While President Bush made reform of the Social Security system one of his top priorities after winning reelection, he met stiff resistance from the Democrats in Congress.  While ten Social Security reform bills were introduced during the 109th Congress, none received congressional action.

There is no activity on this issue this Congress.


President Bush's initiative to restructure Social Security through the creation of personal accounts moved the policy issue to the forefront of the political debate.  The President advocates a system in which benefits would be based increasingly on what is referred to as a pre-funded system through personal savings and investments with the creation of personal accounts.  He has pointed to the system's projected long-range deficit as a driver for change in conjunction with his vision of an "ownership society."  Most congressional Democrats support maintaining the current structure of the program (a system of defined benefits funded on a pay-as-you-go basis) and are strongly opposed to private accounts.  Democrats have pointed to the system's long-range financial projections to support their view that the system is not in "crisis," and that only modest changes aimed at supporting the current structure may be needed.

Currently, Social Security income exceeds outgo.  The Social Security Board of Trustees (comprised of three officers of the President's Cabinet, the Commissioner of Social Security, and two public representatives) projects that, on average over the next 75 years, Social Security outgo will exceed income by 14 percent and by 2041 the trust funds would be depleted (based on the intermediate, or mid-range projections).  At that point, revenues would pay for an estimated 74 percent of program costs.  One of the main reasons is demographic: the leading edge of the post-World War II baby boom generation will begin retiring in 2008 and projected increases in life expectancy will contribute to an older society.  Between 2005 and 2025, the number of people age 65 and older is predicted to increase by 69 percent, while the number of workers whose taxes will finance future benefits is projected to increase by only 13 percent.  As a result, the number of workers supporting each recipient is projected to decline from 3.3 today to 2.3 in 2025.

Social Security revenues are paid into the U.S. Treasury and most of the proceeds are used to pay for benefits.  Surplus revenue is invested in federal securities recorded to the Old Age, Survivors, and Disability Insurance (OASDI, the formal name for Social Security) trust funds maintained by the Treasury Department.  Social Security benefits and administrative costs are paid out of the Treasury and a corresponding amount of trust fund securities are redeemed.  Whenever current Social Security taxes are insufficient to pay benefits, the trust fund's securities are redeemed and Treasury makes up the difference with other receipts.

Currently, Social Security tax revenues exceed what is needed to pay benefits.  These surpluses and interest credited to the trust funds in the form of government bonds appear as growing trust fund balances.  The trustee's project that the trust fund balances will peak at $6.0 trillion in 2026, after which the system's outgo would exceed income and the trust fund balances would begin to decline.  By 2041, the trust funds would be exhausted and technically insolvent.  By 2017, Social Security tax revenue (i.e., excluding interest credited to the trust funds) would fall below the system's outgo.  Because interest credited to the trust funds is an exchange of credits between Treasury accounts and not a resource for the government, other federal receipts would be needed to meet the system's costs starting in 2017 (in other words, the government would begin redeeming bonds held by the trust funds).  At that point, policymakers would have three options: raise taxes, reduce spending, or borrow the money from the public (i.e., replace bonds held by the trust funds with bonds held by the public).  The system's reliance on general revenues is projected to be $64 billion by 2020 and $256 billion by 2030 (in constant 2005 dollars).

Today, the annual cost of the system ($527 billion) is equal to 11.13 percent of workers' pay subject to Social Security taxation (or taxable payroll).  It is projected to increase slowly over the next several years, reaching 11.93 percent of payroll in 2013.  It would then rise more precipitously to 15.55 percent in 2025 and 17.37 percent in 2035, as the baby boomers retire.  Afterward, the system's cost would rise slowly to 19.12 percent of payroll in 2080.  Over the entire period (2005-2079), the system's average cost would be 15.79 percent of payroll, or 14 percent higher than its average income.  However, the gap between income and outgo would grow throughout the period and by 2080 income would equal 13.38 percent of taxable payroll, outgo would equal 19.12 percent of taxable payroll, and the gap would equal 5.75 percent of taxable payroll.  By 2080, outgo would exceed income by 43 percent.

