years,
compared with 19 years for a 65-year-old female in 2000. Projected increases in life expectancy

⁴⁶^{For m}^o^re^inf^o^rm^a^{tion, se}^e^the^SS^A^w^e^bsite^a^t^http://w^ww^.s^sa^.g^ov^/^r^e^tire^c^h^a^r^tre^d^.htm^.
⁴⁷^{For m}^o^re^inf^o^rm^a^{tion, se}^e^the^SS^A^w^e^bsite^a^t^http://w^ww^.s^sa^.g^ov^/^r^e^tire^c^h^a^r^tre^d^.htm^.
⁴⁸^{For m}^o^re^inf^o^rm^a^{tion, se}^e^the^SS^A^w^e^bsite^a^t^http://w^ww^.s^sa^.g^ov^/^s^urvⁱ^v^o^rc^ha^rtre^d.htm^.
⁴⁹^T^h^{ere i}^sⁿ^o^addⁱ^tⁱ^oⁿ^a^l^re^d^u^c^tⁱ^oⁿ^f^o^{r recei}^p^t^o^f^dⁱ^sabl^ed^wⁱ^d^o^w^{(er) b}^eⁿ^e^fⁱ^t^s^b^e^f^o^{re a}^g^{e 6}⁰^.^T^h^{e m}^oⁿ^t^h^l^y^r^e^d^u^c^tⁱ^o^{n i}ⁿ
^s^u^r^v^iv^or^be^ne^f^its^f^o^r^e^a^r^l^y^r^e^tir^em^eⁿ^{t w}^ould^be^e^q^ua^{l to}²⁸^.5%^divⁱ^de^{d by}^the^to^ta^{l n}^u^m^b^e^r^of^m^onth^s^f^r^o^m^a^g^e^{60 t}^o
^the^FR^A^.^For^e^x^a^m^ple^,^the^m^onth^l^y^r^e^duc^{tion i}ⁿ^s^u^r^v^iv^or^be^ne^f^its^f^o^r^aⁿⁱⁿ^dⁱ^vⁱ^dua^{l w}^{ith a}ⁿ^FR^A^of^{67 w}^ould^be
^0.3^39%^[^.²⁸^{5 /}⁸⁴^m^onths⁼⁰^.⁰⁰³³⁹^]^.^F^o^r^m^o^r^e^inf^o^r^m^a^{tion, s}^e^e^the^Socⁱ^a^l^Se^c^u^r^ity^A^d^mⁱ^nis^t^r^a^{tion w}^e^bs^ite^a^t
^http:^//w^w^w^.s^s^a^.g^ov^/^s^ur^vⁱ^v^o^r^c^ha^r^t^r^e^d.htm^.
⁵⁰^Be^{ll, Fe}^lic^itie^C.^A^{nd Mic}^h^a^e^l^L^.^Mille^{r (}²⁰^05).^Life^T^a^b^l^e^s^{for t}^h^e^Unite^d^St^ate^s^Socⁱ^a^l^Se^c^u^rity^Are^a¹⁹⁰⁰^-2¹⁰⁰^.
^S^o^ci^al^S^ecu^ri^t^y^A^d^mⁱⁿⁱ^st^ratⁱ^oⁿ^,^O^f^fⁱ^{ce o}^f^t^h^{e Ch}ⁱ^e^f^Act^u^ar^y^.^Act^u^ari^a^l^S^t^ud^y^No^.¹²⁰^,^T^a^b^l^{e 6.}

suggest to some policymakers that individuals could spend more years in the labor force (rather ⁵¹
than in retirement), thereby reducing the financial strain on the Social Security system.
An increase in the FRA could reduce financial strain on the system in two ways; through reduced
benefit payments and through increased revenues. First, cost savings for the system would result
from larger benefit reductions for individuals who choose to retire early, or from individuals who
opt to wait until the higher FRA to retire. In 2002, 71% of workers who became entitled to
retirement benefits received reduced benefits because of entitlement before the FRA. In that year,
56% of workers elected retirement benefits at the earliest eligibility age (age 62). If a majority of
workers continue to elect early retirement (for a variety of reasons that may include poor health, a
physically demanding occupation, preference for leisure, etc.), an increase in the FRA would
result in cost savings for the Social Security system. Alternatively, individuals may delay their
take-up of benefits to avoid the higher reduction for early retirement. In this case, the Social
Security system saves money because it pays out benefits to these individuals for fewer months.
Second, an increase in tax revenue for the system would result from additional payroll tax
contributions by individuals who choose to remain in the labor force for a longer period. The
extended period of covered employment by workers would generate additional payroll tax
revenue for the system, while the additional earnings could result in a higher benefit for these ⁵²
workers.
The Social Security Administration projects that an increase in the FRA would have a net positive
effect on the system’s financial outlook. They estimate that savings due to larger benefit
reductions for early retirement and/or increased payroll tax revenue associated with extended
periods of covered employment would outweigh any increase in benefit payments due to the
additional covered earnings or the potential increase in the number of older workers who would ⁵³
become entitled to unreduced disability benefits.
The FRA option examined in this report would accelerate the increase from age 66 to age 67
scheduled under current law and would further increase the FRA from age 67 to age 70.
Specifically, for retired workers and spouses, the FRA would increase from age 65 to age 66 in
two-month increments for individuals born in 1938 through 1943 (as under current law). It would
remain age 66 for individuals born in 1944 through 1950 (compared with 1944 through 1954
under current law). The FRA would increase again from age 66 to age 67 in two-month
increments for individuals born in 1951 through 1956 (the FRA would reach age 67 for persons
born in 1956—four years earlier than under current law). For individuals born in 1957 or later,
the FRA would continue to increase one month every two years until the FRA reaches age 70 for

⁵¹^A^lthoug^{h lif}^e^e^x^pe^c^t^aⁿ^cy^is^pr^oje^c^t^e^d^{to i}ⁿ^c^r^e^a^s^e^,^s^o^m^e^indivⁱ^dua^ls^m^a^y^{not be}^a^b^le^{to e}^x^teⁿ^d^theⁱ^r^w^o^r^k^ing^liv^e^s^due
^{to a}^v^a^rⁱ^e^t^y^o^f^f^a^c^t^or^s^tha^t^inc^l^ude^{, bu}^{t a}^r^eⁿ^o^{t lim}^ite^{d to}^{, he}^a^l^t^h^pr^o^b^le^m^s^{, phy}^sⁱ^ca^ll^y^-^dem^a^nding^oc^c^upa^ti^ons^aⁿ^d
^v^a^rⁱ^ous^a^s^pe^c^t^s^of^the^la^bor^m^a^r^k^e^t⁽^s^uc^{h a}^s^f^o^r^c^e^d^r^e^tir^e^m^eⁿ^{t a}^{nd l}^a^bor^s^u^pply^is^s^u^e^s^w^{ith r}^e^s^p^e^c^t^to^olde^r^w^o^r^k^e^r^s⁾^.
^For^a^d^diti^ona^l^inf^o^r^m^a^{tion on}^ol^d^e^r^w^o^r^k^e^r^s^a^{nd la}^bor^s^u^pply^is^s^u^e^s^{, ple}^a^s^e^s^e^e^C^R^S^R^e^por^{t R}^L³²⁷⁵^7,^Un^emplo^y^men^t
^and^O^l^de^r^W^o^r^k^e^r^s^{, by}^Julie^M.^W^h^itta^k^e^r.
⁵²^T^h^{e D}^yⁿ^a^si^m^m^o^d^e^l^d^o^e^{s no}^t^ass^u^m^e^an^y^ch^an^ge^{s i}ⁿ^b^e^h^a^vi^o^r^d^u^e^t^o^{a po}^lⁱ^c^y^ch^an^ge.^T^h^u^s^,^f^o^{r t}^h^{e an}^al^y^sⁱ^s^t^h^at
^f^o^llow^s^{, a}^{ll indiv}ⁱ^d^u^a^l^s^a^r^e^a^s^s^u^m^e^{d to a}^pply^f^o^r^Socⁱ^a^l^Se^c^u^r^ity^be^ne^f^its^a^t^the^s^a^m^e^a^g^e^unde^r^t^h^e^o^p^tio^{n a}^s^the^y^did
^unde^r^c^u^r^r^e^{nt la}^w^.
⁵³^Aⁿⁱⁿ^{crease i}ⁿ^t^h^{e F}^R^A^an^d^t^h^{e l}^a^{rger b}^eⁿ^e^fⁱ^t^red^u^c^tⁱ^oⁿ^cou^l^d^creat^{e t}^h^{e i}ⁿ^cen^tⁱ^{ve f}^o^{r i}ⁿ^dⁱ^vi^du^al^{s t}^o^ap^p^l^y^f^o^{r S}^o^ci^al
^Secu^rity^dⁱ^sab^ility^b^eⁿ^e^f^{its b}^ecau^{se d}ⁱ^sab^ility^b^eⁿ^e^f^its^w^o^u^l^d^b^e^uⁿ^a^ffected^b^y^th^{e FRA}^ch^an^g^e^.

individuals born in 2027 or later. The increase in the FRA for survivors under the option would be
the same as that for retired workers and spouses, although the phase-in would begin for
individuals born in 1940 (rather than 1938). The FRA would reach age 70 for survivors born in
2029 or later. In this illustration, beneficiaries born in 1951 or later who retire early would face
benefit reductions under this option.
Under this option (consistent with current law), individuals who receive disability benefits would
not be directly affected by an increase in the FRA. They would not be subject to reductions under
the FRA option because disability benefits are converted to retired-worker benefits when the
individual reaches the FRA. Thus an increase in the FRA and the benefit reductions associated
with early retirement do not directly affect disability beneficiaries because they do not receive
early retirement reductions.
For survivors, the maximum reduction would remain 28.5% for someone taking benefits at age
60, with a proportionate monthly reduction based on the number of months between age 60 and
the FRA. Thus, for each month of early retirement, the size of the reduction per month is smaller
under the FRA option than under current law. For example, under the FRA option, a survivor born
in 1958 would be subject to an FRA of 67 (compared with 66 and four months under current law).
The benefit reduction for each month of entitlement before the FRA would be .339% (.285/84
months = .00339) compared with .375% under current law. Therefore, because the per month
reduction is .036% per month smaller than under current law, this survivor beneficiary would
actually experience a very slight benefit increase under the FRA option relative to current law.
The early retirement reduction for retired workers and spouses would increase to reflect the
increase in the FRA. For example, for an individual with an FRA of 67 and one month (i.e., an
individual born in 1957), the total reduction in retired-worker benefits would be 30.4%
(compared with 27.5% under current law) for an individual who elects to receive benefits at age

62. The total reduction in spousal benefits for this individual at age 62 would be 35.4%

(compared with 32.5% under current law).
The effects of an increase in the FRA vary by age, benefit type and income quintile.
• Generally, the younger the cohort, the greater the reduction in benefits under the FRA
option compared with current law. This finding is consistent with the design of the option
in which the FRA (and, therefore, the level of benefit reduction associated with early
retirement) would increase gradually over time for individuals born in 1951 or later.
• The results show that disability and survivor beneficiaries would receive a median
benefit reduction of 0% compared with current law. Because disability beneficiaries are
not affected by changes in the FRA under current law, they are held harmless under this
option. In addition, because the FRA option maintains the maximum benefit reduction for
survivor benefits, most survivor beneficiaries are also held harmless.
• Spouse and retired-worker beneficiaries would receive median reductions of 2% and ⁵⁴
3%, respectively. The slightly greater reduction for retired-worker beneficiaries is
attributed to their younger ages.

⁵⁴^T^h^e^m^e^diaⁿ^r^e^pr^e^s^eⁿ^ts^be^ne^fⁱ^cⁱ^a^r^ie^s^a^t^the^mⁱ^ddle^of^the^dⁱ^s^t^rⁱ^b^u^ti^oⁿ⁽ⁱ^.e^.,^ha^lf^of^the^be^ne^fⁱ^cⁱ^a^r^y^pop^ula^tio^{n i}ⁿ²⁰³⁵
⁽^c^onti^nue^d.^..)

• The results show that a majority of the beneficiary population in each income quintile
would receive a benefit reduction of 10% or less. In addition, a small percentage of
beneficiaries would receive an increase in benefits due to the interaction of the FRA
option with the Social Security Retirement Earnings Test.
Figure 10 shows the median percentage change in benefits under the FRA option compared with
current law among beneficiaries in 2035 by age and benefit type. The results show that the
younger the cohort, the greater the reduction in benefits under the FRA option compared with
current law. This finding is consistent with the design of the option. As the FRA gradually
increases for each new cohort of beneficiaries, the reduction for early retirement will also ⁵⁵
gradually increase. Thus, the benefit reductions in the year 2035 are smaller than the reductions
in later years. A particular individual’s level of benefit reduction for retirement before the FRA
would depend on his/her year of birth (which determines the applicable FRA) and the age at
which he/she elected to receive benefits.
Figure 10. Median Percentage Change in Benefits Under Full Retirement Age
Increase Compared with Current Law Among Beneficiaries in 2035 by Age and
Benefit Type
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^P^{lease see the section on}^{“What Do the Figures Show?” in}^{the re}^{port “Int}^{roduction.”}

^(...c^on^tin^ue^d)
^w^{ould e}^x^pe^rⁱ^eⁿ^c^e^la^r^g^e^r^be^ne^f^{it r}^e^duc^tio^ns^aⁿ^d^ha^lf^of^the^be^ne^fⁱ^cⁱ^a^r^y^popu^la^tio^{n i}ⁿ²⁰³⁵^w^oul^{d e}^x^pe^rⁱ^eⁿ^c^e^sm^a^lle^r^or
^{no be}^ne^f^it^r^e^duc^ti^ons⁾^.
⁵⁵^Un^d^e^{r t}^h^{e F}^R^A^o^p^tⁱ^o^{n exa}^mⁱⁿ^edⁱⁿ^t^hⁱ^s^repo^rt^,^t^h^{e F}^R^A^w^o^u^l^d^reach^{age 7}⁰^f^o^{r i}ⁿ^dⁱ^vi^du^al^{s bo}^rnⁱⁿ²⁰²⁷^o^r^l^a^t^e^r.^F^o^r
^the^s^e^indivⁱ^dua^ls^{, t}^h^e^m^a^xⁱ^m^u^m^r^e^duc^tio^{n i}ⁿ^r^e^tir^e^d^-^w^or^k^e^r^be^ne^f^its^ta^k^e^{n a}^t^a^g^e^{62 w}^ould^be⁴³^%⁽^c^om^pa^r^e^d^w^ith
^30%^u^nde^r^c^u^r^r^e^{nt la}^w⁾^.

As shown in the figure, individuals aged 86 and older would not be affected by the FRA option.
Those aged 86 and older would have been eligible for benefits before the FRA option is assumed ⁵⁶
to take effect in 2013. Individuals aged 81-85 would receive a median benefit reduction of 1%,
compared with a median reduction of 2% for those aged 71-80 and a median reduction of 4% for
those aged 62-66. The youngest category of beneficiaries (aged 61 or younger) would have a
median change of 0% because 96% of individuals in this category are disability beneficiaries who
would not be directly affected by an increase in the FRA (see discussion below).
Figure 10 also shows a breakdown by benefit type. As illustrated, individuals receiving disability
benefits would receive no change in benefits compared with current law. Because disability
benefits are converted to retired-worker benefits when the individual reaches the FRA, an
increase in the FRA and the benefit reductions associated with early retirement do not directly
affect disability beneficiaries. In other words, disability beneficiaries are held harmless under the
FRA option.
The figure shows that the median benefit change for survivor beneficiaries under the FRA
increase would be 0% compared with current law. The vast majority of survivor beneficiaries
experience no change in benefits. This result is expected because the maximum reduction for
survivor benefits taken before the FRA is the same under current law and the option (28.5%).
Some survivor beneficiaries may experience slight benefit increases under the FRA option. Since
the 28.5% maximum reduction is divided over a greater number of months under the FRA
increase, the per month penalty for early retirement is smaller under the FRA increase than under
current law. Therefore, survivor beneficiaries who took benefits any time after age 60 could have
experienced a very slight benefit increase under the option. On the other hand, some survivor
beneficiaries that were not affected by the early retirement reduction under current law could
receive benefit reductions under the option to increase the FRA. For example, a survivor who
applied for benefits at age 67 under current law would have been retiring at or above the FRA and
would have experienced no benefit reduction. However, under the FRA increase to age 70, this
survivor would now be taking benefits earlier than the new FRA and would be subject to an early
retirement penalty.
The results also show that individuals receiving spousal benefits and retired-worker benefits
would receive median reductions of 2% and 3%, respectively, compared with current law.
Spouses would receive a slightly smaller reduction in benefits than retired-workers because
spouses tend to be slightly older and thus have a lower FRA. For example, spouses have a median
FRA of 67 and 3 months. By comparison, retired-workers have a median FRA of 67 and 4
months. The lower median FRA for the spouses results in smaller reductions than those for
reti red-workers.
Figure 11 shows the percentage change in benefits under the FRA option compared with current
law among beneficiaries in 2035 by income quintile. The results show that median benefit
reductions do not differ significantly by income group. A majority of the beneficiary population
in each income quintile would receive a benefit reduction of up to 10%.

⁵⁶^Becau^{se t}^h^{e o}^p^tⁱ^oⁿⁱ^s^assu^m^e^d^t^o^t^a^{ke e}^f^f^ectⁱⁿ²⁰¹³^,^t^h^{ere w}^o^u^l^d^b^eⁿ^o^ch^an^{ge i}ⁿ^b^eⁿ^e^fⁱ^t^s^f^o^{r i}ⁿ^dⁱ^vⁱ^d^u^a^l^s^b^o^rⁿⁱⁿ
¹⁹⁵⁰^or^e^a^r^lie^r^.^T^h^e^fⁱ^r^s^{t c}^ohor^t^a^f^f^e^c^t^e^d^un^de^r^the^opti^oⁿ^w^ould^be^w^o^r^k^e^r^s^borⁿⁱⁿ¹⁹⁵¹^w^{ho w}^ould^be^c^o^m^e^e^lig^ible
^f^o^{r re}^tire^m^eⁿ^{t be}^ne^f^{its a}^t^a^g^e^{62 in 2}⁰¹³^.

In general, the slow phase-in of the FRA increase would not result in large benefit reductions by
2035. The percentage of beneficiaries in each income quintile who would receive no change in
benefits ranges from 27% in the highest income quintile to 43% in the lowest income quintile. In
the lowest income quintile, of the 43% of beneficiaries who would receive no change in benefits,
65% are disability beneficiaries, who would not affected by the FRA increase, as previously
mentioned. The remainder of those in the lowest income quintile who would receive no change in
benefits are age 86 and older and, thus, would not be affected by the FRA increase.
Figure 11. Percentage Change in Benefits Under Full Retirement Age Increase
Compared with Current Law Among Beneficiaries in 2035 by Income Quintile
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^{Categories may not add t}^o¹⁰⁰^{% due to rou}^{nding. Please see the section on}^{“What Do the}^Figures
^{Show?” in the re}^{port “I}^ntroducti^on.”
Fewer beneficiaries in the highest income quintile (27%) would receive no change in benefits
than in the lowest income quintile because there are fewer disabled beneficiaries and fewer older
beneficiaries than in the lowest income quintile. The majority of beneficiaries in the highest
income quintile who would receive no change in benefits are disability beneficiaries or are age 86
and older and so are not affected by the FRA option.
The results show that a larger percentage of beneficiaries in the higher income groups would be
subject to benefit reductions under the FRA option compared with those in the lower income
quintiles. For example, the percentage of individuals who would receive a reduction of up to 10%
ranges from 56% in the lowest income quintile to 66% in the highest income quintile. The larger
percentage of beneficiaries who would receive up to a 10% benefit reduction in the highest
income category is attributed to the different share of beneficiaries in each quintile affected by the

Social Security Retirement Earnings Test (RET).⁵⁷ An increase in the FRA could increase the
number of months for which an individual is subject to the RET. Because the RET no longer
applies after the FRA, pushing back the FRA could cause individuals to experience additional
months of benefit reductions under the option. While 8% of beneficiaries in the highest income
quintile with benefit reductions of up to 10% are affected by the RET, none of the beneficiaries in
the lowest income quintile with this size benefit reduction are. Although the share of beneficiaries
affected by the RET differs, the share of beneficiaries by other characteristics, such as age and
benefit type, does not differ significantly between the lowest income quintile and the highest
income quintile (among beneficiaries who would receive a benefit reduction of up to 10%).
A slightly larger percentage of beneficiaries in the higher income quintiles would receive an
increase in benefit levels under the FRA option compared with those in the lower income
quintiles. For example, the percentage of individuals who would receive a benefit increase of up
to 10% ranges from 1% in the lowest income quintile to 4% in the highest income quintile. This
result is attributed to a larger percentage of individuals in the highest income quintile who have
benefits reduced by the RET prior to the FRA and who have reached the FRA by 2035. If an
individual’s benefits are withheld as a result of the RET, benefits are re-computed when he/she
reaches the FRA to take into account months for which benefits were withheld (i.e., reductions for
early retirement would not apply for those months). If an individual’s benefits are withheld for
additional months due to the increase in the FRA mentioned in the previous paragraph, the re-
computation of benefits at the FRA could ultimately result in a higher benefit compared with
current law (i.e., the re-computation would take into account additional months for which early
retirement reductions would not apply). The share of beneficiaries in the highest income quintile
who are affected by the RET and are above the FRA (in 2035) is 4 percentage points higher
compared with the lowest income quintile. Thus, a greater percentage of individuals in the highest
income quintile experience an increase in benefits under the FRA option.
In the 109^th Congress, H.R. 440, introduced by Representatives Kolbe and Boyd, would have
accelerated the increase in the FRA from age 65 to 67 scheduled under current law, so that the
FRA would have reached age 67 for individuals born in 1956 or later (four years earlier than
under current law). The Social Security Administration’s actuaries estimate that this provision
would have eliminated an estimated 3% of the program’s long-range funding shortfall projected ⁵⁸
under current law (based on the intermediate assumptions of the 2004 Trustees Report).
S. 540, introduced by Senator Hagel, would have raised the FRA from age 67 to 68 for
individuals born in 1961 or later. The cost estimate for S. 540 prepared by the Social Security
Administration’s actuaries does not include the estimated trust fund solvency effect of this ⁵⁹
provision on its own.

