Social Security reform

This article concerns proposals to change the Social Security system in the United States. Social Security is a social insurance program officially called "Old-age, Survivors, and Disability Insurance" (OASDI), in reference to its three components. It is primarily funded through a dedicated payroll tax. During 2012, total benefits of $786 billion were paid out versus income (taxes and interest) of $840 billion, a $54 billion annual surplus. Excluding interest of $109 billion, the program had a cash deficit of $55 billion. Estimates of lost revenues due to the temporary payroll tax cuts of 2011 and 2012 were offset by transfers of other government funds into the program; this was $114 billion in 2012. An estimated 161 million people paid into the program and 57 million received benefits in 2012, roughly 2.82 workers per beneficiary.[1]

Reform proposals continue to circulate with some urgency, due to a long-term funding challenge faced by the program. Starting in 2011 and continuing thereafter, program expenses were expected to exceed cash revenues, due to the aging of the baby-boom generation (resulting in a lower ratio of paying workers to retirees),[2] expected continuing low birth rate (compared to the baby-boom period), and increasing life expectancy. Further, the government has borrowed and spent the accumulated surplus funds, called the Social Security Trust Fund.[2]

At the end of 2012, the Trust Fund was valued at $2.7 trillion, up $54 billion from 2011. The Trust Fund consists of the accumulated surplus of program revenues less expenditures. In other words, $2.7 trillion more Social Security payroll taxes have been collected than have been used to pay Social Security beneficiaries; the program has more than fully funded itself.[3] The fund contains non-marketable Treasury securities backed "by the full faith and credit of the U.S. government." The funds borrowed from the program are part of the total national debt of $16.8 trillion as of April 2013.[4]

Program payouts exceeded cash program revenues (i.e., revenue excluding interest) in 2011; this shortfall is expected to continue indefinitely under current law. Due to interest, the Trust Fund will continue increasing through the end of 2021, reaching a peak of approximately $3.0 trillion. Social Security has the legal authority to draw amounts from other government revenue sources besides the payroll tax, to fully fund the program, while the Trust Fund exists. However, payouts greater than payroll tax revenue and interest income over time will liquidate the Trust Fund by 2033, meaning that only the ongoing payroll tax collections thereafter will be available to fund the program.[5] There are certain key implications to understand under current law, if no reforms are implemented:

  • Payroll taxes will only cover about 75% of the scheduled payout amounts from 2033-2086. Without changes to the law, Social Security would have no legal authority to draw other government funds to cover the shortfall.[5]
  • Between 2022 and 2033, redemption of the Trust Fund balance to pay retirees will draw approximately $3 trillion in government funds from sources other than payroll taxes. This is a funding challenge for the government overall, not just Social Security.[5]
  • The present value of unfunded obligations under Social Security was approximately $8.6 trillion over a 75-year forecast period (2012-2086). In other words, that amount would have to be set aside in 2012 so that the principal and interest would cover the shortfall for 75 years. The estimated annual shortfall averages 2.5% of the payroll tax base or 0.9% of gross domestic product (a measure of the size of the economy). Measured over the infinite horizon, these figures are $20.5 trillion, 3.9% and 1.3%, respectively.[6]
  • The annual cost of Social Security benefits represented 5.0% of GDP in 2011. This is projected to increase gradually to 6.4% of GDP in 2035 and then decline to about 6.1% of GDP by 2055 and remain at about that level through 2086.[7]

Former President George W. Bush called for a transition to a combination of a government-funded program and personal accounts ("individual accounts" or "private accounts") through partial privatization of the system.[8] President Barack Obama "strongly opposes" privatization or raising the retirement age, but supports raising the annual maximum amount of compensation that is subject to the Social Security payroll tax ($110,100 of compensation in 2012, and $113,700 in 2013) to help fund the program.[9] In addition, on February 18, 2010, President Obama issued an executive order mandating the creation of the bipartisan National Commission on Fiscal Responsibility and Reform,[10] which made ten specific recommendations to ensure the sustainability of Social Security.[11]

