Briefing Book
Options for Reform

Options for Social Security Reform.

This is a sample of some of the many options for Social Security reform. Americans Discuss Social Security does not endorse any options or take a position in the Social Security debate.

  1. Retirement Age
  2. Payroll Tax Rates
  3. Investment of Trust fund Assets in Stocks
  4. Individual Accounts
  5. Cost-of-Living Adjustments (COLA)
  6. Benefit Reduction
  7. Increase Amount of Earnings Subject to Payroll Tax
  8. Reduction of Benefits for More Affluent Recipients
  9. Tax Social Security Benefits Like a Private Pension
  10. Use the Budget Surplus to Help Social Security Indirectly
  11. Use Budget Surpluses for Retirement Accounts
  12. Increase the Number of Years to Calculate Benefits
  13. Cover All New Workers Hired by State and Local Governments
  14. Change the Structure of Family Benefits
  15. Supplemental Individual Accounts

1- Retirement Age
Current Law: Full benefits are currently available at age 65. A reduced benefit can be collected starting at age 62, with an amount equal to 80% of the full benefit. The age of retirement for full benefits will increase at the rate of two months a year, starting in the next century. It will rise to the age of 66 for those born between 1943 and 1954, and rise to 67 for those born in 1960 or later. People will still be allowed to take early retirement at 62, but the benefit will be reduced to 75%, and eventually 70% of the full benefit.

Option: Increase the age at which one can receive full benefits.

Pro: Since Social Security was enacted, life expectancy at birth has risen from 63 to 76. It makes sense to keep pace with that increase by asking people to work longer before claiming full retirement benefits.

Con: This increase could hurt people who have physically demanding jobs, those who have serious health problems, and those who cannot find work because of age discrimination or lack of suitable work.

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2-Payroll Tax Rates

Current Law: Social Security payroll tax rate for employers and employees each is 6.2% (total of 12.4%) on earned income up to $72,600 in 1999; no increases in the rate are scheduled in present law.

Option: Increase the payroll tax rate.

Pro: A modest increase in the payroll tax is a small price to pay to keep Social Security strong.

Con: Payroll taxes are already too high, and increasing them further will worsen the rate of return that all future beneficiaries receive.

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3-Investment of Trust Fund Assets in Stocks

Current Law: Surplus funds collected by the Social Security system are invested in special issues of Treasury securities, backed by the full faith and credit of the U.S. government. The average interest rate earned in 1997 was 7.5%.

Option: A portion of the Social Security surplus would be invested in the stock market, with an independent board selecting portfolio managers to operate indexed funds.

Pro: Social Security could receive a higher rate of return on its investments, and the Social Security system would bear the risks involved, rather than the individual.

Con: Social Security trust funds would have to absorb risks of market downturns. Investment decisions could become highly politicized as the Social Security trust funds are invested in the market. Social Security could become indirectly involved in businesses operations.

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4-Individual Accounts

Current Law: There is no provision for individual accounts.

Option: Individuals keep some of the money from Social Security payroll taxes, and invest this cash in individual accounts. The money would be invested in stocks and bonds. Some proposals would divert part of the Social Security taxes into individual accounts, while retaining a basic benefit under Social Security. Other plans would eventually privatize the entire system, with individual accounts replacing Social Security.

Pro: Each individual would have a personal nest egg in addition to Social Security benefits. Workers would make a higher rate of return from this money than they would receive from their Social Security contributions, because they would be benefitting from the better returns in the stock market. Individuals would have more control over their retirement income.

Con: Individuals would be at risk if the stock market suffers a steep or extended decline. The separate accounts for 145 million workers would have high administrative costs. If current Social Security taxes are going into individual accounts, the money would have to be replaced to pay for current beneficiaries. This transition would be costly, forcing the government to raise taxes or borrow large sums.

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5-Cost-of-Living Adjustments (COLA)

Current Law: Social Security benefits are changed each year to keep pace with the federal government's Consumer Price Index, which measures the change in the cost of a market basket of goods and services purchased by a typical worker. The annual cost-of-living adjustment (COLA) is automatic and guarantees that the buying power of the benefit check will not lag behind the rate of inflation.

Option: Reduce cost-of-living adjustments.

Pro: Many experts believe that the method used to calculate cost-of-living adjustments overstates the increase in the cost-of-living, resulting in unwarranted, automatic overpayments.

Con: Many experts believe that the present method of calculating the COLA is correct, and that no change is appropriate in calculating this benefit which is extremely important to most beneficiaries.

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6-Benefit Reduction

Current Law: Social Security benefits are based on a person's earnings and work history.

Option: Reduce benefits across the board.

Pro: We have overpromised the amount of future benefits. All beneficiaries, no matter what their economic circumstances, should share the responsibility for strengthening Social Security.

Con: Since many future beneficiaries, particularly those with low incomes, will need their Social Security benefits, we should look at other options first.

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7-Increase Amount of Earnings Subject to Payroll Tax

Current Law: Social Security tax rate is 6.2% for employers and employees each, on earned income up to $72,600 in 1999; increases in maximum taxable amount will be made automatically on the basis of increases in national average earnings.

Option: Raise the amount of earnings subject to the payroll tax more than merely by the increase in the national average earnings.

Pro: Since all earnings are not subject to the payroll tax, more highly compensated workers and their employers pay payroll taxes on proportionately less earnings.