⁵⁷^T^h^e^R^E^T^r^e^duc^e^s^the^le^v^e^{l of}^be^ne^f^its^f^o^r^be^ne^fⁱ^cⁱ^a^rⁱ^e^s^w^{ho a}^r^e^y^oung^e^r^t^h^aⁿ^t^h^e^FR^A^a^{nd ha}^v^e^e^a^r^ning^s^a^bov^e^a
^s^p^e^cⁱ^fⁱ^e^d^am^{ount. U}ⁿ^de^r^t^h^e^R^E^T^,^a^{ll or}^pa^r^t^of^aⁿⁱⁿ^divⁱ^dua^l’^s^beⁿ^e^f^its^m^a^y^be^w^ithhe^{ld f}^o^r^a^pa^r^tic^ula^r^m^{onth if}
^e^a^r^ning^s^e^x^c^e^e^d^a^s^p^e^cⁱ^fⁱ^e^d^am^{ount. F}^o^r^m^o^r^e^inf^o^r^m^a^{tion on}^theⁱⁿ^te^r^a^c^tion^be^tw^e^eⁿ^the^R^E^T^a^{nd p}^o^lic^y^c^h^aⁿ^g^e^s^,
^p^l^{ease refer to}^A^ppeⁿ^dⁱ^x^C^.
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^Re^tire^m^eⁿ^{t Se}^c^u^rity^Ac^{t o}^f²⁰⁰⁵^,”^Nov^e^m^b^e^r^{4, 2}⁰⁰⁵^{, a}^v^a^ila^ble^a^t^h^ttp://w^ww^.ss^a^.g^ov^/^O^A^C^T^/^solv^eⁿ^c^y^/ⁱ^nde^x^.^htm^l^.
⁵⁹^S^o^ci^al^S^ecu^ri^t^y^A^d^mⁱⁿⁱ^st^ratⁱ^oⁿ^,^Offⁱ^c^e^o^f^t^h^{e Ch}ⁱ^e^f^Act^u^ar^y^,^Es^tim^ate^d^Fi^na^nc^ial^Effe^c^t^s^of^“T^he^S^a^vⁱ^ng^S^o^cⁱ^al
^Se^c^u^rity^Ac^{t of}²⁰⁰⁵^,”^Ma^rc^{h 1}⁰^,²⁰⁰^{5, a}^t^htt^p^://w^ww^.ss^a^.g^ov^/^O^A^C^T^/^solv^eⁿ^c^y^/ⁱ^nde^x^.^htm^l^.

S. 2427, introduced by Senator Bennett, would have accelerated the increase in the FRA from age
65 to 67 scheduled under current law, so that the FRA would have reached age 67 for individuals
born in 1955 or later (five years earlier than under current law). The cost estimate for S. 2427
prepared by the Social Security Administration’s actuaries does not include the estimated trust ⁶⁰
fund solvency effect of this provision on its own.
The actuaries at the Social Security Administration have calculated the impact on the solvency of
the Social Security trust funds of an option to increase the FRA similar to the one analyzed in this ⁶¹
report. Under the intermediate assumptions of the 2005 Trustees Report, the actuaries estimate
that eliminating the 10-year hiatus in the FRA increase from age 66 to age 67, and further
increasing the FRA by one month every two years until the FRA reaches age 70, would eliminate
about 36% of the program’s long-range funding shortfall projected under current law and extend ⁶²
the projected trust fund exhaustion date from 2041 to 2047.

Life expectancy is rising faster than the Social Security full retirement age (FRA).⁶³ From the ⁶⁴
start of the Social Security program in 1935 through the year 2000, life expectancy (longevity)
at age 65 increased by about five years while the Social Security FRA remained constant at age
65. In the year 2000, the FRA began gradually increasing from age 65 to age 67. This increase
was enacted in 1983 as part of a series of amendments to improve the solvency of the Social
Security system. When the FRA ultimately reaches age 67, life expectancy at age 65 will have
increased since 1935 by 5.5 and 6 years for men and women, respectively. Thus, despite the
currently-scheduled two-year increase in the FRA, an individual retiring at the FRA under current

⁶⁰^S^o^ci^al^S^ecu^ri^t^y^A^d^mⁱⁿⁱ^st^ratⁱ^oⁿ^,^Offⁱ^c^e^o^f^t^h^{e Ch}ⁱ^e^f^Act^u^ar^y^,^Es^tim^ate^d^Fi^na^nc^ial^Effe^c^t^s^of^a^Pr^op^os^{al t}^o^Re^s^t^or^e
^Sus^taⁱⁿ^able^Solv^eⁿ^c^y^f^o^r^the^Socⁱ^a^{l Se}^c^u^r^ity^Pr^ogr^am^{, Ma}^rc^h¹⁶^,²⁰⁰⁶^{, a}^v^a^ila^ble^a^t^htt^p^://w^ww^.ssa^.^gov^/OA^C^T^/
^s^o^lv^eⁿ^cy^/inde^x^.^htm^l^.
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⁶⁶^un^de^r^c^u^r^r^e^nt^la^w^w^ould^be^e^lⁱ^m^ina^t^e^d^{, not s}^hor^te^ne^{d a}^s^a^s^s^u^m^e^{d in}^this^r^e^por^t⁽ⁱ^.e^.,^the^a^c^t^ua^rⁱ^e^s^a^s^s^u^m^e^tha^t^the
^F^R^A^w^o^u^l^dⁱⁿ^{crease f}^r^o^m^a^g^{e 6}⁶^t^o^{age 6}⁷^at^{a f}^a^st^{er rat}^e^).^In^addⁱ^tⁱ^oⁿ^,^t^h^{ere m}^a^y^b^e^o^t^h^e^{r d}ⁱ^f^f^e^ren^c^e^sⁱⁿ^t^h^e
^sp^eci^fⁱ^c^a^tⁱ^oⁿ^s^f^o^{r t}^h^e^F^R^A^o^p^tⁱ^oⁿ^an^al^yzed^b^y^t^h^{e act}^u^a^ri^{es an}^d^t^h^e^F^R^A^o^p^tⁱ^oⁿ^exa^mⁱⁿ^edⁱⁿ^t^hⁱ^s^re^p^o^rt^.
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^doc^um^eⁿ^ts^/a^dv^is^or^y^boa^r^d^m^e^m^o^—²⁰⁰^5tr^—⁰⁸¹⁰²⁰^05.^pdf^.
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^a^{nd e}^v^eⁿ^f^e^w^e^{r surv}^ive^{until re}^tir^e^m^eⁿ^{t a}^g^e^.^T^{hus, f}^o^{r the}^pur^pos^e^of^Socⁱ^a^l^Se^c^u^rity^be^ne^f^{it e}^s^ti^m^a^t^e^{s, the}^m^o^{st use}^f^ul
^s^t^a^tis^tic^is^a^c^ohor^t’^s^lif^e^e^x^pe^c^t^aⁿ^cy^a^t^a^g^e^{65, c}^o^ntiⁿ^g^e^{nt o}ⁿ^ha^vⁱ^ng^r^each^ed^{age 6}⁵^.^F^u^rt^h^e^rm^o^r^e,^lⁱ^f^{e exp}^ect^an^c^y
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^p^r^o^j^ect^ed^b^y^t^h^{e S}^o^ci^al^S^ecu^ri^t^y^A^d^mⁱⁿⁱ^st^ratⁱ^oⁿ^’^{s Of}^fⁱ^c^e^o^f^t^h^{e Ch}ⁱ^e^f^A^c^t^u^ar^y^.

law would still receive benefits, on average, for at least 3.5 years longer than an individual
retiring at the FRA in 1940.
No provision in current law would increase the FRA to compensate for increased longevity and
longer years of benefit receipt. Although supported by numerous Greenspan Commission ⁶⁵
members as part of the 1983 Amendments, there are no provisions in current law to continue
increasing the FRA as life expectancy increases. Nor are there any other current-law provisions
that would adjust benefits to reflect increases in life expectancy.
Because the FRA has not been adjusted to account for increasing longevity, people retiring today
at the FRA are receiving benefits for a longer period of time than those retiring at the FRA when
the system was designed, contributing to the financial strain on the Social Security system. There
are two possible approaches to reducing the financial strain caused by increasing longevity: (1)
Raise the FRA in line with gains in life expectancy to reduce the number of years that an
individual receives the same monthly benefit amount under current law; or (2) Reduce the Social
Security monthly benefit amount payable at the full retirement age based on increases in life
expectancy. When provided with various options for achieving long-term solvency, increasing the ⁶⁶
FRA is consistently unpopular with Americans. As a result, some policymakers have suggested
other approaches that would achieve the same solvency effect. Reducing Social Security benefits
based on increases in life expectancy (i.e., longevity-indexing) would reduce Social Security
expenditures and help restore solvency. Longevity indexing Social Security benefits seeks to
roughly offset the demographic changes in longevity that increase program costs.
Despite the average increases in life expectancy over the past 70 years, it is important to keep in
mind that future longevity gains are not guaranteed. For example, while life expectancy could
continue to rise with technological and medical advancements, it could also decline with
increases in obesity and related diseases. In fact, demography experts disagree both on the ⁶⁷
magnitude and the direction of future trends in life expectancy. Furthermore, while average life
expectancy has been increasing, these gains in life expectancy may not be shared equally across
the population. For example, life expectancy gains at age 65 have been higher for women than for
men and higher for whites than for blacks. Between 1950 and 2000, women gained 4.3 years and ⁶⁸
men gained 3.5 years. Over this same period, white males gained 3.5 years while black males ⁶⁹
gained 1.6 years, and white females gained 4.1 years while black females gained 2.5 years.

⁶⁵^S^{ee t}^h^{e “S}^up^p^l^em^en^t^a^r^y^S^t^at^e^m^eⁿ^t^on^M^eetⁱⁿ^{g t}^h^{e L}^oⁿ^g^-Ran^{ge F}ⁱⁿ^aⁿ^cⁱⁿ^{g Req}^uⁱ^r^em^en^t^s^b^y^Co^mmⁱ^ssi^oⁿ^e^{rs A}^r^ch^er,
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^“^R^e^{port of}^the^N^a^ti^ona^{l C}^o^m^m^is^sⁱ^on^on^Socⁱ^a^l^Se^c^u^rity^Ref^o^rm^,”^J^a^nua^ry^1983,^a^v^a^ila^ble^a^t^htt^p^://w^w^w^.s^s^a^.g^ov^/
^his^t^or^y^/^r^e^por^ts^/^g^s^p^aⁿ^.htm^l.
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^{NBC News}^a^{nd t}^h^e^W^a^{ll Str}^e^e^t^J^o^ur^nal^oⁿ^Ma^y^12-¹⁶^,²⁰^05,^aⁿ^d^b^y^{ABC News}^a^{nd the}^W^a^s^hⁱ^ngt^{on Pos}^t^on^M^a^r^c^{h 10}^-
^13,²⁰⁰⁵^{, a}^v^a^ila^ble^a^t^htt^p^://w^ww^.^polli^ng^re^port^.^c^o^m^/^socⁱ^a^l^.htm^.
⁶⁷^Se^e^C^R^S^R^e^por^{t R}^L³²⁷⁹²^,^Lⁱ^f^e^E^x^p^ect^aⁿ^{cy i}ⁿ^t^h^{e Uni}^t^e^d^S^t^at^es^,^by^L^a^ur^a^B^.^Shr^e^s^t^ha^{, f}^o^r^de^ta^ile^d^inf^o^r^m^a^tion.
⁶⁸^Fe^de^ra^{l Inte}^ra^g^e^nc^y^Forum^{on Ag}^ing^Re^la^te^{d Sta}^tistic^{s, “}^O^lde^r^A^m^e^r^ic^aⁿ^s²⁰⁰^{4, K}^e^y^I^ndic^a^t^or^s^of^W^e^ll-^B^e^ing^,^”^p.
^22.
⁶⁹^U^.^{S. C}^e^ns^us^B^u^r^e^a^u^,^“⁶⁵⁺ⁱⁿ^t^h^e^Uⁿ^ite^{d S}^t^a^t^e^s^{: 20}⁰⁵^,”^D^e^c^e^m^b^e^r²⁰⁰^{5, T}^a^ble³^-^1,^p.³⁵^.

However, at higher ages (age 85 and older), remaining life expectancy for blacks is higher than ⁷⁰
that of whites, both for men and women.
This report examines two options to slow the growth in Social Security benefits by indexing (i.e., ⁷¹
linking the reduction in) initial benefits to increases in longevity:
• Longevity Index PIA Formula Factors. The first approach would reduce the Social
Security Primary Insurance Amount (PIA) by multiplying the PIA formula factors (90%, ⁷²

32%, and 15%) by 0.995 annually (i.e., reducing the PIA factors by 0.5% annually).

This adjustment would reduce monthly benefit levels by an amount equivalent to
increasing the FRA for retired workers by enough to maintain a constant life expectancy ⁷³
at the FRA for any fixed age of benefit entitlement. For example, for those reaching age
62 in 2013, the first year that the policy is effective, the PIA formula factors would be

89.55%, 31.84%, and 14.925%.

The 0.995 multiplier would be updated every 10 years (starting after 2010) to reflect
actual historical increases in longevity for the most recent decade. This provision would
apply to all new beneficiaries.
• Longevity Index PIA Value. The second approach would reduce a beneficiary’s
Social Security PIA by multiplying the current-law PIA by the ratio of the life expectancy
at age 62 for 2010 to the life expectancy at age 62 for the year that is three years prior to ⁷⁴
the year in which the retiree turns 62. For example, for a worker retiring at age 62 in

2024, the reduction in benefit level would be based upon the increase in life expectancy ⁷⁵

at age 62 between 2010 and 2021 (year 2024 - three years).
This provision would apply to all new OASI beneficiaries but would require a complex
calculation for disabled beneficiaries. Disabled beneficiaries would not be affected until ⁷⁶
they reach the full retirement age (FRA) and convert to retired-worker benefits. Then, at
the FRA, a proportional reduction would apply to their benefits based on the number of ⁷⁷
years they could have worked since 2006 (i.e. years without disability benefits). With
this formula, disabled workers that had few years of work would have a smaller weight

⁷⁰^Se^e^C^R^S^R^e^por^{t R}^L³²⁷⁹²^,^Lⁱ^f^e^E^x^p^ect^aⁿ^{cy i}ⁿ^t^h^{e Uni}^t^e^d^S^t^at^es^,^by^L^a^ur^a^B^.^Shr^e^s^t^ha^.
⁷¹^T^h^e^r^e^a^r^e^c^e^r^ta^inl^y^a^num^be^r^of^pos^sⁱ^ble^a^p^pr^oa^c^h^e^s^to^a^c^h^ie^vⁱ^ng^l^ong^e^v^ity^inde^xⁱ^ng^a^{nd the}^s^e^tw^{o opti}^ons^a^r^e^not
ⁱⁿ^t^e^nd^ed^t^o^b^e^exh^a^u^s^tⁱ^v^e.^Rat^h^er,^w^e^h^a^v^e^sel^ect^ed^t^w^o^t^h^atⁱⁿ^cl^u^d^{e t}^h^{e m}^o^st^vari^et^y^a^m^oⁿ^g^re^cen^t^pro^p^o^s^al^{s i}ⁿ^t^e^rm^s
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^pr^o^por^ti^ona^lly^r^e^duc^ing^be^ne^f^its^f^o^r^the^D^I^be^ne^fⁱ^cⁱ^a^r^ie^s^upo^{n c}^o^nv^e^r^sⁱ^{on t}^o^r^e^tir^e^d^-^w^or^k^e^r^be^ne^f^its^a^t^the^FR^A⁾^.
⁷²^F^o^{r m}^o^{re i}ⁿ^f^o^rm^atⁱ^oⁿ^on^t^h^e^P^I^A^cal^cu^l^a^tⁱ^oⁿ^uⁿ^d^e^{r cu}^rrent^l^a^w^,^p^l^{ease re}^f^e^{r t}^o^A^p^pe^ndi^x^A^.
⁷³^Ca^lc^ula^tions^of^the⁰^.⁹^{95 m}^u^lti^pl^ie^{r a}^r^e^ba^se^{d on}^the^m^o^rta^lity^a^s^s^u^m^p^{tions f}^o^{r the}^inte^rm^e^d^ia^te^e^s^tim^a^t^e^s^of^the²⁰⁰⁴
^O^A^SD^I^T^r^us^te^e^s^R^e^por^{t a}^{nd t}^h^e^a^c^tua^r^ia^{l r}^e^duc^ti^{on f}^a^c^t^or^s^{in c}^u^r^r^e^{nt la}^w^.
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^exp^ect^an^c^yⁱ^s^t^a^k^eⁿ^f^r^o^m^p^e^ri^o^d^lⁱ^f^e^t^a^b^l^{es i}ⁿ^t^h^{e rel}^e^van^t^cal^en^d^a^r^years.
⁷⁵^Ca^lc^ula^tions^of^the^re^d^u^c^tio^{ns a}^p^plie^{d t}^o^P^I^A^s^a^r^e^ba^se^{d o}ⁿ^the^m^o^rta^lity^a^s^sum^p^{tions f}^o^{r the}ⁱⁿ^te^rm^e^d^ia^te^e^s^tim^a^t^e^s
^of^the²⁰⁰⁴^O^A^SD^I^T^r^us^te^e^s^R^e^p^o^r^t^aⁿ^{d t}^h^e^a^c^t^ua^rⁱ^a^l^r^e^duc^ti^on^f^a^ctor^sⁱⁿ^c^u^r^r^e^nt^la^w^.
⁷⁶^U^nde^{r c}^u^rre^{nt la}^w^,^a^{ll D}ⁱ^s^a^bility^Ins^u^ra^nc^e^(D^{I) be}^ne^fⁱ^cⁱ^a^r^ie^s^c^onve^{rt to O}^l^d-A^g^e^{or Surv}^iv^{or Ins}^u^ra^nc^e^(O^A^S^I)
^be^ne^f^{its a}^t^the^f^u^{ll re}^tire^m^eⁿ^{t a}^g^e^.
⁷⁷^T^h^e^y^e^a^r^{2006 is}^a^s^s^u^m^e^{d to be}^t^h^e^y^e^a^r^tha^t^the^{bill e}^s^ta^blis^hing^t^h^is^pr^ov^is^ion^is^pa^s^s^e^d.

placed on the longevity-indexed OASI benefit than on the unreduced current-law DI
benefit when the worker’s retirement benefit is calculated at conversion.
For both options, the changes are assumed to be effective in 2013.
The distributional effects of both longevity indexing options vary by age, benefit type, and
income quintile.
• Under both longevity-indexing options, the later a beneficiary becomes eligible for
Social Security benefits after the policy takes effect in 2013, the more he or she would be
affected by longevity-indexing reductions to the PIA. Thus, older beneficiaries would see
the least amount of change under both of the longevity indexing options. The oldest old
(those 86 and older in 2035) would be nearly held harmless, while those retiring early
(age 62 to 66 in 2035) would face the largest percent reductions relative to current law.
• Retired workers would experience proportionally larger benefit reductions than other
beneficiaries, partly because they are more likely to be subject to the Retirement Earnings
Test (RET). Survivors, who are predominantly women and who frequently qualify for
survivor benefits off of their husband’s earnings record, would have smaller benefit cuts
than other beneficiaries.
• Generally, the effect of reducing the PIA through longevity indexing would be
proportionate, with most of the individuals in each income quintile experiencing the ⁷⁸
expected 10% reduction. However, some interaction with current law program rules
results in higher cuts for higher-income beneficiaries than for lower-income beneficiaries.
Those beneficiaries who first become eligible for benefits in 2035 would face benefit reductions
of approximately 10% under this policy option because of the cumulative effect of reducing the
PIA formula factors by 0.5% per year over 22 years. Those receiving benefits in 2035, including
all of those who became eligible for benefits since 2013, would experience a median benefit
reduction of 5% compared with current law. The majority (76%) of beneficiaries would have
benefit cuts of up to 10%. Some (16%) would experience no benefit change and some (7%)
would experience benefit cuts of 10% or more relative to current law. The primary reasons for
these varied experiences are
• Differences in the year when an individual becomes eligible for Social Security
benefits; and
• The interaction of the longevity indexing provision with current-law program rules.
As Figure 12 demonstrates, an individual’s age has a large impact on the size of the benefit
reduction an individual would face if the PIA formula factors were longevity indexed. The PIA is
calculated at the earliest eligibility age (age 62 for retired workers, the year of disability for
disabled workers, and the year of death of the insured worker for survivors). Because the

⁷⁸^T^h^e^0.9^{95 r}^e^duc^ti^on^is^c^o^m^poun^de^{d ov}^e^r²²^y^e^a^r^s⁽⁰^.995)²²^{= 0}^.⁸⁹⁶^.^T^h^eref^o^r^e,ⁱⁿ²⁰³⁵^t^h^e^P^I^A^f^o^rm^u^l^a^f^act^o^r^{s are}
^m^u^ltiplie^{d by}^89.^6%^{, le}^a^dⁱⁿ^g^{to a}^re^duc^tio^{n of}¹⁰^.⁴^%^{in t}^h^e^P^I^A^.

longevity indexing provision applies to the PIA formula factors, all beneficiaries of the same birth
cohort are projected to experience approximately the same benefit reduction. The size of the
benefit reduction increases after 2013 with each passing year due to the cumulative effect of the
annual 0.5% reduction to the PIA formula factors. Thus, the youngest beneficiaries, who become
eligible for retirement benefits in later years, would have the greatest reductions. For example, in
2035, beneficiaries between age 62 and 66 are projected to have their benefits cut by a median of
10% compared with current law. By contrast, beneficiaries age 86 and over are projected to
experience no benefit change as they would have already passed the earliest eligibility age before
the longevity indexing policy takes effect in 2013. Individuals aged 61 or younger would
experience a smaller benefit reduction than those aged 62 through 66 because the younger group
is composed of disabled worker and survivor beneficiaries. Because disabled worker and survivor
beneficiaries have their PIAs calculated at younger ages than retired worker beneficiaries of the
same birth cohorts (because their eligibility age is likely to be lower than age 62), the lower the
number of years that would have passed between 2013 and the year of entitlement, and the
smaller the effect of longevity indexing on the PIA formula factors.
Figure 12. Median Percent Change in Benefits Under Longevity Indexing the PIA
Factors Compared with Current Law Among Beneficiaries in 2035 by Age and
Benefit Type
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^P^{lease see the section on}^{“What Do the Figures Show?” in}^{the re}^{port “Int}^{roduction.”}
The interaction of the current-law Social Security program rules with the longevity indexing
provision leads to variation in projected benefit reduction. This variation is most evident when
examining individuals by the type of benefit they receive. For example, as Figure 12 shows,
retired worker beneficiaries would experience a median benefit reduction of approximately 6%
relative to current law, while survivor beneficiaries would receive a median benefit reduction of
only 1%. The Social Security Retirement Earnings Test (RET) would lead some beneficiaries to

receive larger than expected benefit reductions when combined with longevity indexing the PIA ⁷⁹
factors. Relative to other benefit types, retired workers would be much more likely to take early
Social Security retirement benefits but keep working, making them subject to the RET. Under the
RET, these workers would experience a benefit reduction of up to 100% because of post-
retirement earnings in excess of the RET thresholds until they reach the FRA. On the other
extreme, survivors would receive smaller benefit reductions than expected under the policy ⁸⁰
option due to the Social Security dual-entitlement rule. Because of the application of the Social
Security dual-entitlement rule, survivor beneficiaries, who are more likely to be female (99% of
aged survivors are women) and have lower earnings than their male counterparts, are likely to
obtain a larger portion of their survivor benefits off of the earnings record of an older spouse than
off of their own earnings record. Under the longevity indexing option, this older spouse would
likely have a smaller reduction to his PIA than the survivor would on her own record. Thus, the
survivor’s overall benefit reduction would be smaller than those receiving only a retired worker
benefit.
Because longevity indexing would lead to proportional reductions in Social Security benefits,
median benefit reductions do not vary significantly by income group. In 2035, beneficiaries in the
lowest income quintile are projected to receive a median benefit reduction of 4% while
beneficiaries in the highest income quintile are projected to receive a median benefit reduction of
6%. As seen in Figure 13, the majority of individuals (roughly 75%) receive a benefit reduction
of less than 10% compared with current law, regardless of income quintile. However, more of
those in the lowest income quintile (22%) experience no benefit change, while more of those in
the two highest income quintiles (10% and 9%, respectively) experience larger benefit reductions
than expected (i.e., greater than 10%) under the option.

