This report presents detailed tables showing the distributional effects of 12 Social Security

solvency options on Social Security beneficiaries in 2035 compared with current law.

The 12 options presented 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.

These tables provide the modeling results used to produce the full analysis of these options

contained in a companion report, CRS Report RL33840, Options to Address Social Security

Solvency and Their Impact on Beneficiaries: Results from the Dynasim Microsimulation Model.

That report presents the distributional effects of these reform options in terms of Social Security

beneficiaries’ median payroll tax increase or benefit reduction and shows the varied effect of

these reforms on beneficiaries along certain socio-economic lines (i.e., age, type of benefit

received, and income quintile). Those readers interested in a complete explanation of these results

are encouraged to read that report.

The tables contained in this report provide some additional detail not included in the previously

mentioned report. The first table for each option summarizes the effect of the policy change on

beneficiaries in 2035 across socio-economic groups (i.e., by gender, ethnicity, educational

attainment, age, marital status, benefit type, and income quintile). These tables show the number

in the population, the mean percent change in benefits or taxes between current law and the

policy option, and the median percent change in benefits or taxes between current law and the

policy option. Subsequent tables show the varied effects of these reforms on beneficiaries in 2035

overall and then within each socio-economic group (i.e., gender, ethnicity, educational attainment,

age, marital status, benefit type, 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

Interpreting the Results...................................................................................................................2

Why These Options?...........................................................................................................2

When Would the Options Begin?........................................................................................3

How Far Into the Future Does This Analysis Look?...........................................................3

What Do the Tables Show?.................................................................................................4

How to Read the Tables......................................................................................................6

Why Do Some of the Results Seem Counterintuitive?.......................................................7

Who Is Included in the Analysis?.......................................................................................7

How Does Dynasim Estimate Future Benefits?..................................................................8

Where Can Readers Find Out More?..................................................................................8

Option 1: Reducing the Annual Cost of Living Adjustment (COLA) by Half a Percentage

Point .......................................................................................................................... ................... 9

Option 2: Reducing the Annual COLA by One Percentage Point.................................................14

Option 3: Increasing the Number of Computation Years in the Benefit Formula From 35

to 38 for All Beneficiaries..........................................................................................................19

Option 4: Increasing the Number of Computation Years in the Benefit Formula From 35

to 38 For All But Disability Beneficiaries..................................................................................24

Option 5: Increasing the Number of Computation Years in the Benefit Formula From 35

to 40 for All Beneficiaries..........................................................................................................30

Option 6: Increasing the Number of Computation Years in the Benefit Formula From 35

to 40 for All But Disability Beneficiaries...................................................................................35

Option 7: Increasing the Full Retirement Age (FRA) by Accelerating the Increase From

Age 66 to Age 67 Scheduled Under Current Law and Further Increasing the FRA From

Age 67 to Age 70........................................................................................................................41

Option 8: Longevity Indexing Initial Social Security Benefits by Reducing the Primary

Insurance Amount (PIA) Formula Factors.................................................................................46

Option 9: Longevity Indexing Initial Social Security Benefits by Reducing the PIA Value

and Holding Disability Beneficiaries Harmless Until They Reach the FRA.............................52

Option 10: Progressive Price Indexing Initial Social Security Benefits........................................57

Option 11: Increasing Earnings Subject to Social Security Payroll Taxes by Raising the

Dollar Amount of the Taxable Earnings Base to 100% of Aggregate Covered Earnings

in the U.S. (Eliminating the Taxable Earnings Base).................................................................62

Option 12: Increasing Earnings Subject to Social Security Payroll Taxes by Raising the

Dollar Amount of the Taxable Earnings Base to 90% of Aggregate Covered Earnings in

the U.S........................................................................................................................................77

Table 1. Reduce the COLA by Half a Percentage Point: Summary of Mean and Median

Percentage Change in Benefits in 2035........................................................................................9

Table 2. Reduce the COLA by Half a Percentage Point: Distribution by Impact in 2035............10

Table 3. Reduce the COLA by Half a Percentage Point: Distribution by Gender in 2035............10

Table 4. Reduce the COLA by Half a Percentage Point: Distribution by Ethnicity in 2035..........11

Table 5. Reduce the COLA by Half a Percentage Point: Distribution by Education Level

in 2035.........................................................................................................................................11

Table 6. Reduce the COLA by Half a Percentage Point: Distribution by Age in 2035.................12

Table 7. Reduce the COLA by Half a Percentage Point: Distribution by Marital Status in

2035 ............................................................................................................................................ 12

Table 8. Reduce the COLA by Half a Percentage Point: Distribution by Benefit Type in

2035 ............................................................................................................................................ 13