Federal Reserve Chairman Ben Bernanke said on October 4, 2006: "Reform of our unsustainable entitlement programs should be a priority." He added, "the imperative to undertake reform earlier rather than later is great."[12] The tax increases or benefit cuts required to maintain the system as it exists under current law are significantly higher the longer such changes are delayed. For example, raising the payroll tax rate to 15.0% during 2012 (from the current 12.4%) or cutting benefits by 16.2% would address the program's budgetary concerns indefinitely; these amounts increase to 16.7% and 25.0% respectively if no changes are made until 2033.[13] During 2010, the Congressional Budget Office reported on the financial effects of various reform options.[14]

Background on funding challenges


Social Security is funded through the Federal Insurance Contributions Act tax (FICA), a payroll tax.[15] Employers and employees are responsible for making equal FICA contributions. During 2012,[16] Social Security taxes were levied on the first $110,100 of income for employment; amounts earned above that are not taxed. Covered workers are eligible for retirement and disability benefits. If a covered worker dies, his or her spouse and children may receive survivors' benefits. Social Security accounts are not the property of their beneficiary and are used solely to determine benefit levels. Social Security funds are not invested on behalf of beneficiaries. Instead, current receipts are used to pay current benefits (the system known as "pay-as-you-go"), as is typical of some insurance and defined-benefit plans.

In each year since 1983, tax receipts and interest income have exceeded benefit payments and other expenditures, in 2009 by more than $120 billion. However, without further legislation, or change in benefits, this annual surplus will change to a deficit around 2021,[17] when payments begin to exceed receipts and interest thereafter. The fiscal pressures are due to demographic trends, where the number of workers paying into the program continues declining relative to those receiving benefits.

Payroll tax rates were cut during 2011 and 2012 as a stimulus measure; these cuts expired at the end of 2012. The Social Security Trustees estimated the amounts at $222 billion total; $108 billion in 2011 and $114 billion in 2012. Transfers of other government funds made the program "whole" as if these tax cuts had not occurred.[18]


The number of workers paying into the program was 5.1 per retiree in 1960; this declined to 3.3 in 2007 and is projected to decline to 2.1 by 2035.[19] Furthermore, life expectancy continues to increase, meaning retirees collect benefits longer. Federal Reserve Chairman Bernanke has indicated that the aging of the population is a long-term trend, rather than a proverbial "pig moving through the python."[20]

Social Security Trust Fund

The accumulated surpluses are invested in special non-marketable Treasury securities (treasuries) issued by the U.S. government, which are deposited in the Social Security Trust Fund. At the end of 2009, the Trust Fund stood at $2.5 trillion. The $2.5 trillion amount owed by the federal government to the Social Security Trust Fund is also a component of the U.S. National Debt, which stood at $15.7 trillion as of May 2012.[21] By 2019, the government is expected to have borrowed nearly $3.8 trillion against the Social Security Trust Fund.[22]

Projections were made by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (OASDI) in their 71st annual report dated May 13, 2011. Expenses exceeded tax receipts in 2010. The Trust Fund is projected to continue to grow for several years thereafter because of interest income from loans made to the US Treasury.

However, the funds from loans made have been spent along with other revenues in the general funds in satisfying annual budgets. At some point, however, absent any change in the law, the Social Security Administration will finance payment of benefits through the net redemption of the assets in the Trust Fund. Because those assets consist solely of U.S. government securities, their redemption will represent a call on the federal government's general fund, which for decades has been borrowing the Trust Fund's surplus and applying it to its expenses to partially satisfy budget deficits. To finance such a projected call on the general fund, some combination of increasing taxes, cutting other government spending or programs, selling government assets, or borrowing would be required.

The balances in the Trust Fund are projected to be depleted either by 2036[23] (OASDI Trustees' 2011 projection), or by 2038[24] (Congressional Budget Office's extended-baseline scenario) assuming proper and continuous repayment of the outstanding treasury notes. At that point, under current law, the system's benefits would have to be paid from the FICA tax alone. Revenues from FICA are projected at that point to be continue to cover about 77% of projected Social Security benefits if no change is made to the current tax and benefit schedules.