⁷⁹^P^l^ease^see^A^p^pe^nd^ix^C^f^o^r^a^d^ditⁱ^ona^{l i}ⁿ^f^o^r^m^a^{tion on}^h^o^w^the^R^e^tir^em^eⁿ^{t Ea}^rⁿ^ing^s^T^e^s^t⁽^R^ET⁾^w^o^r^k^s^a^{nd c}^oul^d
^re^{sult in}^la^rg^e^r^be^ne^f^{it de}^c^r^e^a^s^e^s^{or be}^ne^f^{it inc}^r^e^a^s^e^s^re^la^tiv^e^{to c}^u^r^r^eⁿ^{t la}^w^thaⁿ^a^r^e^a^ttrib^uta^b^le^so^le^ly^{to the}^pol^ic^y
^opti^oⁿ^.
⁸⁰^P^l^ease^see^A^p^pe^nd^ix^B^f^o^r^a^d^diti^ona^{l i}ⁿ^f^o^r^m^a^{tion on}^how^the^S^o^cⁱ^a^l^Se^c^u^r^ity^s^pous^a^l^aⁿ^d^s^u^r^v^iv^or^b^e^ne^f^{it r}^u^le^s
^c^ould^re^{sult i}ⁿ^sm^a^lle^{r be}^ne^f^{it de}^c^r^e^a^s^e^s^re^la^ti^v^e^{to c}^u^rre^nt^la^w^thaⁿ^a^r^e^a^ttributa^b^le^sole^ly^{to the}^polⁱ^c^y^optio^n.

Figure 13. Percentage Change in Benefits Under Longevity Indexing the PIA
Formula Factors Compared with Current Law Among Beneficiaries in 2035 by
Income Quintile
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^{Categories may not add t}^o¹⁰⁰^{% due to rou}^{nding. Please see the section on}^{“What Do the}^Figures
^{Show?” in the re}^{port “I}^ntroducti^on.”
Those in the lowest income quintile who experience no benefit change are primarily survivor
beneficiaries or disabled workers. These survivors tend to be in the older age groups and thus are
not affected by the policy change. The disabled workers qualify for benefits in earlier years than
the rest of their birth cohort and so face lesser reductions under the policy change. Both groups
rely heavily on Social Security in retirement. Thus, the disproportionate number of these groups
in the ‘no change’ category could be viewed as an advantage for this policy option.
Those in the top income quintile that received disproportionately large benefit reductions are not
actually being hit by the longevity indexing provision, but are being affected by the RET. All of
the individuals in this category fall between the ages of 62 and 66, took early retirement benefits,
and are retired worker beneficiaries who have continued working after early retirement,
subjecting them to the RET. Because earnings are included in the definition of income, those with
post-entitlement earnings tend to fall into the upper income quintiles. These same individuals are
then subject to the RET because of these post retirement earnings occurring prior to the full
retirement age. It is important to note, however, that once these individuals reach the FRA, after
which the RET no longer applies, their median benefit reduction falls into the expected range of
between 0% and 10%.
Beneficiaries first becoming eligible for benefits in 2035 would face benefit reductions of
approximately 6% under this policy option because of the cumulative effect of reducing the PIA

by 0.3% per year over 22 years.⁸¹ Those receiving benefits in 2035, including all of those
becoming eligible for benefits since 2013, would experience a median benefit reduction of 2%
relative to current law. The distributional effect of longevity indexing the PIA value is similar to
that of longevity indexing the PIA formula factors. The majority (70%) of beneficiaries would
have benefit cuts of up to 10%. Some (29%) would experience no benefit change and a few (2%)
would experience benefit cuts of 10% or more compared with current law. The primary reasons
behind these varied experiences are:
• Differences in the year when an individual becomes eligible for Social Security
benefits;
• The special treatment afforded to DI beneficiaries under this option; and
• The interaction of the longevity indexing provision with current-law program rules.
As with the first longevity indexing option, the size of the benefit reduction increases the later a
beneficiary becomes eligible to receive benefits. Thus, the youngest beneficiaries tend to have the
greatest reductions. For example, as seen in Figure 14, in 2035, beneficiaries younger than the
full retirement age (age 62 through 66) are projected to face a median benefit cut of about 6%
compared with current law. By contrast, beneficiaries over age 85 are projected to experience no
benefit reduction.
Unlike the first longevity indexing option discussed in this report, the option to longevity index
the PIA value holds disabled workers harmless from any benefit reduction until they have reached
the full retirement age. At the FRA, disabled worker benefits convert automatically to retired
worker benefits and are subject to a proportional reduction under longevity indexing based on the
number of possible work years that the worker was not disabled and thus able to work. This
policy difference explains the few distributional differences between the two longevity indexing
options and leads to unexpected results in some beneficiary categories. For example, under the
option indexing the PIA value itself, disability beneficiaries receive no benefit reductions under
this policy option (Figure 14) but would experience a median benefit reduction of 5% under the
alternative discussed above (Figure 12).

⁸¹^T^h^e^0.9^{97 r}^e^duc^ti^on^is^c^o^m^poun^de^{d ov}^e^r²²^y^e^a^r^s⁽⁰^.993)²²^{= 0}^.⁹³⁶^.^T^h^eref^o^r^e,ⁱⁿ²⁰³⁵^t^h^e^P^I^A^f^o^rm^u^l^a^f^act^o^r^{s are}
^m^u^ltiplie^{d by}^93.^6%^{, le}^a^dⁱⁿ^g^{to a}^re^duc^tio^{n of}⁶^.^4%ⁱⁿ^the^PIA^.

Figure 14. Median Percent Change in Benefits Under Longevity Indexing the PIA
Value Compared with Current Law Among Beneficiaries in 2035 by Age and Benefit
Type
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^P^{lease see the section on}^{“What Do the Figures Show?” in}^{the re}^{port “Int}^{roduction.”}
The interaction of current-law Social Security program rules with longevity-indexing the PIA
value leads to variation in projected benefit reduction. For example, as Figure 14 shows, retired
worker beneficiaries would experience a median benefit reduction of approximately 4%, while
survivor beneficiaries would receive no benefit reduction. The interaction of the Social Security
dual entitlement rule with the hold-harmless treatment afforded to DI beneficiaries under this
option leads some other categories of beneficiaries to appear better off than would be expected
under the policy option. More of those receiving survivor benefits under current law would
instead continue to receive DI benefits off of their own record through 2035 since the DI benefit
they are eligible for is higher than the survivor benefit they would receive under the option. As a
result, survivor beneficiaries are held harmless under the option indexing the PIA value because
of the current-law program rules that provide individuals with the higher of their own benefit or
the survivor benefit that they are eligible to receive.
Because longevity indexing the PIA value would lead to proportional reductions in benefits,
median benefit reductions do not vary significantly by income group. In 2035, beneficiaries in the
lowest income quintile are projected to receive a median benefit reduction of 2% while
beneficiaries in the highest income quintile are projected to receive a median benefit reduction of

3% compared with current law. As seen in Figure 15, the majority of individuals (roughly 70%)

receive benefit reduction of less than 10%, regardless of income quintile. However, more of those
in the lowest income quintile (37%) experience no benefit change, while more of those in the
highest income quintile (4%) experience larger benefit reductions than expected (i.e., greater than

6%) under the option.

Figure 15. Percentage Change in Benefits Under Longevity Indexing the PIA Value
Compared with Current Law Among Beneficiaries in 2035 by Income Quintile
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^{Categories may not add t}^o¹⁰⁰^{% due to rou}^{nding. Please see the section on}^{“What Do the}^Figures
^{Show?” in the re}^{port “I}^ntroducti^on.”
Those in the lowest income quintile are primarily retired worker and DI beneficiaries. Although
retired worker beneficiaries outnumber the DI beneficiaries in this income quintile, retired worker
beneficiaries are the most common among all benefit types and are fairly equally distributed
among all of the income quintiles. Disabled workers fall disproportionately in the lower income
quintile categories because they have fewer years of work to be able to save. The DI
beneficiaries, who rely heavily on Social Security benefits, are held harmless under this longevity
indexing option or receive proportionally reduced benefits relative to the rest of their birth cohort
and so face lesser reductions under the policy change. Thus, the larger number of this group in the
‘no change’ category could be viewed as an advantage for this policy option.
As with the previous longevity indexing option, those in the top two income quintiles that
received disproportionately large benefit reductions are not actually being hit by the longevity
indexing provision, but are being affected by the RET. All of the individuals in this category fall
between the ages of 62 and 66, took early retirement benefits, and are retired worker beneficiaries
who have continued working after early retirement, subjecting them to the RET. Because earnings
are included in the definition of income, those with post-entitlement earnings tend to fall into the
upper income quintiles. These same individuals are then subject to the RET because of these post
retirement earnings occurring prior to the full retirement age. It is important to note, however, that
once these individuals reach the FRA, after which the RET no longer applies, their median
benefit reduction falls into the expected range of between 0% and 6%.

In the 109^th Congress, three bills were introduced that contained, among other things, provisions
to reduce Social Security benefits in line with increases in longevity. S. 540 and S. 2427, like the
first longevity indexing option analyzed in this report, would reduce the PIA formula factors. Like ⁸²
the second option analyzed in this report, H.R. 440 would reduce the PIA value itself.
S. 540, introduced by Senator Chuck Hagel, would take effect for those retired workers and
survivors attaining age 62 in 2024 and later, but would not apply for calculating surviving child ⁸³
benefits nor for calculating surviving spouse benefits with a child in care. The size of the annual
reduction in the PIA formula factors is expected to be approximately 0.5%. As with the treatment
of disability benefits in the second longevity-indexing provision analyzed in this report, S. 540
would hold DI beneficiaries harmless from longevity indexing until they convert to retired worker
benefits at the FRA. Then, at the FRA, a portion of the reduction applied to the retired workers of
the same age would apply to their benefits based on the number of years they could have worked
since 2005 (i.e., years without disability benefits). In their official memorandum analyzing the
effects of S. 540, the Social Security actuaries did not provide an estimate for the actuarial
savings that the longevity-indexing provision would be expected to achieve on its own.
S. 2427, introduced by Senator Robert Bennett, would have applied to those becoming eligible
for aged OASI benefits (not surviving child benefits nor surviving spouse benefits with a child in ⁸⁴
care) in 2018 and later. The size of the annual reduction in the PIA formula factors is expected
to be approximately 0.3%. DI beneficiaries would be held harmless until they converted to retired
worker benefits at the FRA. Then, at the FRA (or at entitlement to any retired worker benefit or
aged surviving benefit, if earlier), a portion of the reduction applied to the retired workers of the
same age would apply to their benefits based on the number of years they could have worked
since age 22, or 2006, if later (i.e., years without disability benefits). In their official
memorandum analyzing the effects of S. 2427, the Social Security Actuaries did not provide an
estimate for the actuarial savings that the longevity-indexing provision would be expected to
achieve on its own.
Like the second option analyzed in this report, H.R. 440, introduced by Representatives Kolbe
and Boyd, would reduce the PIA value itself. Under H.R. 440, longevity-indexing would take
effect for those retired workers and survivors newly eligible for Social Security benefits in 2013 ⁸⁵
and later. The size of the annual reduction in the PIA formula factors is expected to be
approximately 0.3%. As with the treatment of disability benefits in the second longevity-indexing

⁸²^A^{ll of}^the^s^e^{bills re}^ly^{on the}^S^o^cⁱ^a^l^Se^c^u^rity^A^d^mⁱ^nist^ra^{tion Of}^fⁱ^c^e^of^the^Chie^f^A^c^tua^r^y^’^{s unise}^x^life^e^x^pe^c^t^aⁿ^c^y
^e^s^ti^m^a^te^s^{to de}^te^r^m^ine^the^a^nnua^l^be^ne^f^{it r}^e^duc^tio^n.
⁸³^Socⁱ^a^l^Se^c^u^rⁱ^ty^A^d^mⁱ^nis^t^r^a^tion,^Me^m^o^r^a^ndum^{to Se}^na^tor^C^huc^k^H^a^g^e^l^f^r^o^m^Ste^phe^{n C}^.^G^o^s^s^,^C^hⁱ^e^f^A^c^tua^r^y^,^a^nd
^A^lⁱ^{ce H.}^W^a^d^e^,^Dep^u^t^y^Chⁱ^e^f^Act^u^ary^,^“E^stⁱ^m^at^ed^Fⁱⁿ^aⁿ^cⁱ^a^l^E^f^fect^{s o}^f^‘T^h^e^S^a^viⁿ^g^S^o^ci^al^S^ecu^ri^t^y^A^c^t^o^f²⁰⁰⁵^’^—
^Inf^o^rm^a^tion,”^Ma^rc^h¹⁰^{, 2}⁰⁰⁵^{, a}^v^a^ila^ble^a^t^htt^p^://w^w^w^.s^s^a^.g^ov^/^O^A^C^T^/^s^o^lv^eⁿ^c^y^/^C^H^a^g^e^l_2005⁰³^10.^htm^l^.
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⁸⁵^Socⁱ^a^l^Se^c^u^rⁱ^ty^A^d^mⁱ^nis^t^r^a^tion,^Me^m^o^r^a^ndum^{to R}^e^pr^e^s^eⁿ^ta^tiv^e^Jⁱ^m^K^o^lbe^a^{nd R}^e^pr^e^s^eⁿ^ta^tiv^e^A^{llen B}^o^y^d^f^r^om
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^http:^//w^w^w^.s^s^a^.g^ov^/^O^A^C^T^/^s^o^lv^enc^y^/ⁱ^nde^x^.^htm^l^.

provision analyzed in this report, H.R. 440 would hold DI beneficiaries harmless from longevity
indexing until they convert to retired worker benefits at the FRA. Then, at the FRA, a portion of
the reduction applied to the retired workers of the same age would apply to their benefits based
on the number of years they could have worked since age 22, or 2006, if later (i.e., years without
disability benefits). The Social Security actuaries estimated that this provision, taken alone,
would increase the long-range OASDI actuarial balance by 0.52% of taxable payroll based on the
intermediate assumptions of the 2005 Trustees Report.

The current-law Social Security benefit formula provides beneficiaries higher benefits over time,
both across and within generations. Each successive generation receives higher benefits than
those before them, reflecting increases in each generation’s earnings over time. Each generation
also receives higher benefits over their own life-time, reflecting changes in the purchasing power
of their monthly Social Security benefit check.
Under current law, Social Security benefits increase from one generation to the next at the rate
that the national average wage rises. In other words, initial Social Security benefits are wage-
indexed. This feature allows benefits to reflect improvements in the standard of living over time.
It also recognizes that workers’ payroll tax payments to Social Security increase along with the
rise in wages.
Once enrolled in the program, beneficiaries’ Social Security checks increase each year at the same
rate as the Consumer Price Index (CPI-W); that is, post-entitlement benefits are price-indexed. At
the end of each year, the Social Security Administration announces the cost-of-living adjustment
(COLA) that is used to increase benefits payable beginning in January of the following year. The
annual COLA is designed to maintain the purchasing power of Social Security benefits over the
beneficiary’s lifetime. (It is important to note that the progressive price indexing policy option ⁸⁶
would not affect the annual Social Security COLA.)
Under progressive price indexing, initial Social Security benefits would be indexed to a ⁸⁷
combination of wage and price growth (rather than wage growth only as under current law).
Under this policy option, individuals with very low earnings would receive initial benefits
indexed to wages as under current law. Workers with higher earnings would receive initial
benefits that are indexed to prices. Since prices have historically grown more slowly than wages
over time, higher-earning workers would receive lower benefits under this option than under

⁸⁶^Op^tⁱ^oⁿ^s^t^h^at^w^o^u^l^d^al^t^e^r^t^h^{e co}^m^p^u^t^atⁱ^oⁿ^o^f^t^h^{e S}^o^ci^al^S^ecu^ri^t^y^COL^A^are^ad^d^r^essedⁱⁿ^{a sep}^a^rat^e^s^ectⁱ^oⁿ^o^f^t^hⁱ^s
^r^e^por^t.
⁸⁷^For^m^o^r^e^inf^o^r^m^a^{tion, s}^e^e^C^R^S^R^e^por^{t R}^L³²⁹⁰^0,^I^nde^xⁱⁿ^g^Soc^ia^l^Se^c^u^rity^Be^ne^fits:^The^Ef^fe^c^t^{s of}^Pric^e^and^W^age
^In^d^exes^,^b^y^P^a^t^rⁱ^c^k^P^u^rcel^l^,^L^a^u^r^{a Hal}^t^zel^,^an^d^Neel^{a K.}^Ran^a^d^e^.

current law.⁸⁸ Proponents view progressive price indexing as a means to constrain the growth of
initial benefits for future retirees and provide cost savings for the system while protecting the
benefits of low-earning workers.
The progressive price indexing option emerged as a modified version of full price indexing,
which also has been proposed by some policymakers. Under full price indexing, initial benefits
for all future beneficiaries, not just higher-earners, would be indexed to price growth rather than
wage growth. By indexing initial benefits to a combination of wage growth and price growth, the
progressive price indexing option is designed to provide the same level of benefits as under
current law for very low earners and the same level of benefits as under a full price indexing ⁸⁹
mechanism for high earners. Workers at other earning levels would receive benefits that are
lower than those scheduled under current law and greater than those projected under full price
indexing. Proponents of progressive price indexing believe that blending price and wage indexing
will reduce the policy’s impact on low earners who are more likely to rely on Social Security
benefits for a greater share of their total retirement income. However, the growth of initial
benefits for higher-earner future retirees would no longer keep pace with average wage growth in
the economy and Social Security benefits would replace a smaller and smaller share of an
individual’s pre-retirement income. Over a long period of time, these increasing benefit cuts ⁹⁰
would cause the majority of workers to receive the same initial benefit.
There are two components of the Social Security benefit formula that are wage-indexed, although
only one is modified by this option. (For a complete description of how the benefit formula is
calculated see Appendix A.) The first component is workers’ past earnings, which are wage-
indexed before calculating the worker’s career average earnings. This feature allows earnings at
the start of a worker’s career to be treated equally with those earned at the end of his or her career.
Without wage-indexation, the timing of a worker’s earnings—whether peak earnings came early
or late in his or her career—would influence the benefits that individual would receive. This
wage-indexing of earnings is not changed under this option.
The second wage-indexed component of the Social Security benefit formula is the portion of the
PIA formula designed to provide a level of Social Security benefits that replaces about the same