Table 9. Reduce the COLA by Half a Percentage Point: Distribution by Income Quintile

in 2035........................................................................................................................................13

Table 10. Reduce the COLA by One Percentage Point: Summary of Mean and Median

Percentage Change in Benefits in 2035......................................................................................14

Table 11. Reduce the COLA by One Percentage Point: Distribution by Impact in 2035..............15

Table 12. Reduce the COLA by One Percentage Point: Distribution by Gender in 2035.............15

Table 13. Reduce the COLA by One Percentage Point: Distribution by Ethnicity in 2035..........16

Table 14. Reduce the COLA by One Percentage Point: Distribution by Education Level in

2035 ............................................................................................................................................ 16

Table 15. Reduce the COLA by One Percentage Point: Distribution by Age in 2035..................17

Table 16. Reduce the COLA by One Percentage Point: Distribution by Marital Status in

2035 ............................................................................................................................................ 17

Table 17. Reduce the COLA by One Percentage Point: Distribution by Benefit Type in

2035 ............................................................................................................................................ 18

Table 18. Reduce the COLA by One Percentage Point: Distribution by Income Quintile in

2035 ............................................................................................................................................ 18

Table 19. Increase the Number of Computation Years to 38 for All Beneficiaries:

Summary of Mean and Median Percentage Change in Benefits in 2035...................................19

Table 20. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Impact in 2035..................................................................................................20

Table 21. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Gender in 2035..................................................................................................21

Table 22. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Ethnicity in 2035...............................................................................................21

Table 23. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Education Level in 2035...................................................................................21

Table 24. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Age in 2035.......................................................................................................22

Table 25. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Marital Status in 2035.......................................................................................22

Table 26. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Benefit Type in 2035.........................................................................................23

Table 27. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Income Quintile in 2035...................................................................................23

Table 28. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Summary of Mean and Median Percentage Change in Benefits in 2035............24

Table 29. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Impact in 2035...........................................................................25

Table 30. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Gender in 2035...........................................................................26

Table 31. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Ethnicity in 2035........................................................................26

Table 32. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Education Level in 2035............................................................27

Table 33. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Age in 2035................................................................................27

Table 34. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Marital Status in 2035................................................................28

Table 35. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Benefit Type in 2035..................................................................28

Table 36. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Income Quintile in 2035............................................................29

Table 37. Increase the Number of Computation Years to 40 for All Beneficiaries:

Summary of Mean and Median Percentage Change in Benefits in 2035...................................30

Table 38. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Impact in 2035..................................................................................................31

Table 39. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Gender in 2035..................................................................................................32

Table 40. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Ethnicity in 2035...............................................................................................32

Table 41. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Education Level in 2035...................................................................................32

Table 42. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Age in 2035.......................................................................................................33

Table 43. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Marital Status in 2035.......................................................................................33

Table 44. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Benefit Type in 2035.........................................................................................34

Table 45. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Income Quintile in 2035...................................................................................34

Table 46. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Summary of Mean and Median Percentage Change in Benefits in 2035............35

Table 47. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Impact in 2035...........................................................................36

Table 48. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Gender in 2035...........................................................................37

Table 49. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Ethnicity in 2035........................................................................37

Table 50. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Education Level in 2035............................................................38

Table 51. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Age in 2035................................................................................38

Table 52. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Marital Status in 2035................................................................39

Table 53. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Benefit Type in 2035..................................................................39

Table 54. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Income Quintile in 2035............................................................40

Table 55. Increase the Full Retirement Age: Summary of Mean Percentage Change in

Benefits in 2035.........................................................................................................................41

Table 56. Increase the Full Retirement Age: Distribution by Impact in 2035...............................42

Table 57. Increase the Full Retirement Age: Distribution by Gender in 2035..............................42

Table 58. Increase the Full Retirement Age: Distribution by Ethnicity in 2035...........................43

Table 59. Increase the Full Retirement Age: Distribution by Education Level in 2035................43

Table 60. Increase the Full Retirement Age: Distribution by Age in 2035....................................44

Table 61. Increase the Full Retirement Age: Distribution by Marital Status in 2035....................44

Table 62. Increase the Full Retirement Age: Distribution by Benefit Type in 2035.....................44

Table 63. Increase the Full Retirement Age: Distribution by Income Quintile in 2035................45

Table 64. Index the PIA Formula Factors for Longevity: Summary of Mean and Median

Percentage Change in Benefits in 2035......................................................................................46

Table 65. Index the PIA Formula Factors for Longevity: Distribution by Impact in 2035...........47

Table 66. Index the PIA Formula Factors for Longevity: Distribution by Gender in 2035...........48

Table 67. Index the PIA Formula Factors for Longevity: Distribution by Ethnicity in 2035........48