Effect of unemployment on program funding

Increasing unemployment due to the subprime mortgage crisis of 2008–2010 has significantly reduced the amount of payroll tax income that funds Social Security.[25] Further, the crisis also caused more to apply for both retirement and disability benefits than expected.[26] During 2009, payroll taxes and taxation of benefits resulted in cash revenues of $689.2 billion, while payments totaled $685.8 billion, resulting in a cash surplus (excluding interest) of $3.4 billion. Interest of $118.3 billion meant that the Social Security Trust Fund overall increased by $121.7 billion (i.e., the cash surplus plus interest).[27] The 2009 cash surplus of $3.4 billion was a significant reduction from the $63.9 billion cash surplus of 2008.[28]

Effect of income inequality on program funding

Rising income inequality also affects the funding of the Social Security program. The Center for Economic and Policy Research estimated in February 2013 that upward redistribution of income is responsible for about 43% of the projected Social Security shortfall over the next 75 years.[29] This is because income over the payroll tax cap ($110,100 in 2013) is not taxed; if more income flows to those earning above this threshold, the program funding is lower than it would otherwise be.

Size of funding challenge

The CBO projected in 2010 that an increase in payroll taxes ranging from 1.6%–2.1% of the payroll tax base, equivalent to 0.6%–0.8% of GDP, would be necessary to put the Social Security program in fiscal balance for the next 75 years.[30] In other words, raising the payroll tax rate to about 14.4% during 2009 (from the current 12.4%) or cutting benefits by 13.3% would address the program's budgetary concerns indefinitely; these amounts increase to around 16% and 24% if no changes are made until 2037. The value of unfunded obligations under Social Security during FY 2009 was approximately $5.4 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall over the next 75 years.[31] Projections of Social Security's solvency are sensitive to assumptions about rates of economic growth and demographic changes.[32]

The Center on Budget and Policy Priorities wrote in 2010: "The 75-year Social Security shortfall is about the same size as the cost, over that period, of extending the 2001 and 2003 tax cuts for the richest 2 percent of Americans (those with incomes above $250,000 a year). Members of Congress cannot simultaneously claim that the tax cuts for people at the top are affordable while the Social Security shortfall constitutes a dire fiscal threat."[33]

Effect on the budget deficit

Because Social Security tax receipts and interest exceed payments, the program also reduces the size of the annual federal budget deficit commonly reported in the media. For example, CBO reported that for fiscal year 2012, the "On-budget Deficit" was $1,151.3 billion. Social Security and the Post Office are considered "Off-Budget." Social Security had an estimated surplus of $62.4 billion by CBO accounting (different from the $54 billion reported by the Trustees) and the Post Office had a deficit of $0.5, resulting in a "Total Budget Deficit" of $1,089.4 billion. This latter figure is the one commonly reported in the media.[34]

Framing the debate

Ideological arguments

Ideology plays a major part of framing the Social Security debate. Key points of philosophical debate include, among others:[35]

  • degree of ownership and choice among investment alternatives in determining one's own financial future;
  • the right and extent of government taxation and wealth redistribution;
  • trade-offs between social insurance and wealth creation;
  • whether the program represents (or is perceived as) a charitable safety net (entitlement) or earned benefits; and
  • intergenerational equity, meaning the rights of those living today to impose burdens on future generations.[12]

Retirees and others who receive Social Security benefits have become an important bloc of voters in the United States. Indeed, Social Security has been called "the third rail of American politics"[36] — meaning that any politician sparking fears about cuts in benefits by touching the program endangers his or her political career. The New York Times wrote in January 2009 that Social Security and Medicare "have proved almost sacrosanct in political terms, even as they threaten to grow so large as to be unsustainable in the long run."[37]

Conservative ideological arguments

Conservatives and libertarians argue that Social Security reduces individual ownership by redistributing wealth from workers to retirees and bypassing the free market. Social Security taxes paid into the system cannot be passed to future generations, as private accounts can, thereby preventing the accumulation of wealth to some degree.[38] Private accounts also have a much higher rate of return than Social Security accounts.[39] Conservatives tend to argue for a fundamental change in the structure of the program. Conservatives also argue that the US Constitution does not permit the Congress to set up a savings plan for retirees (leaving this authority to the states), although the U.S. Supreme Court ruled in Helvering v. Davis that Congress had this authority.