⁸⁸^Du^{e t}^oⁱⁿ^{creases i}ⁿ^w^o^{rker p}^r^o^ductⁱ^vⁱ^t^y^,^wage^{s t}^eⁿ^d^t^o^ri^{se f}^a^st^{er t}^h^an^p^rⁱ^{ces w}^h^en^measu^r^ed^o^v^{er l}^oⁿ^g^p^e^ri^od^{s o}^f
^tim^e^.^Conse^que^ntly^{, if}^initia^{l be}^ne^f^its^w^e^re^ba^se^{d on the}^ra^te^a^t^w^h^ic^{h pric}^e^s^rise^ra^the^r^t^h^aⁿ^t^h^e^ra^te^a^t^w^h^ic^{h w}^a^g^e^s
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^t^h^{e i}ⁿ^t^e^rm^edⁱ^a^t^e^assu^m^p^tⁱ^oⁿ^s^o^f^t^h^{e 2}⁰⁰⁵^S^o^ci^al^S^ecu^ri^t^y^T^r^u^s^t^ees^Rep^o^r^t^,^w^a^{ges (}^m^e^a^su^red^b^y^t^h^{e avera}^g^e^w^a^{ge i}ⁿ
^co^vered^e^m^p^l^o^y^men^t^{) are p}^r^o^j^ect^ed^t^oⁱⁿ^{crease at}^an^averag^{e an}ⁿ^u^al^rat^e^o^f³^.⁹^%^o^v^{er t}^h^e⁷⁵^-^y^{ear p}^r^o^j^ectⁱ^o^{n p}^e^ri^o^d^.^By
^c^o^m^p^a^r^is^{on, pr}^ic^e^s⁽^m^e^a^s^ur^e^d^by^the^C^o^ns^um^e^r^P^r^ic^e^Iⁿ^de^x⁾^a^r^e^pr^oje^c^t^e^d^to^inc^r^e^a^s^e^a^t^aⁿ^a^v^e^r^a^g^e^a^nnua^{l r}^a^te^of^2.8%
^o^v^{er t}^h^{e n}^e^xt⁷⁵^y^ears.⁽^The²⁰⁰⁵^Ann^u^a^l^Re^p^o^r^t^o^f^t^h^e^Bo^ar^d^{of Tr}^us^te^e^s^{of t}^h^e^Fe^de^r^a^{l O}^l^d-^Age^an^{d S}^u^r^v^iv^or
^Insura^nc^e^an^{d Fe}^de^ra^{l Disa}^b^ility^Insura^nc^e^{Trust F}^uⁿ^d^s^{, T}^a^ble^II.^C1.)
⁸⁹^T^h^is^aⁿ^a^l^y^s^is^is^ba^s^e^{d on a}^pr^og^r^e^s^sⁱ^v^e^pr^ic^e^inde^xⁱ^ng^pr^o^pos^a^lⁱⁿ^w^h^ic^{h w}^o^r^k^e^r^s^w^{ith c}^a^r^e^e^r^-^a^ve^r^a^ge^e^a^r^ning^s^{in t}^h^e
^low^e^s^t^30%^of^the^e^a^r^ning^s^dis^t^rⁱ^buti^oⁿ^w^{ould c}^o^nti^nue^t^o^ha^v^e^theⁱ^r^init^ia^{l be}^ne^f^its^f^u^lly^w^a^g^e^-ⁱ^nde^x^e^{d. C}^ong^r^e^s^s
^c^ould^,^of^c^our^s^e^,^de^fⁱ^ne^low^-^e^a^r^ne^r^s^{in a}ⁿ^y^of^a^num^be^r^of^w^a^y^s^{, de}^pe^ndi^ng^on^the^r^e^la^tiv^e^im^por^taⁿ^c^e^{it a}^s^sⁱ^gⁿ^s^to
^re^duc^ing^pr^og^ra^m^c^o^{sts c}^o^m^p^a^r^e^d^w^{ith m}^a^intaⁱⁿⁱⁿ^g^the^be^ne^f^{its of}^w^o^rk^e^r^s^w^{ith low}^e^a^r^ning^s.
⁹⁰^C^R^S^e^s^tim^a^t^e^s^this^w^{ould oc}^c^u^r^a^ppr^ox^im^a^t^e^l^y^{90 y}^e^a^r^s^f^o^llowⁱ^ng^the^im^ple^m^eⁿ^ta^tion^of^pr^og^r^e^s^sⁱ^v^e^pr^ic^e^inde^xⁱ^ng^.
⁽^C^R^S^R^e^por^t^R^L³²⁹^00,^In^d^exin^g^S^o^c^ia^{l S}^ecu^{rity Be}ⁿ^e^{fits: T}^h^{e Effe}^{cts o}^f^{Price a}ⁿ^d^W^a^g^e^In^d^exes^{, by}^P^a^tric^k^Purc^e^ll,
^L^a^u^r^{a Hal}^t^zel^,^an^d^Neel^{a K.}^Ran^a^d^e^.⁾

share of pre-retirement earnings (i.e. replacement rate) for workers with similar earnings ⁹¹
regardless of when they become eligible for benefits. For example, under current law, Social
Security benefits would replace about 40% of pre-retirement earnings for workers who earn the
economy-wide average wage for their entire career. Wage-indexing the current benefit formula
allows the growth of initial benefits for future retirees to keep pace with the growth in wages in
the economy and allows future cohorts of beneficiaries to maintain their pre-retirement standard
of living. It is this wage-indexing feature, which ensures replacement rates are maintained across
cohorts, that is modified under this option. The mechanics of progressive price indexing the
benefit formula can be found in Appendix D.
The distributional effects of progressive price indexing vary by age, benefit type, and income
quintile.
• Overall, an estimated 69% of all beneficiaries in 2035 would be affected by
progressive price indexing.
• For beneficiaries in 2035, progressive price indexing would result in a median benefit
cut of 4% compared with current law.
• The effects of progressive price indexing would increase over time. Thus, each
successive generation of beneficiaries would have deeper benefit cuts than the last. As a
result, younger beneficiaries in 2035 would have larger benefit reductions than would
older beneficiaries.
• Higher-income beneficiaries would also have proportionately higher benefit
reductions than lower-income beneficiaries since the option is designed to be progressive.
Figure 16 shows the median percentage change in benefits under progressive price indexing
among beneficiaries in 2035 by age and benefit type. The oldest beneficiaries (aged 86 and older
in 2035) would receive little or no change in benefits compared with current law. These
beneficiaries would have been eligible for benefits before the option is assumed to take effect in
2013. Beneficiaries age 76-80 would receive a median benefit reduction of 4% under progressive
price indexing, because the policy would have been in effect for only a few years before they
became eligible for benefits. Individuals in the age 71-75, age 67-70 and age 62-66 categories
would receive median benefit reductions of 7%, 9% and 8%, respectively. The youngest cohort of
beneficiaries (aged 61 and younger) would receive the smallest cut in benefits (2%). Disability
beneficiaries, who make up approximately 96% of this youngest age category, have generally
smaller cuts in benefits as they may have become eligible before the policy took effect or had low
earnings.
There are significant differences in benefit reductions by the type of benefits a person receives.
Retired worker or spousal beneficiaries would have a median cut in benefits of 6% compared
with current law. Disability beneficiaries would receive a relatively small median reduction (1%)
under progressive price indexing (for reasons described above). Survivor beneficiaries are ⁹²
projected to receive no median change in benefits. In 2035, almost 80% of survivor

⁹¹^T^h^{e b}^eⁿ^e^fⁱ^t^f^o^r^m^u^l^{a i}^s^st^ru^ct^u^r^{ed t}^o^p^r^o^vⁱ^d^{e a}^hⁱ^gh^{er rep}^l^acem^en^t^rat^e^f^o^{r l}^o^w^e^r-^{wage e}^a^rn^{ers an}^d^{a l}^o^w^e^r
^rep^l^ace^m^eⁿ^t^rat^e^f^o^{r h}ⁱ^gh^er-wage^earn^e^rs.
⁹²^A^m^ong^s^u^r^v^iv^or^be^ne^fⁱ^cⁱ^a^r^ie^s^{in 203}^5,^51%^w^oul^{d ha}^v^eⁿ^o^c^h^aⁿ^g^eⁱⁿ^be^ne^f^its^r^e^la^tiv^e^{to c}^u^r^r^e^{nt la}^w^,^40%^w^oul^d
⁽^c^onti^nue^d.^..)

beneficiaries are projected to be age 71 or older and therefore could have become eligible before
the policy took effect.
Figure 16. Median Percentage Change in Benefits Under Progressive Price Indexing
Compared with Current Law Among Beneficiaries in 2035 by Age and Benefit Type
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^P^{lease see the section on}^{“What Do the Figures Show?” in}^{the re}^{port “Int}^{roduction.”}
Figure 17 shows the percentage change in benefits under progressive price indexing among
beneficiaries in 2035 by income quintiles. Progressive price indexing is designed to cause
minimal benefit reductions for individuals with low earnings and larger reductions for those with
high earnings. Since earnings tend to be a good indicator of income, the pattern of the results
shown in Figure 17 is generally consistent with the intent of the option. The share of
beneficiaries that experience no change from the policy decreases with rising income, and the
share of beneficiaries that have large benefit cuts increases with rising income. While two thirds
of beneficiaries in the lowest quintile are unaffected by the policy, only 16% of those in the
highest quintile would see their benefits remain the same as under current law. The highest two
income quintiles have the largest proportion of beneficiaries (5% and 4%) who would receive
cuts of 20% or more. No individuals in the lowest two income quintiles receive a benefit
reduction of 20% or more.
This option is designed to protect the benefits of low earners, so it is not surprising that two thirds
of beneficiaries in the lowest income quintile would receive no change in benefits. However,
having low earnings during a worker’s career does not always correspond with having low

^(...c^on^tin^ue^d)
^ha^v^e^a^be^ne^f^{it c}^u^{t of}^le^s^s^thaⁿ¹⁰^%^{; a}^{nd 9%}^w^oul^{d ha}^v^e^a^c^u^{t i}ⁿ^b^e^ne^f^its^of^10%^or^m^o^r^e^.

income during retirement. Likewise, an individual could have high earnings during their career
and live in a low-income household during retirement. This explains why roughly one third of
beneficiaries in the lowest income quintile will receive a benefit reduction, although only 3% of
these low-income beneficiaries will receive cuts of 10% or more.
Figure 17. Percentage Change in Benefits Under Progressive Price Indexing
Compared with Current Law Among Beneficiaries in 2035 by Income Quintile
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^{Categories may not add t}^o¹⁰⁰^{% due to rou}^{nding. Please see the section on}^{“What Do the}^Figures
^{Show?” in the re}^{port “I}^ntroducti^on.”
Because progressive price indexing closely resembles full price indexing at high earnings levels,
beneficiaries in the highest income categories would experience the largest benefit reductions. As
shown in Figure 17, 41% of individuals in the highest income quintile receive a benefit reduction
of up to 10%. An additional 38% receive a benefit reduction of 10% to 19%, and 5% of
individuals in the highest income quintile receive a benefit reduction of 20% or more.
In the 109^th Congress, S. 2427, introduced by Senator Bennett, would have constrained the
growth of initial Social Security benefits for future retirees through progressive price indexing.
The cost estimate for S. 2427 prepared by the Social Security Administration’s Office of the Chief
Actuary, which provides a description of the provision, does not include the estimated trust fund ⁹³
effect of this provision on its own.

⁹³^S^o^ci^al^S^ecu^ri^t^y^A^d^mⁱⁿⁱ^st^ratⁱ^oⁿ^,^Offⁱ^c^e^o^f^t^h^{e Ch}ⁱ^e^f^Act^u^ar^y^,^Es^tim^ate^d^Fi^na^nc^ial^Effe^c^t^s^of^a^Pr^op^os^{al t}^o^Re^s^t^or^e
⁽^c^onti^nue^d.^..)

The actuaries at the Social Security Administration have calculated the impact on the solvency of
the Social Security trust funds of a progressive price indexing option similar to the one analyzed ⁹⁴
in this report. Under the intermediate assumptions of the 2005 Trustees Report, they estimate
that progressive price indexing initial benefits could significantly improve the solvency of the ⁹⁵
Social Security program. This option is projected to eliminate 75% of the long-range financial
shortfall under current law and would extend the trust funds’ exhaustion date from 2041 to 2051.

Social Security payroll taxes are levied on earnings up to a maximum level set each year.⁹⁶ In ⁹⁷
2006, this maximum, or what is referred to as the taxable earnings base, was $94,200. The
taxable earnings base serves as both a cap on contributions into the system and a cap on benefits.
As a contribution base, it establishes the maximum amount of covered earnings that are subject to
the payroll tax. As a benefit base, it establishes the maximum amount of covered earnings that are
used to calculate benefits.
The taxable earnings base limits the amount of wages or self-employment income used to ⁹⁸
calculate contributions to Social Security. Unlike income taxes, workers who have earnings over
the limit, whether they earn $100,000 thousand or $100 million, pay the same amount in Social
Security payroll taxes. Under the 2006 limit of $94,200, the maximum amount a wage and salary ⁹⁹
worker would have contributed to Social Security was $5,840.40 (his or her employer would
contribute an equal amount) while a self-employed individual would have contributed a
maximum of $11,680.80.

^(...c^on^tin^ue^d)
^Sus^taⁱⁿ^able^Solv^eⁿ^c^y^f^o^r^the^Socⁱ^a^{l Se}^c^u^r^ity^Pr^ogr^am^{, Ma}^rc^h¹⁶^,²⁰⁰⁶^{, a}^v^a^ila^ble^a^t^htt^p^://w^ww^.ssa^.^gov^/OA^C^T^/
^s^o^lv^eⁿ^cy^/inde^x^.^htm^l^.
⁹⁴^Note^tha^t^the^a^c^t^ua^rie^s^{’ e}^s^tim^a^t^e^a^ssu^m^e^{d the}^p^o^lic^y^w^ould^be^im^ple^m^eⁿ^te^{d in}²⁰^{12 a}^nd^no^{t i}ⁿ²⁰¹³^a^s^{is do}^neⁱⁿ^this
^r^e^por^t.
⁹⁵^S^o^ci^al^S^ecu^ri^t^y^A^d^mⁱⁿⁱ^st^ratⁱ^oⁿ^,^Es^tim^ate^d^O^A^SD^I^L^oⁿ^g^-^R^a^nge^Fⁱ^nancⁱ^a^{l E}^ffe^c^t^s^of^S^evera^l^P^r^o^vⁱ^sⁱ^oⁿ^s^R^e^qu^est^e^d^b^y
^t^h^{e So}^ci^a^l^S^ecu^ri^t^y^A^d^vi^so^{ry B}^o^a^r^d^{, Me}^m^o^ra^ndum^{, da}^te^{d A}^u^g^u^s^t¹⁰^{, 2}⁰⁰⁵^{; a}^v^a^ila^ble^a^t^http^://w^w^w^.^s^s^a^b.g^o^v^/
^doc^um^eⁿ^ts^/a^dv^is^or^y^boa^r^d^m^e^m^o^—²⁰⁰^5tr^—⁰⁸¹⁰²⁰^05.^pdf^.
⁹⁶^S^o^ci^al^S^ecu^ri^t^y^pay^r^o^ll^t^a^{xes are l}^e^vi^ed^oⁿ^co^vered^earnⁱⁿ^g^s.^Indⁱ^vi^d^u^a^l^s^wⁱ^t^hⁱⁿ^cert^aⁱⁿⁱⁿ^c^o^m^e^b^r^ack^et^{s ma}^y^al^so^p^a^y
^inc^o^me^t^a^{xes o}ⁿ^S^o^ci^al^S^ecu^ri^t^y^ben^e^fⁱ^t^p^a^ym^en^t^s^.^T^h^{e an}^al^y^sⁱ^s^{in this re}^por^{t f}^o^c^u^se^{s e}^x^c^l^usiv^e^l^y^{on the}^distri^but^io^na^l
^e^ffe^c^t^{s of}^ra^ising^{or e}^lim^ina^ting^the^le^v^e^{l of}^e^a^r^ning^{s subje}^c^t^to^pay^r^o^ll^ta^x^e^s.
⁹⁷^T^h^{e b}^a^{se i}^sⁱⁿ^creased^each^{year b}^a^sed^oⁿ^t^h^{e ch}^an^{ge i}ⁿ^averag^{e wa}^ges.^F^o^{r a m}^o^{re co}^m^p^l^e^t^e^d^e^scri^p^tⁱ^oⁿ^aⁿ^d^hⁱ^st^ory
^of^the^e^a^r^ning^s^ba^s^e^{, s}^e^e^C^R^S^R^e^por^{t R}^L³²⁸^96,^S^o^cⁱ^al^Se^c^u^r^ity^:^R^a^isⁱⁿ^{g or}^Elimⁱⁿ^ati^ng^the^T^a^x^a^ble^Earⁿⁱ^ngs^Bas^e^{, by}
^J^a^nem^a^rⁱ^e^Mulv^ey^a^{nd D}^e^br^a^B^.^W^h^itm^aⁿ^.
⁹⁸^B^o^th^e^m^ploy^e^r^s^a^{nd e}^m^plo^y^e^e^s^contrⁱ^bute^6.^2%^of^c^o^v^e^r^e^{d e}^a^rⁿⁱⁿ^g^s^a^{nd the}^s^e^lf^-^e^m^p^loy^e^{d c}^ontrⁱ^bu^te^12.^4%^of^ne^t
^se^lf^-^e^m^p^loy^m^eⁿ^{t inc}^o^m^e^f^o^{r Soc}ⁱ^a^l^Se^c^u^rity^{(both t}^h^e^Old^A^g^e^a^{nd Surv}^iv^{ors Ins}^u^ra^nc^e^(OA^S^{I) a}^nd^Disa^bility
^In^su^ran^{ce (DI) p}^r^o^g^ram^s^).^No^t^e^t^h^at^so^m^e^w^o^{rkers (ap}^p^r^o^xⁱ^m^at^el^{y 4}^%^{) are exe}^m^p^t^f^r^o^m^S^o^ci^al^S^ecu^ri^t^y^p^a^y^r^o^l^l^t^a^xes
^an^d^{are t}^h^eref^o^r^{e n}^o^t^“co^vered^”^b^y^S^o^ci^al^S^ecu^ri^t^y^.^F^r^o^m^t^hⁱ^s^p^oⁱⁿ^t^f^o^rward^,^al^l^ref^e^ren^{ces t}^o^earnⁱⁿ^g^{s are “co}^vered^”
^earnⁱⁿ^g^{s an}^d^w^o^{rkers are “co}^ver^e^d^”^w^o^rkers.^F^o^{r a l}ⁱ^s^tⁱⁿ^g^o^f^w^o^rk^e^r^{s w}^h^o^{are exe}^m^p^t^f^r^o^m^S^o^ci^al^S^ecu^ri^t^y^t^a^x^e^{s see}
^{CRS Rep}^o^r^t⁹⁴^-2⁸^,^S^o^cⁱ^a^l^S^ecu^ri^t^y^aⁿ^d^Medⁱ^ca^{re T}^a^{xes an}^{d P}^r^emi^u^{ms: F}^a^ct^S^h^eet^,^by^D^a^wⁿ^N^u^s^c^hle^r^.
⁹⁹^$9^4,2⁰⁰^x^6.^2%⁼^$5^,8^40.⁴⁰^aⁿ^d^$94^,2^{00 x}^12.^4%⁼^$^11,⁶⁸^0.⁸⁰

The taxable earnings base also limits the annual amount of earnings that are used in benefit
calculations and thus sets a ceiling on the amount Social Security pays in benefits. For example,
the maximum amount of earnings in 2006 that would be used to calculate a worker’s benefit was
$94,200, regardless of whether the worker earned above that amount. If an individual earned at or ¹⁰⁰
above the earnings base for his or her entire career and retired in 2006 at the full retirement
age, his or her annual benefit would be $24,636 ($2,886.33 per month), the maximum benefit
payable under current law. However, very few Americans receive the maximum benefit as it is
rare to have had such consistently high earnings over a lifetime.
According to statistics from the Social Security Administration, a small share of workers earn
above the taxable earnings base each year. In 2003, 6% of workers (8.5 million individuals) ¹⁰¹
earned more than the taxable earnings base. Most of the individuals earning above the base
were men (6.7 million individuals or roughly 80% of the total). In 2003, 8% of all male workers
and 3% of all female workers had earnings above the maximum. Most individuals earning above
the base were wage and salary workers (roughly 90% of the total). Roughly 5% of all wage and
salary workers (7.9 million individuals) and 5% of all self-employed workers (765,000
individuals) had earnings above the base in that year.
Raising or removing the taxable earnings base could reduce or eliminate the long-term Social ¹⁰²
Security deficit. The additional tax revenues would be substantial. However, the full impact of
the policy change would depend on whether the wages above the maximum would also be
counted toward benefits. Raising or eliminating the taxable earnings base while maintaining the
current benefit structure, where benefits are calculated on the full contribution base, would lead to
higher monthly Social Security checks for individuals who earned more than the taxable wage
base over their careers. These higher benefit payments would lead to greater program outlays
although these outlays would be more than offset by greater tax revenues. While the solvency
impact would be improved to a greater degree if the cap on taxes was eliminated and the cap on
benefits was retained, the traditional link between contributions and benefits would be broken.
Some argue that the taxable wage base should cover a constant share of aggregate earnings. In ¹⁰³
1982, 90% of aggregate earnings in the United States were taxed for Social Security. Rising
inequality—primarily increases in the earnings of the highest paid individuals—has led to a
decline in the share of U.S. earnings that are taxed. In 2005, only 85% of aggregate earnings were ¹⁰⁴¹⁰⁵
taxed. The share of earnings that are taxed is projected to continue to fall. Maintaining a
consistent tax base would increase revenue and help to improve the system’s solvency.

¹⁰⁰^T^h^{e S}^o^ci^al^S^ecu^ri^t^y^b^eⁿ^e^fⁱ^t^f^o^r^m^u^l^{a cal}^cu^l^a^t^e^{s b}^eⁿ^e^fⁱ^t^s^b^a^sed^oⁿ^a^w^o^rker’^s^hⁱ^gh^est³⁵^y^{ears o}^f^earnⁱⁿ^g^s.^F^o^{r a}
^de^s^c^rⁱ^ptio^{n of}^the^be^ne^f^{it c}^o^m^puta^{tion r}^u^le^s^u^nde^r^c^u^r^r^e^{nt la}^w^,^ple^a^s^e^r^e^f^e^r^to^A^p^pe^nd^ix^A^.
¹⁰¹^Socⁱ^a^l^Se^c^u^rⁱ^ty^A^d^mⁱ^nis^t^r^a^tion,^A^nnua^{l Sta}^tis^tic^a^l^S^u^p^p^le^m^e^{nt, 2}⁰⁰⁵^{, h}^ttp:^//w^w^w^.s^s^a^.g^ov^/^polic^y^/^d^o^c^s^/s^ta^tc^om^ps^/
^s^upple^m^eⁿ^t/20⁰⁵^/^4b.htm^l^#ta^b^le⁴^.^b1.⁽^H^e^r^e^a^f^t^e^r^r^e^f^e^r^r^e^{d to a}^s^SSA^Sta^tis^tic^a^l^Su^pple^m^eⁿ^{t, 2}⁰⁰⁵^.)
¹⁰²^T^h^{ere i}^s^p^r^eced^en^t^f^o^{r t}^hⁱ^s^p^r^op^osal^.^T^h^{ere i}^sⁿ^o^cap^oⁿ^earniⁿ^g^{s su}^b^j^ect^t^o^t^h^{e p}^a^y^r^o^l^l^t^a^{x t}^h^at^fⁱⁿ^a^{nces t}^h^{e h}^o^s^pi^t^a^l
^ins^u^r^a^nc^e⁽^H^I⁾^por^ti^on^of^Me^dic^a^r^e^.^W^h^eⁿ^the^H^I^ta^x^w^a^s^le^vⁱ^e^d^{in 196}^{6 t}^h^e^m^a^xⁱ^m^u^m^tax^a^ble^am^{ount w}^a^s^s^e^{t the}
^sa^m^e^a^s^f^o^{r Soc}ⁱ^a^l^Se^c^u^rity^{. A}^s^p^a^{rt of}^the^Om^{nibus Bu}^dg^e^t^Re^c^oⁿ^c^ilia^{tion A}^c^{t of}¹⁹^{93 (}^P^.L^{. 1}^03-⁶⁶^{) the}^{HI ba}^se^w^a^s
^rem^o^v^e^{d, ra}^is^ing^aⁿ^e^s^tim^a^t^e^d^{$29 bi}^llio^{n i}ⁿ^re^v^e^nue^s^ov^e^r^the^FY¹⁹⁹^4-FY¹⁹⁹⁸^pe^rio^d^.
¹⁰³^S^S^A^S^t^atⁱ^s^tⁱ^cal^S^u^p^p^l^em^en^t^,²⁰⁰⁵^.
¹⁰⁴^Ibid^.