Table 68. Index the PIA Formula Factors for Longevity: Distribution by Education Level

in 2035........................................................................................................................................49

Table 69. Index the PIA Formula Factors for Longevity: Distribution by Age in 2035................49

Table 70. Index the PIA Formula Factors for Longevity: Distribution by Marital Status in

2035 ............................................................................................................................................ 50

Table 71. Index the PIA Formula Factors for Longevity: Distribution by Benefit Type in

2035 ............................................................................................................................................ 50

Table 72. Index the PIA Formula Factors for Longevity: Distribution by Income Quintile

in 2035........................................................................................................................................51

Table 73. Index the PIA Value for Longevity: Summary of Mean and Median Percentage

Change in Benefits in 2035........................................................................................................52

Table 74. Index the PIA Value for Longevity: Distribution by Impact in 2035.............................53

Table 75. Index the PIA Value for Longevity: Distribution by Gender in 2035............................53

Table 76. Index the PIA Value for Longevity: Distribution by Ethnicity in 2035.........................54

Table 77. Index the PIA Value for Longevity: Distribution by Education Level in 2035.............54

Table 78. Index the PIA Value for Longevity: Distribution by Age in 2035.................................55

Table 79. Index the PIA Value for Longevity: Distribution by Marital Status in 2035.................55

Table 80. Index the PIA Value for Longevity: Distribution by Benefit Type in 2035...................56

Table 81. Index the PIA Value for Longevity: Distribution by Income Quintile in 2035..............56

Table 82. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Summary of Mean and Median Percentage Change in Benefits in 2035...................................57

Table 83. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Impact in 2035..................................................................................................58

Table 84. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Gender in 2035..................................................................................................58

Table 85. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Ethnicity in 2035...............................................................................................59

Table 86. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Education Level in 2035...................................................................................59

Table 87. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Age in 2035.......................................................................................................60

Table 88. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Marital Status in 2035.......................................................................................60

Table 89. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Benefit Type in 2035.........................................................................................61

Table 90. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Income Quintile in 2035...................................................................................61

Table 91. Increase the Taxable Earnings Base to Tax All Covered Earnings: Summary of

Mean and Median Percentage Change in Benefits for Individuals Who Pay No

Additional Taxes Over Their Lifetime in 2035...........................................................................62

Table 92. Increase the Taxable Earnings Base to Tax All Covered Earnings: Summary of

Mean and Median Percentage Change in Benefits for Individuals Who Pay Additional

Taxes Over Their Lifetime in 2035.............................................................................................63

Table 93. Increase the Taxable Earnings Base to Tax All Covered Earnings: Summary of

Mean and Median Percentage Change in Benefits for the Total Population in 2035................65

Table 94. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Benefits for the Total Population by Impact in 2035..........................66

Table 95. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Benefits for the Total Population by Gender in 2035.........................66

Table 96. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Benefits for the Total Population by Ethnicity in 2035......................67

Table 97. Increase the Taxable Earnings Base to Tax All Covered Earnings of the Total

Population: Distribution of Percentage Change in Benefits for the Total Population by

Education Level in 2035............................................................................................................67

Table 98. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Benefits for the Total Population by Age in 2035..............................68

Table 99. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Benefits for the Total Population by Marital Status in 2035..............68

Table 100. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Benefits for the Total Population by Benefit Type in 2035................69

Table 101. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Benefits for the Total Population by Income Quintile in 2035...........69

Table 102. Increase the Taxable Earnings Base to Tax All Covered Earnings: Summary of

Mean and Median Percentage Change in Taxes Paid for Individuals Who Pay No

Additional Taxes Over their Lifetime in 2035............................................................................70

Table 103. Increase the Taxable Earnings Base to Tax All Covered Earnings: Summary of

Mean and Median Percentage Change in Taxes Paid for Individuals Who Pay

Additional Taxes Over their Lifetime in 2035............................................................................71

Table 104. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Taxes Paid for the Total Population in 2035.......................................72

Table 105. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Taxes Paid for the Total Population by Gender in 2035.....................73

Table 106. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Taxes Paid for the Total Population by Ethnicity in 2035..................73

Table 107. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Taxes Paid for the Total Population by Education Level in

2035 ............................................................................................................................................ 74

Table 108. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Taxes Paid for the Total Population by Age in 2035..........................74

Table 109. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Taxes Paid for the Total Population Marital Status in 2035...............75

Table 110. Increase the Taxable Earnings Base to Tax All Covered Earning: Distribution

of Percentage Change in Taxes Paid for the Total Population by Benefit Type in 2035............75

Table 111. Increase the Taxable Earnings Base to Tax All Covered Earnings: Distribution

of Percentage Change in Taxes Paid for the Total Population by Income Quintile in