Liberal ideological arguments

Liberals argue that government has the obligation to provide social insurance, through mandatory participation and broad program coverage. During 2004, Social Security constituted more than half of the income of nearly two-thirds of retired Americans. For one in six, it is their only income.[40] Liberals tend to defend the current program, preferring tax increases and payment modifications.[41][42]

Pro-privatization arguments

The conservative position is often pro-privatization. There are countries other than the U.S. that have set up individual accounts for individual workers, which allow workers leeway in decisions about the securities in which their accounts are invested, which pay workers after retirement through annuities funded by the individual accounts, and which allow the funds to be inherited by the workers' heirs. Such systems are referred to as 'privatized.' Currently, the United Kingdom, Sweden, and Chile are the most frequently cited examples of privatized systems. The experiences of these countries are being debated as part of the current Social Security controversy.

In the United States in the late 1990s, privatization found advocates who complained that U.S. workers, paying compulsory payroll taxes into Social Security, were missing out on the high rates of return of the U.S. stock market (the Dow averaged 5.3% compounded annually for the 20th century[43]). They likened their proposed "Private Retirement Accounts" (PRAs) to the popular Individual Retirement Accounts (IRAs) and 401(k) savings plans. But in the meantime, several conservative and libertarian organizations that considered it a crucial issue, such as the Heritage Foundation and Cato Institute, continued to lobby for some form of Social Security privatization.

Anti-privatization arguments

The liberal position is typically anti-privatization. Those who have taken an anti-privatization position argue several points (among others), including:[44]

  • Privatization does not address Social Security's long-term funding challenges. The program is "pay as you go", meaning current payroll taxes pay for current retirees. Diverting payroll taxes (or other sources of government funds) to fund private accounts would drive enormous deficits and borrowing ("transition costs").
  • Privatization converts the program from a "defined benefits" plan to a "defined contribution" plan, subjecting the ultimate payouts to stock or bond market fluctuations;
  • Social Security payouts are indexed to wages, which historically have exceeded inflation. As such, Social Security payments are protected from inflation, while private accounts might not be;
  • Privatization would represent a windfall for Wall Street financial institutions, who would obtain significant fees for managing private accounts.
  • Privatization in the midst of the greatest economic downturn since the Great Depression would have caused households to have lost even more of their assets, had their investments been invested in the U.S. stock market.

Chronology of prior reform attempts and proposals

  • October 1997 – The Democratic president, Bill Clinton, and the Republican Speaker of the House, Newt Gingrich, reached a secret agreement to reform Social Security. The agreement required both the President and the Speaker to forge a centrist coalition by persuading moderate members of Congress from their respective parties to compromise.[45]
  • January 1998 – Progress on the reform agreement reached on October 28, 1997 between Bill Clinton and Newt Gingrich was derailed by the Lewinsky scandal approximately a week before Clinton was to announce the initiative in his State of the Union address.[46]
  • March 1999 - Republican Senators Spencer Abraham and Pete Domenici circulate the first of a series of "lock box" proposals. These proposals would amend each house's rules, declaring it out of order to consider any bill that would contribute to a Social Security deficit unless a majority or supermajority votes to suspend the rules. All of these proposals fail, but Vice President Al Gore will make the "lock box" concept a part of his presidential campaign program in 2000.
  • February 2005 - Republican President George W. Bush outlined a major initiative to reform Social Security which included partial privatization of the system, personal Social Security accounts, and options to permit Americans to divert a portion of their Social Security tax (FICA) into secured investments. In his 2005 State of the Union Address, Bush discussed the potential bankruptcy of the program. Democrats opposed the proposal.[47] Bush campaigned for the initiative in a 60-day national tour.[48] However, public support for the proposal only declined.[49] The House Republican leadership removed tabled Social Security reform for the remainder of the session.[50] In the 2006 midterm elections, Democrats gained control of both houses, effectively killing the plan for the remainder of Bush's term in office.
  • December 2011 - Democratic President Obama's National Commission on Fiscal Responsibility and Reform proposed the "Bowles-Simpson" plan for making the system solvent. It combined increases in the Social Security payroll tax and reductions in benefits, starting several years in the future. It would have reduced benefits for upper-income workers while raising them for those with lifetime earnings averaging less than $11,000 a year. Republicans rejected the tax increases and Democrats rejected benefit cuts. A powerful network of elderly and liberal organizations and union workers also fought any changes.[51]