This report examines two proposals to raise or eliminate the taxable earnings base. Both options
are assumed to be effective in 2013.
Option 1: Eliminate the taxable earnings base
One approach would be to remove the taxable earnings base completely. Under this scenario,
all earnings would be taxed. Policymakers could retain the current earnings cap used to
calculate Social Security benefits, or they could fully credit the additional earnings and allow
benefits to rise for those individuals with earnings above the current taxable earnings base.
Option 2: Raise the taxable earnings base to cover 90% of earnings
A second approach would be to raise the taxable earnings base to consistently tax 90% of
aggregate U.S. earnings—restoring it to roughly the level in 1983 when Congress last ¹⁰⁶
addressed Social Security’s finances. The earnings base for benefit calculation could also
be raised to allow individuals to receive correspondingly higher benefits.
Raising or removing the taxable earnings base would only impact workers with high earnings. In ¹⁰⁷
2003, 6% of covered workers earned more than the taxable earnings base. The Dynasim model
projects this share would remain relatively constant through 2050. While fewer than 8% of
workers are projected to earn above the taxable earnings base in a given year, the model estimates
that roughly one in five would earn above the maximum at some point in their lifetime (Figure
18). The model projects that 12% of workers would earn above the earnings base for between one
and five years over the course of their working lives. Very few individuals sustain the high
earnings for long periods in their careers. The model estimates that only 5% of workers would ¹⁰⁸
earn above the taxable wage base for more than five years.
Unlike the other sections in this report that analyze the effect of the policy option on the entire
Dynasim population, most of the figures for the options to raise or eliminate the taxable earnings
base include only beneficiaries who would be affected by the option. Since a relatively small
share of beneficiaries would be affected by the options to raise or eliminate the taxable earnings

^(...c^on^tin^ue^d)
¹⁰⁵^T^h^{e t}^a^xab^l^e^w^a^g^e^b^a^{se i}^sⁱⁿ^creas^ed^an^nu^al^l^y^b^y^t^h^{e avera}^g^{e gro}^w^t^hⁱⁿ^w^a^g^e^s,^so^t^h^{e sh}^{are o}^f^t^h^e^p^o^p^u^l^atⁱ^oⁿ^b^e^l^o^w
^t^h^{e cap}ⁱ^s^exp^ect^ed^t^o^rem^aⁱⁿ^rel^a^tⁱ^v^el^y^st^ab^l^e^o^v^{er t}ⁱ^m^e.^Ho^w^e^ver,^t^h^{e sh}^{are o}^f^p^a^y^r^o^l^l^t^h^atⁱ^s^t^a^xedⁱ^s^exp^ect^ed^t^o
^de^c^line^e^v^eⁿ^f^u^r^t^he^r^.^Uⁿ^de^r^theⁱⁿ^te^r^m^e^d^ia^te^a^s^s^u^m^p^tions^of^the²⁰^{06 T}^r^us^te^e^s^R^e^por^t^,^the^pe^r^c^eⁿ^ta^g^e^of^e^a^r^ning^s^tha^t
ⁱ^s^t^a^xab^l^{e i}^s^p^r^o^j^ect^ed^t^o^d^eclⁱⁿ^{e t}^o^ab^ou^t⁸³^%ⁱⁿ²⁰¹⁵^and^rem^aⁱⁿ^st^ab^l^e^t^h^ereaf^t^e^r.
¹⁰⁶^Es^tim^a^t^e^s^o^f^the^ta^x^a^ble^e^a^r^ning^s^ba^s^e^tha^t^w^ould^c^a^p^tur^e^90%^of^c^o^v^e^r^e^{d e}^a^r^ning^s^be^tw^e^eⁿ²⁰⁰^{5 a}ⁿ^{d 2}⁰⁵⁰^a^r^e^f^r^om
^t^h^{e S}^o^ci^al^S^ecu^ri^t^y^A^d^mⁱⁿⁱ^st^ratⁱ^oⁿ^’^{s Off}ⁱ^{ce o}^f^t^h^{e Act}^u^ar^y^an^d^w^e^r^e^cal^cu^l^a^t^e^d^u^sⁱⁿ^{g t}^h^{e i}ⁿ^t^e^rm^edⁱ^a^t^e^assu^m^p^tⁱ^oⁿ^s^o^f
^the²⁰⁰⁵^T^r^us^te^e^s^R^e^por^t.^For^e^x^a^m^ple^,^the^a^c^t^ua^rⁱ^e^s^e^s^ti^m^a^te^tha^t^the²⁰⁰⁶^w^a^ge^ba^s^e^of^$94,²⁰^{0 w}^ould^ha^v^e^ne^e^d^e^d
^t^o^ri^{se t}^o^$1⁶⁴^,¹⁰⁰^t^o^co^{ver 9}⁰^%^o^f^ag^greg^at^{e co}^vered^earnⁱⁿ^g^s.
¹⁰⁷^S^S^A^S^t^atⁱ^s^tⁱ^cal^S^u^p^p^l^em^en^t^,²⁰⁰⁵^.
¹⁰⁸^T^h^{e sh}^{are o}^f^t^h^{e p}^o^p^u^l^atⁱ^o^{n aff}^e^c^t^ed^b^y^t^hⁱ^s^po^lⁱ^c^yⁱ^sⁱⁿ^f^l^u^eⁿ^ced^b^y^t^h^{e w}^a^y^t^h^{e D}^yⁿ^a^si^m^m^o^d^e^l^p^r^o^j^ect^{s an}
^indivⁱ^d^u^a^l^’^s^e^a^rⁿⁱ^ng^s^.^T^h^e^r^e^is^a^sⁱ^gⁿ^if^ic^aⁿ^{t am}^ount^of^y^e^a^r^-^t^o-^y^e^a^r^v^a^rⁱ^a^{tion in}^the^pr^oje^c^tⁱ^on^of^eachⁱⁿ^di^vi^d^u^a^l^s^’
^e^a^r^ning^s^.

base, including the entire Dynasim population in the figures for these options would show only
that the average beneficiary in each subgroup was not affected.
There are only minor differences in the distributional effects of a policy that raises the taxable
earnings base to cover 90% of earnings or one that would eliminate it entirely. This is because the
Dynasim model projects that roughly 1% of workers have earnings above the 90% limit each
year. In other words, due to high levels of earnings inequality, roughly 1% of the population earns ¹⁰⁹
10% of the earnings. Looking over the course of one’s lifetime, the model projects that less
than 4% of the population would ever earn above the 90% base and nearly all of those who do
would earn above the base for less than five years. Because such a small share of the population
ever earns above the 90% limit, this distributional analysis will focus on eliminating the taxable
wage base. The only difference between the options is that the share of individuals who have
large tax and benefit changes declines if the base is capped at 90% of earnings. A complete set of
distributional analysis tables for the 90% wage base option is available in CRS Report RL33841,
Options to Address Social Security Solvency and Their Impact on Beneficiaries: Results from the ¹¹⁰
Dynasim Microsimulation Model—Detailed Distributional Tables.
Figure 18. Share of the Population with Earnings above the Taxable Wage Base over
their Lifetime
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^P^{lease see the section on}^{“What Do the Figures Show?” in}^{the re}^{port “Int}^{roduction.”}

¹⁰⁹^T^h^e^D^y^na^si^m^m^ode^{l proje}^c^tio^ns^a^r^e^c^onsis^te^{nt w}^{ith c}^u^rre^nt^da^ta^oⁿ^w^a^ge^ine^qua^lity^{. In}²⁰^04,^the^t^o^{p 1%}^of^e^a^r^ne^rs
^w^e^r^e^pa^{id 1}¹^%^of^a^g^g^r^eg^a^t^e^ea^rⁿ^ing^s⁽^s^our^c^e^:^C^R^S^aⁿ^a^l^y^s^is^of^the^Ma^r^c^{h 20}⁰⁵^C^u^r^r^eⁿ^t^Pop^u^la^tio^{n S}^u^r^v^ey⁾^.
¹¹⁰^Se^e^C^R^S^R^e^por^{t R}^L³³⁸⁴¹^,^O^p^tⁱ^oⁿ^s^to^Ad^dr^e^s^s^Soc^ia^{l Se}^c^u^r^ity^Solv^e^nc^y^and^Theⁱ^r^I^m^pac^t^on^Be^ne^fic^iarⁱ^e^s^:^Re^s^u^lts
^fr^om^the^D^yⁿ^a^sⁱ^m^Mⁱ^c^r^os^im^ula^tio^{n M}^ode^l—D^e^t^a^ile^{d D}ⁱ^s^t^rⁱ^bu^tio^nal^Ta^ble^s^,^b^y^L^a^u^r^{a Hal}^t^zel^et^al^.

The majority of beneficiaries would pay no additional taxes compared with current law if the base
were removed, as fewer than 8% of workers are projected to earn above the taxable wage base
each year. Examining the impact on individuals receiving Social Security benefits in 2035,
roughly one in five beneficiaries (21%) would have paid any additional taxes over their lifetime
compared with current law (Figure 19). For most of these affected individuals, the increase
would be moderate. Roughly 16% of all beneficiaries would see their lifetime tax payments
increase by less than 10%. However, 3% of all beneficiaries would have tax payments increase by

10% to 19% and 2% would have tax increases of 20% or more.

Figure 19. Share of Beneficiaries in 2035 with Tax and Benefit Increases Compared
with Current Law if the Taxable Earnings Base is Eliminated, by Level of Increase
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^{Lifetime taxes are calculat}^{ed as the s}^{um of individual and e}^{mployer OASDI contrib}^{utions or}^self-
^{employment cont}^{ributions t}^hrou^{ghout the}^{individual’s entire career. Please see the section on}^{“What Do the}
^{Figures Show?” in the}^{report “}^Int^{roduction.”}
If policymakers choose to calculate benefits based on a worker’s total earnings, including those
above the taxable wage base, some beneficiaries would receive higher Social Security benefits.
Under this option, 23% of beneficiaries in 2035 would have higher benefits than under current
law. This share of beneficiaries that receive higher benefits is greater than the share of individuals
that pay higher taxes because some low earners receive benefits based on their spouses’ higher

¹¹¹^W^h^ile^{this se}^c^tio^{n w}^{ill show}^the^distri^b^u^ti^ona^{l im}^pa^c^t^on^be^ne^fⁱ^cⁱ^a^r^ie^{s if}^the^ba^se^{is e}^lim^ina^t^e^d^f^o^{r both}^ta^x^e^{s a}^nd
^be^ne^f^{its, the}^ta^x^re^{sults w}^{ill be}^th^e^sa^m^e^re^g^a^rdle^{ss of}^w^h^e^t^he^{r the}^w^a^g^e^ba^se^{is re}^ta^ine^d^f^o^{r be}^ne^f^its.

earnings. Most beneficiaries (20%) would see their benefits increase by less than 10% relative to
current law. Only 3% of beneficiaries would see their benefits increase by 10% or more.
The impact of eliminating the taxable wage base on taxes paid varies significantly by income ¹¹²
group. The overwhelming majority (98%) of beneficiaries in the lowest income quintile would
pay no additional taxes over their lifetime (Figure 20). The story is different for higher income
beneficiaries. Roughly one-half of those in the highest income quintile are estimated to have had
tax increases over their lifetime relative to current law. While 35% of beneficiaries in the top
quintile would see their lifetime taxes rise by less than 10%, some (7%) would see their taxes rise
between 10% and 19% and some (6%) would see their taxes rise 20% or more.
Figure 20. Share of Beneficiaries in 2035 with Higher Payroll Taxes or Benefits
Compared with Current Law if the Taxable Earnings Base is Eliminated, by Highest
and Lowest Quintile
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Note:^P^{lease see the section on}^{“What Do the Figures Show?” in}^{the re}^{port “Int}^{roduction.”}
Beneficiaries in the highest income groups would see the largest change in their benefits if the
taxable wage base were removed. One-half of beneficiaries in the top fifth of the income
distribution would have an increase in benefits relative to current law. In this highest quintile,
42% would have benefit increases of less than 10%, some (5%) would have benefit increases of
10%-19% and a few (3%) would have benefit increases of 20% or more. Only 3% of
beneficiaries in the lowest income category would receive small benefit increases under this
proposal.

¹¹²^N^o^te^tha^t^theⁱⁿ^c^o^m^e^g^r^oups^a^r^e^de^fⁱ^ne^{d in}²⁰³⁵^us^ing^f^a^mⁱ^l^y^inc^o^m^e^af^te^{r a}ⁿ^indivⁱ^d^u^a^l^c^l^aⁱ^m^s^dis^a^bility^,
^re^tire^m^eⁿ^{t, surv}^iv^{or or s}^p^o^u^sa^{l be}^ne^f^{its. T}^{hus, som}^e^low^inc^o^{me b}^eⁿ^e^fⁱ^ci^ari^e^{s ar}^{e a}^f^f^ect^ed^b^y^t^h^{e p}^o^lⁱ^c^yⁱ^f^t^h^e^y^e^a^rn^ed
^ab^o^v^{e t}^h^{e t}^a^xab^l^{e w}^a^g^e^b^a^{se at}^an^y^p^oⁱⁿ^tⁱⁿ^t^h^ei^r^career.

While 21% of beneficiaries in 2035 would pay some additional payroll taxes over the course of
their lifetimes if the base were removed, those with higher earnings would face the largest
increases. Looking only at those who paid higher taxes over the course of their lifetime, these
beneficiaries would see their total lifetime tax payments increase by a median of 3% relative to
current law (Figure 21). Among those who paid higher taxes under this option, beneficiaries in
the bottom three quintiles would see their lifetime tax payments increase by a median of 2%
while the average high-income beneficiary would see his or her lifetime tax payments increase by
a median of 4%.
Figure 21. Median Percent Increase in Lifetime Tax and Benefit Payments Compared
with Current Law from Eliminating the Taxable Wage Base, Among Individuals Who
Contributed Additional Taxes Over their Lifetime and Received Benefits in 2035
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Notes:^S^{ince the median c}^hange^{for all beneficiaries would be zer}^{o, this chart shows t}^{he median}^c^{hange for}^only^th
^{those individuals who paid higher}^{taxes over t}^{heir lifetime. Note that the}^{median of the}^{five q}^{uintiles are the}¹⁰^,
³⁰^th^{, 50}^th^{, 70}^th^{, a}^{nd 9}⁰^th^{deciles. Please see the se}^{ction on “What}^{Do the Figures Show?” in t}^{he re}^p^ort
^{“Introduction.”}
The beneficiaries in 2035 that would pay additional payroll taxes over the course of their
lifetimes if the base were removed would have a median benefit increase of only 2% relative to
current law. The increase in benefits would be smaller than the increase in taxes due to the
progressive nature of the Social Security benefit formula. Individuals with higher incomes would
receive a slightly larger benefit increase than others. Among the beneficiaries that pay higher
taxes, beneficiaries in each of the lowest four income quintiles are projected to receive a median
benefit increase of 1% while beneficiaries in the highest income quintile are projected to receive a
median benefit increase of 2% compared with current law.

Raising the taxable wage base to a level that covers 90% of aggregate earnings would raise the
Social Security payroll taxes of all individuals who earn above the current taxable wage base (less
than 8% of workers each year). However, the majority of workers would pay no additional taxes
relative to current law if the base is raised. Examining the impact on individuals receiving Social
Security benefits in 2035, roughly four in five beneficiaries (79%) would not have paid any
additional taxes over their lifetimes (Figure 22). For most individuals who do pay higher taxes,
the increase would be moderate. Roughly 17% of all beneficiaries would see their lifetime tax
payments increase by less than 10%, 3% would see their taxes rise between 10% and 19%, and
only 1% would see their payments increase by 20% or more. As described previously, these
figures are nearly identical to the estimates for eliminating the taxable wage base because only

1% of individuals earn more than the 90% base.

If policymakers choose to calculate benefits based on the higher earnings base, some beneficiaries
would receive higher Social Security benefits. Under this proposal, 78% of beneficiaries would
receive no increase in benefits compared with current law. The share of beneficiaries who receive
higher benefits (22%) is greater than the share of individuals that pay higher taxes (20%) because
some low earners receive benefits based on their spouses’ higher earnings. Of the beneficiaries
with an increase in their benefits, most (21% of all beneficiaries) would see their benefits increase
by 10% or less while only 1% would see their benefits increase by more than 10%. Because so
few individuals earn more than this increased base, these figures are only slightly lower than the
estimates for eliminating the taxable wage base.

Figure 22. Share of Beneficiaries in 2035 with Tax and Benefit Increases Compared
with Current Law if the Taxable Earnings Base is Raised to Cover 90% of All
Earnings, by Level of Increase
^Source:^{Congressional Researc}^h^{Service (CRS) calculati}^{ons using}^{the Urba}^{n I}^{nstitute’s Dyna}^{sim microsimulation}
^model.
^Notes:^{Lifetime taxes are calculated as the s}^{um of individual and e}^{mployer OASDI contrib}^{utions or}^self-
^{employment cont}^{ributions t}^hrou^{ghout the}^{individual’s entire career. Please see the section on}^{“What Do the}
^{Figures Show?” in the}^{report “}^Int^{roduction.”}
As stated earlier, the distributional effects by income quintile are comparable to those that would
occur if the taxable earnings base were eliminated and so are not repeated here. However, the
tables containing this information are available in CRS Report RL33841, Options to Address
Social Security Solvency and Their Impact on Beneficiaries: Results from the Dynasim ¹¹³
Microsimulation Model—Detailed Distributional Tables.
In the 108^th Congress, two bills would have raised the taxable earnings base. A bill by
Representatives Kolbe and Stenholm (H.R. 3821) would have gradually raised the earnings and
benefit cap to $133,200 in 2008 and then held the base equal to 87% of aggregate U.S. earnings
thereafter. H.R. 5179, sponsored by Representative Obey, would have brought the percent of
aggregate earnings subject to the Social Security payroll tax up to 90% by increasing the rate of
growth in the Social Security taxable wage base by 2 percentage points above average wage
growth for years 2006 through 2036.

¹¹³^Se^e^C^R^S^R^e^por^{t R}^L³³⁸⁴¹^,^O^p^tⁱ^oⁿ^s^to^Ad^dr^e^s^s^Soc^ia^{l Se}^c^u^r^ity^Solv^e^nc^y^and^Theⁱ^r^I^m^pac^t^on^Be^ne^fic^iarⁱ^e^s^:^Re^s^u^lts
^fr^om^the^D^yⁿ^a^sⁱ^m^Mⁱ^c^r^os^im^ula^tio^{n M}^ode^l—D^e^t^a^ile^{d D}ⁱ^s^t^rⁱ^bu^tio^nal^Ta^ble^s^,^b^y^L^a^u^r^{a Hal}^t^zel^et^al^.

In the 109^th Congress, two bills were introduced which would raise or eliminate the taxable
earnings base. A bill by Representatives Kolbe and Boyd (H.R. 440) would gradually raise the
base to $142,500 in 2010 and then hold the base equal to 87% of total payroll thereafter. A bill by
Representative Wexler (H.R. 2472) would eliminate the taxable wage base but lower the tax rate
on earnings above the current base from 6.2 to 3% for both employers and employees and from

12.4% to 6% for the self-employed.

None of the bills described above are comparable to the option analyzed in this report. However,
the actuaries at the Social Security Administration have calculated the impact of rasing the
taxable wage base on the solvency of the Social Security trust funds. Under the intermediate
assumptions of the 2005 Trustees Report, raising or eliminating the taxable earnings base could ¹¹⁴
significantly improve the solvency of the Social Security program.
• Tax 90% of earnings and pay higher benefits. Raising the wage base to 90% of
earnings would have a net positive impact on the Social Security trust funds. This option
is projected to eliminate 43% of the long-range financial shortfall and would extend the
trust funds’ exhaustion date from 2041 to 2044. In addition to raising the taxable wage
base to tax 90% of earnings, to make Social Security solvent for the full 75-year
projection period the total payroll tax rate would have to be raised by 1.09 percentage
points (from 12.40% to 13.49%) or other policy changes would have to be made to cover
this shortfall.
• Tax all earnings and pay higher benefits. If the earnings base was completely
eliminated for both employers and employees so that all covered earnings were taxed,
95% of the projected financial shortfall in the Social Security program is projected to be
eliminated. Under this scenario high earners would pay higher taxes and also receive
higher benefits. However, the net benefit to the trust funds is positive. In addition to
taxing all earnings, to achieve solvency for the full 75-year projection period the total
payroll tax rate would have to be raised by an additional 0.1 percentage points (from

12.4% to 12.5%) or other policy changes would have to be made to cover this shortfall.

• Tax all earnings and pay no additional benefits. If the base was completely
eliminated for both employers and employees so that all earnings were taxed, but those
earnings did not count toward benefits, the Social Security program would remain solvent
for the full 75-year projection period. The increased revenue would eliminate 115% of the
projected shortfall and the program would have a surplus of 0.29% of wages. Under this
scenario, the payroll tax rate could be immediately lowered from 12.40% to 12.11% and
the program would remain solvent for the full 75-year projection period.

¹¹⁴^S^o^ci^al^S^ecu^ri^t^y^A^d^mⁱⁿⁱ^st^ratⁱ^oⁿ^,^Es^tim^ate^d^O^A^SD^I^L^oⁿ^g^-^R^a^nge^Fⁱ^nancⁱ^a^{l E}^ffe^c^t^s^of^S^evera^l^P^r^o^vⁱ^sⁱ^oⁿ^s^R^e^qu^est^e^d^b^y
^t^h^{e So}^ci^a^l^S^ecu^ri^t^y^A^d^vi^so^{ry B}^o^a^r^d^{, Me}^m^o^ra^ndum^{, da}^te^{d A}^u^g^u^s^t¹⁰^{, 2}⁰⁰⁵^{, a}^v^a^ila^ble^a^t^http^://w^w^w^.s^s^a^b.g^o^v^/
^doc^um^eⁿ^ts^/a^dv^is^or^y^boa^r^d^m^e^m^o^—²⁰⁰^5tr^—⁰⁸¹⁰²⁰^05.^pdf^.