2035 ............................................................................................................................................ 76

Table 112. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Summary of Mean and Median Percentage Change in Benefits for Individuals Who Pay

No Additional Taxes Over their Lifetime in 2035.......................................................................77

Table 113. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Summary of Mean and Median Percentage Change in Benefits for Individuals Who Pay

Additional Taxes Over Their Lifetime in 2035...........................................................................78

Table 114. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Summary of Mean and Median Percentage Change in Benefits for Total Population in

2035............................................................................................................................................80

Table 115. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Impact in 2035.........81

Table 116. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Gender in 2035.........81

Table 117. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Ethnicity in

2035 ............................................................................................................................................ 82

Table 118. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Education

Level in 2035..............................................................................................................................82

Table 119. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Age in 2035..............83

Table 120. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Marital Status

in 2035........................................................................................................................................83

Table 121. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Benefit Type in

2035 ............................................................................................................................................ 84

Table 122. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Income Quintile

in 2035........................................................................................................................................84

Table 123. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Summary of Mean and Median Percentage Change in Taxes Paid for Individuals Who

Pay No Additional Taxes Over Their Lifetime in 2035...............................................................85

Table 124. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Summary of Mean and Median Percentage Change in Taxes Paid for Individuals Who

Pay Additional Taxes Over Their Lifetime in 2035....................................................................86

Table 125. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Impact in

2035 ............................................................................................................................................ 87

Table 126. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Gender in

2035 ............................................................................................................................................ 88

Table 127. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Ethnicity in

2035 ............................................................................................................................................ 88

Table 128. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Education

Level in 2035..............................................................................................................................88

Table 129. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Age in 2035..........89

Table 130. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Marital

Status in 2035.............................................................................................................................90

Table 131. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Benefit Type

in 2035........................................................................................................................................90

Table 132. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Income

Quintile in 2035..........................................................................................................................90

Table C-1. Retirement Earnings Test Application Rules...............................................................96

Appendix A. Computation of the Primary Insurance Amount (PIA) Under Current Law............92

Appendix B. Interaction of Spouse and Aged Survivor Benefit Rules with Policy Options.........94

Appendix C. Interaction of the Retirement Earnings Test with Policy Options............................96

Appendix D. Technical Description of the Progressive Price Indexing Option............................99

Appendix E. Background on the Urban Institute’s Dynasim Microsimulation Model...............101

Appendix F. Glossary..................................................................................................................105

Author Contact Information.........................................................................................................110

This report presents detailed tables showing the distributional effects of 12 Social Security

solvency options on Social Security beneficiaries in 2035 compared with current law. The

options presented are

1. Reducing the annual cost of living adjustment (COLA) by half a percentage point

2. Reducing the annual COLA by one percentage point

3. Increasing the number of computation years in the benefit formula from 35 to 38 for all

beneficiaries

4. Increasing the number of computation years in the benefit formula from 35 to 38 for all but

disability beneficiaries

5. Increasing the number of computation years in the benefit formula from 35 to 40 for all

beneficiaries

6. Increasing the number of computation years in the benefit formula from 35 to 40 for all but

disability beneficiaries

7. Increasing the full retirement age (FRA) by accelerating the increase from age 66 to age 67

scheduled under current law and further increasing the FRA from age 67 to age 70

8. Longevity indexing initial Social Security benefits by reducing the Primary Insurance Amount

(PIA) formula factors

9. Longevity indexing initial Social Security benefits by reducing the PIA value and holding

disability beneficiaries harmless until they reach the FRA

10. Progressive price indexing initial Social Security benefits

11. Increasing earnings subject to Social Security payroll taxes by raising the dollar amount of the

taxable earnings base to 100% of aggregate covered earnings in the U.S. (eliminating the

taxable earnings base)

12. Increasing earnings subject to Social Security payroll taxes by raising the dollar amount of the

taxable earnings base to 90% of aggregate covered earnings in the U.S.

These tables provide the modeling results used to produce the full analysis of these options

contained in a companion report, CRS Report RL33840, Options to Address Social Security

Solvency and Their Impact on Beneficiaries: Results from the Dynasim Microsimulation Model.

That report presents the distributional effects of these reform options in terms of Social Security

beneficiaries’ median payroll tax increase or benefit reduction and shows the varied effect of

these reforms on beneficiaries along certain socio-economic lines (i.e., age, type of benefit

received, and income quintile). Those readers interested in a complete explanation of these results

are encouraged to read that report.