Con: Payroll taxes are too high already, and if we raise them further, more highly paid workers are less likely to recover their contributions.

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8-Reduction of Benefits for More Affluent Recipients

Current Law: Benefits are linked to earnings, and there is no reduction in benefits for anyone above a particular income level.

Option: Reduce benefits for those whose incomes exceed a certain threshold.

Pro: This reduction preserves benefits for those most in need and reduces them for those who are less dependent on Social Security because they have other income.

Con: This reduction punishes those who saved to add to their Social Security - a behavior we want to encourage - and moves the program from a nearly universal one based on financing by contributions to one based on need.

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9-Tax Social Security Benefits Like a Private Pension

Current Law: Up to 85 percent of Social Security benefits are subject to income tax if income is above certain thresholds.

Option: Tax Social Security benefits like a private pension.

Pro: Employer pensions are taxed on every dollar in excess of a worker's contributions. We should not treat Social Security income differently, particularly since the progressive nature of the income tax will protect low-income retirees.

Con: Social Security is different from a private pension because it is a government-based program and its benefits are absolutely essential to low- and moderate-income beneficiaries.

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10-Use the Budget Surplus to Help Social Security Indirectly

Current Law: For the first time in 30 years, the federal government is running a budget surplus. There are no provisions detailing how to spend a surplus.

Option: The money from the budget surplus can be used to pay down some of the massive national debt.

Pro: This will help the economy reduce the government's spending on interest payments, and will strengthen the government for future actions to bolster Social Security.

Con: The surplus, which reflects determined action by both the President and the Congress to bring spending under control, should now be used for the benefit of the citizens. The public may want to use the surplus of money for tax cuts or increases in federal programs.

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11-Use Budget Surpluses for Retirement Accounts

Current Law: For the first time in 30 years, the federal government is running a budget surplus. There are no provisions detailing how to spend a surplus.

Option: Take money from the surplus, and open special new retirement accounts for each American. The accounts would be invested in stocks and bonds, and would provide extra cash at retirement, in addition to Social Security benefits.

Pro: This would give individuals extra money for retirement, making them less dependent on Social Security. The new money would add to national savings, providing additional capital for business investments to make the economy more productive.

Con: It does nothing to solve the long-range financing problems of the Social Security system: after 2032, according to the intermediate estimate, the trust fund will be able to pay only 75% of the benefits promised under current law.

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12-Increase the Number of Years to Calculate Benefits

Current Law: The Social Security retirement benefit is pegged to earnings during an individual's work history. For current retirees Social Security calculates the benefit using the highest 35 years of income.

Option: Increase the number of years for determining benefits to 38 years or 40 years.

Pro: This would help the system's finances by making a slight reduction in overall benefit payments. It would help toward the desired goal of assuring the long-range solvency of Social Security without imposing major tax increases or significant benefit cuts.

Con: This would hurt workers who do not have 38 or 40 years of full employment during their career. The low earnings years, or years of zero earnings would reduce the benefit. Women would be particularly impacted, because they are more likely to leave the work force for a number of years to stay home raising their children.

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13-Cover All New Workers Hired by State and Local Governments

Current Law: A number of state and local governments were allowed to choose years ago to remain outside the Social Security system.

Option: Require any new workers hired by these governments to enroll in the Social Security system.

Pro: This provides an additional source of revenue for Social Security. These workers will be contributing payroll taxes, and most of them will not collect benefits for decades.

Con: This restricts freedom of choice for these newly hired workers. They may prefer to be enrolled exclusively in the retirement programs operated by the state or local agencies. This option creates transition costs for state and local governments.

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14-Change the Structure of Family Benefits

Current Law: A worker has the choice of collecting benefits based on the worker's own earnings record, or collecting an amount equal to 50 percent of the spouse's retirement benefit. An individual can choose whichever benefit is larger. When a retiree dies, the survivor has the choice of taking a benefit linked to the survivor's own earnings, or 100 percent of the deceased worker's benefit. The survivor can pick the larger of the two benefits.

Option: The benefit going to a dependent spouse would be set at 33 percent of the working spouse's benefit, instead of the current 50 percent. Survivor benefits would be increased. The survivor would be guaranteed to receive an amount equal to 75 percent of the couple's combined benefit. This would be an increase over current law.

Pro: Married couples have the lowest rate of poverty among Social Security recipients. Often, the combination of private pensions, savings and investments, and Social Security provides adequate income. But the biggest threat of poverty comes after a spouse dies, and the elderly widow is left with a significantly reduced income. It usually costs the survivor about 75 percent as much to live as it cost the married couple. The increase in the survivor's benefit is needed to combat poverty among elderly women.

Con: The combination of trimming spousal benefits, while boosting the survivor benefit, would add to the financial obligations of the Social Security Trust Fund. This would be inadvisable at a time when efforts should be made to cut the long-range deficit of the trust fund.

Return to list of options.

15-Supplemental Individual Accounts

Current Law: There are no provisions for individual accounts.

Option: Establish individual accounts in addition to Social Security.

Pro: Workers would have an opportunity to build on top of their assured Social Security benefits by investing a portion of their earnings into individual accounts. This would help low-income workers improve their retirement income.

Con: Workers already pay too much in payroll taxes. Supplemental accounts would just be another tax that reduces individuals' income.

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