The Primary Insurance Amount (PIA) is the basic Social Security monthly benefit amount
payable to an individual upon entitlement to retirement benefits at the normal retirement age (i.e.,
the PIA does not reflect any adjustments for early or delayed retirement) or disability benefits. In
addition, the PIA is the base amount used to determine monthly benefits payable to family
members on the worker’s record (such as a spouse or surviving spouse).
Under current law, the PIA is determined by applying a benefit formula to the worker’s average
lifetime covered earnings. In the first step of the benefit computation, the worker’s nominal
earnings (up to 2 calendar years prior to the year of eligibility—for example, earnings prior to age
60 in the case of a retirement benefit) are indexed to wage growth to reflect the change in average
wages over time. (Earnings in subsequent years are counted at nominal value.) For purposes of
computing a basic retirement benefit, the 35 highest years of indexed earnings are then averaged
and a monthly amount is computed to determine the worker’s Average Indexed Monthly Earnings
(AIME). (If a worker has fewer than 35 years of covered earnings, years of “zero” earnings are ¹¹⁵
counted in the computation of the AIME.) The benefit formula is then applied to the worker’s
AIME. The benefit formula that applied to individuals who first became eligible for retirement or
disability benefits in 2006, or who died in 2006 before becoming eligible for benefits, is as
follows:
• 90% of the first $656 of AIME, plus
• 32% of AIME over $656 through $3,955, plus
• 15% of AIME over $3,955
For example, the PIA for a worker who reached age 62 in 2006, based on an AIME of $4,500,
would be $1,727.80. The PIA would be computed as follows:
• 90% x $656 = $590.40, plus
• 32% x $3,299 = $1,055.68, plus
• 15% x $545 = $81.75
PIA = $1,727.80 (rounded to the next lower 10 cents)
The worker’s PIA is based on the benefit formula that applies in the year the worker first becomes
eligible for benefits (age 62 for retired-worker benefits, the year of disability for disabled-worker
benefits, or the year of the worker’s death for survivor benefits ), rather than the first year of

¹¹⁵^T^h^e^num^be^r^of^c^o^m^puta^{tion y}^e^a^r^s^us^e^d^to^de^te^r^m^ine^the^A^I^{ME v}^a^rⁱ^e^s^{, de}^peⁿ^d^ing^oⁿ^t^h^e^ty^pe^of^be^ne^f^{it (}^r^e^tir^em^eⁿ^t,
^surv^iv^{or or}^disa^bility^{). T}^h^e^num^be^{r of}^c^o^m^puta^{tion y}^e^a^r^{s is ba}^se^{d on t}^h^eⁿ^u^m^b^e^r^of^“^e^l^a^p^se^d^y^e^a^r^s^”^(i.e^{., t}^h^e^num^be^{r of}
^c^a^l^e^nda^r^y^e^a^r^s^af^te^r¹⁹⁵⁰^or^,^if^la^te^r^,^a^tta^inm^e^{nt of}^a^g^e²¹⁾^{up t}^o^t^h^e^y^e^a^r^the^w^o^r^k^e^r^a^tta^ins^a^g^e^{62 (}^f^or^r^e^tir^e^m^eⁿ^t
^be^ne^f^{its); the}^y^e^a^r^o^f^de^a^t^{h or,}^if^e^a^r^lie^{r, a}^tta^inm^e^{nt of}^a^g^e^{62 (f}^{or surv}^iv^{or be}^ne^f^{its); or t}^h^e^y^e^a^r^of^di^sa^bility⁽^f^or
^dis^a^bility^be^ne^f^its^{) m}ⁱ^nus^aⁿ^y^“^d^ropo^{ut y}^e^a^r^s^.^”^T^h^e^num^be^r^of^{dropout y}^e^a^r^s^a^l^s^o^v^a^rie^s^{, de}^pe^nding^oⁿ^the^ty^pe^of
^be^ne^f^{it. For}^pur^pose^s^of^re^tire^m^eⁿ^{t a}^{nd s}^u^rv^iv^{or be}^ne^f^its,^u^p^t^o⁵^dr^opo^{ut y}^e^a^r^{s a}^pply^.^{For pur}^pose^s^o^f^disa^bility
^be^ne^f^its^f^o^r^w^o^r^k^e^r^s^dis^a^ble^d^be^f^o^r^e^a^g^e^47,^{1 t}^o⁴^dr^op^{out y}^e^a^r^s^apply^,^de^peⁿ^d^ing^oⁿ^t^h^e^w^o^r^k^e^r^’^s^a^g^e^a^{nd the}ⁿ^u^m^b^e^r
^of^drop^out^y^e^a^r^{s. How}^e^v^e^{r, no f}^e^w^e^{r tha}ⁿ^{2 c}^o^m^puta^tio^{n y}^e^a^r^s^m^a^y^be^use^d^f^o^{r disa}^bility^be^ne^f^{it c}^a^l^c^u^la^tions.

benefit receipt. Beginning with the first year of eligibility, the PIA is increased by the annual
Social Security cost-of-living adjustment (COLA) for any intervening years between eligibility
and benefit receipt. For example, if an individual who first becomes eligible for retired-worker
benefits at age 62 in 2006 elects to receive benefits at the normal retirement age (age 66 in 2010),
the PIA effective at the normal retirement age would be the PIA calculated using the benefit
formula for 2006 (shown above) adjusted annually according to the COLA effective in December

2006, December 2007, December 2008 and December 2009.

The dollar amounts that separate the three brackets of AIME in the benefit formula ($656 and
$3,955) are referred to as bend points. Under current law, the bend points are indexed to wage
growth on an annual basis to provide stable replacement rates over time for workers with similar
earnings patterns. (The replacement rate is based on Social Security benefits in the first year of
retirement divided by final earnings.) For example, under current law, the benefit formula is
designed to provide a replacement rate of approximately 40% for average-wage earners
regardless of the year of retirement.
The percentages that apply to each of the three brackets of AIME in the benefit formula (90%,

32% and 15%) are referred to as formula factors (or replacement factors). The formula factors,

which are fixed under current law, are structured such that Social Security benefits replace a
greater share of pre-retirement earnings for lower-wage workers compared with higher-wage
workers.

The current-law Social Security rules regarding spouses and survivors can increase the benefits of
some married, widowed, and divorced beneficiaries. When these spouse and survivor rules
interact with policy options that reduce Social Security benefits, they can mitigate the effect of
benefit reductions, causing smaller reductions than would have been expected under the policy
option.
The Social Security rules regarding spouses and aged survivors allow some individuals to receive
a benefit when they otherwise would have received none, and allow other individuals to receive a
higher benefit than they otherwise would have received.
Individuals who do not qualify for a Social Security benefit based on their own work records may
qualify for a benefit based on their current or former spouses’ work records. Social Security
spouse benefits are payable to the spouse or divorced spouse of a retired or disabled worker, ¹¹⁶
based on the worker’s earnings record. The primary insurance amount (PIA) for a spouse
beneficiary is generally 50% of his or her spouse’s PIA. Social Security survivor benefits are
payable to the survivors of a deceased worker, based on the worker’s earnings record. The PIA for ¹¹⁷
an aged widow or widower is 100% of his or her deceased spouse’s final benefit amount.
Individuals who do qualify for Social Security benefits based on their own work records may
receive a partial spouse or survivor benefit in addition to their own worker benefit, if the amount
of their spouse or survivor benefit would be greater than their worker benefit. These so-called
dually entitled beneficiaries receive a total Social Security benefit that is the higher of the worker
benefit and the spouse or survivor benefit to which they are entitled, not the sum of the two
benefits.
Some individuals marry more than once throughout the course of their lives, either because they
were divorced or widowed. Some of these individuals may qualify for spouse or survivor benefits ¹¹⁸
based on the work records of more than one spouse. In such a case, an individual would receive
the highest benefit to which he or she is entitled.
When Social Security’s spouse and survivor rules interact with policy options that would reduce
benefits, they can mitigate the effect of benefit reductions, causing smaller reductions than would

¹¹⁶^Dⁱ^v^o^r^c^e^d^s^p^o^u^s^e^s^m^u^s^t^ha^v^e^be^{en m}^a^r^rⁱ^e^d^{to the}^w^o^r^k^e^r^f^o^r^a^t^le^a^s^{t 10}^y^e^a^r^s^{to q}^u^a^lif^y^f^o^r^s^pous^e^or^s^u^r^v^iv^or
^be^ne^f^its^.
¹¹⁷^O^t^he^r^ty^pe^s^of^s^u^r^v^iv^or^be^ne^f^its—^t^hos^e^f^o^r^c^h^il^dr^eⁿ^{, m}^o^the^r^s^or^f^a^the^r^s^w^{ith a}^c^h^{ild i}ⁿ^c^a^r^e^,^aⁿ^{d de}^pe^ndeⁿ^t^pa^r^e^nts
^o^f^S^o^ci^al^S^ecu^ri^t^y^b^eⁿ^e^fⁱ^ci^ari^e^s—^{are n}^o^t^an^al^y^zedⁱⁿ^t^hⁱ^s^rep^o^r^t^.
¹¹⁸^Iⁿ^s^o^m^e^c^a^s^e^s^{, be}^ne^fⁱ^cⁱ^a^r^ie^s^{do n}^o^{t q}^u^a^lif^y^f^o^r^be^ne^f^its^ba^s^e^{d on a}^f^o^r^m^e^r^s^pous^e^’^s^w^o^r^k^r^e^c^o^r^d^if^they^r^e^m^a^r^r^y^.

have been expected under the policy option. There are two mechanisms that could mitigate the
effect of the policy option for a beneficiary: (1) if his or her benefit type changes under the
option, or (2) if the spouse on whose work record his or her the benefit is based changes under the
option.
Some individuals could change benefit types under a policy option because of the spouse and
survivor rules, thus mitigating the effect of the option’s benefit reduction. For example, consider a
couple in which the wife receives a $600 retired worker benefit and the husband receives a
$1,100 retired worker benefit under current law. The woman would not qualify for a spouse
benefit under current law, since her worker benefit ($600) is greater than 50% of her husband’s
primary insurance amount (assuming he is not subject to any reductions or credits, this amount
would be $550). If the wife is younger than the husband, she would be subject to a greater benefit
reduction in 2035 under most of the policy options analyzed in this report. Continuing the
example above, let’s assume under a policy option that the wife’s benefit were reduced by $100
(making her retired worker benefit $500) and the husband’s benefit is reduced by $50 (making his
retired worker benefit $1,050). As a result, the wife would become dually entitled to receive a
partial spouse benefit in addition to her full worker benefit. Her total benefit amount under the
option would be equal to 50% of her husband’s PIA, or $525 in this case (i.e., $500 in worker
benefits and $25 in spouse benefits). Thus, the dual entitlement rule leads the wife to receive a
$75 benefit reduction rather than a $100 reduction.
Some individuals could receive a spouse or survivor benefit based on a different marriage than
under current law as a result of a policy change, thus mitigating the effect of a benefit reduction
that would otherwise result from the policy option. For example, consider a woman who divorced
after 15 years of marriage, then remarried. Under current law, she receives a spouse benefit of
$600. Her spouse benefit is based on her current husband’s PIA of $1,200; her former husband’s
PIA is $1,180. Under the policy option, her current husband’s PIA is reduced by $100 (to $1,100),
and her former husband’s PIA remains at $1,180 since he retired before the policy option was
implemented. Under the policy option, she would receive a divorced spouse benefit based on her
former husband’s work record, rather than her current husband’s work record, since the benefit
she would receive based on her former husband’s record ($590) would be greater than the benefit
she would receive based on her current husband’s record ($550). Thus, the rule that allows
beneficiaries to receive the highest spouse or survivor benefit to which they are entitled means
that the wife in this example receives a $10 benefit reduction rather than a $50 benefit reduction.
It is important to note that in either scenario—changing benefit type or changing the spouse on
which the benefit is based—the affected beneficiary would receive a higher-than-expected benefit
under the option due to Social Security’s spouse and survivor rules. The reason for this effect is
that the Social Security rules always allow beneficiaries to receive a total benefit that is equal to
the highest of the various benefits to which they may be entitled.

The current-law Retirement Earnings Test (RET) can affect benefits received before and after the
full retirement age (FRA). When the RET provision interacts with policy options that reduce
Social Security benefits, it can magnify the size of the benefit reduction received before the FRA
and reduce the size of the benefit reduction received after the FRA relative to what is expected
under the policy option, or even lead to apparent benefit increases relative to current law.
The RET is a current-law provision that reduces the Social Security benefits paid to some
individuals who work before their full retirement age (FRA). Specifically, the RET applies to
non-DI beneficiaries below the FRA who have earnings from employment in excess of certain ¹¹⁹
thresholds. Generally, for workers who fall under the full retirement age for the entire year, the
threshold was $12,480 in 2006. For every two dollars in earnings over this threshold, the worker’s
Social Security benefit is reduced by one dollar. In the year that the worker attains the full
retirement age, a higher threshold of $33,240 applied in 2006 for those months worked prior to
the full retirement age. For every three dollars in earnings over this threshold, the worker’s Social
Security benefit is reduced by one dollar. These thresholds rise annually with increases in the
national average wage. Monthly benefits are eliminated or reduced until all excess earnings have
been offset. The RET does not apply to workers after they attain the full retirement age.
Table C-1. Retirement Earnings Test Application Rules
^{Age of}^{Social Security}^{Threshold in 2006}^{Benefit Reduction}
^Beneficiary
^{Under FRA Entire Year}^$12,4⁸⁰^{$1 for e}^very^{$2 of e}^xcess
^earnings
^{In Year of Attaining FRA, for}^$33,2⁴⁰^{$1 for e}^very^{$3 of e}^xcess
^{Months Prior to the}^FRA^earnings
^{Over th}^{e FRA}^{No thres}^hold^{No reduction}
For example, Joe is 62 and will not reach the full retirement age this year. Thus, Joe could have
earned up to $12,480 in 2006 without penalty. Joe earns $30,000 this year, so his Social Security
benefit would be reduced under the RET. For every two dollars of earnings over the $12,480
threshold, his benefit would be reduced by one dollar. Joe had ‘excess’ earnings of $17,520 in
2006 ($30,000 - $12,480). Thus, the reduction to his Social Security benefit was $8,760 ($17,520
x 0.5) in 2006. Joe’s current-law Social Security benefit is $1,500 per month ($18,000 per year)
before the RET is applied. Therefore, Joe would lose his Social Security benefit payments for five
full months and would lose a portion of his benefit for a sixth month ($8,760/$1,500) because of

¹¹⁹^T^h^{e RET}^d^o^e^{s n}^o^t^ap^p^l^y^to^dⁱ^sab^l^ed^w^o^rk^{ers rec}^e^ivⁱⁿ^g^Di^sab^ility^Iⁿ^su^ran^{ce (DI) b}^eⁿ^e^f^{its b}^ecau^{se th}^{ese in}^dⁱ^vⁱ^d^u^a^ls
^a^r^e^s^ubje^c^t^to^theⁱ^r^ow^{n e}^a^r^ning^s^t^e^s^t^{, the}^S^ubs^ta^nt^ia^{l G}^a^inf^u^{l Ac}^tivⁱ^t^y^(S^GA^{) te}^{st. Se}^e^{CRS Re}^port⁹⁸^-78⁹^,^Soc^ia^l
^Se^c^u^r^ity^:^Pr^o^pos^e^d^C^h^a^nge^s^t^o^t^h^e^Earⁿⁱ^ngs^Te^s^t^,^by^De^bra^{B. W}^h^itm^aⁿ^f^o^{r a}^dditi^ona^l^inf^o^rm^a^{tion o}ⁿ^the^R^E^T^.

his excess earnings under the RET. After application of the RET, Joe’s annual Social Security
benefit would be $9,240 ($18,000 - $8,760).
Those individuals who face benefit reductions due to the RET have their benefits increased at the
full retirement age. Under current law, workers are only subject to the RET if they have excess
earnings, receive non-DI benefits and have not yet reached the full retirement age. When
individuals receive non-DI benefits prior to the full retirement age, they are subject to an actuarial
benefit reduction, the size of which is dependent on the number of months of benefits the
individual is projected to receive benefits before the full retirement age. The greater the number
of months of benefit receipt prior to the full retirement age, the greater the actuarial reduction.
Those retiring at the earliest eligibility age (60 for survivors benefits, 62 for retirement benefits)
face the largest reduction. For every month that an individual’s early retirement or early survivor
benefit is eliminated as a result of the RET, the actuarial reduction that he or she is subject to goes
down as compensation for these lost benefits. When the individual reaches the full retirement age,
the actuarial reduction is lowered and the retirement or survivor benefit is adjusted upward to
account for the lost months of benefits under the RET.
Following on the previous example, if Joe takes Social Security benefits at the earliest eligibility ¹²⁰
age, 62, his benefits will be 25% lower than if he retired at his FRA of 66. If Joe’s full
retirement benefit (PIA) was $2,000 per month, his monthly benefit after the early retirement
reduction would be $1,500 ($2,000 x 0.75). However, if Joe continues working, as described in
the previous example, he would lose benefits for over five months out of the year due to the RET.
If Joe worked intermittently between age 62 and 66 and the RET ultimately eliminated Joe’s
benefit for a total of 12 months over this period, essentially, Joe delayed taking up Social Security
benefits for an additional year. Therefore, his actuarial reduction for early retirement should be
adjusted to reflect his receipt of Social Security benefits for only 36 months prior to his full
retirement age instead of 48. Joe’s actuarial reduction would be reduced from -25% to -20% at the
full retirement age of 66. Thus, at age 66 the RET would increase Joe’s monthly benefit from
$1,500 to $1,600 ($2,000 x .80) under current-law, about a 7% increase. On an annual basis, the
RET would increase Joe’s benefit from $18,000 per year to $19,200 per year.
The RET can magnify the effect of policy options that reduce benefits relative to current law.
Those affected by the RET appear to receive larger benefit reductions than what could be
attributed to the policy change alone. The RET calculation is based on a worker’s excess
earnings. Since earnings are not affected by the policy option, the RET reduction is the same
dollar amount under both current law and the policy option. If a policy option reduces Social
Security benefits, this smaller Social Security benefit is being reduced by the same dollar amount

¹²⁰^T^h^e^be^ne^f^{it r}^e^duc^tio^{n of}²⁵^%^is^c^a^l^c^u^la^te^{d ba}^s^e^d^{on t}^h^eⁿ^u^m^b^e^r^of^m^onths^J^o^e^r^e^tir^e^s^be^f^o^r^e^his^f^u^ll^r^e^tir^em^eⁿ^{t a}^g^e^.
^B^y^re^tiring^a^t^a^g^e^{62, Joe}^w^{ill c}^o^ll^e^c^t^Socⁱ^a^l^Se^c^u^rity^be^ne^f^{its f}^o^{r 48 m}^{onths be}^f^o^re^{his f}^u^{ll re}^tire^m^eⁿ^{t a}^g^e^of^{66. For}
^inf^o^r^m^a^{tion on}^how^the^a^c^t^ua^rⁱ^a^l^r^e^duc^tio^{n is}^de^te^r^m^ine^d^{, s}^e^e^T^a^bl^e^2.A^17.1ⁱⁿ^the^S^o^cⁱ^a^l^Se^c^u^r^ity^A^d^mⁱ^nis^t^r^a^tion’^s
^A^nnua^{l Sta}^tis^tic^a^l^S^u^p^p^le^m^e^{nt to}^the^Socⁱ^a^l^Se^c^u^rity^Bulle^tin,²⁰⁰⁵^a^t^htt^p^://w^w^w^.s^s^a^.g^ov^/^polic^y^/^doc^s^/^s^t^a^t^c^o^m^p^s^/
^s^upple^m^eⁿ^t/20⁰⁵^/^2a^8-^2a¹⁹^.htm^l#^ta^ble²^.a¹⁷^.1^.

under the RET as under current law. Therefore, the RET creates a larger percent reduction in
benefits than is expected under the policy change.
Continuing the current-law example, assume that a policy option reduces Joe’s initial benefit by
10% (prior to the application of the RET). Thus, his annual benefit prior to the RET is $18,000
and the policy option reduces his benefit by 10% ($1,800) to $16,200. Since Joe’s earnings don’t
change, and he still has excess earnings of $17,520 in 2006, the RET still reduces his annual
Social Security benefit by $8,760. So, Joe’s final annual benefit (after the policy option and the
RET) is $7,440 ($16,200 - $8,760), which is approximately a 20% decrease ($7,440/$9,240) from
the current law annual benefit of $9,240 (after the RET). Thus, the interaction of the policy option
with the RET program rules is responsible for the larger than expected reduction in Joe’s benefit.
Some policy options might reduce the Social Security benefit to a size where the fixed dollar
amount of the RET fully eliminates the Social Security benefit for a greater number of months
than under current law. Because of the interaction of the policy option with the RET and the
actuarial benefit reduction, the ultimate consequence of this benefit elimination is a later increase
in benefits relative to current law. When a policy option reduces the size of the Social Security
benefit, the unchanging dollar amount of the RET requires more months of benefits to be
eliminated than under current law. Thus, at the full retirement age, when the benefits are adjusted
upward for this loss, they are increased relative to current law, making some individuals receive
benefit increases that would seem to be counterintuitive under a policy change that reduces
benefits.
For example, if Joe’s benefit were reduced relative to current law, let’s say that the RET would
eliminate his now smaller Social Security benefit for 16 months instead of 12 months during the
period he worked between age 62 and 66. Joe’s actuarial reduction would be adjusted to reflect
his receipt of Social Security benefits for only 32 months prior to his full retirement age instead
of 36 months under current law (after the RET). Joe’s actuarial reduction would be reduced from
-20% to approximately -16.7%. Thus, under the policy option, at age 66 Joe’s benefit increases
from $1,600 (PIA of $2,000 x 0.80) under current law to $1,666 (PIA of $2,000 x .83) under the
policy option, a benefit increase of 4%.
In summary, the RET can either magnify the size of a benefit reduction under a policy change or
appear to create a benefit increase relative to current law, depending on whether an individual is
below or above the full retirement age.