Alternate views

Advocates of major change in the system generally argue that drastic action is necessary because Social Security is facing a crisis. In his 2005 State of the Union speech, President Bush indicated that Social Security was facing "bankruptcy."[52] In his 2006 State of the Union speech, he described entitlement reform (including Social Security) as a "national challenge" that, if not addressed timely, would "present future Congresses with impossible choices – staggering tax increases, immense deficits, or deep cuts in every category of spending."[53]

A liberal think tank, The Center for Economic and Policy Research, says that "Social Security is more financially sound today than it has been throughout most of its 69-year history" and that Bush's statement should have no credibility.[54]

In 2004 Nobel Laureate economist Paul Krugman, deriding what he called "the hype about a Social Security crisis", wrote:[55]

President Ronald Reagan stated in October 1984: "Social Security has nothing to do with the deficit...Social Security is totally funded by the payroll tax levied on employer and employee. If you reduce the outgo of Social Security that money would not go into the general fund to reduce the deficit. It would go into the Social Security trust fund. So, Social Security has nothing to do with balancing a budget or erasing or lowering the deficit."[57]

The claims of the probability of future difficulty with the current Social Security system are largely based on the annual analysis made of the system and its prospects and reported by the governors of the Social Security system. While such analysis can never be 100% accurate, it can at least be made using different probable future scenarios and be based on rational assumptions and reach rational conclusions, with the conclusions being no better (in terms of predicting the future) than the assumptions on which the predictions are based. With these predictions in hand, it is possible to make at least some prediction of what the future retirement security of Americans who will rely on Social Security might be. It is worth noting that James Roosevelt, former associate commissioner for Retirement Policy for the Social Security Administration, claims that the "crisis" is more a myth than a fact.[58]

The Social Security public trustees including Charles Blahous warned in May 2013 that the "window for effective action" to take place was "rapidly closing", with less favorable options available to rectify the problems as time passes.[59]

Proponents of the current system argue if and when the Trust Fund runs out, there will still be the choice of raising taxes or cutting benefits, or both.[60] Advocates of the current system say that the projected deficits in Social Security are identical to the "prescription drug benefit" enacted in 2002. They say that demographic and revenue projections might turn out to be too pessimistic — and that the current health of the economy exceeds the assumptions used by the Social Security Administration.

These Social Security proponents argue that the correct plan is to fix Medicare, which is the largest underfunded entitlement, repeal the 2001–2004 tax cuts, and balance the budget. They believe a growth trendline will emerge from these steps, and the government can alter the Social Security mix of taxes, benefits, benefit adjustments and retirement age to avoid future deficits. The age at which one begins to receive Social Security benefits has been raised several times since the program's inception.

Proposals that keep an entirely government-run system

Robert L. Clark, an economist at North Carolina State University who specializes in aging issues, formerly served as a chairman of a national panel on Social Security's financial status; he has said that future options for Social Security are clear: "You either raise taxes or you cut benefits. There are lots of ways to do both."[61]

David Koitz, a 30-year veteran of the Congressional Research Service, echoed these remarks in his 2001 book Seeking Middle Ground on Social Security Reform: "The real choices for resolving the system's problems...require current lawmakers to raise revenue or cut spending—to change the law now to explicitly raise future taxes or constrain future benefits." He discusses the 1983 Social Security amendments that followed the Greenspan Commission's recommendations. It was the Commission's recommendations that provided political cover for both political parties to act. The changes approved by President Reagan in 1983 were phased in over time and included raising the retirement age from 65 to 67, taxation of benefits, cost of living adjustment (COLA) delays, and inclusion of new federal hires in the program. There was a key point during the debate when House members were forced to choose between raising the retirement age or raising future taxes; they chose the former. Senator Daniel Patrick Moynihan indicated the compromises involved showed that lawmakers could still govern. Koitz cautions against the concept of a free lunch; retirement security cannot be provided without benefit cuts or tax increases.[35]

