Comparing Social Security Reform Option

May 2005
EBRI Issue Brief #281
Paperback, 32 pp.
PDF, 622 kb
Employee Benefit Research Institute, 2005

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Executive Summary

Social Security is widely recognized as the nation’s most effective anti-poverty program for the elderly and widow(er)s. It is so popular that it has often been dubbed the “third rail” of American politics (“touch it and you die”). As a result, changes have come slowly.

For instance, in spite of years of warning in advance of the cash flow crisis of 1983, Congress waited until the last minute to act—and when it did, the action it took included a combination of tax increases and benefit reductions. By the mid-1990s, then-President Clinton was talking about the long-term financing issues faced by Social Security, but Congress did not act. President Bush has raised the same issues since 2000, and has now taken to the road to convince the nation that action should be taken now to assure the program’s long- term solvency.

Because Social Security is a sensitive, complicated, and emotional political topic, many concepts have been discussed but few elected officials have been willing to put forth detailed plans for fear of political backlash. The public, quite naturally, wants to know how they will be affected by “reform.”

In this introductory section, Figure S-1 seeks to provide a simple response to that question by following the method used in the Trustees’ report, where earners maintain a constant percentage of the average wage.

Take the year closest to when you were born, the earnings closest to your expected earnings this year (2005), and follow across the columns to see how much your annual benefit would be in today’s dollars if you start taking benefits at age 65. For an example of a specific individual: Your 30-year-old child (born in 1975) makes a 2005 salary around $16,500. Under current law, your child’s initial annual Social Security retirement benefit would be $11,200 in today’s dollars.

However, given the projected funding shortfall currently facing the program, this promised benefit is not likely to materialize unless some sort of change is made to the program. This analysis compares “Model 2” from the President’s 2001 Commission to Strengthen Social Security (which appears to have the principles for an individual account plan favored by the Bush administration) with four basic options:

  • Current-law benefits with taxes raised to cover the shortfall over the 75-year actuarial period.
  • Include all workers by removing the existing $90,000 annual wage cap.
  • Maintain current benefits until the revenue shortfall occurs, when a “cliff” benefit cut is imposed.
  • A gradual reduction in current-law benefits.