The progressive price indexing policy option would constrain the growth of initial benefits for
future retirees by using a combination of wage indexing and price indexing in the benefit formula
to apply differing degrees of benefit reduction based on the worker’s career-average level of
earnings. The following section explains the mechanics of the progressive price indexing option ¹²¹
examined in this report. The basic steps used to calculate initial benefits for future retirees
under the progressive price indexing option include:
The benefits of low-wage workers would be preserved by establishing a new bend point in the
PIA formula, below which initial benefits would continue to be fully wage-indexed. For the ^th
option analyzed in this report, the new bend point would be established at the 30 percentile of
earnings. This means that workers with career-average earnings in the lowest 30% of the earnings
distribution would experience no change in benefits relative to current law.
The new bend point would fall between the first and second bend points under current law. The
replacement factors for the now four brackets of Average Indexed Monthly Earnings in the
benefit formula would be set initially at 90%, 32%, 32% and 15%. The new bend point would
increase each year after 2013 by the rate of growth of the national average wage, just as the two
current bend points are wage-indexed. All workers with career-average earnings below this new
bend point would continue to have their initial benefits fully wage-indexed. Workers with career-
average earnings above the new bend point would have their initial benefits reduced because the
third and fourth replacement factors (32% and 15%) would be adjusted downward each year
(described in Step 3 below).
For those who become eligible for retired-worker benefits in 2013 and each year thereafter,
calculate a hypothetical fully price-indexed PIA for a worker who had maximum earnings over
his/her career and the percentage reduction in benefits between this hypothetical PIA and the
current law PIA. SSA would compute the percentage benefit reduction that would apply for a ¹²²
career high-wage earner if all three of the current-law PIA factors (90%, 32%, and 15%) were
fully price-indexed.

¹²¹^T^h^e^s^e^s^t^e^p^s^f^o^llow^thos^e^de^s^c^rⁱ^be^{d in a}^m^e^m^o^r^a^ndum^f^r^o^m^Ste^phe^{n G}^o^s^s^,^C^h^ie^f^A^c^tua^r^y^of^the^Socⁱ^a^l^Se^c^u^r^ity
^A^d^mⁱ^nis^t^r^a^{tion t}^o^R^o^be^r^t^Poz^eⁿ^d^a^te^{d Fe}^br^ua^r^y^10,²⁰⁰⁵^{. Se}^e^ht^tp:/^/w^w^w^.s^sa^.g^ov^/^O^A^C^T^/^s^o^lv^eⁿ^c^y^/
^R^P^o^zen^_2⁰⁰⁵⁰²¹⁰^.^p^d^f^.
¹²²^A^car^{eer h}ⁱ^gh^-w^a^g^{e earn}^e^{r i}^s^so^meoⁿ^e^w^h^o^earn^e^d^at^o^r^ab^o^v^{e t}^h^{e t}^a^xab^l^e^w^a^g^e^b^a^{se f}^o^{r at}^l^east³⁵^y^ear^{s i}ⁿ^t^h^ei^r
^en^tⁱ^r^{e career.}

For example, if the benefit for a career high-wage earner retiring at the full retirement age in a
future year were determined to be, say, $2,800 per month and the percentage changes in prices
and wages since 2011 were 2.8% and 3.9%, respectively, the benefit for a high-wage earner
would be recalculated with each of the three PIA factors multiplied by the ratio 1.028/1.039 or ¹²³
.989. Thus, in this example, the benefit of a high-wage earner under full price indexing would
be reduced by 1.1% in 2013, the first year that price indexing would be in effect. After ten
years—assuming that prices and wages continued to grow annually by 2.8% and 3.9%—the PIA ¹⁰¹⁰
factors would be multiplied by 1.028/1.039 = .899, representing a benefit reduction of 10.1%.
The third step of the process would be to calculate the percentage reduction only to the PIA
factors above the new bend point (32% and 15%) that would result in the same benefit reduction
for career-long maximum-wage earners (those always at or above the annual maximum taxable
wage) as would have applied to these earners if price indexing had been applied to all workers.
This would reduce benefits for career-long maximum-wage earners by the same percentage as
they would have been reduced if the benefit formula were fully price-indexed for workers at all
earnings levels. Benefits would be reduced by a smaller percentage for workers with career-long
average wages and not at all for workers with average wages that fall in the lowest 30% of the
earnings distribution.

¹²³^Ea^rning^s^a^r^eⁱⁿ^de^x^e^{d to t}^h^e^a^v^e^r^a^g^e^w^a^g^e^le^v^e^{l t}^w^o^y^e^a^r^{s pr}^{ior t}^o^t^h^e^w^o^rk^e^r’s^fⁱ^rst^y^e^a^r^of^e^lig^ibility^be^c^a^use^the^r^e
ⁱ^s^{a t}^w^o^-^y^{ear l}^a^{g t}ⁱ^m^e^asso^ci^at^ed^wⁱ^t^h^t^h^{e rel}^{ease o}^f^o^f^fⁱ^ci^al^w^a^{ge d}^a^t^a^f^o^{r a gi}^v^eⁿ^year.^T^h^u^s^,ⁱ^f^t^h^{e fi}^rst^y^e^{ar t}^h^{e p}^o^lⁱ^c^y
^a^pplie^s^is²⁰^13,^{it w}^oul^{d be}^ne^c^e^s^s^a^r^y^{to obta}ⁱ^{n t}^h^e^of^fⁱ^cⁱ^a^l^w^a^g^e^data^f^r^o^m²⁰¹^1.

The Urban Institute’s Dynamic Simulation of Income Model (Dynasim) is a computer model that
uses survey data to project demographic changes, retirement income, and Social Security
benefits. It was created by the Urban Institute and was purchased by the Congressional Research
Service. Dynasim can be used to analyze the consequences of retirement and aging policy issues
on individual and family income and benefits. One of the major advantages of using the Dynasim
model is the ability to analyze the distributional effects of Social Security proposals. For example,
Dynasim can be used to (1) analyze the difference in benefit levels between a particular Social
Security reform proposal and current law; (2) model the combined effects of multiple and
complex policy changes on individual and family benefits and total income; (3) model the effect
of a change in Social Security policy on an individual’s eligibility for other means-tested federal
programs (e.g. SSI). The effect on individuals and families can be broken down along multiple
demographic and economic lines, such as gender, educational attainment, marital status, race, and
wealth.
Through statistical adjustments of the data sources listed below, Dynasim projects the major
pillars of retirement income. Starting with a representative sample of individuals and nuclear
families, the model “ages” the data year by year from 1993 to 2050. Characteristics such as an
individual’s year of birth, educational attainment, marital status, and race are used to predict
future values of variables such as earnings, marital changes, and wealth. For each year, Dynasim
simulates such demographic events as births, deaths, marriages and divorces, and such economic
events as labor force participation, earnings, hours of work, disability onset, and retirement.
The large amount of demographic and income information makes Dynasim particularly suitable
to analyze the distributional effects of various Social Security reform proposals and other issues
relating to the aged population. For example, retired worker Social Security benefits are based on
35 years of a worker’s earning history. Having a tool, such as Dynasim, that contains an
individual’s earning history as well as the individual’s traits over his/her entire career is essential
to modeling Social Security reforms. One such policy option that requires 40 years of a worker’s
earning history is to increase the number of computation years from 35 to 40. In addition to
modeling provisions that require long work histories, we can analyze how benefits change due to
changes in life events (such as a marital status change or the death of a spouse) over the span of
the individual’s lifetime. At the end of the simulation process, we have detailed information on
the lifetimes of multiple individuals, with all of the information needed to calculate Social
Security benefits and total incomes. In addition to workers’ earning histories, the Dynasim model
includes additional retirement income projections useful for analyzing policy options. These
projections include but are not limited to: Social Security coverage, eligibility and benefit levels,
pension coverage and participation, income from assets, and Supplemental Security Income
(SSI).

The Dynasim model was created using a complex combination of various data resources. The
base population is composed of households from the 1990 through 1993 panels of the Survey of
Income and Program Participation (SIPP). This sample consists of more than 100,000 people and

44,000 families and is limited to individuals who answered questions regarding assets and ¹²⁴

pensions. Annual earnings are created from a mixture of historical and projected data. Earnings
histories are calculated for SIPP respondents by matching individuals from the SIPP to
individuals interviewed in the Panel Study of Income Dynamics (PSID) and to individuals
interviewed in the 1972 Current Population Survey (CPS). The 1972 CPS is a unique dataset
because it is matched to Social Security Administrative records. The 1972 CPS is matched to the
Social Security Administration’s Summary of Earnings Records and is used to provide SIPP
respondents with earnings between the years 1951 and 1967. The PSID also collects annual
earnings information and provides SIPP respondents with earnings between the years 1968 and

1992.

Once earnings are imputed for the years 1968 through 1992, earnings are then projected for the
years 1993 through 2050. Dynasim uses information from the Panel Study of Income Dynamics
and the National Longitudinal Survey of Youth to project individual earnings from 1993 through

2050 using a series of statistical regression equations. The earnings are projected in five steps.

First, hourly wages are estimated using a random-effects model. Second, results from the hourly
wage model are used to calculate predicted wages for all individuals in the PSID. Third, the
number of annual hours worked is predicted using a tobit model that includes the predicted wage
results from the previous regression. In the fourth step, labor force participation is estimated using
a random-effect probit model. Finally, the labor force participation rates are adjusted to reflect
projected employment rates from the OASDI Trustees’ Report by age and gender.
The model utilizes survey data to estimate population growth, family formation, education and
health, earnings, employee benefits, asset accumulation, pension and Social Security benefits, and
payroll taxes. Some of the survey data used to estimate these processes include the Survey of
Income and Program Participation, the Panel Study of Income Dynamics, the Current Population
Survey, the Health and Retirement Survey, the National Longitudinal Mortality Study, the
National Longitudinal Survey of Youth, estimates from the Social Security Administration’s
Office of the Chief Actuary, Vital Statistics, the Pension Simulation Model from the Policy
Simulation Group, and the Pension Insurance Modeling System from the Pension Benefit
Guaranty Corporation. All of these data sources are used to validate and readjust the underlying
data for the Dynasim model as necessary.
Despite the many advantages of using a microsimulation model, such as Dynasim, one must keep
in mind the caveats that are common to the use of microsimulation models, in general. Such
caveats include, but are not limited to the following:

1. Microsimulation models require the use of a large number of assumptions. For example,

Dynasim utilizes assumptions from the Social Security Administration’s Office of the Chief
Actuary (OCACT) to determine future fertility and mortality patterns and to project

¹²⁴^T^h^e^que^s^tio^ns^r^e^g^a^r^d^ing^a^s^s^e^ts^a^nd^pe^ns^io^ns^c^aⁿ^be^f^oun^{d i}ⁿ^the^S^I^{PP lo}^ng^a^s^s^e^t/peⁿ^sⁱ^oⁿ^t^opic^a^l^m^odule^w^a^v^e^.

employment rates and wage growth. Individuals who believe that OCACT’s fertility and
mortality assumptions are too optimistic or pessimistic will also have the same views of
Dynasim’s fertility and mortality assumptions. In addition, Dynasim models mortality using an
individual’s age, race/ethnicity, marital status, education, disability status and work history.
There may be other variables that affect mortality that are not used in this model.
2. Like all projections, historical information is used to calculate future information for
individuals such as future earnings, future marital status changes, future pensions, etc. There
may be historical information, however, that will not provide good estimates of future values.
For example, 40 years ago, it could not have been foreseen how technological advancements
would have altered mortality and earnings. Similarly, future technology and medical
advancements will have an effect on the population that can not currently be predicted. A
model, such as Dynasim, would not be able to factor in these kinds of advancements unless
they are already, somehow, accounted for in historical information. Put another way, the model
assumes that the future will resemble the past. The model often uses a variety of techniques
(e.g., cohort effects) to place heavier weight on more recent experience than on less recent
experience. The model projects social and economic change mainly through change in the
composition of the population.
3. Microsimulation models require many assumptions and utilize many specific mathematical
equations. Therefore, care should be taken when interpreting results. For example, because of
their detailed assumptions, microsimulation models better represent relative changes in
benefits rather than exact benefit levels. All microsimulation models are estimates of what a
given population will look like in the future. Because they are estimates, all microsimulation
models contain some level of error. By analyzing relative differences, rather than point
estimates such as average benefits, some of the error is controlled for because the underlying
error will be the same under both options. Thus, microsimulation models will be more accurate
in stating that “Plan A is estimated to result in a 23% increase in benefits over current law”
than stating that “Individuals, under Plan A, receive a monthly benefit of $900” because the
error found in microsimulation models is difficult to quantify, but can be mitigated by
comparing plans across the same population and, in essence, holding the error constant.
In addition to the caveats associated with microsimulation models, there are caveats that are
specific to the Dynasim model. For example:

1. Dynasim does not model the “old law” Social Security benefit rules in place prior to 1979.

Therefore, the benefits for the oldest individuals may not precisely reflect the level of benefits
that they actually received.
2. Dynasim does not include behavioral changes resulting from the modification of the Social
Security benefit and tax structures. Thus, changes to Social Security’s tax or benefit structure
will not automatically alter an individual’s work patterns or retirement decision.
3. Dynasim does not include macroeconomic feedbacks. A change in the Social Security program
can affect other segments of the economy. For example, a benefit cut could have effects on the
labor force participation and the savings rate. These kinds of macroeconomic effects cannot
automatically be modeled using the Dynasim model. Thus, second order microeconomic
effects such as the effect of the savings rate on the interest rate earned by individual accounts
cannot be modeled.

4. This version of Dynasim does not currently include an income tax module. Because Social
Security benefits may be subject to income taxation, reform options that alter the level of
Social Security benefits can also alter the amount of income tax paid by individuals. Although
income taxes cannot be modeled, the amount of Social security payroll taxes paid can easily be
calculated from an individual’s earnings.
5. Dynasim is not a Social Security actuarial model and thus cannot estimate the solvency effect
of a proposed policy change. The Dynasim model does not contain all of the information
required to produce solvency estimates. For example, Dynasim does not calculate children’s
benefits and so a complete account of benefit payments cannot be calculated. In addition,
Dynasim simulates the population between the years 1993 and 2050. The benefits received by
individuals outside of this yearly range would not be included in the calculations. For these
same reasons, long-term cost estimates cannot be calculated.
6. Dynasim incorporates differences in processes on the basis of race/ethnicity where the data
suggest that such differences are significant. The literature is not always definitive on the
magnitude of differences by race, and measurement issues can complicate estimation of such
effects. We thus suggest conservative interpretation of differences by race and Hispanicity.
Despite the caveats related to microeconomic models and specifically to Dynasim, the Urban
Institute’s Dynamic Simulation Model is an extremely useful tool for analyzing the effects of
Social Security reform proposals and other topics related to the aged. The wealth of demographic
and economic information found in the Dynasim model enables CRS to provide Members of
Congress with in-depth analysis regarding the distributional effects of reform proposals that
would not be possible without the use of a microsimulation model.

^{Actuarially Fair}^{In the}^conte^{xt of Social Security,}^{holding constant the}^{value of lifetime Socia}^{l Security}
^benefits^{for a pe}^{rson of ave}^rage^li^{fe expectancy}^{, regardless of whe}ⁿ^{he or sh}^{e takes}^up
^{benefits. For exam}^{ple, the}^{early retirement reduction}^and^{delayed retir}^{ement credit}^were
^{intended to make lifetime Social}^{Security be}^{nefits eq}^{ual in actua}^{rial terms regardless of}
^when^bene^{ficiaries began to collect bene}^fits.
^Adequa^cy^{In the}^conte^{xt of Social Security,}^{the goal of providing some basic level of income to}
^{beneficiaries. Meas}^{ures of}^bene^{fit adequacy in}^{clude poverty}^{rates a}^{nd replaceme}^{nt rate}^s.
^{Average Indexed}^{The average mont}^{hly amou}^{nt of}^{a worker’s}^{taxable earnings}^{, which is}^{wage indexed}^(or
^{Monthly Earnings}^{adjusted to reflect increasing wag}^{es) and used to determine}^the^{primary insurance amount}
^(AIME)^(PIA)^whe^{n a worker}^ap^{plies for Social Security benefits. In t}^{he ave}^{rage indexed mont}^hly
^{earnings (AI}^{ME) calculation for a}^{retired worker, the}^highest^{35 ye}^{ars of taxa}^{ble earnings}
^{are wage indexed, averaged, and}^{divided by 12. Fewer years}^{of ear}^{nings may}^be^{used to}
^{calculate the AI}^{MEs of worke}^rs^{who die or become}^disabled^.
^{Average Wa}^{ge Index}^{The average amou}^{nt of total nati}^{onal wages for each}^{year afte}^{r 1}⁹^{50, as meas}^ured^by
^(AWI)^{annual wage data ta}^{bulated b}^y^th^{e Social Security Administration (}^SSA).^{The Average}
^{Wage Index (AWI) includes ea}^rni^{ngs that a}^re^not^covered^and/or^taxable^{by Social}
^{Security. The AWI is used for}^{wage indexing}^{values in the Social Security p}^rogram.
^Baseline^{In the}^conte^{xt of this re}^{port, cu}^r^{rent law Social Security benefits a}^{nd payroll taxes,}
^{against which Social Security be}ⁿ^{efits and pay}^{roll taxes under}^vari^{ous alternative policies}
^{are compared. Also see}^{payable baseline}^and^{scheduled baseline}^.
^{Basic Benefit Amount}^See^{primary insurance amount (PIA)}^.
^{Basic Benefit Formula}^See^{primary insurance amount (PIA) formula}^.
^{Bend Points}^{The dollar amounts that define}^th^{e brackets}^{in the}^{primary insuranc}^{e amount (PIA)}^formula
^{used to calculate basic Social Security be}^{nefits. The be}^{nd points a}^r^e^{wage indexed}^{, or}
^{adjusted annually to reflect inc}^rea^{sing wages. In}²⁰^{06, th}^{e be}^{nd points are}^$6^{56 a}^nd
^$3,95^{5. The}^{use of be}^{nd points in}^{the Social Security bene}^{fit formu}^{la creates a}^progressive
^{benefit st}^ruct^{ure, whe}^{re lower e}^arners^{receive p}^{roportionately higher}^{benefits, relative}
^to^{covered earnings}^{, than do higher earne}^rs.
^Coho^rt^{A group of individuals sharing}^{a p}^{articular chara}^{cteristic and st}^{udied over time. For}
^{example, a birt}^{h cohort is a gro}^u^p^{of individuals born in t}^{he same}^{year or pe}^{riod of time.}
^{Computation Years}^{The years of ea}^rnings^{used to cal}^{culate a worker’s}^{average indexed monthly earnings}
^{(AIME) in t}^{he Social Security ben}^{efit formula. For retirement}^bene^{fits, the highest}³⁵
^{years of ear}^{nings are}^{used. For disability and survivor be}^{nefits, the}^num^{ber of}
^{computation years}^depe^{nds on th}^{e age whe}^{n the}^{wage ear}^ner^beca^me^disabled^{or died;}
^{the n}^umbe^{r of comp}^{utation years}^{varies from}^{2 to 35.}
^{Consumer P}^rice^{An official measure of inflation (i.e., the change ove}^{r time in p}^rices^{) calculated by the U.S.}
^{Index (CPI)}^Department^{of Labor. The Social Security program}^uses^{the Cons}^u^{mer Price Inde}^{x for}
^{Urban Wage}^Ear^{ners a}^{nd Clerical Workers (CPI-W) to calculate annual}^c^ost-^of-living
^adjustments^{(COLA) to be}^nefits.
^{Cost-of-Living}^{The ann}^{ual increase}^{in Social Sec}^{urity be}^{nefits re}^{flecting the in}^cre^{ase in the cost of living}
^{Adjustment (COLA)}^(i.e^.,^inf^lation^{), as measured by t}^h^e^{Consumer Price Index}^{(CPI-W). T}^{he cost-of-living}
^{adjustment (COLA) is effe}^{ctive in}^{December of ea}^{ch y}^{ear and is ca}^{lculated as the cha}^nge
^{in the CPI-W from t}^{he third cale}^{ndar q}^uarter^{of the}^{prior year to}^{the third calendar}
^quarte^{r of the}^cu^rrent^{year. If}^the^{CPI-W increases duri}^{ng this}^{period, S}^ocial^Security
^benefits^{for the}^next^{year inc}^reas^{e proportionately. If the}^{CPI-W decreases, Social}
^{Security be}^{nefits stay t}^{he same.}
^{Contribution a}^nd^See^{taxable earni}^{ngs base}^.