Economist Alice M. Rivlin summarized major reform proposals in January 2009: "Fixing Social Security is a relatively easy technical problem. It will take some combination of several much-discussed marginal changes: raising the retirement age gradually in the future (and then indexing it to longevity), raising the cap on the payroll tax, fixing the cost of living adjustment, and modifying the indexing of initial benefits so they grow more slowly for more affluent people. In view of the collapse of market values, no one is likely to argue seriously for diverting existing revenues to private accounts, so the opportunity to craft a compromise is much greater than it was a few years ago. Fixing Social Security would be a confidence building achievement for bi-partisan cooperation and would enhance our reputation for fiscal prudence."[62]

Various institutions have analyzed different reform alternatives, including the CBO, U.S. News & World Report,[63] the AARP,[64][65] and the Urban Institute.[66]

CBO studies

The CBO reported in July 2010 the effects of a series of policy options on the "actuarial balance" shortfall, which over the 75 year horizon is approximately 0.6% of GDP. Social Security is facing a long-run shortfall of approximately 1% GDP per year or $155 billion/year in 2012 dollars. Key reform proposals include:[67]

  • Removing the cap on the payroll tax. Income over a threshold ($110,100 in 2012) is not subject to the payroll tax, nor are additional benefits paid to those with income above this level. Removing the cap would fund the entire 75-year shortfall.
  • Raising the retirement age gradually. Raising the full-benefit retirement age to 70 would fund half the 75-year shortfall.
  • Reducing cost of living adjustments (COLA), which are annual payout increases to keep pace with wages. Reducing each year's COLA by 0.5% versus the current formula would fund half the shortfall over 75 years.
  • Means testing for wealthier retirees, beyond taxation of benefits which is already arguably a form of means testing.
  • Raising the payroll tax rate. Raising the rate by one percentage point would cover half the shortfall for 75 years. Raising the rate by two percentage points gradually over 20 years would cover the entire shortfall.

One way to measure mandatory program risks is in terms of unfunded liabilities, the amount that would have to be set aside today such that principal and interest would cover program shortfalls (spending over tax revenue dedicated to the program). These are measured over a 75-year period and infinite horizon by the program's Trustees:

  • The present value of unfunded obligations under Social Security was approximately $8.6 trillion over a 75-year forecast period (2012-2086). The estimated annual shortfall averages 2.5% of the payroll tax base or 0.9% of gross domestic product (a measure of the size of the economy). Measured over the infinite horizon, these figures are $20.5 trillion, 3.9% and 1.3%, respectively.[6]

CBO estimated in January 2012 that raising the full retirement age for Social Security from 67 to 70 would reduce outlays by about 13%. Raising the early retirement age from 62 to 64 has little impact, as those who wait longer to begin receiving benefits get a higher amount. Raising the retirement age increases the size of the workforce and the size of the economy by about 1%.[68]

AARP study

The AARP publishes its views on Social Security reform options periodically. It summarized its views on a series of reform options during October 2012.[69]

Urban Institute study

The Urban Institute estimated the effects of alternative solutions during May 2010, along with an estimated program deficit reduction:[66]

  • Reducing the COLA by one percentage point: 75%
  • Increasing the full retirement age to 68: 30%
  • Indexing the COLA to prices rather than wages, except for bottom one-third of income earners: 65%
  • Raising the payroll tax cap (currently at $106,800) to cover 90% instead of 84% of earnings: 35%
  • Raising the payroll tax rate by one percentage point: 50%.

Fiscal Reform Commission

On February 18, 2010, President Obama issued an executive order mandating the creation of the bipartisan National Commission on Fiscal Responsibility and Reform,[10] which had the goal to “[e]nsure lasting Social Security solvency, prevent the projected 22% cuts to come in 2037, reduce elderly poverty, and distribute the burden fairly.”[70] The co-chairmen of the National Commission on Fiscal Responsibility and Reform published their final report in December 2010.[71] The co-chairmen estimated the effects of alternative solutions, along with an estimated program deficit reduction:

  • Raising the payroll tax cap to cover 90% of earnings: 35%
  • Indexing retirement age to life expectancy: 21%
  • Adjusting the COLA formula to reflect chained CPI (e.g., reduce the COLA): 26%[72]