The tables contained in this report provide some additional detail not included in the previously

mentioned report. The first table for each option summarizes the effect of the policy change on

beneficiaries in 2035 across socio-economic groups (i.e., by gender, ethnicity, educational

attainment, age, marital status, benefit type, and income quintile). These tables show the number

of people in the population, the mean percent change in benefits or taxes between current law and

the policy option, and the median percent change in benefits or taxes between current law and the

policy option. Subsequent tables show the varied effects of these reforms on beneficiaries in 2035

overall and then within each socio-economic group (i.e., gender, ethnicity, educational attainment,

age, marital status, benefit type, and income quintile).

The options presented below 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, we present two or more variations on how they could be approached. 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 option in 2035 using results from the Dynasim

microsimulation model. The Dynasim model is not an actuarial model and so cannot produce

solvency estimates for these options.

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

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

benefit enhancements for low earners).

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 tables presented

are essentially a snapshot of the projected beneficiary population in this single year. Focusing on

a different year would lead to different results.

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 tables in this report focus on a single year, these distinctions are not shown.

The first table for each option breaks down the effect of the policy change on beneficiaries in

2035 by gender, ethnicity, educational attainment, age, marital status, benefit type, and income

quintile. (For more information on income quintiles, please see the subsection below called

“Breakdowns by Income Quintile.”). These tables show the number of people in the population,

the mean percent change, and the median percent change in benefits between current law and the

policy option. Since Dynasim projects a representative sub-sample of the population, the number

of observations in the model must be weighted (in this case multiplied by a constant) so that the

numbers total the entire population. Population numbers in the tables are presented in thousands.

The mean, or average, is determined by adding all the values in a data set and dividing the sum by

the number of values in the data set. 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, 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 -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. For both the mean and median percent change in benefits,

numbers have been rounded to the nearest full percentage point.

The results for each option include tables that show the overall distribution of the estimated

benefit change for all beneficiaries as well as for beneficiaries broken down by gender, ethnicity,

educational attainment, age, marital status, benefit type, and income quintile. For example, the

tables show what proportion of beneficiaries in each of the five income quintiles have benefit

reductions of up to -10%, reductions from -10% to -19%, etc.

Every attempt has been made to be consistent in the presentation of the results of the analysis.

The same benefit reduction categories have been used in all tables across the various reform

options so as not to skew the results. Furthermore, the tables for all of the options include the

entire Dynasim population, with one exception. For the options to raise or eliminate the taxable

earnings base, the report contains additional separate tables describing the mean and median

impact for only those beneficiaries who would be affected by the option and for only those

beneficiaries who would pay no additional taxes. These additional breakdowns are presented

since a relatively small share of beneficiaries would be affected by the options to raise or

eliminate the taxable earnings base. Tables that include the entire Dynasim population for these

options show that the median beneficiary in each subgroup is not affected.

All of the options include tables 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

presented 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 tables that follow, the retired worker only category and the disability only category are

made up of beneficiaries who receive solely a retired or disabled worker benefit, not a spouse or

survivor benefit. The survivor category and the spouse 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).

All of the policy options include tables 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 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 tables 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.

There are three types of tables presented in this report: The first shows the mean and median

changes under the policy option across socio-economic groups; the second shows the overall

distribution of benefit or tax changes in the population; and the third shows the distribution of

benefit or tax changes within each socio-economic group.

The first table for each option summarizes the effect of the policy change on beneficiaries in 2035

across socio-economic groups (i.e., by gender, ethnicity, educational attainment, age, marital

status, benefit type, and income quintile). These tables show the number in the population, the

mean percent change in benefits or taxes between current law and the policy option, and the

median percent change in benefits or taxes between current law and the policy option.

For example, if a reader is interested in the average benefit reduction caused by reducing the

COLA by half a percentage point, he or she should turn to Table 1. The first row (labeled “All”)

shows the total number in the population in thousands (e.g., the total population for Table 1 is

80,362,000). The first row also shows the mean change in benefits overall (-6%) and median

change in benefits overall (-6%). In other words, it shows that among the 80 million beneficiaries

in the Dynasim population, reducing the COLA by half a percentage point would result in a mean

benefit reduction of 6% and also a median benefit reduction of 6%. (The mean and the median

may vary for other options.)

Table 1 also shows the mean and median change in benefits for each socio-economic group (i.e.,

by gender, ethnicity, educational attainment, age, marital status, benefit type, and income

quintile). For example, the second and third rows of Table 1 show a breakdown by gender.

Females make up the majority of the population (i.e., there are 43,566,000 females wompared

with 36,766,000 males). Females and males have the same mean benefit reduction (6%). Males

have a smaller median benefit reduction (5%) than do females (6%).

The second table for each option show how the effects of each reform vary among the overall

population. This table shows the number and percent of the population, broken down by the

magnitude of the change in benefits. For example, the table shows the number and percent of

beneficiaries whose benefits would be reduced by 20% or more, then the number and percent of

beneficiaries whose benefits would be reduced by 10% to 19%, and so forth.