This projected long-range financial outlook is mirrored in public opinion polls that show fewer than 50 percent of respondents express confidence in Social Security's ability to meet its long-term commitments.  There is a growing public perception that Social Security may not be as good a value in the future.  Until recent years, retirees could expect to receive more in benefits than they paid in Social Security taxes.  However, because Social Security tax rates have increased to cover the costs of a maturing "pay-as you-go" system, these ratios have become less favorable. Such concerns, and a belief that the nation must increase national savings to meet the needs of an increasingly elderly society, have led to reform proposals.

Supporters of the current program structure suggest that the issues confronting the system are not as serious as sometimes portrayed and believe there is no imminent crisis.  They point out that the system is now running surpluses, that there continues to be public support for the program, and there would be considerable risk in some of the new reform ideas.  They contend that relatively modest changes could restore long-range solvency to the system.


The Social Security system has faced funding shortfalls in the past.  In 1977 and 1983, Congress enacted a variety of measures to address the system's financial imbalance.  These measures include constraints on the growth of initial benefit levels, a gradual increase in the full retirement age from 65 to 67, payroll tax increases, taxation of benefits for higher-income recipients, and extension of Social Security coverage to federal and nonprofit workers.  Subsequently, projections showed the re-emergence of long-term deficits as a result of changes in actuarial methods and assumptions, and because program changes had been evaluated with respect to their effect on the average 75-year deficit.  That is, while program changes were projected to restore trust fund solvency on average over the 75-year period, a period of surpluses was followed by a period of deficits.

The President and congressional Republicans believe that some type of action should be taken sooner rather than later.  This view has been shared by the Social Security trustees and other recent panels and commissions that have examined the problem.  In recent years, a wide range of interest groups have echoed this view in testimony before Congress.  However, there is no consensus on whether the projections represent a "crisis."  In 1977 and 1983, the trust fund balances were projected to fall to zero within a very short period (within months of the 1983 reforms).  Today, the problem is perceived to be as few as 12 or as many as 36 years away.  Lacking a "crisis," the pressure to compromise is diffused and the issues and the divergent views about them have led to a myriad of complex proposals.  In 1977 and 1983, the debate was not about fundamental reform.  Rather, it revolved around how to raise the system's income and constrain costs.  Today, the ideas range from restoring the system's solvency with as few alterations as possible to replacing it entirely with something modeled after IRAs or 401(k)s.  This broad spectrum was clearly reflected in the 1997 Social Security Advisory Council report, which presented three different reform plans.  None of the three plans was supported by a majority of the council's 13 members.  Similar diversity is reflected in the Social Security reform bills introduced in recent Congresses.


Advocates of reform view Social Security as an anachronism, built on depression-era concerns about high unemployment and widespread "dependency" among the aged.  They see the prospect of reform today as an opportunity to modernize the way society saves for retirement.  They maintain that the vast economic, social and demographic changes that have transpired over the past 68 years require the system to change, and they point to changes made in other countries that now use market-based personal accounts to strengthen retirement incomes and bolster their economies by spurring savings and investments.  They believe government-run, pay-as-you-go systems are unsustainable in aging societies.  They prefer a system that allows workers to acquire wealth and provide for their retirement by investing in personal accounts.

They also view it as a way to counter skepticism about the current system by giving workers a greater sense of ownership of their retirement savings.  They contend that private investments would yield larger retirement incomes because stocks and bonds have provided higher returns than are projected from the current system.  Some believe that personal accounts would address what they view as the system's contradictory mix of insurance and social welfare goals (although benefits are not based strictly on a worker's contributions, many of its social benefits go to financially well-off individuals in the absence of a means test).  Others maintain that creating a system of personal accounts would prevent the government from using surplus Social Security taxes for other government spending.

Others, who do not necessarily seek a new system, view enactment of long-range Social Security constraints as one way to curb federal entitlement spending.  The aging of society means that the cost of entitlement programs that aid the elderly will increase greatly in the future.  The costs of the largest entitlement programs, Social Security, Medicare, and Medicaid, are directly linked to an aging population.  Proponents of imposing constraints on these programs express concern that, if left unchecked, their costs would place a large strain on the federal treasury far into the future, consuming resources that could be used for other priorities and forcing future generations to bear a much higher tax burden.