In addition, the final report proposed the steps to ensure the sustainability of Social Security, such as:[11]

  • “[M]andat[ing] coverage for all state and local workers newly hired after 2020” to “simplify retirement planning and benefit coordination for workers who spend part of their career working in state and local governments, and will ensure that all workers, regardless of employer, will retire with a secure and predictable benefit check”;[73]
  • Educating future retirees about “the full implications of various retirement decisions, with an eye toward encouraging delayed retirement and enhanced levels of retirement savings”;[74] and
  • Enhancing dialogue regarding the importance of personal retirement savings and responsibility, including a focus reducing personal debt and increasing personal assets.[75]

President Obama's proposals

As of September 14, 2008, Barack Obama indicated preliminary views on Social Security reform. His website indicated that he "will work with members of Congress from both parties to strengthen Social Security and prevent privatization while protecting middle class families from tax increases or benefit cuts. As part of a bipartisan plan that would be phased in over many years, he would ask families making over $250,000 to contribute a bit more to Social Security to keep it sound." He has opposed raising the retirement age, privatization, or cutting benefits.[76][77]

Cost of living adjustment

The current system sets the initial benefit level based on the retiree's past wages. The benefit level is based on the 35 highest years of earnings. This initial amount is then subject to an annual "Cost of Living Adjustment" or COLA. Recent COLA were 2.3% in 2007, 5.8% in 2008, and zero for 2009–2011.[78][79]

The COLA is computed based on the "Consumer Price Index for Urban Wage Earners and Clerical Workers" or CPI-W. According to the CBO: "Many analysts believe that the CPI-W overstates increases in the cost of living because it does not fully account for the fact that consumers generally adjust their spending patterns as some prices change relative to others." However, CBO also reported that: "...CPI-E, an experimental version of the CPI that reflects the purchasing patterns of older people, has been 0.3 percentage points higher than the CPI-W over the past three decades." CBO estimates that reducing the COLA by 0.5% annually from its current computed amount would reduce the 75-year actuarial shortfall by 0.3% of GDP or about 50%. Reducing each year's COLA results in an annual compounding effect, with greater effect on those receiving benefits the longest.[80]

There is disagreement about whether a reduction in the COLA constitutes a "benefit cut"; the Center for Budget and Policy Priorities considers any reduction in future promised benefits to be a "cut." However, others dispute this assertion because under any indexing strategy the actual or nominal amount of Social Security checks would never decrease but could increase at a lesser rate.

Progressive indexing

"Progressive indexing" would lower the COLA or benefit levels for higher wage groups, with no impact or lesser impact on lower-wage groups. The Congressional Research Service reported that:[81]

"Progressive indexing," would index initial benefits for low earners to wage growth (as under current law), index initial benefits for high earners to price growth (resulting in lower projected benefits compared to current-law promised benefits), and index benefits for middle earners to a combination of wage growth and price growth.

President Bush endorsed a version of this approach suggested by financier Robert Pozen, which would mix price and wage indexing in setting the initial benefit level. The "progressive" feature is that the less generous price indexing would be used in greater proportion for retirees with higher incomes. The San Francisco Chronicle gave this explanation:

Under Pozen's plan, which is likely to be significantly altered even if the concept remains in legislation, all workers who earn more than about $25,000 a year would receive some benefit cuts. For example, those who retire in 50 years while earning about $36,500 a year would see their benefits reduced by 20 percent from the benefits promised under the current plan. Those who earn $90,000 — the maximum income in 2005 for payroll taxes — and retire in 2055 would see their benefits cut 37 percent.[82]

As under the current system, all retirees would have their initial benefit amount adjusted periodically for price inflation occurring after their retirement. Thus, the purchasing power of the monthly benefit level would be frozen, rather than increasing by the difference between the (typically higher) CPI-W and (typically lower) CPI-U, a broader measure of inflation.

Adjustments to the payroll tax limit

During 2009, payroll taxes were levied on the first $106,800 of income; earnings above that amount are not taxed. Approximately 6% of the population earns over this amount, which represents approximately 15% of total wage income.