For example, if a reader is interested in knowing whether the cuts caused by reducing the COLA

by half a percentage point are spread equally across the entire sample, he or she should turn to

Table 2. Table 2 shows that a small number of beneficiaries (103,000 people, or less than 0.5%)

would have benefit reductions of 20% or more. A larger number (14,973,000 people, or about

19%) have benefit reductions of 10% to 19%. Most beneficiaries (63,232,000 people, or about

79%) would have benefit reductions of up to 10%. The last two columns in Table 2 show the

cumulative number and percent of beneficiaries.

The subsequent tables for each option show the varied effects of these reforms on beneficiaries in

2035 within each socio-economic group (i.e., gender, ethnicity, educational attainment, age,

marital status, benefit type, and income quintile).

For example, if a reader is interested in knowing how the cuts caused by reducing the COLA by

half a percentage point are distributed by gender, he or she should turn to Table 3. There, the

reader could see that the majority of both females and males would have a benefit cut of up to

10% (i.e., 75% of females and 83% of males). The reader could also see that females are more

likely than males to receive a cut that is greater than 10% (i.e., 23% of females and 14% of

males). The percentages in each horizontal row add up to 100%.

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.

The results presented in this report focus 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.)

A full written analysis of all 12 policy options is available in CRS Report RL33840, Options to

Address Social Security Solvency and Their Impact on Beneficiaries: Results from the Dynasim

Microsimulation Model. For each reform option, that report 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. That report presents

the distributional effects of these reform options in terms of Social Security beneficiaries’ median

payroll tax increase or benefit reduction and shows the varied effect of these reforms on

beneficiaries along certain socio-economic lines (i.e., age, type of benefit received, and income

quintile). That report, however, does not contain detailed analysis of the effects of these reforms

on Social Security beneficiaries by gender, ethnicity, educational attainment, or marital status.

When interpreting the distributional results of these reform options, it is important for the reader

to have a solid understanding of Social Security program rules, technical details, and terminology.

Detailed explanations of certain 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”

• 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.”

Table 1. Reduce the COLA by Half a Percentage Point: Summary of Mean and

Median Percentage Change in Benefits in 2035

Table 2. Reduce the COLA by Half a Percentage Point: Distribution by Impact in

2035

Table 3. Reduce the COLA by Half a Percentage Point: Distribution by Gender in

2035

Table 4. Reduce the COLA by Half a Percentage Point: Distribution by Ethnicity in

2035

Table 5. Reduce the COLA by Half a Percentage Point: Distribution by Education

Level in 2035

Table 6. Reduce the COLA by Half a Percentage Point: Distribution by Age in 2035

Table 7. Reduce the COLA by Half a Percentage Point: Distribution by Marital Status

in 2035

Table 8. Reduce the COLA by Half a Percentage Point: Distribution by Benefit Type

in 2035

Table 9. Reduce the COLA by Half a Percentage Point: Distribution by Income

Quintile in 2035

Table 10. Reduce the COLA by One Percentage Point: Summary of Mean and

Median Percentage Change in Benefits in 2035

Table 11. Reduce the COLA by One Percentage Point: Distribution by Impact in

2035

Table 12. Reduce the COLA by One Percentage Point: Distribution by Gender in

2035

Table 13. Reduce the COLA by One Percentage Point: Distribution by Ethnicity in

2035

Table 14. Reduce the COLA by One Percentage Point: Distribution by Education

Level in 2035

Table 15. Reduce the COLA by One Percentage Point: Distribution by Age in 2035

Table 16. Reduce the COLA by One Percentage Point: Distribution by Marital Status

in 2035

Table 17. Reduce the COLA by One Percentage Point: Distribution by Benefit Type

in 2035

Table 18. Reduce the COLA by One Percentage Point: Distribution by Income

Quintile in 2035

Table 19. Increase the Number of Computation Years to 38 for All Beneficiaries:

Summary of Mean and Median Percentage Change in Benefits in 2035

Table 20. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Impact in 2035

Table 21. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Gender in 2035

Table 22. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Ethnicity in 2035

Table 23. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Education Level in 2035

Table 24. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Age in 2035

Table 25. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Marital Status in 2035

Table 26. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Benefit Type in 2035

Table 27. Increase the Number of Computation Years to 38 for All Beneficiaries:

Distribution by Income Quintile in 2035

Table 28. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Summary of Mean and Median Percentage Change in Benefits in 2035

Table 29. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Impact in 2035

Table 30. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Gender in 2035

Table 31. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Ethnicity in 2035

Table 32. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Education Level in 2035

Table 33. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Age in 2035

Table 34. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Marital Status in 2035