As a matter of fairness, it has been pointed out that many of today's recipients get back more than the value of their Social Security contributions, and far more than the baby boom generation will receive.  Some believe that to delay making changes to the program is unfair to today's workers, who must pay for "transfer" payments that they characterize as "overgenerous" and unrelated to need, while facing the prospect that their own benefits may have to be scaled back severely.  Others emphasize the system's projected long-range funding shortfall and contend that steps should be taken soon (e.g., raising the full retirement age, constraining future growth in initial monthly benefits, reducing COLAs, raising taxes) so that changes can be phased in, allowing workers more time to adjust their retirement expectations/plans to reflect what these programs will be able to provide in the future.  Otherwise, they maintain that more abrupt changes in taxes and benefits would be required.

Those who favor a more restrained approach believe that the issues facing the system can be resolved with modest tax and spending changes, and that the program's critics are raising the specter that Social Security will "bankrupt the Nation" in order to undermine public support and to provide an excuse to "privatize" it.  They contend that personal savings accounts would erode the social insurance nature of the current system that favors low-income workers, survivors, and the disabled.

Others are concerned that switching to a new system of personal accounts would pose large transitional problems by requiring today's younger workers to save for their own retirement while paying taxes to cover benefits for current retirees.  Some doubt that it would increase national savings, arguing that higher government debt (resulting from the redirection of current payroll taxes to personal accounts) would offset the increased personal account savings.  They also contend that the capital markets inflow created by the accounts would make the markets difficult to regulate and potentially distort equity valuations.  They point out that some of the countries that have moved to personal accounts did so to create capital markets.  Such markets, they argue, are already well developed in the United States.

Some believe that a system of personal accounts would expose participants to excessive market risk for an income source that has become so essential to many of the nation's elderly.  They say that the nation now has a three-tiered retirement system; Social Security, private pensions, and personal assets that already has private saving and investment components.  They contend that while people may want and be able to undertake some "risk" in the latter two tiers, Social Security as the tier that provides a basic floor of protection should be more stable.  They further contend that the administrative costs of maintaining personal accounts could be very large and significantly erode their value.

Some say that concerns about future growth in entitlement spending are overblown, arguing that as people live longer, they will work longer as labor markets tighten and employers offer inducements for them to remain on the job.  They state that a projected low ratio of workers to dependents is not unprecedented, as it existed when the baby boomers were in their youth.


On May 2, 2001, President Bush announced the establishment of a bipartisan, 16-member Commission "to study and report specific recommendations to preserve Social Security for seniors while building wealth for younger Americans."  In December 2001, the Commission delivered a report offering three models for reform.

The three models for Social Security reform, devised by the Commission, demonstrate how alternative formulations for personal accounts can contribute to a strengthened Social Security system.

Reform Model 1 establishes a voluntary personal account option but does not specify other changes in Social Security's benefit and revenue structure to achieve full long-term sustainability.

•           Workers can voluntarily invest 2 percent of their taxable wages in a personal account.

•           In exchange, traditional Social Security benefits are offset by the worker's personal account contributions compounded at an interest rate of 3.5 percent above inflation.

•           No other changes are made to traditional Social Security.

•           Expected benefits to retirees rise while the annual cash deficit of Social Security falls by the end of the valuation period.

•           Workers, retirees, and taxpayers continue to face uncertainty because a large financing gap remains requiring future benefit changes or substantial new revenues.

•           Additional revenues are needed to keep the trust fund solvent starting in the 2030s.

Reform Model 2 enables future retirees to receive Social Security benefits that are at least as great as today's retirees, even after adjusting for inflation, and increases Social Security benefits paid to low-income workers.  Model 2 establishes a voluntary personal account without raising taxes or requiring additional worker contributions.  It achieves solvency and balances Social Security revenues and costs.