^{Benefit Bas}^e

^{Covered Ear}^nings^Earnings^{from a job w}^{hich re}^quir^{es contrib}^{utions to the Social Security progra}^{m. (See}
^{covered worker}^{for more information.) All covered earnings below the taxa}^{ble wage}
^{base—that is,}^{taxable earnings}^{—are su}^{bject to Social Security}^payr^{oll taxes.}^Covered
^{earnings a}^{bove the ta}^{xable wage}^{base are e}^xem^{pt from t}^{he Social Security payroll tax.}
^{Covered Wo}^rker^{A worker who is em}^{ployed in a job at which}^{he or s}^{he cont}^ribute^{s a portion of ear}^nings
^{to Socia}^{l Security, or a worker who is self-employed. Workers not covered by Social}
^{Security are eithe}^{r covered}^{by a}^{similar elig}^{ible contributory syste}^{m offered by}^their
^{employers outside of Social Security, do not have high e}^nough^ear^{nings for ma}^ndatory
^{participation, or have anot}^{her s}^p^{ecial exemption. (About 9}^{6% of a}^{ll workers are covered}
^{by Social Security.)}
^Credits^{To be}^insured^{for retired}^{worker b}^enefits^{, an individual must accum}^u^{late at least 40 c}^redits
^{in the Social Security system, whi}^{ch is eq}^{uivalent to at least 1}⁰^yea^{rs of covered}
^{employment. In}²⁰^{06, a worke}^{r r}^{eceived one credit (up to a total}^{of four pe}^{r year)}^for
^{each $}⁹⁷⁰ⁱⁿ^c^{overed earnings}^{. Fe}^{wer credits may}^{be re}^{quired in}^s^{ome survivor and}
^{disability cases; in these cases, be}^{nefits may}^{be gra}^{nted with as}^few^{as six credits. The}
^{amount of ear}^{nings r}^e^q^{uired for}^{a credit is}^{wage indexed}^.
^{Delayed Ret}^irement^{An increase}^{to the}^{primary insurance amount (PIA)}^{if a}^ben^{eficiary delays claiming Socia}^l
^{Credit (DRC)}^{Security be}^{nefits be}^{yond his or h}^er^{full retirement age (FRA)}^{. The amount of t}^{he increas}^e
^{varies depending on}^the^bene^{ficiary’s date of birth a}^{nd how long a}^{beneficiary delays}
^{benefit take-}^up^{beyond his or}^her^{FRA. However, the increase sto}^{ps whe}^{n a}^person
^{reaches age}⁷^{0, even if}^{he or s}^he^{continues to delay taking u}^p^bene^fits.
^Disabled^{For Socia}^{l Security pur}^{poses, a p}^{erson who is u}^{nable to work}^bec^{ause of a}^{physical or}
^{mental impairment t}^{hat ca}^{n b}^e^e^{xpected to re}^{sult in death}^{or to last for a contin}^uous
^{period of at least one year. Disab}^{led indivi}^{duals under t}^{he age of}⁶²^may^{qualify for Social}
^{Security disability benefits (after}^{which th}^{ey q}^{ualify for retireme}^nt^bene^{fits). No benefits}
^{are paya}^{ble for short-ter}^{m disability or partial disability}^.
^{Distributional}^{A method of analyzing how the}^c^{osts and be}^{nefits of a p}^{rogram or}^{a policy option are}
^Analysis^{distributed among differe}^{nt su}^bgr^{oups (e.g., birth}^cohort^{or income}^level).
^{Dually Entitl}^ed^{Workers who q}^{ualify for Social S}^{ecurity be}^nefits^{based on t}^{heir own work records (i.e.,}
^{Beneficiaries}^{worker benefits}^{) as well as benefits based on t}^{heir spou}^{ses’ work re}^{cords (i.e.}^,^spouse
^benefits^or^{survivor benefits}^{). Dual}^l^y^{entitled beneficiaries receive a}^t^{otal Soc}^{ial Security}
^{benefit t}^{hat is the}^higher^{of the w}^{orker be}^{nefit and t}^{he spo}^use/su^r^{vivor benefit to whic}^h
^{they are e}^{ntitled, not the su}^{m of}^{the two be}^nefits.
^{Early Retirement Age}^{The age at whic}^{h individuals qualify for red}^{uced Social Security retired worker be}^{nefits if}
^{they c}^{hoose to collect benefits b}^{efore the}^{full retirement age (FRA)}^{. The early retireme}^nt
^{age is 62. I}^{ndividuals who begin t}^o^{receive retired worker}^bene^{fits early will be subject to}
^the^{early retirement reduction}^{. (A}^ls^{o called the early eligibi}^{lity age.)}
^{Early Retirement}^{The amount w}^{hich a}^perso^{n’s monthly Social Security benefit is}^pe^rmane^{ntly reduced for}
^Reduction^{taking up}^retireme^{nt be}^{nefits b}^e^f^{ore the}^{full retirement age (FRA)}^{. The amou}^{nt of the}
^{reduction varies depe}^{nding on t}^h^e^bene^{ficiary’s date of birth a}^{nd h}^{ow long before his or}
^{her FRA that}^{he or s}^{he takes}^up^{benefits. The ma}^{ximum a}^mount^{of the redu}^{ction ranges}
^{from 20}^{% to 3}^{0%, depe}^{nding on t}^{he year in}^which^{the worke}^{r was}^{born (be}^{cause of t}^he
^{increase in t}^{he FRA). The early r}^{etirement red}^{uction is intended t}^o^be^{actuarially fa}^ir^.
^Earnin^gs^{Wages or self-employment inco}^{me. Also see}^{covered earnings}^and^{taxable earnings}^.
^Eligibilit^y^{To be eligible for Soci}^{al Security benefits, a worker}^{(or his or he}^r^{family members) m}^ust
^be^insured^{and mu}^{st meet age, disability status, family relationship, and/or other criteria}
^{established by law.}
^Entitlemen^t^{Any federal p}^{rogram—including}^Social^{Security—that legally requi}^{res paym}^{ents to a}^ny
^{individual who meets the}^eligibility^{criteria established by}^{law. (To be entitled to Socia}^l
^{Security be}^{nefits, an individual must meet eligibility criteria and fil}^{e an ap}^{plication for}
^{benefits.) Ge}^{nerally, entitlement}^{programs ar}^{e not s}^{ubject to the}^{annual a}^ppro^priations
^process.

^{FICA (Federal}^See^{payroll taxes}^.
^Insuran^ce
^{Contributions Act)}
^Taxes
^{Full Retirem}^{ent Age}^{The age at whic}^{h an individual ma}^{y first become}^{entitled to unred}^u^{ced Social}^Security
^(FRA)^retirement^bene^{fits. The full retir}^{ement age (FRA) was age 6}⁵^for^{most of Social}
^{Security’s history, and is now gra}^{dually increasing to age 6}^{7. In}²⁰^{06, the FRA was}⁶⁵
^{years and}^{6 mont}^{hs. (Also called}^{the normal retire}^{ment age.)}
^{Hold Harmless}^{In the}^conte^{xt of Social Security,}^{a group of}^bene^{ficiaries is held harmless if be}^{nefit cuts}
^{and/or tax incr}^{eases are}^{not ap}^{plied to that group.}
^Income^{In the}^conte^{xt of this re}^{port, Dy}^{nasim projections of total income in the yea}^{r 2}⁰³^5,
^{including Social Security benefits, defined-benefit pe}^{nsion be}^{nefits, income from}
^{retirement ac}^{counts, ear}^{nings, SSI, and the a}ⁿⁿ^{uitized value of financial assets. Individuals}
^{are the}^{unit of obse}^{rvation, but i}^{ncome estimates include income}^{of the spo}^{use, if the}
^{individual is married.}
^{Inflation (Prices)}^{A rate of increase}^{in the}^gene^{ral price level of all goods and services. The official measure}
^{of inflation in the United States is the}^Consum^{er Price Index}^.
^Insolvency^{In the}^conte^{xt of Social Security,}^{the inability of the tr}^{ust f}^unds^{to pay all curre}^nt
^expe^{nses out of}^cur^{rent ta}^{x inco}^{me and acc}^{umulated tr}^{ust f}^{und as}^{sets. Insolvency would}
^{mean that}^{Social Security’s trust f}^{unds wer}^{e u}^{nable to pay}^{full be}ⁿ^{efits on time.}
^{(Insolvency would not mea}^{n that}^Social^{Security would be complet}^{ely broke and}^una^ble
^{to pay any}^ben^efits.)
^Insured^{In the}^conte^{xt of Social Security,}^{having eno}^ugh^credits^{to meet}^{eligibility requirements}
^{for retired or}^disabled^{worker b}^e^{nefits, or to permit the}^worker’s^{spouse a}^{nd children or}
^{survivors to esta}^{blish eligibil}^{ity for be}^{nefits in th}^{e even}^{t of the wor}^{ker’s retirement,}
^disability^{, or death.}
^Intermediate^{The Social Security Administratio}^{n actua}^{ries’ “best estimate” of f}^u^t^{ure demograp}^{hic and}
^Assumptions^{economic trends. The act}^{uaries a}^{lso produce high cost (}^{pessimistic) assum}^{ptions and low}
^{cost (optimistic) assumptions. These assum}^{ptions are}^pu^{blished an}^{nually in the Social}
^{Security Trustees}^{Report. This re}^{port uses}^{the Tr}^{ustees’ inter}^{mediate assum}^ptions.
^{Life Expectancy}^{An estimate of the}^average^{remaining n}^umbe^{r of year}^{s ex}^pected^p^{rior to death for a}
^{given cohort. In t}^{he conte}^{xt of S}^{ocial Security, l}^{ife expecta}^{ncy at a}^{ge 65 is most}
^{commonly used.}
^{Long Ra}^nge^{In the}^conte^{xt of Social Security,}^{the ne}^{xt 7}⁵^yea^{rs. Long-range}^act^{uarial estimates are}
^{made for this pe}^{riod because it is}^appro^{ximately the ma}^{ximum r}^e^{maining lifetime of}
^{workers cu}^rre^{ntly covered by So}^{cial Security. The annual Social Security Trust}^ees
^{Report includes long-range}^{projections of Social}^{Security’s financia}^{l status. (See also}^short
^range^.)
^Mean^{The mean}^{is t}^{he average}^{value in}^{a data set. It is determined by}^{adding all the values and}
^divid^{ing the su}^{m by}^the^num^{ber o}^f^{values in t}^{he data set. I}ⁿ^{this re}^p^{ort, the}^median^is
^{generally used instead of t}^{he mea}^n.
^Median^{The middle numbe}^{r in a se}^{ries of num}^{bers a}^rra^{nged from least to}^{greatest. Half the data}
^{values are a}^{bove the m}^{edian, and half are}^{below. The value of a m}^{edian is not affected b}^y
^{a few ext}^{remely high or}^extre^{mely low values, as a}^mean^{would be.}
^{Microsimulation}^{In the}^conte^{xt of policy analysis, a computer}^{model that simulates}^{how a governme}^nt
^Model^{program would operate}^unde^{r p}^{olicy changes and}^{how participant}^{s would be affected.}
^{For more information on the Dy}^{nasim microsimulation model used in this report,}^please
^see^Appen^{dix E}^.
^{Nominal Dollars}^{The face value of a}ⁿ^amou^{nt of m}^{oney during a give}^{n year,}^{using th}^{e prices}^prevailing
^{during that}^{year. Nominal dollars are not adjusted for}^inflation^.
^{Normal Retirement}^See^{full reti}^{rement age (FRA)}^.

^{Age (NRA)}

^{Payable Basel}^ine^{In the}^conte^{xt of Social Security,}^a^baseline^{that includes}^bene^{fits p}^{ayable with cu}^rre^{nt tax}
^{income and accu}^{mulated tru}^{st f}^u^{nd assets, even}^{if those}^{benefits a}^{re less tha}^{n those}
^{which would be}^{paid according to the formula set}^{forth in}^{the law}^{. Payable benefits}
^{would be less than}^sched^{uled ben}^{efits in the cas}^{e of Social Security}^insolvency^{. (See also}
^{scheduled benefits}^.)
^{Payroll Tax}^{In the}^conte^{xt of Social Security,}^{a tax levied on all}^{covered earnings}^{, up to the}^contribution
^{wage base}^{in a given yea}^{r. The Social Security payroll tax is paid in equal pa}^{rts b}^y
^{employers and em}^{ployees. Curre}^{ntly the Social Security payroll tax rate is}^12.4%^(of
^{which 6.2}^{% is paid by}^each^{employee and em}^{ployer). Payroll taxes are also known as}
^{FICA (Federal Insura}^{nce Contrib}^{utions Act) or SECA (Self-Employment Contrib}^utions
^{Act) taxes. FICA and SECA ta}^xes^{include both t}^{he Social Security tax and a}^Medicare
^{Hospital Insu}^{rance ta}^{x of}^{2.9% of}^{all covered earnings (of which}^1.^{45% is}^{paid by eac}^h
^{employee and em}^ployer).
^{Price Indexing}^{In the}^conte^{xt of Social Security,}^{a proposed alternative met}^{hod of calculating bene}^fits.
^{The most commonly discussed fo}^{rm of price inde}^{xing would incre}^{ase individuals’ benefit}
^{levels at the rate of}^{price growth}^(i.e^.,^inf^lation^{) rather tha}^{n at th}^{e r}^{ate of wage growth}
^{(as under c}^u^r^{rent law). Under t}^{his form of p}^{rice indexing, the}^prim^{ary insura}^{nce amount}
^(PIA)^factors^{would be m}^{ultiplied each year}^{by t}^{he ratio of the}^Con^{sumer Price Index (CPI)}
^{to the}^{Average Wage Index (AWI)}^{for the seco}^{nd prior year. U}^nder^{a system of}^price
^{indexing, bene}^{ficiaries’ Socia}^{l Sec}^{urity be}^{nefits would be lower t}^h^aⁿ^u^{nder c}^urre^{nt law.}
^(Other^{parts of t}^{he Social Security bene}^{fit formula w}^{hich are wag}^e^{indexed u}^nder
^curre^{nt law, suc}^{h as}^{bend points}^,^{could also be price indexed, b}^{ut t}^{he term “}^price
^{indexing” is typically used in re}^fer^{ence to redu}^{cing the PIA}^factors.⁾
^{Primary Insur}^ance^{The monthly Social Security bene}^{fit amount pa}^{yable to a retired w}^{orker who begin}^{s to}
^Amou^{nt (PIA)}^{receive be}^{nefits at th}^e^{full retirement age}^(FRA)^{or, generally, to a}^disabled^{worker. This}
^{amount, which is}^{based on t}^{he w}^orker’s^{average indexed monthly earnings (AIME)}^{, is a}^lso
^{used to calculate be}^{nefits paya}^ble^{on the worke}^{r’s earnings}^record^{—for exam}^ple,
^benefits^{paid to his or her}^spouse^{or survivors. Also refer}^{red to as a basic be}^nefit
^{amount. For more information o}ⁿ^{the PIA}^{calculation, please refer}^to^{Appendix A}^.
^{Primary Insur}^ance^{The factors}^{by whic}^{h the}^{dollar a}^{mounts in t}^he^{primary insurance amount (PIA) formula}^are
^Amou^{nt (PIA)}^{multiplied. The PIA factors are 9}^{0%, 3}^{2% and}¹⁵^{%; each}^{is applied to a worker’s}^average
^Factors^{indexed monthly earnings}^(AIME)^amounts^between^the^{bend p}^oints^{in the PIA}^formula.
^{Primary Insur}^ance^{The formula to calculate the}^prim^{ary insura}^{nce amount (PIA)}^{for wor}^{kers who attain age}
^Amou^{nt (PIA)}^{62, become}^di^sabled^{, or die after 197}^{8. The PIA is e}^{qual to 9}^{0% of}^{a worker’s}^average
^Formula^{indexed monthly earnings}^(AIME)^{up to the first}^{bend point}^{, plus}^32%^{of AIME}^betwee^{n th}^e
^{first and second}^bend^{points, plus}^15%^{of AIM}^{E above t}^{he se}^cond^{bend point.}
^Progressive^{A system in w}^{hich lower ear}^ners^{receive pro}^{portionately higher}^b^{enefits (or pay}
^{proportionately lower taxes) tha}^{n do higher ea}^rner^{s. The Social S}^{ecurity be}^{nefit form}^ula
^{is progressive.}
^Purchasin^{g Po}^wer^{The amount of goods and se}^rvice^{s that a given}^amount^{of money c}^{an b}^{uy. In t}^{he cont}^ext
^{of Social}^{Security, beneficiaries re}^{ceive an an}^nual^c^ost-^{of-living adjustment (COLA)}^{in which}
^{benefits a}^{re adjusted according t}^o^{the growth in}^{prices (i.e.,}^infla^ti^on^{) as a way to maintain}
^{the p}^urc^hasing^{power of be}^nefits^{over the cou}^{rse of a}^bene^{ficiaries lifetime.}
^{Quarters o}^f^Covera^ge^See^credits^.
^Quintile^{One of five seg}^{ments of a}^{distribution that}^{has bee}^{n divided into fifths. For exam}^{ple, an}
^{individual in the second-from-the}^{-bottom quintile of an income dis}^{tribution is one whose}^th^th
^{income falls between t}^he²⁰^and⁴⁰^pe^{rcentile of the in}^{come of}^{the pop}^{ulation. In this}
^report,^income^q^{uintiles are used}^{to il}^{lustrate the e}^ffects^{of policy changes on}^individuals
^{of different income levels.}
^{Real Dollars}^{The value of an}^{amount of}^mone^{y measur}^{ed in terms}^{of p}^urc^hasin^{g power in a given}
^{year. Real dol}^{lars are adjusted for}^inflation^{. In this report, real valu}^{es are in}²⁰^{05 dollars.}
^Regressive^{A system in w}^{hich lower ear}^ners^{pay p}^{roportionately higher}^taxes^{(or receive}
^{proportionately lower bene}^{fits) than do highe}^{r ear}^{ners. The Social Security pay}^{roll tax is}
^{regressive, since t}^{he tax}^{rate is fl}^{at and the a}^{mount of ta}^{xable ear}^{nings is cap}^ped.

^{Replacement Rate}^{In the}^conte^{xt of Social Security,}^{the p}^{roportion of taxable ea}^rning^{s before}^retirement
^{that are}^{replaced by}^be^{nefits. A Social Security replacement rat}^{e is calculated by dividing}
^{a worker’s initial Soc}^{ial Security benefit}^{by his or}^her^{average indexed monthly earnings}
^(AIME)^{. Replacement rates a}^{re on}^{e way of measu}^{ring t}^he^adequacy^{of a person’s}^bene^fits.
^{Retirement Earnings}^{A provision of the law whic}^{h red}^{uces Social Security bene}^{fits on a}^{ccount of ear}^nings
^{Test (RET)}^{from work be}^{fore the}^{full retirem}^{ent age (FRA)}^{. In 2}⁰⁰^{6, the RET a}^{pplied to beneficiaries}
^{earning more t}^han^$1^2,48⁰^befor^{e the year}^{in whic}^{h the}^{y reac}^{h th}^{e FRA, and to}
^{beneficiaries ear}^{ning more t}^han^$^33,2^{40 du}^{ring th}^{e year in}^which^t^{hey reac}^{h t}^{he FRA}
^(i.e^{., during the mont}^{hs be}^{fore th}^{eir birthdays). For more informat}^{ion on the RET, please}
^see^Appen^{dix C}^.
^{Scheduled Baseline}^{In the}^conte^{xt of Social Security,}^a^baseline^{that includes}^bene^{fits a}^{ccording to the}
^{formula set fort}^{h in t}^{he law, regardless of whethe}^{r those}^bene^fits^{would be paya}^{ble with}
^curre^{nt ta}^{x income and ac}^cum^{ulated trust f}^{und as}^{sets. Scheduled b}^{enefits would be}
^{greater tha}ⁿ^{payable b}^{enefits in t}^{he case of Social Security insolvency. (See also}^payable
^baseline^.)
^{Short Ran}^ge^{In the}^conte^{xt of Social Security,}^{the ne}^{xt 1}⁰^yea^{rs. The an}^{nual Social Security Trustees}
^{Report includes short-ra}^nge^{projections of Social Security’s financial status. (See also}^long
^range^.)
^So^{cial Insura}^nce^{A system t}^{hat insu}^{res worker}^{s an}^{d their families against economic insecurity ca}^{used b}^y
^{the loss of earnings}^{or health}^car^{e due to some event}^{(e.g., retirement, un}^employment,
^disability^{, or death). Benefit amounts are}^{based on worke}^{rs’ and e}^mployers’
^{contributions to th}^{e social insura}^{nce syste}^{m. Social Security is a system of social}
^insuran^ce.
^Solvency^{In the}^conte^{xt of Social Security,}^{the ability to pay sc}^{heduled be}^nef^{its when due}^{out of}
^curre^{nt ta}^{x income and ac}^cum^{ulated trust f}^{und as}^{sets. Social Security is considered}
^{solvent as long as the Social Security trust}^fu^{nds maintain a}^{positive balance.}
^{Spouse Benefits}^Social^{Security bene}^{fits paya}^{ble to the spouse}^{or divorced spouse}^{of a retired or}^disabled
^{worker, based on t}^{he worker’s e}^{arnings r}^{ecord. The}^{primary insur}^{ance amount (PIA)}^{for a}
^spouse^bene^{ficiary is generally 5}⁰^%^{of his or he}^{r s}^{pouse’s PIA. For more information on}
^{how spouse}^be^{nefits are calc}^{ulated, please see}^Appen^{dix B}^.
^{Survivor Benefits}^Social^{Security bene}^{fits paya}^{ble to the sur}^{vivors of a deceased wo}^{rker, based on t}^he
^{worker’s earnings}^{record. Potential survivor bene}^{ficiaries include widow(er)s, former}
^{spouses, children, and}^pare^{nts of}^{the deceased worker. The}^{primary insurance amount}
^(PIA)^{for an}^{aged widow or wido}^{wer is 10}^{0% of}^{his or he}^{r deceas}^{ed spouse’s actual}
^{benefit amou}^{nt (i.e., the deceased spouse’s PIA afte}^{r ap}^{plying the}^{early reti}^{rement reduction}
^or^{delayed retirement credit (DRC)}^,^{if applicable). Other ty}^{pes of s}^u^r^{vivor benefits—c}^hild’s,
^{mother’s, father’s, and}^parent’s^b^{enefits—are}^{not analyzed in this}^{report. For more}
^{information on how su}^{rvivor be}ⁿ^{efits are calculated, please see}^A^{ppendix B}^.
^{Taxable Earnings}^{In the}^conte^{xt of Social Security,}^{wages and/or self-employment in}^{come earned in}^c^overed
^employm^ent^{that is less t}^{han t}^he^t^{axable earnings base}^{. (About 85%}^{of covered earnings}
^{were taxa}^{ble in 2}⁰⁰^5.)
^{Taxable Earnings}^{The maximum}^an^{nual amou}^{nt of}^{covered earnings}^{that are s}^{ubject t}^o^Socia^{l Security}
^Base^{payroll taxes and c}^{redited toward Socia}^{l Security bene}^{fits. Covered earnings a}^{bove this}
^{amount are}^neither^taxable^{nor c}^{reditable for bene}^{fit computation}^pur^{poses. The amou}^nt
^{of the taxa}^{ble earning}^{s base}^is^{wage indexed}^(i.e.^{, rises each year wi}^{th overall wage}
^{growth). In 2}⁰⁰^{6, the amo}^{unt of t}^{he taxa}^{ble earning}^{s base}^{was $}⁹⁴^{,200. (Also called the}
^{contribution and}^ben^{efit base, tax}^{able wage base, or t}^{he taxa}^{ble m}^aximum.)
^{Taxable Maximum}^See^taxa^{ble earni}^{ngs base}^.

^{Wage Indexation}^{In the}^conte^{xt of Social Security,}^{a method by w}^{hich dollar values}^{are adjusted to}
^{account for t}^{he a}ⁿⁿ^{ual growth in}^{national wages. The}^{Average Wage Index (AWI)}^{is us}^ed
^{to increase values in}^{the Social Security p}^{rogram, including the}^aver^{age indexed monthly}
^earnings^(AIME)^{formula, the}^{taxable wage base}^{, the}^{bend points}^{in t}^he^{primary insurance}
^{amount (PIA) formula}^{, and the}^{retirement earnings test (RET)}^e^{xempt amounts.}
^{Worker Benefits}^Social^{Security bene}^{fits paya}^{ble to a retired or}^disabled^{worker, ba}^{sed on his or he}^{r own}
^{earnings record.}
^L^a^u^r^{a Haltzel} ^Sco^{tt Sz}^ym^eⁿ^d^e^r^a
^Specialis^{t i}ⁿ^In^co^m^e^Secu^rit^y^An^al^y^s^{t i}ⁿ^Di^sab^ilit^y^P^o^lic^y
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^An^al^y^s^{t i}ⁿ^In^co^m^e^Secu^ri^t^y
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^In^f^o^r^m^a^tion^R^e^s^earch^Specialⁱ^s^t
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