Table 35. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Benefit Type in 2035

Table 36. Increase the Number of Computation Years to 38 for All But Disability

Beneficiaries: Distribution by Income Quintile in 2035

Table 37. Increase the Number of Computation Years to 40 for All Beneficiaries:

Summary of Mean and Median Percentage Change in Benefits in 2035

Table 38. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Impact in 2035

Table 39. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Gender in 2035

Table 40. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Ethnicity in 2035

Table 41. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Education Level in 2035

Table 42. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Age in 2035

Table 43. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Marital Status in 2035

Table 44. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Benefit Type in 2035

Table 45. Increase the Number of Computation Years to 40 for All Beneficiaries:

Distribution by Income Quintile in 2035

Table 46. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Summary of Mean and Median Percentage Change in Benefits in 2035

Table 47. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Impact in 2035

Table 48. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Gender in 2035

Table 49. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Ethnicity in 2035

Table 50. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Education Level in 2035

Table 51. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Age in 2035

Table 52. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Marital Status in 2035

Table 53. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Benefit Type in 2035

Table 54. Increase the Number of Computation Years to 40 for All But Disability

Beneficiaries: Distribution by Income Quintile in 2035

Table 55. Increase the Full Retirement Age: Summary of Mean Percentage Change in

Benefits in 2035

Table 56. Increase the Full Retirement Age: Distribution by Impact in 2035

Table 57. Increase the Full Retirement Age: Distribution by Gender in 2035

Table 58. Increase the Full Retirement Age: Distribution by Ethnicity in 2035

Table 59. Increase the Full Retirement Age: Distribution by Education Level in 2035

Table 60. Increase the Full Retirement Age: Distribution by Age in 2035

Table 61. Increase the Full Retirement Age: Distribution by Marital Status in 2035

Table 62. Increase the Full Retirement Age: Distribution by Benefit Type in 2035

Table 63. Increase the Full Retirement Age: Distribution by Income Quintile in 2035

Table 64. Index the PIA Formula Factors for Longevity: Summary of Mean and

Median Percentage Change in Benefits in 2035

Table 65. Index the PIA Formula Factors for Longevity: Distribution by Impact in

2035

Table 66. Index the PIA Formula Factors for Longevity: Distribution by Gender in

2035

Table 67. Index the PIA Formula Factors for Longevity: Distribution by Ethnicity in

2035

Table 68. Index the PIA Formula Factors for Longevity: Distribution by Education

Level in 2035

Table 69. Index the PIA Formula Factors for Longevity: Distribution by Age in 2035

Table 70. Index the PIA Formula Factors for Longevity: Distribution by Marital

Status in 2035

Table 71. Index the PIA Formula Factors for Longevity: Distribution by Benefit Type

in 2035

Table 72. Index the PIA Formula Factors for Longevity: Distribution by Income

Quintile in 2035

Table 73. Index the PIA Value for Longevity: Summary of Mean and Median

Percentage Change in Benefits in 2035

Table 74. Index the PIA Value for Longevity: Distribution by Impact in 2035

Table 75. Index the PIA Value for Longevity: Distribution by Gender in 2035

Table 76. Index the PIA Value for Longevity: Distribution by Ethnicity in 2035

Table 77. Index the PIA Value for Longevity: Distribution by Education Level in 2035

Table 78. Index the PIA Value for Longevity: Distribution by Age in 2035

Table 79. Index the PIA Value for Longevity: Distribution by Marital Status in 2035

Table 80. Index the PIA Value for Longevity: Distribution by Benefit Type in 2035

Table 81. Index the PIA Value for Longevity: Distribution by Income Quintile in 2035

Table 82. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Summary of Mean and Median Percentage Change in Benefits in 2035

Table 83. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Impact in 2035

Table 84. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Gender in 2035

Table 85. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Ethnicity in 2035

Table 86. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Education Level in 2035

Table 87. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Age in 2035

Table 88. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Marital Status in 2035

Table 89. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Benefit Type in 2035

Table 90. Index Initial Benefits to a Combination of Wage Growth and Price Growth:

Distribution by Income Quintile in 2035

Table 91. Increase the Taxable Earnings Base to Tax All Covered Earnings: Summary

of Mean and Median Percentage Change in Benefits for Individuals Who Pay No

Additional Taxes Over Their Lifetime in 2035

Table 92. Increase the Taxable Earnings Base to Tax All Covered Earnings: Summary

of Mean and Median Percentage Change in Benefits for Individuals Who Pay Additional

Taxes Over Their Lifetime in 2035

Table 93. Increase the Taxable Earnings Base to Tax All Covered Earnings: Summary

of Mean and Median Percentage Change in Benefits for the Total Population in 2035