•           Workers can voluntarily redirect 4 percent of their payroll taxes up to $1,000 annually to a personal account (the maximum contribution is indexed annually to wage growth).  No additional contribution from the worker would be required.

•           In exchange for the account, traditional Social Security benefits are offset by the worker's personal account contributions compounded at an interest rate of 2 percent above inflation.

•           Workers opting for personal accounts can reasonably expect combined benefits greater than those paid to current retirees; greater than those paid to workers without accounts; and greater than the future benefits payable under the current system, should it not be reformed.

•           The plan makes Social Security more progressive by establishing a minimum benefit payable to 30-year minimum wage workers of 120 percent of the poverty line.  Additional protections against poverty are provided for survivors as well.

•           Benefits under the traditional component of Social Security would be price indexed beginning in 2009.

•           Expected benefits payable to a medium earner choosing a personal account and retiring in 2052 would be 59 percent above benefits currently paid to today's retirees.  At the end of the 75-year valuation period, the personal account system would hold $12.3 trillion (in today's dollars; $1.3 trillion in present value), much of which would be new savings.  This accomplishment would need neither increased taxes nor increased worker contributions over the long term.

•           Temporary transfers from general revenue would be needed to keep the Trust Fund solvent between 2025 and 2054.

•           This model achieves a positive system cash flow at the end of the 75-year valuation period under all participation rates.

Reform Model 3 establishes a voluntary personal account option that generally enables workers to reach or exceed current-law scheduled benefits and wage replacement ratios.  It achieves solvency by adding revenues and by slowing benefit growth to less than price indexing.

•           Personal accounts are created by a match of part of the payroll tax, 2.5 percent up to $1,000 annually (indexed annually for wage growth) — for any worker who contributes an additional 1 percent of wages subject to Social Security payroll taxes.

•           The add-on contribution is partially subsidized for workers in a progressive manner by a refundable tax credit.

•           In exchange, traditional Social Security benefits are offset by the worker's personal account contributions compounded at an interest rate of 2.5 percent above inflation.

•           The plan makes the traditional Social Security system more progressive by establishing a minimum benefit payable to 30-year minimum wage workers of 100 percent of the poverty line (111 percent for a 40-year worker).  This minimum benefit would be indexed to wage growth.  Additional protections against poverty are provided for survivors as well.

•           Benefits under the traditional component of Social Security would be modified by: adjusting the growth rate in benefits for actual future changes in life expectancy, increasing work incentives by decreasing the benefits for early retirement and increasing the benefits for late retirement, and flattening out the benefit formula (reducing the third bend point factor from 15 to 10 percent).

•           Benefits payable to workers who opt for personal accounts would be expected to exceed scheduled benefit levels and current replacement rates.

•           Benefits payable to workers who do not opt for personal accounts would be over 50 percent higher than those currently paid to today's retirees.

•           New sources of dedicated revenue are added in the equivalent amount of 0.6 percent of payroll over the 75-year period, and continuing thereafter.

•           Additional temporary transfers from general revenues would be needed to keep the Trust Fund solvent between 2034 and 2063.


In July 2004, the Congressional Budget Office (CBO) published its official cost estimate of Reform Model 2.  According to the CBO, reform model 2 would enable the government to pay the benefits scheduled under that law without transferring additional money from the general fund until 2036.  From 2036 through 2050, transfers from the general fund would be required.  After 2050, scheduled benefits would fall sufficiently that dedicated revenues would be large enough to pay them in full.   Including payouts from individual accounts, expected annual benefits under Reform Model 2 would generally be stable in constant (2004) dollars, but as real (inflation-adjusted) earnings increased, those benefits would replace a declining portion of pre-retirement earnings.  As a result of increasing life expectancy, expected benefits received over a lifetime would increase in real dollars. However, total expected benefits, including OASDI benefits and individual accounts payouts, would be less than under current law, even though current-law benefits would fall below scheduled benefits with the exhaustion of the trust funds.


During the 2005 State of the Union Address, the President offered the following guidelines for reform:

  1. workers born before 1950 (i.e., workers age 55 and older in 2005) would not be affected by personal accounts or other components of reform;

  2. participation in personal accounts would be voluntary;

  3. eligible workers would be allowed to redirect up to 4 percent of covered earnings into a personal account, initially up to $1,000 per year;

  4. a centralized government entity would administer the accounts; and

  5. worker's would be required to annuitize the portion of the account balance needed to provide at least a poverty-level stream of life-long income, with any remaining balance available as a lump sum.


Representative Sam Johnson (R-TX) introduced H.R. 2002 on April 23, 2007.  This bill would establish individual accounts funded with 6.2 percentage points of the payroll tax.  Participation in personal accounts would be mandatory for persons under age 22 and voluntary for those between 22 and 54.  Workers who participate in personal accounts would no longer accrue benefits under the traditional system and would be issued a marketable "recognition bond" equal to the value of benefits already accrued under the current system.  The measure would provide workers who participate in personal accounts a minimum benefit equal to a specified percent of the poverty level, ranging from 100 percent for workers with at least 35 years of earnings to 0 percent for workers with 10 years of earnings.

Workers who choose not to participate in personal accounts would remain in the current system, however, initial monthly benefits would be lower than those promised under current law.  The measure would constrain the growth in initial monthly benefits for future retirees by indexing initial benefits to price growth (rather than wage growth).

H.R. 2002 would establish a central authority to administer the accounts and provide at least three initial investment options with specified allocations in equities and fixed income instruments (government bonds, corporate bonds), including a default 60/40 investment mix.  Once the account balance reaches $10,000 (indexed to inflation), the worker would be allowed to transfer the balance to a private financial institution.  The personal account would become available at retirement, or earlier if the account balance is sufficient to provide an annuity at least equal to 100 percent of the poverty level.  When the account reaches this level, the worker may opt out of Social Security (i.e., no longer pay the employee's share of the payroll tax).  The worker would be required to annuitize the portion of the account balance needed to provide an annuity at least equal to 100 percent of the poverty level.  Any remaining balance may be taken as a lump sum.  If the balance is not sufficient to provide the prescribed minimum payment, a supplemental payment to the account would be made from general revenues.

The other Social Security reform bill that has been introduced this Congress is H.R. 1090, the Social Security Guarantee Plus Act, introduced by Representative Ron Lewis on February 15, 2007.  This bill would allow workers aged 18 and older to participate in voluntary individual accounts funded with general revenues.  Account contributions would be equal to 4 percent of taxable earnings, up to a limit of $1,000, indexed to wage growth. 

H.R. 1090 would also provide up to five years of earnings credits for workers who stay at home to care for a child under age seven and eliminate the earnings test for recipients below the full retirement age.  In addition, it would set widow(er)’s benefits equal to 75 percent of the couple’s combined pre-death benefit, allow widow(er)s to qualify for benefits based on a disability regardless of age and the time frame in which the disability occurred, and lower the Social Security spousal/widow(er)’s benefit reduction under the Government Pension Offset from two-thirds to one-third  of the individual’s pension from noncovered employment.

Under H.R. 1090, accounts would be administered by private financial institutions selected by the government. The measure would provide three initial investment options with specified allocations in equities and corporate bonds (60/40,65/35, 70/30). The account would become available upon the worker’s entitlement to retirement or disability benefits, or upon the worker’s death.  Upon benefit entitlement, the worker would receive a lump sum equal to 5% of the account balance.  The remaining balance would be used to finance all or part of the worker’s benefit.  The account balance would be withdrawn gradually and transferred to the trust funds for the payment of monthly benefits.  In addition to the 5% lump sum, the measure would provide a monthly payment equal to the higher of a benefit scheduled under current law and an annuity based on 95% of the account balance.


Historically, Social Security has been called by many the "third rail" of American politics.  In public statements after his re-election, President Bush stated that he would work to reform Social Security and was looking to work with Democrats to achieve this goal.  Unfortunately, the President was met with immediate resistance and was never able to get any real legislative momentum.

One can point to any of another of factors to explain why the initiative failed.  Whatever the cause, the result is it will become another Congress’ problem.



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