Table 94. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Benefits for the Total Population by Impact in

2035

Table 95. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Benefits for the Total Population by Gender in

2035

Table 96. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Benefits for the Total Population by Ethnicity

in 2035

Table 97. Increase the Taxable Earnings Base to Tax All Covered Earnings of the Total

Population: Distribution of Percentage Change in Benefits for the Total Population

by Education Level in 2035

Table 98. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Benefits for the Total Population by Age in

2035

Table 99. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Benefits for the Total Population by Marital

Status in 2035

Table 100. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Benefits for the Total Population by Benefit

Type in 2035

Table 101. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Benefits for the Total Population by Income

Quintile in 2035

Table 102. Increase the Taxable Earnings Base to Tax All Covered Earnings: Summary

of Mean and Median Percentage Change in Taxes Paid for Individuals Who Pay No

Additional Taxes Over their Lifetime in 2035

Table 103. Increase the Taxable Earnings Base to Tax All Covered Earnings: Summary

of Mean and Median Percentage Change in Taxes Paid for Individuals Who Pay

Additional Taxes Over their Lifetime in 2035

Table 104. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Taxes Paid for the Total Population in 2035

Table 105. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Taxes Paid for the Total Population by Gender

in 2035

Table 106. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Taxes Paid for the Total Population by Ethnicity

in 2035

Table 107. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Taxes Paid for the Total Population by

Education Level in 2035

Table 108. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Taxes Paid for the Total Population by Age in

2035

Table 109. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Taxes Paid for the Total Population Marital

Status in 2035

Table 110. Increase the Taxable Earnings Base to Tax All Covered Earning:

Distribution of Percentage Change in Taxes Paid for the Total Population by Benefit

Type in 2035

Table 111. Increase the Taxable Earnings Base to Tax All Covered Earnings:

Distribution of Percentage Change in Taxes Paid for the Total Population by Income

Quintile in 2035

Table 112. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Summary of Mean and Median Percentage Change in Benefits for Individuals Who

Pay No Additional Taxes Over their Lifetime in 2035

Table 113. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Summary of Mean and Median Percentage Change in Benefits for Individuals Who

Pay Additional Taxes Over Their Lifetime in 2035

Table 114. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Summary of Mean and Median Percentage Change in Benefits for Total Population in

2035

Table 115. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Impact in

2035

Table 116. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Gender in

2035

Table 117. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Ethnicity in

2035

Table 118. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Education

Level in 2035

Table 119. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Age in 2035

Table 120. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Marital

Status in 2035

Table 121. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Benefit Type

in 2035

Table 122. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Benefits for the Total Population by Income

Quintile in 2035

Table 123. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Summary of Mean and Median Percentage Change in Taxes Paid for Individuals Who

Pay No Additional Taxes Over Their Lifetime in 2035

Table 124. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Summary of Mean and Median Percentage Change in Taxes Paid for Individuals Who

Pay Additional Taxes Over Their Lifetime in 2035

Table 125. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Impact in

2035

Table 126. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Gender in

2035

Table 127. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Ethnicity in

2035

Table 128. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Education

Level in 2035

Table 129. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Age in

2035

Table 130. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Marital

Status in 2035

Table 131. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Benefit

Type in 2035

Table 132. Increase the Taxable Earnings Base to Tax 90% of Covered Earnings:

Distribution of Percentage Change Taxes Paid for the Total Population by Income

Quintile in 2035

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

counted in the computation of the AIME.) The benefit formula is then applied to the worker’s

AIME. The benefit formula that applies to individuals who first become eligible for retirement or

disability benefits in 2006, or who die 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 reaches 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

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 wompared 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,

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

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 and/or survivor

benefits 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

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

thresholds. Generally, for workers who fall under the full retirement age for the entire year, the

threshold is $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 applies 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

For example, Joe is 62 and will not reach the full retirement age this year. Thus, Joe could earn 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 has ‘excess’ earnings of $17,520 in 2006 ($30,000

- $12,480). Thus, the reduction to his Social Security benefit is $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 5 full months and

would lose a portion of his benefit for a 6 month ($8,760/$1,500) because of 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

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

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

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

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

career high-wage earner if all three of the current-law PIA factors (90%, 32%, and 15%) were

fully price-indexed.

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

.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

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.

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: 1) to analyze the difference in benefit levels between a particular Social

Security reform proposal and current law; 2) to model the combined effects of multiple and

complex policy changes on individual and family benefits and total income; 3) to 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 comprised of households from the 1990 through 1993 panels of the Survey of

Income and Program Participation (SIPP). This sample consists of over 100,000 people and

44,000 families and is limited to individuals who answered questions regarding assets and ^{16}

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 Current Population Survey

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 5 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:

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

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.